[Senate Hearing 108-784]
[From the U.S. Government Publishing Office]
S. Hrg. 108-784
FINANCIAL RECONSTRUCTION IN IRAQ
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON
INTERNATIONAL TRADE AND FINANCE
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST AND SECOND SESSION
ON
ECONOMIC STABILTY, JOB CREATION, AND TRANSITION TO INDEPENDENCE LEADING
TO SELF-GOVERNMENT IN IRAQ
__________
SEPTEMBER 16, NOVEMBER 4, 2003, AND FEBRUARY 11, 2004
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate /
senate05sh.html
______
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on International Trade and Finance
CHUCK HAGEL, Nebraska, Chairman
EVAN BAYH, Indiana, Ranking Member
MICHAEL B. ENZI, Wyoming ZELL MILLER, Georgia
MIKE CRAPO, Idaho TIM JOHNSON, South Dakota
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina JON S. CORZINE, New Jersey
LINCOLN D. CHAFEE, Rhode Island
Joseph Cwiklinski, Legislative Assistant
Catherine Cruz Wojtasik, Democratic Staff Director
(ii)
C O N T E N T S
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TUESDAY, SEPTEMBER 16, 2003
Page
Opening statement of Senator Hagel............................... 1
Opening statements and comments of:
Senator Bayh................................................. 3
Senator Carper............................................... 17
WITNESSES
Alan Larson, Under Secretary for Economics, Business, and
Agricultural
Affairs, U.S. Department of State.............................. 4
Prepared statement........................................... 33
Response to written questions of Senator Hagel............... 46
John B. Taylor, Under Secretary for International Affairs, U.S.
Department
of the Treasury................................................ 6
Prepared statement........................................... 41
Philip Merrill, President and Chairman, Export-Import Bank of the
United States.................................................. 9
----------
TUESDAY, NOVEMBER 4, 2003
Opening statement of Senator Hagel............................... 47
Opening statements of:
Senator Stabenow............................................. 47
Senator Bayh................................................. 50
WITNESSES
M. Peter McPherson, former Director of Economic Development,
Coalition
Provisional Authority in Iraq, President, Michigan State
University................................................... 51
Prepared statement........................................... 71
Mark Malloch Brown, Administrator, United Nations Development
Programme (UNDP)............................................... 55
Prepared statement........................................... 72
----------
WEDNESDAY, FEBRUARY 11, 2004
Opening statement of Chairman Hagel.............................. 75
Prepared statement........................................... 99
Opening statement of Senator Miller.............................. 86
WITNESSES
John B. Taylor, Under Secretary for International Affairs, U.S.
Department of the Treasury..................................... 76
Prepared statement........................................... 100
Earl Anthony Wayne, Assistant Secretary, Bureau of Economic and
Business
Affairs, U.S. Department of State.............................. 79
Prepared statement........................................... 103
Response to written questions from Senator Hagel............. 110
Gordon West, Acting Administrator, Bureau for Asia and the Near
East,
U.S. Agency for International Development...................... 82
Prepared statement........................................... 106
FINANCIAL RECONSTRUCTION IN IRAQ
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TUESDAY, SEPTEMBER 16, 2003
U.S. Senate,
Subcommittee on International Trade and Finance,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 2:55 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Chuck Hagel (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. Good afternoon, gentlemen. We apologize for
starting late, but Senator Bayh and I have just saved the
Republic by voting the right way. We concluded as we were
coming over together that we collaborated in the interest of
justice and democracy. So thank you for giving us a few extra
minutes.
The development of Iraq's economy will be a significant
factor in Iraq's transition to stability and democracy. Despite
its potential, including the second largest oil reserves in the
world, Iraq's economy has been devastated by more than three
decades of corruption and mismanagement by Saddam Hussein's
Government; more than a decade of international sanctions;
three disastrous wars; and the looting that followed Iraq's
liberation this year.
Financial reconstruction is critical to the future of Iraq.
