LegaL guide to investing in

Power generation in iraq

CONTENTS

3 Owning and Leasing Land 26

4 Other Relevant Property Laws 27

G Applicable Incentives for IPPs 28

1 Guarantees and Privileges 28

2 Tax and Customs Incentives and Exemptions 29

CHAPTER I. THE POWER SECTOR 3

3 Free Zones 30

A Introduction 3

4 Other Relevant Iraqi Laws on Taxes and Duties 31

B Evolving Market Structures 3

H Legislative Provisions Related to Power Sector 31

1 Private Capital, Public Good 3

1 Exclusive Jurisdiction 31

2 Towards a More Developed Power Sector 4

2 Current Legal Reforms 31

C Creating An Enabling Environment 4

I Enforcement of Investor and Lender Rights 32

1

Power Sector Policy, Legislation, and Regulatory Frameworks 5

1 Dispute Resolution in General 32

2 Secure Ownership Rights 5

2 International Center for Settlement of

3 Commercial y Viable Sector 5

Investment Disputes (ICSID) 33

D Global Examples of Power Generation 6

3 Dispute Resolution for Investors 33

1 Independent Power Generation in Emerging Markets 6

4 Investor Violations 34

2 Case Example I: Pakistan 7

J Doing Business in Iraq 35

3 Case Example II: Turkey 8

1 Investment Application Requirements 35

E Independent Power Projects – Lessons Learned

2 Services Provided to Obtain an Investment License 35

from Decades of Reforms 11

3 Granting an Investment License 35

4 Legal Registration and Establishment of Companies 36

5. Notification and Reporting Requirements 36

CHAPTER II. IRAQ POWER SECTOR’S FINANCE

6 Employment and Labor Requirements 37

& LEGAL LANDSCAPE 14

7 Environmental Requirements 38

A Introduction 14

K Iraq Power Generation Success Stories 39

B Iraq Power Sector 14

1 Al-Khairat Power Plant: “Best Global Project” 39

1 Iraq Power Sector Background 14

2 Zakho Project 39

2 The Iraq Electricity Master Plan 15

3 GE MegaDeal 40

3 Sovereign Guarantees 18

L Challenges/Risks 41

4 The Private Generators Market 18

1 Security 41

5 The Legal Framework as It Pertains to the Power Sector 19

2. Tariff Structure and Payment Recovery 41

C Regulatory Agencies in the Power Sector 19

3 Oscil ating Oil Prices 42

1 The Ministry of Electricity 19

2 The Ministry of Oil 19

3 The General Commission for Taxes 20

CHAPTER III. FINANCING OF POWER PROJECTS 43

4 National Investment Commission 20

A Introduction 43

5 Sovereign Immunity 21

B Overview of Project Finance 43

D Key International Institutions 21

C. Refinancing the Project through A Special Purpose Vehicle 44

1 International Finance Corporation (IFC) 21

D Financial Institutions 44

2 Multilateral Investment Guarantee Agency (MIGA) 22

1 Development Finance Institutions / Export Credit Agencies 44

3 World Bank Iraq Trust Fund 23

2 Political Risk Insurance Providers 47

4 United Nations Development Programme Iraq (UNDP) 23

E Government Financing 47

5 Japan Bank for International Cooperation (JBIC) and

F PPP Value Drivers 48

Japan International Cooperation Agency (JICA) 23

G Alternative Funding Sources 49

6 The Export-Import Bank of Korea and

1 Financing a Project via Corporate Loan 49

South Korean Projects in Iraq 23

H Key Stakeholders 49

7 Overseas Private Investment Corporation (OPIC) 24

I Credit Enhancements 50

8 Other Institutions 24

J. Tariffs 53

E Third Countries 25

K Invoicing and Payments 55

1 Iran 25

L Taxation/Investment Law 56

F Land Rights in Iraq 25

M Collateral Security / Secured Transactions 57

1 Constitutional Basis of Land Rights 25

N Power Project Finance and PPPs in Iraq – Path to Execution 58

2 Extending Land Rights to Foreign Investors 25

CHAPTER IV. NEGOTIATING AND DRAFTING THE POWER

PURCHASE AGREEMENT AND OTHER PROJECT

AGREEMENTS 61

A Introduction 61

B The Power Purchase Agreement 61

1 What is a PPA? 61

2 Origins of a PPA 61

C. Power Procurement and Tariff Considerations 62

1 Putting Pen to Paper 63

2 Negotiation and Finalization 63

D Overview of PPA obligations 63

E Timing Requirements to Consider 64

F Financing of Power Projects 65

1 Bankability 65

2 The Role of the PPA in Bankability 65

3 Risks to Bankability 66

G Other Project and Financing Agreements 67

CHAPTER V. RISK ALLOCATION/MITIGATION & GENERAL

CONTRACTUAL TERMS: IRAQ-SPECIFIC CONTEXT 70

A Introduction 70

B Typology of Risks 70

1 Development & Construction Phase Risks:

Pre-Construction Risks 71

2 Operational Phase Risks 77

3 Payment Risks 84

4 Political and Other Risks 85

5 Consents, Permits, and Licenses; Lapse of Consent 88

6 Tax Issues 89

7 Change in Control 90

8 Force Majeure 91

CHAPTER VI. CONCLUSION 95

FOREWORD BY THE CONTRIBUTING AUTHORS

In an effort to promote foreign investment in Iraq, the Commercial Law

Development Program (CLDP), along with other key partners, has been developing

material to guide potential investors. In 2015, the CLDP published the Legal Guide

to Investment in Iraq, a bilingual Arabic-English guide to general investment

practices in Iraq. It outlined relevant Iraqi legislation with an emphasis on the

recently enacted National Investment Law, delineated critical investment procedures

for key economic growth sectors, and provided a model investment contract.

The present Legal Guide to Investment in Power Generation in Iraq (“Legal Guide”)

follows those efforts by focusing on a sector that is in particular demand by the

people of Iraq and accordingly can benefit from private sector involvement.

Specifically, Iraq has suffered, in the past decade, from a chronic power shortage,

which has not been alleviated from traditional public sector development and

operations. Given the significant gap between supply and demand for power, as well

as the Iraqi government’s commitment to this sector, investment in power generation

offers considerable opportunities for investors willing to assume associated risks.

As outlined below, this Legal Guide is intended to provide a general introduction and

up-to-date overview of certain aspects of the structuring and legal regime for invest-

ment in power generation in Iraq. Of special note, the specific nature and location of a

project, as well as changes to the Iraqi legal regime, may affect the information

included herein. In particular, there may be different regulations and requirements in

the Kurdistan region of Iraq which are not covered by this Legal Guide.

Chapter I outlines how both the private sector and the government should approach

power projects together. In addition, this chapter lists the factors that create an

investor friendly environment and provides case studies of how other countries in

the region have approached investment in the power sector.

Chapter II delves into Iraq power sector’s and legal landscape. It describes the

power sectors’ supply and demand, as well as relevant government agencies, financial

institutions that are active in the country , legislation ranging from land rights to tax

laws and dispute resolution mechanisms.

Chapter III introduces power project financing and describes typical project finance

structures, as well as various ways to structure these types of transactions given the

Iraq context.

Chapter IV describes what elements of a power project influence its bankability, as

well as considerations for both the seller and the buyer in the negotiation of a Power

Purchase Agreement (PPA).

Chapter V continues to build on PPA bankability by outlining common risks in

financing a power project and providing mitigation measures both generally and

specifically in Iraq.

As investment in the power sector increases, we expect this sector and Iraq to evolve

and as such envision that this Legal Guide will be updated to follow that evolution.

For questions or further information on the contents of this Legal Guide, please

contact Adam Al-Sarraf (aal-sarraf@doc.gov) and Marc Tejtel (MTejtel@doc.gov) at

Commercial Law Development Program (CLDP).

* * *

This Legal Guide would not have been possible without the effort and contributions

of the contributing authors and numerous other people, including US and Iraqi

government officials, international and Iraqi lawyers and the private sector.

Special thanks go to each and every one of the authors and their respective teams

that contributed to this Legal Guide, as well as the many other people who provide

input and advice. We are especially grateful for the advice of Dr. Rashad Khalf

Hashim of the Iraqi National Investment Commission, as well as the hard work and

efforts of Omar El-Khattabi, Valentina Castillo, Jad Taha, McKay Harline, Bourn

Collier, Danuta Rychlicka, Chloe Rossen and the rest of the team at Mayer Brown,

Rasha Nadeem (General Counsel) at Bayt Al Hikma (BHC Law Firm), Paul Rafla,

Mohamed Badissy, and Mohammed Loraoui at CLDP. We would also like to recog-

nize the funding of the US Department of State – Near East Affairs/Iraq for their

guidance and support throughout the process of drafting this Legal Guide.

The authors also wish to note that certain sections of this Legal Guide are drawn

from the Legal Guide to Investment in Iraq and Understanding Power Purchase

Agreements, each developed by the CLDP in conjunction with other contributors.

This Legal Guide is issued under the Creative Commons Attribution Non-

Commercial Share Alike 4.0 International License (CC BY NO SA), which allows

anyone to copy, excerpt, rework, translate and reuse the text for any non-commercial

purpose without seeking permission from the authors, so long as the resulting work

is also issued under a Creative Commons License. The Legal Guide is currently

available in electronic form. It can be used as an online interactive resource. Many of

the contributing authors are also committed to working within their institutions to

adapt this Legal Guide for use as the basis for training courses and technical assis-

tance initiatives.

Sincerely,

The Contributing Authors

CONTRIBUTING AUTHORS

Hamada Dara Zahawi

Managing Editor

Attorney-Advisor (International)

U.S. Department of Commerce

United States

Ahmed Dawood, Esq.

Managing Partner

BHC FIRM LLC

Iraq

Mohammed Shaikley

Director

AMEA Power

Iraq/UAE

Tom Eldert

Partner

Mayer Brown LLP

United States

Alex Evans

Assistant General Counsel

The Overseas Private Investment Corporation (OPIC)

1100 New York Avenue NW

Washington DC 20527

United States

Sameh Mobarak

Senior Counsel

The World Bank.

1818 H Street, NW

Washington, DC 20433

CHAPTER I. THE POWER SECTOR

A INTRODUCTION

This chapter addresses the features of the power sector generally, with a special focus

on the current condition of the power sector landscape in Iraq. In addition to an

overview of financial and regulatory requirements for a healthy power sector, a

survey of independent power generation in key emerging markets is provided to shed

light on the particular challenges Iraq might face as it continues to develop its own

power sector.

B EVOLVING MARKET STRUCTURES

1. PRIVATE CAPITAL, PUBLIC GOOD

Competing demands on government funds and limited financial solvency in the

power sector have constrained the ability of many emerging market governments to

invest in additional power generation capacity. This has occurred against the

backdrop of an unmet and growing demand for power.

While attempting to address the needs of its power sector, Iraq will need to balance

political, economic, and fiscal considerations. Governments are often unable to fund

the necessary capital expenditures required to meet their power infrastructure

needs; however, partnering with the private sector would offer the Iraqi government

the opportunity to access greater financial resources and technical expertise. The

integration of the private sector into the power sector not only shifts the financial

burden away from the government, but also shifts some of the risks such as project

preparation, implementation, and operation to the private sector.

In emerging markets, power sector markets typically start out as fully government

financed, owned, and operated. While this model requires less coordination by the

government in terms of various third-party funders, it often requires the government

to add a greater financial burden to its balance sheet. This can limit the available

cash reserves or external financing that a government can channel to other capital-

intensive sectors that it may need to support. Further, due to other priorities, the

government may allocate insufficient funds for the power sector to function at its

optimal capacity, although, as will be discussed in Chapter III ( Financing of Power

Projects) of this Legal Guide, governments can sometimes be very efficient both in

construction and in operation and maintenance. Consequently, many governments

have deemed it beneficial to privatize certain revenue-generating power assets

(primarily generation assets), which may be more attractive to investors, to free up

government funds for social sectors such as education and health. In this vein, the

Iraqi government may benefit by encouraging private capital that frees up the

government’s balance sheet for critical social service-related priorities.

Legal Guide to Investing in Power Generation in Iraq 3

2. TOWARDS A MORE DEVELOPED POWER SECTOR

Despite growing private participation, the provision of power is a public good that

may require the active engagement of the Iraqi government. This level of engagement

exists in varying degrees in different countries.

Within emerging markets, there is a wide continuum along which power markets

evolve. On one end of the continuum, there are markets that are tightly controlled by

their governments, with single offtakers and limited access to the grid. On the other

end, there are countries that allow for spot market auctions, wheeling arrangements

and multiple offtakers. The more a government advances towards the latter position,

the less government support is required.

As the market structure evolves, private participants gain comfort from greater

transparency and a more efficient allocation of resources. As the market matures,

it is likely to attract greater private investment and be better positioned to weather

most of the volatility that may be generated by macroeconomic events and trends.

As the market moves towards becoming self-sustaining and financially solvent, the

government will continue to play a critical role; however, it may no longer be

necessary to subsidize the cost of power production. Nevertheless, until the full

benefits of privatization and liberalization have, or are perceived to have, produced

a relatively developed power market, the government may still be called upon to

provide financial support or guarantees in an effort to create an enabling environ-

ment conducive to developing the market.

C CREATING AN ENABLING ENVIRONMENT

In order to maximize the efficiencies of private participation in power markets, there

are certain legal and regulatory measures that may be implemented in Iraq to assist

in developing a more mature private power sector. Failure to implement these

measures could cause market inefficiencies, which may ultimately result in a cost to

the government, due to the moral hazard, where the market would ultimately rely on

the government to manage these inefficiencies and bear the risks. Conversely, the

application of certain key market reform measures should help ensure a competitive

price for power and allow for a greater transfer of risk and responsibility from

government to private market participants.

Iraq will need a stable, consistent, and investment-friendly framework of laws and

regulations in order to attract private investment. The government will have the

primary responsibility of creating such an environment. The laws currently in place

provide incentives for private investment and also provide assurance that disputes

will be properly resolved. (See Chapter II ( Iraq Power Sector’s Finance & Legal

Landscape) of this Legal Guide for more detail regarding the current framework in

Iraq and the benefits that are in place for foreign and private investors.)

Summarized below are some critical factors that private investors will review to

understand a country’s legal and regulatory framework. A review of the general

4 Legal Guide to Investing in Power Generation in Iraq

enabling environment, as well as the project structure, will often be the starting point for investor negotiations that may result in the investor requesting additional assurances, such as credit enhancements, from the host government and/or the offtaker.

1. POWER SECTOR POLICY, LEGISLATION, AND REGULATORY FRAMEWORKS

Laws that clearly define the roles and rights of the various government entities and

private parties involved in the power sector will enhance the attractiveness of the

electricity market for potential investors. This often entails government parties

clearly allocating certain rights and remedies to private market participants that can

be relied upon when evaluating potential investments. By firmly setting these rights

and remedies in law and regulation, the government is limiting its flexibility but is

also attracting private investment.

An independent regulator also plays a critical role in upholding and balancing

the rights and interests of all stakeholders by comforting investors that decisions

regarding licensing, provisioning, and tariffs will not be made arbitrarily.

Inversely, the regulators will seek to protect end-users from sudden or dispropor-

tionate tariff increases.

2. SECURE OWNERSHIP RIGHTS

Having a system that allows for security of ownership rights is essential for any

investor. In project finance, lenders would require certainty that they can exer-

cise step-in rights and take over the project company and its assets in the event of

loan payment defaults.

3. COMMERCIALLY VIABLE SECTOR

One critical aspect in ensuring the longevity of a power project is having cost-reflec-

tive tariffs to ultimately assure that the offtaker (and other utilities) can retain

favorable margins, and in turn, further finance the growth of the sector. When the

tariff paid by the end-users of power accurately reflects the cost of producing that

power and transmitting and distributing it to the end-users (including the cost of

capital commensurate with risk), no subsidy is required by the government for the

power sector. However, if the tariff does not accurately reflect such cost, the utility

will be a loss-making entity unless alternative sources of funds are found to cover the

deficit. This may impact investor confidence in the offtaker to meet its ongoing

payment obligations over the course of a long-term purchase agreement.

However, increasing electricity tariffs to cost-reflective levels compatible with the

realities of an emerging power market, such as Iraq, can be challenging, especially

where supply is intermittent (i.e., brownouts, blackouts), thereby creating political

pressures to maintain low electricity prices. This needs to be balanced against the

consequence of having a financially insolvent power sector, which may otherwise

necessitate additional financial support from the host government to attract further

Legal Guide to Investing in Power Generation in Iraq 5

investment. This makes it imperative for the Iraqi government to manage the twin

challenges of investor and consumer confidence.

Even if the offtaker benefits from a cost-reflective tariff, it will remain a loss-making

entity if it is unable to collect from end-users and customers, including, in some

jurisdictions, distribution companies. Having a robust system of metering and bill

collections is of critical importance, in addition to cost-reflective tariffs, for the

financial solvency of the power sector. Further, minimizing the technical and com-

mercial losses from transmission and distribution is critical to ensuring proper cash

management in the system.

The private sector plays a key role in ensuring a commercially viable power sector.

Sponsors who build and operate efficient plants that attain the end goal of providing

electricity in a sustainable and cost-effective manner are required in this long-term

partnership.

D GLOBAL EXAMPLES OF POWER GENERATION

1. INDEPENDENT POWER GENERATION IN EMERGING MARKETS

The rationale for early reforms promoting private investment in and ownership of

power generation assets in countries such as the United Kingdom and Chile was

largely focused on increasing the sector’s efficiency and lowering the tariff. Electricity

consumers in these countries enjoyed universal access to reliable services and

demand was generally satisfied through either public investments or private invest-

ments by heavily regulated utilities. In this regard, reforms in developed countries

sought to increase competition on different levels and create markets for supply and

electricity services. Some countries (e.g., Chile and the United Kingdom) pursued this

objective through unbundling and privatizing public utilities, while others (e.g.,

Norway, Sweden, New Zealand, and Australia) pursued it through substantial public

ownership within liberalized electricity markets. This was in stark contrast to the

needs of many developing countries that faced a different set of challenges.

By the late 1980s, the electricity sectors in many developing countries suffered from

poor technical and financial performance resulting from a confluence of factors.

While governments may have intended to subsidize end-user tariffs, fiscal con-

straints sometimes led to underpayment of these subsidies, leaving the utilities to

bear the financial burden of carrying the shortfall. This issue was further exacer-

bated by chronic underinvestments in maintaining the sector’s generation,

transmission, and distribution assets, and in training and building capacities of

utilities’ staff. The power sector also worsened due to public employment policies that

forced utilities to retain more staff than were needed for efficient operations.

The result was significant deterioration in the technical and financial performance of

the sector. A survey of 60 countries in the late 1980s noted that electricity utilities

were able to support only 12% of their investment requirements. There were also

6 Legal Guide to Investing in Power Generation in Iraq

clear indications of problems in utility productivity per employee and in the reliability of electricity services. In regions such as sub-Saharan Africa, this translated to

very low access rates with the bulk of the population lacking access to electricity.

Those fortunate enough to have electricity access received unreliable supplies with

frequent blackouts or brownouts. For developing countries facing these challenges,

reforms meant increasing tariffs in order to address some of these issues. The

reforms also meant significant investments in new generation, transmission, and

distribution infrastructure that required financing beyond the capacity of the public

sector. As a result, private sector participation and competition were generally

viewed as the solution to improve electricity sector performance.

2. CASE EXAMPLE I: PAKISTAN

Pakistan was one of the early examples of developing countries outside Latin

America to attempt to resolve the power sector performance issues. In the late 1980s,

the country developed a framework to attract private sector participation in its

electricity sector. The framework sought to address issues related to incentives,

repatriation of profits and capital, availability of foreign exchange, electricity pricing,

and institutional capacity to review, negotiate, and approve private sector projects.

By 1992, the Government of Pakistan (GoP) adopted a strategic plan to unbundle the

sector, separating generation, transmission, and distribution operations, with the

intention to eventually privatize them. The plan also encouraged private sector

participation in generation and called for establishment of an independent regulator

to oversee sector operations. The government established the Private Power and

Infrastructure Board as a “one-stop shop” to negotiate the private financing agree-

ments and security packages on behalf of the government, and the Water and Power

Development Authority (WAPDA) Private Power Organization (WPPO) to negotiate

PPAs on behalf of WAPDA, the then vertically-integrated incumbent electric utility.

Pakistan’s efforts were quickly rewarded when the US$1.6 billion, 1292 MW Hub

River Power Project (Hub), the first privately-owned, independent power project

(IPP) in the country, was signed in 1994. The country used a slightly modified form of

Hub’s contractual framework as a model under a new 1994 Private Power Policy that

proved to be successful in attracting private sector investments in generation. The

GoP entered into letters of support for 34 projects for more than 9,000 MW under a

tariff ceiling established by the policy. Among these, a total of 16 projects, represent-

ing approximately 4,000 MW, reached financial close and were able to proceed.

These projects raised a total financing of US$5.3 billion, of which US$1.3 billion was

financed by foreign equity. Some of the contributing factors behind this success were

the clear policy framework that followed the government’s vision and intentions in

the sector and the established indicative bulk tariffs with indexation mechanisms for

fuel and inflation. Attractive fiscal incentives, a standardized, bankable contractual

framework for private power projects, and a “one-stop shop” for investor interactions

were also key developments implemented.

Legal Guide to Investing in Power Generation in Iraq 7

However, Pakistan’s early success ran into significant challenges, as efforts continued throughout the 1990s and early 2000s to develop more IPPs. While the country

aggressively pursued implementation of the 1994 Private Power Policy to increase

private sector participation in generation, implementation of reforms in the rest of

the sector lagged. Although fuel and inflation indexation of bulk tariffs for IPPs was

one of the success factors of the IPP program, it strained the WAPDA’s cash flow,

which depended on revenue from government-mandated retail tariffs that did not

pass these costs through to customers (a misstep that Egypt would repeat in late

1999 and the early 2000s with its first three IPPs). Operating inefficiencies on

WAPDA’s system also meant that system losses prevented recovery of a significant

portion of the costs associated with power purchased from IPPs. Furthermore, the

selection criteria used for IPP projects were opaque and subject to political influence.

This led to perceptions of corruption by successive governments and several attempts

to terminate IPP contracts without credible evidence of malfeasance. This damaged

perceptions of the country’s investment environment.

Moreover, the location, size, technology, and fuel choices in selected projects were not

consistent with least-cost expansion planning, which resulted in unnecessarily increas-

ing project costs and risking their long-term viability. While the adopted ceiling bulk

tariff was designed to accelerate private sector participation, some argued that it may

not have provided sufficient incentives for innovation and cost reduction by private IPP

sponsors that would normally result from competitive bidding. As technology and IPP

costs continued to decrease in other countries, there was a perception in Pakistan that

IPPs in their country were over-paid – although subsequent analysis proved this not to

be true – which increased the political pressure and tension with IPPs.

3. CASE EXAMPLE II: TURKEY

While Pakistan elected to approach sector reform in a phased approach, starting first

with introduction of competition by IPPs at the wholesale level that largely preserved

the status quo in the sector’s structure, other countries elected to follow a different

path. Turkey, for example, began reforming its power sector in the 1980s as it was

emerging from a severe economic crisis in the late 1970s, a military coup in 1980, and

political turmoil in the early 1980s. The Turkish Electricity Authority (TEK), which

was originally established in 1970 as an integrated utility for electricity generation,

transmission, and rural electrification, became a monopoly in 1982 when it absorbed

municipal distribution operations that were independent at the time.

Turkey reversed course in 1984 when it adopted a new law removing TEK’s exclusiv-

ity over electricity generation, transmission, and distribution, allowing IPPs under

three models: build-own-operate (BOT), transfer of operational rights (TOOR), and

self-generation. TEK was “corporatized” into a state-owned enterprise that was later

split into the Turkish Electricity Generation and Transmission Company (TEA¸S ) and

the Turkish Electricity Distribution Company (TEDA¸S ). TEA¸S was designated as

electricity buyer from IPP schemes under BOT and TOOR models, and TEDA¸S was

designated as electricity buyer from self-generators.

8 Legal Guide to Investing in Power Generation in Iraq

Development of the wholesale market commenced under the three models provided

under the 1984 law. The TOOR model, which provided for the transferring of

operating rights of public assets to private management, was used many times

during the 1980s and 1990s to attempt to attract private investments. Investors

were expected to make new investments in the public assets they controlled for the

duration of the TOOR contract. However, most of these attempts ultimately failed

because of fundamental legal issues in the transfer of public assets to private

management, unavailability of sovereign guarantees (for generation) before 1994,

and regulatory uncertainties.

The self-generation model, though in existence prior to the 1984 law in mostly

state-owned enterprises and cogeneration plants, was used extensively for wide-

spread investments. The pace increased after regulations were adopted in 1994-1999

allowing companies to set up jointly-owned plants. By 2001, approximately 2,300

MW had been installed.

Legal uncertainties surrounding the BOT model delayed its implementation until a

new law was passed in 1994. In addition to addressing the legal uncertainties, the

1994 law also provided for sovereign guarantees by the Turkish government for TEA¸S

payments under PPAs. These changes resulted in a flood of unsolicited proposals for

new generation projects – in all, 200 proposals were submitted that, if implemented,

would have tripled Turkey’s generation capacity. Ultimately, 24 PPAs (for a total

capacity of 2,450 MW) based on the BOT model were negotiated and executed, but

the government decided to focus more on priority projects of its own choice rather

than to review and compare hundreds of unsolicited proposals. The government also

decided to award projects on a competitive basis to secure more reasonable prices

and conditions. The BOT model was tweaked to remove the requirement for transfer-

ring the assets to TEA¸S at the end of the PPA, thus turning it into a

build-own-operate (BOO) model, to improve bankability. Five PPAs (for a total of

6,100 MW) were signed on a BOO basis.

Although the BOT/BOO approach could have generated more investments in genera-

tion capacity, Turkey elected to change course again. There were allegations of

irregularities in the contracting process that galvanized public opinion against contin-

ued state control of the sector. Moreover, as BOT/BOO projects involved sovereign

guarantees, the government became increasingly weary of the contingent liabilities

these guarantees presented. This issue was further exacerbated by an economic

slow-down that reduced electricity demand growth, making security of supply to meet

increasing demand no longer a sufficient justification for state guarantees. Further, the

take-or-pay obligations in the existing contracts increased the risk of state liability as

the possibility of market over-supply emerged. Lastly, as Turkey was considering

membership in the European Union, which espoused market-based approaches for

wholesale supplies, the government began to ponder similar methods.

By the early 2000s, Turkey had adopted laws to provide the legal and regulatory

framework for a competitive market where multiple buyers and sellers could

Legal Guide to Investing in Power Generation in Iraq 9

transact. The government was intent on privatizing the sector, but concluded that it must privatize TEDA¸S (distribution) before it could privatize generation. The

government’s rationale was that creating a reliable distribution operation would

give confidence to potential private investors in generation companies. At the time,

TEDA¸S ’s distribution operation did not inspire this confidence. If generation

privatization proceeded, state guarantees may have been required to backstop

TEDA¸S ’s obligations in the sector, which was the environment in which the legacy

BOT/BOO IPPs were developed.

To avoid this situation and develop market competition, the government adopted open,

non-discriminatory regimes for access to the transmission and distribution networks

that facilitated bilateral trading directly between generators and wholesale consumers.

The government also required transition arrangements and sequencing of actions to

move from a monopolistic “Single Buyer” model, where a state-owned entity acted as

the counterparty in PPAs and sold power to wholesale customers, to bilateral wholesale

competition. The objective was to establish a transparent, competitive environment to

attract private investments and promote efficiency through competition.

To implement this vision, TEA¸S was further split into the Turkish Electricity

Transmission Company (TEIA¸S ), the Electricity Generation Company (EÜA¸S ), and

the Turkish Electricity Trading and Contracting Company (TETA¸S ). TEIA¸S owned

and operated the transmission system, while EÜA¸S owned and operated the public

generation facilities and TETA¸S managed wholesale activities, including the legacy

BOT/BOO PPAs for the 8,550 MW that existed at the time. TEDA¸S was also restruc-

tured in 2004-2006 into a holding company and 20 regional distribution

subsidiaries to prepare them for the privatization that took place in 2008-2013.

