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2013-08-08 07:57:00
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Iraq's New Provincial Law Could Threaten Foreign Businesses
Dubai/ UrukPress
Iraq's New Provincial Law Could Threaten Foreign Businesses



By Sam Wilkin

Earlier this year, when the UK think tank Chatham House reflected on the 10th anniversary of the Iraq War, it described the current state of affairs in the country as “controlled instability.” It’s an apt assessment of a political system underpinned by constant tension and mistrust. In late June, the balance of that system was altered with a substantial amendment to the country’s Provincial Law that concentrates greater decision-making authority in the hands of regional governments.

The new law gives provincial governments the right to oversee the appointment and activities of all local officials, claim a greater proportion of their province’s oil revenues, overrule central government policy in areas of shared competency and – of most relevance to foreign investors – levy new taxes on foreign companies. Following the law’s passage, there was even some suggestion that the new powers would allow provincial governments to retroactively cancel contracts originally signed by the federal oil ministry in Baghdad. Such claims seem to be all bluster, since Baghdad retains significant influence and would fiercely resist any attempt to cancel contract. Besides, the new law substantially increases direct remuneration that provincial governments receive for oil production under existing contracts – from $1 per barrel to $5. This is a strong incentive to keep current contracts in place.

Nevertheless, the new amendment does present some challenges for international companies doing business in Iraq; and not just in the oil and gas sectors. Baghdad’s interest in preserving the stability of oil and gas does not extend to other sectors, nor does the mitigating effect of greater oil-revenue sharing. While provincial governments seem likely to first flex their newfound muscle with the oil and gas industry, they could increasingly seek to expand their influence over other sectors in the longer term.

At the federal level, politically motivated contract cancellation is already a significant risk in Iraq – a Russian arms contract was cancelled in November 2012 – and the growing involvement of provincial administrations will add another dimension to this. Even if contracts are not cancelled outright, companies will face an increased risk of contract renegotiation, under which provincial governments place additional obligations on businesses that are already operating under their jurisdiction.

Provincial administrations are also likely to play a greater role in the award of new contracts. Although less of a risk to investors than the renegotiation of existing contracts, this could complicate and lengthen bidding processes in cases where the federal and provincial government have competing interests. Local actors have long played a role in Iraq’s more restive provinces – the government of western Anbar province in 2010 blocked a contract awarded by the Oil Ministry until the operating company agreed to a series of additional local obligations – and such practices are now likely to become more widespread.

The lack of clarity in Iraq’s constitution and the weakness of the country’s judiciary mean that the precise effects of the new Provincial Law may not be known for some time. However, the law itself is an explicit move toward greater decentralization, and it clearly increases the risks to foreign companies. Managing these risks in the future will require closer monitoring of the political winds blowing through each individual province.

Sam Wilkin is a Dubai-based analyst for Control Risks, a global risk consultancy. For more information, visit our Country View of Iraq.