[Senate Hearing 108-165]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-165

                 IRAQ STABILIZATION AND RECONSTRUCTION:
               INTERNATIONAL CONTRIBUTIONS AND RESOURCES

=======================================================================

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 4, 2003

                               __________

       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming             RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio            BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee           BILL NELSON, Florida
NORM COLEMAN, Minnesota              JOHN D. ROCKEFELLER IV, West 
JOHN E. SUNUNU, New Hampshire            Virginia
                                     JON S. CORZINE, New Jersey

                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)




                            C O N T E N T S

                              ----------                              
                                                                   Page

                        Hearing of June 4, 2003

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, Ranking 
  Minority Member................................................
    Opening statement............................................     3
    Prepared statement...........................................     5
Lugar, Hon. Richard G., U.S. Senator from Indiana, Chairman......     1
Larson, Hon. Alan P., Under Secretary for Economic, Business and 
  Agricultural Affairs, U.S. Department of State.................     6
    Prepared statement...........................................     9
Natsios, Andrew S., Administrator, U.S. Agency for International 
  Development....................................................    31
    Prepared statement...........................................    35
Taylor, Hon. John B., Under Secretary for International Affairs, 
  U.S. Department of the Treasury................................    25
    Prepared statement...........................................    27
Zakheim, Hon. Dov, Under Secretary of Defense (Comptroller), U.S. 
  Department of Defense..........................................    18
    Prepared statement...........................................    22

       Responses to Additional Questions Submitted for the Record

Question submitted to Under Secretaries Larson (State), Zakheim 
  (Defense), Taylor (Treasury), and Administrator Natsios (USAID) 
  by Chairman Lugar..............................................    80

    Response Submitted by Dov Zakheim, Under Secretary of Defense    80
    Response Submitted by John B. Taylor, Under Secretary of the 
      Treasury...................................................    80
    Response Submitted by Alan Larson, Under Secretary of State..    81

Questions for the Record Submitted by Senator Bill Nelson to 
  USAID Administrator Andrew Natsios.............................    81
  

 
                 IRAQ STABILIZATION AND RECONSTRUCTION:
               INTERNATIONAL CONTRIBUTIONS AND RESOURCES

                              ----------                              


                        Wednesday, June 4, 2002

                               U.S. Senate,
                    Committee on Foreign Relations,
                                           Washington, D.C.
    The committee met, pursuant to notice, at 9:36 a.m., in 
Room SD 419, Dirksen Senate Office Building, Hon. Richard 
Lugar, presiding.
    Present: Senators Lugar, Hagel, Chafee, Alexander, Biden, 
Sarbanes, Feingold, Nelson, and Corzine.

            OPENING STATEMENT OF HON. RICHARD LUGAR,
                   U.S. SENATOR FROM INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order.
    The committee is pleased this morning to welcome Under 
Secretary of State Alan Larson, Under Secretary of Defense Dov 
Zakheim, Under Secretary of the Treasury John Taylor, and 
Administrator of the Agency for International Development 
Andrew Natsios. Our panel represents a broad range of United 
States agencies responsible for American stabilization and 
reconstruction activities in Iraq. The bureaucratic diversity 
of this panel also underscores how important interagency 
coordination of the operation is in our success in Iraq.
    The committee is looking forward to this testimony about 
the funding required for efforts in Iraq, the administration's 
plans for seeking international contributions, and efforts to 
ensure that resources are used effectively.
    This is the second in our series of hearings on post-
conflict Iraq. The committee greatly appreciated the 
comprehensive testimony delivered by Deputy Defense Secretary 
Paul Wolfowitz and General Peter Pace on May 22. They helped to 
clarify United States policy and plans for stabilization and 
reconstruction in Iraq and to put in perspective the 
difficulties that accompany these efforts. They assured us that 
the administration is making adjustments to its plan aimed at 
accelerating reconstruction and addressing stabilization 
problems. I was particularly pleased to hear Secretary 
Wolfowitz assure the committee that the administration is 
committed to the long term in Iraq and ``will remain there as 
an essential security force for as long as we are needed.''
    Up until now, the support of the American public for the 
war in Iraq and the war on terrorism has been strong. As we 
move into the expensive and complicated process of rebuilding 
Iraq, Americans will want to know that their money is being 
spent effectively and that other nations are contributing a 
fair share.
    As part of the $79 billion supplemental appropriations bill 
covering Operation Iraqi Freedom and the war on terrorism, 
Congress has already provided $2.5 billion for relief and 
reconstruction in Iraq. Most experts anticipate that 
significant additional appropriations will be needed by year's 
end. As we examine what funding will be needed, we must ask 
what are the most critical priorities, how are existing funds 
being used to meet those priorities, and who is making the 
decisions about those expenditures.
    We are also intensely interested in the administration's 
efforts to secure contributions from other nations that will 
reduce long-term United States financial burdens and broaden 
the interests of the international community in a successful 
outcome in Iraq. During the military conflict, many nations 
contributed to the success of the coalition, some by 
contributing troops, others by offering logistical support, 
material, or shared intelligence. We are grateful for the 
partnership and commitment of these nations.
    With regard to the rebuilding effort, however, it is still 
unclear what international contributions have been offered and 
what goals the administration has set for securing both 
financial and human resources. Experts have identified the need 
for peacekeeping forces along with economic and technical 
experts, but it remains unclear who is being asked to provide 
these personnel. The main criteria for the involvement of 
allies and international organizations must be their ability to 
make contributions that will advance our goals in Iraq.
    Another issue that we wish to explore in depth is the 
degree to which Iraq's own resources will be available for the 
rebuilding effort and how Iraqi funds will be administered. 
These resources include the $1.7 billion in frozen Iraqi assets 
in the United States, at least $600 million in Iraqi assets in 
other nations, plus the more than $700 million dollars 
recovered by coalition forces that was hidden in Iraq by Saddam 
Hussein's family and associates. We would also like to examine 
funds remaining in the United Nations' Oil For Food account and 
revenues from future oil sales. Together, these assets 
represent a substantial down payment on Iraq's future, but the 
administration of Iraqi assets will require full transparency 
and a high degree of political sensitivity.
    The passage of Resolution 1483 lifting the United Nations' 
sanctions on Iraq had added a new dimension to these resource 
issues. The winding down of the Oil For Food program over the 
next six months and the establishment of the Development Fund 
for Iraq with $1 billion in unallocated UN escrow account funds 
can help meet immediate reconstruction needs.
    The measure of success in Iraq that matters most is what 
kind of country and institutions we leave behind. Toward that 
end, we should acknowledge that we are engaged in nation-
building in Iraq. The achievement of stability and democracy in 
Iraq presents an opportunity to catalyze change in the Middle 
East region that can greatly improve United States' national 
security and help win the war against terrorism. Achieving such 
ambitious goals will require careful planning by the 
administration, full participation by the Congress, and support 
from the American people.
    We look forward to exploring these issues with each of you 
today. I call now upon the distinguished ranking member of our 
committee, Senator Biden, for his opening statement.

                STATEMENT OF HON. JOSEPH BIDEN,
                   U.S. SENATOR FROM DELAWARE

    Senator Biden.  Thank you very much, Mr. Chairman. I think 
we have a lot of important hearings but I think this is a truly 
important hearing. The reason I do is that to state the 
obvious, but you are assembled at the table the players who are 
going to make this work or not work in Iraq, and we have a lot 
of questions.
    Let me begin, though, by saying that I think this is a 
moment of great opportunity both in the war on terrorism 
generally and specifically in terms of changing the face of, 
the climate, and the circumstances in the Middle East 
generally.
    And I want to begin by complimenting the President. I have 
been an open critic of the President and a private critic to 
him personally for his failure from the time he became 
President to get deeply involved in the Palestinian-Israeli 
conflict, because I believe there is no possibility of 
resolution without U.S. leadership there. And I must say that I 
have been very positively impressed by his commitment which he 
made privately as well as publicly to me and to others that he 
is going to get involved with both feet.
    I noted in today's New York Times one paragraph, and I 
quote: ``In a remarkable turnaround for the President, who has 
resisted taking a personal role in peacemaking in this part of 
the world, Mr. Bush spent 90 minutes alone with Arab leaders, 
leaving Secretary of State Colin Powell and National Security 
Advisor Condoleeza Rice sitting in an ante room as he concluded 
and conducted talks with the help of only a translator.'' That 
to me is the most significant thing that I have seen or heard 
of the President's efforts in the Middle East thus far, and I 
want to publicly compliment him.
    We all understand, we have been here a while, that a 
President who involves himself in this way is putting his 
political capital at risk. He has great capital right now and I 
want to publicly acknowledge that as long as he is working this 
way, he will get the support of this senator and I suspect many 
Democrats in his effort.
    The second point I would like to make is that I hope we get 
by in this hearing today about, you know, how well you planned 
this before. You didn't plan this well before and this has not 
been planned well, it's understandable why it's not been 
planned well. The thing never got off the ground the right way 
in terms of the reconstruction of Iraq. You guys had your hands 
full. Let's just go from here. Please do not bore me with how 
much planning you did before you got involved and what this 
long lead-up was.
    The fact of the matter is, it's understandable that we find 
ourselves in a situation where all the things that we were 
privately told that you and the administration planned on 
didn't come to fruition. We were told there was going to be an 
infrastructure left of the military, we would have them 
available to us. An infrastructure left of the various 
agencies, all we are going to do is decapitate the bad guys and 
the Ba'athists, and we would have agencies up and running. 
Please, let's not do this, okay? Let's not go into that. Let's 
talk about what you are really going to do from this point on, 
because there is still a chance to make all of this work in a 
way that I think with the personal leadership of the President 
with regard to the Israeli-Palestinian issue, has an 
opportunity to have a ripple effect throughout the region, and 
there is a confluence of a number of streams here that are 
working.
    And so the question is, how do we get this thing underway. 
The things I would like to hear about today, and maybe you 
won't have the answers, I don't expect all the answers today, 
is, how are the various agencies coordinating their efforts 
here in Washington? Is there a single office, a single 
individual in Washington who is charge of managing the efforts 
minute-by-minute and day-to-day? I'm not suggesting there 
should be, but is there? What's the plan, Stan? You know, 
what's the deal here, okay? What is the balance of decision 
making in Washington versus the decision making made by 
Ambassador Bremer and his team in the field? How much 
unilateral or independent authority do they have? Does Bremer 
have the authority to disperse resources as he sees fit? If so, 
how many funds does he have control over?
    And I would like to know, is the Pentagon's chief budget 
officer going to provide us with working estimates even if they 
are ranges, on the size, the length, the cost of maintaining a 
presence here? If you haven't thought that through, if you 
haven't thought through the possibilities, then you shouldn't 
be here at the table. And you owe it to us and to the American 
public to give us the ranges.
    We're in the deal now. We're in the deal as to whether or 
not we go to war, the Congress, and we gave the President the 
authority. From the time he went to war to the time the 
shooting stopped, that was his business, he's the commander in 
chief. He made the judgments. Now the reconstruction rests upon 
us cooperating with you, and we have to know front end what the 
ranges are, what's the idea, what do you think we're in for. 
Because the American people, if you look at the polling data 
already, do not sign on to the idea of staying there for years 
and spending billions of dollars, when we know they're going to 
have to. It may be a year, it may be 10 years, but we know it's 
more than a day.
    When we were kids we used to play that game, guess what I 
have in mind, bigger than a bread box, smaller than a Mack 
truck. Well yeah, give us some ranges. Give us some ammunition, 
because we have to go home and tell our folks what you're going 
to expect us to come up with, as you should, the resources 
needed to get your job done.
    I would also like to know your estimates as to what extent 
you believe Iraqi oil will pay for Iraqi reconstruction. Again, 
there is this notion out there that this is it, now all we have 
to do is tap the well and boom, we don't have any problems. I 
believe that not be to accurate. Some in the administration say 
what they think it is. Again, if you have not thought that 
through, you shouldn't be at the table.
    What is the Treasury estimate of the size of Iraqi debt? 
Will there be an effort to reschedule or write off that debt? 
If it's not written off, what will be the impact on Iraq's 
recovery?
    AID published a vision statement in February that 
identified benchmarks on a range of sectors of Iraqi 
reconstruction. I would like to know from Mr. Natsios whether 
or not we're on target and if not, what do we have to do to get 
you on target, or have the targets changed?
    And what is the plan across a number of areas? How are we 
going to get Iraqis back to work, including former military 
personnel? What's going to replace the Oil-For-Food program 
when it's phased out over the next six months? What efforts are 
being made to rebuild the justice system? How is education to 
Iraqi children being managed? Are there new textbooks that will 
be available to every Iraqi child the next school year, as AID 
planned?
    These are practical things we'd like to know about. I don't 
expect you personally, I don't expect you to have all the 
answers to these things, but I do expect, and quite frankly 
respectfully demand that you let us know what your plans are, 
who's in charge, what your estimates are. We have an absolute 
right to know that.
    And I would ask unanimous consent that my formal statement 
be placed in the record at this point, Mr. Chairman.
    The Chairman. Placed in the record in full.
    Senator Biden.  I thank you all for being here, and we look 
forward to having a conversation with you.
    [The prepared statement of Senator Biden follows:]

           Prepared Statement of Senator Joseph R. Biden, Jr.

    Mr. Chairman, our witnesses today come from a wide range of 
agencies within our government: the Pentagon, the State Department, the 
Treasury Department and AID. Even more agencies will have a role in 
Iraq in the coming months and years--from the Commerce, Justice, and 
Energy Departments, to the Office of Management and Budget.
    Each has a critical part to play in helping to win the peace in 
Iraq.
    The fact that so many parts of our government will be focusing 
their time and resources on Iraq shows just how extensive our effort 
must be.
    But for all this effort, there appears to be no effective structure 
to coordinate the activities of these diverse agencies. We have been 
told that the Defense Department is in charge. But which office and who 
in Washington has the sole and exclusive responsibility minute-by-
minute, day-to-day to ensure that decisions are made efficiently, 
agencies are coordinating their activities, and that Ambassador Bremer 
is getting all of the support he needs in the field.
    Our superb planning for and execution of the war has not been 
matched by our planning for and execution of the peace. It appears 
there was a failure to comprehend that security would be the sine qua 
non for progress in all other areas. This should have come as no 
surprise after our experience in the Balkans.
    This committee, going back to last summer, has been a virtual 
Groundhog Day on the question of security and post war planning, 
repeating over and over again the need to get our act together before 
we went into Iraq, not after the fact.
    And many of the leading think tanks in town have made the same 
point, too.
    Simply put, without security, people will not return to their jobs, 
parents will not send their children to school, doctors and nurses 
won't make it to their hospitals, women will not leave their homes and 
participate in rebuilding their country, and engineers cannot make 
vital repairs to the infrastructure.
    So, I'd like to learn today what we are doing to secure 
international contributions--for police forces like the gendarmes, for 
more traditional troops, and for funds to stabilize and rebuild Iraq. 
I'm glad that President Bush has moved beyond the finger pointing and 
talk of retribution with our allies in Europe and is asking for their 
help. Marshalling the help of friends and allies in Iraq is the the 
best way to spread the risks and reduce the burden on U.S. troops and 
taxpayers.
    I also hope to hear from our witnesses the answers to several 
fundamental questions today: What are the working estimates for the 
cost and duration of the occupation? What are the working estimates for 
the cost of reconstruction?
    What I do not want to hear is a dodge we've heard all too often 
from the civilian leadership at the Pentagon that the future is 
unknowable, so we won't estimate anything.
    I'd also like to explore whether the administration still believes 
that oil will cover the reconstruction costs? Leading energy experts, 
including Dr. Daniel Yergin of Cambridge Energy Research Associates, 
estimate that when Iraq achieves its pre-war level of oil production, 
that is expected to generate $15 to $20 billion per year.
    Witnesses before this committee have calculated that maintaining a 
security force of 100,000--which is significantly less than the number 
of troops now in Iraq--will cost approximately $25 billion a year.
    And then there are the reconstruction costs, which are expected to 
be in the tens of billions of dollars.
    What is the size of Iraqi debt and how will it be handled? The 
Center for Strategic and International Studies estimates that Iraq's 
obligations--be they debts, claims, or contracts--total some $383 
billion. What impact will this burden have on Iraq's economic recovery?
    Mr. Chairman, we cannot afford to fail in Iraq. Our credibility in 
a region vital to our security is at stake.
    We have gotten off to a rough start, but there is still time to 
turn things around. Doing so will require a lengthy and costly effort 
in troops and treasure from the United States. The American people will 
support that if they are informed of what is to be expected of them.
    As I have said repeatedly, no foreign policy can be sustained 
without the informed consent of the American people.
    They have not been informed to date.
    I hope that today's hearing provides some of that information. More 
important, I hope that the President follows through on the pledge he 
made to me and tells the American people that we will be in Iraq for 
several years at least, with tens of thousands of troops, at a cost of 
tens of billions of dollars, but that this high price is worth paying.
    At our last hearing, Deputy Secretary Wolfowitz said that he had 
heard the President say privately that winning the peace would be even 
tougher than winning the war. Well, it is high time he said that 
publicly to the American people.
    If he does that, I am confident the American people will support 
the effort.
    Again, I welcome our witnesses and I look forward to hearing their 
testimony.

    The Chairman. Thank you very much, Senator Biden.
    I will ask the four of you to testify in the order that I 
introduced you to begin with. I will commence with Secretary 
Larson and then move to Dr. Zakheim, Secretary Taylor, and Mr. 
Natsios. Let me just say at the outset, all of your statements 
will be published in the record in full. You need not ask for 
permission to do that; and please, if you can, reduce your 
statement or summarize it. We will not be restrictive in terms 
of time, but we have asked a lot of questions and we are 
hopeful that you will be full in your testimony. We will ask 
for questions following that.
    Secretary Larson.

STATEMENT OF HON. ALAN P. LARSON, UNDER SECRETARY FOR ECONOMIC, 
  BUSINESS AND AGRICULTURAL AFFAIRS, U.S. DEPARTMENT OF STATE

    Mr. Larson.  Mr. Chairman, Senator Biden, and distinguished 
members of the committee, I am pleased to be here today with 
Under Secretary Zakheim, Under Secretary Taylor, and 
Administrator Natsios to discuss Iraq reconstruction. The four 
of us and many others have worked long and hard together on 
this issue and our close teamwork is representative of the 
administration's efforts to plan and implement reconstruction 
policy on Iraq.
    This is an important task and a challenging task. It's 
going to require concerted efforts of the administration, the 
Congress, our partners abroad, and most importantly, the Iraqi 
people. Even as we confront those challenges, we should bear in 
mind what has been accomplished so far.
    Contrary to fears and expectations of many, the coalition's 
military strategy and humanitarian planning did prevent large 
movements of refugees, significant food shortages, and health 
crises. Basic services such as water and electricity are being 
restored, with levels of performance now exceeding in many 
instances those Iraqis experienced before the war. The oil 
infrastructure has been protected and now oil production is 
being ramped up.
    The challenges we now face are those of working with an 
Iraqi people who are eager for progress after 25 years of 
depression and economic decline. The oil and transportation 
sectors need significant rehabilitation. The telecommunications 
system, as detailed in my written testimony, has been neglected 
for decades and will need to be expanded and modernized. The 
food production and distribution systems will need to be 
overhauled, moving them from a system of price controls and 
rationing to one based on free markets and individual choice.
    The commercial need, the commercial regime will need to be 
revamped in order to encourage trade, promote investment, and 
facilitate private enterprise.
    A national budget is being prepared that will set out 
priorities both for recurrent expenditures but also for 
reconstruction projects. And all of this needs to be done as we 
facilitate the formation of a representative and legitimate 
Iraqi government. With so much to do, it's important that both 
Americans and Iraqis be somewhat patient, remembering that we 
cannot undo in a month or six months the legacy of 25 years of 
misrule.
    The United Nations Security Council Resolution 1483 
provides a crucial framework for reconstruction. Among other 
things, it recognizes the role of the United States and the 
United Kingdom as the responsible authority in Iraq. It ends 
economic sanctions. It provides a significant role for the 
United Nations, including through the creation of a special 
representative of the Secretary General. We welcome the 
appointment to this position of Sergio de Mello, who will among 
other things coordinate UN assistance, assist in the 
development of representative government institutions, and 
promote economic, legal and judicial reform.
    The resolution also establishes a development fund for Iraq 
that will receive proceeds from export sales of oil and will 
disburse these funds in a transparent manner for the benefit of 
the Iraqi people.
    And finally, the resolution signals through the unanimous 
voice of the Security Council that the international community 
needs now to rally behind the cause of reconstruction in Iraq.
    We know that Congress is eager to have the clearest 
possible picture of the costs of reconstruction and of the 
resources that will be available to cover those costs. As for 
needs and costs, Peter McPherson, who is the financial 
coordinator for the Coalition Provisional Authority working 
under Ambassador Bremer, is working on such a budget. We hope 
that at least a rough estimate of this budget will be available 
for discussion later this month.
    In addition, the United Nations Development Program and the 
World Bank have agreed to collaborate on a needs assessment 
that should be available at the end of the summer.
    On the resource side, Iraq itself will rightly shoulder 
much of the responsibility. Among the sources of revenues 
available are $1.7 billion in invested Iraqi assets; the found 
assets in Iraq, which currently total roughly $600 million; and 
$1 billion of unallocated Oil-For-Food money that will be 
deposited in the development fund for Iraq.
    In my written testimony I have described in considerable 
detail the state of oil production and exports. The Iraqi CEO 
of the oil ministry, Mr. Ghadhban, is making very good 
progress. Mr. Ghadhban has produced production and export 
estimates which for obvious reasons are subject to considerable 
uncertainty.
    Nevertheless, understanding the committee's interest in 
having even a rough frame of reference, my testimony uses Mr. 
Ghadhban's figures to suggest that Iraq's gross export revenues 
from oil could be in the range of $5 billion for the second 
half of this year. It also suggests that based on similar rough 
estimates, that their gross export proceeds for 2004 could be 
on the order of $15 billion. Looking further to the future, it 
must be left to a new representative Iraqi government to decide 
whether to expand productive capacity beyond past levels, which 
have been roughly 3.5 million barrels per day; that has been 
their past peak. Any significant expansion of baseline oil 
product capacity would need to be accommodated by increased 
demand in the international marketplace and in my view would 
most likely be privately financed.
    The administration is actively seeking support from other 
countries. We began this process while the war was still going 
on. With strong encouragement from the administration, UNBP, 
the World Bank and the United States will be taking a leading 
role in pulling together an initial meeting on Iraq 
reconstruction issues in New York on June 24. While this 
meeting is not a pledging session, it will set in motion a 
process of collaboration in assessing needs and in mobilizing 
the resources to meet those needs. We expect it will lead to a 
major ministerial level donors conference, perhaps in 
September.
    I was privileged to attend the G-8 meeting that President 
Bush attended over the last few case in France, and at that 
meeting the leaders welcomed this conference and agreed that it 
should be the starting point for pulling together an 
international response to the challenge of reconstruction in 
Iraq.
    To date, other countries have already pledged an estimated 
$1.7 billion, most of this for humanitarian assistance in 
response to a United Nations appeal. Creditors also will need 
to make a contribution. Official creditors have already 
acknowledged that it's unrealistic to expect Iraq to make 
payments on its external debt, at least through the end of 
2004.
    Mr. Chairman, we appreciate the strong interest and support 
of the Congress in the important task of reconstruction. We 
look forward to cooperating very closely with the committee in 
the future. Thank you.
    [The prepared statement of Mr. Larson follows:]

                  Prepared Statement of Alan P. Larson

                              INTRODUCTION

    The liberation of Iraq was a triumph of American armed forces, 
working with coalition forces. The reconstruction of Iraq must be a 
triumph of the Iraqi people, working with the coalition and the 
international community. Our military victory was swift and decisive. 
The rebuilding of Iraq after decades of misgovernment will take longer. 
Most of this work will--and rightly should--fall to the citizens of 
Iraq. It is their country, and they must ultimately decide how it takes 
shape. The United States and other friends of the Iraqi people will be 
there to assist, and to advise. A free, democratic and prosperous Iraq 
will remove an island of hatred that long threatened its neighbors and 
the United States.

                                 UPDATE

    The situation on the ground in Iraq remains tense. Gunfire, looting 
and the remnants of Saddam's regime continue to disrupt life in Baghdad 
and elsewhere. To ensure stability, American troops continue to be 
deployed throughout the country. In addition, we will stand up an Iraqi 
national civilian police force within existing structures. In Baghdad, 
there are already over 7,000 Iraqi police patrolling with U.S. military 
forces. Until the security situation calms down, it will be difficult 
for a genuine redevelopment of the Iraqi economy to gather momentum.
    Many of the problems that had been widely anticipated did not 
materialize. We did not see mass hunger, widespread medical emergencies 
or floods of internally displaced persons. The military plans protected 
the oil fields from sabotage by Saddam in his final moments.
    Looking to the future, there are many things upon which to build. 
Iraq has a large cadre of talented, dedicated technocrats anxious to 
return to work. And we have offers from many, many countries ready to 
provide technical assistance and to do business in Iraq.
    We are beginning to see some bright spots. For example:

   water in Baghdad is back at 75 percent of pre-war levels;

   power is being gradually restored;

   mail delivery has begun around parts of the country;

   the Ministry of Health has been re-established and there is 
        currently no major health crisis;

   primary schools re-opened May 4;

   oil production is increasing;

   the agricultural sector is reviving; and

   shops are open and the retail sector is increasingly active.

    My colleagues and I can all tell you of the fine work our people 
have done on the ground in dangerous and difficult circumstances. 
Ambassador Bremer, General Garner and their teams have worked hard to 
bring order out of a chaotic situation. Ambassador Bremer is moving 
quickly to establish coalition authority in the country. State, USAID, 
Defense, Treasury, Justice and others have experts in the field looking 
at key reconstruction issues. Ambassador Bremer has made real progress 
in establishing communications with Washington, and in organizing his 
own resources to meet the challenges ahead. We in Washington have also 
organized ourselves to be as helpful to Ambassador Bremer and his team 
as possible, as they progress from the current situation, where 
stability and provision of basic services are critical, to a time when 
we can address broader policy issues.
    Some practical steps have already been achieved by the team in 
Baghdad. For example, an early goal of ours was to re-start economic 
activity by getting people back to work, and to employ the energy and 
talent of the Iraqi people in rebuilding the country. In order to get 
Iraqis untainted by strong links to the Ba'ath Party back to work, the 
Office of the Coalition Provisional Authority (OCPA), in consultation 
with Defense, Treasury, State and OMB, has begun making ``emergency'' 
salary payments to Iraqis in key sectors. These payments have brought 
port workers back to work at Umm Qasr, and key civil servants back to 
critical jobs at important ministries, for example the Ministry of 
Trade. And putting cash back into pockets means giving people money to 
spend on goods and services, which spurs economic activity.

          UNSC RESOLUTION 1483: A FRAMEWORK FOR RECONSTRUCTION

    President Bush has made clear his desire to work with the United 
Nations, other international organizations and other nations to rebuild 
Iraq. UN Security Council Resolution 1483 provides an important 
framework for economic development in Iraq.

    UNSCR 1483:

   Recognizes the United States and United Kingdom as the 
        ``Authority'' and charges us with carrying out the 
        responsibilities and obligations of this role for the welfare 
        of the Iraqi people.

   Ends the economic sanctions in place for more than a decade, 
        allowing trade and financial transactions with the world.

   Provides for a significant role for the United Nations in:

                   humanitarian and reconstruction assistance;

                   return of refugees;

                   restoring and establishing national and 
                local institutions for representative governance;

                   formation of an Iraqi interim 
                administration; and

                   coordination of humanitarian and 
                reconstruction assistance by a Special Representative 
                of the Secretary General (Mr. Sergio Vieira de Mello 
                has been named to this position).

   Establishes a Development Fund for Iraq to be used to meet 
        humanitarian needs, for reconstruction and repair of Iraq's 
        infrastructure, and other purposes benefiting the Iraqi people. 
        Specific requirements include:

                   receiving proceeds of all export sales of 
                petroleum and natural gas from Iraq, along with 
                remaining UN funds designated for Iraq, and frozen 
                assets that had belonged to the Government of Iraq or 
                designated senior officials, including Saddam Hussein;

                   disbursing money in a transparent manner, at 
                the direction of the Coalition Authority, with 
                expenditures to be audited by independent public 
                accountants: the humanitarian needs of the Iraqi 
                people; rebuilding the economy and infrastructure; 
                continued disarmament; the costs of civilian 
                administration; and for other purposes that benefit the 
                people of Iraq; and

                   formation of an International Advisory and 
                Monitoring Board, comprising representatives of the UN 
                Secretary General, the IMF Managing Director, the 
                Director General of the Arab Fund for Economic and 
                Social Development and the World Bank President.

   Supports efforts by the Iraqi people to form a 
        representative government based on equal rights and justice for 
        all Iraqi citizens.

   Calls upon the international community and multilateral 
        institutions to assist with the reconstruction and development 
        of the Iraqi economy.

   Provides for a six-month winding-down of the Oil for Food 
        Program (OFF), and removes restrictions on oil exports and 
        sales.

            THE JOB AHEAD: KEY CHALLENGES OF RECONSTRUCTION

    We speak about the ``reconstruction'' of Iraq, but that word is 
misleading. We are looking not at reconstruction, but at construction, 
not at rebuilding, but at building. The Iraqi people must overcome the 
damage of 25 years of corrupt and vicious tyranny to build their 
society into a lively and historic center in the Middle East.
    As a result of Saddam Hussein's misrule, Iraq's economy 
deteriorated significantly. GDP fell from almost $180 billion in 1979 
when Saddam took power to around $50 billion in 2001. Twenty-five years 
ago per capita income was approximately $17,000--on a par with Italy--
based on purchasing power. Today, per capita income is around $2,000, 
comparable to El Salvador. Moreover, the United Nations Development 
Programme's Arab Development Report 2002 ranked Iraq in 110th place 
among 111 countries on its Alternative Human Development Index, which 
measures such things as life expectancy at birth, educational 
attainment and enjoyment of civil and political liberties.
    Iraq's economy today not only has shrunk, it is distorted in the 
way that the economies of Eastern Europe and the Soviet Union once 
were. Central control removed incentives for production. Overcoming the 
legacy of state planning and controlled prices will be arduous and time 
consuming.There are many tasks ahead, including solving problems in the 
most critical sectors, properly managing the newly created Development 
Fund for Iraq, creating a healthy trade and investment climate and 
transitioning the country off the Oil for Food Program.