Moreover, an independent regulator was established to oversee sector operation and

prepare regulations necessary for licensing, tariffs for regulated activities, transmis-

sion and distribution grid codes, market opening, market rules and procedures,

balancing and settlement mechanisms, and more. Regulated activities included (a)

transmission, (b) distribution, (c) retail sales and retail sale services to captive

consumers (whose consumption was below a certain threshold), and (d) TETA¸S ’s

wholesale activities. Activities that were not regulated included generation, wholesale

transactions except for TETA¸S ’s activities, and retail sales to non-captive consumers.

As economic growth began to pick up in Turkey and the risk of looming power

shortages from 2009 onward increased, the government revisited its regulated tariffs

after a 5-year gap with little or no increases. This hiatus significantly contributed to

the low level of private investments in the sector at the time and to the deteriorating

financial performance of the public distribution companies. The government raised

the tariffs to cost-recovery levels by 2008 and adopted an automatic, cost-based

pricing mechanism to ensure full cost-recovery in the future. This step preceded the

generally successful privatization of the distribution companies in the 2008-2013

period and the generation privatization that followed.

10 Legal Guide to Investing in Power Generation in Iraq

While the government was taking steps to reform the sector, investments in new

generation capacity came mostly from IPPs. Between 2002 and 2015, 43,100 MW of

new generation facilities were commissioned, with the bulk (74%) of this capacity

developed, owned, and financed by private companies. The majority (88%) of these

private investments came after 2007 when the government undertook tariff reforms,

with annual investments of US$4 billion in the 2008-2014 period. Except for invest-

ments in renewable energy projects under prevailing feed-in tariff regimes, these

generation investments were made without any take-or-pay guarantees from the

government, in contrast to the legacy BOT/BOO transactions. By 2014, 13 years after

the 2001 reforms, market-based generation capacity accounted for the majority of

Turkey’s power supplies.

1. INDEPENDENT POWER PROJECTS – LESSONS LEARNED FROM DECADES OF

REFORMS

The standard prescription restructuring reform efforts in Latin America, England

and Wales, and Norway in the 1980s and 1990s focused largely on vertical and

horizontal unbundling and privatization of generation, transmission, and distribu-

tion functions, and the creation of independent regulatory agencies to oversee sector

operations. This standard model aimed to liberalize markets where competitive

forces determined prices in the wholesale and retail electricity supply markets.

Experience over the past 25 years illustrate that this standard model, which requires

a certain level of sophistication of the legal and regulatory frameworks in which it is

implemented, may not be suitable for all countries. Even when suitable, the time-

frame in which it can be implemented varies widely by country based on a variety of

political, economic, financial, and social factors that are specific to each country.

One of the key lessons learned from power sector reforms worldwide is that there

should be a holistic approach to addressing sector deficiencies. Generally, private

participation in the sector becomes attractive when utilities and governments are no

longer able to sustain the public investments needed to maintain availability or

reliability of electricity services. This typically stems from successive policies that

prioritize short-term fiscal and social objectives over the sector’s long-term sustain-

ability. At the heart of this bargain are tariff policies that significantly contribute to

deterioration of the sector’s financial and technical performance. At the same time,

chronic technical mismanagement of the sector adds to this deterioration and lends

credence to public resistance to solving the sector’s fiscal challenges until technical

performance improves, regardless of public or private ownership of the assets.

Morocco, for example, has a mix of public and private ownership in its electricity

sector. A significant portion of its generation is provided by IPPs and electricity

imports from Spain, and the distribution systems in most of Morocco’s large cities

are privately operated under competitively awarded concessions. The transmission

system and the balance of generation and distribution assets are owned by the

national utility (along with public municipal utilities in certain rural areas). From

Legal Guide to Investing in Power Generation in Iraq 11

2014 to 2015, Morocco phased out indirect subsidies in the sector that aimed to

defray some of the fuel costs of public generation plants. Nonetheless, the country

still provides a small subsidy to cover the difference between the national utility’s

cost of service and the retail tariffs approved by the government. Rather than

giving this subsidy to the utility outright, the Ministry of Finance (MoF) agreed

with the utility on a contract program whereby subsidy payments were linked to

achieving key performance indicators that target improving the utility’s opera-

tional and financial performance.

The reality is that, in order to be comprehensive enough to lead to meaningful

change in sector performance, sector reform takes a long time. In the meantime,

increasing electricity demand requires investments in additional generation

capacity that public budgets may find difficult to support, particularly in fiscally

constrained countries. Private participation in generation provides some relief by

shifting the initial capital outlays to construct new generation capacity away

from relying on public resources. This helps in meeting the short- to medium-

term capacity needs of a country and provides time to design and implement

necessary reforms to ensure the sector’s sustainability. IPPs can be added to the

sector on the basis of a contractual framework, as further discussed in this Legal

Guide, which obviates the need for comprehensive legal and regulatory frame-

works to govern the power sale transactions.

It is important to note, however, that opening the sector to private participation

through IPPs without contemporaneous efforts to implement comprehensive

reforms can have negative consequences. When executed properly, IPPs can provide

required generation capacity at the lowest possible price, but an IPP’s contractual

structure is designed to ensure recovery of this price if the private operators deliver

what they agreed to. Unlike public utilities, whose budgets are subject to annual or

periodic reviews and which can be restricted based on the fiscal pressures of the

time, the costs of private power are contractually set. As illustrated in many coun-

tries, public utilities attempt to cope with significant reductions in their budgets by

slashing operation and maintenance budgets, even when it severely reduces the

useful life and investment value of public assets, or by deferring payments to their

creditors. IPPs, whose costs are largely fixed, do not have this flexibility. Delays or

deferrals of IPP payments to its creditors or operation and maintenance costs can

have dire consequences.

In other words, private participation in generation commits the national utility and,

often in cases where this utility is not financially viable, the associated government

to costs that cannot be easily changed. For example, if retail tariffs are not cost-

reflective, fiscal strains will grow as the difference between the cost of power from

IPPs, on the one hand, and revenues from the sale of this power to retail customers,

on the other, widens. Egypt learned this lesson when it first introduced IPPs in late

1999 and the early 2000s. Differences in indexation of the dollar-denominated IPP

12 Legal Guide to Investing in Power Generation in Iraq

tariffs and the Egyptian pound-denominated retail tariffs created significant strain on the public budget to finance the shortfalls in revenue collected from consumers for

power generated by IPPs.

By the same token, disruptions or inefficiencies in the transmission or distribution

networks and, if provided by public entities, fuel supply could lead to rolling black-

outs or brownouts as the public utilities attempt to cope with their consequences.

However, as such disruptions or inefficiencies are not in the IPPs’ control, they

typically do not affect the utility’s payment obligations under PPAs, if the IPP was

otherwise available to provide power, even if the utility did not actually generate any

revenue to cover these payments.

In sum, private participation in generation is a very useful tool in addressing imme-

diate needs for new capacity without relying on public financing. However,

introduction of IPPs should be viewed as the first step in a broader plan to make the

sector more self-sustainable. As experiences in Pakistan and other countries demon-

strate, the longer it takes to implement this broader plan, the higher the risk that

significant government support will be needed to sustain the sector.

Legal Guide to Investing in Power Generation in Iraq 13

CHAPTER II.

IRAQ POWER SECTOR’S FINANCE & LEGAL LANDSCAPE

A INTRODUCTION

This chapter will provide an overview of the power sector in Iraq, including the

Electricity Master Plan that was developed in 2010 by the Ministry of Electricity

(MoE). Further, this chapter will discuss a few key regulatory agencies and institu-

tions and their roles in the power sector. In addition, land rights, incentives for IPPs,

investor obligations, and lender rights, as well as fiscal policies and provisions specific

to the power sector, will be examined. Lastly, the chapter will explore how business is

conducted in Iraq, from the formation of a company to the implementation of the

project, and success stories in the power sector and challenges that a foreign investor

may face in Iraq.

B IRAQ POWER SECTOR

1. IRAQ POWER SECTOR BACKGROUND

Iraq is among the countries most endowed with energy resources. However, electric-

ity supply has been inadequate to meet both the demands of Iraq’s population and

the country’s needs for economic growth. The consumption of electricity (recognized

sales) in 2010 for Iraq was approximately 8.3 gigawatts (GW). However, the peak

demand for electricity in Iraq was estimated at 13.7 GW. This outstanding deficit

between supply and demand has been met through a variety of means, including

imports from neighboring countries. In 2014, there were more than 3.5 million

customers in Iraq, including in the Kurdistan Region. Households represented 82%

of these customers, consuming approximately half of all billed electricity. Due to the

inadequate supply of electricity, the average Iraqi household received power for only

eight hours per day.1 Peak demand is predicted to rise from around 11 GW in 2015

(Iraq excluding the Kurdistan region) to approximately 32.5 GW by 2030 in the Base

Case forecast.2 Accordingly, with Iraq’s 8% average annual growth of electricity

demand, the energy situation will only deteriorate in the future.3

Improving the electricity sector in Iraq is as important and urgent as projects to

develop the economy. The Government of Iraq (GoI) recognizes that the current lack

of electricity is the main obstacle for investments in all sectors, as electricity is

essential to the diversification of Iraq’s post-war economy. To this end, the World

Bank indicated that the electricity expansion program in Iraq requires an additional

US$83 billion of capital over the period 2011-2030. Further, the World Bank predicts

that the electricity sector will require approximately US$10 billion in the short term

for additional power generation and for repairs of existing generators.1 A sizable p

1 IFP Grp., Market Insights, Energy Iraq / Erbil, http://goo.gl/Zte1lC (last visited August 30, 2016).

2 Parsons Brinckerhoff, Republic of Iraq, Ministry of Electricity, Iraq and KRG Electricity Master Plans, Final Report, Executive Summary, vol. 1, 3 (Dec. 2010) (hereinafter, Iraq Electricity Master Plan).

3 See World Bank Group, Republic of Iraq Public Expenditure Review: Toward More Efficient Spending for Better Service Delivery (2014).

14 Legal Guide to Investing in Power Generation in Iraq

ortion of this US$10 billion covers recurrent expenditures, mostly salaries, without addressing the need to expand the sector. Additional funding worth US$5.3 billion

from the U.S. Government has been used for 550 energy-related projects since 2003.4

As the principal regulator of the electricity sector in Iraq, the MoE has sought to

invoke the role of the private sector in several fields such as financing, construction,

and contribution in raising the additional generation capacity to cover the country’s

needs.5 Accordingly, power generation in Iraq represents one of the more attractive

investment opportunities available to local and foreign investors. The MoE has

outlined a series of goals and incentives directed at increasing the sector’s capacity by

encouraging domestic and foreign investors to build, operate, and supply the coun-

try’s energy needs. The Iraq Electricity Master Plan and the favorable investment and

dispute resolution laws are but a few of the ways in which Iraq has proactively sought

to encourage investments and increase the power sector’s capacity.

2. THE IRAQ ELECTRICITY MASTER PLAN

The Iraq Electricity Master Plan (excluding the Kurdistan Region) considers the

needs and plans for the period 2010 through 2030. The plan outlines: load forecast-

ing, generation, transmission, and distribution planning. The plan was created as a

response to the loss of US$40 billion to Iraq’s economy from unserved energy, due to

the shortages in electricity supply to the people of Iraq.6

The Master Plan’s short-term goal called for US$26 billion to be injected into the

power sector. The MoE determined that some of the generation investment could be

generated from IPPs, with returns from tariff payments made to IPP owners.

a. Load Forecasting

In 2009, the MoE, in partnership with Parsons Brinckerhoff, analyzed the substa-

tions and electrical systems throughout the country. From this data, it was estimated

that there was a dispatched generation demand of approximately 13.4 GW. The MoE

also calculated that Iraq would have an average of 7% growth in their real GDP. The

report forecasted that the base case load in 2030 would be an average of 32.5 GW.

Approximately 56% of this demand would be used for domestic usage, while the

remaining would be channeled for commercial, industrial, and agricultural purposes.

b. Generation Planning

In 2009, estimates found that Iraq had 115 billion barrels of crude oil resources and

112 trillion cubic feet of natural gas reserves, with 70% of the gas reserves located in

the Basrah governorate. The increased usage of natural gas in Iraq can be traced to

the implementation gas-fired gas turbines (GTs) and combined-cycle gas turbines. As

Iraq moves away from crude oil, gasoil, and heavy fuel oil, natural gas has become

the economic and environmental fuel of choice. Furthermore, the conversion of

4 See id. at 86.

5 Republic of Iraq, Nat’l Inv. Comm’n, Iraqi Investment Map 2016, available at http://investpromo.gov.iq/nic_flash/

refrence_materials/investment_map_english/.

6 See Iraq Electricity Master Plan, supra note 3.

Legal Guide to Investing in Power Generation in Iraq 15

power stations running on crude oil and GTs operating on heavy fuel oil to gas is a

main priority in Iraq’s power sector strategy. The transition is driven by the high

relative value of oil-based fuels for export and the subsequent competitive advantage

of natural gas in Iraq. Further, conversion of GTs running on gas to combined cycle

operation, in addition to incorporating new combined cycle plants, would be the

most optimum approach to a revised power sector strategy.7

The efficiency and high generation potential of conversion will enable a reduction

of existing power station sites.8 In the generation planning analysis, the Master

Plan noted that the capacity of existing plants would decrease from 9.2 GW in

2009 to 3.5 GW in 2030 due to the retirement schedule for the plants, which was

based on their condition and on the dates of commission and rehabilitation.

However, the analysis also noted that there were already about 11 GW of commit-

ted generation capacity from GE, Siemens, and Hyundai in the form of gas

turbines. These gas turbines would become part of a MegaDeal and subsequently

converted to combined cycle. In 2016, GE signed a “Power Up” plan with the MoE

for US$328 million to provide equipment and maintenance for 10 plants,

increasing the electricity production capacity by one GW.9

c. Short-Term Transmission Planning

The existing Iraqi transmission network uses 400 kV and 132 kV, as shown in the

map below. The map also indicates the locations of the Grid Supply Points (GSPs),

Bulk Supply Points (BSPs) and the major load centers in the country. The 132 kV

network is the local load distribution network within each governorate, with a few

132 kV ties to neighboring governorates, while the 400 kV network is the national

grid bulk power transfer highway between the governorates and with neighboring

countries. The network consists of:

• 3723km of 400 kV, twin 490/65mm2 ACSR, single circuit construction over-

head lines with thermal rating of 100MVA;

• 24 400/132 kV substations (GSPs);

• 13,746km of 132 kV overhead lines; and

• 209 132/33/11kV substations which are used as BSPs to distribute electricity in

the governorates.

The major problem with the existing system is the high fault levels on the 132kV

system, particularly in Baghdad. Seventeen percent of the BSPs in Iraq have three

phase fault levels higher than 30kA, and all these BSPs are located in Baghdad city.

7 See Iraq Electricity Master Plan, supra note 3.

8 See id.

9 See Ahmed Rasheed, Iraq agrees $328 million GE deal to boost electricity grid, Reuters (Jan. 25, 2016, 7:41 AM), http://

www.reuters.com/article/us-iraq-energy-idUSKCN0V31B5. See the “Success Stories” section below for further details about the GE MegaDeal.

16 Legal Guide to Investing in Power Generation in Iraq

d. Long-Term Transmission Planning / Pipelines

The Ministry of Oil (MoO) released information indicating that over 50% of gas

resources will come from the Southern region of Iraq (Basrah/Missan/Thiqar). An

electricity demand forecast showed that Baghdad accounts for 35% of the demand

in Iraq, while Basrah accounts for about 15% of the demand. Utilizing this infor-

mation, the Master Plan then addressed the question of whether the generation

plants should be built in the Southern region and transmitted to Baghdad or if the

generation plants should be constructed around Baghdad, transferring gas through

underground pipelines.

The MoO had envisioned several key pipelines to be built across various provinces

in Iraq between 2010 through 2015. These included the following: 2009 pipeline

traveling between Basrah, Thiqar, Muthana, Qadisiya, Babil, and Baghdad; 2011

pipeline between Basrah, Muthan, Najaf, Karbala, and Al-Anbar; and two pipe-

lines in 2015 between Basrah, Missan, Wasit, and Diyala, and Basrah, Thiqar,

Muthana, Qadisiya, Babil, and Baghdad. The rise in terrorist activity in Iraq and

the fall in global oil prices have significantly slowed the MoO’s pace in achieving its

construction objectives.

Taking all of this into consideration, the Master Plan concluded that it would be less

costly to generate electrical power where gas resources are located and transmit the

power to cities such as Baghdad.

Legal Guide to Investing in Power Generation in Iraq 17

e. Distribution Planning

Distribution planning in Iraq is a complex, resource-intensive process that requires

deep knowledge of local conditions, loads, and future growth. The MoE’s distribution

planning, as outlined in the Master Plan, is illustrated in the figure below:

The poor condition of Iraq’s distribution network is currently negatively impacting

the quality and efficiency of power supply, which is experiencing a high level of

losses. The Master Plan concluded that an immediate reduction of losses at the

distribution level is crucial to ensure the correction of maintenance and construc-

tion problems. The Master Plan also recommended the immediate establishment

of a Loss Reduction Program.

3. SOVEREIGN GUARANTEES

Iraq’s current credit rating is a B- (S&P 2016). The security, political, economic,

regulatory, and legal environments in Iraq today do not provide the confidence

investors and lenders will need to fund capital intensive assets such as power plants.

Sovereign guarantees have been widely used in developing regions such as countries

in Africa and Asia, including Kenya, Morocco, Nigeria, and Indonesia, to fund

infrastructure, power plants, and other public service projects. As discussed further

in Chapter III of this Legal Guide, the Iraqi MoF may provide sovereign guarantees

for certain power projects.

4. THE PRIVATE GENERATORS MARKET

A large population of Iraq currently pays two electrical bills, one to the government

and the other to the owners of private generators. Indeed, approximately 90% of

Iraqi households supplement the public network with private generators. In 2011,

generation from private generators was estimated to be three terawatt-hours, while

37 terawatts came from the power grid. Private generators currently play a major

role in making up for the shortfall from government supply of electricity.10 Although

10 See Iraq Electricity Master Plan, supra note 3.

18 Legal Guide to Investing in Power Generation in Iraq

private generators receive subsidized fuel from the government, the price to consum-

ers is anywhere between 10-15 times more than grid electricity. However, even with

these two forms of electricity output, the average availability of electricity to consum-

ers in 2011 was limited to around 11 to 19 hours per day.11

5. THE LEGAL FRAMEWORK AS IT PERTAINS TO THE POWER SECTOR

Beyond addressing the immediate need to add capacity to the network, efforts have

been under way in Iraq to put the electricity sector on a legal and regulatory footing

that will facilitate its development over the coming decades.12

C REGULATORY AGENCIES IN THE POWER SECTOR

In addition to the role of the MoF and Council of Representatives in issuing sovereign

guarantees to support power sector projects, the following are also key GoI institu-

tions that play a critical role in the power generation process:

1. THE MINISTRY OF ELECTRICITY

The MoE is headquartered in Baghdad, Iraq, in the Al-Mansour District. The power

sector is primarily regulated and managed by the MoE. Further, the MoE manages

the generation, load dispatch and distribution of the power sector, except in the

Kurdish Region, which is managed by the Kurdish Regional Government’s MoE.

Historically, there has not been grid connectivity between the federal network and

the KRG network. Both ministries ensure parallel operations, which cover separate

geographic regions. The MoE is responsible for policy setting, regulations, planning,

engineering and projects, and the operation of electrical assets. The MoE is also

responsible for suggesting tariff levels, which must then be approved by the Council

of Representatives. Lastly, the MoE determines Iraq’s power sector investment needs

and either enters into direct negotiations or issues a request for proposals in connec-

tion with a proposed project.

2. THE MINISTRY OF OIL

The MoO is responsible for Iraq’s oil and gas industry including encouraging invest-

ments, operation of infrastructure, planning, recommending and overseeing energy

related policies. The MoO operates and manages 16 state-owned oil companies and

five training centers or institutes focused on the oil and gas industry. In the context of

power generation, the MoO is required to provide 100% of the feedstock necessary to

operate an independent power producer. Any deficiencies in supply are the responsi-

bility of the MoE (hence, the Iraqi Power Purchase Agreement is structured as an

energy conversion agreement). It is worth noting that the importance of oil is not

limited to its role in developing Iraq’s economy; rather, it also functions to allow Iraq

to respond to the demand from the power sector.

11 See Int’l Energy Agency, World Energy Outlook Special Report: Iraq Energy Outlook 31 (2012).

12 For further information, see “Fiscal Policies and Provisions in the Power Sector” section below.

Legal Guide to Investing in Power Generation in Iraq 19

3. THE GENERAL COMMISSION FOR TAXES

The General Commission for Taxes (GCT) was established in 1982, pursuant to Act

No. 92 of 1981 and is a body that falls under the MoF. The main objectives of the

GCT are to generate revenues that contribute to the State budget and to create better

tax laws. The GCT sets tax rates and laws, as well as passes tax incentives to encour-

age foreign and Iraqi investors to invest capital. The corporate income tax rate has

remained stagnant at a rate of 15% for several years, similar to the long-term capital

gain tax rates in the United States.

It is worth noting that under the Investment Law No. 13 of 2006, projects are exempt

from taxation for 10 years and the NIC has the right to increase the exemption, as

discussed below in Chapter II.G. ( Applicable Incentives for IPPs) of this Legal Guide.

4. NATIONAL INVESTMENT COMMISSION

Under Investment Law No. 13 of 2006 (the National Investment Law),13 the GoI laid

out the foundation to attract foreign direct investments into Iraq. The National

Investment Law provided for several strategic initiatives including tax incentives,

investor guarantees, and obligations of investors. The National Investment Law also

established the National Investment Commission (NIC), making it responsible for all

national policies for investment and to serve as promoter, facilitator, monitor, and

policy advisor for investments in Iraq. The NIC specializes in strategic investment

projects of a federal nature exclusively and monitors the implementation of guide-

lines and instructions in investment.

The NIC has full access to national-level bodies including parliament, ministries, and

the Prime Minister’s office. To facilitate investment in Iraq, Investment Law No. 13

called for the creation of a One-Stop-Shop, a single interface for investors looking to

bring their business to Iraq. By streamlining many of the legal and regulatory require-

ments facing investors, the NIC hopes to simplify the investment process for

international investors in Iraq.14

Through Provincial Investment Commissions (PICs), which were established under

Investment Law No. 13 of 2006,15 the NIC can support the needs and priorities of each

of Iraq’s provinces. PICs consult with local governments regarding investment plans

and facilities and coordinate their activities with the NIC on drafting investment

policies. These PIC offices also draw investment maps of their respective provinces and

grant investment licenses for non-strategic projects under US$250 million.

Under Investment Regulation No. 2 for 2009, the NIC has exclusive jurisdiction over

electric power projects with production capacity not less than 30 MW.16 In

13 See Investment Law No. 13 of 2006 art. 4 (Iraq).

14 See Commercial Law Dev. Program, Legal Guide to Investment in Iraq 29 (2016), available at http://cldp.doc.gov/sites/

default/files/Legal%20Guide%20to%20Investment%20in%20Iraq%20(2016).pdf.

15 See id., art. 5.

16 See Investment Regulation No. 2 for 2009, art. 4 second (h) (Iraq).

20 Legal Guide to Investing in Power Generation in Iraq

coordination with the MoE, the Board of Directors for the NIC prepares an invest-

ment map for investment projects and investment opportunities.17

5. SOVEREIGN IMMUNITY

The MoE and other Iraqi government counterparties can waive sovereign immunity

in theory, but for political and optics reasons refer to this as a waiver of “judicial”

immunity (a dispute resolution clause functions as a de facto waiver) and will be

resistant to using the term “sovereign” immunity.

Below is a standard waiver of judicial immunity clause:

“The First Party agrees that it will not invoke its judicial immunity against the

Second Party in pursuing its right to seek arbitration and shall waive any motion or

objection relating to such immunity. The First Party agrees to the jurisdiction of the

arbitration board provided in Section [XX] of this Contract in case any Dispute

arose regarding the interpretation or execution of this Contract, as well as any

decisions issued by the arbitration board regarding this Contract.”

D KEY INTERNATIONAL INSTITUTIONS

International support for Iraq reconstruction includes bilateral and multilateral

assistance that has come in the forms of loans and grants. Below are descriptions of

Development Financial Institutions and Export Credit Agencies that have financed

or guaranteed a deal in Iraq. Examples are given of the participation and general

details behind some of the projects that have taken place in Iraq. The institutions

that have made a significant impact in Iraq are not limited to the institutions listed

herein and the example projects do not constitute a complete list of all projects that

have taken place in Iraq’s power sector.

1. INTERNATIONAL FINANCE CORPORATION (IFC)

IFC is a member of the World Bank Group that finances and provides advice for

private sector ventures in developing countries.

In Iraq, IFC focuses on aiding in the development of the private sector. IFC

expects to invest US$100-130 million over the next few years in Iraq, focusing on

infrastructure financial markets. Additionally, on April 28, 2016, IFC announced

that it was committing US$375 million in financing for an Iraqi power company,

Mass Global Holdings Sulaymaniyah, to provide an additional 500 MW of

capacity to a 1,000 MW power plant in Kurdistan, thereby providing power to

three million people. Mass Global Holdings will also help complete a new power

plant near Baghdad that will supply the city’s electricity requirements.18 Another

example of IFC’s role in Iraq’s power sector is their financing of the Zakho Power

Plant (see Chapter II.D.2 ( Multilateral Investment Guarantee Agency (MIGA))

17 See Tom Arnold, IFC arranges $375 mln in financing to boost Iraq’s power sector, Reuters (Apr. 28, 2016, 4:30 AM), http://www.reuters.com/article/ifc-iraq-power-idUSL5N17T5RY.

18 See Reuters, IFC arranges $375 mln in financing to boost Iraq’s power sector.

Legal Guide to Investing in Power Generation in Iraq 21

and Chapter II.K (Iraq Power Generation Success Stories) below for more information regarding the completion of the Zakho Power Plant).19

2. MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)

MIGA is a member of the World Bank Group that promotes foreign direct investment

into developing countries to support economic growth. MIGA attracts investors and

private insurers to demanding and challenging environments by insuring these invest-

ments. One of MIGA’s target areas is energy efficiency in countries eligible for assistance

from the International Development Association (IDA). MIGA provides political risk

insurance guarantees to private sector investors and lenders. These guarantees gener-

ally protect investments against non-commercial risks and assist investors in obtaining

access to funding sources with improved financial terms and conditions, given the

support of the MIGA guarantee.20

In general, MIGA insures eligible projects against losses resulting from currency

inconvertibility, expropriation, war, terrorism, breach of contract, and non-honoring of

financial obligations. Such coverage may be purchased from MIGA individually or in

combination.21 The insurance benefits investors and lenders by:

• Providing additional leverage in protecting investments through the relationship

with the shareholder governments;

• Resolving disputes by intervening at times of conflict or disagreement and

attempts to resolve the disputes before they reach claim status. If MIGA is unable

to resolve the dispute, its strong financial status allows MIGA to make payments if

the claim is enforced;

• Assisting investors to obtain project financing from banks and equity partners;

• Lowering borrowing costs; and

• Increasing the tenor of loans available to investors.

In March 2015, MIGA proposed a guarantee that would cover loans from financial

institutions that were determined in UNIT Zakho Power Plant in Iraq. The financing

was covered by a MIGA guarantee for up to US$400 million for a period of up to 13

years against the risks of transfer restriction, expropriation, war and civil disturbance,

and breach of contract. This project involved the development and design through to the

construction, testing, and operation of a gas-fired power plant with a capacity of 840

MW in the Kurdistan Region.22 This project was rated by MIGA as a category A project,

because it may have potentially significant adverse social or environmental impacts that

are diverse, irreversible, or unprecedented.23

19 See “Success Stories” below regarding IFC role in funding the Zakho Power Plant.

20 Multilateral Inv. Guar. Agency, Investment Guarantee Guide (July 2015), available at https://www.miga.org/documents/

IGGenglish.pdf.