Without economic stability and the prospects for job creation
and growth, the transition to independence and self-government
in Iraq cannot and will not succeed. Our witnesses today will
testify on the economic situation in Iraq, as well as the
specific steps that the Bush Administration is taking to help
rebuild Iraq's economy, Finance Ministry, Central Bank, banking
system, and oil industry. The United States and its allies face
a continuing security challenge in Iraq. Instability and rising
violence have threatened the progress of Iraq's economic
reconstruction.
The task in Iraq is daunting. The Bush Administration has
estimated that Iraq's reconstruction will cost between $50 and
$75 billion; $20 billion of the Administration's forthcoming
$87 billion supplemental appropriations request will be
specifically targeted for Iraq's reconstruction. Projected oil
income from July 2003 through December 2004 is around $14.3
billion. Iraq's oil revenues will not cover the budget for the
Iraqi Government, which includes operating expenses of at least
$1 billion per month, let alone the costs of reconstruction.
Iraq faces an enormous debt and reparation burden. Current
estimates are $70 to $120 billion in foreign debt, and
approximately $116 billion in unpaid reparations claims pending
against Iraq through the United Nations Compensation
Commission. There are assessments underway to determine the
exact amount of Iraq's debt. I look forward to learning from
our witnesses what plans there are for working with
international creditors to provide debt and reparations relief
for Iraq.
America cannot meet Iraq's reconstruction and development
needs without the help of the international community. The
Administration has recognized the critical role that the
international community must play in the reconstruction of
Iraq. Secretary Powell and others have been working to seek a
new UN resolution that will help facilitate the political
transition to full Iraqi sovereignty. I also look forward to
Under Secretary Larson's update on what we can expect from the
International Donors' Conference in Madrid, Spain, October 23
and 24 of this year.
Rebuilding the financial sector in Iraq is a complex task.
Setting up a trade-credit system is one of the first steps in a
broader effort to help rebuild Iraq's financial system and
allow Iraq to trade with the world. The CPA created the Trade
Bank of Iraq on July 17 of this year to finance the import and
export of goods to and from Iraq. The Trade Bank will also
assist in the transition from the UN's Oil for Food Program
when that program terminates in November of this year. The CPA
has chosen a consortium of international banks, led by JP
Morgan, to handle the operations of the Trade Bank. The Ex-Im
Bank will play a key role in providing insurance for letters of
credit issued by this Trade Bank.
The banking system itself must undergo significant reforms
so that it can play its role in promoting economic growth and
investment. Also, a legal framework for conducting transactions
must be established to enable commencement of international
trade and contracts.
A stable, unified currency is a key part of financial
reconstruction. The CPA has announced that beginning October 15
of this year, the Central Bank will oversee a new Iraqi
currency. New Iraqi dinars will replace both the ``Saddam''
dinars used in southern Iraq as well as the ``Swiss'' dinars
used in the north. This new currency is an important step in
the process to establish a stable, unified national currency.
An issue I would like our panelists to consider is how we
can encourage the emergence of an Iraqi private sector, how we
can draw this sector into our plans, and what are the best
means to support small and medium enterprises in Iraq.
We have one panel of witnesses today to discuss all of
these issues and more. First, we will hear from Under Secretary
of State for Economics, Business, and Agricultural Affairs, Al
Larson, who, by the way, has just returned from Cancun, Mexico,
and, Mr. Secretary, we appreciate you making the effort to come
before us today. Secretary Larson will describe the efforts to
raise political support and funds for reconstruction in Iraq.
We will then receive testimony from Under Secretary of the
Treasury for International Affairs, John Taylor, who will give
his assessment of the state of the Iraqi economy, as well as
the economic situation on the ground in Iraq. Then, we will
hear from the President and Chairman of the Ex-Im Bank, Philip
Merrill, who will discuss Ex-Im's role in the economic
reconstruction of Iraq, including plans to work with the newly
created Trade Bank of Iraq.
Gentlemen, we appreciate you being here, and at this time I
would like to call upon my friend and colleague, the Ranking
Minority Member of this Subcommittee, Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you very much, Chairman Hagel, both for
your friendship and also for calling this hearing today. This
issue before us is both important and timely. And thank you,
gentlemen, in the midst of your busy schedules, for coming to
share your thoughts with us.