Tasks in Four Key Sectors
            Oil
    The oil sector did not do well in Saddam Hussein's Iraq. The 
infrastructure suffered from years of neglect, forcing Iraqi engineers 
to exercise ingenuity and find creative solutions to keep oil 
production levels as high as possible. The technologies applied to 
boosting production have in some cases damaged the oil fields. The lack 
of maintenance, equipment, and spare parts also affected the 
infrastructure throughout the production chain--from the wellhead to 
the gas-oil separation plants, to the power plants, to the pumping 
stations, to the refineries, and to the pipelines.
    Since the liberation, Iraqi and U.S. engineers have been working 
around the clock to restore production so that Iraq will be able to 
meet domestic needs and begin earning revenues through exports. A lot 
of progress has been made already, but much more remains to be done. 
Because the oil sector is of such central importance and the issues it 
faces so complex, I will provide more details about it later in my 
testimony.

            Food and Agriculture
    The complexity of the task of reconstruction and reintroduction of 
market principles is well illustrated in the food and agriculture 
sector.
    Under Saddam, agricultural productivity suffered from low 
investment, input shortages, poor agricultural and irrigation 
practices, droughts and soil salinity. Returning Iraqi agriculture to 
productivity and competitiveness is a major challenge we face.
    Iraq has not been food-self sufficient, traditionally importing 60-
70 percent of its caloric needs. Thus as we rebuild agricultural 
production to be competitive, we will also need to ensure that a 
vibrant trading environment exists.
    The government rationing system provided a majority of Iraqi's with 
food. Procurement and production of staples, like grains, were by the 
government. Neither production nor consumption reflected market prices.
    Winding down the Oil for Food program does not mean the end of the 
need to feed Iraqis, most of whom have received virtually all their 
food through OFF. We are in the process of re-activating the food 
distribution system to do this. Operational responsibilities of buying, 
shipping, and distributing food and medicine will be transferred to us 
as the occupying power at the end of six months.
    In the short run, we must continue food assistance for the Iraqi 
population dependent on it. In the longer term, we must move the Iraqi 
economy from the distortions of the Oil for Food program to a market-
driven system with cash salaries so that people can begin to purchase 
their own food. When freed of government control, the agricultural 
sector is one of the most responsive to market forces.
    Locally produced products, such as fruits and vegetables are now 
traded freely in open markets. Our challenge will be to extend this to 
grains, wheat and rice, which are the staples of the Iraqi diet.
    USDA and AID have already, begun to think through and implement 
steps needed to reintroduce competitiveness to Iraqi agriculture. For 
example, USAID and USDA have already designed and are putting in place 
a project to assist agricultural production and develop agricultural 
enterprise, credit availability and infrastructure. In the 1980's the 
United States was Iraq's largest supplier of agricultural products. We 
now look forward to rebuilding cooperation between Iraqi and U.S. 
agricultural sectors.

            Transport
    Critical to Iraq's reconstruction will be the transportation 
sector, which faces numerous challenges. On May 23, the port of Umm 
Qasr became the first reconstruction project transferred from military 
to civilian administration. The basic infrastructure is sound, but has 
not received proper maintenance for years. Rehabilitation priorities 
include the port administration buildings, new lighting, utilities, 
security fences, grain elevators, port dredging so that larger bulk 
grain vessels can offload near the grain elevators. The adjoining 
railroad system is also under review for repair to help move the large 
amount of cargo projected to arrive through the port. Major roadways 
have also sustained conflict-related damage and will need work.
    In civil aviation, the aircraft of Iraqi Airways, the former 
national carrier, are parked outside Iraq and are not airworthy. 
Moreover, Baghdad International Airport has taxi lane craters, broken 
runway lights, unexploded ordinance, plumbing difficulties, and 
security access control problems. There is also no functioning civil 
aviation authority to oversee airport security, flight safety 
oversight, and the administration of civair services. Despite these 
obstacles, the Coalition Provisional Authority hopes to resume civair 
services before July to accelerate the flow of U.S. and foreign actors 
involved in reconstruction efforts. We foresee that with the 
improvement of Iraq's internal transport system, trade and investment 
relations with its neighbors will also improve.
    USAID contractors Skylink, Bechtel and Global Securities are making 
preparations for the possible re-opening of Baghdad International 
Airport to limited commercial traffic by June 15. As part of an interim 
operation, Global Securities is to provide passenger and baggage 
screening security, Bechtel a temporary passenger terminal and Skylink 
airport management. Skylink has also been contracted to assess and make 
preparations for the re-opening of the Basra Airport. USAID contractor, 
Stevedoring Services of America, assumed operational responsibility for 
the deepwater port of Urn Qasr from the British military on May 23.

            Telecommunications
    Telecommunications remains a critical requirement for OCPA and the 
reconstruction effort. Prior to the conflict, Iraq had minimal 
telecommunications--some three phones per 100 citizens. Although among 
the lowest levels in the world, even this low figure overstates phone 
penetration experienced by the average Iraqi since the ruling 
institutions--Ba'ath Party, military and government offices--controlled 
many of the phones. In addition, there was no wireless system, little 
Internet and few computers.
    In prosecuting the war, command and control systems, and 
telecommunications centers, were targeted. The war and subsequent 
looting and fires destroyed some 50 percent of the telephone switches 
in Baghdad and severed all intercity and international links. Thus, 
even though about two-thirds of the 800,000 lines in Iraq remain 
serviceable; they can connect only with phones in their local 
exchanges.
    As part of its efforts to provide security and operations for OCPA, 
DoD contracted with MCI for a small emergency wireless system for 
Baghdad, initially involving some 2,000 phones. The United Kingdom 
Ministry of Defense contracted through Vodafone for similar wireless 
coverage in the south.
    The Department of State has been active in developing a policy 
response to address the larger telecommunications requirements. State 
leads an interagency Telecommunications Support Team to coordinate with 
and support the operations of OCPA's Joint Communications Advisory 
Board. The interagency team has endorsed a three-phase approach for 
telecommunications that addresses (1) emergency requirements, (2) 
telecommunications needs assessments, and (3) development of a broad 
policy framework for the telecommunications sector reconstruction and 
development.
    The interagency team has also taken the lead in responding to 
specific telecommunications requests from OCPA, including that from 
Ambassador Bremer for an emergency interim nationwide communications 
system for Iraq. With interagency agreement, State has recommended that 
USAID contract for the rapid restoration of critical emergency 
telecommunications facilities. This contract would provide a coherent, 
integrated management approach to emergency telecommunications that 
would link 21 cities and provide international connections. It would 
call for multiple technologies and not prejudge future decisions by 
service providers about technology. It would support supervisory 
control and data acquisition (SCADA) systems for other critical 
sectors--power, water, refinery, transportation/airport, as well as 
support medical, fire, police and other emergency response operations. 
And, most importantly, it would provide these services within 30 days.
    In other areas, members of the interagency team are developing a 
spectrum management plan and a framework for the telecommunications 
regulatory structure in Iraq that has as its goal a market based, 
private sector-led telecommunications sector.
    Looking forward, there remain several requirements for getting a 
modern telecommunications system in Iraq. These include repair and 
building the wireline system, as well as a registration system leading 
to competitive licensing of wireless service providers so the Iraqi 
people can benefit from this important technology. We are working, as 
noted above, to establish the policy infrastructure for this action. It 
is difficult to speak with precision as to when these actions can be 
completed, but we hope within a matter of months.
    As you can see from a very brief overview of key sectors, Iraq will 
need assistance to get up and running. Not long-term aid, but shorter-
term aid until its economy can function well, and its citizens prosper.

  MANAGEMENT OF THE COUNTRY'S FINANCES--THE DEVELOPMENT FUND FOR IRAQ

    Security Council Resolution 1483 directs that oil proceeds be 
deposited in a Development Fund for Iraq and be used for the 
humanitarian needs of the Iraqi people, for rebuilding the economy and 
infrastructure, for continued disarmament, and for the costs of 
civilian administration. Ambassador Bremer already has created a 
senior-level Project Review Board, to be chaired by former USAID 
Director Peter McPherson, that would approve projects and allocate 
funding sources. This process of reviewing and approving expenditures 
will provide the basis for a national budget for Iraq; Treasury already 
has budget experts on the ground in Baghdad working on these issues. We 
also expect OCPA to design a transparent procurement mechanism for 
Development Fund expenditures that is consistent with USG procurement 
guides.
    We have worked with other agencies to open accounts for the 
Development Fund for Iraq in both the Central Bank of Iraq and at the 
New York Federal Reserve Bank. The Development Fund for Iraq is now 
open for deposits of oil sale proceeds and other revenues, including 
transfers from the UN. State is also working closely with the 
Department of the Treasury to support the work of the International 
Advisory and Monitoring Board, which will bring representatives of the 
UN and international financial institutions together to approve 
auditors for the Development Fund for Iraq.

          CREATING A HEALTHY CLIMATE FOR TRADE AND INVESTMENT

    Removing economic and financial sanctions alone will not open 
trade. We must reestablish Iraq's trade with its neighbors and the 
world, and establish a healthy business climate for Iraqis and for 
domestic and foreign investment. Our team in the field has already made 
a preliminary identification of several key issues. These include:


   establishment of a new tariff schedule;

   removal of non-tariff barriers;

   encouragement of foreign investment through drafting of a 
        more open investment code and loosening of restrictions of 
        foreign ownership of private property;

   creation of an effective banking system, and other financial 
        services;

   privatization of substantial means of production and 
        development;

   adoption of effective copyright protections; and

   eventual entry into the WTO.

              MOBILIZING RESOURCES FOR IRAQ RECONSTRUCTION

    UNSC Resolution 1483 lays a foundation for redevelopment of much of 
Iraq's economy and more work will need to be done over and above that. 
The American people and coalition allies paid the price in blood and 
treasure to liberate Iraq. The cost of redeveloping Iraq's economy 
should be shared by the Iraqi people, the international community and 
by the coalition.
    I cannot give you a figure on how much it will cost to rebuild 
Iraq. This is a complicated question with a number of component parts. 
First, there is a need for funding of repairs and rehabilitation 
following this most recent conflict. Second, is the larger task of 
undoing the damage done by decades of Saddam Hussein's misrule--
corruption, plunder and the distortions of central state planning. 
Third, the Iraqi people will need financing--public and private, 
domestic and foreign--to bring Iraq--isolated for decades--into the 
information-rich, technology-driven global economy.
    As my comments on the oil, agriculture, transport and 
telecommunications sectors imply, it will be some time before we can 
even begin to estimate accurately all the forms of damage this 
country's economy has sustained. We are not talking about traditional 
long-term financial assistance. Iraq needs help to get its economy on a 
sound basis, develop a welcoming investment climate and integration 
into regional and international trade. The global community has asked 
the World Bank and UNDP to send a team of experts to Iraq soon to do a 
thorough assessment. The instability of the environment hampers our 
efforts currently, but to the extent we can, we stand ready to update 
you at any time on this important issue.
    There are a number of resources that we plan on mobilizing to 
finance the rebuilding of Iraq.
Found and Vested Assets
    First, existing Iraqi state assets and the ill-gotten gains of 
Saddam Hussein and his regime will be made available for the benefit of 
the Iraqi people.
    After Saddam Hussein's invasion of Kuwait in 1990, the United 
States acted quickly and decisively to deprive the Iraqi regime of the 
means and materials to continue its regional aggression, further 
develop its weapons of mass destruction programs, and continue its 
repression of the Iraqi people. Consistent with UNSC Resolution 661, 
the United States blocked all Iraqi state assets legally within its 
control.
    Today, the United States is using those assets for the benefit of 
the Iraqi people, as they build a new and better Iraq. The President 
vested $1.7 billion in Iraqi government assets in the United States. 
The Secretary of the Treasury has already designated the Secretary of 
Defense with the authority to use over $573.5 of these assets to meet 
the immediate humanitarian needs of the Iraqi people.
    Since the President signed the March 20 Executive Order vesting 
Iraqi state assets in the United States, the State Department, in 
cooperation with our interagency partners, is confirming the status of 
assets declared frozen by foreign governments in 1991. We have reached 
out to more than 20 additional countries that also may have information 
regarding Iraqi state assets. With the unanimous passage of UNSCR 1483, 
we are also reminding countries of their obligation under the new 
resolution to make available any Iraqi state assets to the Development 
Fund for Iraq.
    We have had, and continue to have, extensive bilateral and 
multilateral meetings with key jurisdictions. For example, the 
administration took advantage of the IMF/World Bank meetings held in 
Washington in April to hold several important bilateral meetings to 
discuss the matter. Treasury and State officials have contacted their 
counterparts in key jurisdictions. My colleagues and I have stressed 
the need for all countries to search their financial institutions for 
ill-gotten gains of Saddam Hussein and his regime.
    The Department of State is working closely with the Departments of 
the Treasury, Justice, Defense, and Homeland Security, as well as law 
enforcement and intelligence colleagues across the government, to 
identify additional assets and front companies that may be connected to 
Saddam Hussein or his fallen regime. Our efforts are leading to the 
identification of funds that can be made available for the benefit of 
the Iraqi people. To date more than $1 billion in previously unfrozen 
assets outside Iraq have been identified.

Revenue from Petroleum Production
    Oil sales are the biggest potential source of revenue for the new 
Iraq, as they were for the old, but this time Iraq's oil revenues will 
benefit the Iraqi people. A top priority is to bring the industry on 
line and to repair and rehabilitate the existing infrastructure. A 
highly qualified team is ready to take on this work. Thamir Ghadhban is 
the CEO of the Oil Ministry and is actively directing the process. He 
has a team of experienced and well-qualified Iraqi managers and 
engineers in place at the Oil Ministry, the State Oil Marketing 
Organization (SOMO), and the South and North Oil Companies, and they 
have technical support from the Army Corps of Engineers. Steps are 
being taken every day by Iraqis working with the Army Corps to assess 
the condition of wells, pipelines, pumping stations, gas-oil separation 
plants, power grids, and refineries, and to make repairs. As the 
security situation improves, the work will proceed at a faster pace.
    Iraq's entire oil infrastructure was shut down in the face of the 
American advance. The Iraqis and we have been working diligently since 
the international coalition liberated Iraq, to bring the sector back on 
line. Mr. Ghadhban announced on May 21 that Iraq was already producing 
800,000 barrels of oil per day. While there are many variables that can 
affect success in meeting production goals, he also said that 
production could reach 1.4 or even 1.5 million barrels by June 15. On 
May 28, Mr. Ghadhban announced that the northern fields around Kirkuk 
have been producing 600,000 barrels per day since May 27 but are not 
expected to increase production above that level in the near term. In 
the south, the situation is not as far advanced, but again, progress is 
being made. He also said that, as of May 27, oil production in southern 
Iraq exceeded 200,000 barrels per day, so it seems that Iraq is well on 
its way to meeting Mr. Ghadhban's production goals.
    As a point of comparison, Iraq produced between 2 and 3 million 
barrels per day in 2002. This is was down from 3.5 million barrels 
produced at Iraq's production peak in 1990. During 2002, Iraq exported 
an average of 1.7 million barrels per day.
    Mr. Ghadhban also announced that the Basra refinery is--or soon 
will be--operating at full capacity--140,000 barrels per day. The plant 
is antiquated and the condition of the pipeline that runs to Baghdad is 
still being assessed. Iraq's two other major refineries at Baiji and 
Daura are also operating, but at below capacity, because of damage from 
looting, the continued lack of stable electrical power, and a shortage 
of heavy fuel storage.
    Mr. Ghadhban has determined the first task is to ensure that Iraq 
is able to meet its own domestic needs for motor fuel and liquefied 
petroleum gas, which is used for cooking. Iraq's domestic needs for 
refined products require a production level of some 250,000 barrels of 
oil per day. But in creating gasoline, Iraq also generates considerable 
heavy fuel, which is largely exported. As Iraqi oil production reaches 
1.3-1.5 million bpd, this would translate into roughly 1 million 
barrels of crude oil available for export every day, plus lesser 
quantities of refined product/heavy fuel.
    SOMO has placed the first crude up for sale and is in the process 
of collecting and evaluating bids in expectation of oil listings 
resuming in the next week, if not the next few days.
    There is ample crude ready for export now through the port at 
Ceyhan in Turkey, with over nine million barrels of oil already in 
storage at the port, over eight million of which will be ready for 
export as soon as contracts can be drawn up and signed by SOMO.
    The Mina al-Bakr oil terminal is operational. However, there are a 
number of problems that will need to be resolved in the south, not the 
least being the need to repair an industrial water plant needed for oil 
extraction, in order to raise production to pre-war levels of 1.2 
million barrels per day.
    In order to export these quantities, however, the legal framework 
of contracts, guarantees, payments, and credits will need to be 
finalized. SOMO has been working to draft a model contract. The head of 
SOMO, Mohammed al-Jibouri, has announced that the new contracts will be 
similar to those used under the Oil for Food program, but some 
important changes are envisioned: most importantly, contracts will be 
made transparently, unlike the past when Saddam Hussein sought 
kickbacks from purchasers.
    Al-Jibouri plans to sign direct sales contracts with traders and 
refiners, cutting out the middlemen that facilitated the kickback 
schemes. SOMO will also drop the UN's retroactive pricing formula, 
moving instead to standard market pricing techniques.
    The petroleum sector has seen virtually no new investment since 
1991, and no new technology. Upgrades to protect the environment, to 
enhance efficiency, and to meet commercial and safety standards are 
badly needed, both upstream and downstream. There are a number of 
estimates that have been made regarding the probable costs associated 
with returning Iraq's oil production to previous levels. For example, 
Cambridge Energy Research Associates recently put a ballpark figure of 
$3 billion over two years to reach 3.5 million bpd through an intensive 
program of rehabilitation and modernization. This would bring 
production back to pre-1990 levels.
    In the meantime, Mr. Ghadhban has announced that in the short term 
Iraq would need not billions of dollars but ``several hundred million 
dollars.'' Under a new Iraqi Government, Ghadhban has noted that, ``We 
are going to open the doors for foreign investment but in accordance 
with a formula that safeguards the interest of the Iraqi people.''
    Oil Ministry officials hope to raise production to over 2 million 
barrels per day by the end of this year. This will require more 
rehabilitation of the Rumaila fields and production chains in southern 
Iraq. Since the security situation is only slowly improving, it is 
difficult to project the likelihood of success or the likely costs 
associated with this work.
    There obviously is considerable uncertainty surrounding these 
production and export projections. But we can still use these numbers 
as a rough basis for estimating potential revenue earnings from oil 
exports. In the next few days, as Iraq begins to sell oil from Ceyhan 
and the Gulf, we will have a better idea of the price Iraqi oil can 
fetch, compared to other blends on the market. Recently, European oil 
traders were tentatively pegging Kirkuk crude at a price of $3.65 to 
$3.85 per barrel lower than Brent, which is the standard against which 
all European crude is measured. Because of long-term damage to the 
fields, Kirkuk crude is higher in sulfur than it used to be. Europe's 
strict air quality standards will make the oil a hard sell there, which 
is reflected in the lower price.
    If, for purposes of estimate, we say that a barrel of Iraqi crude 
sells for $20, and if Iraq is able to bring exports up at a stable rate 
from 1 million bpd in mid-June to 2 million bpd at the end of the year, 
Iraq's gross earnings--before costs are deducted--would be in the range 
of $5 billion for the second half of 2003. If Iraq is able to maintain 
stable production and export rates at 2 million bpd throughout 2004, it 
could earn, again in gross revenues, about $ 14-15 billion. But 
potential earnings are subject to a host of factors both inside and 
outside the country, including the volatile nature of global oil 
markets and whether there is sufficient demand for Iraq's sour crude to 
keep the price at the projected range. The state of the global economy 
is also hard to predict, and this too will have an impact on potential 
earnings.
    In looking toward the longer term, Iraq's oil ministry has begun to 
assess its rehabilitation requirements and evaluate existing service 
contracts against identified needs. Development contracts with Lukoil 
and China are being held in abeyance until a new Iraqi government is in 
place to determine their future. We would expect that the new 
government would also need new contracts to upgrade facilities--
including refineries, gas-oil separation plants, power plants, 
pipelines and pumping stations, as well as to rehabilitate wells and 
open new fields to production.
    Because Iraq has not had access to investments or new technology 
over the last decade, analysts say that the country may not be able to 
increase its production at existing fields even to pre-1990 levels, 
because standard operating procedures used over the past decade may 
have caused irreparable damage to the fields, especially in Kirkuk. The 
status of these fields will need to be assessed.
    Over the long term, Iraq will want to acquire updated technology, 
and may want to open new fields (only 15 of the 73 known fields are in 
production now). It is possible that Iraq will also be looking into 
options for exploration in other regions.
    Other parts of the oil sector infrastructure also need work. 
According to recent reports, the Mina al-Bakr export terminal in the 
Gulf has the potential to handle 1.6 million barrels per day, but we 
estimate that it cannot be safely run at levels much above 1.1 million. 
A second oil terminal, Khor al-Amaya, was destroyed in the first Gulf 
War and only partially repaired. It lies in a calmer area of the Gulf, 
however, and once rehabilitated will provide a useful alternative.
    Many commentators are speculating about how much it would cost if 
Iraq should seek to raise production above historical levels. For 
example, experts at Deutsche Bank, PFC Energy Associates, and Energy 
Compass, have looked at not only sector rehabilitation, but also new 
field production. They have come up with large estimates of the 
financial cost of raising Iraqi oil production far above its historical 
peak.
    But it will be up to the new Iraqi government to decide how far it 
wants to go and just where it wants to target Iraq's future production 
levels. Any large expansion of Iraqi production capacity would have to 
be accommodated by increased demand in the international oil market; 
such an increase in production capacity would, in all probability, need 
to be privately financed. The focus now is on rehabilitation and repair 
to help Iraq meet Mr. Ghadhban's more modest goal of 2 to 2.5 million 
barrels per day.
    Finally, new laws and regulations will be needed to foster 
investment and facilitate foreign ventures in order to fund new 
development.
    OPEC will hold its next meeting on June 11 in Doha. Mr. Ghadhban 
has indicated that Iraq has no plans to leave OPEC, which it helped 
establish, but he also has no plans to attend the June 11 meeting. 
Before the first Gulf War, Iraq was responsible for about 4 percent of 
world oil sales. Under UN sanctions, Iraq was exempt from OPEC quotas, 
and the other OPEC members, especially Saudi Arabia, adjusted 
production to compensate for Iraqi oil sales through the UN Oil for 
Food program and to maintain their target price of $25 to $28 per 
barrel.

                   CONTRIBUTIONS FROM OTHER COUNTRIES

    Despite the billions Iraq has in existing assets and expected oil 
revenues, resources will remain far below what will be needed for the 
next year or so to help the Iraqis achieve a stable economic base. We 
expect that other countries--both individually and through 
international organizations such as the United Nation--will make major 
contributions to this effort. Many countries have come forward with 
offers of assistance--either monetary or in-kind contributions. To date 
these have been offers nearing $2 billion from third countries--much of 
this pledged through the $2.2 billion UN appeal. The EU alone has 
promised $107 million. There have also been many pledges of in kind 
contributions--from Albania's 70 peacekeeping troops to Jordan's field 
hospital to a medical team from Lithuania.
    Even before the fighting stopped, the State Department, working 
closely with colleagues from DoD and Treasury, launched a series of 
quiet consultations with countries that share our interest in helping 
Iraq rebuild. These consultations confirmed that there is widespread 
recognition that repairing the damage of decades of misrule in Iraq is 
an international undertaking.
    We now are working with the United Nations and the World Bank on a 
preparatory meeting on reconstruction that will involve a broad cross 
section of countries. The preparatory meeting will examine not only 
current needs, but also explore requirements in coming years. The 
preparatory meeting will be organized by the UINDP, the World Bank and 
the United States on June 24. One outcome of the meeting is likely to 
be a major donors conference in the fall. The meeting should also 
underline the urgency of undertaking a World Bank/UNDP needs 
assessment.

                              DEBT RELIEF

    In addition to the many costs Iraq faces to rebuild its economy, it 
will also have to deal with the weight of huge amounts of debt 
contracted by the previous regime. Treasury and State are working with 
other creditor countries on a long-run solution to Iraq's debt burden 
that is responsive to the full range of Iraq's creditors. Secretary 
Snow has urged the need for a comprehensive, multilateral debt 
treatment for Iraq. The issue was discussed at the spring World Bank/
IMF meetings and in the G-7, where nations agreed on the need to engage 
the Paris Club, a group of creditor nations that meet regularly to 
provide debt relief to debtor countries.
    At the April session of the Paris Club, State and Treasury and 
Paris Club colleagues discussed Iraq and began the process of debt data 
reconciliation. In their recent meeting at Deauville, G-8 Finance 
Ministers recognized that it would be unrealistic to expect Iraq to 
make payments on its debt at least through the end of 2004. Currently, 
Iraq is not making payments on its international debt. The G-8 also 
asked the IMF to assess Iraq's debt situation.

                       PRIVATE SECTOR INVESTMENT

    In the end, the single largest contributor to Iraq's economic 
renewal will be the Iraqi people, their ingenuity and their 
determination to improve their lives, now that the burden of the Saddam 
regime has been lifted.
    Ambassador Bremer has stressed that we must begin to create the 
conditions for a free market economy in Iraq now. Our biggest 
challenges will be creating a secure environment in which honest 
Iraqi's can establish and run businesses, and the smooth transformation 
of a state-controlled economy into a free market. But the Iraqi people 
are talented and ambitious. And, despite decades of war, Iraq has a 
small private sector, which can be nurtured back to health.
    We have been studying the legal and economic reforms needed to 
create a stable business environment in Iraq. Ambassador Bremer's team 
has been cataloging such reforms--which range from lifting tariffs to 
WTO accession to creation of a new legal framework. These and many 
other practical issues must be addressed before international trade 
activity with Iraq will resume and flourish.
    In Washington, State's Assistant Secretary for Economic and 
Business Affairs has hosted a series of interagency meetings to look at 
key economic reconstruction issues for which Ambassador Bremer's team 
in Baghdad needs Washington guidance. Last week, the group conferred 
over necessary steps to revitalize business and commerce in Iraq 
following the lifting of economic sanctions. The group also examined 
action needed to successfully transition from the current centrally 
controlled food distribution system under the UN's Oil for Food program 
to a market-based food distribution system.
    We have been drawing on the knowledge and expertise of our 
embassies in the region, and are also working to engage regional 
governments--the idea being to identify ``best practices'' and use 
regional reform models where appropriate.
    One of the most important steps we can take is to help Iraq re-
integrate with the broader regional economy. The upcoming June 21-23 
special World Economic Forum event in Amman, Jordan, provides an 
excellent opportunity to begin this process, as Secretary Powell will 
undoubtedly underline during his discussions there. In addition, the 
international development institutions and the donor community will 
focus extensively on steps we can take to re-stimulate private economic 
activity in Iraq during June 24 donor's meeting at the United Nations.

                               CONCLUSION

    The transformation that will take Iraqis from life under a ruler of 
unimaginable cruelty to a free and prosperous nation will take time. 
The American people have committed to help Iraqis make this 
transformation, but it will require much more work on our part. The 
long-term future of Iraq depends on the establishment of rule of law, 
representative government, and sustainable economic development. The 
United States, our coalition partners, the United Nations, and most 
importantly, the Iraqi people, must work together to finish the job, in 
order to guarantee peace and stability in the region, and safety for 
the American people.
    The administration welcomes the strong interest of the Congress in 
this issue and its strong support for the important task at hand. We 
look forward to working closely with the Congress in the months ahead.

    The Chairman. Thank you very much, Secretary Larson.
    Secretary Zakheim.