21 Multilateral Inv. Guar. Agency, Types of Coverage, https://www.miga.org/Pages/Investment%20Guarantees/Overview/

TypesOfCoverage.aspx#toc5.

22 Multilateral Inv. Guar. Agency, Summary of Proposed Guarantee, https://www.miga.org/pages/projects/project.

aspx?pid=1410.

23 Multilateral Inv. Guar. Agency, Environmental and Social Sustainability, https://www.miga.org/projects/environmental-and-social-sustainability. See Success Stories in Chapter II below for more information regarding the completion of the Zakho Power Plant.

22 Legal Guide to Investing in Power Generation in Iraq

3. WORLD BANK IRAQ TRUST FUND

The World Bank Iraq Trust Fund commits funds to the International

Reconstruction Fund Facility for Iraq for the financing of projects. The World

Bank also commits funds through the IDA.

4. UNITED NATIONS DEVELOPMENT PROGRAMME IRAQ (UNDP)

The UNDP provides the MoE in Kurdistan with technical assistance and grants

financial assistance to electricity rehabilitation. In 1997, the UNDP implemented the

Electricity Network Rehabilitation Programme to rehabilitate the electricity network

across four sectors in the northern governorates of Erbil, Dahuk, and Sulaymaniyah.

5. JAPAN BANK FOR INTERNATIONAL COOPERATION (JBIC) AND JAPAN

INTERNATIONAL COOPERATION AGENCY (JICA)

JICA and JBIC have been providing loans and assistance to Iraq and aiding in the

redevelopment of their infrastructure for several years. JICA’s support to Iraq is

primarily focused on (i) the promotion and diversification of industry for economic

growth, (ii) strengthening the basic economic infrastructure, and (iii) building a

foundation for the livelihoods of the people.24

Official Development Assistance (ODA), with concessional terms and a grant

element of at least 25%, must be undertaken by governments for the promotion of

economic development and welfare in developing countries.25 In an effort to improve

Iraq’s situation, JBIC signed a deal in 2008 supporting the Al-Mussaib Thermal

Power Plant Rehabilitation Project and the Electricity Sector Reconstruction

Project. The objective of the project was to expand the power generation capacity by

rehabilitating Al-Mussaib Thermal Power Plant. Another objective of the Electricity

Sector Reconstruction Project in Kurdistan Region was to improve the levels of

reliability and availability of the electricity network in the Kurdistan Region by

developing substations and distribution sectors.

6. THE EXPORT-IMPORT BANK OF KOREA AND SOUTH KOREAN PROJECTS

IN IRAQ

The Export-Import Bank of Korea, also known as Korea Eximbank (KEXIM) is

the official export credit agency of South Korea.26 The primary purpose of KEXIM

is to support South Korea’s economy by providing loans, financing mega projects,

and facilitating economic cooperation with other countries. KEXIM provides

financial support for overseas investment projects and the development of overseas

natural resources.27

24 Japan Int’l Cooperation Agency, Iraq, http://www.jica.go.jp/iraq/english/.

25 Japan Int’l Cooperation Agency, Japan’s ODA and JICA, http://www.jica.go.jp/english/about/oda/index.html.

26 Company Overview of The Export-Import Bank of Korea, Bloomberg (Aug. 30, 2016, 4:03 PM), http://www.bloom-berg.com/research/stocks/private/snapshot.asp?privcapId=3590645.

27 Export-Import Bank of Korea, Purpose of Establishment, Korea Eximbank, https://www.koreaexim.go.kr/site/homep-age/menu/viewMenu?menuid=002001001001.

Legal Guide to Investing in Power Generation in Iraq 23

KEXIM has provided billions of dollars to the development and reconstruction of Iraq.

On July 11, 2012, KEXIM announced that it planned to provide US$1.16 billion in

guarantees to Hanwha Engineering and Construction for the Bismayah New City

Project in Iraq. The guarantee is comprised of a US$775 million advance payment

bond and a US$338 million performance bond. The advance payment bond guaran-

teed the liability of Hanwha to repay advance payments received for initiating

construction and the performance bond guaranteed the liability of Hanhwa for failing

to execute the terms of the contract between themselves and the sponsor. Hanwha is to

build a new city accommodating 100,000 households in Bismayah over a seven-year

period. The total project will cost approximately US$7.75 billion.28 Further, Hanwha

won an additional US$2.12 billion contract to build the social infrastructure for

Bismayah New City. The subsequent agreement was signed on December 2015.29

KEXIM also announced on September 16, 2013 that it planned to provide US$117

million in guarantees to Daewoo Engineering and Construction for the Akkas Gas

Field Project in Iraq. The guarantee is comprised of a US$46 million advance

payment and a US$71 million performance bond.30

7. OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC)

OPIC provides financial products such as loans and guaranties, political risk insur-

ance, and support for investment funds, so long as the transaction furthers OPIC’s

development mission and involves significant U.S. involvement (typically, at least

25% U.S. ultimate beneficial ownership of the project company). For example, in

2013, OPIC provided political risk insurance to Ellicott Dredges LLC to support the

sale of its dredging equipment to the Iraqi MoE. OPIC’s proposed insurance amount

was US$505,000 and the total project costs were estimated at US$11 million.

8. OTHER INSTITUTIONS

The list of institutions above is not exhaustive, nor does it cover all projects. There

are other Development Financial Institutions, including but not limited to the

Islamic Development Bank, the European Bank for Reconstruction and

Development (EBRD), European Investment Bank (EIB), Kuwait Fund for Arab

Development (KFAED), and OPEC Fund for Development (OFID). Further, there are

other export credit agencies, including but not limited to US ExIm, NEXI, K-SURE,

China Export & Credit Insurance Corporation (Sinosure), and European ECAS such

as SACE, CESCE, COFACE, and UKEF. Local and regional banks, as well as inter-

national banks, contribute to Iraq’s power sector. These include Trade Bank of Iraq

(TBI), Bank of Baghdad, Rafidain Bank, National Bank of Iraq, Citi, J.P. Morgan,

HSBC, SMBC, BTMU, China Construction Bank, and Bank of China.

28 USD 1.16 Billion Guarantee Provided for Iraq’s New City Project, Korea Eximbank, https://koreaexim.go.kr/site/program/board/basicboard/view?&boardtypeid=284&currentpage=49&menuid=016004007%2C016004007&pagesize=1

0&boardid=16750.

29 Hanwha Wins Addition $2.12 Billion Construction Project in Iraq, Totaling over $10 Billion in the Bismayah New City Alone, Hanwha (Apr. 6, 2015), http://www.hanwha.com/en/news_and_media/press_release/hanwha__wins_ad-ditional_2_12_Billion_dollar_construction_project_in_Iraq_totaling_over_10_billion_dollar_in_the_bismayah_

new_city_alone.html.

30 USD 117 Million Guarantee Provided for Iraq’s Akkas Gas Field Project, Korea Eximbank, https://koreaexim.go.kr/site/

program/board/basicboard/view?&boardtypeid=284&currentpage=17&menuid=014003007%2C014003007&pagesiz e=10&boardid=16914

24 Legal Guide to Investing in Power Generation in Iraq

E THIRD COUNTRIES

1. IRAN

Iran supports Iraq’s power sector by providing gas through pipelines that travel

from Iran to multiple power plants in Iraq. For example, in 2013, Iran and Iraq

signed an agreement whereby Iran would export gas from the South Pars field.

In April 2016, Iran completed 100km of pipelines on the Iranian side that will be

connected to Iraq to complete a 270 km network. Based on this agreement, 25

MCM of gas will be delivered daily to Sadr, Baghdad and Al-Mansouryah power

plants, earning Iran US$3.6 billion a year in revenue.

F LAND RIGHTS IN IRAQ

1. CONSTITUTIONAL BASIS OF LAND RIGHTS

Sharia has separated land into a few categories: privately-owned land ( mulk), land

in charitable trusts ( waqf ), publicly owned land ( matrukah), unused land ( mawat), and state-owned land possessed by an individual ( amiri).31 Amiri land can be

possessed by an individual who retains tasarruf rights. Tasarruf is the “right to use, exploit, and dispose of amiri land.”32

The Iraqi Civil Code of 1951 regulates property rights such as tasarruf. A pos-

sessor of miri land is entitled to tasarruf rights. Tasarruf can be used as security for a loan. Under Article 1233 of the Iraqi Civil Code, a holder of a tasarruf

forfeits the right to the land if the holder does not exploit it and leaves it unused

for three years without cause.33

Iraq’s Constitution, approved on October 15, 2005, seeks to protect private property

and affords investors land rights. Under Article 23, the Constitution protects private

property, giving the owner the right to benefit, exploit, and dispose of private property.

The Constitution holds that every Iraqi has the right to own property anywhere in Iraq

and no others may possess immovable assets, except as exempted by law.34 This has

been amended by Investment Law No. 13, affording foreign investors the same rights

and privileges as Iraqi nationals (discussed in greater detail below).

Expropriation is always a major concern for foreign investors. However, Iraqi law

has expressly prohibited expropriation without just compensation. Article 23 of the

Constitution, designed to protect the rights of tasarruf holders, prohibits expropria-

tion unless the landowner is provided with just compensation and such

expropriation is for the benefit of the public (eminent domain). While the specific

31 Farhat J Ziadeh, Property Law in the Arab World: Real Rights in Egypt, Iraq, Jordan, Lebanon, Libya, Saudi Arabia, and the Gulf States 8 (1979).

32 See also, Chapter III of Land Registration Act No. 43 of 1971, as amended.

33 See Iraqi Civil Code of 1951, art. 1233. Further, Article 1175 of the Iraqi Civil Code states, in pertinent part, “no person may exploit an amiri land to which a third party has a right of disposal ( tasarruf).” Article 1176 states, in pertinent part, “where a person has usurped an amiri land (state owned property), the person who is entitled to dispose (the holder of a tasarruf right), may recover it from him and may claim the comparable rent.” Article 1178 states that “the person who has the right to dispose ( tasarruf holder) of an amiri land, may not be deprived of his said right except in the cases and in the manner prescribed in the law which he will receive a fair compensation in advance for.”

34 Article 23, Doustour Joumhouriat al-Iraq [The Constitution of the Republic of Iraq] of 2005.

Legal Guide to Investing in Power Generation in Iraq 25

expropriation legislation envisioned in the Constitution has yet to be ratified, the National Investment Law provides a guarantee against the seizure or nationalization

of investment projects, excepting final judgments issued by Iraq’s Commercial Court,

which resolves all expropriation cases.

2. EXTENDING LAND RIGHTS TO FOREIGN INVESTORS

Investment Law No. 13 of 2006 was legislated in an effort by the Iraqi Government

to attract private and foreign investment to Iraq. The National Investment Law

specifies which lands are owned by the state and restricts their use, placing them at

the disposal of the NIC for the purpose of allocating them for investment projects.

The National Investment Law extends to all sectors, except for investments in the

production and extraction of oil and natural gas and investments in the banking and

insurance sector. The minimum capital of the project being covered by the provisions

is set at US$250,000 or its equivalent in Iraqi dinars. The National Investment Law

holds that Iraqi and foreign investors will enjoy the same privileges, facilities, and

guarantees (Article 10/A of Investment Law No. 13 of 2006).

3. OWNING AND LEASING LAND

There are two important sources of Iraqi investment legislation that provide guide-

lines for the owning and leasing of lands by potential Iraqi or foreign investors:

• Investment Law No. 13 of 2006, which provides that Iraqi and foreign investors

may own publicly owned land for housing;35 and

• Regulation No.5 (2011), which outlines “The Sale and Leasing of Real Estate

and Landed Property belonging to the State and Public Sector for Investment

Purposes.” This regulates how rent is assessed in specified investments when

leasing or buying public real estate.

a. Owning Land

Under Regulation No. 5 of 2011, the value of land and property, owned by departments

of the state and other Iraqi government bodies, for the purposes of investment projects,

except housing projects, shall be assessed by committees formed as follows:36

• For investment projects of value exceeding US$250 million, committees shall be

formed by the NIC and PICs as follows:

» Chairman of the NIC, president

» Head of the investment commission of the concerned governorate, member

» Director General of General Tax Authority, member

» Director General of Real Estate Registration Department, member

» Representative of the authority that owns the real estate or land property,

member.

35 Investment Law No. 13 of 2006, art. 10/Second/A/1 and 2 (Iraq).

36 See Regulation No. 7 of 2010, art. 4 and 5 (Iraq).

26 Legal Guide to Investing in Power Generation in Iraq

• For investment projects of value below US$250 million, committees shall be

formed by the National Investment Commission as follows:

» Head of the investment commission of the concerned governorate, president

» Representative from the National Investment Commission, member

» Representative of the General Tax Authority in the governorate, member

» Representative of the Real Estate Registration Department in the governor-

ate, member

» Representative of the authority that owns the real estate or land property,

member.

• The investor must abide by the purpose for which the land or property owner-

ship was allocated under the investment license or risk cancellation of the

registration by the Real Estate Registration Administration, resulting in the

return of the land/property to its former owner at the request of the NIC or the

PIC issuing the license.37

• The developer may assign partial or full ownership of a project under the

Investment Law to a developer only after completion of 40% of the project and

with the approval of the NIC.

b. Leasing Land

To establish an investment project, the investor may lease land and real estate from

the government, private owners, or mixed sectors for a term of not more than 50

years. This lease period is renewable upon consent of the parties and after full

consideration of the nature of the project and its economic feasibility.38

Articles 8 and 9 of Regulation No. 7 of 2010 explain the leasing process whereby the

NIC leases the land for the purpose of executing industrial, agricultural, service,

recreational, and other investment projects, beginning on the date that commercial

operations commence. Electrical power and oil projects are located outside munici-

pal borders and are carried out in the form of build, operate, and either own or

transfer to the beneficiary provide, own and build, operate, transfer to the benefi-

ciary provide a leasing return of 2% of the estimated annual lease return.39

4. OTHER RELEVANT PROPERTY LAWS

The following are exclusions for real estate allocated for the establishment of

investment projects and other laws relevant to property:40

• Under the Real Estate Rental Tax 162 of 1959, a basic tax is assessed and

collected that is equivalent to 10% of the annual revenue from all real estate.

However, the annual revenue is discounted by 10% for real estate maintenance

and expenses. An additional tax is assessed and collected if the revenue of the

real estate exceeds 750,000 Iraqi dinars, according to the schedule in Article

37 Investment Law No. 13 of 2006, art. 10/Second/E (Iraq); Regulation No. 5 of 2011, art. 6/Third (Iraq).

38 Investment Law No. 13 of 2006, art. 10/Third/A (Iraq).

39 See Regulation No. 7 of 2010, art. 8 (Iraq). For further information regarding leasing land, see Legal Guide to Investment in Iraq, supra note 14, at 33-5.

40 For general laws regarding leasing and owning land, see Legal Guide to Investment in Iraq, supra note 14.

Legal Guide to Investing in Power Generation in Iraq 27

2.41 Further, several exemptions are provided under Article 3.

• The Sale and Lease of Government Assets Law No. 21 2 of 2013 states that the

basis of calculating the sale and rent amounts shall be determined in accordance

with the regulations to be issued for this purpose.

G APPLICABLE INCENTIVES FOR IPPS

The incentives and privileges a foreign investor would be guaranteed are provided in:

• Chapter Three of the Investment Law No. 13 of 2006, which outlines privileges

and guarantees;42

• Chapter Five of the Investment Law, which outlines tax and customs duties

exemptions;43 and

• Decree No. 170 of 1983 and the Tax Free Zone created by the Iraq General

Commission for Taxes.

1. GUARANTEES AND PRIVILEGES

There are a number of guarantees and privileges afforded to eligible foreign investors:

• The National Investment Law grants foreign investors the right to repatriate the

capital brought into Iraq as well as its proceeds, pursuant to the instructions of

the Central Bank of Iraq, in an exchangeable currency and after paying all taxes

and debts to the Iraq government and all other authorities;44

• Foreign investors shall be afforded the right to deal in the Iraq Stock Exchange

(ISX), rent or lease lands needed for the project for the term of the investment

project, provided that the renτ or lease cannot be renewed for more than 50 years

except with agreement of the Commission;45

• The National Investment Law grants foreign investors the right to open a branch

of the foreign company;46

• Through Article 12/Third, the Investment Law guarantees foreign investors

the right of ownership and protection against seizure or nationalization of the

investment project, except in the case of a final court decision and the investment

project shall not be expropriated except for public benefit, in whole or in part,

and under just compensation. Protection against seizure and nationalization of

all or any part of the relevant project (except for public benefit) is provided in

exchange for fair and just compensation;

• Foreign investors may hire foreign workers as needed, but priority must be given to

Iraqi workers.47 Further, non-Iraqi technicians and administration employees work-

ing for investment projects may transfer their salaries and other compensation out of

Iraq after paying all taxes and debts owed to the GoI and all other authorities;48

41 Real Estate Rental Tax 162 of 1959, art. 2 (Iraq).

42 See Investment Law No. 13 of 2006, art. 3 (Iraq).

43 See id. at art. 15 – 18.

44 See id. at art. 11/First.

45 See id. at art. 11/Second/A.

46 See id. at art. 11/Second/C.

47 See Investment Law No. 13 of 2006, art. 12/First (Iraq).

48 See id. at art. 12/Fourth.

28 Legal Guide to Investing in Power Generation in Iraq

• Foreign investors have the right to insure the investment project with any

foreign or national insurance company they deem suitable;49

• Foreign investors have the right to “open accounts in Iraqi or foreign currency or

both at a bank inside or outside Iraq for the licensed project”;50

• The provisions of Investment Law No. 13 of 2006 shall apply to mixed sector

projects and existing or operating private sector projects at the request of

management and the approval of the Commission, without retroactive effect;51

• The National Investment Law applies to partnership projects between the

public and the private sectors, including public sector projects contracted for

rehabilitation or operation or to be established with both private and mixed

sector provisions of this law before and after the entry into force of this law

and may not be exempt from state taxes and fee exemptions owed prior to its

enforcement;52 and

• The Council of Ministers can replace lands and facilities belonging to the public

sector in exchange for constructing new facilities with modern production lines

with the exception of relevant legislation in accordance with the instructions

issued by the Council of Ministers.53

2. TAX AND CUSTOMS INCENTIVES AND EXEMPTIONS

a. Tax and Customs Incentives

Eligible investment projects are exempt from taxes and fees for a period of 10 years

from the date of commencement of commercial operations, in accordance with the

areas and development defined by the Council of Ministers at the suggestion of the

NIC based on the degree of economic development and the nature of the investment

project. This tax-exempt period restarts if the MW level of the project increases.54

Furthermore, the NIC has the right to increase the years of tax and fees exemption in

a way directly proportional to the increase in the Iraqi Investor share in the project to

reach a maximum of 15 years if the Iraqi Investor share in the project is more than

50%.55 In addition, assets imported for the purposes of the investment project shall

be exempted from taxes and customs duties.56

In terms of raw materials, those imported for the purposes of commercial operation

of the project that are used to manufacture ration card items, medicines, and con-

struction materials shall be exempted from taxes and customs duties, with the

exception of raw materials available and produced in Iraq. Furthermore, raw materi-

als imported for the purposes of commercial operation of the project shall be

exempted from taxes and customs duties in accordance with the proportions of local

materials contribution to the manufacture of the product, to be determined under

controls developed by the NIC in coordination with the sectoral authorities.57

49 See id. at art. 11/Fourth.

50 See id.

51 See id. at art. 32/A.

52 See Investment Law No. 13 of 2006, art. 32/B (Iraq).

53 See id. at 32/C.

54 See id. at art. 15/First/A.

55 See id. at art. 15/Third.

56 See id. at art. 17.

57 See id. at art. 17/Fifth/B.

Legal Guide to Investing in Power Generation in Iraq 29

Imported spare parts are exempted from fees if the value of these parts does not

exceeded 20% of the fixed assets value, provided that they are not to be used for any

other purpose.58 Also, under Article 30 of Investment Regulation No. 2 of 2009, the

investment project must utilize local materials and satisfy the potential local

demand for the project’s product in order to benefit from the taxes and import duties

exemptions as determined by Investment Law No. 13 of 2006.

3. FREE ZONES

Iraq has created “Free Zones” to advance the economy and to create new opportuni-

ties for local workers and reduce unemployment. The Free Zones were also created

to increase the volume of exports and income of foreign currency by establishing

different investment projects. The Free Zones Law No. 3 of 1998 established the

General Commission for Free Zones under the MoF.59

• Locations of Free Zones:

» There are currently three Free Zones: (1) Nineveh, (2) Khor Al-Zubair/

Basrah and (3) Al-Qa’im/Anbar.

• Permitted activities in the Free Zones:

» The Free Zones Law allows industrial, commercial, and service projects

investment in specific zones designated as “Free Zones” to benefit from

many exemptions. Activities such as industries that pollute the environ-

ment, involve toxic materials, or are harmful to public health, are

prohibited. To apply for approval to begin a project in a Free Zone, investors

must submit a request and pay a US$100 USD fee to the Free Zones Board.

• The Free Zones Law enables the following activities in Free Zones:

» Industrial activities, including production, sales, assembly, manufacturing,

and repacking;

» Warehousing for re-export and trade;

» Warehousing services;

» Transportation services;

» Banking, insurance, and reinsurance; and

» Professional support services for the industrial activities listed above.

• Privileges granted to investors through Free Zones:

» All capital invested, as well as interest and income generated, are exempt

from taxes and fees throughout the lifetime of the project, including con-

struction and start-up phases;

» Wages of foreign workers are exempt from taxes and allow the transfer of

their income outside Iraq, and Iraqi workers benefit from having 50% of

their wages exempt from income tax;

» Imported and exported goods and raw materials are exempt from all taxes

and fees, except those exported to the interior of the country;

58 See id. at art. 17/Fourth.

59 See The Free Zones Law No. 3 of 1998, art. 1 (Iraq). For further information, see Republic of Iraq, Ministry of Fin., A completed project to attract the investments, available at http://freezones.mof.gov.iq/fil/dalelen.pdf.

30 Legal Guide to Investing in Power Generation in Iraq

» Foreign currency may be transferred inside or outside or dealt within the

Free Zone and will not be subject to any restrictions; and

» Investors are granted a temporary customs privilege for entry of their

vehicles according to the needs of the project.

4. OTHER RELEVANT IRAQI LAWS ON TAXES AND DUTIES

Income Tax Law No. 113 of 1982 (the main source of tax law in Iraq) and Customs Law

No. 32 of 1984 require investors exempt from paying income tax under Investment Law

No. 13 to nonetheless submit the required financial disclosures to the GCT. Customs

Tariff Law No. 22 of 2010 regulates the percentage of customs fees on imported goods

according to the rates set forth in the tariff tables of customs duties and the agricul-

tural calendar based on the Harmonized System Coding. Customs Tariff Law No. 22

dissolved the 5% “Iraq Reconstruction Levy” on August 1, 2015.60

H LEGISLATIVE PROVISIONS RELATED TO POWER SECTOR

1. EXCLUSIVE JURISDICTION

Under Investment Regulation No. 2 for 2009, NIC has exclusive jurisdiction to grant

an Investment License to federal strategic projects, which includes electric power

projects with production capacity greater than 30 MW.61 If it is less than 30 MW, the

PIC is the governing authority that may grant the license.

2. CURRENT LEGAL REFORMS

As of 2016, there were two relevant laws that have been drafted and are under

consideration: the draft MoE Law and the draft Electricity Regulation Law.62

a. Draft MoE Law

The draft MoE Law aims to restructure the MoE. The draft outlines new key

roles for the MoE. According to the draft, the MoE’s 27 directorates are to be

restructured, corporatized, and eventually privatized. The draft also authorizes

the creation of an independent regulatory entity to oversee the sector, ensuring

competitive, effective, and transparent electricity market. It is a major concession

that the government has finally accepted a role for the private sector in the

economic reform of the energy sector, as an essential step toward tackling the

sector’s problems. Further, the draft legislation would mandate the government

to proceed with liberalization of the power sector, limiting the MoE’s role to

regulatory and licensing policies, while expanding the role of the private sector,

defining consumer rights and obligations, and encouraging investment.

60 See Republic of Iraq, MoF, Public Commission of Customs, Iraqi Tariff Table According to the Harmonized System , available at http://www.iraq-businessnews.com/wp-content/uploads/2011/02/Iraqi-DRAFT-Tariff-Schedule.

pdf?d9c344. For further information, see Legal Guide to Investment in Iraq, supra note 14, at 42-45.

61 Regulation No. 2 of 2009, art. 2/Second/h (Iraq).

62 See Iraq Energy Outlook, supra note 11. Still, the bill has yet to be adopted, partly due to disagreements between various parliamentarian blocs on privatization and the role of the central government in protecting national assets, and partly due to fears that reform of the electricity sector might become another divisive political issue. See Luay Al-Khatteeb & Harry Istepanian, Turn a Light On: Electricity Sector Reform in Iraq, Brookings Inst. (Mar. 2015), available at https://

www.brookings.edu/wp-content/uploads/2016/06/Alkhatteeb-Istepanian-English-PDF.pdf; and Luay Al-Khatteeb & Harry Istepanian, Iraq’s Draft Electricity Law: What’s Right, What’s Wrong? , Brookings Inst. (Apr. 15, 2014), https://

www.brookings.edu/research/iraqs-draft-electricity-law-whats-right-whats-wrong/.

Legal Guide to Investing in Power Generation in Iraq 31

b. Draft Electricity Regulation Law

The draft Electricity Regulation Law establishes a regulatory office for the electricity

sector, with responsibility for monitoring the sector, licensing participants, enforcing

technical codes, and resolving disputes and consumer complaints.63

I ENFORCEMENT OF INVESTOR AND LENDER RIGHTS

If there is a conflict between a provision of Investment Law No. 13 of 2006 and a

provision of another Iraqi Law that pertains to investment, then the National

Investment Law governs. Investors and related parties are to follow the procedures

set forth in the National Investment Law for dispute settlement and investor

violations pertaining to projects covered by the National Investment Law and

related Iraqi laws.64

1. DISPUTE RESOLUTION IN GENERAL

Dispute resolution is governed by the Civil Procedure and Actions Law No. 83 of

1969. The law governing arbitration can be found in Articles 251-276 of the Civil

Procedure Law. It is permissible to agree on resolving certain disputes through

arbitration, with key aspects of this particular mechanism listed below:65

a. Arbitration Requirements

The arbitration agreements must be in writing, and arbitration procedures, location

and prevailing law should be outlined and agreed upon. The dispute may not be

heard by the court if it was subject to an arbitration agreement between the parties,

provided the party wishing to rely on the clause makes an objection. 66 The arbitra-

tor’s acceptance to his appointment shall be in writing.67 After accepting his

appointment, the arbitrator may not quit without an acceptable excuse and may not

be discharged except by the parties’ agreement.68 If resorting to the arbitration

option was required to be done within a certain period of time, then such option

shall terminate upon the expiry of such a period, unless the litigants agree to extend

the same.69 However, if the arbitrators failed to resolve the dispute within the

agreed-upon period or the one stipulated under Iraqi Law or if they were unable to

submit their report due to a force majeure, then each litigant may invoke the compe-

tent court to apply for an extension or request the court to adjudicate the dispute or

appoint an alternative/another arbitrator for that purpose, as the case may be.70

Unless the parties agree otherwise, a tribunal must comply with the procedures set

out in the Civil Actions Law.71 A tribunal must give reasons for its award.72

63 See Iraq Energy Outlook, supra note 11.

64 See Investment Law No. 13 of 2006, art. 34 (Iraq).

65 See Civil Procedure and Actions Law No. 83 of 1969, art. 252-76 (Iraq).

66 Id. at art. 253.

67 Id. at art. 259.

68 Id. at art. 260.

69 Id. at art. 262.

70 Civil Procedure and Actions Law No. 83 of 1969, art. 263 (Iraq).

71 Id. at art. 265.

72 Id. at art. 270.

32 Legal Guide to Investing in Power Generation in Iraq

b. Enforcing an Award in Iraq

A domestic Iraqi award cannot be enforced unless the supervising court approves

it.73 The court may decide to annul it on certain grounds.74 It is noteworthy that Iraq

is one of the few countries that is not a signatory to the New York Convention. Thus,

enforcing an award outside Iraq depends on whether the country where enforcement

is sought has a treaty with Iraq on judicial matters.

