This article examines how US investors in Iraqi public-private partnerships should test termination compensation against unpaid debt and shareholder funding. Investors often assume that termination compensation will repay lenders and return shareholder capital, but project agreements may provide narrower amounts, different treatment depending on the termination event, or payment conditions that delay recovery. A formula in a contract is not the same as an unconditional payment entitlement.
Iraq has no dedicated PPP statute. Depending on how the project was awarded, the framework may include the Iraqi Civil Code No. 40 of 1951, including its provisions on public utility concessions; the Investment Law No. 13 of 2006; the Investment and Partnership Instructions No. 1 of 2024; the Public Contracts Implementation Instructions No. 1 of 2025; and sector legislation such as the Ministry of Electricity Law No. 53 of 2017. Iraq’s accession to the New York Convention by Law No. 14 of 2021 is relevant to enforcing awards.
Identifying the legal basis and termination event
The framework governing the project should be established, including the public body’s powers, the approved contract and any investment or sector rules. The label PPP does not determine the compensation regime; the actual provisions on authority default, operator default, force majeure, prolonged disruption and voluntary termination must be reviewed one by one.
For public-sector projects in Iraq, it should be confirmed that the contracting body has authority and the necessary approvals, including budget approval for any payment commitment. An obligation of the contracting entity should be distinguished from a guarantee by the Ministry of Finance or the state, and government participation should not be treated as an unlimited sovereign commitment.
Reconciling the formula with the financing structure
The contract’s definitions of outstanding debt, eligible financing costs and equity should be identified. Senior loans, shareholder loans and equity may be treated differently, and the agreement may exclude amounts incurred outside an approved financing plan or arising from the sponsor’s own default. The analysis should test:
- Principal, accrued interest and permitted break costs.
- Equity contributions and any agreed return.
- Shareholder loans and their ranking.
- Insurance proceeds, unpaid revenue and other recoveries.
- Deductions for defects, liabilities or prior payments.
The model should be reconciled with evidence of funds actually advanced. A board funding commitment is not a paid contribution, and intercompany balances may need explanation before they qualify. A compensation shortfall does not reduce the borrower’s debt to lenders, so sponsors must understand who bears the gap.
Distinguishing calculation from payment and distribution
The compensation clause should identify the valuation date, supporting documents and dispute process, when payment falls due and how undisputed amounts are paid while other items are contested. A formula requiring agreement on every item can leave the whole payment unresolved.
A review of project financing arrangements in Iraq should link the payment route to security, direct agreements and creditor priorities. Payment to the project company does not mean shareholders can immediately receive it; lenders’ rights, tax and corporate rules on distributions under the Companies Law all apply.
Public budget and payment practice
Payments by Iraqi public bodies depend on budget allocations and Ministry of Finance procedures, and large unbudgeted payments can take considerable time even when liability is accepted. Investors should consider whether compensation would be paid as a lump sum or in instalments, whether interest accrues on late payment and what security, such as a Ministry of Finance guarantee or escrow, supports the obligation.
Addressing enforceability and collection realistically
The Civil Code and mandatory rules affect the remedies available, and Iraqi courts may review agreed compensation. Jurisdiction, the authority of the public body to agree arbitration and the route for recognising an award should be assessed. Public property used for public purposes is generally protected from attachment, so a compensation award should not be equated with a right to seize public assets.
The actual obligor and any valid guarantee should be identified, and payment conditions reflected accurately in the financial model. If an essential commitment remains subject to approval, it should not be treated as effective simply because the project team expects consent.
Stress-testing the recovery before investing
Different termination scenarios should be modelled using the contractual formula and the documented funding structure, including delays in payment and partial recovery. This shows investors and lenders where their real exposure lies and where additional protection, such as political risk insurance, may be needed.
Political risk insurance from international or US government-backed providers can cover certain government defaults, expropriation and currency inconvertibility, and may complement contractual compensation. Investors should check how such cover interacts with the project agreement, including whether arbitration awards must first be obtained and how long the insurer requires before paying a claim for non-payment by a public body.
Conclusion & how Etihad Law Firm can help
Termination compensation is only as valuable as its legal basis, its formula and the public body’s ability and authority to pay it.
As Iraq public private partnership lawyers for American companies, Etihad Law Firm reviews project agreements, compensation formulas and government support instruments, advises on public budget and approval processes, and helps US investors understand which debt and equity amounts may realistically be recovered.