I am struck, Chairman Hagel, by the fact that the last time
this Subcommittee met to take testimony, it was on the subject,
I believe, of Argentina and the profound economic and financial
challenges facing that country. It is, however, my impression
that that is largely a walk in the park compared to the
challenges that we are facing in Iraq today, both the magnitude
and the possible intractability of some of these challenges.
We are embarked upon nothing less than Nation building in
its most profound sense. We are dealing with a society that
cannot provide basic security for its citizens, some of the
basic elements of even a rudimentary standard of living--water,
electricity, things of that nature. Some basic elements, basic
building blocks of an economic structure have not existed in
the past, a central bank, for example, and some of the other
things that the Chairman just mentioned that need to be put
into place.
They face a crushing debt burden, no foreign investments,
and a variety of other challenges, largely based upon the fact
that they have oil and very little else to offer the rest of
the world. So, I am going to look forward to hearing your
thoughts.
I have four questions in the back of my mind. I may have a
chance to pose some of them to you a little bit later.
First, what burden is it appropriate to ask the U.S.
taxpayers to pay in this undertaking? We are willing to pay for
the liberation and the war, but when it comes to economic and
financial reconstruction, what burdens should we bear versus
what burden is it appropriate to expect the Iraqi people to
bear themselves at some future date, given the vast petroleum
reserves that they will hopefully eventually have access to?
Second, what about debt cancellation? They face a crushing
debt burden. What role, if any, are some of our allies willing
to play, particularly with regard to some of the debts rung up
by Saddam for arms purchases and other things used to subjugate
the Iraqi people, unrelated to the Iraq-Iran war?
Third--Secretary Taylor, this may be your ballpark--what
about ensuring that they put into place sound economic
institutions and begin practicing sound macroeconomics so that
our assistance does not just go down the drain but instead will
be an investment that will give them a decent start toward a
stable economy? As you know--and there is some parallel to the
Argentine experience here--you invest in a system that is
fundamentally flawed, you do not tend to get much return.
Finally, what is realistic to expect for their petroleum
industry, both in terms of magnitude and timing? That obviously
is going to be a big key here as they try and get back on their
feet and transition to what hopefully will be an economy based
on something more than just petroleum?
Gentlemen, thank you for your time. Again, Chairman Hagel,
thank you for your foresight in calling this hearing. I look
forward to working with you.
Senator Hagel. Senator Bayh, thank you.
Secretary Larson.
STATEMENT OF ALAN LARSON
UNDER SECRETARY FOR
ECONOMICS, BUSINESS, AND AGRICULTURAL AFFAIRS
U.S. DEPARTMENT OF STATE
Mr. Larson. Thank you very much, Mr. Chairman. I would
like, if I could, to summarize the longer written statement
that I will submit for the record.
Senator Hagel. Each of your written statements will be
included in the record.
Mr. Larson. Mr. Chairman and Senator Bayh, we really
appreciate the opportunity to testify on the overriding
national priority of reconstruction in Iraq. The task of
reconstruction is going to be a very challenging one and a
costly one. At the same time, if we move decisively to mobilize
the necessary resources and speed
reconstruction, we will lower the long-run financial burden
shouldered by the United States. In addition, a strong push for
reconstruction now will reinforce efforts to establish an
effective and internationally recognized Iraqi Government.
The task of reconstruction is going to be particularly
challenging because of, as you said, Mr. Chairman, the years of
neglect, mismanagement, and corruption of Saddam Hussein's
regime. There is also a huge infrastructure deficit that
impedes economic growth. You also will appreciate, Mr.
Chairman, that the heavy-handed government controls that were
practiced by Saddam Hussein's regime have distorted the
economy, particularly in areas like food and agriculture, in
ways reminiscent of the communist societies, and these
distortions may be very difficult to unwind.
In spite of these challenges, we are seeing important signs
of progress in rebuilding Iraq. We are working with the Iraqi
people and have been making progress in meeting immediate
needs, such as a dependable supply of food, reopening schools
and hospitals, and rehabilitating water and electric power
infrastructure. At the State Department, we have been
particularly active in supporting the CPA and the Iraqi people
in the analysis of issues related to oil, transportation,
telecommunications, and the transition from the Oil for Food
Program to a more market-based agricultural and food economy.