2. INTERNATIONAL CENTER FOR SETTLEMENT OF INVESTMENT DISPUTES

(ICSID)

The ICSID Convention established ICSID, an international institution that provides

facilities for the resolution and arbitration of investment disputes. ICSID offers

services for the resolution of international disputes, primarily between investors and

States, but also in the context of State-to-State disputes. In addition, it offers

fact-finding proceedings to examine and report on facts before a dispute arises.

On November 17, 2015, Iraq signed the ICSID Convention and became a signatory

State. The ICSID Convention entered into force in Iraq on December 17, 2015. This

provides investors with a globally recognized dispute forum to seek recourse.

3. DISPUTE RESOLUTION FOR INVESTORS

a. Governing Law

Investors and related parties who are subject to provisions of Investment Law No. 13

shall resolve disputes under Iraqi law unless otherwise agreed.75 It is worth noting

that Iraq has explicitly endorsed the use of arbitration by investors.76

b. Dispute Process

The following relevant provisions are of note:

• Any dispute that arises from a work contract shall be subject to the provisions

of the Iraqi law and the jurisdiction of Iraqi courts. Any non-Iraqi worker may

be exempted if the contract stipulated otherwise;77

• If a dispute arises between the investment project partners resulting in a

stoppage to the project for a period that exceeds three months, a warning shall

be sent to the investor to the settle the dispute within 30 days of the date of the

warning. If three months elapse without settlement of the dispute, the dilatory

investor may be liable for a penalty fine that is commensurate with the length

of delay, provided that it does not exceed 10% of the project capital;78

• The party in breach of its obligation shall be excluded after the period

stipulated by law, which is 30 days, and shall be replaced by the partner not

in breach or an approved replacement. This must be undertaken without

73 Id. at art. 272.

74 Id. at art. 273.

75 Investment Law No. 13 of 2006, art. 27 (Iraq).

76 Id.

77 Id. at art. 27/First.

78 Id. at art. 27/Second/A.

Legal Guide to Investing in Power Generation in Iraq 33

prejudicing the relevant Commission’s right to revoke the investment license

after the expiration of the 30-day period;79

• If an investment project stops because of a dispute between the investor and

third parties, and after taking into account a 30-day period in Article 27/

Second/A, the Commission shall take legal action to liquidate the project and

notify the project owner. Subsequently the liquidation proceeds shall be depos-

ited in a bank after paying the dues of the State or any other dues;80 and

• Disputes arising between the Commission or any other governmental entity and

a party subject to the Investment Law but where the matter is not related to one

of the provisions of the Investment Law, shall be subject to Iraqi law and courts

on civil matters.81

4. INVESTOR VIOLATIONS

Article 28 of Investment Law No. 13 of 2006 outlines the recourse for the relevant

Commission to take against an investor who has breached an agreement, as follows:

• If the investor violates any of the provisions of the Investment Law, the

Commission shall have the right to warn the investor to resolve the violation

within a specific period decided by the license issuing committee;82

• If the investor does not resolve the violation within the specified period, a final

warning shall be sent to the investor allotting 30 days to cure the violation

from the date of warning. If the period of the final warning expires, a penalty

shall be imposed that is proportional to the disparity in time, provided that the

accumulated amount shall not exceed 10% of the cost of the project;83

• In the case that the investor fails to provide a response within the aforementioned

period, the license-issuing commission retains the right to revoke the investor’s

license starting from the date of the violation, while third parties retain the right

to claim compensation from the investor for the damage caused to them as a

result of the violation, without prejudice to any other penalties;84 and

• Upon repeating the violation, the Commission shall have the right to revoke

the investor’s license it issued and order stoppage of work on the project and

deny the investor the granted exemptions and privileges from the date of the

violation. The Commission may allow others to demand compensation for the

damage caused by this violation, without breaching any punishments or other

compensations stipulated in applicable laws.85

79 Id. at art. 27/Second/B.

80 Investment Law No. 13 of 2006, art. 27/Third (Iraq).

81 Id. at art. 27/Fifth.

82 Id. at art. 28/First/A.

83 Id. at art. 28/First/B.

84 Id. at art. 28/Second.

85 Id. at art. 28.

34 Legal Guide to Investing in Power Generation in Iraq

J DOING BUSINESS IN IRAQ

Iraq’s Investment Law No. 13 of 2006, as amended, enables domestic and foreign

eligible investors with investment license grants to enjoy the abovementioned

benefits and guarantees. Domestic and foreign companies must be registered with

the Ministry of Trade’s Companies Registration Department to do business in Iraq.

1. INVESTMENT APPLICATION REQUIREMENTS

Article 19/Second of Investment Law No. 13 of 2006 states that the applications

for investment license applications submitted by investors must include (i) the

completed license application form available on the NIC website; (ii) the project

financing plan accompanied by the financing party guarantee from an accredited

financial institution; (iii) the list of projects carried out by the investor or its

partners in or outside Iraq and the parties supporting them in its execution; (iv)

details of the investment project, including an economic and technical feasibility

study; and (v) the timetable for project completion.86

2. SERVICES PROVIDED TO OBTAIN AN INVESTMENT LICENSE

The One Stop Shop department of the NIC or the relevant PIC assists potential

investors obtain investment licenses. This assistance includes (i) coordinating with

the offices of relevant ministries and authorities to create a list of investment

opportunities for strategic projects; (ii) providing investors with market research

and details about the economic climate; (iii) directing investors to authorities

specialized in economic and technical feasibility studies; (iv) facilitating the required

business visa application process; (v) providing information needed by investors

regarding Iraqi cities and human and natural resources of the regions; and (vi)

assisting with obtaining approval of sector-specific entities.

3. GRANTING AN INVESTMENT LICENSE

After the NIC or the relevant PIC receives a complete application for an investment

license, the relevant entity (i) studies the application of the investor, (ii) studies the

economic feasibility statement, (iii) clarifies the legal issues, (iv) obtains the approval

of the relevant authorities for the investment project, and (v) assists the investor in

obtaining land allocated for the establishment of the project.

Following the steps listed above, the NIC must either contact the relevant sector

authorities and land owning authorities or reply to the investor within 45 days.87

Within 15 days of notification, the relevant sector authorities and land owning

authorities must study the project’s economic and technical feasibility and issue

a statement of an opinion on the establishment of the investment project

(approve, deny, or request amendment).88

86 See Investment Law No. 13 of 2006, art. 19 (Iraq).

87 Id. at art. 20/First, Second.

88 Id. at art. 2.

Legal Guide to Investing in Power Generation in Iraq 35

In the event of a dispute between the NIC and other relevant entities involved in the license granting process (other than PICs), the dispute shall be brought before the

Prime Minister for settlement.89

4. LEGAL REGISTRATION AND ESTABLISHMENT OF COMPANIES

Under Company Law No. 21 of 1997, a foreign or domestic person or entity has the

right to acquire membership in a company.90 The investors must first determine what

category the company in question belongs to.91

a. Establishing the Company

Under Article 13 of Company Law No. 21 of 1997, the founders of the company shall

prepare a contract that shall contain the following information:

• The company’s name and form;

• The company’s head office, which must be in Iraq;

• Deposit of appropriate capital for the company, in IQD, at an authorized Iraqi

bank and notification to the Companies Registrar of the same;

• The purpose of establishing the company and its nature;

• The capital divided in quotas and shares;

• The method of distributing profits and losses; and

• The address of the company’s commercial activity in Iraq, including any

branches and other types of foreign company entities in Iraq.

The application for establishment shall be submitted to the registrar with the

company’s contract and a statement from the bank that the capital required has

been deposited.

b. Registering with the MoE

Any company that wishes to register with the MoE and provide additional informa-

tion about the company to the MoE can obtain and complete an informational form

from the MoE and email the form in Word to the Department of Investments and

Contracts within the MoE.92

c. Investor Obligations

There are certain investor obligations in terms of project implementation and

commercial operation after the investment license is granted, which can be broken

down into (i) notification and reporting requirements, (ii) employment and labor

requirements, and (iii) environmental, safety and public order requirements.

5. NOTIFICATION AND REPORTING REQUIREMENTS

After an investment license has been granted and an investment project has com-

menced, the investor must meet certain obligations to keep the NIC, the PICs, and

other relevant agencies informed of the status of the investment project, in addition

89 Id. at art. 20/Third.

90 Company Law No. 21 of 1997, ch. 1, sec. 3, art. 12 (Iraq).

91 Id. at ch. 2, sec. 1, art. 13.

92 For registration information, see Ministry of Electricity, Republic of Iraq, http://www.moelc.gov.iq/index.

php?name=Pages&op=page&pid=210.

36 Legal Guide to Investing in Power Generation in Iraq

to honoring the commitments made when applying for a license. Under Article 14 of

Investment Law No. 13 of 2006, the investor shall (i) notify the NIC, the Region or

Governorate Commission in writing immediately following the installation and

equipping of fixed assets for the purposes of the project and the date of the beginning

of commercial activity;93 (ii) keep proper records audited by a certified accountant in

Iraq, in accordance with Iraqi law; 94 (iii) provide a technical and economic feasibil-

ity study for the project and any information, data, or documents required by the

Commission or other competent authorities regarding the budget of the project and

progress made;95 (iv) keep records of the project’s duty-free imported materials and

specify the depreciation periods of these materials;96 (v) protect the safety of the

environment and adhere to the valid quality control systems in Iraq and interna-

tional regulations accredited in this field;97 (vi) commit to the correspondence of the

work progress schedule by the investor with reality provided that that the time

difference shall not exceed six months, and the NIC shall have the right to withdraw

the license and shall set forth punitive conditions if the six-month period is

exceeded;98 (vii) adhere to the provisions stipulated in the Commercial Bookkeeping

Regulation No. 2 of 1985 required for income tax;99 and (viii) determine the depre-

ciation of materials imported for the project in accordance with the Depreciation

Regulation No. 9 of 1994, which includes using the historical value of fixed assets as

a base for calculating depreciation.100

6. EMPLOYMENT AND LABOR REQUIREMENTS

Employment and labor requirements derive generally from two sources: Investment

Law No. 13 of 2006 and the Ministry of Labor Worker’s Retirement (WR) and Social

Pension Organization (SPO).

• Under Article 14/Sixth of Investment Law No. 13 of 2006, investors must adhere

to Iraqi and international legal standards for labor regarding salaries, vacations,

and work hours and conditions, in addition to the following requirements:

» Employment priority must be given to Iraqi workers, if possible;

» Iraqi nationals must make up at least 50% of the workforce in the project;101

» Investors have the right to employ non-Iraqi workers only where Iraqis with

the requisite skills and qualifications are not available;102 and

» A foreign investor’s company must train and rehabilitate its Iraqi employees

and raise their efficiency, skill, and capabilities. Priority in employment

shall be given to Iraqis.103

93 Investment Law No. 13 of 2006, art. 14/First (Iraq).

94 Id. at art. 14/Second.

95 Id. at art. 14/Third.

96 Id. at art. 14/Fourth.

97 Id. at art. 14/Fifth.

98 Investment Law No. 13 of 2006, art. 14/Seventh (Iraq).

99 Id. at art. 17.

100 Id. at art. 18.

101 Investment Regulation No. 2 of 2009, art. 30/First (Iraq).

102 Investment Law No. 13 of 2006, art. 12/First (Iraq).

103 Id. at art. 14/Eighth.

Legal Guide to Investing in Power Generation in Iraq 37

• All companies must register with the Ministry of Labor Worker’s Retirement

(WR) and Social Pension organization (SPO) before beginning any activities.104

» Social Security deductions equal to 17% of an employee’s wages shall be paid

quarterly. Employers are responsible for 12%, with the remaining 5% paid

by employees;105 and

» Payments should be made by employers to the WR and SPO by certified check.

• Iraqi Labor Law requires that the investor maintain required work conditions

and hours and train Iraqi employees based on requirements under the Ministry

of Labor and Social Affairs. The Iraqi Labor Law of 2015 governs workplace

safety matters. Employers are required to ensure healthy conditions at the

workplace and take sufficient safety measures to protect workers. The safety

measures include: (i) providing a safe and secure workplace environment; (ii)

providing workers with training to avoid occupational hazards; (iii) educating

workers on occupational health and safety and clearly displaying applicable

rules related to occupational risks; (iv) providing first aid equipment; (v) provid-

ing safety instructions whenever necessary; (vi) protecting workers from any

immediate danger (such as explosions); (vii) providing workers with appropriate

safety devices and clothing for protection against any hazards; (viii) clearly

indicating potentially hazardous locations; (ix) providing emergency rescue and

first aid tools; and (x) implementing periodic workplace inspections.

The National Center for Occupational Health and Safety (NCOHS) oversees the

implementation of safety requirements in the Labor Law. The NCOHS decides on a

case-by-case basis whether certain types of work warrant special requirements

(such as reduced hours).106

7. ENVIRONMENTAL REQUIREMENTS

To operate in Iraq, a project must comply with certain Iraqi Environmental and

Antiquities and Heritage Laws.

a. Environmental Impact Assessment

According to Ministry of Environment Law No. 37 of 2008, all investors must study

the environmental impact of the project and the degree to which it conforms to the

environmental conditions required. Project companies may not begin work on a

project until the Ministry of the Environment issues an approval. Project companies

must produce an environmental impact assessment that includes the following:

• Calculation of both negative and positive environmental impacts on the sur-

rounding environment (in relation to the perceived production benefits),

• Proposed method of avoiding pollution,

• Proposed method of treating pollution,

104 See National Investment Commission, Investor Guide to Iraq 2015 34 (2015), available at http://www.iraq-jccme.jp/

pdf/arc/investors_guide_2015.pdf.

105 Pension and Social Security Law No. 39 of 1971 (Iraq).

106 Investment Law No. 13 of 2006, art. 15/Fifth (Iraq). See also Commercial Law Dev. Program, Legal Guide to Investment in Iraq, supra note 14, at 49-50.

38 Legal Guide to Investing in Power Generation in Iraq

• Calculation of the probability of a pollution-related emergency and necessary

preventative precautions,

• List of alternatives technology that can be used to minimize environmental

harm less harmful for the environment and rationalizing the resources usage,

• Plan to reduce waste, and

• Evaluation of the project’s environmental feasibility

For more information on obligations relating to environmental protection, please

consult Law 27 of 2009 relating to the Improvement and Protection of the

Environment.

b. Antiquities and Heritage Law

Investors must also comply with the Antiquities and Heritage Law No. 55 of 2002,

which requires investigating and digging for antiquities on the land designated for

the investment project.

c. Absence of Oil Pipeline Restrictions

The approval of the MoO required for the issuance of an Investment License will

only be granted after verification that there are no oil pipeline restrictions

within the land area of the project (Ministry of Oil Law No. 101 of 1976). The

Ministry of Industry and Minerals Law No. 38 of 2011, which emphasizes the

implementation of scientific methods and quality control, seeks to ensure

optimum mineral investment through effective exploitation while preserving

natural resources and protecting the environment and improving quality.

K IRAQ POWER GENERATION SUCCESS STORIES

Over the course of the past decade, many notable foreign investment projects have

taken place in Iraq, including some in the power sector. Billions of dollars were

invested from foreign private investors who have succeeded in completing projects

and have begun operations.

1. AL-KHAIRAT POWER PLANT: “BEST GLOBAL PROJECT”

Çalık Enerji, is a leading energy company headquartered in Turkey. The existing

markets of Çalık Enerji are Turkey, Turkmenistan, Uzbekistan, Iraq, Georgia, Libya,

and Kosovo.107

In 2014, Çalık Enerji completed a power plan with 1,250-MW capacity in

Al-Khairat Region, Karbala.108 As part of the agreement made in 2011, the power

plant was built with 10 gas turbines purchased by the GoI from General Electric

(GE).109 The power plant is not an IPP as it is operated by the MoE. The Al-Khairat

Natural Gas Cycle Power Plant was completed in two years and selected as the “Best

107 Çalik Energi, http://eng.calikenerji.com/Pages/Çalık%20Enerji.aspx.

108 Çalik Holding, Annual Report 2014, available at http://i.tmgrup.com.tr/calik/2015/12/03/clk_frae_2014-1449134840893.pdf.

109 Çalik Energi, Çalik Energi Invests 445.5 Million Dollar in Iraq for a Power Plant, http://eng.calikenerji.com/Pages/

NewsDetail.aspx?ID=27.

Legal Guide to Investing in Power Generation in Iraq 39

Global Project” in 2013.110 The plant, constructed for an estimated US$445.5 million, will supply electricity to millions of citizens. The cost is to be repaid based on a

deferred payment system as agreed with the Turkish government.111

2. ZAKHO PROJECT

The Zakho Project, which commenced in 2014, entails the development, design

financing, construction, testing, commissioning, ownership, and operation of a 1,260

MW greenfield natural gas-fired gas turbine combined cycle power plant, executed

on a BOO basis. The power plant and its substation will be located in Zakho City in

the Kurdistan Region once complete.112 Kurdistan Regional Government (KRG) will

construct a short gas pipeline to supply natural gas to the power plant.

The financing of the project is sourced by IFC. Financing is taking place in two phases

in conjunction with the two phases of the power plant’s development. Phase 1A will

consist of a 560 MW open-cycle phase gas-fired gas turbine including the associated

400/132/11 kV Dohuk substation and a 40km 400kV overhead transmission line.

Phase 1B will consist of 280MW open-cycle gas-fired gas turbine. Phase 2 will consist

of conversion of the open-cycle gas turbines to CCGT with three heat recovery steam

generators. IFC is investing a total of US$578 million, which will cover the cost of

phase 1A. The proposed IFC investment is (i) up to US$100 million of A Loans for

IFC’s own account, (ii) up to US$65 million of IFC’s Managed Co-Lending Portfolio

Program Loan, and (iii) up to US$240 million of B / Parallel Loans. However, subject

to final lender appetite, the financing package may be increased by an additional

US$140 million pro rata to accommodate Phase 1B, which has a cost of US$204

million.113 Lastly, the project is sponsored by UNIT Investment N.V., Polteks Insaat A.S.

and will be developed by UNIT and Polteks. The project has been awarded a 15-year

PPA by the MoE to design, construct, and operate the Project.114

3. GE MEGADEAL

In January 2016, GE signed an agreement with the MoE to provide equipment and

maintenance for 10 power plants across Iraq, which will boost electricity production

by 1,000 MW. GE has begun shipping parts and commenced the projects at the MoE

plants in Iraq. The technology upgrades include heavy fuel oil (HFO) conversions

that will help scale up productivity in addition to installing advanced hot gas path

components at the various gas turbines.115 The GoI will pay GE in deferred payments

over three years, and the MoE’s commitment is backed by a sovereign guarantee.116

110 Debra K. Rubin, Global Best Industrial Project: Al Khairat Gas Turbine Power Plant, Iraq, Engineering News-Record (May 7, 2014), http://www.enr.com/articles/7397-global-best-industrial-project-al-khairat-gas-turbine-power-plant-iraq?v=preview.

111 Work Starts at $450m Karbala Power Station, Iraq-Business News, http://www.iraq-businessnews.com/2011/05/09/

work-starts-at-450m-karbala-power-station/.

112 Int’l Fin. Corp., Unit Zakho: Environmental & Social Review Summary, http://ifcext.ifc.org/IFCExt/spiwebsite1.nsf/7

8e3b305216fcdba85257a8b0075079d/98b86f657de6179a85257ca50076be83?opendocument.

113 Id.

114 Unit & Polteks Ltd., Zakho Natural Gas-Fired Power Plant, Duhok Substation and Overhead Transmission Line Project: Environmental and Social Impact Assessment (ESIA) Report Non-Technical Summary, available at http://ifcext.ifc.

org/ifcext/spiwebsite1.nsf/0/98B86F657DE6179A85257CA50076BE83/$File/UNIT%20Zakho%20NTS%20Mar%20

2014.pdf.

115 General Electric, GE Signs Agreement with Iraqi Ministry of Electricity; GE Power Up Plan to Sustain and Increase Iraq’s Power Generation for the Peak Summer Period, GE Newsroom (Jan. 28, 2016), http://www.genewsroom.com/

press-releases/ge-signs-agreement-iraqi-ministry-electricity-ge-power-plan-sustain-and-increase-iraq.

116 See Rasheed, supra note 9.

40 Legal Guide to Investing in Power Generation in Iraq

L CHALLENGES/RISKS

Although Iraq is attractive to domestic and foreign investors from a legal perspec-

tive, understanding the risks and challenges that investors face will allow better

business decisions to be made in regards to how investments operate. Iraq has made

limited progress enacting certain key laws and many investors face concerns about

security, corruption, infrastructure, and societal stability.117

1. SECURITY

An obstacle foreign investors face when entering the Iraqi market is the uncertainty

faced due to the Islamic State (IS). In June 2014, IS took control of Mosul and Iraq’s

economic development has suffered as a result. Namely, Iraq’s power sector has

become fragile and the MoE announced grid losses of more than 8,000 MW.118 IS

relies on funding from various sources, including the appropriation of cash held at

state-owned banks, exploitation of oil fields and the extortion of a portion of salary

payments of Iraqi government employees. Iraq has made a commitment to work

with the inter-governmental Financial Action Task Force (FATF) and MENA-FATF

to address the issue of terrorism, but the security issues still prevail due to the

insufficient progress of this program.119 To address this challenge, the Iraqi Security

Forces and the international Coalition to Counter ISIL, led by the United States,

have partnered to combat IS. A proposed stabilization and rebuilding process will

follow military operations to eradicate IS and reintegrate large parts of the country.

2. TARIFF STRUCTURE AND PAYMENT RECOVERY

The tariff structure in Iraq suffers from an unduly low cost to end-users and revenue

collection is estimated at one-third of what actually enters the distribution network.

Electricity from the grid is heavily subsidized by the government, leading to mini-

mal incentive to the consumer to use electricity efficiently. Iraq’s tariff structure

charges US$.01 per kilowatt-hour consumed, with higher prices being charged when

more than 20,000 kilowatt-hours are consumed.120 Iraq’s tariff rates are about

one-tenth of the rates in other MENA countries. Further, the tariffs only cover about

10% of the cost to the MoE.121 The low rates encourage consumers to focus their

usage on grid-based electricity rather than on private generators, which further

hamper the grid. Until the quality and duration of electricity enhances in Iraq, it will

be difficult for the MoE to increase tariff rates because such a decision will be

greatly opposed by the public.

The lack of metering and payment collection for electricity usage is another chal-

lenge that must be taken into consideration. It is estimated that tariff revenue is

117 Cent. Intelligence Agency, Middle East: Iraq, The World Factbook, https://www.cia.gov/library/publications/the-world-factbook/geos/iz.html (last updated Aug. 15, 2016).

118 See Al-Khatteeb & Istepanian, Turn a Light On, supra note 69.

119 Int’l Monetary Fund, 2015 Article IV Consultation and Request for Purchase under the Rapid Financing Instrument

– Press Release; Staff Report; and Statement by the Executive Director for Iraq, IMP Country Report No. 15/235 (Aug.

2015), available at http://www.imf.org/external/pubs/ft/scr/2015/cr15235.pdf.

120 See World Bank Group, Iraq Public Expenditure Review, supra note 3.

121 See Al-Khatteeb & Istepanian, Turn a Light On, supra note 69.

Legal Guide to Investing in Power Generation in Iraq 41

collected for only one-third of the electricity that enters the distribution network.122

In addition to the lack of payment collection, it is difficult for investors to properly

cover their operating expenses and recover their cost of capital due to the illegal

networks provided by the private generators.

3. OSCILLATING OIL PRICES

Excessive dependence on oil as a form of revenue makes Iraq highly vulnerable to

changes in international oil prices. The recent fall of oil prices drastically reduced

Iraq’s revenue from oil exports, which accounts for more than 90% of Iraq’s

budget. Although Iraq has the fifth largest proven oil reserves in the world, the

GoI has publicly stated its commitment to attract foreign investment and is

committed to diversifying Iraq’s economy to be less reliant on oil exports. 123 A

major challenge that has evolved from the fall in oil prices is the limitation placed

on the financing of government contracts and tenders, which is the source of

many commercial opportunities in Iraq. The reason these contracts and tenders

have been limited is because they are widely financed by oil revenues. The Iraqi

government is interested in attracting assistance and loans from foreign financial

institutions in order to address this concern. For further information, see the

2015 Investment Climate Statement.

122 See Iraq Energy Outlook, supra note 11 and The World Bank, Republic of Iraq Public Expenditure Review: Toward More Efficient Spending For Better Service Delivery (2014).

123 See U.S. Dep’t of State, Iraq: Investment Climate Statement 2015 (Jun. 2015), available at http://www.state.gov/

documents/organization/241811.pdf.

42 Legal Guide to Investing in Power Generation in Iraq

CHAPTER III. FINANCING OF POWER PROJECTS

A INTRODUCTION

This chapter addresses project finance in general, including an overview of project

partnerships, public and private financial institutions, credit enhancements, and

secured transactions. In addition to this broad survey, this chapter also addresses

the current condition of Iraq’s power project environment, specifically in regards to

administrative procedures and sources of funding.

B OVERVIEW OF PROJECT FINANCE

Project finance is the financing of large infrastructure or commercial projects,

such as power plants, transmission networks, other energy projects, roads, water-

ways, and more. Project finance is usually done on a long-term basis and based on

the project’s projected cash flows rather than on the balance sheet of the borrower

or its sponsor. Project finance is a means of financing a company created for the

specific purpose of owning, constructing, and operating a project, with limited or

no recourse to the company’s shareholders. This means that the shareholders of

the project company will have limited or no liability for the debts and obligations

of the project company. Project finance is especially suitable for long-lived, large-

scale, capital-intensive investments.

Project finance transactions have more complexity than balance sheet financing.

There are large up-front costs that are incurred due to the multiple parties, financ-

ing and legal documents, and technical studies along with extensive due diligence

required. Often times, the sovereign (or government offtaker) grants certain conces-

sion rights related to the building, ownership, and operation of a project to a special

purpose company whose sole business is the building, ownership, and operation of

the project. The project company typically contracts third parties to perform certain

of those obligations (such as construction and operation). The principal financing

documents can include a common terms agreement, loan facility agreements,

security documents, an accounts agreement, an Intercreditor agreement, hedging

documents, direct agreements with the counterparties to the key project documents,

and shareholder agreements and/or equity subscription agreements.124

Public-private partnership (PPP) projects can generally be classified into entirely

privately financed long-term structures, such as Build-own-operate-transfer

(BOOT) and Build-own-operate (BOO), and short-term IPP structures such as

Design, build, finance, and operate (DBFO) and Build-operate-transfer (BOT),

which employ more public finance. A comprehensive list of structures is attached

to the end of this chapter.125

124 For more information on the basics of project finance, please see Understanding Power Project Financing, 2 Power Africa Understanding Series ch. 3, available at http://cldp.doc.gov/sites/default/files/UnderstandingPowerProjectFi-nancing.pdf.

125 Id.

Legal Guide to Investing in Power Generation in Iraq 43

C REFINANCING THE PROJECT THROUGH A SPECIAL PURPOSE

VEHICLE

The borrower, with generally limited recourse to sponsors, typically uses a special

purpose vehicle (SPV), a separately incorporated legal entity with limited liability for

the project. The use of an SPV isolates the liability of the project in a separate entity

and provides assurance that the project company will not have prior liabilities. 126 In

addition, SPVs shield the assets of the sponsors of the project. Unlike a corporate

loan, financing with the use of an SPV does not depend primarily on the borrower’s

creditworthiness, but rather on the strength of the project, measured in terms of its

structuring and its finances. Loans are typically secured by the assets of the project,

including contractual rights, and a suitable sovereign guarantee. Note, SPVs in Iraq

are not typically used, but they can be done. It is therefore prudent for the investor to

seek local Iraqi counsel in creating SPVs using Iraqi law and procedures.

