TEPAV stated that with the right steps to be taken in the future, large Turkish investors will be able to enter the Iraqi market more easily.

ANKARA- TEPAV, stating that Prime Minister Tayyip Erdoğan's visit to Iraq was of critical importance for the enhancement of bilateral economic relations between the two countries, said: "With the right steps to be taken in the future, the two countries can work together on the investment plans and large Turkish investors will be able to enter the Iraqi market more easily."

Policy note titled "The Transformative Power of the Turkish Private Sector in Iraqi Kurdistan" by TEPAV Economic Policy Analyst Sarp Kalkan was published. The note reviewed the economic relations between Turkey and the Kurdish Regional Government (KRG) and laid out the growth potential of the KRG in the coming period to enable a clearer understanding of the importance and the potential economic impacts of the visit on the KRG at the Prime Minister level.

Stressing that despite the improvements enabled in the KRG, the note said that it was not possible to talk about a healthy investment climate in the region. The note expressed that severe constraints were observed particularly in attracting investments in the industrial sector and added:

Insufficient electricity

"The first impediment to investment is the lack of enough electricity to support production. Daily electricity usage increased from 2 hours in 1991 to 14-16 hours. Efforts being made to improve capacity rapidly via 11 production and 96 distribution stations installed over the last decade. But the rapid increase in production will fail to meet the rise in the demand. In 2011, US$ 533 million, corresponding to 60% of the new project budgets, are allocated for electricity production; however, it appears that the electricity shortage problem will not be overcome in the short term. Waste of electricity at substantial levels also has a role in the failure to meet the electricity demand despite the rapid increase in production. Electricity was provided free of charge for a long time, which plays a significant role in the escalation of its waste."

Lack of qualified labor force

TEPAV's study maintained that the lack of qualified labor force was the second important impediment to investment. Emphasizing that the region lived in conflicts in the last 20-30 years, which has substantially weakened the education infrastructure, the note said:

"The recent attempts have enabled a considerable improvement in the education infrastructure. In 1991, 1,320 schools provided education to 550,000 students, whereas in 2010 the number of schools and the number of students reached 5,500 and 1,400,000, respectively. A total amount of US$ 220 million transferred via two projects aims to increase both the number of schools and the number of students who hold master's degrees.

However, the current skills set of the labor force remains far from fulfilling those required by the industrial and services sectors. Moreover, substantial social assistance schemes push up the cost of even unqualified labor. Another important challenge regarding the labor force is that the working culture is not matured due to the lack of the habit of continuous employment. Daily working hours are quite low, affecting the labor productivity adversely."

Banking system constitutes another constraint

The evaluation note maintained that the problems with the banking system constituted another constraint to the improvement of the investment climate. Underlining that despite the tens of million dollars of trade volume the region enjoys, there existed no healthy payment mechanism that meets international standards, the note continued:

"A large proportion of trade transactions are carried out in cash. Due to the absence of letters of credit and guarantee letter mechanisms, Turkish exporters have to export goods via open account schemes, which push up the risks facing them.

In the recent period 4 Turkish banks (Ziraat, İş, Vakıf and Al Baraka) have accelerated efforts to open up branch offices in Arbil. Moreover, HSBC Bank has bought the majority shares of a domestic bank. Nevertheless, despite these, it appears that it will take quite a long time to effectuate the system and spread it throughout the entire economy."

Improvement of the bilateral relations critical for Turkish private sector

Stressing that the bilateral relations between Turkey and Iraq had been growing continuously, the note stated that the trade relations between the Iraqi Kurdistan and Turkey and the investments of the Turkish private sector in the region played significant roles in the transformation of the KRG. Maintaining that estimates that the oil revenues of Iraq will increase in the future indicated that Iraq will become a more important market for Turkey, the note concluded:

"The visit to Iraq and to Iraqi Kurdistan in particular at the Prime Minister level is of critical importance for the enhancement of bilateral economic relations between Turkey and Iraq. The advance in economic relations with Iraq so far has been enabled via the initiatives of the private sector, preventing Turkey from undertaking the desired role, especially in large investments. With the right steps to be taken in the future, the two countries can work together on the investment plans and large Turkish investors will be able to enter the Iraqi market more easily."