   STATEMENT OF HON. DOV ZAKHEIM, UNDER SECRETARY OF DEFENSE 
           (COMPTROLLER), U.S. DEPARTMENT OF DEFENSE

    Dr. Zakheim.  Mr. Chairman, Senator Biden, and 
distinguished members of the committee, I am delighted to 
participate in this important discussion. Let me echo up front 
what my colleague Secretary Larson has said. We at the table 
and our agencies are working exceedingly closely together to 
speed Iraq's recovery. I can't underscore that too often.
    As Deputy Secretary of Defense Paul Wolfowitz emphasized 
before this committee about two weeks ago, the Department of 
Defense is strongly committed to helping the Iraqi people 
establish an Iraq that is free and at peace with itself and its 
neighbors. We continue to work to stabilize the country and to 
accelerate its recovery. In particular, we are focusing on 
humanitarian assistance, reconstruction, and new governance.
    DOD and other departments and agencies play a critical role 
in ensuring that the Iraqi people get what they need to rebuild 
their lives and their nation. Today, I will in brief address 
DOD support for recovery in Iraq, the resources available to 
achieve that recovery, and our efforts to enlist the support of 
the international community.
    Let me begin with the various sources of funding for Iraq's 
speedy recovery. As has been mentioned, in the Emergency 
Wartime Supplemental Appropriations Act of 2003 the Congress 
appropriated $2.475 billion for the President's Iraq relief and 
reconstruction fund, which is the primary source of 
appropriated funding for Iraqi relief and reconstruction 
activities. The Congress also made $489 million of the Iraqi 
Freedom Fund appropriation available to be used if needed to 
repair damage to Iraqi oil facilities and to preserve their 
distribution capability.
    Iraqi state assets are a second category. President Bush, 
as you heard, has directed that Iraqi state assets under our 
control, that is U.S. control, be used only for the benefit of 
the Iraqi people and their nation's recovery. These assets fall 
into two categories.
    One we've termed vested assets, and that's about $1.7 
billion in formerly frozen Iraqi state assets in the United 
States, which the President has vested in the Treasury 
Department for apportionment to federal agencies' requirements 
that benefit the Iraqi people. We have shipped $199 million of 
those vested assets already. We have another request in for 
$358 million and almost all of those funds are for salaries for 
Iraqi civil servants, pensioners and so on, and there was about 
$30 million for ministry start-up costs.
    The second category that I mentioned earlier, seized 
assets. There are now, to update the estimate you heard, about 
$798 million so far in Iraqi state assets that were brought 
under U.S. control in Iraq by U.S. troops pursuant to the laws 
and usages of war.
    Now there are the international contributions, yet another 
category. The UN, other international institutions, and the 
United States and its coalition partners continue to urge all 
nations to contribute to the recovery in Iraq in any way they 
can. And the public pledges to date, again to give you an 
updated estimate, are now about $2 billion. We anticipate other 
contributions as well, including troop contributions to create 
multinational divisions of peacekeeping forces.
    As you heard, the UN Security Council Resolution 1483 
adopted on May 22 directs certain monies to be placed in the 
Development Fund for Iraq. These monies include the 
unencumbered funds from the UN's Oil-For-Food escrow account, 
including an initial transfer of a billion dollars that has 
already been deposited in the Development Fund. Proceeds from 
the sale of petroleum, petroleum products and natural gas, have 
returned Iraqi assets from UN member states. And this is 
significant. The Development Fund may be used only in a 
transparent manner for the purpose of benefiting the people of 
Iraq.
    The funding is obviously not enough. We have to identify 
the most pressing and promising requirements for recovery. That 
is to say, programs, projects and other uses that will benefit 
the Iraqi people and help transform that country. We look to 
the Coalition Provisional Authority (CPA) to identify these 
requirements. The presidential envoy, Ambassador Paul Bremer, 
who is the administrator of the CPA, oversees and coordinates 
all executive, legislative and judicial functions necessary for 
temporary governments in Iraq, including humanitarian relief, 
reconstruction, and assisting in the formation of an Iraqi 
interim authority.
    Now the CPA, this Coalition Provisional Authority, includes 
representatives from both coalition nations and U.S. government 
agencies, all of whom are involved in identifying and 
prioritizing recovery requirements in Iraq. Ambassador Bremer 
is also getting substantial input from the leaders of the Iraqi 
people. Agencies or entities outside the CPA can propose 
requirements, but these have to be submitted to Ambassador 
Bremer for his review.
    For funding from vested or seized assets, and again, vested 
are the ones that were frozen, seized are the ones that were 
found out in Iraq, the CPA submits its proposed requirements to 
the Office of the Secretary of Defense and specifically to my 
office.
    Requests for funds appropriated through the Defense 
Department from the $2.47 billion appropriation are also 
submitted to my office, which as in all cases, evaluates them 
and then forwards them to the Office of Management and Budget.
    For funding for non-DOD appropriated funds, the CPA submits 
its proposed requirements directly to OMB. OMB consults with 
the Secretary of Defense and other appropriate federal offices 
on policy and program issues.
    Now my office has organized a liaison cell to help 
Ambassador Bremer and his people fulfill its responsibilities. 
This cell will be led by my office and includes representatives 
from outside the Defense Department, OMB, AID, and the General 
Accounting Office as well. Within DOD, the Inspector General, 
the Joint Staff, and several defense agencies such as our 
contract managers and our contract auditors will also have 
representatives.
    This cell will help the CPA expedite coordination and 
approval of requirements for recovery in Iraq. It will provide 
on-cite expertise in budgeting, financial plan development, 
costing, accounting, and other needs.
    Now the President has directed that the DOD in consultation 
with OMB and my colleagues at State and Treasury, adopt 
procedures to ensure that Iraqi state or achieved owned assets 
are used only to assist the Iraqi people and support the 
reconstruction of Iraq, and are properly accounted for, and we 
at DOD have adopted strong measures to uphold the President's 
direction. We are using longstanding proven safeguards for 
handling and accounting for Iraqi state assets. We're 
emphasizing transparency, rigorous accounting and auditing 
procedures, and the process includes on-site audit testing, of 
course the use of signatures, and standard financial and 
management controls.
    And toward that objective, on May 21, Deputy Secretary 
Wolfowitz designated the Secretary of the Army as the DOD 
executive agent for all support of the CPA. This includes 
contracting support of all DOD agencies. Notably the Defense 
Contract Auditing Agency, which is part of my organization, are 
presently supporting all known Iraqi contracting requirements, 
and will fully support the Army as it transitions to a 
permanent contracting presence in the Iraq theater of 
operations.
    To the maximum extent practicable, vested and seized assets 
are being administered and accounted for under controls that 
are equivalent to those applicable to DOD appropriated funds. 
DOD procedures cover the full range of asset handling, from the 
initial seizure of assets all the way through final 
disbursement of those assets. Safeguarding foreign national 
assets is not new to the U.S. nor to the Department of Defense.
    It's impossible to overestimate the importance of 
accountability for Iraqi state assets under U.S. control. The 
Iraqi people, the American people, and the international 
community must be satisfied that these assets are being used 
only to help Iraq recover and that funds go to the most 
pressing requirements, and that a proper accounting be done.
    With the recent delegation by Deputy Secretary Wolfowitz 
naming the Army as executive agent, I am confident that the 
Army will stand up a highly confident and practicable 
organization to centrally integrate all current and future Iraq 
reconstruction contracting requirements. I believe that the 
Deputy Secretary's directive was the one key action needed to 
ensure that there is no duplication of Iraqi construction 
requirements and that appropriate financial controls will be 
established and deployed.
    I will be meeting with the Secretary of the Army and his 
staff to offer my support throughout the efforts. I'm 
personally and absolutely committed to an integrated well-
managed contracting process in Iraq, a transparent process 
equal to the very best military acquisition centers in this 
country. All financial and audit issues serviced by DCAA, 
that's the Contract Audit Agency, and other DOD components will 
be brought to my immediate attention, and have been, for 
appropriate action.
    I would like to give you some detail, because particularly 
Senator Biden asked for it, without going on at length, about 
the nature of the international contributions. These 
contributions, both cash and in kind, are obviously going to be 
critical to Iraq's recovery. I have been designated as the 
Department of Defense coordinator for international assistance 
in post-conflict Iraq. I work jointly in that regard with my 
colleagues at this table, Under Secretaries Larson and Taylor, 
and Mr. Natsios, and their offices, as well as some offices 
outside the U.S. government.
    We are working closely with multinational institutions, 
notably the UN, the World Bank, and the IMF, who will play 
critical roles in facilitating the assistance to Iraq recovery. 
As you already heard from Secretary Larson, these international 
institutions are developing needs assessments, which I think 
goes to some of Senator Biden's concerns about coming up with 
longer range estimates. It takes time and that is what they are 
undertaking. And finally, I should add that we have daily 
coordination with the Office of the Coalition Provisional 
Authority.
    As I mentioned, the international community has publicly 
offered something over $2 billion for reconstruction assistance 
for Iraq. About $800 million of that has been meant in response 
to the UN flash appeal for urgent requirements, and the 
remaining $1.2 billion has been offered outside the flash 
appeal.
    Let me give you some examples. Japan has agreed to 
contribute more than $150 million in emergency humanitarian 
aid. Australia has delivered more than $26 million dollars, 
include 100,000 metric tons of wheat, shipping costs as well. 
Australia is also providing agricultural expertise. Canada has 
delivered more than 41 million U.S. dollars for critical water 
sanitation, food, shelter and health requirements. The United 
Kingdom has pledged $338 million in humanitarian assistance. 
Spain has pledged $56 million, primarily in humanitarian 
supplies, and Spain has also initiated its own needs assessment 
which is certainly kind of preliminary to what could be done 
from here on out, and the Spanish have just sent to the CPA 
proposals for six new projects that they want to undertake in 
Iraq. The Netherlands is contributing $14 million in response 
to the flash appeal and that will be provided through Dutch 
non-governmental organizations. Norway is donating up to $21.5 
million for humanitarian assistance. The European Union has so 
far pledged $107 million, of which $14.5 million has been 
delivered, including 10 tons of medical supplies that has been 
airlifted to Baghdad.
    Jordan has deployed a field hospital to Baghdad for 
emergency medical services. United Arab Emirates has set up 
water purification plants. It has an adoptive program we have 
worked on here as well as internationally, kind of like adopt a 
highway that you're aware of, adopt a hospital, adopt a school, 
adopt a day care center, and the United Arab Emirates has 
adopted 8 hospitals in that way.
    So these are just some examples of what the international 
community is doing to respond to the humanitarian and 
reconstruction needs. We, my colleagues and I here will 
continue to engage the international community to come together 
to assist the Iraqi people to rebuild their lives and their 
country.
    So, in closing, I want to emphasize that the Department of 
Defense is intensely focused on advancing stabilization and 
recovery in Iraq as rapidly and as smoothly as possible. We 
recognize, as you do, that the stakes cannot be higher. The 
emergence of an Iraq that protects the right of its citizens, 
that represents all of its diverse ethnic and religious groups, 
that prospers economically for the benefit of all its people, 
all of that would be a profoundly important model for the 
Middle East and the entire world. To help the Iraqi people meet 
this challenge, President Bush has pledged America's commitment 
to stay the course and there is no doubt, success will be very 
expensive and it will take years and not months.
    This committee is helping the American people and the 
international community understand the criticality and 
difficulty of building a new Iraq, and I look forward to 
contributing to the important work and be of assistance as I 
can. Thank you.
    [The prepared statement of Dr. Zakheim follows:]

                  Prepared Statement of Dov S. Zakheim

Iraq Stabilization and Reconstruction
    Mr. Chairman, members of the committee, I am delighted to 
participate in this important discussion. As Deputy Secretary of 
Defense Paul Wolfowitz emphasized before this committee two weeks ago, 
the Department of Defense (DoD) is strongly committed to helping the 
Iraqi people establish an Iraq that is free and at peace with itself 
and its neighbors. We continue to work to stabilize the country and to 
accelerate its recovery. In particular, we are focusing on humanitarian 
assistance, reconstruction, and new governance.
    The Department of Defense, working closely with other departments 
and agencies, plays a critical role in ensuring that the Iraqi people 
get what they need to rebuild their lives and their nation. Today I 
will address DoD's support for recovery in Iraq, the resources 
available to achieve that, and our efforts to enlist the support of the 
international community.

Funding Sources for Recovery
    Let me begin with the various sources of funding for Iraq's speedy 
recovery and renewal.
    Appropriations. In the Emergency Wartime Supplemental 
Appropriations Act, 2003, Congress appropriated $2.475 billion for the 
President's Iraq Relief and Reconstruction Fund, which is the primary 
source of appropriated funding for Iraqi relief and reconstruction 
activities. Congress also made $489 million of the Iraqi Freedom Fund 
appropriation available to be used if needed to repair damage to Iraq 
oil facilities and to preserve a petroleum distribution capability.
    Iraqi state assets. President Bush has directed that Iraqi state 
assets under U.S. control will be used only for the benefit of the 
Iraqi people and their nation's recovery. These assets fall into two 
categories:

          Vested assets: $1.7 billion in formerly frozen Iraqi state 
        assets in the U.S., which the President has vested in the 
        Treasury Department for apportionment to federal agencies for 
        requirements that benefit the Iraqi people;

          Seized assets: About $800 million so far in Iraqi state 
        assets brought under U.S. control in Iraq by U.S. troops, 
        pursuant to the laws and usages of war.

    International contributions. The UN, other international 
institutions, and the U.S. and its coalition partners continue to urge 
all nations to contribute to recovery in Iraq in any way they can. 
Public pledges from the international community exceed $2 billion. We 
anticipate other contributions as well--including troop contributions 
to create Multi-National divisions of peacekeeping forces.
    Development Fund for Iraq. UN Security Council Resolution 1483, 
adopted on May 22, directs certain monies to be placed in the 
Development Fund for Iraq. These monies include unencumbered funds from 
the UN's ``Oil for Food'' escrow account including an initial transfer 
of $1 billion that has already been deposited in the Development Fund; 
proceeds from the sale of petroleum, petroleum products and natural 
gas; and returned Iraqi assets from UN Member States. Significantly, 
the Development Fund may be used only in a transparent manner for 
purposes benefiting the people of Iraq.

Determining Requirements for Recovery
    Funding is not enough. We must identify the most pressing and 
promising requirements for recovery: programs, projects, and other uses 
that will benefit the Iraqi people and help transform Iraq. We look to 
the Coalition Provisional Authority (CPA) to identify these 
requirements. Presidential envoy Ambassador L. Paul Bremer--as 
Administrator of the CPA--oversees and coordinates all executive, 
legislative, and judicial functions necessary for temporary governance 
of Iraq including humanitarian relief, reconstruction, and assisting in 
the formation of an Iraqi interim authority.
    The CPA includes representatives from both coalition nations and 
U.S. government agencies that are involved in identifying and 
prioritizing recovery requirements in Iraq. Ambassador Bremer also is 
getting substantial input from leaders of the Iraqi people. Agencies or 
entities outside the CPA can propose requirements, but these must be 
submitted to Ambassador Bremer for review.
    For funding from vested or seized assets, the CPA submits its 
proposed requirements to the Office of the Secretary of Defense (OSD)--
specifically to my office. Requests for funds appropriated to DoD are 
also submitted to my office which, as in all cases, evaluates them and 
forwards approved requests to the Office of Management and Budget 
(OMB). For funding from non-DoD appropriated funds, the CPA submits its 
proposed requirements directly to OMB. OMB consults with OSD and other 
appropriate federal offices on policy and program issues.
    My office has organized a liaison cell to help the CPA fulfill its 
responsibilities. This cell will be led by my office and includes 
representatives from outside DoD: OMB, the U.S. Agency for 
International Development (USAID), and the General Accounting Office. 
Within DoD, the Inspector General, Joint Staff, and several defense 
agencies will have representatives. The cell will help the CPA expedite 
coordination and approval of requirements for recovery in Iraq. It will 
provide on-site expertise on budgeting, financial plan development, 
costing, accounting, and other needs.

Accountability for Iraqi State Assets Controlled by the U.S.
    The President has directed that the Department of Defense--in 
consultation with OMB and the Departments of State and Treasury--adopt 
procedures to ensure that Iraqi state or regime-owned assets are used 
only to assist Iraqi people and support the reconstruction of Iraq, and 
are properly accounted for. DoD has adopted strong measures to fulfill 
the President's direction.
    The Department is using long-standing, proven safeguards for 
handling and accounting for Iraqi state assets. We are emphasizing 
transparency and rigorous accounting and auditing procedures. The 
process includes on-site audit testing, and the use of signatures and 
other strong financial and management controls. Towards that objective, 
on May 21, 2003, Deputy Secretary Wolfowitz designated the Secretary of 
the Army as the DoD Executive Agent for all CPA support. This includes 
contracting support. All DoD agencies, notably the Defense Contract 
Audit Agency, are presently supporting all known Iraq contracting 
requirements, and will fully support the Army as it transitions to a 
permanent contracting presence in the Iraq theater of operations. To 
the maximum extent practicable, vested and seized assets are being 
administered and accounted for under controls that are equivalent to 
those applicable to DoD appropriated funds.
    DoD procedures cover the full range of asset handling--from initial 
seizing of assets, all the way through final disbursement of those 
assets. Safeguards for foreign national assets is not new for the U.S. 
government and Department of Defense.
    It is impossible to overestimate the importance of accountability 
for Iraqi state assets under U.S. control. The Iraqi people, the 
American people, and the international community must be satisfied that 
these assets are being used only to help Iraq recover, that funds go 
for the most pressing requirements, and that proper accounting is done.

Defense Contract Audit Agency (DCAA) Support of Iraq Reconstruction
    The DCAA mission is to provide all contract audit and financial 
advisory services related to the Department of Defense acquisition of 
goods and services. DCAA provides similar services, on a reimbursable 
basis, to most civilian agencies including the State Department and 
USAID. In total, DCAA has 3500 contract auditors at 82 field audit 
offices, and a total of 350 resident DCAA locations. Thirty-six percent 
of DCAA auditors are licensed CPAs and 21 percent have advanced 
degrees.
    DCAA is playing a major audit role in support of Iraq 
reconstruction and is responding with real time audit assistance for 
all known Iraq contracting requirements:

   A team of seven DCAA auditors is currently reviewing over 
        500 United Nations Oil-for-Food contracts for price 
        reasonableness and value received. The review has identified 
        numerous inconsistencies with the contracts and noted 
        significant areas of potential contract overpricing. A total of 
        $11 billion is being evaluated, and a trip will be taken in 
        early June to the United Nations to evaluate UN contract file 
        documentation.

   A team of six DCAA auditors is currently evaluating audit 
        documentation and contracting actions by Washington 
        Headquarters Services in support of CPA contract requirements. 
        DCAA is also providing related audit assistance to assure that 
        contractor proposal estimates are properly prepared, and that 
        ongoing contract awards are properly priced.

   A team of nine DCAA auditors has been deployed to Iraq/
        Kuwait to support current mission requirements of the U.S. Army 
        and the Corps of Engineers.

   DCAA has selected ten additional auditors who will be 
        embedded with Corps of Engineers, Army Material Command, USAID, 
        and wherever future customer workload dictates. Three of these 
        auditors are now in-theater, with the remainder going through 
        required training.

   DCAA is the contract auditor for USAID in Iraq. There are 
        currently eight USAID contracts valued at $1.0 Billion. Bechtel 
        National Industries has the largest contract, with a total 
        value up to $680 million for road, electricity, power, and 
        bridge reconstruction.

   DCAA is a member of a financial oversight cell being 
        deployed to Iraq. A DCAA senior manger will provide the cell 
        with audit and financial counsel.

   Finally, DCAA is building an audit universe of all known 
        Iraq/Kuwait related contract requirements, and will brief 
        senior DoD and CPA representatives in mid June. DCAA will use 
        this data for future Iraq planning and staffing requirements.

    I have authorized the DCAA Director to stand-up a DCAA field audit 
office in Baghdad and Kuwait as soon as practicable. This office will 
not only service all in-theater reconstruction contracting, but will 
initiate any assist audit requests at U.S. contractor locations, where 
most contractors retain the accounting records.
    With the recent delegation by Deputy Secretary Wolfowitz naming the 
U.S. Army as the Executive Agent for all Iraq Reconstruction effort, I 
am confident that the Army will stand-up a highly competent contracting 
organization to centrally integrate all current and future Iraq 
Reconstruction contracting requirements. I believe that the Deputy 
Secretary's directive was the one key action needed to assure that 
there is no duplication of Iraq Reconstruction requirements; and that 
appropriate financial controls will be established and employed. I will 
be meeting with the Secretary of the Army and his staff to offer my 
support and assistance throughout this effort.
    I am absolutely committed to an integrated, well managed 
contracting process in Iraq--a process that is transparent and the 
equal of the very best military acquisition centers in this country. 
All financial and audit issues surfaced by DCAA or other DoD components 
will be brought to my immediate attention for appropriate action.
International Contributions to Recovery in Iraq
    Contributions from the international community--both cash and in 
kind--will be critical to recovery in Iraq. I have been designated as 
DoD coordinator for international assistance to post-conflict Iraq. I 
work jointly in that regard with my colleagues at this table, Under 
Secretaries Larson and Taylor, and with their offices as well as with 
USAID. We also are working closely with multilateral institutions--
notably the UN, World Bank, and IMF--who will play critical roles in 
facilitating the international assistance to Iraq recovery efforts. 
Finally, we have daily coordination with the Office of the Coalition 
Provisional Authority.
    To date, the international community has publicly offered over $2 
billion for humanitarian and reconstruction assistance for Iraq. About 
$800 million of this has been in response to the UN Flash Appeal to 
meet urgent requirements in Iraq. The remaining $1.2 billion has been 
offered outside the flash appeal.
    Examples of these international contributions include:


   Japan intends to contribute more than $150 million in 
        emergency humanitarian aid.

   Australia has delivered more than $26 million--100 thousand 
        metric tons of wheat, including shipping costs. Australia is 
        also providing expertise in agriculture.

   Canada has delivered more than $41 million (US$), for 
        critical water, sanitation, food, shelter, and health 
        requirements.

   The United Kingdom has pledged $338 million in humanitarian 
        assistance.

   Spain has pledged $56 million, primarily in humanitarian 
        supplies.

   The Netherlands is contributing $14 million in response to 
        the UN Flash appeal. Assistance will be provided to Iraq 
        through Dutch NGOs.

   Norway is donating up to $21.6 million for humanitarian 
        assistance.

   The European Union (EU) has pledged $107 million, of which 
        $14.5 million has been delivered, including 10 tons of medical 
        supplies that have been airlifted to Baghdad.

   Jordan deployed a field hospital to Baghdad to provide 
        emergency medical services.

    These are just several examples of the international community and 
its response to the humanitarian and reconstruction needs of Iraq. My 
colleagues here and I will continue to engage the international 
community in coming together to assist the Iraqi people to rebuild 
their lives and their country.

Closing
    In closing, I want to emphasize that the Department of Defense is 
focused intensely on advancing stabilization and recovery in Iraq as 
rapidly and smoothly as possible. The stakes could not be higher. The 
emergence of an Iraq that protects the rights of its citizens, that 
represents all of its diverse ethnic and religious groups, that 
prospers economically for the benefit of all its people--this would be 
a profoundly important model for the Middle East and for the entire 
world.
    To help the Iraqi people meet this historic challenge, President 
Bush has pledged America's commitment to stay the course. Clearly, 
success will be very expensive and take years, not months. This 
committee is helping the American people and international community 
understand the criticality and difficulty of building a new Iraq, and I 
look forward to contributing to your important work. Thank you.

    The Chairman. Thank you very much, sir. That was very 
helpful testimony. Secretary Taylor.

     STATEMENT OF HON. JOHN B. TAYLOR, UNDER SECRETARY FOR 
     INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY

    Mr. Taylor.  Thank you, Mr. Chairman, Senator Biden, and 
members of the committee. My testimony is about the economic 
and financial issues related to reconstruction and I want to 
focus on some of the accomplishments and some of the plans for 
the future.
    The international community and the people of Iraq face an 
enormous task in this reconstruction effort. A quarter century 
of repression and economic mismanagement under Saddam Hussein 
has cut the size of the Iraq economy to a small fraction of 
what it was before his regime took over. In 1979, ADP in Iraq 
was $128 billion. In 2001 it had declined to about $40 billion, 
and income per capita has plummeted, people have been 
impoverished, and this is during a period where the world 
economy has expanded. The economy of Iraq has shrunk 
drastically.
    So the reconstruction task is challenging, but for the same 
reason the challenges are great, simply restoring the economy 
to what it was before Saddam will be a tremendous improvement 
for the Iraqi people. But establishing a large economy based on 
clear property rights, upon a sound rule of law, upon economic 
freedom, I think will unleash a long tradition of 
entrepreneurship and build on an abundant human potential and 
natural resources of the country.
    There is still much to do, to be sure, but I believe we 
should mention some of the successes that we have achieved 
since the end of the military operations. Over 1.5 million 
workers and pensioners have received salaries and emergency 
payments. Our financial experts in Baghdad report that Iraqis 
and other observers consider this act alone to be a turning 
point in the mood of many in the city. These payments have 
enabled Iraqis to return to work to run the railroads, to teach 
school children, and to help in the payment of other Iraqis.
    There are other successes, some of which my colleagues have 
already mentioned. Just since March 20th, $1.7 billion of 
Saddam's assets have been vested in New York and made available 
to the Iraqi people. Another $1.2 billion have been newly 
frozen around the world. We have approximately $1 billion in 
cash found in Iraq, excluding funds in the Central Bank.
    Working intensely with the international community, we have 
achieved the removing of the sanctions on selling Iraqi oil and 
we have agreement with the international financial institutions 
to provide needs assessments and provide technical assistance.
    Later this month, as Under Secretaries Larson and Zakheim 
indicated, there will be a donors conference. It's already 
scheduled for June 24th, to make plans for international 
support of the country.
    I think it's also important to emphasize that we have 
achieved successes by avoiding catastrophic events that could 
have occurred, and in fact these were events we were concerned 
about, events which we took actions to try to prevent. For 
example, instead of collapsing, as many had feared, the Iraqi 
currency has recovered from low levels at the beginning of the 
war. Hyper inflation has been avoided, another concern we had 
going into this. As has already been mentioned, oil fields have 
been saved from destruction and there has been no humanitarian 
crisis.
    And I should add from the Treasury perspective, that the 
crippling burden of debt service payments has been lifted at 
least through the end of 2004, so that Iraq can focus on 
reconstruction needs.
    I believe these successes are due to the work of 
experienced and dedicated people and to contingency plans laid 
out months in advance of the war. We began selecting people for 
our financial teams back in January. The first wave was 
deployed to Kuwait in March. These were some of the first 
people who went into Baghdad in April. We have since sent 
additional financial experts with expertise ranging from 
budgets to payment systems to monitoring policy.
    And Peter McPherson has been designated the financial 
coordinator. Peter McPherson is a former U.S. AID Administrator 
and former Deputy U.S. Treasury Secretary. He is giving advice 
to Ambassador Bremer on the ground. He and his team have 
responsibility for working with the Iraqis to get the Central 
Bank running again, the finance ministry running again, the 
commercial banks and other institutions up and running. Their 
very first task on the ground, which has largely been 
accomplished, was to assess the conditions and evaluate the 
basic economic infrastructure, including the payment systems. I 
am in nearly constant contact with them through telephone, e-
mail, providing support and advice with the help of a financial 
task force set up in Treasury by our Office of Technical 
Assistance, and of many others stationed here in Washington.
    I would like to spend just a minute in my opening remarks 
with a description of the mechanism we put in place to restart 
payments, because I think it indicates the kind of plans that 
have been underway and which will continue to be underway. This 
is the top reconstruction priority, that is, to make emergency 
payments and salary payments to government workers and 
pensioners. Starting late last year, we developed a contingency 
plan for such payments. The plan called for paying workers and 
pensioners in U.S. dollars on an interim basis. Making payments 
in dollars, we thought on an interim basis was a good way to 
get things started. It is not dollarizing the economy. On the 
contrary, the plan calls for the continued use of the local 
currency, the dinar.
    But to make this plan operational, we had to have some 
funds, some resources, so the first step in making this plan 
operational was to invest the Iraqi regime assets that were 
frozen back in 1990.
    That plan also required an assessment of the payroll 
system, how are you actually going to make payments to workers 
in Iraq. Our priority was for our first wave of people to 
assess what the payment system was like, how could you actually 
get payments of dollars to people. I'm pleased to say that this 
plan is basically on track and has been successful so far. On 
March 20th, President Bush did vest $1.7 billion in assets, 
placed them in an account in New York. Treasury representatives 
in close cooperation with the New York Fed and the Department 
of Defense have arranged for delivery of already $199 million 
U.S. dollars, currencies from these vested assets, and to make 
shipments from the storage facility in New Jersey, shipped down 
the turnpike to Andrews Air Force Base, and off on an airplane 
into the region.
    A mechanism for making these emergency payments also had to 
be set up, and was quickly established on the ground so the 
payments could commence for dock workers, for rail workers, for 
power workers and others. While this system will have to be 
upgraded over time, it provides a basic infrastructure for 
making salary and pension payments. So despite tremendous 
logistical challenge, this system of payments has been a 
success. Pensioners, civil servants, workers crucial to the 
function of essential public services have received payments, 
an initial financial lifeline for these people.
    I will end with this example, Mr. Chairman, and will be 
very happy to take your questions.
    [The prepared statement of Mr. Taylor follows:]

                  Prepared Statement of John B. Taylor

         RECONSTRUCTION IN IRAQ: ECONOMIC AND FINANCIAL ISSUES

    Chairman Lugar, Ranking Member Biden, and other members of the 
committee, thank you for inviting me to testify on the reconstruction 
of Iraq. I will discuss economic and financial issues, focusing on 
accomplishments since the end of major military operations and on our 
plans for the future.
    The international community and the Iraqi people face an enormous 
task in the reconstruction of the Iraqi economy. A quarter century of 
repression and economic mismanagement under Saddam Hussein cut the size 
of the economy to only a small fraction of what it was before his 
regime took over. In 1979, GDP in Iraq was $128 billion in Purchasing 
Power Parity (PPP) terms; by 2001, it had declined to about $40 
billion. And income per capita has plummeted, impoverishing the Iraqi 
people. While the world economy expanded, the Iraqi economy shrunk. As 
a consequence, the Iraqi people fell way behind, from a rank of 76 in 
1990 to a rank of 127 in 2001 on the UN Human Development Index.
    While the reconstruction task is significant, the opportunities are 
great. Simply restoring the economy to what it was before Saddam will 
be a tremendous improvement in the well being of the Iraq people. 
Establishing a market economy based on clear property rights, a sound 
rule of law, and economic freedom will unleash a long tradition of 
entrepreneurship and build on the abundant human potential and natural 
resources of Iraq. I am confident that if these resources are used 
effectively, economic growth will soon be above, rather than well 
below, the world average.
    Though there is much to do, I believe that we have already achieved 
important successes since the end of the major military operations, 
especially in the economic and financial areas. Over 1.5 million 
workers and pensioners have received salaries and emergency payments. 
Our financial experts in Baghdad report that Iraqis and other observers 
consider this act alone as a turning point in the mood of the city for 
many. These payments have enabled Iraqis to return to work to run the 
railroads, teach school children, or help in the payment of other 
Iraqis.
    There are other successes. Since March 20, $1.7 billion of Saddam's 
assets have been vested; $1.2 billion have been frozen; and $0.9 
billion in cash has been found in Iraq. Working with the international 
community, we have removed sanctions on the selling of Iraqi oil and we 
have agreed that the international financial institutions should 
provide needs assessments and technical assistance. Later this month in 
New York we will convene the first meeting of donors. I will provide 
more details on these and other accomplishments later in my testimony.
    We have also achieved successes in avoiding catastrophic events 
that could have occurred; we were concerned about such events and took 
actions to prevent them. Instead of collapsing as many had feared, the 
Iraqi currency has recovered from its low levels at the start of the 
war. Hyperinflation has been avoided. Oil fields have been saved from 
destruction. There has been no humanitarian crisis. And the crippling 
burden of debt service payments has been lifted through the end of 2004 
so that Iraq can focus on reconstruction needs.
    These successes are due to the work of experienced and dedicated 
people and to the contingency plans laid out months in advance of the 
war. We began selecting members for our team of Treasury advisors back 
in January; the first wave was deployed to Kuwait in March and arrived 
in Baghdad in April. We have since sent over a dozen additional 
advisors with expertise in areas ranging from budgets, to payments 
systems, to monetary policy. Peter McPherson--former USAID 
Administrator and former Deputy Treasury Secretary--now serves as 
financial coordinator and adviser to Ambassador Bremer on economic and 
financial issues. He and his team have responsibility for working with 
Iraqis to get the Central Bank, the Finance Ministry, commercial banks 
and other financial institutions up and running. Their very first task 
on the ground was to assess conditions and evaluate the basic economic 
infrastructure, including the payments system. The work they are doing 
is similar to some of the tasks that we undertook in Afghanistan; 
indeed, while Treasury's work continues in Afghanistan, some of the 
same people who worked there have brought their experience to Iraq. I 
am in nearly constant contact with them through telephone and email, 
providing support and advice with the help of our Iraq Financial Task 
Force, Office of Technical Assistance, and others stationed here in 
Washington.

A Plan to Pay Workers and Pensioners
    A top reconstruction priority from the start was to make emergency 
and salary payments to government workers and pensioners. Starting late 
last year we developed a contingency plan for such payments. The plan 
called for paying workers and pensioners in U.S. dollars on an interim 
basis. Making payments in dollars on an interim basis was not an 
attempt to dollarize the economy. On the contrary, the plan called for 
the continued use of dinars as an acceptable means of payment. Using 
dollars on an interim basis would create stability immediately after 
the war, as the dollar is a stable medium of exchange and a good store 
of value. By making sure that the spending on salaries was matched by 
the revenues available, the dollar payment plan also was a way to 
prevent inflationary financing.
    To make this payment plan operational, financial resources were 
required. Hence, the first step in the plan was to vest the Iraqi 
regime assets that were frozen in the United States over a decade ago. 
The plan also required some functioning payroll system, so a high 
priority of our first wave of people on the ground was to assess the 
state of this system.
    This plan is basically on track and has been successful thus far.
    On March 20, President Bush vested $1.7 billion of assets and 
placed them in an account at the New York Fed to be used to support 
reconstruction. Treasury representatives, in close cooperation with the 
New York Fed and the Department of Defense, arranged the delivery of 
$199 million of these vested assets in three shipments from a storage 
facility in New Jersey to Andrews Air Force Base, where the currency 
was loaded on a transport and flown to the region. A fourth shipment of 
$358 million will be made shortly.
    A mechanism for making emergency payments was quickly established 
on the ground, so that payments could commence for dock workers, rail 
workers, power plant workers, and others. At the same time, upon 
arriving in Iraq, our advisors conducted an assessment of the existing 
payroll system for salaries and pensions and found that adequate, 
functional procedures already existed. While this system will have to 
be updated over time, it provides the basic infrastructure for making 
salary and pension payments.
    Despite tremendous logistical challenges, the system of payments 
has been a success. To date, over 1.5 million pensioners, civil 
servants, and workers crucial to the functioning of essential public 
services have received payments. Our advisors have played a key role, 
working closely with counterparts from the Defense Department and other 
agencies, in extending this initial financial life-line to the Iraqi 
people.

