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Iraq's Kurds Find Prosperity Breeds Distrust
Tensions Churn Over Who Benefits In Economy Dominated by Parties

By Sudarsan Raghavan
Washington Post Foreign Service
Saturday, March 21, 2009

AKRA, Iraq -- On a hilltop overlooking this small Kurdish town, a sleek $28 million hospital rises like a cutting-edge sculpture. Inside, builder Sabah Melhem admired a European medical scanner gleaming under white fluorescent light. Virtually every room contains state-of-the-art equipment, unlike anywhere else in Iraq. "I hope in every city I can build a hospital like this," Melhem declared. "This is my dream."

Two floors down, it is apparent who helps to turn such dreams into reality: a larger-than-life photo of Kurdish leader Massoud Barzani looms over the entrance, a reminder of how much patronage still prevails in one of Iraq's most stable and developed regions.

Melhem is part of a generation of entrepreneurs driving the economic transformation of Kurdistan, as northern Iraq's Kurdish autonomous region is known. Many Iraqis say that a strong economy that allows sects and ethnic groups to share in the country's wealth is a vital path to stability. But below the surface of Kurdistan's prosperity, tensions are churning over who is benefiting from economic growth. The two ruling Kurdish political parties, America's staunchest allies in Iraq, dominate virtually every aspect of the regional economy, spawning conflicts of interest and corruption, according to Kurdish and U.S. officials.

"They are interfering," said Noshirwan Mustafa, a senior leader of the Patriotic Union of Kurdistan (PUK), the political party led by Iraqi President Jalal Talabani. Investors, Mustafa said, are expected to provide the parties with stakes in businesses. "If you want to contract with the government or with a ministry, you should give a share to the parties," he said.

Mustafa, who recently had a falling out with Talabani, said the PUK and the rival Kurdish Democratic Party (KDP), led by Barzani, each receive $35 million a month as part of the funds transferred to the Kurdistan Regional Government by the central government in Baghdad. "Nobody knows how they spend the money," Mustafa said.

Iraq's minister of planning, Ali Baban, said the central government does not monitor how Kurdish authorities spent the 17 percent share of the national budget that Kurdistan receives each year. When asked about Mustafa's assertion that some of the funds go to political parties, Baban said, "If that is true, it would be a violation and a breach of the regulations governing the spending of public funds, but such breaches do exist in most provinces of the country."

According to the 2009 draft budget, the Kurdistan Regional Government will receive roughly $6.2 billion from the central government. The region has two audit boards, each affiliated with one of the two main parties, but Abdulbasit Turki Saeed, the head of the central government's Board of Supreme Audit, said he was discussing with Kurdish authorities how to monitor the funds this year. "Legally, every dinar that was not spent properly concerns us," Saeed said. "But from what actually happens, nothing surprises me. Since the occupation until now we have seen everything."

Kurdish officials denied that the parties receive monthly allocations of central government funds, but they conceded that corruption is a major concern.

"Corruption in Iraq is an old problem. But in Kurdistan it is much less than in other parts of Iraq," said Mullah Baktiar, a PUK spokesman. Falah Mustafa Bakir, a top KDP official, said the regional government's budget is transparent: "We do not deny that there are things happening that should not happen, but we are determined to correct this."

Critics assert that senior leaders of both parties hide their ownership of large companies by funneling tens of millions of dollars through mid-level party members or reliable entrepreneurs.

"The big problem is Talabani's family and Barzani's family," said Kamal Rahim, the editor of Hawlati, the region's largest independent newspaper. "Both families have small groups that they trust. They are running everything for them and dealing for them. Some of the businessmen, they are not even members of the parties."

Mustafa said the PUK owns Nokan, a conglomerate in Sulaymaniyah, the hub of eastern Kurdistan, with interests in construction, trade and food. "Every political party has the right to invest and work to finance themselves. But they are using the PUK influence," he said, referring to Nokan. Mustafa himself owns a media company.

Azad Jundiani, head of PUK's media office in Sulaymaniyah, said that the Patriotic Union does not own Nokan but that it was "close to the party."

Bakir, of the KDP, said there was no harm in the relatives of politicians engaging in business. "If any member of Barzani's family owns a company, if they don't have government positions or connections to politics, is that a crime?" he said.

Rahim, the editor, said the United States has overlooked corruption by the two main parties "because Talabani and Barzani made Kurdistan a model of stability for the rest of the country. But they used this to their advantage."

"In Kurdistan, there is no opposition," Rahim said. "Talabani and Barzani -- they have a deal between themselves to handle the situation. So they are not afraid of the people. They have no opposition from the Americans because they are allies. And they are not afraid of the central government because it is weak."

A senior U.S. Embassy official in Baghdad said the commercial activities of politicians and parties were a necessary part of building the new Iraq. "It is not necessarily done to steal the money. It is to spend and to invest. We might qualify this as corruption or certainly conflict of interest, but in an emerging economy, corruption is just unofficial fees and taxes," said the U.S. official, who spoke on condition of anonymity because of the topic's sensitivity. "At a certain point, that line has to become darker. The government has to get out of business."