My written testimony details the nature and the magnitude of
the reconstruction challenges that we face in Iraq, including
in some of the more important sectors.
For months, we have been working closely with international
organizations, key donor governments, and the Coalition
Provisional Authority to lay the groundwork for a
reconstruction process with robust international participation
and support. The Administration reached out early on to the
administrator of the United Nations Development Program and
vice presidents of the World Bank to help launch meetings of
some 30 donor countries in June of this year in New York at UN
headquarters. This meeting resulted in the establishment of a
core group of countries comprised of the European Union, Japan,
the United Arab Emirates, and the United States. Since then, in
both face-to-face meetings and weekly conference calls that
have included the United Nations Development Program, the World
Bank, the IMF, and the CPA, we have worked through some of the
important issues of reconstruction.
For example, at the June 24 meeting, the countries there
present commissioned assessments of the reconstruction needs
from the United Nations, the World Bank, and the IMF. In
conducting these 14 assessments, the international institutions
have been working very closely with the CPA, as well as with
the interim Iraqi Government.
Understanding that some donor countries might prefer to
make contributions into a fund in which they have a voice in
the governance, we set in motion preparations for a multidonor
international trust fund. The World Bank is taking the lead in
helping to design this fund, which is likely to be similar to
the trust fund that supported reconstruction in Afghanistan.
As you said, Mr. Chairman, at the end of October, the
international community will meet at a ministers'-level donors'
conference in Madrid. At that time we expect to have a much
clearer picture of the budget prospects in Iraq. We expect to
have the final results of the United Nations, World Bank, and
IMF needs assessments in these 14 sectors. We expect to have a
model of the multilateral trust fund, as well as input from
other countries on how it should operate. We expect as well to
have the draft budget of the CPA for 2004, which will be fine-
tuned in accordance with information that comes out of this
donors' conference.
As a result of these multilateral efforts, we are seeing a
converging of assessments about the magnitude and the nature of
the reconstruction challenge in Iraq. In discussing the vital
role of these international institutions, I would like, Mr.
Chairman, to pause to pay tribute to the dedicated men and
women of the United Nations, the World Bank, and the IMF who
were killed or injured in the bombing of the UN headquarters in
Iraq on August 19.
Linked with this work on the donor process has been the
political work that the Secretary of State and the
Administration have been pursuing through the Security Council
of the United Nations. They have the UN Security Council
resolutions, and basically the political framework that would
give the maximum possible encouragement and support through the
involvement of other donor countries and the international
financial institutions.
As the realities of the reconstruction task come into
sharper focus, the task can appear daunting. Fortunately,
President Bush is leading by example. In his September 7
address, he set out for the American people the need for a
large commitment of funds to finish the job that our troops
have so ably and courageously begun. As you said, sir, he will
be requesting $20 billion for the reconstruction of Iraq, about
a quarter of which will be devoted to security-related
reconstruction needs and the rest for the most urgent
infrastructure needs.
We intend to make the same case as forcefully and as
effectively as we can that our friends and allies need to be
fully engaged in this effort. Congress' support for the
President's request will strengthen the hand of the
Administration in making the case for international
participation that is commensurate with the importance and the
urgency of this task.
As time proceeds, oil revenues in Iraq and private sector
investment, both from within Iraq and outside of Iraq, can make
increasing contributions to Iraq's development. My testimony
says that
export revenues for Iraqi oil could reach $12 billion in 2004,
which would roughly cover the recurrent costs of the
government. It also says that in 2005 and we believe in 2006,
those oil export proceeds could reach $19 billion, which would
mean that Iraqi resources could begin making a significant
contribution to economic reconstruction.
We also believe that with the proper economic policies and
a rehabilitated infrastructure, Iraq could attract considerable
foreign investment. CPA, the Governing Council, and the Interim
Cabinet are working hard to establish the appropriate
investment and commercial rules and regulations that could make
that type of private sector investment possible.
Mr. Chairman, we know that the President's request is a
large one. We also believe that it is an urgent and essential
one. During this hearing and in the weeks ahead, we want to do
everything we possibly can to address all of the Congress'
questions so that we can move forward as quickly as possible.
Thank you.