D FINANCIAL INSTITUTIONS

Financial institutions play a key role in project finance transactions. There are a

broad range of institutions involved and some of the most influential are the

Development Finance Institutions (DFIs), Export Credit Agencies (ECAs), Political

Risk Insurance Providers, and commercial and local banks.

1. DEVELOPMENT FINANCE INSTITUTIONS / EXPORT CREDIT AGENCIES

DFIs provide an alternative to traditional financial institutions for areas either not

generally exposed to project finance or with heavily restricted markets. DFIs

encompass a growing range of alternative financing institutions, but all with a

126 See Commercial Law Dev. Program, Legal Guide to Investment in Iraq, supra note 11, at sec. 2.

44 Legal Guide to Investing in Power Generation in Iraq

common mandate of providing finance to promote development and poverty

reduction. DFIs are often more concerned with environmental, social, and other

policy guidelines. The shareholders of DFIs are typically governments, although

occasionally other financial institutions or organizations do hold shares. DFIs can

be broadly categorized as multilateral, bilateral, or regional.

Multilateral DFIs are established by more than one country and are subject to interna-

tional law. These DFIs can be composed of several national governments as well as

international or private institutions. Each multilateral DFI has its own independent

legal and operational status although they often have similar mandates allowing them

to cooperate on transactions. Due to their size, multilateral DFIs have a greater

financing capacity than bilateral DFIs. Examples of multilateral DFIs include the

International Finance Corporation, a branch of the World Bank (IFC), the Multilateral

Investment Guarantee Agency, a member of the World Bank (MIGA), EIB, KFED,

OFID, the European Commission, and the Nordic Investment Bank.

Regional development banks have a similar function to multilateral development

banks or institutions, but with a regional focus. Shareholders usually consist of the

regional countries, with additional major donor countries. Examples include the

Caribbean Development Bank, the African Development Bank, the Inter-American

Development Bank (IADB), the Asian Development Bank, Islamic Development

Bank the EBRD, and the Eurasian Development Bank.

Bilateral DFIs are majority-owned by national governments and have historically

served to implement government foreign development and co-operation policies in

their investments in developing countries. Examples of bilateral DFIs include the

CDC Group plc (UK) (CDC), Proparco (France), Norfund (Norway), Swedfund

(Sweden), Netherlands Development Finance Company (Netherlands), the OPIC

(United States), JBIC (Japan), and JICA (Japan).

There is a broader category of government-backed financial institutions known as

ECAs, which are typically private or quasi-governmental institutions that act as an

intermediary between governments and exporters to issue export financing, fre-

quently acting as underwriters on long-term loans. ECAs provide significant funding

for project finance in developing countries, which means the distinction between

ECAs and DFIs can be blurred. However, ECAs have a broader mandate, namely to

assist the national economy (of that ECA) by financing and insuring against loss in

respect of foreign purchases of that country’s goods in circumstances where com-

mercial lenders are unable or unwilling to accept the political or commercial risks.

While this chapter focuses on commercial lenders’ engagement with DFIs, increas-

ingly in emerging market deals, the involvement of an official government bank or

export credit agency is becoming the norm rather than the exception. Examples of

ECAs include KEXIM (Korea), K-Sure (Korea), Sinosure (China), US ExIm (United

States), and the UK Export Credits Guarantee Department (United

Kingdom).“”Traditionally, DFIs provided relatively simple financial instruments

such as grants or concessional loans (i.e., loans that are extended on terms

Legal Guide to Investing in Power Generation in Iraq 45

substantially more generous than market loans, either through low interest rates,

longer grace periods, or a combination of both). However, an appetite for more

sophisticated products has grown rapidly and an innovative range of financial

instruments are now being issued by DFIs, including equity and quasi equity instru-

ments, guarantees, and hedging instruments. In February 2013, IFC partnered with

Standard Chartered Bank as sole arranger to launch the first RMB-denominated

note. This note issuance was designed to increase IFC’s opportunities to fund private

sector development in emerging-market countries. Other alternative financial

products, such as microfinance, social bonds or, on a smaller scale, peer-to-peer

lending, are on the rise. While these alternative financial products may not present

current opportunities for partnership with commercial lenders, they should be

carefully watched by the commercial sector.

Together with principal financing functions, DFIs can also act as management

consultants and technical advisors, equipped to provide a complete package of

services and consultancy skills in developing countries. The business of develop-

ment finance, however, is not designed to compete with the commercial finance

sector. The EBRD, for example, states that its loans are designed to “complement”

rather than “displace” private sources of finance. These loans, which are in no

way subsidies, deliberately price debt at a mark-up level that reflects genuine

country and project risk, including administration costs, commission fees,

structuring fees, outside counsel fees, and commitment fees at market rates.

Listed below are some of the several advantages of co-financing with a DFI

lender, for both the beneficiary and other commercial lenders.

• Risk Guarantees – A DFI is mandated to facilitate investment in developing

economies, which often carry a high-risk, unstable profile. Risk mitigation is

one of the most significant benefits of co-financing with a DFI, usually provided

in the form of a guarantee. These guarantees can range from all-risk guar-

antees against all defaults, regardless of the cause, to partial risk guarantees

(PRGs), which cover defaults arising from specified events (e.g., sovereign

non-obligation and political risks).127 A DFI will consider the optimum level

of risk by balancing the costs of managing elevated levels of risk with their

liquidity requirements, institutional credit ratings, and the cost of borrowing.

As a result, these guarantees encourage commercial lenders to invest in frontier

markets higher risk sectors than they might otherwise.

• Partial Risk Guarantees (PRG) – A PRG facilitates private sector invest-

ments by covering private lenders or investors against the risk of a government

or public entity failing to perform its contractual obligations in respect to a

private project. PRGs ensure the payments and typically cover outstanding

principal and accrued interest of the debt tranche. Eligible projects consist of

BOT and PPP projects that have private participation and are dependent on

certain government contractual obligations. PRGs cover a broad category of

risks, including changes in the country’s legal framework, nonperformance of

127 For information on Enclave PRGs, see World Bank Group, World Bank Guarantee Products: IBRD Enclave Partial Risk Guarantee (PRG), available at http://siteresources.worldbank.org/INTGUARANTEES/Resources/

IBRDEnclavePRG.pdf.

46 Legal Guide to Investing in Power Generation in Iraq

contractual obligations, expropriation, nationalization, and foreign currency

availability and convertibility, among other risks. Lastly, PRGs can cover both

foreign and local currency for a broad range of commercial debt instruments.128

• Longer Maturity – Significantly for beneficiaries, development finance loans

are characterized with longer maturity periods than commercial loans (typi-

cally 10 to 15 years, rather than three to five years), which can be tailored to

suit the individual project. Similarly, a beneficiary can benefit from longer

grace periods. Often, loans will be structured in two tranches (A and B loans),

where the DFI will fund a portion of the loan (with a longer tenure), and the

remaining portion will be syndicated to commercial lenders. The flexibility

provided by such loans allows all parties to maximize the sources of finance

available and structure the finance appropriately.

• High Level of Liquidity – Because the majority of funds are prepaid in stock,

DFIs have the opportunity to offer additional callable capital, exemptions on

dividends, and corporation tax. DFIs are also able to borrow at sub-LIBOR

rates due to high institutional credit ratings (usually AAA due to state guaran-

tees and income from trading in borrowings).

The benefits from co-financing flow both ways. For the project and beneficiaries, it

increases the amount of resources available for funding projects. For the DFI, it

engages the international debt market in sustainable trade with developing markets.

For the commercial lenders, it opens up opportunities in new economies with the

protection of risk guarantees and support from the DFI.

2. POLITICAL RISK INSURANCE PROVIDERS

Domestic and foreign investors, as well as banks, face a number of risks when

conducting business overseas. While some risks can be mitigated or allocated

through due diligence, a number of risks are difficult to mitigate or assess and

allocate effectively. Political force majeure is a risk that overseas projects may face

and is difficult to assess or allocate as it is independent of the projects and not under

the control of any parties to the project. Thus, political risk insurance (PRI) may be

obtained to guarantee the investment and may be used as a tool to mitigate the

political risk. PRIs also provide greater access to financing as there is less of a risk

that unforeseen circumstances will hinder the ability of the debt to be repaid.

a. Providers129

PRI can be provided by both public and private insurers. Private PRI providers have

greater flexibility in the types of projects and breadth of coverage they can offer, but

they have a lower risk tolerance than public PRI providers and typically have shorter

tenors. Public providers include both ECAs and DFIs. Public providers include but

are not limited to MIGA and OPIC. These providers are typically mandated to

128 For more information on PRGs, see World Bank Group, Partial Risk Guarantees (PRG), available at http://web.

worldbank.org/external/default/main?theSitePK=3985219&pagePK=64143534&contentMDK=20260268&menuPK

=64143504&piPK=64143448.

129 See Multilateral Inv. Guar. Agency, About Political Risk Insurance, https://www.miga.org/Pages/Resources/

AboutPoliticalRiskInsurance.aspx.

Legal Guide to Investing in Power Generation in Iraq 47

support the policy goals of their sponsoring government institutions, such as facilitating exports in emerging markets. Given the political clout the backers of public

insurance providers have, securing at least a portion of a project’s PRI cover from a

public insurer with a diverse set of strong backers such as MIGA can be an effective

tool in managing political risk. ECAs typically support investors and lenders of their

home country investing in foreign countries.

The Berne Union is the leading global organization for the export credit and invest-

ment insurance industry. With over 80 member companies around the world, an

investor may find a diverse group of providers that have different risk appetites.130

b. Coverage

PRI policies generally insure eligible projects against losses relating to asset-backed

and trade-related risks. Asset-backed risks include confiscation, expropriation,

nationalization, forced abandonment, war, terrorism, civil disturbance, license/permit

cancellation, and political violence. Trade-related risks include currency inconvertibil-

ity and transfer restriction, contract frustration, breach of contract, non-honoring of

financial obligations, and wrongful/unjust withdrawal of a guarantee.

c. Commercial and Local Lenders

Commercial and local lenders may also provide financing to a project finance transac-

tion in a more traditional lending form. These commercial lenders may include banks,

insurance companies, credit corporations, and other lenders. Commercial lenders are

more likely to be risk averse, so their financing costs may be higher than those of other

financial institutions, such as DFIs and ECAs, for which providing project financing is

more common and more closely aligned with their mission or mandate. Sometimes

commercial lenders are strategically chosen from multiple countries, and there may

also be reasons for involving local banks as commercial lenders.

E GOVERNMENT FINANCING

Government-financed PPP significantly reduces the amount of capital investment

needed from a private party, decreasing the level of risk transfer and weakening

private sector incentives to create value for money. In this way, government-

financed PPP makes it somewhat easier for a private party to abandon the project

in the event that complications arise. Nonetheless, there are several reasons why

governments may choose to provide financing for PPP projects, including (i)

avoiding excessive risk premiums, (ii) mitigating government risk, and (iii) improv-

ing availability or reducing cost of finance.

Governments can contribute to the financing structure of a PPP in several ways.

They can provide:

• Loans;

• Government guarantees on commercial loans; and/or

• Direct financial grants to project companies.

130 See http://www.berneunion.org/about-the-berne-union/berne-union-members/ for a full list of members.

48 Legal Guide to Investing in Power Generation in Iraq

Government-owned development banks and other financial institutions can also be

involved, either as entities established specifically to support the PPP program or as

providers of finance to PPPs as part of a broader portfolio. Governments can also

retain ongoing responsibility for capital expenditures without the involvement of

private sector entities.

By using private finance, governments reduce their spending obligations, enabling

the redirection of public resources to other development priorities. These types of

projects allow governments to (i) transfer construction and operation risks to the

private sector, (ii) ensure timely completion of the construction, (iii) guarantee

supply to support industrial development, (iv) share political risk with Lenders and

DFI/ECAs, (v) improve accountability in the provision of infrastructure and public

services, and (vi) improve reliability and availability.

F PPP VALUE DRIVERS

PPP value drivers, which increase the value for money, include: (i) whole-of-life

costing, (ii) risk transfer, (iii) upfront commitment to adequate maintenance and

predictability/transparency of whole-of-life costs, (iv) focus on service delivery, (v)

innovation,

(vi) asset utilization, (vii) mobilization of additional funding, and (viii)

accountability.131

PPPs can reduce whole-of-life costing due to full integration. When one party is

responsible for each aspect of the project, it is incentivized to ensure each part is done

correctly and efficiency is created. PPPs also transfer the risk of the project from the

government to a private party, which may be better equipped to manage the project.

There is more opportunity for innovation as well, both through competitive procure-

ment of contracts for PPPs, which motivates bidders to come up with creative

solutions, and the creation of greater opportunities.

Private parties may also be more motivated than the government to reduce costs

and improve asset utilization, as governments can be inefficient and bureaucratic in

their operation and management of an asset. Similarly, the use of private parties

mobilizes additional funding opportunities and can create greater accountability in

the development, construction and operation of a project. Government payments to

the private party may be conditioned on the private party’s performance.132

The below chart depicts the relative costs of DBFO projects as compared to BOO

projects. While DBFO projects cost less in nominal terms, when the implied costs (i.e.,

inefficiencies) are factored in, the project may end up costing more to a government.

131 The World Bank, Public-Private Partnerships Reference Guide (1st v. 2012), available at http://www.ppiaf.org/sites/

ppiaf.org/files/publication/Public-Private-Partnerships-Reference-Guide.pdf.

132 Ibid. See also Mustafa Alshawi, Concept and Background to Public Private Partnership (PPP) / Private Finance Initiative (PFI): UK Experience, Iraq Inst. for Econ. Reforms (Nov. 20, 2009), available at https://www.oecd.org/

mena/47562550.pdf; and Patrick Sabol and Robert Puentes, I, Brookings Inst. (Dec. 2014), available at http://www.

brookings.edu/~/media/research/files/reports/2014/12/17-ppp/bmpp_privatecapitalpublicgood.pdf.

Legal Guide to Investing in Power Generation in Iraq 49

G ALTERNATIVE FUNDING SOURCES

1. FINANCING A PROJECT VIA CORPORATE LOAN

Lenders of a corporate loan extend credit to the borrower based on the borrower’s

creditworthiness and the risk attached to the specific project. If the borrower’s credit

ratings or credit history is not sufficient, it is common to have a shareholder of the

borrower guarantee the loan.

a. Financing a Project Using Equity

Companies can finance a project either partially or entirely through the use of equity

but often financing consists of equity and debt. Equity is an expensive source of

funding due to the added risk investors bear. Debt, alternatively, is a less expensive

source of funding than equity because a lender has a first claim to the assets of a

project in the event of default on a loan (traditionally referred to as collateral). As the

diagram below illustrates, a project relying on the combination of both equity and

debt will require a lower overall return. Such a project will not only impose less risk

to an equity investor, but will also allow for greater investment than only equity

would allow. The equity investor will benefit from a high internal rate of return on

the capital it deploys for a project. The project finance lenders will bear a portion of

the risk at a lower rate of return.

50 Legal Guide to Investing in Power Generation in Iraq

H KEY STAKEHOLDERS

The following are the key stakeholders in project finance transactions and their

relationship is illustrated below:

• The project company: investor and borrower (typically an SPV)

• The sponsor (typically the borrower’s shareholders)

• The Government Offtaker (grants concessions/licenses / buys products/

services generated by the project on regular basis)

• The EPC Contractor (the entity hired to construct the project)

• Fuel suppliers

• The Operation and Maintenance Contractor, who runs the project once

construction has been completed.

• Other Government authorities (grant permits/rights of use)

• Lenders (typically a syndicate of banks):

» Commercial

» Multilateral/bilateral/national development banks

• Hedge providers

• Insurers

• Agents (administrative agent/collateral agents/process agents)

• Special consultants (legal counsels/independent engineer/financial

consultant)

Legal Guide to Investing in Power Generation in Iraq 51

I CREDIT ENHANCEMENTS

Governments need to create an enabling environment that facilitates the development

of the host country power sector. The enabling environment may not be sufficient by

itself, and therefore, to catalyze IPP deals in the market, the host country government

may need to offer credit enhancements. Investors are concerned with allocating the

risks of continuing payment obligations and termination payments.

• Sovereign Guarantees. Typically, a State’s central bank or the appropriate

governmental authority guarantees the obligations of the offtaker towards the

project company. The guarantee serves to insulate debt and equity investors

for the duration of the project from government-related risks such as (i) politi-

cal risks, (ii) changes in legislation, (iii) tax changes, (iv) bankruptcy, and (v)

force majeure risks.

It should be noted that the sovereign guarantee is not a guarantee of the debt

obligations owed to lenders by the project company. Governments should be

cognizant of the impact of credit enhancements on their sustainable debt

frameworks developed in cooperation with the IMF. Host governments have

many factors to consider when determining whether to provide sovereign

credit enhancements.

• Letters of Comfort and Support. This type of credit enhancement provides

less support than a full sovereign guarantee but is not uncommon. A letter of

comfort is a letter from a host country whereby it promises to facilitate a project

by offering certain assurances to the project developer. Unlike a sovereign

guarantee, which establishes legally binding obligations on the sovereign, a letter

of comfort may be a simple reflection of willingness and intent of the sovereign to

support the development of the project. Since the objective of a letter of comfort

may not necessarily be to create legally binding obligations, the letter may rather

seek to demonstrate the host country’s commitment to the project and offer “soft

52 Legal Guide to Investing in Power Generation in Iraq

comfort” that the host country will support the project, the project company and

its sponsors. This support may include facilitating approvals required for project

implementation, general support of its offtaker and fiscal incentives.

• Put and Call Option Agreements (PCOA). PCOAs typically deal with more

significant events triggering termination, and do not provide enhancements for

continuing payment obligations. A PCOA establishes two contractual obliga-

tions: the first being a put option in favor of the project shareholders to require

the purchase of the assets of the power project company by government; and

the second being a call option in favor of the host country to require the project

shareholder to sell the assets of the power project. The PCOA also defines

under which conditions the options can be exercised and defines the formula

for how payments under the PCOA are to be calculated.

• Continuing payment obligations. These instruments can be covered by either

Liquidity Letters of Credit or Liquidity Escrow ac counts. They do not provide

coverage for termination-related events.

• Sponsor and subcontractor credit support. Lenders often require sponsors

to set up credit-enhancement measures that reduce some of the credit risk of

these Lenders. Typically, these measures are in the form of (i) sponsor/third-

party guarantees relating to the performance of the project as set out in any

relevant documentation, (ii) insurance against risks relating to the project,

such risks associated with construction and environmental liability, and (iii)

financing facilities that allow for the use of temporarily available liquidity to

handle certain risks such as local currency depreciation.

J TARIFFS

The offtaker in a power project has obligations set forth in a PPA to make recurring

payments to the power producer, broadly referred to as tariff payments. Tariff

payments are the actual price the offtaker pays to the project company for capacity

made available and/or energy generated.

Tariff payments are important in understanding how to finance a power project

because the payment structure and components reflect a pricing of certain risks and

an allocation of certain risks between the project company and offtaker. Investors

will assess a tariff when evaluating the overall bankability of a deal and their

consequent decision to invest in it or not and at what price or expected rate of

return. Understanding a tariff is key to understanding a condition or element of a

deal that may or may not drive the need for credit support.

The components of tariffs payable for a power generation facility will vary depending

on a number of factors. Typical components include capacity payments and energy

payments. Tariff components are often affected by whether the power plant is dis-

patchable, meaning whether the plant can respond to the instruction, or dispatch, of a

system operator to provide or vary its power. Dispatchable technologies include

gas-fired power plants, coal-fired power plants, and hydroelectric projects with

Legal Guide to Investing in Power Generation in Iraq 53

sizeable reservoirs. Non-dispatchable technologies typically include solar PV, run-of-river hydro, and wind, because they are reliant on natural conditions and, accordingly,

may be intermittent. Tariffs for power projects using dispatchable technologies usually

have capacity payments and energy charges; projects with non-dispatchable technolo-

gies usually only provide for the payment of energy charges. Tariffs may also vary

depending on the time of use or provision of power, and there may be different calcula-

tions applicable to baseload, mid-merit, peaking, and/or self-dispatched power.

• Capacity Payments. A capacity payment is a monthly charge for capacity made

available to the offtaker (or deemed to have been made available), regardless

of whether the offtaker actually dispatches the plant. The capacity payment is

structured and calculated to enable the project company to earn consistent and

sufficient revenues under the PPA to enable the project company to:

» Pay all the fixed operations and maintenance costs and any other agreed

project costs,

» Pay all corporate and other taxes that are assessed on the project company

and its properties,

» Repay the project loans (and in some cases the costs of the associated

infrastructure such as transmission lines), and

» Pay the sponsors/equity investors a return on equity.

• Energy Payments. Energy payments are monthly charges for the energy

dispatched and actually delivered to the offtaker. It is calculated with reference

to the net electrical output of the plant that is delivered to an agreed delivery

point. It is usually measured in units of MWh or kWh. For dispatchable plants,

energy payments are structured to allow the project company to recover the

cost of inputs (such as fuel) used to generate the net output delivered and to

recover operations and maintenance costs that vary depending on the quantity

of net output generated. For non-dispatchable plants, the energy payment is

structured to allow the project company to recover the costs a capacity pay-

ment would cover in the case of a dispatchable plant. The energy charge rate,

which is the price per MWh or kWh of net electrical output, is priced to enable

the project company to recover those costs over time. Typically, the project

company is required to generate a specified quantity of net electrical output

over a period of time (e.g., a year) in order to receive the energy charge rate. The

quantity specified is typically based on a statistical probability of how much the

plant should be able to produce in that period of time. For example, it may be

based upon how much net output a solar PV plant is expected to generate over a

year with a 90% degree of probability.

• Deemed Energy Payments. Non-dispatchable plants can rely on energy pay-

ments as their sole source of revenues because offtakers are generally obligated

to purchase all of the energy the plants generate. In the event that (i) the project

company is asked to curtail the generation of net electrical output or (ii) the plant

is not capable of generating and delivering net electrical output to the delivery

point as a result of risks the offtaker has agreed to assume, then the offtaker

54 Legal Guide to Investing in Power Generation in Iraq

remains obliged to pay deemed energy payments. The amount of this payment is

equal to the energy payments the project company could have earned by generat-

ing net electrical output if the project company had not been asked to curtail the

generation. Deemed energy payments are usually determined by calculating the

quantity of net electrical output the plant could have generated during a curtail-

ment using real-time data for the site conditions (wind speed and direction in the

case of wind plants, solar irradiation in the case of solar plants, and quantities of

water spilled in the case of run-of-river hydroelectric plants).

• Pass-through Payments. Power projects that have a separate fuel supply con-

tract will themselves often have a take-or-pay obligation to the fuel supplier.

Under a take-or-pay provision, the purchaser commits to purchase an agreed

quantity of fuel over a given period of time and will be liable to pay for this

quantity regardless of whether or not it actually accepts delivery of the fuel. By

the same token, the supplier may have a put-or-pay obligation to compensate

the power project for non-delivery of fuel. Similar provisions apply to other

feedstock supply contracts. The PPAs for such power projects will typically

include a provision whereby this liability is passed through to the offtaker/

host government where non-delivery is caused by a risk which is assumed by

the offtaker/host government. In other words, if an offtaker fails to dispatch a

plant at a level that will enable the project company to consume the specified

take-or-pay quantity of fuel, the offtaker (or host government, depending on

the risk) will be required to make a payment to allow the project company to

cover the take-or-pay payment (in part or whole, depending on the PPA provi-

sions) to the fuel supplier.

K INVOICING AND PAYMENTS

In order to be paid for the energy it delivers, plus any applicable capacity charge, the

seller will need to periodically invoice the buyer in an amount denominated in the

currency agreed in the PPA. The billing period is typically on a monthly basis. The

invoice will generally include the following components: (a) capacity payment, (b)

energy payment, (c) supplemental payments (including payments for any start-ups

above the agreed threshold), and (d) liquidated damages and penalty amounts owed to

the buyer. The buyer has the right to review the invoice prepared by the seller, and if it

disagrees with the amount payable in the invoice, it may request clarification and

substantiation of such invoice within a number of days agreed among the parties.

An important element after the tariff negotiation is how to measure the energy

and capacity to be invoiced to the buyer. The seller is typically responsible for

buying and installing meters to measure the output of the power plant. The net

electrical output and capacity to be invoiced will usually be measured according

to a metering code published by the regulator. The parties will agree on the

meters (a main meter and a backup meter) to be used for measurements, and the

delivery points for those measurements. Those meters will be regularly inspected

and tested by both parties. Representatives of both parties should generally be

present on the date of reading of meters for invoice.

Legal Guide to Investing in Power Generation in Iraq 55

Undisputed payments must be made in the currency agreed by the parties to the PPA.

• Currency. The currency of payment under the PPA is a negotiated issue that

may vary in different countries. Sellers often have foreign exchange exposure in

emerging markets. Foreign exchange exposure arises when a significant portion

of the project costs have been financed in a foreign currency (e.g., U.S. Dollars

or Euros). If the seller is to be paid by the buyer in the local currency, it must

ensure that it can pay back the lenders in the foreign currency.

The currency of payment will often depend on the strength of the local currency

as well as the convertibility of the currency. In situations where the local currency

has a long history of stability and is generally regarded as being able to maintain

this stability, the PPA will likely be payable in local currency.

In other markets without this stable history it is accomplished by: 1) bench-

marking the amount of the buyer’s payment in local currency to the foreign

currency at the market exchange rate or 2) the buyer paying the seller directly

in a foreign currency.

As an alternative, the tariff may include a more structured foreign currency

indexation formula. The indexation formula is used in cases where the seller can

“hedge” the foreign exchange exposure. Hedging is generally available in markets

where the local currency markets are highly liquid.

• Method of payment. The method of payment is subject to agreement of the

parties, but is often by wire transfer to a designated account of the seller.

• Disputed amounts. Normally, if any portion of the invoiced amounts are dis-

puted by the buyer, these will be withheld from payment and contested as part

of the agreed dispute resolution mechanism under the PPA. An interest rate will

apply to all such withheld amounts which must be added to the payment as deter-

mined under the dispute resolution mechanism to be owed to the seller. In some

cases, the parties may agree that the amounts representing the disputed portions

of the invoice will be put in an escrow account until resolution of the dispute.

• Late payment. Any late payments (i.e., payments made after the due date

agreed between the parties) will bear interest at an interest rate (either local

interest rate or foreign interest rate) agreed between parties from the date on

which the payment was due until the date the payment is made. The basis of the

interest rate is generally the interbank rate for the monetary market published

by the central bank of the country for local currency components or the LIBOR/

EURIBOR for US/EUR foreign currency components.

L TAXATION/INVESTMENT LAW

The Iraqi legal regime governing investment in Iraq consists of several related laws

on establishing a project, including: Residency Law No. 118 of 1978, Companies

Law No. 21 of 1997, as amended, Trade Law No. 30 of 1984, and Banking Law No.

94 of 2004, Civil Law No. 40 of 1951, Investment Law on Crude Oil Refining No.

56 Legal Guide to Investing in Power Generation in Iraq

64 of 2007, Industrial Investment Law No. 20 of 1998, and Free Trade Zone Law

No. 3 of 1998, in addition to several related pieces of legislation, such as

Regulation No. 5 of 1989.

Three points should be noted regarding these related laws:

First, when the text of any of these laws conflicts with the National Investment Law,

application of the National Investment Law supersedes these laws, even if the

conflicting law was enacted subsequent to the National Investment Law. This is

pursuant to the principle that “specific rules restrict general rules,” and is also

affirmed in the National Investment Law, which states that “any provision that

contradicts the regulations of this law shall be null and void.”

Second, the general policy of the State is toward ensuring that investments are given

priority. This is a critical point in terms of the application of related laws, drafting

contracts, and removing ambiguities in applying laws and procedures.

