Ten years after - doing business in Iraq
26 April 2013
Oil, security, infrastructure, corruption, getting paid, opportunity, risk - all to be weighed in the scales in deciding whether to do business in Iraq. At the tenth anniversary of the 2003 Iraq invasion where is Iraq now, in terms of opportunity, risk and law for the UK construction industry?
In 2010, according to a report of the National Investment Commission, in association with UK Trade and Investment and published by Allurentis Ltd, the value of the UK’s commercial activity in Iraq was 1,215 million US dollars, 2.8% of the foreign commercial activity by value. Way out in front was Turkey, with its geographical logistical advantage, at 34.9% with another 7 countries, including, in descending order, Italy, France, South Korea and the US.
What are the opportunities?
Iraq has massive oil reserves. It has budgeted for exporting 2.9 million barrels per day this year and its aim of producing 12 million barrels a day by 2017 would make it a very major player amongst producers. But getting to the target of course requires all the necessary infrastructure.
The oil will also have to pay for the other infrastructure the countries needs – dams, railways, bridges, airports, hotels and literally millions of new homes (200,000 units each year for a decade) plus the roads, sewers and services to support them, which is where the opportunities begin. It amounts to a lot of work that should last for years.
Security for a start, an obvious first thought prompted by the press headlines. Corruption is another. Iraq was ranked 169 out of 176 countries in the Transparency International 2012 Corruption Perceptions Index.
And Iraq was ranked 165 out of 185 in the World Bank 2013 Ease of doing business tables. Time, energy and patience are required to make progress through the bureaucracy.
And the legal framework?
Investment is governed by Investment Law 13 of 2006 as amended by law No. 2 of 2010 and foreigners can take a 100% stake in an Iraq company.
For those used to doing business in the Middle East, the law in Iraq will look familiar. The Iraq Civil Code, influenced, like other Arab codes, by the Egyptian Civil Code, takes precedence over, for instance, Shari’a. Iraq cannot compete, however, with the more advanced approach of, for instance, Dubai and its International Financial Centre, to dispute resolution.
Foreign arbitration is the obvious contract dispute resolution route that sidesteps any concerns about the speed, expertise or impartiality of local courts and the Iraqi courts have recently adopted a welcome hands-off approach to foreign arbitrations.
But even if an arbitration award is obtained, there remains the important question of enforcement because Iraq is not yet a signatory to the New York Convention (although this may change before too long). A possible alternative is enforcement of an award in Iraq under the Riyadh Convention.
All of which makes it important to take local legal advice in getting over all the legal and administrative obstacles.
What about contracts?
Iraqi law provides specific provisions relating to construction contracts in Articles 864-890 of the Iraqi Civil Code (the "ICC"). These provisions provide the framework for the main requirements for contracts of works. Three key obligations arise from these articles: (i) the work should be in accordance with the provisions of the construction contract between the parties, (ii) the contractor should deliver the works on completion, and (iii) the contractor is liable against any complete or partial collapse of the building.
This is a joint liability imposed on the contractor and the designer for certain building defects, and is known as Decennial Liability. This is similar to strict liability but is applied to construction projects. This joint liability imposed on the contractor and the designer lasts for ten years from completion and means that the contractor and designer are jointly and severally liable for any structural defects in the works.
And what might Iraq’s next ten years mean for UK construction companies?
Pass the crystal ball. As risks reduce, or are successfully managed, then the opportunities presented by Iraq become more attractive, but not, of course, just to the UK construction industry. Less risk is likely to mean more competition and a buyer’s market. Swings and roundabouts or perhaps in this case, fortune might favour the brave.