Senator Hagel. Mr. Secretary, thank you.
Secretary Taylor.
STATEMENT OF JOHN B. TAYLOR
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
U.S. DEPARTMENT OF THE TREASURY
Mr. Taylor. Thank you very much, Senator Hagel and Senator
Bayh, for inviting me to testify on financial reconstruction in
Iraq. This Committee is an excellent one for discussing trade
and financial issues in Iraq, and it is also a pleasure for me
to be here with Mr. Merrill and Mr. Larson. It demonstrates the
great degree of government-wide work that is needed to get a
job like this done.
The last time I testified on Iraq reconstruction was on
June 4 at the Senate Foreign Relations Committee, and at that
hearing I stressed two things which I would like to come back
to in this testimony based on what has happened over the months
of the summer.
The first was that the international community and the
Iraqi people face an enormous task in the reconstruction of the
economy. A quarter of a century of repression and economic
mismanagement under Saddam Hussein, cut the size of the economy
to a small fraction of what it was before his regime took over.
In 1979, GDP in Iraq was $128 billion. By 2001, it had declined
to only $40 billion.
The second thing I stressed was the importance of a
strategy for financial reconstruction; that is, the contingency
plans developed in advance of the military conflict. I also
stressed the tactics that were important on the ground to
implement that strategy.
I think much has been accomplished in the financial area
since the fall of Saddam's repressive regime, and many
potential financial catastrophes have been avoided as well. In
my view, it was the months of advance planning by the U.S.
Government before Saddam's fall as well as the dedicated work
of the Coalition Provisional Authority and the Iraqi people
since his fall that are responsible for these accomplishments.
Starting late last year, we began developing a strategy for
financial reconstruction based on the information we had at the
time. The strategy addressed such issues as payments to Iraqi
workers and pensioners, the currency, the banking system, the
international debt, the assessment of the reconstruction costs,
and the international fundraising efforts. My written testimony
reviews how that strategy is playing out, and I think it shows
many successes.
An important part of our advance planning which I would
like to emphasize here was the selection of some extraordinary
people to participate in the effort. We began selecting experts
back in January. The first wave of people were deployed to
Kuwait in March and then into Baghdad in April. Early on, we
decided that a financial coordinator is essential, and we are
very grateful to Peter McPherson who serves in that position in
Iraq.
My written testimony covers all of the six areas and
addresses some of the questions that both of you raised in your
opening remarks. I would be happy to come back to those in my
question and answer period. But I would like to in my opening
remarks here stress the strategy that was laid out for just one
of the areas, and that was for paying workers and pensioners
and for the currency.
It was clear that we had to have a strategy early on for
paying workers and pensioners in Iraq after Saddam's fall. It
was also clear that we had to work out a strategy well in
advance of his fall. Keeping workers on a payroll with stable
purchasing power would be essential to preventing severe
hardship and economic collapse. But there are a lot of
questions that we had to address: How many workers were there?
How much should they be paid? What currency should we use to
make the payments? Where would the funds come from? Would the
payment system be sufficient to actually make the payments?
What condition was it in? How could we prevent hyperinflation,
sharp depreciation of the currency, which would further
impoverish the Iraqi people?
Starting late last year, we developed a payment strategy.
The payment strategy was approved interagency after a lot of
good discussion and debate. The strategy in the end called for
paying people in U.S. dollars on an interim basis. Using U.S.
dollars, we could create stability and help prevent a collapse
of the local currency, the dinar.
Finding a way to secure the funds for these payments was
also a challenge. In the end, we decided that the best approach
was to use Iraqi regime assets frozen back in 1990. Our
estimates were there was about $1.7 billion of such funds
frozen in U.S. banks.
But in order to use those assets, we had to have them
vested for the use of the Iraqi people. So a vesting strategy
was worked out, reviewed, and approved by our legal experts.
Under this plan, the President would call for U.S. banks to
transfer the assets to the Federal Reserve Bank of New York
near the time the military conflict began.
