US Agency for International Development (USAID) and the RTI Local Governance Program (LGP II)

1. US Agency for International Development (USAID) and the RTI Local Governance Program (LGP II) Executive Summary Economic Development Assessment of the Kurdistan Region (EDA) December 22, 2008

2. Economic Development of the Kurdistan Region • First economic assessment devoted to a region in post invasion Iraq • Identify sectors within the KR that have the greatest chances of being competitive • Six key economic sectors + banking chosen • Lead ministry the MOP, but needed buy in from other ministries • Make recommendations to KRG on how to advance competitiveness • Recommend capacity-building to KRG.

3. Extractive Industry Findings • 28 companies are currently involved in oil exploration in the Region • 49 oil and gas concessions listed, 30 blocks awarded • (KNOC) the largest number of blocks • Estimated 10 billion - 45 billion bbls of crude oil reserves • Two major gas fields estimated 11.7 (TcF) , 82 (TcF) all KR • No modern refining capacity • Oil pipeline dilemma • Pir Daud Power Plant, Build-Own-Operate (BOO) • Oil and gas companies have signed Production Sharing Contracts requiring certain infrastructure building • 11,000 to 13,200 oilfield service jobs • Mining Act is being drafted by Ministry of Natural Resources.

4. Extractive Industry Impediments • The KRG needs access to a strategic pipeline • Crude oil and natural gas pipelines are the only cost-effective method of transporting to export markets • No major oil companies in the Region • Down turn in capital markets • Capacity building for industry workers • Refining capability nearly non-existent • Larger capacity refineries are needed

5. Extractive Industry Recommendations • Encourage via service contracts the construction new refineries • replace private sector ‘topping plants • Bring KNOC’s proposed 50,000 bbl/day refinery on-line as soon as possible. • Strengthen engineering and management programs to support hydrocarbon sector. • Encourage the growth of local oil service companies • Increase utilization of natural gas for electric generation ( Pir Daud Model) • Align local universities with the PSC holders • Develop scholarships to attract and recruit the most gifted students • Mining Act needs to be finalized.

6. AgricultureSector Findings • Agriculture can be a major contributor to economy. Second only to oil sector • Production and processing chain needs to be in place and operating effectively to be competitive. (value added production) What areas of the Agriculture sector show the best prospects? • Poultry • Soybean production and processing. • Greenhouses • Fruit, nuts, and selected vegetables • Organic production provides a significant opportunity • Biotechnology possible strategic key agricultural future • Dehydration and processing of certain vegetables

7. AgricultureSector Impediments • Several decades of conflict • 20 year gap in knowledge of current agricultural technology • Oil for Food program, Public Distribution system • Land tenure • Bloated bureaucracy • Lack of statistical data (crops, metrological) • Few farmer associations or cooperatives • Lack of quality testing • Transportation and marketing infrastructure

8. AgricultureSector Recommendations • Legal framework of private ownership of agricultural land - KRG priority • Develop modern system of metrological stations and soil laboratories in coordination with universities • Develop a long-term plan for basic research • Goal of agricultural self sufficiency 2020. Phased reduction of selected food products • A regionally integrated marketing/branding scheme • Create a public-private authority, possible model Oman • A study of soybean production and processing and biotechnology should be undertaken

9. Tourism Sector Findings • Cultural tourism based on the Region’s historical sites offers great potential • Citadel site can be the cornerstone in establishing destination identity • “Kurdistan – the other Iraq” promotional campaign and UNESCO’s proposed master plan for the Citadel • Religious and Adventure tourism • Business travel has increased from other areas of Iraq • Conferences at Erbil Convention Center and hotels increasing • Erbil International Airport and new EIA terminal has the capacity to handle 3 million visitors annually and commercial airport in Sulaymaniyah

10. Tourism Sector Impediments • Perceived security concerns limit tourism • Inventory of 1,300 cultural /archeological sites needed • Sites are unguarded • Master tourism plan is needed that coordinates historical and cultural activities • A comprehensive tourism plan requires significant investment • Electricity, roads, banking are needed • No “culture of service” • English taught as the primary second language

11. Tourism Sector Recommendations • Identify and restore tourism sites • Work with donors to inventory 1,300 cultural /archeological sites (USAID, State Department, UNESCO initiatives) • Target Middle Eastern, European and other foreign tourists by featuring quality hotels, restaurants, transportation • Develop the research and marketing capabilities within the Ministry of Tourism • Identify and select a private sector destination marketing organization (DMO) to represent Kurdistan Region • Create hospitality management schools and tour guide training • Arabic should be encouraged as a second language in the schools as well as English

