The Kurdistan Regional Government (KRG) has an international media profile out of all proportion to its size. As an autonomous provincial governing authority in Iraq covering the governorates of Erbil, Suleimaniyah and Dohuk, the KRG’s status as an independent centre of power – often in opposition to Baghdad – has made it a force to be reckoned with.

Governing a region where stability and security are the rare exceptions in Iraq, the KRG has won a hard-earned reputation for efficient service delivery. Investors from across the globe have made a beeline for Kurdistan, resulting in a construction boom equal to any Gulf state. It has pulled in nearly 50 oil companies to explore oil and gas reserves estimated at 45 billion barrels and 3-6 trillion cubic metres respectively.

KRG track record

The KRG, now in its 21st year, has a longer track record in government than the central government in Baghdad, which only assumed office in 2004. Since the imposition of the no-fly zone by the allied forces in 1991, Iraq’s Kurds have assiduously built up a series of institutions that have laid the foundation for the modern-day KRG.

The Kurds have exploited the federal provisions within Iraq’s constitutions to the maximum. Its institutions exercise legislative and executive authority across a raft of areas – setting the KRG’s own budget and overseeing security, health and education, natural resource management and infrastructure.

In several of these areas, notably hydrocarbons, the KRG’s autonomy has been challenged by the government in Baghdad. Under the Kurdish interpretation of Article 121 of the Iraqi federal constitution, the Kurdistan Parliament has the right to amend the application of Iraq-wide legislation that falls outside the federal authorities’ exclusive powers.

The KRG still cooperates with the federal authorities in a number of areas and is reliant on Baghdad for its budget allocation, officially set at 17 per cent of the national budget. But relations with Baghdad have deteriorated sharply over recent years, following the federal government’s opposition to Kurdistan’s self-management of its oil and gas reserves.

The KRG remains defined by the rival political factions in Kurdistan: the Kurdistan Democratic Party (KDP) of President Masoud Barzani, and the Patriotic Union of Kurdistan (PUK), headed by Iraqi’s federal president Jalal Talabani. The two men are veterans of the Kurdish struggle against the Baathist regime, and in 1996 waged a bitter civil war against one another.Erbil has become the main power base of the KDP, while the PUK’s territory is Suleimaniyah. The two parties have an agreement to rotate the prime ministership. However, the relative strength of the KDP over the PUK has put this deal under strain. The PUK’s previous incumbent, Barham Salih, was forced to yield the premiership to Nechirvan Barzani on schedule in early 2012, even though Barzani’s previous term in office had been extended by a year in 2009. The equivalent extension was not offered to Salih – a clear sign, say analysts, of the greater might of the KDP. 

KRG decision-making continues to be influenced by the KDP/PUK party leaderships. High-level party elites determine ministerial spending policies and, aside from the influential Natural Resources Minister Ashti Hawrami, no individual KRG minister exercises substantial power of his or her own accord. Ultimately, decisions on spending and contract awards are referred back to the political elites. 

Calls for reform

Iraq experts tell MEED they expect party control of the KRG apparatus to persist, although the outbreak of anti-government protests in Suleimaniyah in March 2011 suggests a latent desire for change. The rise of the Goran (Change) opposition movement, which controls 25 seats in parliament, is a pointer to this groundswell for reform.

“The parliament is still largely a paper tiger, but now there is the Goran presence so you at least have a more active legislature,” says Denise Natali, a Kurdish affairs expert at the Institute for National Strategic Studies in Washington. “The opposition does not have enough seats to change a bill, but for the first time there is somebody willing to check the two main parties.” Talabani has declared he favours changes in the formal KDP-PUK power-sharing agreement.

The KRG continues to amass more power and build institutional muscle, while strengthening clan-based lines of succession. In July 2012, President Barzani announced the formation of the KRG National Security Council (NSC), appointing his son, Masrour Barzani, to head the new body that includes representatives from the Asaiish (the KRG’s domestic security agency) and KRG military intelligence.

Masrour Barzani is not the only heir of a political dynasty to have been elevated. Qubad Talabani, son of Jalal Talabani, returned last year to the Kurdistan region after six years as the KRG representative in the US. He now heads the Department of Coordination and Follow-Up within the KRG’s Office of the Prime Minister, where his role is to promote inter-agency policy coordination and boost communication between ministries.

Although dependent on the central Iraq budget for an estimated 97 per cent of its revenues, the KRG has attempted to chart an independent course in its economic decision-making, bolstered by its own investment law. 

The KRG has attempted to burnish the Kurdistan region’s credentials as an investment location by offering incentives to investors, such as allowing foreigners to own land – an opportunity not afforded by Baghdad. The crafting of its own investment law has enabled the KRG to present itself as a pro-business province. The latest figures from the KRG Board of Investments show that Erbil has attracted $24.5bn in more than 521 projects, with at least 20 per cent of them involving foreign investment.

Kurdistan regional government budgeted spending

The KRG also sets its own budget, which in 2012 reached $10.8bn. The 2013 KRG budget has been approved by parliament and the Council of Ministers, and reportedly increases spending by more than $2bn to ID15.26 trillion ($13.1bn).