To make such a strategy operational, of course, many
tactical issues and contingencies had to be considered. This
plan called for the military on the ground to issue public
statements. These statements were worked out in advance by
Defense and Treasury. The statements would say that the dinar
would continue to be accepted as a means of payment after
Saddam's fall. The plan also called for the first wave of
financial advisers to go into the country and assess the
payments mechanism to see if it was capable of making payments
in dollars.
Another essential operational issue concerned the shipping
of the currency to Iraq. We estimated that enough currency was
in storage in the New York Fed's warehouse in East Rutherford,
New Jersey. We determined that it was feasible to ship the
currency by truck to Andrews' Air Force Base and then fly it to
Kuwait for distribution into Iraq. Many tons of currency were
involved because of the need for small denominations, $1 or $5
bills. On the ground, the military would assist in the actual
shipment of the currency around the country. Financial experts
would develop lists of people, eligible workers to be paid, and
then make the actual payments. In some cases, the currency
would be paid at the government ministries or the state-owned
enterprises. In other cases, pensioners would come to the local
banks to get the payments.
I am pleased to say that this strategy, along with all the
tactical details I have described, has been carried out with
great success. Back on March 20, at the start of the conflict,
President Bush issued an order calling for the vesting of these
frozen assets, and as planned, about $1.7 billion was sent to
the New York Fed. With these funds, the first shipments of
currency were sent from the Fed's warehouse to Kuwait and then
to Iraq. We were able to make emergency payments to dock
workers, rail workers, power plant workers, and other essential
workers essential for restoring basic services. We soon
transitioned to a regular civil service salary structure and
pension payments to over 2 million Iraqis.
Our financial experts in Baghdad considered this to be a
major force for stability in the country as well as a
significant spur to the economy. And throughout this period, I
should add, there has been no collapse of the currency, no
hyperinflation, and no serious glitch in the process.
This major and essential success in the financial
reconstruction was due in large part to preconflict planning
and to adjustments that were made as we implemented those
plans. As I indicated, the payment strategy called for the use
of U.S. dollars on an interim basis only. Our goal was for the
Iraqi people to ultimately choose a new national currency to
replace the Saddam dinar and the Swiss dinar. And we would
provide them with the necessary financial and technical
logistical assistance to do so. A stable unified currency is
essential for a market economy, and, therefore, it was a key
part of our financial reconstruction plans.
I am happy to say that this part of the financial
reconstruction strategy is on track as well. This summer, after
consulting with representatives from the central bank, the
finance ministry, and Iraqis all over the country, the CPA
announced that a new currency would be issued starting in
October. The new currency is now being produced and printed in
facilities around the world, and it is on schedule. It will be
shipped from printing facilities in England, Spain, Sri Lanka,
and other countries, and it is on time.
A public education campaign is underway in Iraq to make
sure the Iraqi people are well informed about the new currency
and about the exchange itself. The new currency will be issued
in more denominations than currently available, six rather than
two. It will have built-in security features to enhance public
confidence and reduce the risk of counterfeiting.
Mr. Chairman, let me conclude my opening remarks here with
these examples of how the strategy is working. My written
testimony documents similar progress in banking, in debt, in
assessment of reconstruction costs, and preparations for
international fundraising. We have made considerable progress
over the summer months, and our activities will only intensify
in the coming months. The challenges are formidable. We are on
our way to creating great opportunities for the Iraqi people.
President Bush's request for $20.3 billion in supplemental
funding for security and infrastructure is essential to this
effort, as is the contribution from our friends and allies and
from the international financial institutions.
Thank you, Mr. Chairman.
Senator Hagel. Thank you, Secretary Taylor.
Chairman Merrill.
STATEMENT OF PHILIP MERRILL
PRESIDENT AND CHAIRMAN
EXPORT-IMPORT BANK OF THE UNITED STATES
Mr. Merrill. Mr. Chairman, Senator Bayh, Members of the
Subcommittee, I too am very pleased to be here with able
colleagues to testify on the Bush Administration plan to
rebuild Iraq and establish the foundation for a stable society.
There are three pillars to this effort: physical security,
political stability, and economic growth. I want to focus on
the economic needs of Iraq and how to pay for them. In
particular, I want to discuss the role the Bank is playing in
this effort as it pursues its mission of supporting U.S.
exports and the U.S. jobs they represent.