Establishing a Stable Currency
    One of the most important objectives in the near-term is to promote 
the establishment of a stable, unified national currency. A currency 
that has the full faith and confidence of the Iraqi people, and which 
can be used as a store of value, is a prerequisite for establishing a 
vibrant economy.
    The pre-existing currency situation in Iraq makes this a complex 
and difficult task. Iraq has not had a stable currency for some time; 
several currencies circulate widely in Iraq, including the Iraqi (or 
``Saddam'') dinar in central and southern Iraq, the Old Iraqi (or 
``Swiss'') dinar in the northern part of the country, and the U.S. 
dollar. The Saddam dinar has fallen dramatically in value over the past 
dozen years due to the policies of the Saddam Hussein regime. One 
dollar used to purchase only a third of a Saddam dinar under the 
official exchange rate; now, it will purchase about 1,200 dinars in the 
market.
    One of our primary concerns was that the conflict and its aftermath 
would result in a massive depreciation of the Saddam dinar and 
hyperinflation. There were concerns about losing control over large 
warehouses of Saddam dinar notes and currency printing facilities. And 
with the fall of the regime, there was the risk that the currency would 
cease to serve as an accepted means of exchange.
    For these reasons, early action was taken to secure currency stocks 
and currency-printing facilities and stop the printing of the Saddam 
dinar. The military made public announcements that existing currencies 
in Iraq would continue to be accepted as means of payment. These 
measures helped stabilize the Saddam dinar and avert a monetary crisis. 
In fact, the Saddam dinar has actually strengthened in recent weeks--
from a low of about 5,000 dinars per U.S. dollar during the conflict to 
approximately 1,200 per dollar today.
    This achievement notwithstanding, a stable, unified currency system 
is essential for Iraq's long-run economic prospects. Several options 
exist for currency reform, including the introduction of a new currency 
or the replacement of Saddam dinars with Old Iraqi dinars. We stand 
ready to assist in the implementation of whichever option the people of 
Iraq choose through a representative, elected Iraqi government.

Development of an Iraqi Budget
    Prior to the war, no Iraqi government budget was published. The 
lack of transparency and accountability in fiscal operations made it 
difficult to determine how resources were allocated or how revenues 
were raised.
    Development of an integrated and transparent Iraqi government 
budget is necessary for ensuring that essential government services and 
reconstruction needs can be financed without resorting to printing 
money. Our advisors are working with personnel within the Ministry of 
Finance to develop an interim budget and to implement a centralized 
treasury mechanism for government spending. In addition, several 
Treasury advisors with expertise in tax systems will be working with 
Iraqi officials to revise the tax code and build the capacity of 
revenue agencies.
    Initially, budgetary resources will derive primarily from returned 
Iraqi assets, oil sales, and donor contributions.
    With the initiation of military action, the United States and its 
coalition partners acted to secure the Saddam Hussein regime's assets 
for the benefit of the Iraqi people. In addition to the rapid vesting 
of $1.7 billion of assets in the United States, we have spearheaded 
bilateral efforts that have led to the identification and freezing of 
about $1.2 billion of Iraqi assets outside of the United States since 
the beginning of the war. We are working with these countries to return 
them to the Iraqi people, as required by UNSCR 1483. The United States 
has deployed financial investigation teams to Iraq and other foreign 
jurisdictions to identify and recover additional Iraqi assets.
    Efforts have also been made to secure assets inside of Iraq. Since 
the end of the conflict, approximately $900 million in currency has 
been found in various locations, in addition to $350 million of 
currency and gold discovered in vaults at the Central Bank of Iraq. All 
of the vested assets in the United States, as well as the assets found 
in Iraq, will be used to assist the Iraqi people and support the 
reconstruction of Iraq.
    Proceeds from the sale of Iraqi oil will be another critical source 
of funds. The Security Council resolution introduced by the U.S., Spain 
and the UK and approved unanimously last month provides immunity from 
attachment for Iraq's oil and proceeds from its sale through 2007. Oil 
revenues will be deposited in the Development Fund for Iraq, an account 
of the Central Bank of Iraq. The Coalition Provisional Authority now is 
working on the development of regulations to ensure transparency and 
accountability in the use and administration of oil proceeds and other 
revenues that will be deposited in the Development Fund for Iraq.
    An important part of this effort will be the establishment of the 
International Advisory and Monitoring Board, which will be responsible 
for approving the auditors of the Development Fund for Iraq and 
reviewing their findings. Representatives from four international 
organizations--the IMF, the World Bank, the United Nations, and the 
Arab Fund for Social and Economic Development--will participate on this 
board. On May 24, Ambassador Bremer sent letters to the four 
organizations to initiate the process of constituting the board; I will 
chair a meeting later this month to finalize the terms of reference.
Role of the International Financial Institutions
    Donor contributions will also play an important role in the 
reconstruction of Iraq. Active participation by the international 
financial institutions is important to mobilizing this international 
support.
    I am pleased to report that the international financial 
institutions are intensifying their support for the process of 
reconstruction and recovery in Iraq. IMF and World Bank officials are 
traveling with the delegation of Sergio Vieira de Mello, the U.N. 
special representative for Iraq, on his trip to Iraq this week. In 
addition, IMF Managing Director Horst Kohler announced last week that 
he was prepared to send out a team to Baghdad for a fact-finding 
mission as early as this weekend. This team will work with the 
Coalition Provisional Authority and Iraqi officials to identify 
priority needs related to budget planning and execution, central bank 
functions, payments systems and banking sector reform, as well as the 
social safety net.
    Later this month, the United Nations Development Program and the 
World Bank will cohost a donor meeting in New York to launch a 
coordinated, international effort to support Iraq's reconstruction 
needs and lay the groundwork for a donor conference in late summer 
after the World Bank has completed its needs assessment of Iraq.

Reforming the Banking Sector
    Strengthening and modernizing the banking sector is central to 
achieving overall economic progress in Iraq. We are still in the early 
stages of assessing the banking system. We know, however, that Iraqi 
banks were oriented much more toward the fulfillment of Ba'athist 
political objectives than toward financial intermediation and other 
economic services that one normally associates with banks. Essentially, 
Iraqi banks were vehicles for storing and moving cash around the 
country, and in some cases outside the country.
    Our overarching objective in this area is to help Iraq restore its 
banking sector and ensure that it begins to function in a commercially 
viable way. We want Iraq's banking sector to be a vehicle for sound 
economic growth, to meet the needs of the Iraqi people, and to reflect 
regional as well as international best practices. For example, we 
endorse the objective of Iraqis having access to financial products and 
services that are based on Islamic principles.
    Creating a sound supervisory and regulatory regime is a critical 
step to establishing a sound financial system. We are working with the 
Iraqis to help them bring this about. To this end, we will be working 
with governments in the region that have strong systems and have 
offered technical assistance for the banking sector.

Iraq's Foreign Debt
    An issue that has garnered much attention and will clearly have to 
be addressed is Iraq's capacity to address the potentially enormous 
burden of its existing financial obligations. Estimates of Iraqi 
external debt range from $60 billion to $130 billion. Whatever the 
precise level, Iraq's external obligations are significant and must be 
addressed in a comprehensive manner.
    In the near-term, we have taken two important steps put to address 
this situation. First and foremost, we have worked with our G-8 
partners to provide Iraq with some breathing room. We achieved 
agreement that given Iraq's precarious financial situation, creditors 
should not expect Iraq to make any payments on its debt for at least 
the next eighteen months. Secondly, we have put a lot of people to work 
on what could be described as data forensics. On the creditor side of 
the ledger, we proposed at the last meeting of the Paris Club, and 
creditor governments agreed, to report the amount of debt they are 
currently owed. We have also approached the IMF for its assistance in 
determining the amount of debt owed to non-Paris Club governments. To 
address the other side of the ledger, we have placed Treasury advisors 
in Baghdad to go through Iraqi government debt records.
    In the medium-term, once we have a better estimate of the true 
level of Iraq's debt, we can move forward to develop a comprehensive 
strategy to deal with Iraq's official debt. To supplement these 
efforts, we are providing a Treasury advisor to work with Iraqi 
officials to develop a notional strategy for external debt treatment.

Conclusion
    Achieving our economic objectives in Iraq is central to achieving 
our ultimate goal of a stable, unified, and prosperous Iraq--one which 
provides opportunities for all Iraqis to forge a better future for 
themselves and their children. The challenges are formidable. We have a 
tough job ahead. Our achievements to date can be attributed to careful 
planning, vigilance to potential problems, and early action by 
dedicated and talented professionals to prepare for them. We will bring 
the same spirit to our work in the coming months.

    The Chairman. Thank you very much, Secretary Taylor.
    Mr. Natsios.

STATEMENT OF ANDREW S. NATSIOS, ADMINISTRATOR, U.S. AGENCY FOR 
                   INTERNATIONAL DEVELOPMENT

    Mr. Natsios.  Thank you very much, Mr. Chairman, for the 
opportunity for us to testify before the committee. I have 
longer testimony that I will submit for the record.
    AID sent its team of AID mission staff and disaster 
response team members, almost a hundred people, to the region 
the week the conflict began, and into southern Iraq almost as 
soon as combat operations moved north. We did not experience a 
major humanitarian crisis, we avoided it. Part of that was, 
Saddam was so shocked by the combat operations that he couldn't 
carry out any of the plans that we understood he was 
considering, like blowing up the dams, which he had done during 
the Iraq-Iran War, the atrocities he committed against the 
Kurds, and we felt might happen again against the Shiites in 
the south and the Kurds in the north. That did not happen.
    We did not have mass population movements and so we avoided 
major catastrophe on the humanitarian side. We did have pockets 
of need and so the disaster assistance response team focused on 
those pockets to respond quickly.
    What is it that the mission in AID is directed to do? First 
is to conduct assessments of need, infrastructure building, 
working with our partners in the NGO community, the UN 
agencies, and private businesses. Secondly, design programs. We 
have planners to plan out the requirements of each contract in 
terms of time line and budgeting. We have our sector 
specialists, agricultural scientists, economists, health 
experts, education experts. We have people who oversee the 
contract management and each subcontract granted in cooperative 
agreement. We have contract officers who negotiate these 
contracts.
    Donor coordinators. The donor coordination AID does is not 
at the macro level that Defense and State does. We work with my 
counterparts in other ministries around the world; in fact not 
just here but in other emergencies, other projects that we work 
together jointly with Canadian CIDA, which is the AID of 
Canada, DFID in Britain, and CSA in Sweden, for example. And 
what we do is decide exactly which donor government will do 
which sector in which province and which institution. And we 
work very carefully with these matrixes we develop over a 
period of time through other emergencies to directionalize this 
process. And finally, we do program evaluation to make sure the 
program is getting on track, or we can get it back on track.
    The reconstruction itself actually began for AID on the 
28th of April when the President declared major combat over, 
because our contractors, particularly that are doing the 
reconstruction primarily, had provisions in their contracts for 
insurance purposes that said until the combat was officially 
over, on a large scale they could not go into the country. So 
we have been working at this for about five weeks, not in terms 
of the disaster response which began earlier, but in terms of 
actual reconstruction.
    We took control of the port facilities from the British 
Marines on May 23rd, and with our contractors are now 
responsible for managing the port. We began the preparatory 
work to upgrade the port to international standards, and we 
have been working closely with our friends in the World Food 
Program for the preparation of massive movements of food into 
the country. They have moved already 440,000 tons of food into 
the country and began the first national distribution of food 
on June 2nd.
    I just came back 2 days ago from Cyprus, where I met with 
the UN officers there. They have, by the way, their best team I 
have ever seen in any emergency. They've collected them, put 
them in Cyprus and Iraq and Kuwait, and I am very pleased with 
the quality of people who are running this. Romero DeSilva is 
arguably the best logistician in the international system, and 
he is in charge of the entire UN effort on humanitarian food 
assistance side.
    A million more tons of food will arrive by September and 
the entire system will be up and running.
    The airport administration will be taken over as well for 
the international airports only. AID is not responsible for the 
local airports. We are now doing the preparatory work to 
upgrade them to international standards, and a civil aviation 
conference is scheduled for June 14th with other U.S. 
government agencies for the restoration of commercial air 
traffic to international standards.
    We began, on May 7th, a 24-hour, 7-day a week dredging 
operation for the port of Umm Qasr. It is now down 9 meters and 
we can bring in vessels that carry up to 15,000 tons of cargo. 
In the next few months we hope to remove the four wrecked ships 
that are at the bottom that we had not known were there until 
we conducted our assessment. We expect that within three months 
the port will be up to a standard it hasn't been in 20 years.
    We have completed the engineering work for reconstruction 
of the boilers at electrical generating plants, the repair of 
the 400 KVA and 135 KVA high voltage initial transmission 
repairs, the urban water system in the southern part of Iraq, 
and 3 bridges which are critical to traffic around the country.
    Most of this work has nothing to do with the war. This has 
to do with the lack of investment over a 20-year period towards 
this infrastructure in a country, by the way, that had western 
standard infrastructure as late as the mid 1980s. Because of 
the Iran-Iraq war and the success of destructive things that 
Saddam did to his country, there was no investment and 
maintenance of these. For example, Basra right now has better 
electrical service than it had in 14 years. They have not had, 
in most of the city, 24-hour electrical service. They do now 
have that.
    The only remaining problem we're facing in electrical 
requirements is in Baghdad and we have made a great deal of 
progress just in the last week to bring it up to pre-war 
standards, at least.
    In water and sanitation, we purchased, for the first time, 
enough chlorine for all of the treatment plants in the country 
for 100 days, purchased through UNICEF. The water and 
sanitation system experts are now coordinating with Bechtel and 
with UNICEF and the NGO community about local rehabilitation 
and then longer term reconstruction of those systems.
    We bought 22 million doses of vaccines and are beginning a 
massive immunization program. We have established a 
surveillance system to monitor potential cholera outbreaks--
which have not happened yet, but we are watching it--and set up 
a tracking system for international medical donations.
    We have begun our back to school campaign to encourage 
students to return to school not only for education purposes, 
but to get them off the streets. One of the first public safety 
things we do in any reconstruction effort after a war is to get 
kids off the streets by opening the schools up as fast as 
possible. We have already provided enough school materials for 
120,000 students in Baghdad during the month of May. We have 
inventoried 700 schools with the Ministry of Education in 
Basra, and finalized the purchase of 8,000 school kits for 
teachers and students for 700 schools in Basra for the opening 
of school, and we have begun giving grants for the 
reconstruction of Basra schools which have been neglected for 
more than 15 years.
    We have awarded a contract to UNESCO that does high school 
textbooks for the printing and distribution of 5 million math 
and science textbooks. We have begun the process with UN 
agencies to evaluate the textbooks generally, many of which are 
full of ethnic, racial and religious vitrea against groups, not 
just the United States I might add--he had a lot of people he 
hated--and those textbooks need to be revised. UNICEF does 
textbooks grades 1 through 6, UNESCO 7 through 12, and we want 
the international system involved in this, so it's not an 
American only effort we're funding.
    Senator Biden.  Mr. Natsios, I apologize, I didn't hear the 
beginning of your statement. Has that process begun?
    Mr. Natsios.  Yes, it has begun, and the textbooks in fact 
are being written now specifically for math and sciences, 
that's the first category.
    Senator Biden.  Thank you.
    Mr. Natsios.  We have also begun a call for grants that's 
been published on our web site for American universities to 
begin a university and college partnership program between 
American universities and colleges and Iraqi institutions, 
which is being greeted very enthusiastically in the university 
community in the United States in the areas of health, 
education, agriculture, and engineering among others.
    We have also begun a process of evaluating proposals from 
the NGO community for community assistance and rehabilitation 
at the local level.
    And most importantly, I had a fascinating briefing by our 
local government contractor from the Research Triangle in North 
Carolina that was awarded a bid. They have begun to set up 
neighborhood councils and we've been giving them small grants 
to begin projects. One fascinating story in one city in the 
north, we had a meeting of the Shiite, Suni and Christian 
leaders in the community and they told us they had never sat 
down, ever, in a cooperative way and talked about what they 
could do in a common way to improve their society. This was the 
first time they've ever had a meeting like that.
    Senator Biden.  Where was that?
    Mr. Natsios.  This was in the north, I think it was in 
Mosul, I don't know. I can get the name of it. But they said 
this is the only constructive meeting we have had without 
suspicion and malice and acrimony in the meetings.
    There's some moving stories. We opened the first Internet 
cafe in Umm Qasr. We showed the local Hamas leaders and the new 
village council what the Internet was. They said they'd heard 
rumors of this thing but they had never seen it. And several 
old men sort of broke down, I didn't quite know why, you know, 
Internet cafes for us are quite common. And they said, we heard 
stories that this thing called the Internet existed, we never 
understood it until now. We showed them they could look up any 
Muslim or Arab speaking newspaper in the world, instantly get 
it, or English speaking or French or whatever, on the Internet, 
look it up and read it every day. They had never seen this 
before, they couldn't imagine that they could freely read 
newspapers from other countries anytime they wanted to. It was 
a very moving event apparently, from what our staff is telling 
us.
    We have begun the marshland initiative assessment process. 
We haven't got a plan in place yet to do this, but there is an 
assessment team working with the NGO community, international 
organizations and the White House on how we will look at the 
restoration of the marshes, to which enormous ecological damage 
was done. 90 percent of them have been destroyed. There is one 
great marsh that's still left, about 200,000 people in it. This 
is the remnant of the classic Marsh Arabs that Wilfred Thesiger 
wrote about in a wonderful book in the 1950s about living among 
those Marsh Arabs, and is something I have always remembered in 
the work I've done around the world.
    And finally in the area of agriculture and rural economy, a 
competitive procurement will be published very shortly for 
assistance in improving agricultural production, world finance, 
reducing water logging and soil salinity, and other areas in 
the agriculture sector.
    So, we have begun the process, it's accelerating quite 
rapidly at this point, contractors, NGO staff, international 
staff, and our own agencies. We have been working, by the way, 
on this report of this conflict with the UN, I have never seen, 
actually, such intense collaboration with UN agencies among 
themselves or with the international donor agencies as I have 
in Iraq, and I have been involved in more than 10 
reconstruction efforts in the last 14 years. There are more 
than 5 major UN agencies that have large funding from us to do 
their work.
    And one thing we do have, and I would just conclude with 
this, we have never had a unified assessment system, an 
international system for reconstruction. Usually we all have 
different mechanisms to assess the situation. In January we 
began training the civil affairs units, part of the U.S. Army, 
and I'm a retired civil affairs officer myself, I served in the 
first Gulf War, and they are very critical and we work very 
closely with them. We use this template, the UN agencies use 
this assessment template, the NGOs are trained in it, other 
donor governments were, and all UN agencies are now using it. 
So we now have one template for the first time in any 
reconstruction effort, for assessing each sector in each region 
of the country, so there's a common language that we can all 
get to quickly without having to retranslate everything back 
into a language we all understand. That's been a great benefit 
from the start, and so, those conclude my remarks.
    [The prepared statement of Mr. Natsios follows:]

                Prepared Statement of Andrew S. Natsios

    Chairman Lugar, Senator Biden, members of the committee, I am 
honored to be here today to speak about the U.S. Agency for 
International Development's programs in Iraq.
    As you know, USAID is providing both emergency and reconstruction 
assistance for Iraq. We are approaching these tasks, unprecedented in 
size and scope, with six broad objectives in mind. They are to:


   show the Iraqi people an improvement in their standard of 
        living and public services;

   stabilize the population--reduce ethnic and religious 
        tensions, repatriate refugees, resettle internally displaced 
        people, and resolve property claim disputes created under 
        Saddam;

   develop a market economy--produce new jobs and encourage 
        investment and agricultural and economic growth; create the 
        institutions of economic governance which will form the 
        foundation of the new Iraqi economy and the fiscal structure of 
        the national government;

   support the de-Ba'athification of Iraqi society--eliminate 
        the palpable sense of fear that was a feature Saddam's rule; 
        and create a genuine civil society that can control the abuses 
        of the state, stabilize social order, and help reconstruction 
        take place;

   create accountability and control systems to prevent oil 
        revenues from being diverted by future Iraqi governments and 
        ensure future revenues are used for public good; and

   ensure a peaceful transition to a pluralistic democracy 
        representative of the ethnic and religious make-up of the 
        society.

    I will discuss what we are doing and what we plan to do in Iraq in 
the context of these six objectives.

Show the Iraqi People Improvements in Their Living Standards and Public 
        Services
    The brutality of Saddam Hussein's regime is well-known, but his 
rule was also characterized by the willful neglect of many areas, among 
them basic infrastructure, education, health, governance, and the 
economy. The highly centralized nature of the regime severely limited 
opportunities for local or individual initiatives. The level and 
quality of services people received was substantially lower than the 
gross indicators of Iraqi economic development would suggest.
    Prior to the 1990s, for example, Iraq had one of the best education 
systems in the Arab world, achieving universal primary enrollment and 
significantly reducing women's illiteracy. Those achievements have 
eroded significantly since then, however. Primary school enrollment at 
the time hostilities began was approximately 76.3 percent and secondary 
school enrollment was down to 33 percent, with nearly twice as many 
girls absent from the classroom as boys.
    In health care, too, the downward trend is clearly evident. Today, 
almost of a third of the children in the south and central regions of 
the country suffer from malnutrition. Low breast feeding rates, high 
rates of anemia among women, low birth weight, diarrhea and acute 
respiratory infections all contribute to Iraq's high child mortality 
rate--131 deaths per 1,000 live births. This rate has more than doubled 
since the 1980s.

            Emergency Humanitarian Relief
    Thanks to early, prudent, and thorough contingency planning, the 
pre-positioning of emergency supplies, and careful coordination with 
U.S. and international humanitarian organizations, the humanitarian 
crisis in Iraq that many had predicted was avoided. Many elements of 
the U.S. Government were involved in this unprecedented effort--but 
there are three units of USAID in particular that I would like to focus 
on today: the Office of Foreign Disaster Assistance (OFDA), Food for 
Peace (FFP), and the Office of Transition Initiatives (OTT).
    The first challenge facing any relief effort, especially one of the 
size and complexity of Iraq, is gathering accurate information so that 
urgent needs can be identified and specific interventions designed that 
make the most sense for a specific location. To this effect, USAID 
assembled the largest Disaster Assistance Response Team (DART)--outside 
of a few search and rescue missions--in history. The DART included more 
than 60 people--doctors, public health professionals, water and 
sanitation experts, food distribution and agricultural specialists, 
logisticians, security officers and specialists in refugees, internally 
displaced persons (IDPs) and abuse prevention. Most members of the DART 
have had years of experience dealing with complex humanitarian 
emergencies and international relief situations, and their assessments 
of the conditions on the ground are vital to our humanitarian and 
reconstruction efforts.
    In the months prior to the war, OFDA began preparing for a possible 
humanitarian emergency by stockpiling emergency relief supplies, 
including water tanks, hygiene kits, health kits, plastic sheeting and 
blankets. OFDA also provided funding to the World Food Program (WFP), 
UNICEF, and NGOs to set up logistics operations, offices and relief 
stockpiles. Because of this, our NGO partners were in a position to 
respond quickly to urgent humanitarian needs and are now making repairs 
to water and sanitation facilities in Ar Rutbah, Basra, and Erbil. OFDA 
grants are also supporting urgent health care assistance: CARE is 
working in Baghdad; Save the Children in Mosul; the International 
Medical Corps in Basra, al Nasariyah, and Wasit; and World Vision in Ar 
Rutbah. OFDA has also purchased medical kits, each containing enough 
supplies for 10,000 people for three months. In late May, the DART 
provided 33 of these kits to our NGOs partners for distribution in 
several cities in Iraq.
    Timely USAID grants from the Office of Food for Peace helped 
prepare WFP to undertake the largest mobilization operation they have 
ever carried out. The first country-wide distribution of food in Iraq 
is already under way. Much of it comes from a $200 million FFP grant to 
WFP which made it possible to purchase food in Jordan, Syria, and 
Turkey for immediate consumption. In just the month of May, for 
example, more than 360,000 metric tons (MTs) have arrived in Iraq from 
neighboring countries. All of this is in addition to the 245,000 MTs of 
U.S.-produced food that is already in the region or en route.
    As a result of these careful preparations--and the fact that the 
Iraqis received increased rations prior to the fighting--there has been 
no food crisis in Iraq. We anticipate continuing U.S. food shipments 
through October and perhaps longer, if needed. The long-term solution, 
however, is the creation of a functioning market system. In the 
meantime, our food specialists on the DART have been working with DoD, 
WFP and the Ministry of Trade on issues like finding the 9,000 trucks 
needed to haul the 480,000 MTs of food that we expect to arrive in Iraq 
every month, assuring security along the corridors from Kuwait, Jordan, 
Syria, Turkey, and Iran, and preparing enough silos, warehouses and 
equipment to support these vital supplies.
    The Office of Transition Initiatives (OTT) specializes in small, 
``quick impact'' programs. OTT's flexibility and quick turn-around 
times have proved invaluable in many situations. OTT grants are 
currently helping the Town Council in Umm Qasr, Iraq's principal deep 
water port, get up and running and funding sports activities for young 
people there. One of the lessons we have learned from our work in other 
failed and failing societies is the need to keep young people, 
especially young men, off the streets, in school and in healthy 
activities such as sports. Unless they are occupied, young men are 
often a source of disruption, for they can be easily lured into looting 
or organized crime and violence.
    OTT has also provided grants to keep the electric generators at the 
Mosul Dam running, so that the 1.7 million people who depend on it have 
electricity. Other OTT projects currently underway include efforts to 
repair a school in Umm Qasr; shore up the Mosul Dam; put 16,000 people 
to work cleaning up garbage and debris in al Thawra; and supplying 
water testing equipment, refurbishing the fire station, and supplying 
new furniture and instructional materials to primary school in Kirkuk.
    In addition, OTT has begun work on repairing ministries and public 
buildings and supplying them with computers, copiers, communications 
equipment, supplies and furniture, so that they can resume their normal 
functions. One of the advantages of this approach is that it allows us 
to work directly with Iraqi citizens and civil servants on practical 
every-day matters. Already we have started programs with the Iraqi 
Ministries of Justice, Irrigation and Finance, as well as the Central 
Bank, and we are looking at the possibility of doing more. Indeed, we 
have received proposals for 30 ministries and commissions for just such 
services.
    Other OTT projects envision repairing the Courthouse in al Hillah; 
building concrete platforms for three radio and television broadcast 
towers; assessing the needs of fire department throughout the country; 
and designing more public works projects such as in al Thawra (ex-
Saddam City).

            Infrastructure Restoration
    Since the President declared an end to major combat operations in 
Iraq on May 1, 2003, USAID's reconstruction efforts have focused on 
critical areas that will each contribute to substantial improvements in 
the lives of the Iraqi people. They are ports, airports, electricity, 
water, sanitation, health, education, and local governance.
    Through a contract with Stevedoring Services of America (SSA), we 
have been upgrading facilities--silos, warehouses, and cranes--at Umm 
Qasr, Iraq's principal deep water port. Administration of the port was 
handed over to SSA by the British on May 23. This is the first 
reconstruction project in Iraq to be transferred from military to 
civilian authority. In the days ahead, SSA will phase in over 3,500 
local workers as managers, heavy equipment operators, maintenance and 
other workers and is working closely with the newly elected director 
general of the Iraqi Ports Authority on staff training and port 
revitalization issues.
    At the same time, Bechtel is rebuilding port administration 
buildings and analyzing the adjoining rail system for repair. Meanwhile 
Bechtel's subcontractor, Great Lakes, has been dredging Umm Qasr since 
May 7 on a 24-hour, seven days a week basis. This is dangerous and 
difficult work: some 200 pieces of unexploded ordnance have been 
removed from the harbor and ten sunken vessels discovered in the 
harbor. As a result of the dredging, the channel is now nine meters 
deep, and two ships, carrying 15,000 metric tons (MTs) of rice and 
wheat respectively, were unloaded last week at Umm Qasr. Our goal is 
for the work to have progressed enough so that the port can handle 
ships carrying 50,000 MTs of food by the end of this summer.
    Through our contract with SkylinkUSA, preparatory work to upgrade 
Basra and Baghdad International Airport to international standards has 
been done, and we are aiming to have the latter opened by June 15.
    Restoring electric power is an urgent priority, a task made 
considerably more difficult by acts of deliberate vandalism. On May 26, 
for example, two 400 KY towers were torch cut and hauled down, bringing 
the number of towers that have been damaged since the end of 
hostilities to 8. In other cases, substations essential to the 
restoration of power service have been totally destroyed by looters 
looking for copper wire and other scrap to sell on the black market.
    In parts of the north and south of the country, however, there is a 
surplus of electricity. For the first time in more than a decade, Basra 
has electricity 24 hours a day, a marked improvement in the life of the 
country's second largest city. At the same time, electrical shortages 
continue in the center of the country. We are working hard to rectify 
these problems. Bechtel has completed its assessments and we have 
approved task orders that will enable them to repair the 400 KVA and 
135 KVA high voltage transmission lines.
    We are also funding new boilers for electrical generation plants. A 
further problem is that much of the country's power generation depends 
on natural gas, diesel and bunker oil, which Saddam's regime failed to 
produce in sufficient quantities. With the lifting of U.N. Security 
Council sanctions and the gradual restoration of the country's oil 
field capabilities, this problem should ease.
    Another way Saddam punished the people of southern Iraq was by 
withholding chemicals to treat and purify drinking water. This 
contributed greatly to the unnecessarily high death and illness rates, 
particularly among children and other vulnerable groups. USAID has 
begun addressing this by providing funds to UNICEF to purchase enough 
chlorine for 100 days of water treatment for the southern governates of 
Al Muthanna, Al Basra, Dhi Qar, and Maysan. The International Rescue 
Committee, acting on another USAID grant, will work to improve the 
rural water systems in 59 areas in An Najaf Governate.
    Other infrastructure work includes the restoration of bridges at Ar 
Rutbah, Al Ramadi, Mosul, and one just southeast of Baghdad.

