Project finance where debt is repaid from the cash flows generated by a specific project rather than from the general assets of a sponsor is the financing model of choice for major infrastructure, energy, and industrial projects in Iraq. The country’s significant infrastructure deficit, substantial oil and gas sector, and ambitious reconstruction programmes create substantial project finance opportunities. However, the legal framework for project finance in Iraq presents unique challenges that require careful navigation by sponsors, lenders, and their legal advisers. This article examines the key legal and regulatory considerations for project finance transactions in Iraq.

The Investment Law Framework

The primary legal framework for project investment in Iraq is Investment Law No. 13 of 2006 (as amended), which established the National Investment Commission (NIC) as the central body for regulating and promoting investment. The Investment Law provides a framework of incentives for qualifying investments including: exemption from taxes and fees for a period of up to ten years from project commencement; guarantee against non-commercial risk expropriation; right to repatriate capital and profits; and permission to employ foreign workers in technical and managerial positions. Investment Law protections apply to investments approved by the NIC or the relevant regional investment commission. The Kurdistan Region operates under a separate investment law Law No. 4 of 2006 administered by the Kurdistan Board of Investment.

Project Company Structure and the SPV

Project finance transactions in Iraq typically involve establishing a special purpose vehicle (SPV) a separate project company incorporated specifically for the project. The SPV is the borrower under the project finance loan agreement and the project developer under the project agreements. Under Iraqi Companies Law No. 21 of 1997, project SPVs are typically structured as limited liability companies (sharikat mahduda al-masouliya). Foreign sponsors may hold equity in the SPV, subject to any sector-specific foreign ownership restrictions. The NIC investment licence is typically obtained in the name of the SPV.

Key Project Agreements and Their Legal Basis

A project finance transaction in Iraq involves a suite of project agreements including: concession or BOT agreement with the relevant government ministry or authority, the legal basis for the project company’s right to develop, operate, and collect revenues from the project; off-take agreement securing the purchase of the project’s output, often by a government entity such as the Ministry of Electricity; EPC contract governing the construction of the project by the engineering, procurement, and construction contractor; O&M agreement governing the operation and maintenance of the project; and government support agreements including direct agreements and support letters from the relevant ministry confirming the project’s legal status and government support.

Lender Requirements — Security Package

International lenders financing Iraqi projects require a comprehensive security package. Given the limitations of Iraqi security law, the project finance security package typically includes: mortgage over the project’s real property and fixed assets; assignment of the project company’s rights under key project agreements off-take agreements, EPC contracts, and insurance policies; pledge over the shares of the project SPV; assignment of the project company’s accounts including the revenue account, the debt service reserve account, and the distribution account; and direct agreements between the lenders and key project counterparties including the government offtaker and EPC contractor giving lenders step-in rights in the event of project company default.

Government Support and Sovereign Risk

Government support is a critical element of project finance in Iraq, given the significant role of government entities as offtakers, land providers, and concession grantors. Lenders typically require: a government guarantee or support letter confirming the government’s commitment to the project; a direct agreement with the relevant ministry acknowledging the assignment of project agreements to lenders and confirming step-in rights; and comfort on the government’s obligations under the concession or BOT agreement. Political risk insurance from multilateral institutions such as MIGA (Multilateral Investment Guarantee Agency) or export credit agencies is commonly used to mitigate sovereign risk in Iraqi project finance.

International Development Finance Institutions

Several international development finance institutions (DFIs) are active in Iraqi project finance, including the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD), and bilateral DFIs such as the US International Development Finance Corporation (DFC). DFI involvement brings significant benefits: it provides additional comfort to commercial lenders and sponsors on project viability; DFIs typically conduct extensive environmental and social due diligence, reducing reputational risk; and DFI financing may be available on more favourable terms than pure commercial lending. DFI participation also subjects the project to IFC Performance Standards or equivalent environmental and social requirements.

How Etihad Law Firm Assists

Etihad advises sponsors, lenders, and government authorities on project finance transactions in Iraq. Our services include advising on NIC investment licence applications, structuring project company arrangements, drafting and reviewing project agreements, advising on the Iraqi law security package, negotiating direct agreements with government counterparties, and advising on dispute resolution provisions in project documentation.