Many Kurds argue that Kurdistan is like other parts of the Middle East, where leaders' wealth derives from patronage and the mixing of government and business.

"If you visit any Gulf state, like Dubai, you find these families," said Iyad Abdul Halim, chairman of the Chamber of Commerce and Industry in Dahuk, a city in the Kurdish region. "Democracy in the Middle East is not like democracy in Sweden or the United States."

Melhem, a jovial man with an oval face, pear-shaped body and a taste for expensive suits, says he does not belong to any party. He said the Kurdish Democratic Party does not "interfere" in his companies and that he doesn't give a share of his companies to the party.

But Melhem said he is a partner in Salahaddin Co., which he said owns 50 percent of the Middle East Co., a conglomerate involved in reconstruction projects that is funded in part by the Kurdish regional government. Two of his three partners, he added, are economic advisers to Nechirvan Barzani, the Kurdistan Regional Government prime minister and Massoud Barzani's nephew.

Salahaddin projects include two hotels in Irbil, a residential complex of 1,000 villas called Dream City, a soft-drink factory and a project to revitalize Irbil's downtown. Melhem also owns several other companies.

"Building a country is not easy," he said.

After high school, Melhem worked as a photographer and in a factory. He was often unemployed. "Those were hard days," he recalled. He refused to join Saddam Hussein's Baath Party and was not allowed to attend university, he said. In 1991, when Hussein cracked down on Kurds after the Persian Gulf War, Melhem fled to Turkey. He later settled in Dahuk and with a friend started a trading company bringing in Turkish goods. As his business grew, so did his connections with officials in Dahuk, controlled by the KDP.

After the 2003 U.S.-led invasion, Melhem decided to start a construction company, even though he had no experience in that field. Within months, he got his first contract -- the hospital in Akra. "It was with help of friends in the government," Melhem said in his Dahuk mansion, which has a swimming pool and flower garden. He sat on an exquisite Turkish-made sofa, clutching his 4-year-old daughter, who wore a massive gold chain.

"Sabah built his relationship with the government because of his work, not through relatives," said Abdul Halim, the chairman of the Dahuk chamber. "His work gave him the opportunity to get close to the leadership of the KDP."

In the past five years, Melhem said he has received eight government contracts, and he is building another hospital in Barzan, the ancestral homeland of Barzani.

One of Melhem's biggest supporters is Dahuk's governor, Tamar Fattah, who used to run the KDP intelligence agency. Recently, the governor selected Melhem to accompany him on a trip to Pennsylvania and Washington to meet U.S. officials and potential investors.

In an interview, Fattah said Melhem does not get preferential treatment. "He's neither KDP nor PUK. He's still independent," he said. "If you ask me, of course, I want the contract to go to someone from KDP. But in a legal way."

Jawharideen al-Harki, the secretary general of the Kurdish Freedom and Justice Party, an opposition group, described Melhem as "a partner of Nechirvan Barzani."

"There is a common saying in Kurdistan -- if you buy a kiosk in the street, make sure half of it belongs to Barzani or Talabani," said Harki, who leads one of Dahuk's largest tribes. "Otherwise, don't get the kiosk."

Bakir, of the KDP, denied that the younger Barzani profited from business relationships. "If the prime minister wanted to do business, he would leave office to do business," Mustafa said.

In Dahuk, Melhem walked through Zaryland, his sprawling residential complex, named after a Kurdish folk hero. He said the regional government had given him the land and provided $100 million to subsidize apartments for government employees. "I was able to help the city, and, of course, I'll get benefit from this," Melhem said. "This is the first step to be like other developed countries."

Melhem is concerned about growing tensions between Kurdish leaders and Iraqi Prime Minister Nouri al-Maliki and about America's waning influence in Iraq. If U.S. troops leave too quickly, he predicts instability. "Now we are building and developing, " he said. "All that will be delayed."

Without investment by Americans, he fears Kurdistan will hit an economic ceiling. "Why don't they have the confidence to invest here? It is safe here," he said.

The senior U.S. official provided an answer: "You will need to have a more transparent system before you see a lot of American investment," the official said.

In downtown Irbil, the main city of the Kurdish region, Iraq's past clashes with its future. For two years, Melhem has tried to persuade thousands of shop owners to sell their roadside stalls and move into a new mall. The plan is to raze 20,000 old shops, extend the mall and build parks and parking lots. Melhem wants to create a new downtown, like those in modern cities such as Dubai and Beirut.

But the vast majority of the shopkeepers refuse to move. Some say their stores are part of the city's history and need to be preserved. Most, though, fear that corruption will hurt their chances of getting a prime position in the mall.

"People say the mall belongs to Nechirvan Barzani," said Abu Jasim Sadiq, 39, whose family has operated its stall for more than five decades. "They will give the shops on the first floor only to their relatives and their friends."

As he stared out at the massive construction site and large cranes, and the thousands of old shops around it, Melhem said: "To dream is beautiful. But to reach it is not easy in Iraq."

Special correspondent K.I. Ibrahim in Baghdad contributed to this report.

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