While the National Investment Law lays out the general terms for providing benefits

and protections for investors, there are areas on which the National Investment Law is

silent and the relevant laws outline more detailed procedures to be followed by the

investor. At the same time, the National Investment Law does not absolve any investor

from fully adhering to the requirements and mechanisms of other laws, as well as any

legal requirements applicable under Iraqi law as a whole. For example, obtaining an

investment license does not absolve a project investor from satisfying the requirements

for registering a company under the Companies Law, nor from registering or satisfy-

ing the particular requirements for obtaining a building permit or import license.

Moreover, while the National Investment Law provides exemptions for investors from

paying income tax for a specified number of years, it does not exempt investors from

submitting the required financial disclosures to the tax and regulatory authorities in

Iraq, as required by Iraqi Income Tax Law No. 113 of 1982.

Third, it is noteworthy that Iraq is in the process of joining multilateral and

bilateral agreements that regulate investment activities, as a means of providing

additional privileges to investors. Once such agreements are joined and acceded

to by the GoI, they will supersede local legislation and should be taken into

consideration by those concerned with the drafting of investment contracts as

providing an alternative means of recourse.

M COLLATERAL SECURITY / SECURED TRANSACTIONS

Collateral security protects the lender in the event the borrower fails to perform its

repayment obligations. The lender essentially holds an interest in the borrower’s

property to secure a loan or obligation. Assets of the project and/or the sponsors are

assessed to impose a charge, either in the form of a mortgage, pledge, hypothecation,

lien, or other type of encumbrance used as collateral, which may be supplemented by

guarantees and assignment of rights (whether individual, corporate, or sovereign).

In the event of default, the lender is entitled to liquidate charged assets.

Legal Guide to Investing in Power Generation in Iraq 57

Secured transactions provide many benefits for power project borrowers and

lenders. For example, they make lower cost credit available to finance the project

by making secured credit more available. They also allow the project company to

use the full value inherent in its assets to support its credit. Secured transactions

laws also enable borrowers and lenders to obtain security rights in a simple and

efficient manner, provide equal treatment of diverse sources of credit and of

diverse forms of secured transactions, and help establish clear and predictable

priority rules. The UNCITRAL Legislative Guide on Secured Transactions

provides an international framework of workable laws for secured transactions.133

The key to secured transactions is that collateral increases the level of credit

available to a project borrower and decreases the cost of that credit, while also

providing a measure of security for a lender.

N POWER PROJECT FINANCE AND PPPS IN IRAQ – PATH TO EXECUTION

Restoring a business-friendly atmosphere in Iraq is a building-block process that

involves the use of DFIs, ECAs, Iraqi, and other regional banks. DFIs in particular

play a key role in demonstrating confidence in the new regulatory and economic

environment as well as in mitigating political risk to the project. Given the impor-

tance of DFIs, ECAs, and international banks (mainly under ECA cover) in the

financing plan, projects will have to demonstrate compliance with local and interna-

tional environmental regulations, the Equator Principles,134 and the environmental

and social policies of lenders, which frequently include the IFC Performance

Standards on Environmental and Social Sustainability and the World Bank Group

Environmental, Health, and Safety (EHS) Guidelines.

Iraqi banks may have interest in limited recourse projects but may not be willing or

have the capacity to fund the entire project, compelling foreign and domestic inves-

tors to obtain senior and subordinated debt from multiple sources. Collectively, the

DFIs, ECAs, and Iraqi banks will lend credibility to a project and will be instrumen-

tal in providing assurance to international banks that the Iraqi MoF is committed to

adhering to international best practices and mitigating risks.

Project financing fundraising requires diversification and optimization of liquid

sources. It will be driven by the terms of the draft PPA, with a MoF Guarantee that is

confirmed by the MoF. Another important source of funding in the financing plan

comes from the involvement of the local and regional banks for policy reasons, which

133 See United Nations Comm’n on Int’l Trade Law, UNITRAL Legislative Guide on Secured Transactions, available at https://www.uncitral.org/pdf/english/texts/security-lg/e/09-82670_Ebook-Guide_09-04-10English.pdf. For more information on secured transactions, and the laws that make these security arrangements possible and workable, see Heywood Flesig, Secured Transactions: The Power of Collateral, available at https://www.imf.org/external/pubs/ft/

fandd/1996/06/pdf/fleisig.pdf; Int’l Fin. Corp., Secured Transactions and Collateral Registries, available at http://

www.ifc.org/wps/wcm/connect/793e79804ac10fff9ea69e4220e715ad/Secured+Transactions+and+Collateral+Regist ries+Brochure-English.pdf?MOD=AJPERES; and The World Bank, Principles for Effective Insolvency and Creditor/

Debtor Regimes, available at http://pubdocs.worldbank.org/en/998191463585986043/ICR-Principles-Insolvency-Creditor-Debtor-Regimes-2015.pdf.

134 The Equator Principles is a framework adopted by various financial institutions for assessing and managing the environmental and social risks of projects. For a list of the financial institutions that have adopted the Equator Principles, see Equator Principles Association Members & Reporting, available at http://equator-principles.com/index.php/

members-and-reporting. For an overview of the requirements under the Equator Principles for project financing, see The Equator Principles (Jun. 2013), available at http://equator-principles.com/resources/equator_principles_III.pdf.

58 Legal Guide to Investing in Power Generation in Iraq

could significantly enlarge the pool of liquidity for a given project. The capacity of

Iraqi banks to lend in U.S. dollars over long periods will have to be assessed. As a

final assessment of liquidity, the total amount of debt for a project and its impact on

the overall financial structure will be determined (i.e., Debt-to-Equity ratio, timing

of future phases, etc.).

The limited headroom in the financing sources as well as the Iraqi sovereign credit

rating is likely to result in suboptimal debt pricing levels as compared to the low

market pricing seen on recent IPP projects in the MENA region. These levels are,

however, subject to change as political risk and credit rating improve.

The illustration below distills the information above into a simple, step-by-step

approach to setting up a project in Iraq:

-

Legal Guide to Investing in Power Generation in Iraq 59

DBFO projects (EPC + [X]y O&M)

BOO / BOOT (IPP) projects

Construction

Risk borne by EPC Provider

Risk borne by EPC Provider / IPP Sponsors

Milestone Payments by MOE during construction

No payments for MOE before PCOD

Equity

MOE Equity Exposure [ca. X%]

No Equity Exposure for MOE

Debt

MOE borrowing with MoF Guarantee on Debt

Project Company borrowing with MoF

Debt on MOE Balance Sheet

Guarantee on PPA payments only

Important impact on sovereign borrowing limits

Debt on project Company Balance Sheet

Technical Solution

Limited technical due diligence by MOE

Extensive independent due diligence by MOE,

Sponsors and Lenders given non-recourse structure

Plant Performance

Risk born by MOE

Risk born by IPP Sponsors

• Dependable

Guaranteed only at PCOD

Guaranteed degradation for [X] years

Capacity

[Limited Guarantee until PCOD + 5 years]

Capacity and Fixed O&M Payments paid against

• Heat Rate

Debt service and Fixed O&M costs (after transfer) to be paid

availability (owner and lenders take performance risk)

• Degradation

regardless of availability

O&M

Risk born by MOE [after initial O&M period]

Risk born by IPP Sponsors

• Availability

Provided for [X] years + MOE O&M afterwards

Provided for long-term by world class operators

• O&M Costs

Likely Limited Liability for original O&M Provider

Full Liability on Sponsors with Equity Risk

• Admin Costs

Admin cost for MOE High

Admin cost for MOE Low

Fuel Supply Risk

Risk born by MOE

Risk can be transferred to IPP Sponsors

Extensive experience of IPP Sponsors

TYPE

DESCRIPTION

TYPE OF

FUNCTIONS

PAYMENT

ASSET

TRANSFERRED

MECHANISM

Build-Own- Operate- BOOT is often used interchangeably with BOT However,

New

Typical y, design,

Can be either

Transfer (BOOT)

a BOOT project typical y has a much longer tenor than a

infrastructure build, finance,

government or

BOT project

maintain, and some user pays

or al operations;

BOOT always

includes private

finance

Build-Own-Operate Ownership of the project usual y remains with the

New

Design, build,

Can be either

(BOO)

project company Therefore, the private company gets

Infrastructure finance, maintain al government or

the benefits of any residual value of the project. This

operations

user pays

framework is used when the physical life of the project

coincides with the concession period A BOO scheme

involves large amounts of finance and long payback

period

Build-Operate-

This approach to describing PPPs for new assets

New

Typical y, design,

Can be either

Transfer (BOT) /

captures legal ownership and control of the project

infrastructure build, finance,

government or

Build- Transfer-

assets Under a BOT project, the private company owns

maintain, and some

user pays

Operate (BTO)

the project assets until they are transferred at the end of

or al operations;

the contract In contrast, a Build-Transfer Operate (BTO)

under some

contract, asset ownership is transferred once construc-

definitions, BOT or

tion is complete. Ownership rights mainly affect how

BTO may not include

handover of assets is managed at the end of the contract

private finance,

whereas BOOT

always includes

private finance

Rehabilitate-

In either of the naming conventions described above,

Existing

As above, but

Can be either

Operate-Transfer

“Rehabilitate” may take the place of “Build” where the

infrastructure “rehabilitate”

government or

(ROT)

private party is responsible for rehabilitating, upgrading,

instead of “build”

user pays

or extending existing assets

Design-Build-

Under this nomenclature, the range of PPP contract

New

As captured by

Can be either

Finance-Operate-

types is described by the functions transferred to the

infrastructure contract name

government or

Maintain (DBFOM);

private sector The “maintain” function may be left out of

user pays

Design- Build-

the description (so instead of DBFOM, a contract

Finance- Operate

transferring al those functions may simply be described

(DBFO); Design-

as DBFO, with responsibility for maintenance implied as

Construct- Manage-

part of operations) An alternative description along

Finance (DCMF)

similar lines is Design-Construct-Manage-Finance

(DCMF), which is equivalent to a DBFOM contract

Operations and

O&M contracts for existing assets may come under the

Existing

Operations and

Government pays

Maintenance (O&M) definition of PPP where these are performance- based,

infrastructure maintenance

and long-term contracts (sometimes also cal ed

performance-based maintenance contracts)

60 Legal Guide to Investing in Power Generation in Iraq

CHAPTER IV. NEGOTIATING AND DRAFTING THE POWER

PURCHASE AGREEMENT AND OTHER PROJECT

AGREEMENTS

A INTRODUCTION

This chapter provides an in-depth analysis of the agreements at the core of power

project transactions, most notably the PPA. An overview of issues relating to the

financing and bankability of a project is also provided, in addition to other consider-

ations relating to the drafting and negotiation of such transactions.

B THE POWER PURCHASE AGREEMENT

1. WHAT IS A PPA?

The agreement that governs the sale and purchase of power is known as a PPA.

A PPA is a contract between two parties, one who produces or generates power for

sale (the seller/producer/project company) and one who seeks to purchase power (the

buyer/offtaker). This contract is sometimes referred to as an offtake agreement.

2. ORIGINS OF A PPA

A PPA is merely an instrument intended to facilitate the sale and purchase of

electrical power. As such, it only comes into being once the prospective buyer (the

offtaker) has made a series of critical decisions. These decisions can include the need

for power, the available sources of power, the buyer’s economic ability to purchase

power, the power generating technology desired, and the location of the power plant.

a. Power Demand

Before anything else, the offtaker will need to assure itself of the demand for power.

A study will need to be undertaken to ascertain not only current power demand, but

also any anticipated fluctuations in demand over time.

b. Budget and Technology

After identifying the need for power, the offtaker must identify potential sources of

power. This determination will depend on the approximate tariff at which it can

afford to purchase power and the fuel and technology to be used. The determination

regarding the offtaker’s budget will go hand-in-hand with the selection of power-

generating technology. Certain technologies are more expensive than others, but may

be desirable due to their ability to supplement their power sources when demand is

greatest, or because of their perceived environmental benefits. Government policy on

the appropriate overall energy mix for the country may also affect the decision.

c. Location

The offtaker will then need to determine where the power source should be located.

The location is typically determined on the basis of which regions of the country

Legal Guide to Investing in Power Generation in Iraq 61

need additional power and proximity to transmission and distribution lines. If

possible, the location will be near substations and transmission lines that can carry

that power most efficiently to the end-user. Ultimately, offtakers (and producers) will

want to locate the power source as close as possible to a connection point on the

power grid to avoid the cost and risk of building transmission infrastructure, with

the subsequent result of transmission line losses. Other equally important issues that

will determine location are as follows: easy access to the fuel source to the plant, the

potential social and environmental impact of any power plant on local communities,

and whether efficient or low-cost mitigants are available. A gas-fired power plant, for

example, would be of little use in a remote area where there is not an economically

efficient source of gas. Certain renewable energy resources, such as solar or wind,

may be more appropriate for remote locations and will have the added benefit of not

adding to carbon emissions. These power sources, however, do not offer the same

predictability of thermal power sources (both wind and solar are by nature more

unpredictable power sources). The choice of power generating technology is an

important one for the offtaker. It will have a direct impact on the cost and reliability

of power, as well as the environmental and social impacts of the project.

C POWER PROCUREMENT AND TARIFF CONSIDERATIONS

Armed with the knowledge gained from making these decisions, the offtaker will be

able to reach out to market participants to seek solicitations of interest and price

estimates. There are generally two ways in which this can be done.

The more common method is via a solicited bid that takes the form of a competitive

procurement process. This will often involve a formal request for proposals (RfP)

which will identify, among other things, the amount of power being sought, the

generation technology to be used, and the area where the power is needed. Using this

information, producers will bid against each other to highlight their qualifications,

their ability to pay for the upfront cost of building the power plant, and to offer the

best tariff within their capability. The offtaker will compare prices, financial capacity

and qualifications to ensure that the chosen proposal obtains a source of power that

will function reliably over time at a price that is most advantageous to the end-user.

This method is generally seen as producing a more effective result than engaging in

direct negotiations with interested producers who put forward unsolicited proposals.

Unsolicited proposals are sometimes utilized as a means of quickly procuring power

to deal with emergency situations, and hastening power generation in countries with

large power deficits. This process is also utilized in jurisdictions where there are no

frameworks in place for competitive bidding. It is important to have adequate

regulatory safeguards to ensure transparency and value for money in comparison to

unsolicited proposals.

62 Legal Guide to Investing in Power Generation in Iraq

1. PUTTING PEN TO PAPER

In competitive bidding, the draft PPA is sometimes included in the RfPs package to

enable prospective bidders to ensure that project risk allocations are given due

consideration in the submissions of their bids. In unsolicited proposals, by compari-

son, the offtaker has the option to provide a draft PPA to the producer after

satisfactory due diligence to ascertain the viability and feasibility of the proposal.

The first draft of the PPA can sometimes come from the producer. However, as the

offtaker is seeking to purchase the power and will be relying on the document for

years to come, it is advisable for the offtaker to take responsibility for preparing the

initial draft PPA with the assistance of qualified legal counsel. Many multilateral

and bilateral development institutions have financing available to government entity

offtakers to hire qualified legal counsel.

2. NEGOTIATION AND FINALIZATION

The draft PPA will include key items such as tariff, technology, and location. It will

also address a number of other issues that the parties will negotiate and agree upon.

It bears noting that during the negotiation process it is advisable for both parties to

engage knowledgeable legal counsel, technical advisors, and financial consultants,

unless sufficient resources exist in-house. The parties will benefit from the advice of

these consultants in determining which risks and obligations are properly allocated

to each party. This is an iterative process that will allow each of the parties to better

understand the transaction they are entering into, with the goal of arriving at an

agreement that both parties can ultimately execute and abide by.

D OVERVIEW OF PPA OBLIGATIONS

The main obligation of the buyer under the PPA is to pay the agreed tariff when due.

The seller’s primary responsibilities are to build, operate, and maintain the power

plant in accordance with the requirements of the PPA and applicable law, and

deliver the agreed amount of power in accordance with the PPA. However, the

parties’ obligations do not stop there.

Additional obligations relate primarily to the need for: (i) payment and performance

security; (ii) transmission of power and interconnection to the grid; (iii) arrangements

with lenders; (iv) consents, permits, approvals, and licenses; (v) rights to the land on

which the power plant and/or transmission lines will be located; and (vi) insurance.

For the most part, these obligations do not fall solely on one party, but are often

shared by parties or will shift from one party to another based on the circumstances

surrounding the power plant and where it is located.

Legal Guide to Investing in Power Generation in Iraq 63

BUYER

SELLER

Primary Obligations Make payment

Build and operate power plant; deliver

agreed energy

Security

Payment security

Performance security

Transmission/

Transmission/Interconnection

Transmission/

Interconnection

(bundled and some unbundled)

Interconnection (some bundled)

Arrangements with Direct Agreement

Financing

Lenders

Permits

Assistance with permits/certain buyer Obtaining permits

approvals

Land

Grant of land/assistance with obtaining Obtaining land

land

Insurance

Force majeure, business interruption

Force majeure, currency, etc

Local Content

N/A

Labor, materials, equipment

Decommission

N/A

Decommission, clean-up

E TIMING REQUIREMENTS TO CONSIDER

There are usually various timing requirements in a PPA that both the producer and

the offtaker need to keep in mind. Both parties need to make sure they are comfort-

able with the timing requirements and the consequences if they fail to meet their

deadlines for these requirements under the PPA.

These include:

• Effective date of the PPA

• Time for satisfying conditions precedent and attaining financial close under any

related financing

• Time for testing the plant units for ascertaining the Commercial Operations

Date (COD)

• Date for completing interconnection facilities and related facilities

• Time for fuel supply connection to the plant

• Fuel supply start date

• Time for submission and payment of invoices

• Time for conducting capacity tests

• Cure periods for various breaches

• Time to serve termination notices

• Dispute resolution timelines

There is also a need to ensure that the various timing elements are properly aligned.

For instance, the interconnection date and the fuel supply start date need to occur

before the COD.

64 Legal Guide to Investing in Power Generation in Iraq

F FINANCING OF POWER PROJECTS

1. BANKABILITY

Bankability refers to whether a project will be acceptable to lenders and refers to the

scope of consideration of a project seeking project financing in the lending market. A

project can be financed by ECAs, DFIs, commercial banks, and private equity funds.

Therefore, bankability can also be thought of as the ability to attract financing from

multiple source of funds rather than limiting it to one particular source.

2. THE ROLE OF THE PPA IN BANKABILITY

While all of the other project agreements listed in the paragraphs below are impor-

tant to bankability, the PPA is often seen as the key to any bankability analysis. For

the typical power project, there is only one stream of revenue – payments from the

buyer under the PPA. If the buyer fails to pay, it will be very difficult for the project

to repay its lenders on a timely basis.

The PPA also helps to accommodate the unique nature of power projects. Power

generation is unique in that the electricity generated is being sold into a geograph-

ically limited, and often highly regulated, market. As opposed to other high-value

commodities like hydrocarbons, minerals, or precious metals that can be trans-

ported to meet demand, the power project is beholden to the demand of the

market that it serves.

Similarly, the pricing of electricity to end-users in emerging markets is often

guided by regulation rather than by market forces. The PPA is essential as it

addresses the uncertainty in demand and in pricing. In respect to the demand, the

PPA establishes a long-term purchase obligation that provides a consistent revenue

stream to the producer and a consistent flow of electricity to the offtaker. On the

pricing side, the PPA incorporates a tariff formula that is tailored to the technol-

ogy, operations, and debt characteristics of the project, which can be modeled over

the full life of the project. This allows the PPA to establish an electricity price that

reflects the true cost of generating the power.

For projects being financed by third-party lenders, before a PPA can truly be deemed

final, the lenders will need to be comfortable with the PPA. Although typically not a

party to the PPA, the lenders financing the producer’s up front costs will want to

assure themselves that the documentation governing the availability of revenue to

repay their loan – i.e., the PPA – is satisfactory to them. The lenders will therefore

seek to clarify or even modify provisions in the PPA to grant them greater comfort

regarding the ability of their borrower (i.e., the producer) to rely on the PPA as a

source of repayment of their loan. The lenders will seek to make clarifications or

modifications to the PPA even if it has been signed. Such amendment could be

contained in an addendum to the PPA or contained in a document referred to as a

“direct agreement.” This direct agreement will be entered into by the offtaker, the

Legal Guide to Investing in Power Generation in Iraq 65

producer, and the lenders, and may include any amendments to the PPA required by

the lenders, as well as certain provisions related to the offtaker’s consent to the

producer’s collateral or conditional assignment of the PPA to the lenders in a default

scenario and the lenders’ step-in rights.

3. RISKS TO BANKABILITY

In the typical power project financing, the only financial return to lenders is the

repayment of the project debt and the payment of interest rates (along with certain

agreed-upon fees). However, since debt providers have large capital outlays at risk

and depend exclusively on revenues from the project for repayment, the lenders will

insist that the project sponsors and documents are strong enough for the project to

reach commercial operations. The lenders, like all of the parties, want to avoid a

catastrophic scenario where the project fails completely, especially during the

construction phase of the project. At operations, the overarching concern is ensuring

that revenues are adequate to service debt.

The following are some of the key considerations which, if not sufficiently covered,

will make a project unlikely to receive debt financing:

• Term: The term of the PPA should be long enough to allow the debt to be

repaid, and if the debt is not fully amortized (in other words, if there will be any

principal amount outstanding at maturity) the term of the PPA should be long

enough to support a refinancing of the remaining debt.

• Tariff: Lenders will require certainty with respect to the tariff payable under

the PPA.

• Changes in Law and Tax: Lenders are not in a position to take any risk related

to changes in law or taxes over the life of the project.

• Offtaker Creditworthiness: If the offtaker is not sufficiently creditworthy,

lenders will require other broad forms of credit support that create additional

costs and complications for the project. Even in developed markets, many

offtakers are not sufficiently creditworthy to create a financeable project.

• Sponsor Quality: The lender and offtaker will consider the experience, reputa-

tion and financial strength of the owners of the SPV.

• Billing and Payment: The billing period from the offtaker to the producer

should be frequent enough (monthly or even bi-weekly) to minimize the level

of unpaid energy and ensure that the schedule of debt service payments are

adhered to. It also alerts the lenders to potential payment/liquidity issues.

• Currency/Calculation: PPA payments and calculations are most often made in

the same currency as that needed to repay the debt. If not, there will need to be a

plan for foreign exchange hedging and/or exchange rate indexation and a true-up

mechanism. In addition, are there any convertibility issues with the payment cur-

rency? If so, the lenders may require payment to be made in a different currency,

or the offtaker or the host government will need to guarantee conversion.

66 Legal Guide to Investing in Power Generation in Iraq

• Termination: Lenders do not want the offtaker to be able to escape the long-term purchase obligation under the PPA, since this would leave the project

without any revenue to service the project debt. Lenders will pay particular

attention to ensure that seller events of default and force majeure events do not

allow the offtaker to prematurely terminate the project. If termination does

occur, lenders will also want assurances that the project debt will be satisfied.

• Remedies upon Buyer Events of Default: In particular, lenders need the seller to

have the ability to exercise certain rights, even up to PPA termination, if the off-

taker is failing to make payments or fails to deliver the required payment security.

• Lenders Rights: Lenders will typically make provision for step-in rights and for

taking a security interest over project assets via the loan and direct agreements.

While the above can provide some useful guidelines, ultimately, bankability is an

ever-changing concept. What the lending market accepts (or demands) today may be

different from what it will accept (or demand) in the near and distant future. Given

the technology, size, scope, volume, and geographical location of power projects, it can

be very difficult to ascertain what is truly “market” (i.e., consistent with terms you

generally see market participants accepting). Moreover, an experienced developer or

sponsor may be better able to persuade lenders to accept provisions that are more

friendly to the project company. Alternatively, lenders may be happy to live with a

particular provision or risk at the project level, as long as they have a guarantee or

other form of credit support (from either the sponsor or offtaker) to cover that risk.

Finally, it is worth noting that some power markets, particularly in developed

countries, are sufficiently mature that PPAs are not even required to make a project

bankable. This is often the case with merchant power plants (those that do not

benefit from a dedicated buyer) where a project can be developed on the basis of

independent reports indicating the existence of sufficient expected spot market

demand. Once the project is completed, the plant will simply sell into the spot

market. However, even in the most developed markets, the absence of a long-term

PPA can result in higher interest rates for the project. A conventionally bankable

PPA remains an essential tool in virtually every market and ideal in energy markets

in developing countries.

G OTHER PROJECT AND FINANCING AGREEMENTS

While the PPA governs the sale and purchase of power, there are a number of related

contracts that interplay and relate to the financing, building, and operation of the

power plant. These agreements must be aligned with the PPA to ensure fair appor-

tionment of risks.

Additionally, each of the counterparties to the Engineering, Procurement and

Construction Contract (EPC Contract) and the Operating and Maintenance

Agreement (O&M Agreement) / Long-Term Service Agreement (LTSA) will need to

be familiar with, and agree to abide by, the terms in the PPA relating to the design,

construction, operation, and maintenance of the power plant.

Legal Guide to Investing in Power Generation in Iraq 67

The following are some of the related project agreements typically necessary for a

power project:

• Concession/Implementation Agreement: Grants the producer the right to

develop, finance, construct, and operate the power plant, including the right to

sell power to the offtaker. The commissioning government will undertake to

ensure the granting of requisite approvals and consents for the project to ensure

that no part of the project is nationalized or expropriated, and may also agree

to guarantee the performance of the offtaker’s obligations under the PPA (if not

separately set out in a Sovereign Support Agreement). The producer will under-

take to apply for all requisite approvals and to proceed with the development,

construction, and operation of the power plant in accordance with the PPA.

• Grid Interconnection Agreement: Governs the connection of the power plant

with the power grid. In addition to setting out connection charges and condi-

tions, the Interconnection Agreement sets the capacity levels (for connection

and transmission) and conditions for outages.

• Fuel Supply Agreements/Bulk Supply Agreement: Where relevant, estab-

lishes the availability of fuel supply and quality. The quantity of fuel supplied

shall be as notified by the producer. The Supply Agreement will provide for the

passing of title and risk (upon delivery of the fuel) and details of the delivery

facilities. Provisions will also be included for interruption to supply or variation

in specification of supplied fuel.

• Fuel Transportation Agreement: Provides for transporting the fuel from the

fuel supplier to the power plant.

• EPC Contract: Sets the terms and conditions for the design of the power plant,

the procurement of materials and equipment, and the construction of the power

plant. The obligations created under this agreement can also be divided among

multiple contracts that include one or more of these scopes. The EPC Contract

will provide for fixing of the contract price and completion date and provide

for liquidated damages payable in the event of delays or failure to meet certain

performance criteria and guarantees. The EPC Contract will also provide for

the Contractor to obtain access to the transmission grid (ensuring that the

infrastructure is in place and that the power producer is permitted to export

power). Certain provisions from the PPA, such as the commissioning and test-

ing, are typically mirrored (incorporated) in the EPC Contract.

• O&M Agreement: Governs the rights and responsibilities of the entity that will

operate the plant and be responsible for its maintenance.

• LTSA: Provides for servicing the plant at regular intervals during the operation

of the PPA.

If the power project is financed, relevant financing documents may include:

• Loan Agreement: Creates the obligation of the lender to make a loan to the

producer to finance the power plant, as well as the obligations of the producer/

borrower to comply with various covenants in the agreement.

68 Legal Guide to Investing in Power Generation in Iraq

• Collateral Security Documents: Local and offshore security documents,

including share pledges, mortgages, assignments of asset, intellectual property

and contract rights, account control agreements, etc., sufficient to enable the

lender to step into the shoes of the borrower.

• Completion Guaranty: Obligates the owners of the power plant to complete

the project by a date certain or repay the loan.

• Equity Contribution Agreement: Obligates the owners of the power plant to

make equity or subordinated debt contributions to finance the portion of the

power plant not being financed by third-party lenders.

• Sovereign Support Agreement: May include sovereign guarantees, comfort

letters, put-and-call options, and other forms of sovereign support that

enhance the creditworthiness of the offtaker and other governmental entities

involved in the project.

• Credit Support Agreement: May include PRGs, letters of credit and bank

guarantees from commercial banks, escrow agreements, and sponsor support.

• Direct Agreement: Governs the relationship between the lenders and the

parties involved in the project.