            Health, Education, and Agriculture
    Initial evaluations of the health sector show that services have 
been disrupted and equipment, medicine, and supplies have been looted 
from some hospitals and warehouses. While there have been no major 
outbreaks of communicable diseases, the potential for such outbreaks 
remains a source of concern. USAID's goal in this sector is to meet 
urgent health needs as well as normalizing health services rapidly. To 
this effect, we have worked through UNICEF to supply 22.3 million doses 
of vaccines to prevent measles, pediatric tuberculosis, hepatitis B, 
diphtheria, whooping cough, tetanus and polio. This is enough to treat 
4.2 million children under the age of 5 as well as 700,000 pregnant 
women.
    We have also established a surveillance system with WHO, UNICEF, 
and ABT Associates to monitor cholera, worked with the Iraqi Director 
of Public Health on a diarrhea survey, established a database for 
tracking and coordinating international medical donations, and helped 
prepare public service announcements about sanitation and breast 
feeding. In addition, we have made grants to CARE, Save the Children, 
the International Medical Corps, and World Vision for emergency health 
projects in Baghdad, Mosul, Basra, al Nasariyah, Maysan, Wasit, and Ar 
Rutbah, respectively. Our grant to ABT will enable them to address 
other medical needs, such as pharmaceuticals and equipment and 
coordinating donations of medical supplies. ABT will also work with the 
Iraqi Ministry of Health to improve their administration of medical 
services throughout the country.
    In the education sector, we have launched a ``back to school'' 
campaign with UNICEF and delivered 1,500 school kits that helped 
120,000 students in Baghdad return to their classrooms in May. Through 
a contract with Creative Associates, we have inventoried all 700 
schools in Basra with the Ministry of Education, begun making grants to 
refurbish a number of schools there, and finalized plans to distribute 
8,000 school and student kits for Basra schools when the new school 
year starts in September. The next step is to do the same in Dhi Qar 
Governate. We are also funding UNESCO to print and distribute 5 million 
math and science texts on time for the beginning of the school year, 
and we are in the process of soliciting proposals to link U.S. colleges 
and universities with Iraqi institutions of higher learning on various 
health, education, agro-industry, engineering, and other projects. A 
USAID technical advisor is also working with the Ministry of Education 
on ways to deliver sufficient equipment, material, supplies for the new 
school year.
    We are also about to launch a competitive procurement for 
assistance to Iraq's agriculture sector. This program will address 
issues such as increasing agricultural productivity, rural finance, and 
reducing water-logging and soil salinity.

Stabilize the Population: Refugees, IDPs and Abuse Prevention
    The emergency humanitarian assistance and early reconstruction work 
cited above are only one part of USAID's overall strategy for Iraq. 
Stabilizing the ethnic and religious tensions within the country, 
resettling TDPs, and ultimately helping resolve some of the complex 
property disputes created during Saddam's 24 years of corrupt and 
abusive rule are important goals.
    Our first step began with the DART, which, for the first time ever, 
included specialized abuse prevention officers. Our Agency has years of 
experience in post-conflict situations. A priority for the DART was to 
identify key contacts with the U.S. armed forces, civil affairs units, 
the International Committees of the Red Cross, NGOs, the media, and 
local leaders and brief them on the kinds of lawlessness and human 
rights abuse that occur in the immediate aftermath of a conflict so 
that suitable responses could be fashioned. As part of this effort, 
each of our abuse prevention officers distributed USAID's Field Guide 
to Preventing, Mitigating and Responding to Human Rights Abuse, which 
was designed for just such situations.
    Another important goal of our abuse prevention officers was to 
identify mass grave sites. Iraq tragically has plenty of these sites: 
clerics have told us there are 146 of them in and around Najaf and 
another 29 in Karbala. The presence of mass graves is an important 
reminder of the nature of Saddam Hussein's regime. Other mass grave 
sites have been found near Musayeb, Kirkuk, Basra, Al Hillah, and 
elsewhere. Should any of Saddam's immediate circle be tried for major 
human rights abuse or crimes against humanity, the sites will be prima 
facie evidence.
    These abuse prevention officers are also monitoring the situation 
of IDPs in northern cities like Kirkuk, Dohuk, Zamar, and Domiz, where 
upwards of 100,000 Kurdish families were driven from their homes as 
part of Saddam's Arabization campaign. Many of these Kurdish families 
are now returning to their homes--or trying to--and this makes for a 
potentially destabilizing situation. Our role, for the moment, is to 
try and sort out the dynamics of these conflicting property claims, so 
that ultimately, they can be resolved by legal means, somewhat like 
they were in Eastern Europe after the fall of the Berlin Wall.
    Elsewhere our abuse prevention officers are working with several 
NGOs to identify and train local groups in human rights monitoring and 
grave site protection.
    Another early USAID grant supports the International Organization 
on Migration (IOM), which is providing relief supplies for up to 
500,000 IDPs in central and southern Iraq and coordinating the 
distribution of supplies for another two million Iraqis in the same 
region. As you know, after the first Gulf War, Saddam deliberately 
targeted the Marsh Arabs, or Madan people, for destruction. Tens of 
thousands were killed, land and water mines were sown throughout the 
region, and some 200,000 people were driven from their homes. The 
systematic draining of these marshes reduced them to a tiny fraction of 
their former size, destroyed a way of life that had survived for 
millennia, and caused an environmental catastrophe of unprecedented 
size and cope. This month, we hope to send a team of hydrologists, 
environmental specialists and economists to the region to study what 
might be done to begin restoring some part of this region and how to 
include the Marsh Arabs in the process.

Develop a Market Economy and Create Institutions of Economic Governance
    Under Saddam, the Iraqi economy was highly centralized and 
exceedingly corrupt. All the country's heavy industries, and much of 
its light industries are government owned. So, too, is the oil 
industry, which is the main source of the country's revenue. With the 
lifting of U.N. sanctions and the gradual improvements in the oil 
sector, some revitalization of legitimate economic activity should 
follow naturally, along with a reduction of black market activity which 
has in the past fueled criminal syndicates. Yet much more must be done 
to make a solid break with past practices and put the country on a 
solid economic and commercial footing.
    One of the keys to doing this will be to harness the power of the 
private sector and give the economy the jump-start it needs to create 
jobs and raise incomes for millions of Iraqi citizens. We are about to 
seek bids for a contract that would begin this process. We also expect 
to provide technical assistance under the policy guidance of the 
Treasury and State Departments to Iraq's Central Bank, Ministry of 
Finance, and the private banking sector. Within a year, we hope that 
the Ministry of Finance will be able to handle government payrolls, 
Iraqis will begin tackling some of the tough economic choices that lie 
ahead, a legal framework will be established that encourages the 
private sector, and access to private commercial banks will be 
widespread.
    An early focus on economic governance is essential if the new Iraqi 
government is to be successful. Many laws and institutions need to be 
changed or created from scratch: a framework for fiscal and monetary 
policies must be put in place and legal and regulatory reforms shaped. 
Customs and tax policies must be devised so that the government has 
revenue from more than just the oil sector and the proper incentives 
are given for the private sector. Property rights and the repatriation 
of profits must be assured, clear tariff structures created and free 
trade encouraged. USAID, working with other USG agencies and 
appropriate international organizations and partners, will support 
Iraqi efforts in all of these sectors to transform Iraq's economy and 
establish a model for the region and beyond.

De-Ba'athification of Iraqi Society
    Ambassador Bremer's recent decision to remove 30,000 members of the 
Ba'ath Party from all positions of responsibility in post-Saddam Iraq 
was a wise and necessary step. Clearly, the top echelons of the Party 
can hardly be counted on to take the country in the proper direction. 
Indeed, until such time as they are jailed or thoroughly reformed, 
these people can be expected to obstruct progress in whatever way they 
can. Many of them have long experience with smuggling, black 
marketeering, and armed repression. One of the great dangers is that 
they will turn, as others have done in Serbia and Russia, to criminal 
syndicates or armed paramilitary organizations whose ties to extremist 
elements could make them very dangerous to both Coalition Forces and 
ordinary Iraqis. Some will turn to crime--extortion, murder, and 
robbery. Others will foment tensions among contending ethnic and 
religious groups or hire themselves out as mercenaries and enforcers.
    While it is obviously not USAID's job to provide security or police 
protection, we do have experience in many post-conflict situations with 
rehabilitation and reintegration programs following demobilization and 
disarmament. And, as I mentioned above, we do have human rights 
monitors in the country already, and they are preparing to expand our 
capabilities substantially in this domain.
    De-ba'athification also hinges on the success of our larger goals 
in Iraq: the establishment of a stable society, with free market 
economy and an honest, competent democratic government that represents 
the entire spectrum of Iraqi citizens.

Creation of Accountability and Control Systems in the Oil Sector
    Iraq has the second largest proven oil reserves in the world. Oil 
is the country's primary foreign exchange earner and the major source 
of government revenues. It can be a source of great wealth and hope for 
the Iraqi people, but it can also be a source of great temptation to 
the unscrupulous. The way oil revenues are used, therefore, will become 
an extremely important political and economic question in the country 
as soon as a new government is established. How the industry is managed 
will likely set the pattern for the way the country is governed 
economically and politically. Simply put, ensuring the transparency and 
accountability of every facet of the oil industry is crucial to the 
country's transformation.
    The natural resources of the country belong to the Iraqi people. 
This puts a huge premium on questions of economic governance. Yet 
unless the new government is honest, technically sound, and strongly 
democratic it will be very difficult, if not impossible, to break with 
the corrupt practices of the past. We must, therefore, make it crystal 
clear that a new day has dawned and that there will robust systems of 
accountability and transparency in place from the beginning.

Ensure a Peaceful Transformation to a Pluralistic Democracy
    The three most important tasks the U.S. must accomplish if we are 
to be successful in Iraq are security, democracy, and a free market 
economy.
    No one with an understanding of Iraq's history should expect that 
the country can be immediately transformed into a fully functioning 
democracy. As we have seen all over the world, the process of 
democratization is often slower than we would like. And yet, the slope 
of history points in one direction only--toward more democracy and more 
democratic governance in every part of the world. Even in the Middle 
East, there are unmistakable signs of progress, but so too are there 
formidable obstacles.
    Iraq, of course, presents a special case. The brutality with which 
the Ba'ath Party ruled has left a legacy of suspicion and fear. 
Individual initiative has been discouraged if not crushed outright. The 
centralized, autocratic nature of the regime afforded little 
opportunity for anyone to develop the local governance skills that are 
so essential to the daily functioning of a working democracy. There has 
been no freedom of speech, no freedom of thought, no freedom to 
organize interest groups of any kind, no freedom to develop political 
views or skills or parties. All of this has left a legacy that can and 
will be overcome with time. Our job is to accelerate the pace at which 
this happens.
    Our first step has been to work with Coalition forces to identify 
key local leaders with whom we can work and connect them to 
opportunities for relief and reconstruction assistance. This has been 
an important part of our DART's responsibilities, as well as those of 
our NGO and private sector partners.
    In April, we awarded a contract to Research Triangle Institute 
(RTI) to work with local communities in secure areas and respond to 
their priorities, and help build up local governments so that they can 
respond to their constituents and deliver basic services like potable 
water, schooling, and health care. Already RTI and its subcontractors 
have about 20 people in the country, working closely with the Coalition 
Provisional Authority, and that number is expected to reach 50 by the 
end of this month. RTI's technical experts are setting up neighborhood 
advisory councils in Baghdad and working with appropriate local 
administrators to improve the delivery of essential services.
    Last week we awarded cooperative agreements to five U.S. NGOs--
Mercy Corps; International Relief and Development, Inc.; Agricultural 
Cooperative Development International and Volunteers in Overseas 
Cooperative Assistance; Cooperative Housing Foundation International; 
and Save the Children Federation, Inc.--as part of our Iraq Community 
Action Program. This, too, is specifically designed to promote grass-
roots citizen involvement in the affairs of some 250 communities 
through Iraq.
    One of the hallmarks of a free society is an open, pluralistic 
media, and we are working to create one in the new Iraq. Already, we 
have given funds to Radio Sawa to support their reporting of 
humanitarian and reconstruction efforts and to Internews to help 
support a symposium that brought Iraqi, Arab and Western media experts 
together to develop a set of recommendations on fostering a free, 
pluralistic media in Iraq.

Conclusion
    One of the strengths of USAID is our ability to enlist the American 
private sector in projects of great importance to the country. Neither 
we nor any other government agency has the expertise on hand that we 
have been able to bring on board through our relationships with the 
private sector in just the past two months. This was a major reason we 
were able to position enough supplies and technical expertise in the 
region to deal with a potential humanitarian crisis and start our 
reconstruction efforts quickly and aggressively.
    But if we are nearing the end of the emergency phase of our work, 
we are a long way from completing the reconstruction, for our goal is 
nothing less than the transformation of Iraq into a functioning, stable 
state that poses no threat to its own citizens or its neighbors and 
serves the interests of the Iraqi people. Rebuilding the physical 
infrastructure of the country is but one part of this. Helping the 
Iraqis build the institutions of an honest, democratic state that 
represents the broad spectrum of Iraqi society at the local, regional, 
and nation level and a functioning, transparent economy based on the 
power of the private sector will be at least as important. We have no 
illusions that this will be quick or easy. The President and Secretary 
of State have made it clear that the United States is in this for as 
long as necessary.
    Thank you.

    The Chairman. Thank you very much. Let me just indicate 
that we will now have a question period in which we will have 7 
minutes on the first round so all can be heard. We may then 
need to proceed through additional questions.
    I would just say at the outset that this was an apropos 
comment made by my colleague Senator Biden as you were 
proceeding, and I agree with him. He said these gentlemen 
really mean business; we're getting somewhere. As a matter of 
fact, the testimony is impressive. I would commend to all of 
our colleagues the four papers you have presented plus the 
additional information you have furnished, because it does have 
a structural soundness to it, a tactical and strategic emphasis 
that I believe is very important for all of us to understand 
and to build upon. Sometimes people feel they are almost being 
harassed by our insistence. I think that we feel excited that 
you are proceeding in so many ways and with such success.
    Let me just say that each one of you has played a role as 
part of the administration, and I once again mention Senator 
Biden's earlier quote about how he found it impressive that the 
President of the United States was meeting one on one with the 
leaders of the Arab world, expressing as a matter of fact that 
we are going to have success with the road map. Now skeptics of 
that process abound everywhere. They ask, are we really staying 
the course and is there longevity to this? My own judgment, at 
least from my knowledge of President Bush, is that there is. 
People will be surprised, as they will be, I think, with Iraq.
    We are now talking about a successful Iraq down the trail. 
You're saying we are going to take the time and spend the money 
and do the planning so that, as a matter of fact, in the war 
against terrorism, there will not be a nation out here 
harboring young men who fly airplanes into our World Trade 
Center or into our Pentagon, a nation that has seen a festering 
mass of difficulty for the last 20 years. As you have 
explained, the government not only tortured its own people and 
ran down its economy, but from time to time attacked others and 
used weapons of mass destruction against others. This is a 
matter of record. Now it's gone, what is coming in its place is 
what you're trying to describe.
    Let me just say that there are two technical challenges 
that I am curious about in my time frame. The first has to do 
with the debt. You pointed out, Secretary Taylor, that you have 
had success in getting forbearance with regard to demands for 
payment for servicing that debt through 2004. That's important, 
because the dimensions of the debt are difficult to define, 
quite apart from what is to happen with it.
    It is all well and good for people to argue that the Iraqis 
ought to govern themselves, Iraq for Iraqis. Yet the fact is, 
whoever is in Iraq now is faced with dimensions that are very 
substantial. So, without there being someone to more or less 
wipe the slate clean, whatever fledgling government that comes 
along could be crushed by international pressure, by demands 
for payment of this debt, whatever it may be.
    You may not be able to go further than you have in trying 
to define the dimensions of it, or precisely what kind of 
conversations we're having. Yet I hope that we're having 
conversations with European countries, with Russia, with other 
countries, that indicate that they are going to need to settle 
this situation for very little. In other words, we are not 
going to have a case in which America tries to put together a 
country to finance the debts of other countries that really 
need to take a differing view.
    My second question is an internal one that any of you may 
want to answer. Congress did appropriate the supplemental of 
about $2.475 billion. There was a first report to Chairman 
Young, but it doesn't have much in it. It's not really clear to 
me, in other words, what Ambassador Bremer has asked for and 
what he has been granted, and how far $2.475 billion takes us. 
That part of our internal housekeeping seems to remain either 
vague or nonexistent. If any of you could comment on the first 
matter that I raised, or the $2.475 billion and who's asking 
for it, who's getting it, and where that will take us, I would 
appreciate it.
    Mr. Taylor.  Mr. Chairman, I'll take the first one, or at 
least get it started. You are correct to emphasize this very 
important problem. I think the success we have had so far, of 
having an agreement that we can't expect service payments at 
least through the end of '04, has been significant, because it 
was a concern as we make plans for the budget for this year and 
next year that we can effectively zero out that alone.
    I think in answer to your question about discussions with 
Europeans, many of these discussions have taken place in the 
context of the G-7 or G-8 apparatus that we have, and 
particularly the meeting of the G-8 finance ministers including 
Russia that occurred in France a few weeks ago delved into 
these issues. There was quite a bit of interest in resolving 
them, first as you say, to get an estimate of the size of the 
debt. There is a lot of uncertainty. The estimates we got 
originally, we see have to be revised. There's quite a range, 
$60 billion to $130 billion, it is a huge amount, and the range 
of uncertainty is huge.
    What we are doing first is having the so-called Paris Club 
survey all its members to find out what their estimates of the 
debt are. Second, we have had the IMF survey the non-Paris Club 
countries which also have a lot of debt, particularly some of 
the Eastern European countries and countries in the Middle 
East. Those two things together will provide us with estimates.
    We also have people on the ground in Iraq going through 
records to estimate, trying to get a better sense of what the 
debt is.
    As soon as that is together, we are going to sit down and 
try to find a way to have what is necessary, and that is 
substantial reduction in the value of the debt, and we will 
work on that cooperatively. So far it seems to me that things 
are going better than I could have expected and it does show 
cooperation, but there are going to be differences of opinion 
amongst the various debtors.
    Dr. Zakheim.  Let me start with the answer to your second 
question, Senator, and I think Mr. Natsios may want to talk 
about this as well. In terms of the appropriated funds and how 
we look at those as opposed to the other funds, clearly there 
is a sense that if we are not paying monies directly to the 
Iraqi people, for example, funds to set up the original Office 
of Reconstruction and Humanitarian Assistance, ORHA, which has 
now been folded into the CPA, we have already spent or 
committed $250 million of appropriated funds to setting up, or 
covering rather, the operational expenses. We spent or 
committed $175 million of appropriated funds for natural 
resources risk remediation, that's to remove unexploded 
ordnance and emergency repairs and so on. So these are the 
things that we spend money on or contract essentially to help 
ourselves administer or to do some things that we are really 
doing.
    When you then look at payments to Iraqis, for example, it 
makes a lot of sense not to tax the American taxpayer in effect 
by using appropriated funds to pay Iraqis when you have Iraqi 
funds to do so. So that is a general rule of thumb, and as I 
mentioned earlier, we have spent $195 million, of which we 
spent about, as I said, $30 million or so, a little less than 
that, on ministry start-ups. The rest were spent really through 
salaries, and we requested $258 million, again, overwhelmingly 
for salaries for Iraqis.
    The Chairman. That's very helpful. The business plans for 
Iraq still are not clear to me, and maybe not to you. You're 
still forming them, but at least you've put some pieces in, 
made some estimates regarding the oil revenues, made some 
decisions as to whether to pump more oil or not, and started to 
determine how much investment is required for that and other 
sources of revenue. At some point these funds that are now 
impounded and have been found are going to be exhausted if they 
are not recurring, so in an ongoing procedure that goes on for 
months and years, the cash flow situation here is important. We 
are trying to figure out for us at least, two people who are 
going to be voting on appropriations as they go down the trail, 
what we might anticipate for the American people. Therefore 
this is still, in my mind's eye, something that I would like to 
see fleshed out a little bit more.
    Likewise, the debt situation, as you say, maybe $70 
billion, maybe $130 billion, maybe more than that. Some have 
made estimates; everybody is trying to divine what we think is 
owed there. All I'm saying is that to leave the Iraqi people 
facing all of that as the rest of us leave and say do your 
best, would be ridiculous. Having undertaken the responsibility 
of nation building in Iraq, we're going to have to build the 
debt structure to end it in one form or another, or there will 
be no viability after these cash flows that I'm talking about 
finally come along. We know what they are, and we either 
supplement them, or we get the French, the Germans, the 
Russians, somebody else to also contribute to the cash flow, 
which is a pretty good idea. One reason I would sort of like to 
see what kind of flow there is going to be is that we then 
could become rather poignant in asking them to do those things.
    You know, as I visit Russia to talk about arms control, I 
could also talk about debt, and about their obligations. 
Senator Biden and others have visits and we do some of this 
work from time to time. Sometimes it's impressive to people 
that we're worried about it and we might be voting on it. This 
is why these are not abstract questions which the 
administration answers in dribs and drabs until we find out 
what we're talking about. This is a team effort now, in which 
we understand we're in there for a long while, and we try to 
get some construct.
    Having said that, you have filled in a lot of blanks today. 
I thought it was very, very impressive, and I appreciate that 
very much. Even as I raise these additional questions, I do so 
in good faith; because as you know, we all need to be thinking 
about them. This is not an antagonistic situation or a 
competition; it's looking for the best thing that we can put 
together at this stage.
    Senator Biden.
    Senator Biden.  Thank you very much, Mr. Chairman. I want 
to echo your view and express the cliche, we're all in this one 
together. The American people are not going to stick with us on 
this unless we are able to come up with a coherent and uniform 
view.
    I would begin my questioning by saying I think we suffered 
from an overwhelming expectations game. On the ground in Iraq, 
I'm sure, Mr Natsios, as you have found, the average Iraqi 
looking at the awesome military power we had, does not 
understand why we can't reconstruct Iraq as rapidly as we can 
deconstruct it. I mean that sincerely. I see when I am 
traveling, and I always kid about this, but it's true. I find 
that we are the totality of their problems and the totality of 
their solutions, from their perspective. And so the Iraqis are 
sitting there saying if the United States really wanted to do 
this, the water and the lights would be on, it would be like 
the Lord on the seventh day, you know what I mean, and so 
that's a difficulty.
    The other expectation game is, with all due respect, 
Secretary Taylor, and I do think you have made good progress, 
the idea that we accomplished no one seeking any payment on 
debt to 2004. This is no accomplishment at all in the sense 
that nobody expected anything. They know there's nothing to 
get, there's no way to get it out now, and I think the 
expectation game is going to get very very very tough in terms 
of the debtor community when in fact things start to roll a 
little bit more. That means we are going to have a real hard 
time making it clear that this has to be worked out. So I think 
your real work is cut out for you, and I know you know that, 
but I think the expectation game is real in terms of the debtor 
community, particularly the smaller and the poorer countries, 
or large countries like Russia with real needs, and I think 
they're going to find it very much difficult to work it out. We 
look forward to working with you to help in that effort.
    Let me ask one question, Mr. Natsios. You mentioned the 
success in Basra, and I'm not being a wise guy when I ask this. 
Did we get the electricity on or was that the Brits? I mean, 
was it you guys, was it AID who did this, or the Brits?
    Mr. Natsios.  I would like to give you any success story 
attributable to us; however, it's almost never just one 
institution. It was the British Marines with their engineers, 
with UNICEF, UNICEF did some of the work, with AID, and DFID, 
which is the British aid agency, all worked together on this.
    Senator Biden.  So you worked together on this. What I'm 
trying to get at, again, is expectations. Was the bulk of that 
led by AID?
    Mr. Natsios.  No. It was led by the engineers. What we led 
with was funding, but that started before Bechtel arrived on 
the ground and before the contract was activated. They started 
that very early on and Bechtel has taken over much of that 
responsibility.
    Senator Biden.  Now, let me ask Defense, you have given us 
a pretty detailed estimate of the resources that we can bring 
to bear right now to help build Iraq and as I listened I added 
it up, and it's about $15 billion now roughly, based on your 
statement, including congressional appropriations, Iraq assets, 
UN and international donations, and projected oil revenues. Add 
them all up in the near term, next 12 months roughly, and 
you're talking about $15 billion. What I still don't have a 
sense of from all this testimony here is what are the costs 
going to be over that same period of time, matching those 
revenues? Do we have an estimate of the cost?
    I'm just going to lay it out and any one of you can jump 
in, if you could speak to this. We're going to have, and I 
don't want to get into a debate about how long, but at least 
for the remainder of this calendar year, and my guess is the 
next fiscal year, we are going to have somewhere over 100,000 
American troops in the region and we're going to have probably 
close to 150,000 troops. I would like to know what the annual 
cost of maintaining just those troops is, which as I understand 
it is not being paid for out of any Iraqi assets frozen, any 
Iraqi assets in the future, any Iraqi assets at all. And 
although there will be contributions, God willing and the creek 
don't rise, from NATO forces and others to supplement those 
forces, there will be no in-kind contribution that I'm aware of 
to pay for the maintenance of those U.S. forces. So what is the 
cost of that, of our current deployment?

    [The following information was submitted by Dr. Zakheim on 
August 8, 2003 in response to Senator Biden's question:]

    Dr. Zakheim. Based on current mobilization levels and 
projected demobilization schedules, the total estimated cost of 
maintaining the current mobilization and military operations 
now in Iraq is approximately $3.9 billion per month. However, 
projecting annual costs out into the future cannot be done with 
any certainty at this point--and it may be misleading to 
suggest that any such estimate is valid. The drawdown of troops 
in support of Operation Iraqi Freedom is currently underway and 
will continue through next year. The U.S. Central Command's 
stability operation plan for Iraq is still evolving to meet the 
dynamic situation within the country. The number of troops and 
the pace of demobilization are still to be determined. 
Therefore the annual cost of supporting the troops cannot be 
estimated with any degree of certainty.

    And second, what are the additional cost estimates that we 
have in the near term, meaning the next 3, 6, 12 months, for 
all the things that you've talked about, and how do they match 
to revenues that are pledged, we have appropriated, or 
represent assets of the Iraqis?

    [The following information was submitted by Dr. Zakheim on 
August 8, 2003 in response to Senator Biden's question:]

    Dr. Zakheim. The costs for the current post-combat 
transition-stability period is approximately $3.9 billion per 
month. However, this level of spending can change significantly 
if the level of operations (OPTEMPO) or the number of Reserves 
deployed were to change. A limited drawdown of troops in 
support of Operation Iraqi Freedom is currently underway. The 
environment within the country remains dynamic, however, and 
the U.S. Central Command stability operations plan continues to 
evolve. The number of troops and pace of demobilization over 
the next few months has not yet been determined.
    Projecting costs for the next few months is difficult due 
both to the dynamic environment within Iraq today and to the 
continuing identification of reconstruction needs. We are 
continually assessing both the needs and our ability to garner 
the appropriate resources. To date the international community 
has offered to contribute over $2 billion in cash and in-kind 
assistance for Iraq reconstruction and humanitarian assistance. 
This amount is expected to rise significantly in the next 
several months in response to further UN appeals for 
assistance, an informal international consultation meeting on 
the heals of the UN Flash Appeal, and a formal international 
donors conference planned for September 2003.
    In addition, the United Nations Security Council Resolution 
(1483) calls for certain monies to be placed in the Development 
Fund for Iraq (DFI) which will be disbursed at the direction of 
the CPA. The DFI now has an initial deposit of $1 billion 
derived from the UN's ``Oil for Food'' escrow account. It is 
expected to also accept proceeds from the sale of petroleum, 
petroleum products and natural gas and returned Iraqi assets 
provided from UN member states.
    Approximately $1.7 billion in formerly blocked and 
confiscated Iraqi state assets in the U.S. have been vested in 
the Treasury Department for apportionment to Federal agencies 
for requirements that benefit the Iraqi people. In addition, 
about $800 million in Iraqi state assets have been brought 
under U.S. control in Iraq. The seized assets, which include 
primarily U.S. dollars are being verified for authenticity.
    Finally, in the Emergency Wartime Supplemental 
Appropriations Act, 2003, Congress appropriated $2.475 billion 
for the President's Iraq Relief and Reconstruction Fund which 
is the primary source of U.S. government funding for Iraqi 
recovery activities. Congress also made $489 million to the 
Department of Defense within the Iraqi Freedom Fund to be used 
if needed to repair damage to Iraqi oil facilities and to 
preserve a petroleum distribution capability.

    Dr. Zakheim.  Let me start with the military costs. The 
Congress gave us a supplemental of approximately $62 billion, 
most of which was for maintaining operations, and those were 
assumed to the end of this fiscal year. We have already 
allocated and essentially paid back something slightly over $30 
billion to the services for operations that they had 
essentially forward financed.
    We are still going through our mid-year review of expenses, 
and what costs we project out to the end of the fiscal year, 
and we believe that the supplemental will be adequate.
    Senator Biden.  The end of the fiscal year being this 
October?
    Dr. Zakheim.  Yes, sir, September 30th. It will be adequate 
to cover within reason whatever number of troops remain. The 
reason for that is that we had built in some estimates for 
moving troops back and there is a cost to that, and the pay for 
the troops, of course, is a constant wherever they are. So the 
real issue is, how much more are you paying to keep the troops 
out there, as against how much are you paying to bring them 
back, and it looks at present to be in balance.
    We will be able to get you better numbers for the record a 
little later on when we finish this review, but it looks like 
the supplemental will be covering the cost of troops through 
the end of the fiscal year. Beyond that, I am not in a position 
to predict right now.
    Senator Biden.  Well, I have not heard anybody even 
postulate that we are likely to bring home the bulk of American 
forces in the next 12 months, not the fiscal year. We're now 
doing the appropriations process, we are in that cycle, and we 
are going to appropriate money for the Defense Department, 
which is already well underway. Can you give us the estimate as 
to the cost for the next fiscal year, because you have to be 
doing that now? What is the cost for the next fiscal year of 
maintaining the projected military presence, whatever that is? 
I know you don't know for certain, but that's part of the 
budget process now and there probably will be a supplemental 
come January of next year again if past is prologue, and that's 
not a criticism, it's an observation. So, can you give us a 
sense what we're going to need for the next fiscal year just to 
maintain troops which comes out of direct Congressional 
appropriations?
    Dr. Zakheim.  Regarding the statement you just made about a 
supplemental in January, I cannot talk to the future. The 
reason is that last year the supplemental came quite a few 
months into the fiscal year. Right now, to estimate the timing 
of a supplemental we have to do two things. First, we cannot 
forward finance again until we get our estimates right, and 
then we have to get our estimates right and get them up to 
Congress. So at this stage, I would not be doing any justice to 
anyone by giving you a concrete estimate on that.
    Senator Biden.  With all due respect, and I know my time is 
up, if you guys don't have an idea in June of 2003 what the 
cost of maintaining forces is going to be in Iraq for fiscal 
year 2004, then it's not the Defense Department that I 
remember. You guys have to have an estimate now. If you're 
going to wait until next January to present us with a proposal, 
that is, I would argue, irresponsible, irresponsible. You've 
got to give us your best estimate now; and so I assume that's 
in train, and if it's not in train then it's derelict.
    Dr. Zakheim.  I don't think we are derelict, Senator. I 
think I indicated that it was in train. All I simply said was 
that in putting this estimate together, and particularly as you 
yourself indicated, with regard to troop levels and bringing 
troops back and so on, that does take a little time. It is not 
a question of whether we wait until January, it is simply a 
matter of assessing where you are and projecting out where it 
is apt to be. You cannot predict perfectly. We have done pretty 
well with the supplemental, but we cannot predict perfectly and 
we want to have our estimates right.
    Senator Biden.  What is the current cost of maintaining 
deployment per month now, just now?
    Dr. Zakheim.  Probably in the region, if you include the 
cost of reserves, in excess of $3 billion per month, but I can 
get you that figure accurately.