12. Trade and Industrial Sector Findings • The Kurdistan Region has a long history of external and internal trade • Few reliable economic statistics • External trade US$5.0–5.5 billion range • Largest trading partner Turkey US$2.8 to 3.5 billion in 2007 • Iran exported approximately US$1 billion to KR • Imports account for 95% of trade • Region has become an ideal market for substandard food and drugs • Industrial sector is small and underdeveloped • Foreign direct investment (FDI) $15 billion a success story • The KRG Investment Law of 2006 incorporates attractive terms and conditions for foreign investors

13. Trade and Industrial Sector Impediments • Lack of meaningful economic statistics • Investment law generous but in actuality complex in application • Corruption, whether perceived or actual, remains a significant deterrent to foreign direct investment (in effect a tax) • The KRG seeks to attract FDI but hinders development by serving as the largest employer • Industrial sector driven by supply value-chain economics. KR weakness in value chain results in products of unreliable quality • No written, detailed manual of government policies and procedures required to establish and operate businesses or Public Private Partnership • Absence of a regulatory structure that provides for basic enforcement of quality standards • Weak import regulations for trade

14. Trade and Industrial Sector Recommendations • Increase the statistical gathering capabilities of Ministries and Universities • Ministries of Agriculture, Health, and Trade need to review and revise regulations for food safety and health • Continue open market policies, but establish import standards to ensure a level playing field for domestic goods • Reduce employment levels in government • Invite an organization such as Transparency International to measure corruption or perception of corruption • Promote information on the steps the KRG takes to reduce corruption and increase transparency • Develop and implement a clearly stated economic development and formal trade policy

15. Banking Sector Findings • 44 banks operating in the KR,100 offices, 66% are private • Emerald Bank and Kurdistan International Bank only local banks • Banks play a limited role in business transactions • A lack of confidence in the banking sector • Limited ability for business and individuals to obtain loans • Regulatory situation - two Ministers of Finance and two CBI branches • Limited electronic banking and check clearing • Basic training for bank staff needed

16. Banking Sector Impediments • CBI anti-inflation policy inhibits private banking sector growth • A lack of confidence in the banking sector • Lack of transparency of financial information for banking sector • Confusing roles of the CBI and the Ministry of Finance • Little prudential oversight exercised by CBI Baghdad in KR • Creditworthiness sometimes not a key lending criteria in making loans • Interbank clearing not available • Limited to no check clearing • No Self Regulatory Organization of private bankers

17. Banking Sector Recommendations • CBI offices Erbil and Sulaymaniyah consolidated into one KR Central Bank office • KRG engage major consulting firm to do master plan for sector • Work with donors to initiate training for CBI and private banking staff • Technical assistance is needed for monitoring systems • Ministry of Finance should be responsible for fiscal policy CBI should be responsible for monetary policy • CBI develop website to display bank data to increase transparency • Check clearing system (temporary manual system) • Develop bankers association • increase confidence in banks by creating a deposit insurance system

18. Construction Findings • The construction sector is a major part of the Region’s economy • The size market estimated at $2.8 billion, with 95% Turkish companies. • The industry contributes significantly to job creation estimated 70,000 workers • 3 cement plants in KR • One small steel manufacturing facility • Materials testing capabilities weak • Lack of small affordable residential units • Water supply in limited in coverage and quality • Solid waste collection, limited in coverage and quality • Environmental impact assessment (EIA) required for projects

19. Construction Impediments • A lack of experienced managers, technicians, and engineers • A lack of quality control on materials being used in the construction industry • Local contractors and workers do not always receive a share of the work • No single facility exists for obtaining permits • Local engineers / technicians lack on-the-job experience. • Difficulty obtaining visas to receive training outside of Iraq

20. Construction Recommendations • Improve data collection • Improve materials testing laboratories • Develop financing mechanisms for affordable housing • Publish a manual of policies and procedures for application processing • Establish and enforce building codes • Institute automated processes for permit applications • Targets for hiring locals on government contracts • Develop improved sanitary utility regulations

21. Information and Communication Technology (ICT) Findings • The ultimate goal for the IT Sector should be universal access to all services via a single delivery system • Private investment only in communications in KR to date • Mobile services are currently well established • International Internet connectivity only available from satellite • Efforts underway for fiber optic network by KRG • No investment in last-mile infrastructure • Economic growth requires a high speed data • Education requires the use of ICT • Financial services can not compete without connectivity • Oil and gas companies will be one of the few certain to invest in IT

22. ICT Impediments • Expensive International connectivity • Connectivity only available by satellite • Education, medicine and financial institutions lack fast internet access • ICT backbone based on fiber optics is needed • Lack of skilled labor to operate and repair fiber system • No centers of excellence for information technology

23. ICT Recommendations • Continue efforts on building fiber-optic-based network for data entry and communications • WiMax a possible short term solution to fiber-optic-based network • Establish centers of excellence for information technology • Build new universities with high speed telecommunications • Establishment of an e-Government network and information strategy • Establish business parks with excellent connectivity