June 27, 2007 | By KIRK SEMPLE

ERBIL, Iraq - "It is a measure of soaring Kurdish optimism that government officials here talk seriously about one day challenging Dubai as the Middle East’s main transportation and business hub.

The Kurdistan Regional Government is betting that it can, investing $325 million in a modern terminal at the Erbil International Airport to handle, officials hope, millions of passengers a year, and a three-mile runway that will be big enough for the new double-decker Airbus A380.

“We’re not saying Kurdistan is heaven,” said Herish Muharam, chairman of the Kurdish government’s Board of Investment. “But we’re telling investors that Kurdistan can be that heaven.”

As the rest of Iraq has plunged into a downward spiral, Kurdistan has enjoyed relative political stability and suffered limited violence, in part owing to a sectarian and political homogeneity lacking elsewhere in the country. The Kurdish region has enjoyed de facto autonomy since 1991, when the American military established a no-flight zone there, a status formalized by the new Iraqi Constitution. Although many Kurds would prefer to secede, Kurdistan, with a population of about 4.2 million, has its own army and virtually total control of its territory.

Kurdistan’s rising fortunes have been nowhere more apparent than in the wave of building and investment that has swept the region in the past four years. Iraqis and foreigners alike have poured in billions of dollars, defiantly wagering that the region will remain relatively peaceful, even as the rest of Iraq slips deeper into civil war.

Where explosions and bomb-scarred buildings have been a defining symbol elsewhere in Iraq, construction cranes are now a common feature on the Kurdish landscape, tugging hotels, shopping centers and office and housing complexes from the ground.

While public infrastructure is still suffering from chronic underinvestment, the regional government has approved more than $4 billion worth of mostly private development projects since August, when the Board of Investment was created. Billions of dollars worth of other projects were already under way.

Much of the money is coming from overseas, including the United States, Europe, the Persian Gulf countries, Iran and Turkey, officials say.

The Kurdistan government has placed special emphasis on attracting investors from the United States and Britain, unleashing a slick advertising campaign in English called “The Other Iraq,” which includes television commercials featuring romantic shots of Kurdistan’s mountains and waving, cherubic children. “It’s spectacular, it’s joyful,” intones a narrator in one 30-second spot. “It’s not a dream. It’s the other Iraq.”

The government has also hired lobbyists in Washington to help promote its development agenda, urging the State Department to change its travel warning for Iraq to distinguish Kurdistan from the rest of the country. Iraqi officials regard the travel warning as an impediment to investment and tourism.

Even with the negative travel advisory, development has been booming. Contractors have been clearing savanna and brush here in the capital of Kurdistan to build suburban residential complexes that go by names like English Village Five.

One development ��" Dream City, advertised as “the most elegant square kilometer in Iraq” ��" will include about 1,200 houses priced $180,000 to $700,000, as well as three schools, a supermarket, a restaurant, recreation areas, a casino and a mosque, according to Amer Ibrahim, the project’s manager and architect.

The principal partner in the Dream City project is also building an American-style megamall and four office towers downtown. It is a few blocks away from the ancient citadel, one of the oldest continuously inhabited sites in the world.

Several luxury hotels are under construction, including one by the Kempinski hotel chain. A joint venture by Austrian, Turkish and Kurdish investors is developing a 500-bed hospital.

There is even talk of a Burger King franchise and a ski resort.

Asked about the most compelling ideas circulating in the investor community here, Mr. Ibrahim responded, “Everything, everything, everything.” He went on: “There’s a big lack of everything. There are no services, no infrastructure.”

For all the shiny new construction in Kurdistan, there are glaring deficiencies in the public sector. Kurdistan’s residents who rely on the public system receive at most about three hours of electricity a day, although many businesses and affluent people have their own generators. Not all areas of the region have access to clean drinking water, and the health care and education sectors are anemic. There are no wastewater treatment plants and sewer systems are inadequate: even a moderate rainfall turns the streets into foul rivers.

In the immediate aftermath of the 2003 American invasion, Kurdistan’s officials were so desperate for any kind of investment that they signed off on numerous projects with only limited concern for the essential needs of the population. “The government built like mad,” said Douglas Layton, director of the Erbil office of the Kurdistan Development Corporation, a public-private partnership promoting investment in the region. “There was no master plan.”

To make matters worse, government graft went unchecked. “The corruption was happening because of the rushing we were doing in nearly everything in a limited amount of time,” Mr. Muharam, of the Board of Investment, said in an interview here in May. “It caused misuse, lack of transparency.”

Many projects foundered for lack of capital. Erbil, for instance, is dotted with half-finished buildings, roadways and overpasses.

The government is now implementing a more transparent contracting system and is trying to rectify the imbalance between public and private sector development. Mr. Muharam said the government was also trying to strengthen the banking system and insurance laws to provide a more attractive environment for investors.

The government passed an investment law last year that offers generous incentives to outside investors, including the right of full ownership of property, tax and customs duty exemptions, repatriation of earnings and partnerships. The government has also been providing free land to developers to stimulate construction.

Officials and investors argue that Kurdistan offers the opportunity for businesses to establish a foothold with an eye toward a more peaceful future when development in the rest of Iraq will be possible.

“You can do business here today and as the situation stabilizes down south ��" and I hope it will; it’s not looking too good right now ��" you can move down south,” Mr. Layton said.

Last December, Austrian Airlines began twice-weekly flights between Vienna and Erbil, becoming the first European commercial airline to fly into Iraq since 2003. Taher Horami, the airport’s director general, said he is in discussion with other major international airlines on opening routes into Kurdistan.

But hovering above the development boom is a dark question: if the situation in the rest of Iraq continues to worsen, will Kurdistan’s relative tranquillity hold? And if not, will all this investment be lost?

Two truck-bomb attacks by Sunni Arab insurgents in May against Kurdish government targets, including one in the center of Erbil, severely unnerved residents and the elected leadership, not only because they were so deadly ��" at least 69 people were killed ��" but because the last major suicide attack in the region happened two years ago.

Harry J. Schute Jr., an American security adviser to the Kurdistan government, said the attacks may have been intended to punish the government for sending its pesh merga militia to help with the Baghdad security plan. In addition, he said, insurgent groups have repeatedly criticized the Kurdish authorities for their secularism and cooperation with the West.

The Kurds are anticipating an increase in insurgent activity as the country approaches a referendum on the question of whether Kurdistan can annex oil-rich Kirkuk and a swath of disputed territory in northern Iraq, a move opposed by many Sunni Arabs and Shiites. The Constitution calls for a vote by the end of the year, but no date has been set yet.

As jarring as the latest attacks may have been, they did not appear to derail any development projects, according to several government officials and private investors.

Kurdistan’s boosters point to the region’s homogeneity, as well as a strong military and a well-developed intelligence network as effective buttresses against rampant violence. “It’s relatively secure,” said Mr. Layton, an American who has worked for many years in Kurdistan. “It’s not perfect, but I’d much rather walk down the streets of Erbil than walk down the streets of Detroit, New York, Washington and Chicago.”

Still, he is not taking any chances. As he spoke, bodyguards were posted outside his office. And behind his desk chair, next to an umbrella, a Kalashnikov leaned against the wall.

Alan Attoof contributed reporting from Sulaimaniya