The following chart illustrates the relationships between the different types of

agreements:

Legal Guide to Investing in Power Generation in Iraq 69

CHAPTER V. RISK ALLOCATION/MITIGATION & GENERAL

CONTRACTUAL TERMS: IRAQ-SPECIFIC CONTEXT

A INTRODUCTION

This chapter seeks to explore the key risks that arise in the context of a PPA with a

focus on Iraq. The risks outlined here are not exhaustive. Risks and methods for their

mitigation may also vary from project to project, depending on where the project is

located, the underlying regulatory framework, the structure of the offtaker, and the

particular generation technology, among other considerations.

B TYPOLOGY OF RISKS

The foundation of a successful and bankable PPA (and the power project as a whole)

is the achievement of an equitable balance and allocation of risks among the con-

tracting parties to the PPA. The age-old principal of contractual risk allocation in

project financing is especially true for PPAs – risks should optimally be allocated to

the party best able to manage such risk.

In the case of most power projects, there are two principal risk takers who must

agree on the allocation and pricing of risk: (i) the offtaker, typically a government-

owned power utility, and (ii) the sponsors, representing the project investors in the

project company. Lenders and other financing providers (such as letter-of-credit

issuing banks and hedge providers) also actively participate in the risk allocation

process as they effectively become exposed to all of the allocated risks through their

financing. Other risks may also be shifted, to some extent, to insurers and other

project participants, though at a cost to the project.

In some cases, third parties are in the best position to manage some of the risks

associated with the power project. Such parties may include, for example, the

contractor who has been appointed to undertake the construction of the power plant

or the transmission company responsible for building the interconnection facilities.

These third parties are not generally parties to the PPA, yet the risk must be allo-

cated to one of the parties to the PPA, so the project parties must consider how to

mitigate such risks. There are scenarios where a party that may not necessarily

control a risk is nonetheless willing to take it for the right economic benefit or simply

to get a project financed. For example, a government seeking to attract greater

private sector investment may agree to a lower tariff in exchange for assuming

certain risks outside of its control. For instance, even if the offtaker has no direct

control over the government fuel supply entity, it may agree to take the risk of fuel

supply with a view to attracting investment. If a project sponsor agrees to take a risk

outside of its control, it may seek a tariff which in turn results in a higher return for

its investors. In this event, a party to the PPA would assume the risk under the PPA

and may seek back-to-back provisions in both the PPA and third-party contracts in

order to effectively pass the risk onto the third party.

70 Legal Guide to Investing in Power Generation in Iraq

There is, however, a limit to the extent to which parties can shift risk. Ultimately, the

allocation of risk must still result in a bankable and viable project. An appropriate

balancing and allocation of risk in a PPA should aim to provide sufficient incentive to

the contracting parties to perform their obligations under the PPA.

Some risks are present throughout all phases of a project. Certain risks arise only

during the development and construction phase, while others arise only once the

project is operational.

1. DEVELOPMENT & CONSTRUCTION PHASE RISKS: PRE-CONSTRUCTION

RISKS

a. Land Procurement

The project company will typically bear the primary responsibility to procure the land

on which the power plant will be developed and operated. To the extent that the

offtaker and/or government owns, leases, or grants a concession over such land, and is

making such land available to the project company, then the responsibility may sit more

appropriately with the offtaker or another government entity, such as the MoF.

Similarly, where a government authority or government-controlled offtaker entity is the

lessor of the project site, the project company will often seek additional comfort from

the government with respect to such lessor’s compliance with the terms of the relevant

lease arrangement. In some instances, the offtaker may still be called upon to assist the

project company in obtaining such rights, especially where private landowners are

unwilling to sell their land and the government can use its right of expropriation or

eminent domain (the right of a sovereign or its agencies to acquire private property for

public use in exchange for fair compensation). It is in the interest of both the offtaker

and the project company to ensure that the right to occupy the project site is secured for

the entire term of the PPA. If the term of the PPA can be renewed, then the right to

occupy the project site should be secured for the extension period.

Legal Guide to Investing in Power Generation in Iraq 71

In Iraq, most projects are likely to be located on land owned by either the MoE, the MoF, or local municipal authorities. Land is usually provided to the project company

under a musataha, a specific type of long-term arrangements that allows its holder to

lease land for a long period. A musataha can be registered with the Real Estate

registrar and is recognized as a transferable right in rem by the MoF. For projects

operating under the National Investment Law, the NIC assists the project company

in obtaining these rights for projects that generate at least 30MW of power, while for

investment projects that generate less than 30MW, the PIC will assist in obtaining

these land rights, in each case to the extent not directly obtained from the MoE.135

b. Failure to Commence Construction

The offtaker will want reassurance that the project company will commence construc-

tion activity within a minimum period of time after the effective date of the PPA.

Although the failure to commence construction may not be a direct result of the project

company’s acts, such as when an EPC contractor fails to execute its duties under the

EPC Contract, the potential liabilities associated with this form of default still rest

entirely with the project company. Failure to commence construction within the

defined time period will either cause the PPA to terminate automatically, or give the

offtaker the right to terminate the PPA. The project company’s failure to commence

construction may also trigger payouts under construction or performance bonds.

There are often limited opportunities for a project company to cure a failure to

commence construction. Some PPAs may provide the project company with the

option to extend the commencement period, while at the same time paying liqui-

dated damages to remedy the initial delay. If the delay is caused by a force majeure

event (including a political force majeure event) or by a default by the offtaker (or any

related party or governmental authority under any other project contracts), the time

limit for commencement of construction will be extended day-for-day. This extension

will continue so long as the relevant force majeure event or default prevents the

project company from commencing construction.

For projects governed by the National Investment Law, delays attributable to the

project company are subject to penalties calculated on a daily basis.

c. Construction Risks: Abandonment

Following commencement of construction, the offtaker will also want to be sure that

construction proceeds as planned and that the project will not be abandoned.

Abandonment could take the form of a permanent suspension of the project’s

construction or operation, or could occur via constructive abandonment, where

construction or operation has been suspended for a protracted period of time. In

either case, abandonment of the project will constitute an event of default by the

project company, entitling the offtaker to terminate the PPA. After the project is

operational, the concept of abandonment and the applicable time period will vary

(depending on the technology of the project) in order to account for different levels of

intensity of the operation (for example, active management of a thermal plant versus

passive management of a solar installation).

135 See Investment Regulation No. 2 for 2009, art. 4 second (Iraq).

72 Legal Guide to Investing in Power Generation in Iraq

For projects that are not governed by the National Investment Law, the party

responsible for the default will pay compensation. For projects governed by the

National Investment Law, defaulting project companies are subject to penalties

(calculated on a daily basis), government withdrawal, and liquidation of the project.

d. Delays in Achieving the Commercial Operation Date (COD)

Construction of the power plant within an agreed time schedule is one of the

primary obligations of the project company under the PPA. Accordingly, failure to

complete the plant (i.e., achieve COD) within the applicable timeframe will, in the

absence of force majeure or other relief events, constitute a breach of the PPA,

entitling the offtaker to claim liquidated damages for delay and/or ultimately to

terminate the PPA. The project company will in turn need to ensure that any

obligation to pay delay liquidated damages is passed through to the EPC contrac-

tor under the EPC Contract (in which liquidated damages for delay will need to be

sized to cover not only those payable under the PPA, but also debt service under

the loan documents). The EPC Contract should also provide that, upon termina-

tion of the PPA for prolonged delay, the project company is entitled to terminate

the EPC Contract and claim appropriate compensation.

e. Deemed Completion

There are a number of circumstances in which the project company (and its contrac-

tors) must be entitled to claim relief for delays. Relief may be given with respect to

time only (i.e., the project company is given a time extension only), or both time and

money, through the concept of “deemed completion.” Deemed completion occurs

where completion is not achieved, as a result of risks for which the offtaker (and/or

government) bears the risk. In such circumstances, deemed completion will typically

be held to have occurred on the later of the relevant scheduled completion date and

the date on which the plant would, but for the relevant risk event, have occurred.

Upon deemed completion, the offtaker will be entitled to receive capacity payments

(or deemed energy payments) sized by reference to the contracted capacity of the

power plant. Thereafter, following completion testing, if the plant performance tests

demonstrate a lower-than-contracted capacity, the project company will typically

need to account for the difference.

f. Construction Cost Escalation

From the offtaker’s perspective, one of the key objectives in tendering out or negoti-

ating a power project for development by the private sector is to establish price (and

therefore tariff) certainty with respect to the capital cost of the project. The tariff

will therefore be determined on the basis of a competitive bid or an agreed construc-

tion cost. The project company will in turn typically look to lock in the construction

cost by negotiating a lump-sum, date-certain, turnkey contract with its EPC con-

tractor. Thereafter, the basic principle is that the project company (under the PPA)

and the EPC contractor (under the EPC Contract) will bear the risk of any cost-over-

runs. There are however, certain exceptions to this rule. Where the construction cost

increases as a result of a variation required by the offtaker or changes in law (see

Legal Guide to Investing in Power Generation in Iraq 73

Chapter V.B.4.b ( Compliance with Law and Change in Law) below), the PPA should allow either for direct compensation to be payable by the offtaker to cover the

incremental cost in construction, or for the tariff to be adjusted to cover the incre-

mental capital cost (and any associated financing cost).

g. Site Access and Availability

There are a number of potential risks and issues associated with construction that

relate to the site selected for the project. These include geological risk (i.e., whether

the site is geo-technically suitable for the construction activity), archaeological risk

(the possibility of archaeological discoveries being made during excavation/construc-

tion and how such discoveries are managed), security risk (safety of personnel and

materials at and in transit to the site), and any pre-existing environmental contami-

nation that may be discovered during construction activities.

h. Right to Occupy

The project company’s right to occupy the project site for the purposes of construct-

ing and then operating the power plant is fundamental to the integrity and viability

of the project. That right may take a variety of forms, ranging from outright owner-

ship of the project site (potentially through acquisition from a third party), different

forms of leasehold interest, concession arrangements, or other rights to occupy.

These will vary based on the location and the circumstances of the particular project.

The project company may also require additional access rights, easements, or written

consents in order to carry out construction activities with respect to associated

infrastructure for which it is responsible, such as transmission lines. Access to the

project site will also be required, not only for the construction, operation, and

maintenance of the power project, but also to afford the offtaker access to undertake

whatever inspection rights it may have under the PPA.

In Iraq, the MoE and, for projects under the National Investment Law, the NIC

generally will assist in obtaining these rights, as long as the project company holds a

musataha right to the land.

i. Site Suitability

The project company will typically bear the primary responsibility for the suitability

of the project site. Where the project company has had the opportunity to conduct

full site surveys, including detailed soil sampling and geo-technical analysis, it may

be reasonable for the project company/contractor to take responsibility for geological

risk, particularly where the project company has been the primary driver for selec-

tion of the project site. Conversely, where the offtaker/government has effectively

preselected the project site and/or the project company has had limited opportunity

to conduct such reviews, it may be more appropriate for the offtaker to take such

risk. This is particularly the case where the project site is effectively a brownfield site

that is being made available to the project company. In such circumstances, the

project company is likely to require appropriate protection, including time relief and

deemed completion, as well as robust indemnities for third-party claims with respect

to any preexisting environmental contamination.

74 Legal Guide to Investing in Power Generation in Iraq

j. Site-Related Infrastructure

It is generally the project company that determines and assumes the adequacy of

road and rail links (or other transportation links) to and from the project site. This

may also extend to the routing or rerouting of existing powerlines and water pipe-

lines required for the supply of utilities to the project site. The availability of the

supply of utilities to the project site is also typically the project company’s responsibil-

ity, although this may vary where the offtaker, government authority, or other related

party is operating an adjacent site and enters into an express contractual undertaking

to supply such services. Similarly, where it is agreed that a significant piece of infra-

structure (such as a transmission line, gas pipeline, or road) is to be undertaken by the

offtaker or a government entity, the completion risk associated with such infrastruc-

ture may be assumed by the offtaker. Resettlement may also be required in order to

acquire the project site. The impact on the timing of the project by a resettlement

process should be carefully assessed by the contracting parties to the PPA.

k. Responsibility for Interconnection Infrastructure

The construction and operation of a new power plant need to be supported by a host of

infrastructure. In addition to connection to the physical grid via transmission lines,

which can vary from a few kilometers to hundreds of kilometers, the construction

process also needs to be supported by the availability of utilities and access roads.

In terms of timing, the development of the power plant and associated transmission

network needs to be coordinated to ensure that the power plant is ready to be

connected to the grid at the time of commissioning. This also requires planning

ahead in terms of availability of fuel and the infrastructure to bring in such fuel.

The project company and the offtaker must decide, typically at a very early stage,

which party will be responsible (and bear the risk) for the construction of the

transmission line, as well as the ongoing ownership and maintenance of the line.

l. Construction by Offtaker

Commercially, the prime incentive for the offtaker to take on the obligation to

construct the transmission line is to avoid the higher construction cost if construc-

tion is undertaken by the project company. The increased cost of construction by the

project company will be passed back to the offtaker through a higher tariff.

The advantage of potential cost savings of construction by the offtaker must be

weighed against two disadvantages:

1. The offtaker may not have a source of sufficient funds to undertake the

construction.

2. If the offtaker commits to constructing the transmission line, then the offtaker

will also bear the responsibility if it fails to complete the transmission line

when the power plant is ready for commissioning. Under the PPA, this will

normally result in the offtaker being required to pay liquidated damages to the

power plant, calculated as if electricity is deemed to have been delivered. To

Legal Guide to Investing in Power Generation in Iraq 75

reduce the risk of delay in implementing the construction, the offtaker will need

to plan ahead in terms of financing and equipment procurement to ensure that

completion can be aligned with the timing for completion of the power plant.

m. Construction by Project Company

Where the project company is responsible for constructing the transmission line, the

offtaker will try to control the costs of constructing the transmission line since these

costs will ultimately be passed back to the offtaker via tariff. The offtaker can try to

control these costs by requiring all major supply contracts to be subjected to com-

petitive tendering and by employing a competent engineer to oversee the

implementation of the transmission line construction.

n. Delivery Point

Once the transmission line has been completed, the PPA identifies the obligation of the

project company to deliver energy to a delivery point. The delivery point is a physical

location that is specified in the PPA. The project company will want the delivery point

as close to the power plant as possible. The offtaker will then take transmission line

risk from and after the delivery point. However, this risk allocation may be specifically

negotiated, particularly when the transmission line will be operated and maintained

by a transmission company that is unrelated to the offtaker.

o. Testing and Commissioning

Testing and commissioning of the power plant is required before COD in order to

ensure that the individual plant and equipment are functioning according to the design

and the contracted performance output of the power plant. In addition to the testing of

individual equipment, a complete power plant needs to be tested to determine the

overall output parameters, including, among others, installed capacity, voltage output,

frequency, and specific fuel consumption. The obligation to carry out tests and com-

missioning of the power plant rests on the project company, which has to ensure that

experts and suitable test equipment are available when required before COD. Sufficient

notice must be given to the offtaker and lenders, who may engage their own experts to

witness the tests together with the project company’s engineer.

Since part of the testing process for certifying the plant’s capacity involves the

generation of electricity, the offtaker must be prepared to receive that energy prior to

the commencement of the testing and commissioning period. If the interconnector

line or the network is not available, then pursuant to the terms in the PPA, the

project company may claim liquidated damages for delayed COD, which may include

evoking the deemed completion clauses in the PPA. Therefore, there is need for close

coordination, especially where transmission lines are required, before and during

commissioning of the power plant and related facilities. In case the offtaker’s facili-

ties are not available when testing and/or commissioning must begin, the project

company may exercise the right to claim appropriate damages, including deemed

capacity and energy output. The offtaker therefore should carefully evaluate its

capacity to undertake its obligations to meet the requirements of the testing and

commissioning of the power plant.

76 Legal Guide to Investing in Power Generation in Iraq

p. Failure to Meet Contract Capacity

Testing and commissioning may reveal lower-than-contracted outputs and/or

failure to meet required performance levels, such as dependable capacity, specific

fuel consumption (heat rate), and other issues. Depending on how much the test

results differ from the specified output in the applicable contracts, there may be a

need to rectify the plant to meet acceptable performance output. This may result in

delays in achieving COD.

If there is no possibility for improving the performance of the power plant, then

there are typically two options for the offtaker:

1. Accept the resulting output, with relevant penalties for not achieving the

guaranteed output.

2. Reject the deal, and therefore terminate the PPA.

The PPA will contain relevant clauses to address the reduced performance output

levels (usually addressed in the capacity charge payment of dispatchable generation

plants). If the test results are not acceptable, then the PPA may have to be termi-

nated or amended substantially, with other remedial actions taken to improve the

performance to acceptable levels. The project company bears the risk of perfor-

mance of the power plant throughout the term of the PPA.

q. Output/Heat Rate Risk Allocation

Upon testing, if the plant output and fuel consumption capacity fail to meet the

contracted performance levels, the project company may have recourse through

its EPC Contract to make claims against (i) the EPC contractor and (ii) the

equipment manufacturer’s warranties and guaranties. It is important to note,

however, these protections are not directly available to the offtaker under the

terms of the PPA because the offtaker is not a party to the EPC Contract or the

equipment supply contracts.

2. OPERATIONAL PHASE RISKS

a. The Offtake Obligations

These payments are typically referred to as “availability payments” or “deemed

energy payments” and are structured to ensure that the project company’s capital

costs (debt service, return of equity, and return on equity) and fixed operating costs

are covered. In cases where the power plant is unavailable or incapable of generating

electricity as a result of circumstances for which the offtaker (or government) has

agreed to take the risk (including, among other things, political force majeure, force

majeure affecting the offtaker, change in law, unavailability of the grid, and offtaker

default), the project company may be entitled to deemed availability or deemed

energy payments that are also intended to cover capital and fixed operating costs.

These contractual devices are crucial to the allocation of risk in a power project.

b. Curtailment

Notwithstanding the basic principle described above, certain offtakers and/or the

Legal Guide to Investing in Power Generation in Iraq 77

relevant transmission system operator may want to reserve some flexibility with

respect to the commitment to take interruptible energy through curtailment rights

(i.e., the right to reduce the output from a power generator because of transmission

congestion, lack of transmission access, low load periods, or other reasons). This will be

a keenly negotiated issue. From the project company’s (and the lenders’) perspective,

they will want certainty that the minimum offtake commitment will cover all fixed

costs (including debt service and a minimum equity return). They may request that the

PPA provide for an extended term if curtailment rights are exercised, or they may get

comfortable with curtailment rights under the circumstances of the project.

c. Performance

The contracting parties will agree, when entering into the PPA, what the contracted

capacity of the power plant will be. In order to reach COD, the power plant must be

tested and certified as having met a percentage of the contracted capacity. This is

generally referred to as a minimum capacity requirement. This testing typically

involves participation by the project company, the offtaker and any independent

engineer appointed by the parties. For power plants that are paid both a capacity

charge and an energy charge, the tested capacity at COD may (depending on how the

tariff is structured) determine the capacity charge the offtaker will pay to the project

company. This testing is generally repeated on an annual basis, and in each instance

the newly tested capacity will impact the capacity charge payable to the project.

If the power plant achieves or exceeds the minimum capacity requirement by the

agreed date for the scheduled COD, but still does not achieve the contracted capacity,

then the project company may have the option of either repairing or replacing the

impacted portions of the power plant within an agreed period of time in order to

achieve the full contracted capacity. At a certain point in time, the project company

may be required to live with the capacity it has been able to demonstrate, and will no

longer have the ability to increase the tested capacity up to the contracted capacity by

fixing the deficiency and demonstrating the higher capacity of the power plant. In the

event that the minimum capacity is not achieved by the agreed outside or longstop

date for COD, the offtaker will typically have the right to terminate the PPA. Some

PPAs may restrict the project company from delivering any energy in excess of the

tested capacity locked in at COD, or may simply specify that the offtaker is not

required to pay for such additional amounts.

In PPAs in which the tariff consists of both a capacity charge and an energy charge,

because the offtaker is being required to pay for capacity of the plant, it will typically

want to ensure that this capacity is available for its use. As such, an offtaker will

typically impose minimum availability requirements. Availability is typically mea-

sured over an agreed period of time. Minimum availability thresholds are commonly

negotiated by the parties and are uniquely dependent on project site conditions such

as ambient conditions, the particular technical makeup of the power plant, and other

efficiency criteria provided for in the PPA. The PPA would then provide a remedy to

the offtaker for a failure by the project company to meet the minimum availability

78 Legal Guide to Investing in Power Generation in Iraq

thresholds. This may take the form of a right to terminate the PPA or the payment of performance liquidated damages by the project company. In any event, under a

well-structured tariff, the offtaker should not be required to pay for capacity that is

not made available to it.

d. Dispatch

Under the PPA, the project company is required to strictly comply with the dispatch

instructions of the grid operator. The project company takes the risk of any opera-

tional failure to dispatch. The grid’s dispatch protocol can be referenced by the PPA

and becomes part of the PPA, or can be part of the transmission connection agree-

ment to be signed between the project company and the transmission company.

Dispatch plans are delivered to the project company to cater for monthly, weekly,

and daily load planning purposes.

e. Special Considerations for Renewable Energy Projects

The allocation of performance risk in renewable energy projects is complicated by

the generation profile for these projects, namely the fact that power generation is

subject to the intermittent availability of the renewable resource.

In renewable energy PPAs, the offtaker only pays for the energy that is delivered.

The obligation of the offtaker to pay at the tariff rate for delivered energy is some-

times capped at an amount set forth in the PPA, with any excess energy being

remunerated at prevailing spot prices if there is a spot market. While the offtaker

may insist upon a minimum capacity requirement, that threshold should be consid-

erably lower than for dispatchable plants because of the inability of the project

company to control the output of its renewable energy project.

Put simply, renewable energy projects are in many ways subject to the whims of the

sun, the rain, and the wind, and are unable to guarantee a particular capacity on any

particular day.

Similarly, while the offtaker would prefer to set a minimum availability requirement

in order to support its projected net power capacity, shifting this risk to the project

company may severely deter investment in renewable energy projects. A compromise

solution is to establish minimum availability requirements that are substantially

lower than dispatchable power plants in order to allow the project company flexibil-

ity to weather unforeseen environmental variables while still leaving the offtaker

with the confidence that the project could be terminated if the lower availability

requirement is not met for an extended period of time.

f. Fuel and Other Feedstock Supply

The long-term adequacy of supplies and the pricing for fuels and other supplies of

feedstock is one of the most critical elements in a power project. The allocation of

fuel supply risk will depend on a number of issues including, in particular, which

party is in the best position to negotiate the supply, the financial viability of the fuel

supplier, the availability/accessibility of alternative fuel suppliers, and the state of

development of the relevant market for fuel supply.

Legal Guide to Investing in Power Generation in Iraq 79

(i). Tolling Arrangements

Project companies are not always in the best position to negotiate and secure a stable

supply of a fuel resources such as oil, coal, natural gas, biomass, or steam. The

offtaker or government may be better positioned to do so. In such circumstances, the

offtaker may prefer to structure the power project as a tolling arrangement. This may

make sense, particularly when the fuel supplier is owned by the government or

affiliated with the offtaker.

Under a tolling arrangement, the offtaker takes full responsibility for the procure-

ment (including payment) and supply of fuel to the power plant. If the offtaker

wishes to dispatch the power plant, it needs to ensure that a sufficient volume of fuel

is delivered to the power plant to allow the electricity it dispatches to be generated.

The project company will then take responsibility for ensuring that the fuel delivered

to the power plant is utilized in an efficient manner. This is accomplished by requir-

ing the project company to convert fuel into energy at an energy conversion rate that

reflects the agreed efficiency of the power plant given the ambient atmospheric and

transmission conditions. In Iraq, tolling fees cannot be imposed on electricity

without the passage of a specific law. There are also legal and cultural impediments

to fee collection. Offtakers are deemed as investors under the National Investment

Law. Any assignment of contract rights to offtakers must have clear written approval

from the MoE. The NIC allows for assignment of contract rights upon completion of

40% of the project and written approval the MoE.

Under a tolling arrangement, therefore, the offtaker or the host government will

enter into fuel supply agreements directly with third-party fuel suppliers and be

responsible for the fuel resource payment. Then the offtaker will enter into a separate

agreement, which may be called a PPA, a tolling agreement, or an energy conversion

agreement, with the project company. This will contain both the conventional PPA

terms and certain terms for the fuel supply. For ease of administration, the project

80 Legal Guide to Investing in Power Generation in Iraq

company may give instructions directly to the third-party fuel supplier for the

delivery of fuel, and agree to protocols for nominating quantities of fuel to be

delivered and for taking deliveries of that fuel, but the project company should not

bear responsibility for payment nor the risk that the fuel supplier may breach its

obligation to deliver the fuel properly nominated by the project company.

(ii). Fuel Supply Agreements

Offtakers will often seek to pass greater responsibility onto the project company for

procuring fuel supply and require the project company to enter into a fuel supply

agreement with a third-party fuel supplier. The project company will then need to

contract for sufficient volumes of fuel to meet its contractual commitment to make

the power plant “available” under the PPA, so that, if the offtaker elects to dispatch

the plant, the project company has sufficient fuel to generate. Conversely, it is

important that the project company does not contract for quantities of fuel that it

cannot use, or the project company will be making unnecessary payments for excess

fuel that cannot be used to generate power.

A detailed analysis of fuel supply agreements is beyond the scope of this Legal

Guide, but the project company will need to ensure that a number of key issues are

covered, including:

• A binding legal obligation on the part of the fuel supplier to provide the con-

tracted quantity of fuel. This can be contrasted with a “best endeavors” or “best

efforts” type of obligation, which creates the risk of fuel supply failure with

little or no remedies for the plant developer;

• Appropriate levels of flexibility with respect to monthly and annual con-

tracted quantities to address circumstances in which the power plant is not

dispatched;

• Appropriate protections with respect to the supply of off-specification fuel. The

fuel must meet certain specifications. The offtaker should be entitled to receive

liquidated damages from the fuel supplier to cover additional costs incurred as

a result of burning off-specification fuel (including the increased use of filters

and stoppage time for cleanups and startups);

• To the extent that the project company is assuming responsibility for fuel supply

under the terms of the PPA, the project company will also need to ensure that

any liability it incurs under the terms of the PPA for non-availability due to

fuel supply failures is passed through to the fuel supplier. It is often difficult or

impractical to obtain agreement from a fuel supplier to bear such liabilities; and

• Alignment of the commencement of the fuel supply with the commissioning

and testing of the power plant under the PPA to ensure the availability of fuel

to test the plant before the scheduled COD provided for in the PPA. However,

the fuel supply start date should not be too early, or the project company may

end up paying capacity payments under the fuel supply agreement well before

the fuel is actually needed.

Legal Guide to Investing in Power Generation in Iraq 81

In addition, liabilities that the project company incurs under a fuel supply agreement in respect of a take-or-pay obligation will, where appropriate, need to be passed through

to the offtaker under the PPA. In other words, to the extent that the project company is

liable to pay for fuel that is not taken due to a risk assumed by the offtaker under the

PPA, the offtaker will need to indemnify the project company for this liability.

As a result, a number of the provisions of the fuel supply agreement will be of direct

interest to the offtaker. The fuel price will usually be a direct pass-through under the

PPA (assuming that the fuel is converted into energy at the agreed efficiency). It is

therefore important for the offtaker, as part of project due diligence, to review and

ensure that the fuel cost is reasonable and consistent with industry rates. The offtaker

should also review the minimum take-or-pay commitment for fuel in the fuel supply

contract. Given that the contractual commitment for plant availability is always lower

than 100%, factoring in periods of maintenance, it is important that the minimum

take-or-pay commitment for fuel is not so high as to create a payment obligation for

fuel for periods when the fuel is not being utilized due to planned maintenance. In the

same vein, the project company should aim to align the scheduled maintenance of the

power plant with the scheduled maintenance of the gas facilities (in the case of a

gas-fired power project) as a misalignment may lead to the plant being unable to

produce power due to ongoing maintenance of the fuel facilities.

