By Serena Chaudhry and Aseel Kami
NAJAF, Iraq (Reuters) - With its sweeping highway, solar-powered street lights and plethora of hotels, the Shi'ite holy city of Najaf is a beacon for investment in Iraq, outshining other areas where projects have been slow to take off.
Virtually every economic sector in the country needs funding and attention to redevelop crumbling facilities that were neglected during decades of war and financial sanctions.
Foreign and local investors are eager to participate in rebuilding the country but complain that bureaucracy, a weak banking sector, poor legislation and a lack of land allocated for projects are huge deterrents.
Out of 780 investment licenses worth $32 billion granted to businessmen around the country since 2008, only about 30 percent of the projects have been started, according to Sami al-Araji, head of the National Investment Commission.
But the southern city of Najaf, the capital of a province with the same name, offers hope. Its success in pushing through projects suggests that with the right policies, obstacles can be overcome, and it may be an early sign of an investment boom in the country as a whole.
In fact, Najaf has become something of a model for other provinces; officials from elsewhere in Iraq look to it for guidance on issues such as how to allocate land for projects and how to work around the inefficiencies of the banking system.
Over 50 percent of about licensed 200 investment projects totaling $8 billion are under construction in Najaf province, with most development coming in the housing and tourism sectors, said Najaf Investment Commission chairman Wafy al-Bahash.
Home to the Imam Ali shrine, one of Shi'ite Muslims' most revered sites, Najaf city receives millions of pilgrims annually. The provincial investment commission has awarded 51 licenses for hotels alone to try to accommodate the influx of visitors.
Drive through the relatively clean city and you will spot boards hanging from lamp posts that read '2012 Al-Najaf: The capital of Islamic culture'. Towering cranes overshadow many streets and construction sites are filled with workers, in contrast to other provinces where half-finished buildings lie deserted.
One of the major projects in Najaf is a $25 million, five-star hotel being built by Iraqi firm Alkhawarnaq Palace. With 10 floors and a revolving restaurant at the top, the hotel is expected to be completed by the end of 2013. Construction started in April 2011.
A typical example of a Najaf project is a $7 million deal, funded by three local investors, to build 134 houses on the outskirts of the city. Construction started in April 2011 and is expected to be completed within another year. More than three-quarters of the units have been sold, and a family moved into the first house two months ago.
By comparison, in the neighboring province of Babil, infighting between officials has delayed development of at least one building for two years.
"The investor has been waiting for two years for a decision from two directorates in the same ministry. One is insisting on a two-floor building, while the other wants a single-storey building," said Alaa Ibrahim Harba, chairman of Babylon Investment Commission.
In the western province of Anbar, investors have been waiting since last year for approval to build a fertilizer factory worth $800 million.
"It was delayed because it was sent from the governate to the central government and it's taking a lot of time there for approval," Anbar investment commission head Amer Awadh told Reuters. "We have preliminary approval but not final approval."
"MINISTERS DON'T UNDERSTAND"
Iraq's economy is still very state-centric, and a weak credit culture has hampered development. Investors say a lack of laws and guarantees also makes working in the country, once a Middle Eastern breadbasket, extremely difficult.
At a recent investment conference in parliament attended by Araji and all of Iraq's provincial investment commission heads, officials openly admitted they needed to intensify efforts to improve the business environment.
A key problem is a backlog of projects awaiting approval from the central government. Provincial officials say they should be given more authority to work with investors.
Baghdad has awarded 70 licenses of which seven projects are in the works, documents showed. In Maysan, Wasit and Diyala, out of every 10 investment projects licensed in each province, work has started at only three or fewer.
"We should minimize the routine and bureaucracy in granting investment licenses," Awadh told the conference. "We are losing big opportunities to other countries because of these problems and many other issues."
Rising tensions within Iraq's fragile coalition government of Shi'ites, Sunnis and Kurds has hampered work and delayed approval of many laws, such as a long-anticipated hydrocarbons law which is crucial for the oil sector.
Policy-making is also paying the price of decades of economic isolation. Many officials are unused to moving at the speed demanded by foreign investors, and even when new legislation is passed, it can take months to be understood and implemented within the government.
Bahash says the key to Najaf's success has been close cooperation between the province's investment commission and the local governate, with officials taking the initiative to tackle problems rather than wait for a national directive.
"The governor and members of the provincial council are cooperating with us; they support our investment steps, and that has not happened in other provinces," Bahash said.
Razzaq Shareef, deputy governor of Najaf, said the province had seen so many projects take off because it had a strict policy that any investor granted a license had to pay 10 percent of the project's costs upfront as a guarantee that it would meet its commitments.
The rule has proved successful with both local and foreign investors, and is now being rolled out in other provinces following an order from the central government, Shareef said.
Iraq has a target under its five-year economic development plan of attracting $85 billion in investment by 2014. Luring pledges of that amount of money looks likely to be relatively easy; translating them into concrete projects on the ground may require educating many more government officials in Najaf's approach.
"The help from the central (government) is limited in this field," said Anbar investment commission head Awadh. "Some officials don't even understand the culture of investment. Even at the level of a minister."
(Editing by Andrew Torchia)