    [The following information was submitted by Dr. Zakheim on 
August 8, 2003 in response to Senator Biden's question:]

    Dr. Zakheim. Based on current mobilization levels and 
projected demobilization schedules for Operation Iraqi Freedom 
(OIF), the total estimated cost for the remainder of the fiscal 
needed to maintain the current force level is approximately 
$3.9 billion per month. This estimate includes the following 
costs:
    The Department anticipates that on average approximately 
124,501 reserve component members will be mobilized on active 
duty for OIF during FY 2003 at an estimated incremental cost of 
$0.8 billion per month. This cost estimate includes all pay and 
allowances as well as personnel support costs (e.g., medical, 
temporary duty costs) associated with mobilized Reserve and 
Guard members.
    In addition, approximately $500 million per month is 
estimated for the incremental cost for imminent danger pay, 
family separation allowance, foreign duty pay, subsistence, 
defense health care costs and other military personnel support 
costs for personnel directly supporting OIF.
    Also, the Department estimates that ongoing operations 
during the transition and stability period will cost 
approximately $2.6 billion per month. Included in this category 
are various necessary consumable items, such as subsistence, 
fuel, spare parts, and transportation costs and other ground, 
air and naval operational costs.

    Senator Biden.  Thank you. I will come back.
    The Chairman. Thank you very much, Senator Biden. Senator 
Hagel.
    Senator Hagel.  Mr. Chairman, thank you, and gentlemen, 
thank you for appearing this morning.
    To follow on with Senator Biden's questions on costs of 
maintaining our forces in Iraq, Dr. Zakheim, would you clarify 
where we are with force structure now for example, which 
countries have troops in Iraq, are providing additional 
security, what the numbers are? For example, I think when 
Secretary Wolfowitz was up here a couple weeks ago, he noted 
that the British had 20,000 troops in Iraq. My understanding 
now is we have 10,000 in Iraq. Are they demobilizing, who's 
there, what do we anticipate in addition to allied troops? Are 
you factoring those in, at what numbers. To replace our troops? 
Would you clarify that picture for us?
    Dr. Zakheim.  Well, Senator, most of that I will really 
have to do for the record, but let me say this. The number of 
the troops that are out there and that would be coming out 
there obviously would be less than those that were fighting the 
war, and that explains to some extent the turnover in British 
forces. I will get you for the record the exact numbers as to 
where the British are right now. In terms of other 
contributions, again, this has to be worked through Ambassador 
Bremer and the Coalition Provisional Authority (CPA), but we 
have quite a few offers, some of them are well-known. For 
example, the Spanish have offered forces, the Italians have 
offered forces, as well as many smaller countries.
    Senator Hagel.  Pardon me for interrupting, but could you 
tell us who is on the ground there, which countries have forces 
there?
    Dr. Zakheim.  The British have forces on the ground, the 
Polish have had forces on the ground.
    Senator Hagel.  They had?
    Dr. Zakheim.  I believe there are still some there but I 
would have to check on that. There are some smaller units and I 
will get you that for the record, Senator.
    Senator Hagel.  To go back to the British forces, are my 
numbers correct that there are 10,000 troops, British troops 
there now, versus 20,000?
    Dr. Zakheim.  I'd have to check into that.
    Senator Hagel.  You're not sure?
    Dr. Zakheim.  I'm not sure.
    Senator Hagel.  That's a little puzzling, don't you think, 
if you're coming up here to testify about the issue of 
reconstruction and security, anticipating questions that 
Senator Biden asked, that the Chairman has asked, and others 
will ask, and you have no idea how many British troops are 
there?
    Dr. Zakheim.  You are talking about a transition; so if I'm 
going to give you something, I want to be sure that it's 
accurate to the day.
    Senator Hagel.  How about a ballpark? Can we get you on the 
record to take a wild guess?
    Dr. Zakheim.  I don't like----
    Senator Hagel.  Are 20,000 still out there?
    Dr. Zakheim.  No, 20,000 are not still out there.
    Senator Hagel.  What is your position at DOD?
    Dr. Zakheim.  I am the comptroller, Senator.
    Senator Hagel.  That means controlling. As I listened to 
your testimony, everything has to go back through you; is that 
right?
    Dr. Zakheim.  Well, certainly with respect to resources, 
that's correct, Senator.
    Senator Hagel.  Well, troops are classified as what?
    Dr. Zakheim.  But they are British troops.
    Senator Hagel.  And that's not factored in as to what may 
be a factor as to troops we'll need, more or less, because our 
allies have troops or will have troops, that hasn't factored 
into your equation?
    Dr. Zakheim.  Force planning, sir, is normally done by the 
Joint Staff, and requests of other nations for forces are done 
in conjunction with our policy people. The last time I checked, 
sir, the British government does not run those kinds of things 
through me, and it would be presumptuous, quite frankly, to do 
anything other than try to get you the facts on the ground as 
opposed to talk about their decisions. That is not my theme, 
sir.
    Senator Hagel.  All right. Let's try another witness and 
maybe we will get some answers.
    Mr. Larson, the June 24th meeting that you described, tell 
us about what's going to happen there and what you anticipate, 
what are the objectives? Is this to get allies to commit to 
resources?
    Mr. Larson.  This is not a pledging conference as such.
    Senator Hagel.  International donors?
    Mr. Larson.  Yes. It's beginning the process of preparing 
for a pledging conference that I would hope to have in 
September. What we found is that a good way to get this sort of 
mobilization of resources underway is to have a meeting at 
officials level, basically the level of those of us at this 
table, and to task out work. One of the things that we want to 
do and it's already underway is make sure that there is an 
international assessment of needs, and the United Nations 
Development Program and the World Bank are going to work on 
that together. We will take stock at the conference of where 
that work stands.
    We believe it is going to be possible to have some 
representatives of the Coalition Provisional Authority from 
Baghdad attend this meeting to give a firsthand account of what 
they're thinking at that stage, of what the nature of the needs 
are, what the budget will be, a lot of the questions that 
senators are asking today, recurrent needs for salaries, 
investment needs for these various sectors that need to be 
rehabilitated.
    Then we will set in motion planning for a ministerial 
level, cabinet level donors meeting, as I say, in September. We 
are frankly pleased that the United Nations has been willing to 
step forward and work on this with us. We were pleased that at 
the G-8 meeting just ending yesterday, there was a positive 
reference to this conference, and an understanding that the 
international community is going to need to pull together.
    Senator Hagel.  So you're looking at September as the 
meeting to get people to pledge and commit; is that right?
    Mr. Larson.  I think that's fundamentally right. There will 
be a blend, Senator, between the humanitarian needs where there 
has already been a fairly strong international response, and 
reconstruction. We expect this June 24 conference to come 
immediately after a meeting that is planned to focus on 
reconstruction needs. I think that--excuse me, on humanitarian 
needs. I think we will get pledges on humanitarian needs at 
both conferences and then we will have to have that roll over 
to a September meeting.
    You know, donors will want to see what the needs are, and 
that will come out of the assessment that is being worked on as 
we speak.
    Senator Hagel.  Let me ask you this question. I know that 
decisions are made at levels higher than yours, although your 
level is pretty high, under secretary. It strikes me that 
waiting until September--I mean, we are just now into June. I 
don't know what the mystery is here as to the help that we need 
in order to bring stability and some security to that country 
and anticipating what those needs are, and then why it takes so 
long for assessments.
    Mr. Larson.  Let me respond quickly. This is a rolling 
process. Even as the military operations were underway, we were 
meeting and having consultations with allies. We were going out 
and making requests for things like help in policing, as well 
as humanitarian support. So we are not just sitting around and 
waiting until the fall. On those things where it's possible to 
move forward, we are moving forward, and we're getting 
responses, as Under Secretary Zakheim and I and others have 
indicated.
    But we think to carry this to the next level, we're going 
to, in order to get the sort of commitments that we would like 
to get out of European countries, for example, we are going to 
have to go through a process that will give them some 
benchmarks, and part of those benchmarks will be the needs 
assessments that have been done internationally by the World 
Bank and UNDP, and those can be meshed with the needs 
assessment that the Coalition Provisional Authority.
    Senator Hagel.  Just a quick point, since my time is up. By 
September, the world is going to change considerably in Iraq, 
and all the crack planning that has been done obviously is 
missing some of that, and we'll come back around to this in the 
next round. But as I fade off in the sunset in my first round 
of questioning, Dr. Zakheim, could you provide this committee 
with a number of American troops in Iraq?
    Dr. Zakheim.  I believe the actual number right now is a 
classified one.
    Senator Hagel.  You're kidding? We have newspaper reporters 
at the tables here, and they may want to tell you, because we 
read about it almost daily in every major newspaper. Deputy 
Secretary of Defense Wolfowitz gave us a number when he was 
here. So that's your answer?
    Dr. Zakheim.  That's my understanding. I will get you the 
number.
    Senator Hagel.  Maybe some of the reporters want to give 
you the numbers, but we will see the next round of questions. 
Thank you, Mr. Chairman.
    The Chairman. Senator Sarbanes.
    Senator Sarbanes.  I pass for now.
    The Chairman. Senator Feingold.
    Senator Feingold.  Senator Sarbanes, you are very 
courteous, thank you.
    Why don't we start with Mr. Zakheim. The administration has 
rightly emphasized the idea that Iraqi resources will be used 
for the Iraqi people. This is a very important idea, but I'm 
sure you agree that just articulating it is not enough. So my 
question has to do with the transparency of this. How are the 
Iraqi people supposed to know how found funds and seized assets 
and oil revenues are used? You did mention that there are 
careful accounting procedures, but what is the proactive effort 
that is being made to ensure that this information is actually 
available to the Iraqis? Since the United States is now engaged 
in nation building in Iraq, doesn't it make sense to do 
everything we can to establish a culture of transparency and 
accountability right away?
    Dr. Zakheim.  I completely agree with you, Senator, and I 
think as you are well aware, the presidential envoy, Ambassador 
Bremer consults with Iraqis, there are Iraqis working back at 
the ministries and therefore, anything that is going to be 
public for us will be public for them. There is no particular 
reason to hide from them what is being done with their funds, 
it's quite public.
    What I have told you this morning regarding the expenditure 
for salaries, for example, is that we are giving them the 
numbers, we are providing them. It is no more, no less than 
that. There is every reason to provide the same level of 
accountability to the Iraqi people, since they are going to 
want to know what happened to their money, as it would be to 
the United States Congress and the American people who want to 
know how we are treating that money as custodians.
    Senator Feingold.  What are you actually doing proactively 
to get that information out?
    Dr. Zakheim.  As I understand it, the Coalition Provisional 
Authority is in constant contact with leading Iraqis. There are 
efforts to stand up the ministries. We put monies into that so 
that there are Iraqi civil servants working who would have 
access to information. We are also funding two daily 
newspapers, which will provide announcements and information 
for Iraqis. As you know of course----
    Senator Feingold.  Is that kind of information currently in 
those newspapers?
    Dr. Zakheim [continuing]. I doubt it probably is as yet, 
but it could be. It is probably most useful for Iraqis in the 
civil service sector. Again, we are rehiring people, paying 
them, and once they are on board, they will have that 
information.
    Mr. Larson.  Senator, your question also touched on the oil 
aspect of this. Just to say briefly, the Security Council 
resolution sets out a relatively clear process for having 
transparency with respect to the use of oil proceeds that are 
deposited into the development fund for Iraq. It includes an 
international advisory monitoring board that would have 
representatives of the UN Secretary General, the managing 
director of the IMF, director general of the Arab Fund for 
Economic and Social Development, as well as the World Bank 
president. So with respect in particular to the development 
fund, which will be the repository of oil proceeds, there is a 
process that will ensure accountability and transparency in the 
use of those revenues.
    Senator Feingold.  Let me ask anybody on this panel more 
about just the expected cost of overall stabilization and 
relief and reconstruction. Obviously the percentage at this 
point that the United States is enormously greater than the 
other possible contributors. I would like to know how much the 
United States has spent to date. Do we expect the relative 
percentage of what we're spending versus other donors to 
change? What can we expect the percentages to be once that 
happens. Mr. Zakheim?
    Dr. Zakheim.  As I indicated in my testimony, we are 
clearly providing the largest percentage. That will change, 
because once more donations come in and particularly given the 
conference that will take place, as Secretary Larson said in 
September, we expect that the size of our percentage will 
change, although we may remain the largest donor. That is the 
case in Afghanistan and again, there our initial percentage was 
much larger. With the influx of other contributions, that 
percentage diminished. I expect a similar pattern with respect 
to Iraq.
    Senator Feingold.  What do you anticipate the pattern will 
be, what's the goal? Where are we at now and what is your plan 
and our plan, given your role as comptroller, for what 
percentage we will be paying and others will be paying? I would 
like to get some number estimates of what the goal is.
    Dr. Zakheim.  The first thing to do, as Secretary Larson 
noted, is get the needs assessments done. Quite frankly, the 
international financial institutions were reluctant to send 
teams out to Iraq until there was a Security Council resolution 
passed. These needs assessments take some time. Once we have 
them and we know the size roughly of what we are trying to 
achieve, we would then go out and solicit support from 
countries that are wealthier and countries that are not. Small 
countries have contributed already. Organizations like the 
European Union are likely to significantly increase their 
contributions over the long term once those needs assessments 
are done.
    Until that point, I think it is very difficult to make an 
estimate of just what our percentages are likely to be.
    Senator Feingold.  But I'm asking you what our goal is. My 
constituents want to know how much we're going to pay. They 
want to know as much as possible what the total will be and 
what can be expected as a percentage by other countries. I 
understand that that can be affected to some extent by what the 
needs are, but you must have an objective in mind with regard 
to how much the United States of America is going to pay here 
and how much other countries are going to pay. I want to know 
what that objective is.
    Dr. Zakheim.  Our objective is clearly to solicit as much 
as we can overseas. Just to give you another example why it is 
so tough to predict, we cannot give you the revenues from oil 
which are not simply going to be available for reconstruction. 
Sixty percent are still going to be used for food. As that 
situation improves in Iraq, oil revenues will be available, 
that will lower the overall numbers. It's tough to predict 
that, we have to do some serious analysis by lots of people. So 
to say, ``Well, here's a cap on our numbers or here's a cap on 
our percentage,'' when we clearly don't know the size of----
    Senator Feingold.  I wanted to know, though, not a cap. 
What's your goal? What would you like to see happen? Would you 
like to see the rest of the world do 90 percent of this or 10 
percent of this? What's a realistic goal that I can tell my 
constituents, we're going to try to get other people to help us 
with?
    Dr. Zakheim  [continuing].----I think the realistic goal is 
to get them to contribute as much as they possibly can.
    Senator Feingold.  That is a complete non-answer. You must 
have some goal. You must have some documents or papers that say 
you know, our goal here is to try to push the donors and 
everybody else to contribute X percentage. You don't have such 
a goal?
    Dr. Zakheim.  I just do not think it's easily answered that 
way, Senator.
    Senator Feingold.  Thank you, Mr. Chairman.

             Prepared Statement of Senator Russell Feingold

    I thank the Chairman and Senator Biden for holding this important 
hearing, the second in a series scheduled since the regime of Saddam 
Hussein fell and the U.S. became responsible for Iraq. These hearings 
help to establish where we stand today and to clarify the sometimes-ad 
hoc policies and procedures in place, so that we can meet our 
responsibilities to the American people and exercise oversight without 
constantly groping in the dark for the most basic information. So first 
and foremost, these hearings are giving all of us the tools we need to 
do our jobs.
    Equally important is the role that these hearings can play in 
helping to inform the American people about the magnitude of the task 
ahead. The men and women of the United States military performed 
brilliantly throughout the military engagement in Iraq, but that was 
only one piece of the puzzle. The U.S. mission in Iraq is not yet 
accomplished. Our work has only just begun. We still have not secured 
the weapons of mass destruction and the means to make them that were at 
the heart of this Congress's reasoning for taking military action. A 
repressive order has been replaced with simple disorder. The American 
people deserve to know what will be asked of them in terms of the costs 
of reconstruction and the amount of time during which our military sons 
and daughters, husbands and wives, and mothers and fathers will be on 
the ground.
    The hearings also help to raise some critically important issues. 
Over the weekend the New York Times Magazine ran a very disturbing 
article about conditions in Afghanistan, the last country where the 
U.S. forcibly removed the government in power, rhetorically committing 
to stay the long and difficult course of stabilization and 
reconstruction in the aftermath of the conflict. I supported our action 
in Afghanistan wholeheartedly. The Taliban government colluded with the 
Al Qaeda network, and the President was right to use force against 
these enemies. but as the article put it, reconstruction in Afghanistan 
to date has been ``a sputtering, disappointing enterprise, short of 
results, short of strategy, short, most would say, of money.'' This is 
about more than failing the people of Afghanistan. It is even about 
more than damaging our international credibility. It is about our 
security. We know what disorder and international indifference bred in 
Afghanistan in the recent past. And yet our resolve to do the hard work 
of reconstruction has been called into question repeatedly over the 
past year.
    Now we face a new challenge in Iraq, and we are asking the donor 
community, the Iraqi people, and the rest of the world to believe that 
reality will match our rhetoric, and to believe that we will stay 
committee to reconstruction in Iraq. There is ample reason to be 
skeptical. Hearings like this one help all of us to assess whether or 
not we are on the right course.

    The Chairman. Thank you, Senator Feingold.
    Senator Chafee.
    Senator Chafee.  Thank you, Mr. Chairman. I would like to 
thank the distinguished panelists also. As we try and look at 
the situation there in Iraq and judge what we have in front of 
us, I didn't hear too much on the most important area, in 
drinking water, and we're getting some reports from the media 
on the ground that it's not very good, that most of the 
citizens are getting their water from sewage choked waterways, 
there's been an epidemic of cholera. What exactly is the 
situation? I think Mr. Larson said that 75 percent of Baghdad 
has drinking water, but didn't refer to the rest of the 
country. Mr. Natsios addressed some obscure cities in the south 
that had 100 days worth of drinking water available. What 
actually is the situation with that most basic of needs, 
especially if much of our food needs to be mixed with good 
water. I guess, Mr. Natsios, you raised your hand. Give us an 
assessment of where we are and that will help us know where 
we're going and how bad it is.
    Mr. Natsios.  Our first priority is the drinking water and 
the reason for that is that about 400,000 children have died 
needlessly in the last five years, mostly from dirty water. It 
is unconscionable that a country of this wealth has child death 
rates of the size that Iraq has had. And Saddam successfully 
blamed the international sanctions regime, which is nonsense. 
This deliberately planned effort by the central government to 
kill off the children of his opponents, the Shiites and the 
Kurds.
    Senator Chafee.  But where are we, never mind who's to 
blame?
    Mr. Natsios.  No, let me just go through this because we're 
dealing with a very different position in different areas of 
the country. The central part of the country, the water system 
is in reasonably good shape. The areas in the north where the 
Kurds are were independent of the central government, they are 
in recently good shape; there are pockets here and there. Our 
focus is on the 60 percent of the population who are Shiite in 
the southern 60 percent of the country.
    We just completed an assessment using Bechtel engineers of 
the water pumping stations, and there are a total of 673 water 
pumping stations and 253 treatment plants. The treatment plants 
have had no chlorine for years. We have enough chlorine now 
that we just purchased through UNICEF for 100 days so that all 
of those areas in the south will have chlorine very shortly. 
It's been ordered, it's on its way. That will at least clean up 
temporarily the condition of the water system in the south so 
we can drive down these death rates. The death rates in India, 
for example, which has the largest numbers of poor people in 
the world, 101 per 1,000 die before they are 5. The rate of 
death is Iraq is 131. The death rate in Jordan among children 
is 50. Iraq is considerably richer than Jordan, so we're hoping 
to get the death rate down in the next six months to a year, 
fairly quickly, and the water system will be the principal 
means by which we do that.
    In order to do this more systemically over the longer term, 
in addition to fixing the water system we have to also fix the 
sewer system. The sewer system doesn't treat sewage in the 
south, it simply flows into the Tigris and the Euphrates Rivers 
untreated and that's where the water comes from, for the most 
part. There are also wells, but they're not in good shape 
either.
    So we are now in the process of taking the assessment we've 
done to determine the facilities that need rehabilitation or 
reconstruction first, and then the ones that are in reasonably 
good shape, we will do those last. And Bechtel will begin that 
process in terms of actually doing the reconstruction very 
shortly. Congress just released to us $234 million last week, 
and a good portion of that money will go into the Bechtel 
contract and they can begin construction in this area.
    We have improved the situation in Basra fairly dramatically 
over what it was before the war or during the war, but it still 
is nowhere near where it should be.
    Senator Chafee.  Thank you very much. You've painted a 
picture of an extremely impoverished country with no access to 
good drinking water pretty much, so I think that let's us know 
the magnitude of the task in front of us, what we have as we 
try to bring some stability and order to this country, starting 
with that.
    Moving, if I have the time, to the next precious liquid, 
the oil, and Mr. Larson, you said that their capacity at peak 
was 3.5 million barrels per day. Do we have some kind of goal, 
I've heard that Iraq has the second largest reserves in the 
world, known reserves in the world, as to what we want for 
price per barrel? If we're able to generate close to 3.5 and 
perhaps more in the near future, would that glut the market? 
And I suppose there are competing dynamics here. We'd like to 
have a lower price of gas here and help our economy, but we 
also want a higher price per barrel to help the Iraqis. Do we 
have an idea of what we want for a price per barrel on the 
world market, and can we affect that in the years to come with 
controlling the second largest known reserves in the world?
    Mr. Larson.  I think in the short run our focus is very 
much on getting the existing capacity up as quickly as 
possible. Mr. Ghadhban, who is serving as the CPO, indicated 
last month that production had reached 800,000 barrels a day 
and he expressed hope that it could get up to 1.5 million 
barrels a day by the middle of this month. If so, that would be 
very good progress. He also said he'd like to see it 
approaching 2 million barrels a day by the end of the year and 
then be sustained at that level or somewhat above that level in 
2004.
    We are in the first instance working very hard. The Iraqis 
and the Army Corps of Engineers are working very very hard to 
make sure that those sorts of goals can be met.
    I think that the decisions about whether to increase 
production well beyond the levels that had previously been 
possible in Iraq is something that a new representative Iraqi 
government is going to have to decide. For the purposes of my 
calculations, I used the figure of $20 a barrel. It's a very 
rough guess. It represents the fact that Iraq produces a sour 
crude that sells at a discount of 3 to $4 dollars per barrel 
under other types of crude oil. I don't think that we should 
have a goal with respect to the price of oil. I don't think 
that we can or should try to aspire to be controlling it. There 
are lots of other factors, shifts in demand in many parts of 
the world, production from Russia, from Kazakhstan, from 
Venezuela, from West Africa, that all have a bearing on that.
    Senator Hagel has been conducting a series of hearings 
about the international energy market and the effect of this on 
global energy security. One of the points that we had tried to 
make in those hearings is that you can't focus on just one 
major supply region to understand how the oil market works, you 
have to understand that there are several big areas that 
interact together.
    Senator Chafee.  Thank you.
    The Chairman. Thank you very much, Senator Chafee. Senator 
Sarbanes.
    Senator Sarbanes.  Thank you very much, Mr. Chairman.
    I would like to ask about a product I recently saw. I was 
at a conference over the recess and I learned that Proctor & 
Gamble has a packet that you put in a 10-liter can of water and 
it cleans it up. It seems to me that it was sort of a very 
significant breakthrough in terms of providing clean water. I 
understand that you all are dealing with them about that; is 
that correct, and what does it offer in terms of addressing the 
water problems?
    Mr. Natsios.  I had to demonstrate the technology to them 
and I actually drank the water.
    Senator Sarbanes.  You don't look any worse for wear.
    Mr. Natsios.  No, I'm still here. I was a little disturbed 
as to what the water was. They didn't tell me what it was when 
I cleaned it up, they told me after I drank it what I had just 
drunk. And as I said, I'm still here, although a little upset 
about what I had just taken in. It's an extraordinary 
technology and its very useful for us in emergency situations. 
We may purchase some of it, we're looking at that now. I think 
UNICEF is looking at purchasing some of this technology. 
However, in terms of cost, over the longer term, we tend to 
look at systemic solutions to water problems, which is to say 
we want the water system itself to be functional or we want the 
treatment plant, and we want the processing to take place in 
the treatment plant and the clean water to run through the 
system. That's the cheapest way so far. This is more expensive 
than that, but in the case where it would take too long to do 
that, in the interim, this is an appropriate technology where 
the treatment takes place at point of use, so we are intrigued 
by it and I can tell you, it does work.
    Senator Sarbanes.  Now, when is the donor conference?
    Mr. Larson.  June 24th, Senator.
    Senator Sarbanes.  Who is the point person for foe donor 
conference?
    Dr. Zakheim.  It is a joint effort; the three of us in 
particular are working on it.
    Senator Sarbanes.  I want to follow up on what Senator 
Feingold was asking. Are we going to the donor conference with 
no framework or guidelines of what it is we want to get in 
terms of the allocation or a percentage of contributions?
    Mr. Larson.  I was looking for an opportunity, Senator 
Sarbanes, for an opportunity to clarify a little bit about 
that, our thinking on how we get the best possible contribution 
from other countries.
    Senator Sarbanes.  What I understand Mr. Zakheim's answer 
to be is well, we will get what we can get.
    Dr. Zakheim.  It is not exactly that. Let me clarify that 
please, sir. Basically, the point is that there are a variety 
of sources, including, Iraqi sources. If we lay out 
percentages, we do run the risk of scaring some people off. The 
June conference, in any event, is a technical one; in effect it 
is a planning conference for September where there will be a 
full-blown donors conference. Even then, if we say, ``Well, 
we're doing X percent and we expect you to do Y,'' some people 
will say, ``we just might not do what you ask of us.''
    We found regarding Afghanistan, and I was involved there 
with many of my colleagues here, that in raising the funds for 
Afghanistan, we got several billion dollars of support. I found 
that it was much more effective not to come up with fixed 
percentages and instead push people to do more, rather than 
say, ``Here's a percentage,'' because the first thing they will 
say is, ``Who are you to determine the percentage.''
    Mr. Larson.  If I could just amplify slightly, Senator 
Sarbanes, we found as we started approaching other countries on 
this that some certainly in the coalition, but also some 
outside the coalition were very very willing to be involved in 
this sort of work. Japan, for example, is very very interested 
in being involved. But we also want it understood that we have 
a political process to get some of the other major contributors 
into this game. Part of that process was getting the United 
Nations Security Council resolution, because that was really a 
signal that we could move forward.
    A second part of the process is getting an assessment of 
what the needs really are and making sure that the focus is on 
helping the Iraqi people.
    A third part of the process is helping, is trying to get 
some distinction between the sorts of things that governments 
have to do, humanitarian support, basic types of 
reconstruction, from what will probably be done by the private 
sectors. We have talked in this hearing about needs in the area 
of telecom and possible big oil investments. I assume that 
those are the things that the private sector is going to have 
to step in and do.
    I believe that politically the way to get countries on 
board is to make them part of the preparatory process, to bring 
them in on the 24th, make sure they feel that they are a part 
of identifying what the needs are, and then I think based on 
the experience that we have had in Afghanistan, that we, you 
know, have a real shot at getting some significant support from 
them, but if we came out with a percentage goal now, I think it 
would be counterproductive to what clearly all of the senators 
here and all of us at the table are trying to accomplish.
    Senator Sarbanes.  What is the percentage that we're 
putting into Afghanistan?
    Mr. Larson.  I would like to get that for you for the 
record. It's the plurality but it's not over half. We have 
gotten very significant contributions from the European Union 
for our work in Afghanistan.

    [The following information was submitted by Dr. Zakheim on 
August 8, 2003 in response to Senator Sarbanes' question to Mr. 
Larson:]

    Dr. Zakheim. At the Brussels conference in March, the 
United States Government committed $600 million out of a total 
international commitment of $1.8 billion, i.e., 30 percent. I 
note, however, that the USG's total commitment for fiscal year 
2003 was subsequently revised and will be on the order of $900 
million (versus the $600 million pledged in Brussels). If other 
countries do not make additional pledges, our overall share 
will rise.

    Senator Sarbanes.  Now, I would like to ask Mr. Zakheim. 
Secretary Rumsfeld said in a hearing before the Senate 
Appropriations Committee, and I'm quoting here: ``Let me be 
clear. When it comes to the reconstruction, before we turn to 
the American taxpayer, we will turn first to the resources of 
the Iraqi government and the international community.''

    I'm interested, first of all, in ascertaining what are the 
resources of the Iraqi government to which he is referring. 
They are presumably seized Iraqi assets and oil revenues, I 
would like to know the magnitude of those. And secondly, he 
talks about the international community; what is he referring 
to?

    Dr. Zakheim.  I think that's right in terms of the Iraqi 
resources, it is the seized and the vested assets.

    Senator Sarbanes.  And how much is that ?

    Dr. Zakheim.  As I said, the amount seized is roughly $800 
million, it is actually $798 million right now. That is 
excluding gold that has been seized, and that is being assayed 
with the help of the Treasury Department and the U.S. mint, and 
we will know what the value of that is.

    In addition, as you heard earlier, the vested assets, that 
is, the monies that were essentially frozen in this country, 
total about $1.7 billion.

    So right there you have approximately $2.5 billion, which 
is about the equivalent of what the Congress gave us in 
appropriated funds. That gives you a rough sense of the 
proportions.

    Senator Sarbanes.  And the oil revenues?

    Dr. Zakheim.  That is over and above that, Senator.

    Senator Sarbanes.  How much do you have to spend to get the 
oil on line? I've heard a figure as high as $20 billion.

    Mr. Larson.  That's very exaggerated, Senator Sarbanes. The 
CEO of the oil ministry that's working on this is suggesting 
that it will take in the hundreds of millions of dollars to 
achieve the goals he set out for this year, that is, to get 
production up in the range of 1.5 million barrels per day 
sometime this month, and to 2 million barrels a day by the end 
of the year.

    Where you begin to get these very large numbers is when you 
begin to talk about actually increasing the baseline productive 
capacity, going beyond where Iraq has ever been in the past. 
And that's where I believe that one is really talking about how 
much foreign investment can Iraq attract in order to increase 
its baseline capacity.