It is also important to note that the existence of a separate fuel supply agreement

between the offtaker and the fuel supplier does not necessarily mean that the

offtaker must take full fuel supply risk under the terms of the PPA. The offtaker’s

ability to accept fuel supply risk under the PPA will depend largely on its recourse to

the fuel supplier and/or its access to readily available alternative sources of fuel. If

the fuel supplier is the only or primary viable source of fuel supply, the offtaker will

need to ensure that, upon a fuel supply failure, it has recourse to the fuel supplier on

a full indemnity basis for any shortfall in revenue, any penalties payable under the

terms of the PPA, and ultimately the loss suffered on termination of the PPA. The

offtaker will also need to consider the credit status of the fuel supplier. Will the fuel

supplier have the financial resource to pay out on such an indemnity? If not, what

sort of credit enhancement is available in the form of liquidity support and/or

guarantees (including, if necessary, sovereign guarantees)?

(iii). Fuel Transportation Arrangements

These considerations may involve further complexity if there is a division of responsi-

bility for supply and transportation of fuel. Depending on the proximity of the plant

to the fuel source and the nature of the fuel, it may be necessary to enter into a

separate agreement with a transporter for transporting the fuel from the fuel

processing facility to the plant. This would likely increase the risk elements of the

project, as the fuel supplier could transfer title and risk of the fuel to the fuel trans-

porter or the project company at a delivery point that is still far from the plant.

Where the fuel supplier commits to delivering the fuel to the delivery point at the

82 Legal Guide to Investing in Power Generation in Iraq

power plant, the fuel supplier will bear the risks associated with ensuring that fuel of the right quantity and specification reaches the delivery point at the plant. Where,

however, there is a separate contract for transportation of the fuel, that contract

would apportion risks among the fuel supplier, the transporter, and the project

company. The delivery of off-specification fuel to the plant, for instance, may not be

the fault of the fuel transporter, but may result from off-specification fuel being

provided to the fuel transporter by the fuel supplier, in which case the project

company should have recourse to the latter through the remedies provision of the

fuel supply agreement. If the fuel transporter is publicly owned, the project company

may make an argument for the offtaker to bear the risk of nonperformance or

defective performance by the fuel transporter, in addition to fuel transportation

force majeure. However, depending on how well capitalized the public fuel trans-

porter is, it may be able to bear such risks on its own, which also avoids the political

challenges of one government entity (the offtaker) bearing the risks of another

government entity (the fuel transporter).

g. Transmission

In a bundled system like Iraq, the market roles of power purchasing, transmission,

and distribution are all bundled into one entity: the offtaker. The offtaker, the MoE

in Iraq, usually bears responsibility (and the risk) for transmitting the power that is

produced and sold by the project company. Similarly, the offtaker in this system will

have the obligation to keep the power plant connected with the power grid.

h. Foreign Exchange Rate Fluctuation

Ideally, financing for the project should be obtained locally and in the host country’s

currency to avoid exchange rate risks. However, this is rarely possible in emerging

markets where there is an underdeveloped banking industry and limited capacity for

lending. When financing for the project cannot be obtained in the local currency of the

host country, and the tariff cannot, for whatever reason, be denominated in the foreign

currency in which the investment was made and the financing is obtained, the project

company will need to seek funding in an alternative currency and protect itself against

short-term fluctuations (but not catastrophic devaluation) in exchange rates.

Mitigation of short-term exchange rate risks is commonly achieved through one or

more of the following means:

1. All tariff components are denominated in the funding currency and the

offtaker is required to pay electricity fees in the local currency equivalent to the

electricity fee denominated in the funding currency;

2. Entering into derivatives and future currency swap arrangements with credit-

worthy counterparts; and/or

3. Government undertaking to make up losses due to exchange rate fluctuations

(a less common approach).

While each of the above is effective in mitigating against short-term currency

exchange fluctuations, neither is capable of protecting the project company against

Legal Guide to Investing in Power Generation in Iraq 83

catastrophic devaluation risk. In the event of a catastrophic devaluation of the host country’s currency, it is unlikely that the end-users or the host government will be

able to afford the increase in tariff or shortfall payments for an extended period of

time. Mitigation of the risk of a catastrophic devaluation is usually best achieved

through insurance in the form of a currency hedge.

i. Convertibility and Remittance

In locations where the local currency is not freely convertible and foreign currency is

required to make debt payments and distributions, the project company could face

difficulties in securing access to foreign currency in which the investment was made

and debt is being serviced. While the host government would normally provide an

undertaking to ensure the convertibility of currency throughout the term of the

project, convertibility and remittance risks remain on two fronts:

• Breach by host government of its undertaking on convertibility; and

• Lack of foreign currency reserves to meet its conversion obligations.

Mitigation against such risks can be achieved in a number of ways:

1. Build up an offshore debt service reserve account that should help

to create a buffer for short-term conversion obstacles;

2. Swap for other valuable commodities in lieu of cash payment; and

3. Obtain political risk insurance cover on currency inconvertibility.

In Iraq, there are no currency or foreign exchange restrictions on revenues gener-

ated by the project company if the project is licensed by NIC. There are no special

rules in Iraq regarding the transfer of money in relation to power projects. It is

advisable, however, to refer to any existing international treaties between Iraq and

other countries that might impose special currency exchange conditions. Parties

are generally free to transfer investment capital outside of Iraq, along with debts,

revenues, and amounts payable, in foreign currency. Additionally, parties freely

apply such amounts as contributions to the capital of any other company in accor-

dance with the instructions of the Central Bank of Iraq.136

3. PAYMENT RISKS

Although the components of the revenue stream (capacity and energy) are contractu-

ally agreed under the PPA, there still exists the risk that the offtaker does not meet

its ongoing payments to the project company when required. This is known as

payment risk. Non-payment by the offtaker will impact the ability of the project

company to meet its scheduled payment obligations, which include capital costs,

fixed operating costs, and debt service. This risk is magnified when the offtaker is

seen as not creditworthy and/or financially insolvent.

Furthermore, the termination provisions in the PPA will typically stipulate a termi-

nation amount to be paid by the offtaker to the project company in exchange for

136 For further information on this topic, refer to the Central Bank of Iraq Law of 2004.

84 Legal Guide to Investing in Power Generation in Iraq

transfer of the power plant ownership to the offtaker. The termination amount

payable is usually large and, as with payment risk, funders are concerned as to

whether the offtaker will be able to fund the termination obligation in the event of a

termination of the PPA.

The project company can seek to mitigate this risk with respect to a government

offtaker by obtaining a sovereign guarantee or political risk insurance, or, in the case

of a non-government offtaker, a parent guaranty or other credit support.

4. POLITICAL AND OTHER RISKS

Political risk represents the probability of disruption of the operations of private

sector businesses by political forces, actions, or events, whether they occur in the

host country or result from changes in the international environment.

Political risks are typically those which the host government is considered better

placed to manage. This management will often embody a wide range of risks,

including:

• Restrictions on the convertibility of local currency into foreign exchange and its

transfer outside of the host government;

• Expropriation of ownership, control, or rights to an investment;

• Breach of contract by the host government of a contractual obligation (such as

construction of a transmission line);

• Terrorism and acts of violence;

• War, civil disturbances, and insurrection;

• Changes in law, including taxation and other adverse legal or regulatory changes;

• Refusal of government agencies to grant permits and approvals after the

developer has fulfilled all necessary requirements; and

• Action or inaction by the host government or government authorities.

Such risks will often be captured in a PPA through the concept of Political Force

Majeure or Political Risk Events. Some of these risks are explained in further

detail below.

a. Sovereign Risk and Expropriation

A PPA is a commercial agreement for the supply and purchase of electricity between

a private developer and an entity frequently owned by the government. There is a

risk that the government may decide to interfere in the functioning of the plant,

directly or indirectly, with the result that the project company is no longer able to

generate project revenues. In turn, this will jeopardize the project company’s ability

to service its debt, as well as shareholders’ return on equity. Such interference is

typically provided for either under local political force majeure or a separate provi-

sion dealing with government risk events.

Legal Guide to Investing in Power Generation in Iraq 85

The consequences of expropriation should be addressed in the PPA. Expropriation

may be in relation to the physical plant or shares in the project company, and the PPA

should cover both instances. In the former case, the government could deploy

security personnel to physically take over the plant, and in the latter case the govern-

ment could compulsorily take over ownership of shares in the plant. There is need for

clear definition of actions that come under this umbrella, including nationalization,

confiscation, requisition, and other related actions.

It may also be necessary to make provisions for creeping expropriation, which usually

refers to situations in which the government does not directly expropriate a plant but

takes measures that ultimately ensure that the project company is no longer in

effective control of the plant, including onerous regulatory impositions and restric-

tions in foreign currency purchase or repatriation where the PPA tariff is

denominated in local currency. Such measures may be covered in provisions dealing

with local political force majeure or change of law or tax which, unless compensated

for by the offtaker, could spell doom for the project.

It is also important for the PPA to provide for what is not expropriation. Otherwise,

the government may find itself facing severe penalties for taking legitimate actions

that are not generally recognized as amounting to expropriation. Governments are

usually able to take measures for regulating economic activity in the country,

including health and environmental safety measures and tax-related measures.

However, such measures must be made in good faith and not be discriminatory in

nature or primarily intended to confiscate private property. Also, when a project

company has contractual agreements with government-owned companies respon-

sible for associated infrastructure, such as transmission and gas transportation, it is

also important to distinguish between expropriation, which is essentially a political

act, and commercial disputes, which should be dealt with in accordance with the

remedies provided for in these agreements.

Developers typically argue that expropriation should be treated as a termination

event under the PPA, for which the project company should be fully compensated for

the expected revenue stream over the life of the PPA. In any case, compensation

under PPA termination may or may not be appropriate, depending upon the extent to

which the offtaker is independent from the government. The more independent the

offtaker is, the better the argument that the project company and the lenders should

cover the risk of expropriation in some other way, rather than expect the offtaker to

pay them in full for such event.

In addition, all parties should consider whether the offtaker will have a source of funds

to make any termination payments in the event of expropriation. Ideally, this obliga-

tion would be supported by a sovereign guarantee, but that may be difficult to obtain.

Where there is a separate agreement dealing with the compensation regime, such as

a Put and Call Option Agreement, it should clearly provide for exactly what the

payout should be in the event of expropriation to avoid any ambiguity.

86 Legal Guide to Investing in Power Generation in Iraq

A developer may also consider getting political risk insurance from an institution

like MIGA. The benefit of MIGA insurance is not just the certainty of a payout in the

event of expropriation, but more importantly, the reduced likelihood of expropria-

tion due to the reputational risk for the government and the likely adverse collateral

impact on its perception in other international transactions.

b. Compliance with Law and Change in Law

The offtaker and the government will likely require the project company to contrac-

tually commit in the PPA to comply in all material respects with the laws of Iraq.

The project company should in turn be able to commit to do so, at least by reference

to applicable laws at the outset of the project on the basis of legal due diligence and

advice. The project company (and by extension its lenders) will, however, find it

difficult to give an unqualified commitment to comply with laws to the extent that

laws may change over time.

The concept of “Change in Law” has evolved to include (i) the introduction of new

law, (ii) modification of existing law, and/or (iii) changes in the interpretation of law

by any court, tribunal, governmental entity, or other authority that has applicable

jurisdiction or regulatory oversight with respect to the project or the project com-

pany. “Law” in this context should be defined to cover a comprehensive range of

legislative, statutory, and regulatory instruments, orders, guidelines, etc.

There may be some debate between the offtaker and the project company as to the

date from which any Change in Law should be considered. This will often be the

date of signature of the PPA. However, where the project company has committed to a

tariff in the course of a tender process, it may be more appropriate to set the date at

the date of submission of the project company’s proposal (in response to the RfP). This

is an issue that can sometimes be resolved by due diligence to determine whether a

Change in Law has occurred that might have an impact on the project company’s cost

structure. However, depending on the transparency of legislation in the location and

the time available to the project company to perform such due diligence, it may make

more sense for the offtaker to add this incremental risk to the risk of changes in law

after execution of the PPA, which it will often already have agreed to take.

A Change in Law may impact the project company in a number of ways:

1. It may adversely affect performance of a particular obligation under the PPA or

render performance impossible;

2. It may adversely affect the project company’s revenue stream;

3. It may require the project company to incur a one-off capital cost or cause an

ongoing increase in the project company’s operating costs (in each case, in

order for the project company to comply with the relevant change in law); or

4. Conversely, it may lead to a reduction in the project company’s operating or

forecast capital expenditure.

Legal Guide to Investing in Power Generation in Iraq 87

Subject to appropriate materiality thresholds, the project company and offtaker will generally agree that the project company should be left in no better or worse position

than if the relevant Change in Law had not occurred. Thus, to the extent the project

company is temporarily unable to perform an obligation as a result of a Change in

Law, this will not constitute a project company default and any time limits imposed

on the project company will be extended accordingly. Furthermore, to the extent that

the Change in Law causes a delay in COD, the plant may be “deemed complete” and

to the extent that the plant is unavailable as a result of such Change in Law, the

project company may be entitled to Deemed Availability or Deemed Generated

Energy payments. In addition, to the extent that the project company incurs an

increase in costs or decrease in revenues as a result of a Change in Law, this will

entitle the project company to receive either (i) direct compensation to pay for or

reimburse the project company for such cost or revenue shortfall, or (ii) an appropri-

ate tariff increase. Conversely, if the project company benefits from a Change in Law,

then an appropriate downward adjustment in the tariff will typically apply.

To the extent that a Change in Law renders performance under the PPA impos-

sible, the project company will generally be entitled to terminate the PPA with

the level of compensation applicable assessed in the same way as termination for

Political Force Majeure.

5. CONSENTS, PERMITS, AND LICENSES; LAPSE OF CONSENT

a. Project Company’s Responsibility to Secure Consents, Permits, and Licenses

Offtakers understandably want power plants to be built and operated in accordance

with the consents required by the applicable law. To ensure this occurs, parties to the

PPA will want to clearly delineate who is responsible for obtaining the various permits.

The project company is typically responsible for obtaining the necessary consents to

build, own, and operate the power plant. These include, among others: a construction

permit, an environmental license, an archaeological permit, and an operating

permit. The term consents are generally understood to include any registration,

declaration, filing, consent, license, right, approval, authorization, or permit.

For a project under the National Investment Law, the NIC can assist with identifying

and obtaining all necessary consents and permits (see also Chapter II ( Iraq Power

Sector’s Finance & Legal Landscape) of this Legal Guide ).

b. Offtaker’s Obligation to Assist in Securing Consents, Permits, and Licenses

It is not the case that all obligations regarding consents reside with the project

company. Because the offtaker is often affiliated with the government, it is

anticipated that the government will have some connections to, and influence

over, other government agencies. In addition, as an established entity in the

domestic market, the offtaker is often more familiar with the legal and regula-

tory requirements for operations in the market. As a result, the parties will

typically agree that the offtaker should be obligated to offer “reasonable

88 Legal Guide to Investing in Power Generation in Iraq

assistance” to the project company in obtaining consents. Ultimately, this is in

the interest of all of the parties, including the lender, who will need the assur-

ance that the project company has obtained all of the necessary consents.

c. Joint Coordination for High-Level Approvals

In certain instances, the parties may agree that the responsibility to obtain

particular consents from higher levels of government is a joint responsibility.

Such approvals might include consents of the relevant authorities (such as

cabinets, parliaments, ministries of finance, ministries of energy, tax authorities,

regulators, and central banks). Since such consents are often necessary for the

effectiveness of a PPA, it generally makes sense that both parties would work

together to ensure that they are obtained on time.

d. Lapse of Consent

Where a government authority fails to grant or renew a consent upon due applica-

tion of the project company, this will be treated in the same way as a Change in Law.

This is sometimes referred to as a Lapse of Consent. Note that where the project

company is unable to complete the requisite formalities to obtain or renew a consent

as a result of a Change in Law, the Change in Law protection should nonetheless

apply. It bears noting that the concept of Lapse of Consent is sometimes referred to

in PPAs as a political force majeure event, with the same net effect.

6. TAX ISSUES

a. Change in Tax

Changes in tax may severely impact project revenue and could result in making a

project fundamentally uneconomical. The change may come in the form of a change

in tax rate, the creation of a new class of tax, or removal of relevant tax benefits that

may adversely affect the project’s return on investment and/or its ability to service

its debt. The consequences of a change in tax may:

1. Increase or decrease project costs;

2. Increase or decrease the maintenance and operation costs; and

3. Increase or decrease the revenues expected by the project company.

Material issues to consider in relation to the management of change in tax risks

include the reference date by which the change in tax is measured and whether the

change is discriminatory in nature.

b. Reference Date by Which Change in Tax is Measured

A change in the tax position must be defined relative to the tax position at a refer-

ence date. The reference date is commonly agreed between the parties and could be

the date of the signing of the PPA or the date of financial closing.

c. Whether the Change is Discriminatory in Nature

In determining which party shall bear the risk of change in tax, distinction is

normally drawn between three categories of changes:

Legal Guide to Investing in Power Generation in Iraq 89

1. Changes that are applicable specifically to the project and the involved sponsors, contractors, and lenders only (a Discriminatory Change in Tax);

2. Changes that are applicable to the industry in general or a similar class of inves-

tors (a Specific Change in Tax); or

3. Changes that do not fall into the above two categories and are applicable to the

general community (a Non-discriminatory Change in Tax).

For a Discriminatory Change in Tax, the offtaker is normally expected to bear this

risk by means of tariff pass-through. In other words, any increased tax charges are

included in the tariff calculation of project costs, and therefore the offtaker has to

pay a tariff that is reflective of the extra tax charges. For a Non-discriminatory

Change in Tax, the project company is normally expected to accept this as part of the

risk of conducting business in the host country. For a Specific Change in Tax that is

not discriminatory in nature, the parties may negotiate risk.

d. Mitigating the Risk of a Change in Tax

Mitigation measures against changes in tax are normally implemented through one

or more of the following:

• Host government undertaking and political risk insurance: An undertaking

by competent government authority(ies) of the host country that no change in tax,

imposition of new tax, or removal of tax benefits will be applicable to the project

company, its sponsors, and contractors throughout the life of the project. The

project company can further mitigate this risk by obtaining political risk insur-

ance to insure against breach of the undertaking by the host government.

• Tariff Pass-Through: The tariff is designed to allow full pass-through of any

increase in tax, imposition of new class of tax, or removal of tax benefits during

the term of the Project that are “discriminatory” or “specific” in nature.

For projects in Iraq without an investment license, there is no way to mitigate a change

in tax. Projects under the National Investment Law are legally protected against

changes in tax, even after the expiration of an initial 10-year tax exemption period.

7. CHANGE IN CONTROL

Just as important as assessing the viability of a project, both the lenders and the

offtaker must undertake an assessment of the project company itself and the

parties in control of the project company. The reputation of these parties, their

experience, and their track record all influence the offtaker and lenders in

assessing whether the project company will have the ability to meet its obliga-

tions under the PPA. It therefore becomes important to both the offtaker and the

lenders that the project company’s shareholders be restricted from unilaterally

changing the control of the project company.

PPAs normally contain explicit provisions on the meaning of control and what

constitutes a change in control of the project company. The PPA could provide that a

change in control of the project company cannot occur without offtaker consent.

90 Legal Guide to Investing in Power Generation in Iraq

Typically, the PPA will state that the offtaker cannot unreasonably withhold its

consent. Alternatively, a change in control may only be allowed after a prescribed

time period (this may be aimed at, for example, locking in the parties for the initial

loan term, or for the construction phase). Further conditions may be imposed that if

a change in control has to occur, then it cannot reduce the local content requirement

of the project company, or that the new entities must have the same reputational

standing as their respective predecessors. The latter may be quite a subjective

assessment. The restrictions and conditions will vary from project to project.

The project company may also have an interest in changes in control of the offtaker,

particularly in those locations undergoing an unbundling of the electricity supply

industry and the restructuring of a monopoly utility offtaker. Where sovereign support

has been provided for the offtaker’s obligations under the PPA, this issue may be less

important to the project company. However, where no such support has been provided

and the investment grading, reputation, and sophistication of the offtaker were key

considerations for the project company and the lenders when concluding the PPA, then

the offtaker may be similarly restricted from undergoing a change in control without

the project company’s consent. There may also be conditions imposed on the offtaker,

such as the restructured offtaker having the same investment grading as its predeces-

sor or an obligation that sovereign support be provided.

8. FORCE MAJEURE

It is important to have a clear provision dealing with force majeure in a PPA, which

will set out the meaning and consequences of force majeure and who bears those

consequences. These provisions may also specifically describe what is not covered

within the scope of force majeure in the PPA.

a. Key Features of Force Majeure

In general, force majeure tends to have the following defining features (see also

Legal Guide to Investment in Iraq):

• The event has material adverse impact on a party’s ability to discharge contrac-

tual obligations.

• The event is not the fault of the party seeking relief and is beyond the reason-

able control of the party.

• The event could not have been reasonably foreseen by the party, and reasonable

measures could not have been implemented by a diligent party to avoid it or

mitigate its impact.

Sometimes, the definition extends beyond the event itself to the continuing

impact of the event. For instance, when there is a major unexpected flood that

damages a power plant, and it takes up to a month for the flood water to be

drained out before the commencement of damage assessment, the force majeure

relief claimed could go beyond the day of initial flooding and also extend to the

continuing impact of the flooding.

Legal Guide to Investing in Power Generation in Iraq 91

It is also important to clarify what is not covered within the scope of force

majeure. Where a power plant is down because of poor maintenance, it would not

fall within the scope of force majeure. This would also be the case when the

project company has failed to contract for a sufficient quantity of fuel to enable it

to produce the full contract capacity.

b. Types of Force Majeure

Force majeure events under a PPA can be placed in a number of categories, including

the following:

Local Political Force Majeure tends to cover events that are either caused by the

government of the host country or could be best prevented, controlled, or mitigated

by the government. Events in this category would include widespread riots and civil

disorder, acts of terrorism, and nationwide industrial strikes. The scope could also

extend to lack of transmission grid availability to transmit power from a power plant

owned by the government, as well as lack of any other associated infrastructure

needed by the power plant that is publicly owned or controlled. Some elements of

change in law could also fall within the scope of local political force majeure, such as

the host government’s introduction of restrictions on capital repatriation, which

prevents scheduled payments to offshore equity and debt providers.

Foreign Political Force Majeure tends to cover acts of a political nature that are of

foreign origin but still have a material adverse impact on a party’s ability to continue

with PPA obligations. For instance, an industrial strike in a foreign country could

mean that a critical piece of plant equipment, such as a replacement turbine manu-

factured in that country, cannot be exported to the country where the power plant is

located. A trade embargo could also have a similar impact.

Natural Force Majeure covers events such as flooding, hurricanes, earthquakes,

tsunamis, and other adverse weather or natural conditions that have a material

adverse impact on a party’s ability to meet its contractual obligations.

c. Extension of Force Majeure

Typically, a PPA will provide for force majeure relief to extend beyond the PPA to

other project agreements that the PPA parties are also party to, including the fuel

supply and transportation agreements, the EPC contracts. and the transmission

agreements. As such, where the occurrence of a force majeure event prevents the fuel

supplier or transporter from supplying fuel to the power plant, the project company

may be able to seek relief from its contractual obligation under the PPA for minimum

plant availability. Given the fact that a PPA counterparty may wish to seek force

majeure relief for events that occur under other agreements, it is important to aim to

harmonize force majeure across all of the project agreements. Otherwise, there is a

risk that an event that is defined as a force majeure in the transmission agreement,

for instance, may not be featured as a force majeure event under the PPA.

Consequently, on account of the misalignment, that event may not qualify a party for

relief from its other contractual obligations.

92 Legal Guide to Investing in Power Generation in Iraq

d. Relief from Contractual Obligations as a Result of Force Majeure

As has been discussed, a party claiming force majeure usually wants relief from

contractual obligations during the duration of the force majeure event. If the

force majeure period is protracted, the PPA will usually identify how long relief

from contract obligations will be granted before the unaffected party can seek

contractual termination.

In a PPA, it is often important to draw a distinction between force majeure affecting

the offtaker and the project company, respectively. When the offtaker is affected by

force majeure, the PPA will usually provide for continuation of capacity and energy

payments to the project company during the period of the force majeure. If the effect

of the force majeure event affecting the offtaker is to delay COD, the project com-

pany may be entitled to claim a deemed completion. In that instance, the project

company may be entitled to deemed capacity payments that cover debt service

(which will commence on the original COD) and any additional project costs

incurred as a result of the delay.

When the force majeure affects the project company, the impact on capacity or

energy payments may depend on the specific type of force majeure. Such payments

will typically continue in the case of Local Political Force Majeure, but could be

suspended in the case of Natural Force Majeure or Foreign Political Force Majeure.

Also, a project company affected by force majeure may still be able to produce some

power even if it is below the contract quantity, and provision should be made in the

PPA for such power to be purchased and paid for nonetheless.

e. Specific Remedies as a Result of Force Majeure

Although the primary form of relief in the case of force majeure may be the suspen-

sion of certain contractual obligations, there are also other forms of specific

remedies for force majeure that may be provided for in the PPA. One common

example is an extension of certain time periods under the contract in order to

account for the delay caused by the disruptive event. If the force majeure delay

occurs during the construction phase, the project company should be entitled to an

extension of the time period for achieving COD. If the force majeure delay occurs

after COD, the full term of the contract should be extended to account for the delay.

Other project agreements should be aligned accordingly.

f. Force Majeure under Iraqi Law

Articles 168 and 425 of Iraq’s Civil Code allow for a party to a contract to be

excused from performance if nonperformance or a delay in performance is due to a

cause beyond that party’s control. It is unclear whether Iraqi law gives rise to

compensation in such cases.

Legal Guide to Investing in Power Generation in Iraq 93

Below are examples of typical force majeure provisions from a standard investment

agreement:

“If either Party is unable to meet its obligations due to Force Majeure, such Party

shall be excused from meeting its obligations during that period in accordance

with this contract and shall not be obliged to pay any fees or compensation

resulting from such Force Majeure.”

“If a Party is unable to perform its obligations in whole or part due to Force

Majeure, or if such Party knows of its inability to meet its obligations because of

that, such Party shall notify the other Party in writing as soon as possible, pro-

vided that such notification shall not exceed [180] days after actual knowledge of

the occurrence or the possible occurrence of Force Majeure.”

For additional force majeure standard provisions, please refer to the Legal Guide to

Investment in Iraq.

94 Legal Guide to Investing in Power Generation in Iraq

CHAPTER VI. CONCLUSION

Despite abundant fossil fuel reserves and a location ideal for solar generation,

Iraq currently suffers from a significant deficiency in power generation, with

demand far outstripping supply. This deficiency creates political instability both

directly, as a result of citizens dissatisfied with rolling blackouts, and indirectly,

due to a lack of economic growth and job creation. Given low oil prices and the

need to fund security operations, the government of Iraq simply does not have the

ability to self-fund the necessary power generation needed for its population. As

described in this Legal Guide, the government of Iraq has put forth a concerted

and comprehensive effort to provide significant incentives to investors in the

power sector. This includes land rights and infrastructure, NIC support in obtain-

ing permits and licenses, investor-favorable tariffs, taxes, and customs incentives,

and MoF guarantees for eligible projects.

While investing in Iraq is certainly not without its challenges, it is the sincere belief

of the authors that such an investment can benefit the investor, Iraq, and the region

as a whole. Investors willing to take the risk will benefit from government incentives

that may not be available in the future, as well as gain an early foothold in what has

the potential to be a strong regional market. For Iraq, reliable power generation will

allow it to improve its economic outlook by developing a broad set of industries and

maximizing its educated workforce to help the country diversify from oil. Perhaps

more importantly, such development in power generation will undoubtedly reduce

political and social instability by decreasing unemployment and providing Iraqi

citizens with their seemingly inalienable right to power, especially for medical,

educational, and basic living purposes. Given its location and both its cultural and

significant historical relevance in the Middle East, a stable and prosperous Iraq

would be a tremendous benefit to the region and the world.

Legal Guide to Investing in Power Generation in Iraq 95

Funded BBy

Developed By

BHC LAW FIRM