Institute for War and Peace Reporting | Giving Voice, Driving Change

Energy Crisis Threatens Investment

Investors in Iraqi Kurdistan say escalating fuel costs are trying their patience.
By Fazil Najeeb
Since the fall of the Saddam, foreign investors have flocked to Kurdistan and Iraq’s northern provinces thanks to the north’s relative safety - but business development even in these relatively safe parts of the country is fraught with problems.

Like other parts of the country, foreign and Iraqi investors alike are plagued by power outages. State energy plants only provide electricity for a few hours per day - even in Kurdistan’s capital, Erbil - and shortages force business to buy expensive fuel-powered generators.

But the problems don’t end there because fuel is itself in short supply and rising demand means that it has become prohibitively expensive.

Some investors warn they will lose profits and be forced to leave Kurdistan if power cuts persist and fuel prices continue to rise.

Zewar Alknach, head of a Kurdish branch of a Turkish construction company known as Renas, said generator fuel for their three offices and a construction site comes to more than 5000 US dollars a month. The government, he complained, should grant subsidies for such costs.

Yassein Sheikh Qadir, owner of another construction company based in Erbil, warns that if the energy crisis continues there may be little point in doing business in the area.

"Building costs have already increased 20 per cent due to high fuel prices,” he said. “If they…increase further, we will reach a stage where construction is not profitable anymore."

Qadir said profit from a current project was already less than he expected, though he was not prepared to say what this amounted to.

In Erbil, the government currently provides electricity for a maximum three hours per day. Some days, it goes down to two and on others there’s none at all.

Escalating energy prices have affected the local economy in myriad ways - one of the main causes of concern is that it drives inflation, which in turn impacts on the cost of living, even the price for basic goods like flour is affected.

Aso Yassein, owner of Sebar, a company that imports flour from Turkey to Kurdistan, said up until the end of 2005, it used to cost four dollars per tonne for the trip from Zakho at the Turkish-Iraqi border to Erbil. "Now it costs us 12 dollars," he said.

The fuel crisis here dates back to 1991, when the autonomous Kurdish region was established and Iraq’s central government stopped supplying energy. Prior to this, Kurdistan enjoyed a relatively stable power supply, thanks to a small population and limited demand.

Following the fall of Saddam regime in 2003, the region has witnessed an economic boom. Demand for power has increased and has become a serious threat to local economic growth.

Officials say one of the main reasons for the fuel shortage is instability in Iraqi areas that supply Kurdish region with fuel. Kawa Abdulla, head of Sulaimaniyah City Council, said that tankers are constantly attacked and oil pipelines blown up by insurgents.

To solve this problem, said Abdulla, the Iraqi government imports fuel from Turkey and the Kurdish government does so from Iran. But he warned that there were no guarantees that supplies would continue or that they will be sufficient.

"There could be shortages at any time,” said Abdulla, "because there’s no major solution to the problem, like the constuction of refineries.”

For Alknach, the Kurdistan business sector would improve if it enjoyed the same investment laws that exist in Turkey, where, he said, the government compensates companies when fuel prices rise; an important reassurance for investors.

"So far there is no such a law in Kurdistan and this worries us," said Alknach.

Nooradin Hamid, general manager of Erbil Fuel Distribution, maintained that the regional government doesn’t plan to reimburse companies for higher energy costs.

"When they [the companies] sign a contract, they have to take into consideration that fuel prices might rise,” he said.

Until the beginning of 2006, the regional government did allocate fuel to private companies in order to foster investment.

"But now, as we ourselves suffer from a fuel crisis, we don't help them,” said Hamid.

Alknach says he’s close to giving up on the region.

"When a litre of diesel costs one dollar, all of our projects will lose,” he said. “And we will be obliged to leave Kurdistan."

Fazil Najeeb is an IWPR contributor in Iraqi Kurdistan.

This article has been produced with support from the International Republican Institute (IRI).