    Now there's a middle ground between 2 and some 
significantly larger number, and that is, what would it take to 
get them back to 3.5 million barrels a day. My testimony quotes 
Cambridge Energy Associates with a figure of $3 billion. It is 
a figure, I don't mean to endorse it, but it's sort of a 
reasonable estimate of what it could take to get to 3.5 million 
barrels a day.

    Senator Sarbanes.  My time is up, but I want to pursue just 
for a moment, Mr. Chairman.
    There is a story in the Washington Post today entitled, 
``Iraq Is Ill Equipped To Exploit Huge Oil Reserves.'' The 
story develops, in part, on the basis of a report by the 
Council on Foreign Relations, spelling out some figures. And 
this story is sort of miles apart from what we're being told 
from the witness table. Now, you know, maybe this is all wrong, 
but somehow we have to get to the point where we have a set of 
facts that people are more or less agreed upon in terms of 
being able to evaluate the situation.
    Mr. Larson.  Senator, I'll make two quick comments on 
today's story. First of all, with respect to the cost that it 
will take to get production up to the levels I indicated, 1.5 
million barrels per day this summer, 2 million barrels per day 
by the end of the year, I put my faith in the people who are 
the ground actually assessing the physical state of the 
infrastructure. No one knew before they were able to get on the 
ground and take a look at these things exactly what had to be 
done and exactly what it would cost. Now the numbers that I 
have quoted to you today may turn out not to be right, but I 
think they are closer by a considerable degree than any 
estimates that were done at a desktop in New York.
    The other piece of this article that I think was confusing 
is that many of the comments were sourced to the French oil 
company Total, and they were talking about what needs to be 
done to get $5 billion or more new investment to develop new 
capacity. And those are important issues, but they are issues 
in my judgment that are not today's issues, they are issues 
that will only really become serious issues at the time we have 
a representative Iraqi government that is in a position to 
decide whether they want to increase oil productive capacity 
beyond what it has ever been in the past.
    The Chairman. Thank you, Senator Sarbanes.
    Senator Biden.  Can I ask for a point of clarification? 
Daniel Yergin, from Cambridge that you referred to, he told us 
in the meeting that you and I attended that it would take $5 
billion, not $3 billion, to get to 3.5 million barrels per day. 
Your statement says $3 billion. We called to check. He said $5 
billion, not $3 billion.
    Mr. Larson.  If we misquoted the Cambridge study, we'll 
certainly clarify it, but I think Daniel Yergin would agree 
that any of these estimates are very approximate, there's a 
range, but if his point estimate is 5, we then we should change 
our testimony.
    Senator Biden.  Yes, but it's a 67 percent increase, or 
difference, so that's why I raised it.

    [A follow-up to Secretary Larson's response follows:]

                 United States Department of State,
      Under Secretary of State for Economic, Business, and 
                                      Agricultural Affairs,
                                         Washington, DC 20520-7512,

                                                     June 11, 2003.
Hon. Richard Lugar, Chairman,
Committee on Foreign Relations,
U.S. Senate.

Dear Senator Lugar:
    Thank you for allowing me to testify before the Foreign Relations 
Committee on economic restructuring in Iraq on June 4. As always, it 
was a pleasure to appear before the committee and to speak with you and 
your colleagues. I look forward to continuing our dialogue on Iraq 
reconstruction as we move forward to support Iraqi efforts to undo the 
terrible legacy of Saddam's misrule.
    Senator Biden asked a question about the numbers I had used in my 
testimony concerning the costs associated with raising Iraqi oil 
production to a rate of 3.5 million barrels per day. I cited a figure 
of $3 billion for the Cambridge Energy Research Associates (CERA) 
annual conference in mid-February, but Senator Biden recalled that CERA 
has more recently used a higher figure of $5 billion to reach that 
level of production. In response to his question, we have confirmed 
with CERA that they have in fact increased their estimate of the likely 
costs associated with raising Iraqi oil production to 3.5 million 
barrels per day. The new estimate is at the high end of their late-
February estimate: $5 billion, raised from the lower level I cited in 
my testimony earlier this week.
    The fact that CERA's numbers have been updated reflects how 
difficult it is to project potential costs associated with raising oil 
production. Given the uncertainties, it is possible that CERA and other 
analysts will revise the numbers further. It is important to note, 
though, that even at $5 billion, the resources required to restore 
Iraqi production to its highest historical levels do not approach the 
tens of billions of dollars being discussed in the media.
    I also want to make sure you were aware that the State Oil 
Marketing Organization has announced a tender for the crude oil now in 
storage in Ceyhan, Turkey, and in southern Iraq, with bids due June 10. 
The first liftings should take place about a week after that. Restoring 
oil exports under Iraqi management sends a clear signal of progress to 
Iraqis and the international community and provides much needed 
financial resources for the Iraqi people.
    Please contact me or my staff if we can be of further assistance.
            Sincerely,
                                        Alan Larson

    The Chairman. Senator Alexander.
    Senator Alexander.  Thank you, Mr. Chairman. I have 
listened to the four of you and I thank you for your testimony. 
My opinion is that your progress is impressive and specific, 
and it answers a lot of questions. I have three questions I 
hope to get in.
    Mr. Larson, you just came back from France. The pictures 
looked good. The president seemed to have a one-day good visit 
there, but if I am not mistaken, France agreed to help with the 
reconstruction of Iraq, and what might we expect from France, 
and what could France do at this conference at June, for 
example? What might we expect from France as we look ahead, 
specifically regarding the Iraqi debt?
    Mr. Larson.  I think that the G-8 meeting was a very 
important milestone in the process of reconstruction, because 
the leaders were able to discuss privately the challenge of 
reconstruction in Iraq. And in his concluding statement, 
President Chirac's concluding statement, he referenced the 
importance of this conference and the importance of working 
together on reconstruction for Iraq.
    We believe that France is very important in two respects on 
donor issues. One, they are an important donor and contributor 
in their own right. And secondly, as a large member of the 
European Union, they will have a very very strong voice in 
determining the extent and way in which the European Union gets 
involved in reconstruction.
    Finally, on the debt aspect of your question, the French do 
preside over the Paris Club, the institution that Under 
Secretary Taylor mentioned. Treasury and State represent the 
United States in the Paris Club, and as Under Secretary Taylor 
mentioned, we are pressing the issue in the Paris Club right 
now. At this stage it's
basically a data collection issue, but I think that everyone 
agrees not only with the point that if we cannot expect Iraq to 
be servicing debt, at least until the end of 2004, and I they 
at least privately would agree with Under Secretary Taylor's 
statement, that when the time comes, it's going to be necessary 
to get substantial debt relief to Iraq.
    Senator Alexander.  Mr. Zakheim, let me take the discussion 
a different sort of direction. The administration now says 
we're there for a long haul. The committee seems reassured by 
that. I agree with that. However, not everybody is excited 
about that and one group are spouses of many of the men and 
women who are serving in our military. Last Friday, Senator 
Chambliss and I each held hearings in our respective states, 
and Senator Dodd and Senator Nelson will do so in the next 
week, and then we will have a joint hearing later this month on 
issues affecting military parents raising children. And what we 
have is more missions, longer deployments, fewer soldiers, a 
few more women in the service, more spouses working, and a lot 
of pressure on our volunteer army.
    And if family readiness isn't in good shape, it affects 
readiness of our military. One witness before our subcommittee 
on children and families last week pointed out her great pride 
in her husband's work, but that they had a 17-month old 
daughter and he's been in Afghanistan or Iraq for 15 of the 17 
months, and most of the time he was home, he was training with 
helicopters. He's a volunteer and he also volunteered for the 
marriage, but there is a lot of pressure there.
    And I wonder as we think about the future in this long haul 
that we're all there for, we need to also be thinking, and I 
hope you're planning as a part of all this, how we--the size of 
our force structure and the length of our deployments, and how 
that affects military readiness by not putting too much stress 
on families.
    Dr. Zakheim.  Senator, we certainly do that, and the best 
evidence of that is that re-enlistments are still very very 
high. We have probably historic retention rates. We are doing a 
number of things in terms of the pay and benefits that we are 
providing our forces. Thanks to the Congress, we are able to 
provide them with really healthy benefits and pay, not 
necessarily yet fully competitive with the equivalent in the 
civilian world, but certainly a lot closer than they were some 
years back.
    Second, we are looking very carefully--and the Secretary of 
Defense has talked about this--at how we can realign--
particularly reserve and active missions--or rather, the 
functions of the reserves and the actives. It turns out that 
there are some things that are almost uniformly reserve 
activities (civil affairs is a good example), because there was 
some sense in the past that this is what reserves ought to do. 
It is quite clear that this should not only be a reserve 
activity.
    Of course of all our forces are voluntary, but in a sense 
with
respect to the reserves, some of them were more voluntary than 
others, if you will. So we are looking very carefully at the 
missions
and the taskings we are giving to our reserves. Some of those 
might migrate over to the active force to provide a little more 
relief in that regard, so reserves are not deployed for 
excessively long periods. We are also looking at personnel 
tempo, which affects the active forces as well. The course we 
are taking is very much under advisement.
    Senator Alexander.  My last question has to do with 
contracting authority. I want to make sure I have this right. 
We've got the resolution, the United Nations says the UK and 
the United States have the authority. There is an organization 
which you call the CPA, Bremer's in charge. He reports to the 
President; is that right?
    Dr. Zakheim.  That is correct.
    Senator Alexander.  He reports directly to the President?
    Dr. Zakheim.  He does report to the Secretary of Defense.
    Senator Alexander.  He reports to the Secretary of Defense, 
so he's not the President's representative?
    Dr. Zakheim.  No, he is the President's envoy, but he 
reports to the Secretary of Defense.
    Senator Alexander.  Oh. How does that work?
    Mr. Larson.  This is very similar to the situation of an 
ambassador in another country. You know, the ambassador reports 
to the President through the Secretary of State, and I think 
this is similar.
    Senator Alexander.  I will leave that to the President.
    Let me get on down to the next level. The next level is, 
you had designated the Army to handle the contracts.
    Dr. Zakheim.  Yes, Senator.
    Senator Alexander.  So if someone wants to be a contractor 
for drinking water, for a variety of--for all contracts going 
into Iraq, they call the Army? Is that how you find out what to 
do?
    Dr. Zakheim.  Well, what they do, the Army administers the 
contract.
    Senator Alexander.  Who does the contractor call?
    Dr. Zakheim.  The contractors will go to the CPA. That is 
their address.
    Senator Alexander.  Where is the CPA?
    Dr. Zakheim.  That is Mr. Bremer's organization.
    Senator Alexander.  So you call Baghdad ?
    Dr. Zakheim.  No. There are officials here as well. 
Contractors also work for AID, for example, and then AID puts 
proposals to Ambassador Bremer, so Ambassador Bremer and his 
staff in Baghdad are the ultimate authority deciding what is 
done, and then the various agencies.
    Senator Alexander.  I don't want to overstay my time, Mr. 
Chairman, but I'm trying. I thought you simplified this and I'm 
now a little more confused. So what does the Army do about 
contracting?
    Dr. Zakheim.  The Army is essentially managing the 
contracts; its role is simply to make sure that the contracts 
are drawn up properly and are audited properly. It is basically 
responsible for contract management. It will issue those 
defense contracts that it is executive agent for. The Army will 
not, for example, issue contracts that are issued by AID.
    Senator Alexander.  So the Army only does Army contracts. I 
thought the Army was working for Mr. Bremer and the CPA.
    Dr. Zakheim.  Yes, but the Army is the executive agent for 
the Defense Department and for the CPA.
    Senator Alexander.  Isn't the CPA in charge of everything?
    Dr. Zakheim.  Yes, it is.
    Senator Alexander.  Well then, why wouldn't they be in 
charge of AID contracts?
    Dr. Zakheim.  I will let the director of AID answer that 
one.
    Mr. Natsios.  The contracts that we let, we let 9 
contracts, are AID contracts. They report to us, we spend the 
money, we are responsible, we are audited by the GAO, the 
Inspector General. All the money we spend is money that you the 
Congress appropriated. We do not have any of these other 
sources of money. All our money is appropriated money. The 
contracts are by AID, they are AID contracts, I am responsible 
ultimately as the CEO of AID.
    We have a fixed set of things we are supposed to do that 
was agreed to by an inter-agency process beginning last 
October, and we are carrying these functions out. There has 
been one or two more things that were added along the way that 
we weren't planning to do, but the inter-agency process said we 
want you to do this, please do it, and whatever we are asked to 
do, we do.
    Senator Alexander.  Thank you, Mr. Chairman.
    Senator Sarbanes.  Mr. Chairman, could I ask one follow-up 
to that? Who makes the decision on whether these contracts are 
going to be non-bid contracts?
    Mr. Natsios.  For AID?
    Senator Sarbanes.  Well, no, for anybody.
    Mr. Natsios.  Our contracts, we have one contract that's 
just for hiring some technical personnel people that we issued 
last October, I think we hired 20 people, and was not bid. All 
our other contracts are approved through what is called under 
the FARS, Federal Procurement Act, limited competition. This 
was done in January when there was debate before the Security 
Council as to whether or not other countries would endorse 
this, and so we were told by the inter-agency they wanted this 
done quietly within the confines of federal law. And we did it 
exactly according to the federal act and the FARS act.
    A limited competition means you go to nine companies or 
eight companies. In the case, for example, of the engineering 
construction contract that Bechtel ultimately won, there were 
seven companies, the largest engineering and construction 
companies in the United States as prime contractors that were 
asked to bid. They bid. There were two final bidders. We asked 
for last best offer. We chose Bechtel because they had the 
lowest price with the highest technical review, and they were 
awarded the contract. But those were bid. They were bid using 
this limited competition which we also used, by the way, in 
Afghanistan and was also used in Bosnia.
    It's a much faster process. Our process normally takes six 
months from the time you bid the thing publicly to the time you
award the contract. We did not have six months, we were told we 
have two months. I said then we must use a truncated process, 
which there is a provision for in the FARS, which is what we 
used.
    Senator Sarbanes.  Did the military do the same thing or 
are you doing non-bids?
    Dr. Zakheim.  The way it is going to work is that--and this 
is also in answer to Senator Alexander, so I can be clear on 
this. When there is a requirement by the CPA in Baghdad, the 
Army will be issuing the solicitations, contractors will 
respond, and then the Army, once the decision is made, will 
simply issue the award. Will the contracts necessarily be sole 
source? No, not necessarily at all. Again, it is a function, as 
Mr. Natsios said, of the urgency and the need.
    Senator Sarbanes.  You have been doing primarily sole 
sourcing up to now; is that correct?
    Dr. Zakheim.  There has been, as you just heard, an urgency 
there. We are caught really----.
    Senator Sarbanes.  No, no, I understand Administrator 
Natsios' procedure and that seems to be in conformity with 
existing law and seems to retain a competitive bidding 
dimension, although circumscribed from what might ordinarily be 
the case in order to address the urgency of the situation, but 
it's not my understanding that that's what the Defense 
Department has been doing.
    Dr. Zakheim  [continuing].----I'm sorry, sir, what do you 
think we have been doing? You've lost me here.
    Senator Sarbanes.  Have you been following the procedure 
that Administrator Natsios was just outlining?
    Dr. Zakheim.  What we have done, we have issued contracts, 
some of them sole source. Again, because some of the things 
that were needed, for instance supporting the ORHA people in 
Baghdad, were exceedingly urgent.
    Senator Sarbanes.  Thank you, Mr. Chairman. I will pursue 
it.
    The Chairman. Thank you very much, Senator Sarbanes.
    Let me start the second round just by making an 
observation; you're welcome to comment. I have heard a 
discussion of the technical conference on June 24th with a 
potential pledging conference in September. This is an overall 
point of policy of our government; and it is important that we 
try to emphasize to other nations that we are all involved in 
the war against international terrorism, all of us. The Iraqi 
situation, as the President has stated on other occasions, is 
one chapter of that, but it is only one chapter. Afghanistan is 
another chapter. It is an ongoing story, and we do not know how 
many chapters we are going to have.
    One part of it, which precedes the Mideast, is the problem 
of the leftovers from the Cold War with the Soviet Union. There 
are huge stores of weapons and materials of mass destruction 
that are potentially obtainable by terrorists. They could 
obtain them from other sources, but Russia and the United 
States have more than 95 percent of the stores. Already we have 
drawn the attention of the G-8 to that issue, both at last 
year's conference and in preparation for the G-8 conference 
this year, attempting to pin down what was an overall pledge at 
the time, that the United States was doing roughly a billion 
dollars worth of work in this area in threat reduction and 
other programs, and the G-8 would do a billion.
    Throughout the past year, some of us, as we have visited 
with the British and the French and others, have been asking 
how much are you going to do? They began thinking about it, and 
began to put some figures on this. We've had a hearing or two 
here. I believe Mr. Larson was in one. Ideally you would have a 
chart with 10 years of projects. Countries would be invited to 
take on projects in terms of their own self interests and 
geography. For example, tactical nuclear weapons or Russian 
submarines that are not strategic but, nevertheless, would foul 
up the waterways of the northern seas in a big way and so 
forth, would be an important objective.
    In any event, together we are moving toward cleaning up the 
materials and weapons of mass destruction, the fissile 
materials that might be a part of this intersection of fissile 
materials and terrorists, would be the final bottom-line 
existential event.
    Now Afghanistan is an important part, and Dr. Zakheim has 
said there have been pledges made. We have heard testimony that 
some of the pledges have not been kept as yet, or at least 
there has been some reticence in being forthcoming with the 
monies that we might have anticipated. Maybe they felt we were 
too reticent, that our plans were not comprehensive enough for 
Afghanistan. Ours are becoming broader. The involvement of NATO 
certainly is a breakthrough for that organization as well as 
our overall diplomacy with European countries.
    I sketch all this because I think it's relevant to whatever 
you're going to talk about on the 24th of this month and 
subsequently. This is not simply a cafeteria course on whether 
you want to sample Iraq and get a little bit here and there. It 
is really a question of our overall diplomacy in getting an 
idea out there that the intersection of terrorism with weapons 
of mass destruction, is a potential existential event for all 
the participants, not just the United States. This was not just 
an idea in which we became aggressors and decided to become 
universal enforcers and so forth.
    We have suffered here. Other countries have too, but maybe 
not in the same dramatic way. They might sometime unless we all 
work together and round up the rest of the terrorists. There 
are a good number of things that we are doing. I hope that is 
the context for the conference you are preparing for and for 
whomever will represent the United States at this conference. 
It seems to me that that's the kind of context we're going to 
have again and again as we approach these issues.
    Otherwise, whether it's debt servicing or who contributes 
this or that, or what have you, it becomes an ad hoc matter of 
the moment; and that really won't be good enough. We will be 
back again in this conversation in which people ask Senators 
representing Americans, how much are we doing, how much are 
others doing, and how much are we asking others to do?
    Now if the thought is, do as much as you can, make your 
best effort. That isn't good enough. Ultimately this entire 
situation is going to falter through mistrust of others, 
whether they are allies or whether they just happen to be other 
countries in the world that might be affected by terrorism. So 
I just ask any of you, do you generally agree that this is a 
reasonable context and if so, is that the way you're 
approaching it?
    Secretary Larson.
    Mr. Larson.  Thank you, Senator. I think it is, and in 
answering, I would like to commend you for all the leadership 
that you have shown on the issue of the Global Partnership and 
cooperative efforts to reduce the threat posed from these 
materials left over from the Cold War.
    This provides, I think, an excellent example of what we are 
trying to do. As you indicated, last year at the Canada G-8 
summit, we were able to push through after a great deal of 
diplomacy and effort, a plan that really was sometimes called 
10 plus 10 over 10. In other words, to get a commitment for $20 
billion over 10 years, of which the United States might provide 
half. At this most recent G-8 summit yesterday and a few days 
before, there was a reaffirmation of the commitment of the G-8 
to that plan. We were able to bring in some additional 
partners, Norway, Sweden, Poland. So we are growing this out 
from the G-8 so it isn't just a G-8 initiative.
    I think it is a good model or template, but to be able to 
get that sense of commitment to other countries to a share of a 
global effort, we first of all had to get them to accept that 
it was a global effort, and I think the Security Council 
resolution and the G-8 statement of a few days ago will be very 
helpful in that regard. We had to give them a sense of what the 
magnitude is. We had to give them a sense of the $20 billion as 
being a rough estimate of what really ought to be done over the 
next 10 years. And then we had to get into the hard work of 
convincing countries that they needed to do their share of 
that.
    We do have a similar idea here. It's just that if we had 
started with our partners with the $10 billion, we need you to 
contribute $10 billion without having laid that foundation 
beforehand, we wouldn't have had the success that we did on the 
Global Partnership. And so, here in the case of Iraq, I think 
we need to follow much of the game plan that we followed on the 
Global Partnership.
    The Chairman. I appreciate that response. It implies of 
course that we are able to furnish to them a construct that 
you're trying to provide for us today of the budgets, the cash 
flow, the other aspects that indicate why we are doing what 
we're doing and why we are anticipating that they would want to 
do their part.
    Senator Biden.
    Senator Biden.  Thank you very much, Mr. Chairman.
    Gentlemen, there was an Office of Reconstruction and 
Humanitarian Assistance organizational chart, that is obviously 
no longer relevant. Is there a chart we can submit in the 
record as to who reports to whom and so on? Is that available?
    Dr. Zakheim.  Certainly, Senator, and it is actually a 
combination of charts so that there is more clarity, and we 
will certainly submit it for the record.


    [The following chart was submitted by Dr. Zakheim on August 
8, 2003.]




    Senator Biden.  I appreciate that. Secondly, one of you and 
I can't recall who, I think it was you, sir, indicated that a 
national budget is being prepared for Iraq. Who's preparing 
that budget?
    Mr. Larson.  I will take the first crack at this and maybe 
Under Secretary Taylor may be able to amplify, but as Under 
Secretary Taylor indicated, Peter McPherson is working with 
Ambassador Bremer as the key person in Baghdad.
    Senator Biden.  Does he work for Bremer?
    Mr. Larson.  Yes.
    Senator Biden.  Okay.
    Mr. Larson.  And a main part of his job is really to 
prepare, in consultation with the Iraqis and with the other 
parts of the Coalition Provisional Authority, a notional 
budget. Because it's through that budget that one can identify 
what the immediate and investment needs are.
    Senator Biden.  I'm not trying to cut you off, but you said 
a notional budget?
    Mr. Larson.  Well, what I mean is that you are going to 
have to accept, we all are going to have to accept that in the 
first instance, this will be a rough and ready budget, 
because----
    Senator Biden.  But it will have numbers?
    Mr. Larson  [continuing]. It will have numbers, but it's 
the sort of budget that if you scratch it too deep, any of us 
would be able to raise questions about it, and he understands 
that.
    Senator Biden.  Got you.
    Mr. Larson.  That has to be a starting point for coming to 
the international community or anyone who wants to be a part of 
this to see what the priorities are.
    Senator Biden.  When is that budget due? What's the time 
frame?
    Mr. Taylor.  Let me add a few things about it. There is not 
a set deadline for this, but the meeting in New York is an 
important event to have as much information for that. What you 
have been hearing from us in this hearing are pieces, some 
different sources of funds from the assets, from the oil, and 
the budget that's being put together by our team in Baghdad 
working for Ambassador Bremer is the government's budget, and 
the government's budget is the salary payment, the payment to 
teachers, et cetera. But broader than that will be the whole 
budget for reconstruction, which is going to include whatever 
it has to do for roads, hospitals, et cetera.
    And both of those are being done. There is actually a lot 
of work on it going on right here in Washington.
    Senator Biden.  How many Iraqi ministries are there? You 
know, when we sit down and do our budget, I think we can make 
that comparison, we have certain functions, we have 13 
appropriations bills. I mean, how many ministries were there 
and how many ministries are we attempting to maintain? Not the 
personnel, but is there a ministry for education, a ministry 
for transportation? How many ministries are there?
    Dr. Zakheim.  I know that there were a total, I believe, of 
24 ministries before the war. Some of those ministries are not 
going to be stood up as quickly as others. The Ministry of 
Defense obviously is a later one, agriculture is probably an 
earlier one. My understanding, and we will get you an answer 
for the record on that, is we are talking initially about a 
half dozen more technical ministries that will be ramped up 
earlier to deal with some of the more immediate, or what you 
might say less national security types of problems like defense 
or intelligence.

    [The following information was submitted by Dr. Zakheim on 
August 8, 2003 in response to Senator Biden's question:]

    Dr. Zakheim. Prior to the war, there were 23 ministries. As 
part of the restructuring of the Iraqi government, it is 
anticipated that four of these ministries will be dissolved due 
to their past history of abuses or misuse. These include the 
Ministries of Intelligence, Information, Higher Education and 
Scientific Research, and the Military Industrialization 
Commission.

    Senator Biden.  Are there ministries that you would 
consider functioning? Not that we should or shouldn't, I'm just 
trying to get a sense of what's on the ground. What ministries 
are up and running now, if any, and which ones are the 
priorities to get up and running? Agriculture, you said is one. 
Can you tell us which ones?
    Mr. Taylor.  I can tell you the Central Bank is up and 
running and that's important. These economic ministries we want 
to move very quickly on.
    Dr. Zakheim.  Regarding the Agriculture Ministry, they are 
bringing back the civil servants. Obviously the more senior the 
civil servants, the greater the problem; because these people 
got to the top as part of their connection to the old regime. 
Then there is a problem with just getting the buildings up to 
speed because some of them were destroyed.
    Senator Biden.  I'm just trying to get a sense of the time 
line. January 1st is the date that every witness has basically 
said from the Defense Department on, that is really the time, 
though there was a lot of preliminary planning before that, the 
administration began to really focus on the reconstruction of 
Iraq after Saddam is gone. And one of the things that we had 
heard in this committee and in our private conversations at the 
White House as well as State and other places, was that there 
was a game plan that existing ministries were going to be able 
to be preserved, if you will, because there were very well 
educated civil servants who were competent, who were within 
those various ministries. And once you got rid of the bad 
apples at the top, so to speak, they would be able to get 
functioning relatively quickly. Or at least that was the 
expectation in November and December of last year--that we had 
assigned counterpart persons from departments in the United 
States.
    So there were Department of Education people from the 
United States named and assigned to help get up and running the 
Department of Education, if there is such a department stand-
alone in Iraq, and there were going to be some from the 
Department of Agriculture, et cetera. So we were going to take 
American personnel who were going to be the de facto ministers 
functioning, getting these agencies up and running.
    I would like, since my time is up, for the record, to know 
what ministries there are that you believe that are, that exist 
in Iraq, what American counterpart personnel by name have been 
assigned to those ministries, what their functions are, and 
what the needs that remain are as you're assessing them now, so 
that we get, or at least I get a sense of how this is going to 
be stood up, how we're going to deal with this.
    I know my time is up, but I would also ask Mr. Natsios, for 
the record, you had identified on February 19th, in a vision 
statement, benchmarks and a range of sectors in Iraq for 
reconstruction. If you could update those for us, it would be 
very very helpful. And I realize this does not cover the 
problem we would all agree is maybe the most important thing 
that's going to hold it all together, what the transition 
government is going to be and who is in charge of doing that 
and how that will be stood up, et cetera.
    But one of the big pieces is the reconstruction of the 
justice system. Who would be the person, if we wanted to get 
the most knowledgeable person in the administration to talk 
about the state of the existing Iraqi justice system, what 
plans we have, preliminary or otherwise for reforming or 
getting that system functioning, who is the person we should 
talk to? Who do I pick up the phone and call? I'm not being 
facetious now. I'm trying to get a sense of who is in charge of 
the justice system, the justice department for Iraq.
    Mr. Natsios.  Can I answer your earlier question, Senator?
    Senator Biden.  Yes, you can. Does anybody have a name for 
who that person is? Okay, so we don't have it. Mr. Natsios.
    Mr. Natsios.  There is someone, I just don't know his name.
    Senator Biden.  Oh, okay.
    Mr. Natsios.  We were asked to make functional, and when I 
say functional, many of these ministries were looted and so 
there was nothing there. We were given a list of the five 
essential ministries, five or six, one of them was the Central 
Bank, which is not a ministry.
    Senator Biden.  Can you tell me what they are?
    Mr. Natsios.  Justice, finance, trade. Now, I will explain 
why trade is important. Irrigation and agriculture, and the 
Central Bank. There is, I think one more, I just can't recall 
from my memory what the other one is.
    What we were asked to in AID, and we have done, is put 
together what we call--and we did this is Bosnia, Kosovo, 
Afghanistan--ministries in a box. We buy the computers that are 
put in the network through the whole system, we put up the 
electric lights. Many of the ministries in Kabul had the roofs 
blown off, so we repaired the buildings. We bought fax 
machines, we made the phone system functional, all of the 
office equipment that you need to communicate. The materials 
you need, the desks and that sort of thing. We repaired the 
buildings so people could function in them. And so, that's one 
thing we did.
    The second thing we did is through our contracts put in 
place, if it was necessary, the training of people in certain 
disciplines. Now, there is a controversy in the education 
ministry. We went in and said we really are not enthused about 
the way in which subjects are taught in schools, highly 
authoritarian, very propagandistic, a problem with textbooks, 
the way the teachers were trained. So we went in and said we 
want to retrain your teacher force, which is one of our 
benchmarks.
    The initial response was we don't need any retraining, we 
like this the way it is. We said well, we don't like it, and 
we're going to work with you. We had a long debate and once the 
senior people were removed, the people at the school level said 
we want the training, help us. So we're now at the point where 
we're designing a curriculum to retrain the teachers, and the 
mid-level people who were not really drawn into the Ba'athist 
party.
    So that's the capacity building part of our job. We don't 
appoint the people who run the ministries, that is another 
division of CPA that Ambassador Bremer appoints, and they 
report to him, but we do the capacity building and the making 
of the functions so the place can run.
    The trade ministry is important for this reason. You may 
ask, why are we doing the Ministry of Trade? They run the food 
distribution system, and without them we can't set up the 
44,000 distribution sites for people to get the food that 
people depend on. So, the most important ministry is trade, 
because people have to eat.
    Mr. Taylor.  If I could just add a couple sentences to 
Senator Biden's questions. In the case of the Finance Ministry, 
our people are working with the civil servants in that ministry 
and have been from the day they arrived. And they've had to 
work on how the payment system is working, and they are 
actually functioning quite actively.
    Same with the Central Bank. They are engaged with the 
people who have been employed for 30 or 40 years in the Central 
Bank, very qualified, dedicated people. They are thinking about 
the currency and what monetary policy should look like. So 
that's all going pretty much along the lines of what we 
indicated we were thinking about last January, at least with 
respect to these economic issues.
    Senator Biden.  That's all I want to know, how each and 
every one of the ministries is working, relative to the way you 
just described the Central Bank.
    Mr. Natsios.  Could I just add one thing? Senator, we will 
have to you the updated benchmarks. We adjust them every two 
weeks and we do have a chart with all these benchmarks on it 
and dates, and the last time it was updated was two weeks ago, 
it's time for another update, and we will send that to you.
    Senator Biden.  I appreciate that, thank you.
    The Chairman. I want to recognize the three senators who 
are here for the second round. My hope is that the hearing will 
conclude in roughly 21 minutes or so. We will obviously have 
leeway, as there are important questions and answers. That's 
the purpose of this hearing.
    Senator Hagel.
    Senator Hagel.  Mr. Chairman, thank you. Dr. Zakheim, for 
the record, let me--I have a couple of excerpts, one from a May 
20th press conference with Secretary Rumsfeld and the Chairman 
of the Joint Chiefs of Staff, General Myers, and this is 
General Myers speaking: ``We continue in that broad range of 
security and stability operations and to support the 
increasingly effective humanitarian operations in Iraq, as the 
Secretary said. We currently have some 150,000 U.S. troops in 
Iraq. Approximately one-third of those forces are in and around 
the greater Baghdad area.''
    Two days later, Doctor, at this hearing as a matter of 
fact, with the Deputy Secretary of Defense and the Vice 
Chairman of the Joint Chiefs of Staff, General Pace, our 
colleague Senator Sarbanes asked this question, and I quote 
from the transcript. He asked this question to General Pace:

    Senator Sarbanes. How many U.S. troops are in Iraq now?
    General Pace. 145,000, sir.
    Senator Sarbanes. Ah-ha. And are we expecting to increase that 
number?
    General Pace. The number is being increased as we speak, by about 
18,000 with the arrival of the 1st Armored Division and then beyond 
that, there are no current projected deployments.
    Senator Sarbanes. So, we're going to go up to over 160,000?
    General Pace. Potentially, sir, although some of the troops that 
are there now, the ones who did all the fighting earlier, as General 
Franks sees the opportunity and the security environment allows, he 
will bring home who got there first.

