Iraq adopted a federal structure when the northern region of Kurdistan achieved virtual independence after the 1991 Kurdish uprising against Saddam Hussein.

Twenty years later, other Iraqi provinces are seriously assessing the merits of the Kurdistan Regional Government (KRG) model, in a bid to seize financial control from Baghdad. 

The KRG’s success in building an autonomous region from scratch is founded in part on a preferential financial arrangement negotiated with the post-Saddam authorities, which grants Kurdistan 17 per cent of Iraq’s budget. This is a privilege denied to any other province, and one critics regard as handing an unfair advantage to a region that generates at most 7 per cent of the country’s oil output.

Petrodollar scheme in Iraq

Under the ‘petrodollar’ programme, oil and gas producing provinces are granted $1 for each barrel of oil produced and a similar amount for every 150 cubic metres of natural gas. This becomes a huge sum for hydrocarbon-rich provinces such as Basra and Kirkuk, the former earning almost $1bn in 2011 on the basis of the 1.8 million barrels a day (b/d) of oil it extracted. Kirkuk is reported to have dedicated $4.4bn from its petrodollar budget to reconstruction.

Despite this, Kurdistan remains an exception, rather than a model for other provinces. Iraq is still a centralised state and Prime Minister Nouri al-Maliki is adamant that Baghdad should remain in full control of the country’s economic resources.

There are strict limits on the governorates’ spending. Provincial governments cannot spend their budget allocations as they please and provincial level officials answer to the central government, not regional political leaders.

Dissatisfaction at this state of affairs is increasing. The failure to deliver adequate services over the nine years since Saddam’s regime was ousted has led many to question Baghdad’s control of the purse strings. The impressive record of the KRG in service delivery, with electricity supply assured, stands in stark contrast to much of the rest of the country.

Some provinces have voted for autonomy in their own regions, but in reality it isn’t working

Ali Kurdistani, Sulaimaniyah-based political analyst

For 2010, the KRG was granted $9.07bn from the central budget, of which all was spent. Iraq, as a whole, spent only $55bn of the total $72.4bn in the budget. The ongoing failure to disburse the budget does not suggest prudence on the part of the central government, but is instead a sign of its failure to activate capital projects to improve infrastructure and services.

Given this situation, the desire for regional financial autonomy is understandable. The ring-fenced budget allocation that heads Erbil’s way every year is an incentive for other provinces to seek the same, say Iraq analysts. “Practically speaking, the provinces individually are getting much less than a formed region would get,” says Luay al-Khateeb, head of the Iraq Energy Institute and an adviser to the country’s parliament, the Iraqi Council of Representatives.

Kurdistan’s oil exports are expected to average 175,000 b/d in 2012, or about 8 per cent of the average Iraqi oil exports of 2.1 million b/d. The Kurds receive a large annual subsidy from Baghdad, which has enabled the KRG to spend on housing, electricity and infrastructure.

For the moment, the Kurds have sufficient political clout to ride out any challenge to this arrangement. “Constitutionally speaking, budget allocations are supposed to be based on demographics irrespective of oil production. So in that respect there is not a major problem, although some say the Kurdish share is a couple of percentage points too high,” says Reidar Visser, a research fellow at the Norwegian Institute of International Affairs.

Certain Kurdish MPs in Baghdad’s national assembly have voiced concerns that the allocation is being eroded. Al-Maliki has been accused of paring back the allocation by failing to allocate resources for the KRG’s peshmerga (defence) force from the ID40bn ($34m) earmarked for the national defence system.

Kurdistan profits

However, few Kurds would deny they have done well out of the budget transfer arrangement. Even if pressure grows for a reassessment of that allocation, Baghdad remains powerless to shift it. “The federal parliament voted for the 17 per cent allocation and I can’t see Baghdad doing anything to change it,” says Khateeb.

The funding granted to the KRG is a reciprocal arrangement between Erbil and Baghdad, which is separate from the provincial councils. Provinces such as Basra, Diyala and Salahuddin obtain their funding from a separate part of the central budget dedicated to the development of the provinces. The Kurdish provinces of Dohuk, Erbil and Sulaimaniyah obtain some funding from the same allocation.

This is a source of continuing controversy. “Basra, which produces so much more [hydrocarbons] than the KRG, gets so much less for its budget because governorates are treated so differently in the budget without any constitutional justification,” says Visser.

Provincial dissatisfaction

The situation has led other provinces to question the merits of this arrangement. In October 2011, Salahuddin and Anbar set out their plans for taking more autonomy from the centre, following Basra, Dhiqar, and Missan. However, any ambitions to copy the KRG model may be doomed to failure. Kurdistan’s capacity to deliver services has evolved over two decades. For a province such as Salahuddin to build its own education or health services from scratch would prove a huge challenge.

“Some provinces have voted for autonomy in their own regions, but in reality it isn’t working,” says Ali Kurdistani, a Sulaimaniyah-based political analyst. “[Autonomy is] a long procedure that could break up the country.”

Development funding from external donors, mainly the US, is increasingly focused on boosting economic development at the provincial level. In June 2011, the US Agency for International Development launched the Iraq National and Provincial Administrative Reform Project, which aims to strengthen federal, provincial and sub-provincial government bodies, while working to increase provincial control over public policy decision-making and resources. 

Basra has a $1.3bn development plan for its region, with priority given to key infrastructure sectors, such as electricity and water.

The council aims to develop the province through 538 projects spread over 17 service sectors, but is facing implementation challenges linked to the lack of financial allocations from Baghdad. Council members complain that additional funds are needed to buy electricity supplies. The solution, according to Basra, is to get a higher share from the petrodollar scheme. 

Autonomy discouraged in Iraq

The provincial clamour for resources will become increasingly hard to ignore. However, Al-Maliki has said he will block any attempt to form federal super-provinces. In December 2011, Diyala voted for autonomy and its budget allocations were reportedly reduced in the 2012 budget from about $206m to only $123m.

Taking a tough approach to the governorates can only take the central government so far. Unless Baghdad dramatically improves service delivery at the provincial level, the clamour for greater autonomy is only likely to increase.

The prospect of Iraq disintegrating into competing provinces battling over a diminishing central budget will only exacerbate existing sectarian and ethnic tensions. The challenge facing Al-Maliki is to ensure that addressing the desire for greater control at the regional level does not come at the expense of a united Iraq.