The Kurdish budget focuses spending mainly on infrastructure. This year’s investment is expected to include plans to build up to seven hospitals and 50 health clinics. Security remains another major area for spending. However, current outgoings dominate the KRG budget; between a half and two-thirds is devoted to paying civil servants’ salaries. Unlike other Iraqi provinces, which have persistently failed to use their budget allocations, the KRG has spent to the maximum and has pressed the central government for additional funds, mainly to reimburse oil companies active in the Kurdish north. This has become a serious bone of contention between Erbil and Baghdad as the two sides engage in an increasingly bitter discourse over alleged constitutional transgressions.

A senior Kurdish politician in Baghdad tells MEED that the situation has grown markedly tenser. “I expect there to be tensions because they [Baghdad] are delaying payment and that will put pressure on the KRG as it can’t pay salaries,” says Mahmoud Othman, an independent MP within the Kurdish bloc in the Council of Representatives. “Baghdad wants to create more problems for the KRG and whatever Baghdad does, the KRG sees as negative.”

The KRG is reported to be demanding an additional $4bn from Baghdad to cover retroactive payments from 2010 up to 2013. Under the proposed 2013 federal budget, just $625m out of $119bn in total spend would be allocated to pay oil companies in the north. 

Payment disputes

Under the terms of its agreement with Baghdad, the KRG is entitled to 17 per cent of Iraq’s national budget, which in 2012 was $100.1bn. But the KRG disputes that it receives the full amount it is due, claiming the federal government has deducted more than was appropriate under the agreement to pay for federal expenses. This resulted in the KRG receiving only 10.7 per cent of the 2012 federal budget, according to the US Special Inspector General for Iraq Reconstruction.

“The KRG is not getting 17 per cent of the budget,” says Natali. “Under the UN Oil for Food Programme, the KRG was getting about 13 per cent – closer to what it is getting today.”

Iraqi MPs have delayed a vote on the 2013 budget because of the dispute over the KRG’s share of the federal fund. According to the Kurds, Prime Minister Nouri al-Maliki’s State of Law Coalition wants to cut the KRG’s official share from 17 per cent to just 12 per cent.

The KRG’s demand for more funds is not purely related to the need to pay oil companies. It is spending more because it is providing services beyond the three main provinces of Iraqi Kurdistan, reflecting the extensive KRG presence in the disputed territories that lie beyond the official border demarcation line, including Kirkuk. “The KRG has found itself forced to pay for more services, and even within the KRG area it is taking on a much greater social welfare function, which in turn requires more revenues,” says Natali.

A survey by the US-based Gallup released in the third quarter of 2012 found that public satisfaction with three key government-supplied services had declined in Kurdistan during the year. The poll found the percentage of those satisfied with public transport and the availability of affordable housing fell sharply, while the satisfaction rate for the region’s education system declined marginally.

The growing disenchantment was evident in March 2011, when violent protests hit the streets of Suleimaniyah. While Kurds enjoy many advantages over other Iraqis, such as around-the-clock electricity provision, there are constraints in capacity that undermine performance in other areas.

“What happened in 2011 was a wake-up call to the Kurdish government to try to get its act together, but the problem is a lack of institutions and process,” says Shwan Zulal, an independent consultant who advises oil companies in the KRG.  “The KRG has the vision but lacks the hardware to put the vision into action. If you haven’t got the intellectual capacity and the institutions, it’s going to take a long time to get things right.”  

Healthcare is an example of this, although the sector was a clear focus of government expenditure, the 1980s and 1990s saw a haemorrhaging of local medical staff who have proved hard to replace. Similarly, oil firms active in the KRG areas find it difficult to employ local staff, as the skills base is not sufficiently developed.

Financial services is another area where reform is needed. Kurdistan remains a cash economy. Unlike other investment activities, financial services are still regulated by the federal authorities, and the KRG has chosen to abide by this.

“The banking system is not functioning as well as it could, largely because of a lack of capacity and partly because it’s convenient for some people, as money can disappear with little trace,” says one Kurdish commentator.

Most KRG ministries do not enjoy exclusive authority over spending decisions, with the one exception being the Natural Resources Ministry headed by Ashti Hawrami. Hawrami enjoys complete authority over the KRG’s most important economic sector and nothing happens in the oil and gas industry without his explicit agreement.

Government scrutiny

There are attempts under way to improve scrutiny of government. The KRG passed legislation in 2011 to establish a regional Commission of Public Integrity and the parliament has also established an integrity committee to promote anti-corruption efforts in the region.

Despite being dissatisfied with the KRG’s performance, many Kurds, particularly those in Erbil, have benefited handsomely from the region’s booming economy. Several individuals have grown extremely wealthy as a result of the construction boom. The social welfare focus should keep protesters off the streets. Education and healthcare are free at the point of delivery, while electricity supplies remain the envy of the rest of Iraq.

But the need to continue spending only increases the KRG’s dependence on the central budget. “The KRG, with its social welfare function, has got itself into a vicious cycle: it is increasingly critical of Baghdad and yet is becoming more dependent on it for revenues,” says Natali.