    I wanted to make sure that's on the record so there is no 
question about what's classified and what's not classified.
    Dr. Zakheim.  Senator, you are absolutely right. I saw 
those numbers on a classified document and that is why I told 
you what I told you. I asked my staff whether in fact the 
actual numbers were unclassified, and I have an answer for you. 
As of yesterday, sir, U.S. forces in Iraq, just over 146,600. 
You also asked me about the British forces. As of yesterday, 
sir, British forces in Iraq, 13,000.
    I was not trying to obfuscate at all. What I saw was a 
classified chart. The numbers are not in this case.
    Senator Hagel.  Thank you very much.
    Secretary Taylor, Secretary Larson mentioned, as you did 
generally, the Paris Club, negotiations or responsibilities 
that we are going to have to work our way through, for all the 
reasons you both understand. Are there currently plans now 
underway to organize a Paris Club meeting to deal with the debt 
that Iraq now holds?
    Mr. Taylor.  The Paris Club representatives met and 
discussed the first task, which was to collect the data on that 
as best we can for the Paris Club members, and that has already 
taken place and it's underway. Since there is debt held by 
countries not in the Paris Club, we have asked the IMF to do 
the same kind of activity, to go to the countries and ask what 
kind of debt do you have. And then third, since we want to get 
information from the perspective of Baghdad, our people on the 
ground are working with the records to see what their records 
are of the debt that they owe.
    So that is what's underway now, and as soon as we get some 
clarification, better estimates of the size of the debt, then 
the actual discussions of how much of value will be reduced and 
who participates and that actually, the dates for that have not 
been set at this time.
    Senator Hagel.  But that planning is underway to set the 
date and to take it to the next step to try to resolve?
    Mr. Taylor.  There certainly is a plan to take the next 
step as soon as we get the information.
    Senator Hagel.  Okay, thank you.
    Secretary Larson, did you have something to add to that?
    Mr. Larson.  No, sir.
    Senator Hagel.  A question on the issue of oil. Does anyone 
at the table know what our position, the U.S. government 
position would be on advising the interim authority or 
government or whatever comes at some point in Iraq, what their 
position should be regarding membership in OPEC? Get out of 
OPEC, stay in OPEC, have you thought it through?
    Mr. Larson.  I think that we are very aware of the fact 
that oil and nationalism are very closely intertwined in Iraq 
and that we will want to make sure that any decision on their 
future participation in OPEC is a decision that the new 
representative government takes. I'm sure that our team on the 
ground will be able to help them think through some of their 
options.
    If I could just add quickly in response to Senator Biden's 
question earlier, that we do have a very functioning 
administration in the oil ministry as well, because as I 
mentioned, Mr. Ghadhban and including many well qualified 
Iraqis. They are doing a strategic review of the options for 
the oil sector and the contribution it can make to the economy.
    We will have to evaluate, Senator Hagel, that question, but 
I think it's one where we need to be careful not to be seen as 
steering them, because it does need to be seen as a decision 
they make in the interest of Iraq.
    Senator Hagel.  This certainly could have a bearing on 
previous questions about oil pricing and how much they increase 
production, and all that are going to have an impact on 
revenues coming from oil in Iraq, which you all know. Anyone 
want to add anything to what Secretary Larson said?
    My last question goes back to the Iraqi military situation, 
high unemployment, problems that we have because of that 
unemployment, obviously spilling over into social issues. Who 
can explain to this committee the plans we have in place to 
deal with that issue, the Iraqi military unemployed, out on the 
street, eventually will cause a lot of trouble, and some 
trouble is being caused now. But what are our plans to deal 
with it?
    Dr. Zakheim.  As you know, Ambassador Bremer has made it 
very clear that because as you say, some of them are being 
troublesome, he is not going to bring back the wrong people or 
address them in the way they perhaps would like to be 
addressed. Clearly, it just adds to the unemployment problem 
and it goes back to the overall economic recovery of the 
country. At some point, of course, there will have to be a 
reconstituted Iraqi military and some of the former military 
may well be requalified. It really depends on what they did 
before. The more senior people, are less likely to be 
requalified, the less senior ones are more likely to be. But at 
this stage of the game, I think it is a little premature for me 
at least to speak about how that military might be restructured 
when we still have our operations that we conduct.
    I would reemphasize what Ambassador Bremer has said; the 
fact that they are unemployed and the fact that some of them 
are noisy about it should not in any way deter us from getting 
the wrong people out of uniform and doing it as soon as 
possible.
    Senator Hagel.  Well, in the interest of time, I will not 
pursue that, but yes, Mr. Natsios?
    Mr. Natsios.  We have found in the aftermaths of conflicts 
and civil wars that if you don't get young men working, and I 
don't mean senior officers, I mean young men, we have trouble 
on the streets. So we developed a set of mechanisms through our 
Office of Transition Issues, OTI, to do mass employment 
programs. In a country like East Timor, we recruited a third of 
the work force through these programs. They don't pay a lot of 
money, $2 a day, but for many of these countries, that is a 
living wage.
    We started these programs three weeks ago, and the first 
one was Sadda City, which is the poorest slum area in what used 
to be called Saddam Hussein City, but it's a Shiite city and 
they hated him so much, the first thing they did was to change 
the name. It was full of, and this is not garbage from the 
conflict that wasn't picked up, it has been like that for years 
and years--old trash, garbage, trash; it was just very 
depressing. So we decided to make that our first mass 
employment program. We employed 16,000 people, I think it was 
$2 a day, to begin a mass cleanup of the area. It was a huge 
morale boost for the city, which had been completely neglected 
for a very long period of time. I think 180 trucks left with 
the garbage and the trash and the refuse from years on the 
first day alone, and there has been this very big community 
uplift that has taken place there. I think we are in four other 
neighborhoods now of the city, and we will be extending these 
mechanisms throughout the country in order to get particularly 
younger men off the streets.
    Senator Hagel.  And this includes former military?
    Mr. Natsios.  It does, but it's not the officers. We don't 
employ those people, and they tend not to want to do a lot of 
physical labor; I just wanted to say that.
    Senator Hagel.  Thank you very much.
    Dr. Zakheim.  Senator, just to add and amplify, because of 
your question, we in fact have in the solicitation phase, which 
means we are very early on, we are soliciting contracts for 
retraining and reshaping the Iraqi military. Now again, it is 
early, we are just soliciting the contracts. By the way, in 
response to an earlier question, while we did have sole source 
contracts before, the new contracts are all being competed 
because the kind of FAR regulations that justify sole source as 
a compelling activity, are not as applicable now. So we are 
soliciting contracts, we are going to compete on those 
contracts, and that will include developing, retraining and 
supplying the army. Obviously it is too soon to determine who 
will actually be brought in, but there is a process in train 
that goes hand in hand with what AID is doing.
    Senator Hagel.  Thank you.
    The Chairman. Thank you, Senator Hagel. Senator Sarbanes.
    Senator Sarbanes.  Thank you, Mr. Chairman, I just have a 
couple follow-up questions.
    I'm glad we clarified this level of the military. I was 
very much taken aback when I arrived at the hearing to hear 
Senator Hagel asking you about that and being told that the 
figure was classified. I take it that means that you were not 
aware either of Secretary Rumsfeld's statement or those of 
Deputy Secretary Wolfowitz before this subcommittee; is that 
correct?
    Dr. Zakheim.  At the risk of saying it is not correct, it 
is not correct. As I mentioned when I answered the original 
question, the numbers change. I had seen a number on a 
classified chart. I did not feel that I could reveal that. I 
checked that, and the numbers I provided, 146,000 for us and 
13,000 for the British, 146,006 actually, are as of yesterday, 
so that is the most up-to-date number. I wish again to 
emphasize I was not trying to obfuscate or fail to give a 
straight answers to straight questions.
    Senator Sarbanes.  How can we avoid drawing that conclusion 
when we have both the Secretary of Defense and the Deputy 
Secretary of Defense publicly giving us figures and then have 
you come in and say that the figure is classified?
    Dr. Zakheim.  Again, because the number I saw, and the 
numbers do change daily, was on a classified chart. I gave you 
the number as of yesterday.
    Senator Sarbanes.  On your bidding process at AID, for what 
duration do you give those contracts?
    Mr. Natsios.  The contracts we did were 12 to 18 months, 
not all of them. There were some shorter ones. I think the 
personnel one was for 3 months or something like that, but the 
longest one was 18 months. I can get back to you, Senator, with 
precise dates for each one.
    Senator Sarbanes.  I wanted to lay the basis for my 
question to Mr. Zakheim. It's my understanding that some of the 
contracts the Defense Department gave on a sole source basis--
none of your contracts were sole source, were they, in the AID?
    Mr. Natsios.  The personnel contract, that small one. Other 
than that, no, they were not.
    Senator Sarbanes.  My understanding is that the sole source 
contracts that were given by the Defense Department have a 
multi-year duration to them; is that correct?
    Dr. Zakheim.  As I understand it, they are 90-day contracts 
with 90-day options.
    Senator Sarbanes.  The previous ones you gave were 90-day 
contracts with 90-day options?
    Dr. Zakheim.  That is what I am being told, 90 days and 
then 90-day options, so we are talking about a total of 6 
months if the option is picked up.

    [The following information was submitted by Dr. Zakheim on 
August 8, 2003 in response to Senator Sarbanes' question:]

    Dr. Zakheim. Virtually all post-war Iraq contracts awarded 
by DoD were short duration (e.g. 90 days) sole-source contracts 
with 90-180 day option periods. DoD's present objective is to 
transition all post-war Iraq contracting, wherever possible, to 
full and open competition. Federal Acquisition Regulation 
6.302-2, Unusual and Compelling Urgency, was cited as the 
rationale for the initial sole-source awards. Even in such 
cases, senior executive approvals are required to fully 
document any sole source awards, and that all ``agencies shall 
request offers from as many potential sources as is practicable 
under the circumstances.''

    Senator Sarbanes.  Well, I'm looking at a New York Times 
story of April 11th. The Pentagon contract given without 
competition to a Halliburton subsidiary, that's Kellogg Brown & 
Root, to fight oil well fires, is worth as much as $7 billion 
over 2 years.
    Dr. Zakheim.  That is if all the task orders are picked up. 
We have actually spent a few tens of millions of dollars and 
what they do in any event is called in the terminology wildcat, 
and that is for contingencies anywhere, it is not just for 
Iraq.
    Senator Sarbanes.  Well, was it a two-year contract or a 
90-day contract?
    Dr. Zakheim.  The contracts specifically for work in Iraq 
that were let specifically for Iraq are 90-day contracts with 
90-day options.
    Senator Sarbanes.  What about this contract?
    Dr. Zakheim.  That is a contract that is not purely for 
Iraq, it is worldwide. It is based on a series of contingencies 
that might take place and then we pick up task orders. We let 
lots of multi-year contracts. This is by no means the only 
multi-year contract.
    Senator Sarbanes.  Do you let a lot of multi-year contracts 
on a sole source basis?
    Dr. Zakheim.  No, sir. What I am saying is we generally let 
a lot of multi-year contracts.
    Senator Sarbanes.  No, no, no. It's not responsive to the 
point we're pursuing to say to me that you let a lot of 
multiyear contracts if those contracts were being let on a 
competitive basis. That's not what I'm pursuing. Do you let a 
lot of sole source contracts on a multi-year basis?
    Dr. Zakheim.  We let some sole source contracts on a multi-
year basis. This is not the first of its kind, no, sir.
    Senator Sarbanes.  Why don't you submit something to the 
committee that develops that?
    Dr. Zakheim.  Certainly. I am told that even this one was 
competitive within the contract as well, but I will get you 
something that clarifies it.

    [The following information was submitted by Dr. Zakheim on 
August 8, 2003 in response to Senator Sarbanes' question:]

    Dr. Zakheim. Halliburton-Kellogg, Brown & Root (KBR), was 
awarded the competitive Logistical Civil Augmentation Contract 
(LOGCAP III) in December 2001. LOGCAP III is the third 
competitive multi-year award for U.S. Army logistical support. 
DynCorp Corporation was awarded the previous multi-year 
contract award from 1997-2001.
    LOGCAP III, as presently written, is a ten-year Task Order 
Contract, with a one-year base period, and nine one-year 
options. There were five bidders on the 2001 contract awarded 
by the U.S. Army Support Command, Rock Island, Illinois. 
Funding on this contract is by task order.
    In late May, the U.S. Army issued a LOGCAP III Statement of 
Work (this will result in a new contract task order) to provide 
logistics support for up to 110 thousand personnel in Iraq (for 
a three-to-five-year span). Internal Government budgets are 
approximately $1.0 billion for this new work.
    A separate task order was executed in November 2002 under 
the above competitive LOGCAP III contract. This task order 
required KBR to develop an Oil Restoration Contingency Plan. 
This plan included extinguishing oil well fires; capping oil 
well blowouts; and assuring continuation of the operations of 
the Iraq oil infrastructure.
    The Oil Restoration Contingency Plan resulted in a new 
contract solicitation. KBR was the sole-source, contract 
awardee for this new work. This sole-source award was for one 
year with three one-year options, and was based on the U.S. 
Army's determination that KBR was the only contractor that 
could commence and deliver this complex Contingency Plan on 
extremely short notice. Total contract value (cost plus award 
fee) is presently $172 million.

    Senator Sarbanes.  Thank you.
    The Chairman. Thank you very much, Senator Sarbanes. 
Senator Chafee.
    Senator Chafee.  Thank you, Mr. Chairman.
    Mr. Larson, you really dialed in on the oil, and I 
congratulate you. You really know your facts and figures on 
this and where we are going. And as I look at it, and the cost 
and where we're going, am I right that if we generate, or if 
Iraq generates the 2 million barrels per day that you hope for 
by the end of the year and you get the $20 a barrel, that's 
only $40 million a day, and $14 billion a year, is that about 
right, minus what it costs to produce it?
    Mr. Larson.  Right. The rough estimate that I put in my 
written testimony was 14 to $15 billion a year of gross 
revenues based on a lot of assumptions, including the ones you 
just gave.
    Senator Chafee.  That's a long way, if we keep 160,000 
troops, that will cost about, according to the CBO, about $40 
billion a year?
    Mr. Larson.  Yeah. And we believe that the funds from oil, 
the oil proceeds need to be put into this development fund for 
Iraqi use for the Iraqi people. They are not contributed to the 
cost of keeping our troops on the ground.
    Senator Chafee.  So we are saddled with an enormous cost 
here, no denying that, just to keep 150,000, and it's actually 
going up, according to the testimony, up to 160,000 U.S. 
troops, and that the CBO estimates, I think $200,000, $225,000 
per peacekeeper per year, and we're up to $40 billion per year, 
without addressing any of the reconstruction. That's just 
peacekeeping, let alone getting the citizens away from the 
sewage filth, drinking water, and establishing schools, and 
other indications of order. As we look at it, how are we going 
to afford this?
    Mr. Larson.  As some of the senators have said, which is 
the focus of these meetings, is that we identify the 
reconstruction costs and that we get a strong international 
support for that. It is to work together as well to get other 
countries to contribute to the cost of maintaining security 
over time. Dr. Zakheim has touched on many efforts that we have 
made to get on the ground support from other countries in this 
regard, and Poland is a notable example.
    Senator Chafee.  You don't dispute the math, though, about 
$40 billion per year for peacekeepers?
    Dr. Zakheim.  The CBO's estimates presuppose a certain 
level for a certain duration and there is just no way we can 
predict that. I think there were predictions before the war 
started that we needed more than 300,000 troops and that 
clearly was not the case. The predictions regarding how long 
and how many troops will have to stay are all over the place as 
well. I used to work at the CBO, and they make some pretty good 
estimates; but those estimates do not always bear out. I think 
it is fair to say that while the cost will be substantial, I do 
not know what it is actually going to be, and I do not think 
anybody can honestly tell you that it is going to be $40 
billion.
    Senator Chafee.  I don't know if any of you have an answer 
to this, but looking back, how we treated the United Nations 
and the Security Council probably was a mistake, and with these 
enormous costs, why should they help with this burden? They 
were opposed to it.
    Mr. Larson.  I think one of the missions that we also have 
moved forward on is to build international support for the task 
that lies ahead. I think the United Nations Security Council 
resolution of a couple of weeks ago, which was unanimous, with 
only Syria not voting, was a very strong signal that the 
Security Council has said whatever differences there may have 
been in the past over Iraq, there is an assignment that the 
international community has that it can't shirk from, and 
that's helping the Iraqi people reclaim their country.
    I think the announcement out of the G-8 summit was another 
sign that the major countries of the world have recognized this 
responsibility.
    We have in the most recent Security Council resolution a 
framework for reconstruction that brings in the United Nations, 
it brings in the World Bank, and calls for other countries to 
play their part, and so we're going to use that as a foundation 
for moving forward.
    Senator Chafee.  There is a long way to go from expressions 
of support and contributing valuable resources. One of the 
testimonies, Denmark, the Netherlands, are committing $100,000 
here, a few million there, and I think probably what we can 
expect and assume is that we are going to be saddled with the 
cost unless any of you can dispute that, because looking back, 
certainly the Security Council and the United Nations wanted us 
to pursue the inspections and let the inspections process work 
before we embarked on this endeavor.
    Mr. Larson.  I think Senator Lugar pointed us in the right 
direction by comparing this to what is now called the Global 
Partnership, which is designed to reduce the risk from chemical 
or nuclear materials left over from the Cold War from falling 
into the wrong hands. And there, the first step was to get 
everyone to agree that this is a problem, to get them to agree 
that it's a global problem, not just for the United States, and 
then to begin to set up a framework for working together to 
accomplish it. Because of the provisions in the international 
community that existed earlier this year about what should be 
done in Iraq, it has taken some hard work to get to where we 
are. We would agree with you, Senator Chafee, that having 
gotten the acquiescence or support of countries for the most 
recent Security Council resolution is not a guarantee of 
financial support, but it's an important milestone towards 
that, and it's our responsibility to use these needs 
assessments that are being developed, to have the Iraqi people 
through their representatives begin to make the case for the 
help that they need, not to recover from the war but to recover 
from 25 years of being oppressed by Saddam Hussein. That there 
will be a growing appreciation that this is something that 
countries have a moral responsibility to be involved in, but it 
will not be easy, I'm not trying to suggest that it will.
    Senator Chafee.  Just a follow-up on that. In the first 
Gulf War, by presenting our case accurately and with enough 
patience that we did get the Security Council, they did 
participate in the cost. I don't think that will be the case 
here because of the way it unfolded.
    I just have one last question or note. Somebody mentioned 
the book about the Marsh Arabs. What was the book?
    Mr. Natsios.  It's called the Marsh Arabs, by Wilfred 
Thesiger, the last of the great British explorers, about his 
time from 1950 to 1957 with the Marsh Arabs.
    Senator Chafee.  And you recommend?
    Mr. Natsios.  I strongly recommend it.
    Senator Chafee.  Thank you, gentlemen.
    Mr. Natsios.  If I could just add, we have an update every 
day on our web site. It's called Iraq Humanitarian and 
Reconstruction Assistance Fact Sheet, and it has on it a chart 
of every country in the world that has contributed, how much, 
what it's valued at, and the current level is $1,185,000,000. 
That changes each day or as people make further pledges.
    The Chairman. That's an important announcement, because 
people may want to follow on the web site with running totals. 
These hearings are evolutionary; they move on from our 
testimony today to the actual facts.
    Let me just indicate in conclusion, I think Senator Chafee 
presents a point of view that many Americans may have. There is 
some pessimism out there. When we go out of this committee now, 
or to some other debate with questions about Medicare reform, 
prescription drugs for the elderly of America, and problems of 
shoring up Social Security and how to make ``leave no child 
behind'' work, these are very important issues for the American 
people. Although we are focused today on international 
relations and security in this committee, and these are 
paramount considerations for us, there are lots of others.
    I am somewhat more optimistic. I take my cue again, playing 
off Secretary Larson's thoughts, that when the United States 
and Russia, say 12 years ago, took a look at the fact that the 
Russians had produced 40,000 metric tons of chemical weapons we 
could have taken the position, and some Americans did, that 
they made their bed, let them sleep in it, it's not a great 
problem, and all these things, it's their tough luck. It was a 
horrible stock, and the Russians had no money with which to 
destroy it, or likewise, biological things which are much more 
murky. Nuclear is quite obvious. Of course it's a pretty small 
world, and we came to the conclusion that it could be our bad 
luck too.
    As a matter of fact, other countries may not have stepped 
up to the plate until the G-8 meeting that we have been talking 
about today in the same manner, but I think they do understand 
that. We had an agreement 12 years ago, and there is a 
recognition that there are disasters out there. Now Iraq is 
potentially that sort of situation and we're going to have to 
be successful. There really is no compromise in the event that 
we are not successful with the weapons of mass destruction, in 
getting them either secured or destroyed, nor is there any 
halfway option with regard to Iraq or Afghanistan.
    Other nations may not come to this conclusion instantly. I 
appreciate the problems that you have as our negotiators, 
actually sitting at the table with them. Yet all of us really 
have to be on the same page in indicating that these are 
potentially existential events for them as well as for us, and 
that it's out there and it has to be solved, and that we are 
leaning upon them. Now they may not like that. It's not a 
popularity contest in terms of leadership of this sort, but it 
seems to me that more and more are coming to that conclusion, 
whether they like it or not, and they are beginning to see many 
of the same things through the same prism that we do.
    It is tough going, and I think this committee appreciates 
that. I personally appreciate your testimony today, your 
response to our questions and your appearance. I hope that you 
understand the importance that we place in the oversight 
function and requesting these hearings from time to time so 
that we can all catch up, at least through our dialogue with 
the American people and with people around the world who may 
have some greater confidence in our system, complex as it is in 
coming to the right conclusions. I appreciate your testimony.
    With that, the hearing is adjourned.
    [Whereupon, the hearing adjourned at 12:40 p.m.]

       Responses to Additional Questions Submitted for the Record

    Question submitted to Under Secretaries Larson (State), Zakheim 
  (Defense), Taylor (Treasury), and Administrator Natsios (USAID) by 
                             Chairman Lugar

    Question. We have just received the first OMB report dated June 2, 
2003 on U.S. strategy and activities related to post-conflict 
reconstruction In Iraq, as required under Section 1506 of the FY 2003 
Emergency Wartime Supplemental Appropriations Act, 2003. One of the 
questions raised by this report is how much has each cite agency 
requested to obligate out of the $2.475 billion in FY 2003 funding, and 
how much has OMB actually apportioned and provided to implement the 
Iraq stabilization.
    Can you be specific: to date, what are the amounts requested by 
each agency; what are the amounts already apportioned by OMB by agency; 
and how much has actually been transferred into each agency's account 
for obligation for Iraq stabilization and reconstruction efforts?

     Response Submitted by Dov Zakheim, Under Secretary of Defense

    To date, agencies have formally requested that $616.1 million be 
made available from the appropriated Iraq Relief and Reconstruction 
Fund (IRRF) to implement Iraq relief and reconstruction activities. 
Three agencies have requested funding from this account: USAID ($549.1 
million), Department of Defense ($66 million), and Department of State 
($.956 million). OMB has apportioned and transferred $527.1 million to 
USAID. Of that amount, $212 million was provided as reimbursements to 
USAID for activities in Iraq undertaken with non-IRRF resources. The 
remaining $315.1 million was provided for reconstruction and transition 
activities. In addition to these appropriated resources, OMB has 
appropriated $563.9 million in vested Iraqi assets to the Department of 
Defense primarily for salary and pension payments.

 Response Submitted by John B. Taylor, Under Secretary of the Treasury

    Treasury technical assistance began work in Iraq with two blocks of 
funding: A total of $225,000 remained unused from the FY 2000 Treasury 
International Affairs Technical Assistance (TIATA) Program; and $2 
million that had not yet been committed to the FY 2003 TIATA Program. 
This gave the Office of Technical Assistance (OTA) a total of $2.25 
million in resources for use in Iraq. Congress was given informal 
notification of OTA's intent to use these funds in this manner with the 
understanding that the funds would be repaid from whatever resources 
OTA received for its work in Iraq. Use of these funds began February 
19, 2003 when funds were obligated to advisor contracts. As of July 14, 
2003 essentially all of these funds have been obligated, although 
spending continues against these obligations.
    OTA forwarded the budget request for its activities in Iraq at a 
joint meeting with USAID at OMB on Wednesday, May 16, 2003. The request 
totaled $6 million, broken down into the following categories: Ministry 
of Finance, $2 million; Central Bank of Iraq and the commercial banks, 
$1.8 million; Office of the Financial Coordinator, $1.4 million. In 
addition, OTA requested $.8 million to provide grant funding to the 
Financial Services Volunteer Corps (FSVC) to work on inter-bank 
clearing, the Baghdad Stock Exchange, and Iraq's insurance industry.
    According to the agreed protocols for use of funds out of the 
Emergency Wartime Supplemental Appropriations Act of 2003 (P.L. 108-
11), all budget proposals must originate from the Coalition Provisional 
Authority (CPA) in Baghdad. Therefore, OTA immediately forwarded its $6 
million budget request to the Program Review Board (PRB) of the CPA. 
OTA received notice that its request was approved by the PRB on June 3, 
2003. The approved usage of the funds was subsequently approved by the 
CPA Administrator, Paul Bremer, and forwarded to OMB in Washington.
    Since then, OTA has drafted a Congressional Notification (CN) and 
agreed the wording with OMB. This will be forwarded to Congress, today, 
July 14, 2003. Once the CN has lapsed, OTA expects prompt apportionment 
by OMB. When the funds are received, OTA will reimburse both the FY 00 
and the FY 03 TIATA funds to the full extent that they have been 
utilized. The balance ($3.75 million) will be spent in ongoing 
assistance projects.
    In summary, OTA has requested $6 million from the $2.475 billion 
Emergency Wartime Supplemental. While none of this funding has yet been 
apportioned, we expect it to be done promptly after the lapse of the 
CN. OTA expects the transfer soon after the apportionment is made.

       Response Submitted by Under Secretary of State Alan Larson

    As of June 4, 2003, the Coalition Provisional Authority (CPA) has 
requested $550.1 million and OMB has apportioned $527.1 million of the 
$2.475 billion appropriated to the Iraq Relief and Reconstruction Fund 
(IRRF) to the U.S. Agency for International Development (USAID).

       Breakdown of Funds Obligated for Iraq Stabilization and Reconstruction Efforts, As of June 4, 2003
                                             (millions U.S. dollars)
----------------------------------------------------------------------------------------------------------------
                                                                  CPA/USAID      Dept. of State       Total
----------------------------------------------------------------------------------------------------------------
Request......................................................          $549.1           $0.956           $550.1
  Apportioned and Transferred................................           527.1               --            527.1
  Not Yet Apportioned........................................              22            0.956               23
----------------------------------------------------------------------------------------------------------------
CPA = Coalition Provisional Authority; USAID = United States Agency for International Development.

  Questions for the Record Submitted by Senator Bill Nelson to USAID 
                      Administrator Andrew Natsios

                     RESTORATION OF IRAQ MARSHLANDS

    Question. An important aspect of reconstruction will be the 
restoration of the Marshlands that were devastated by Saddam's 
destructive and inhumane policies. To restore the Marshlands we must 
have a comprehensive plan to change water resources management in the 
Tigris-Euphrates region. I understand the University of Miami's Iraq-
Aware Project is a constructive proposal. The Project proposes to work 
closely with AID and other interested parties to develop a 
comprehensive framework for a long-term program to address the 
competing problems that are confronting the Marshlands drawing on 
extensive Everglades restoration experience. I further understand 
University officials have met with AID to discuss the Iraq-Aware 
Project.
    Are you aware of this project?

    Answer. USAID has been researching marshland restoration and 
management since March 2003 and have met with several interested 
parties, including the University of Miami, to discuss a strategic 
approach and action plan. To prepare for the long-term program, USAID 
fielded a four-person technical team in June to conduct a rapid 
assessment of the marshlands. Team members included a social scientist, 
wetlands ecologist, agricultural specialist and a geotechnical 
engineer. They were joined on the field visits by national and district 
officers from the Ministry of Water Resources and scientist from the 
Marine Science Center at the University of Basra, the Iraq Foundation, 
and the AMAR International Charitable Trust Foundation which provides 
primary health care to marsh dwellers in Iran and Iraq.
    At the time of the USAID meeting with the University of Miami, 
USAID encouraged the University to submit a proposal under the 
University Partnership program (Higher Education and Development 
(HEAD)) that could include marshland restoration and management.

    Question. What is the plan for, and when will USAID hear 
competitive proposals for the Marshland Initiative, as described in CN 
#130, dated May 16, 2003?

    Answer. The program is still in the design stage with the rapid 
assessment and strategic approach and action plan contracted under an 
existing task order. If this initiative is approved and goes forward, 
proposals will be solicited.

    Question. Describe the process by which you are awarding contracts 
in Iraq for this and other projects.

    Answer. USAID awards contracts in accordance with the Federal 
Acquisition Regulation (FAR), the rules that apply generally to all 
federal agencies. The Agency is responsible for the purchase of over 
$2.5 billion of goods and services each year in the support of U.S. 
foreign policy goals in over 100 countries.

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