As you and my colleagues from the Departments of State and
the Treasury have noted in your and their testimony, the cost
estimates of what Iraq will need in future years for
reconstruction are in the tens of billions of dollars. So, how
will all this be financed? One source is, of course, U.S.
funding. I think the President's speech demonstrates the high
priority the Administration places on this effort.
Another source is donor support from other countries on
which the Administration, as you have heard, is actively
working.
But, of course, Iraq has its own resources. Iraq is a
country with an educated people, a rich heritage, and
significant natural resources, including tremendous oil
reserves. The Administration
expects Iraqi oil and other revenues and recovered assets to
contribute to meeting Iraq's reconstruction needs. The U.S.
economic contribution is designed to have an immediate and
significant impact on the sectors critical to stability and
growth. In this regard, Ex-Im Bank is working on several
initiatives to help Iraq move toward the utilization of its own
resources for its own development with its own people.
While our mandate is to support U.S. exports and U.S. jobs,
U.S. exports and trade in general are powerful tools of
economic growth. Re-establishing Iraq's trade with its
neighbors in the world is a key element in rebuilding Iraq's
economy, and opening Ex-Im Bank's programs in Iraq will further
this objective while fulfilling our mission to support U.S.
exports and exporters.
Senator, you dealt in your testimony with our proposed $500
million short-term credit facility, and so I am going to skip
over it. It is in the written testimony. I am going to skip
over that part here except to say that this is good for only up
to 1 year, and part of the reason for that is that under the
UN-funded oil mandate, Iraqi debt is excluded from creditors
only for a relatively short period of time, through the end of
2007, I believe.
In any event, in the short term the Trade Bank will support
Iraqi imports funded by the Development Fund of Iraq by current
Iraqi oil revenues. This facility is also expected to serve as
a model for other export credit agencies that are interested in
providing similar support for the Trade Bank, making this a
multilateral effort. I will come back to this. We expect that
Ex-Im Bank's program in conjunction with the Trade Bank and
similar programs initiated by other export credit agencies,
will help jumpstart the flow of trade into Iraq.
But after we are done patting ourselves on the back, we
cannot expect current Iraqi oil revenue to begin to generate
the money needed now to ensure Iraq's success. Pay-as-you-go is
simply not going to cut it.
So, other than the U.S. taxpayer and international donor
contributions, where can the money come from?
One answer is foreign investment. Creating the right
climate for foreign investment can provide dividends directly
to the citizens of Iraq. This is no small effort. There is a
historic reluctance on the part of Iraqis, and also most of the
Muslim world to accept foreign investment, whether it is U.S.
or anybody else's investment, so this is no small problem for
Paul Bremer. For the economic stabilization of Iraq, however,
prompt resolution of Iraq's external debt is absolutely a
minimal requirement.
I think the important point to get across is that Iraq's
potential oil revenues are enormous, on the order of tens of
billions of dollars per year. Our numbers are consistent. These
reserves can be tapped if the long-term investment to generate
them is provided. This money needs to be invested on the
conditions where the oil and gas business in Iraq will be
conducted by and for the Iraqi people themselves and for their
own benefit. But nobody is going to invest long term in Iraq if
at the end of 3 years whatever they get is going to be seized
by a plague of creditors in every country in the world,
including, but by no means limited to, this one.
One could also envision an Iraqi authority that could
securitize these revenues were the oil production there, in
order to raise more money up front.
As one player in this area, we stand ready to respond. The
business of Ex-Im Bank is to provide guarantees, insurance, and
project finance for projects as soon as conditions make such
financing possible. That means somebody there that you can lend
to, whatever you call it, DFI, Coalition Provisional Authority,
or Provisional Government. We are willing to meet these
challenges to the extent it benefits U.S. exporters and creates
U.S. jobs. That is our job. But we fully expect the other
export credit agencies to do the same thing for their
exporters, again creating the circumstances for a significant
multilateral effort.
There are 26 export credit agencies in the OECD and a
number in other countries outside the OECD. The Bank also has a
history I wish to call to your attention, of providing
innovative financial solutions during times of political
transition. It played a major role in the administration of the
Marshall Plan. When Israel was being formed in 1948, Ex-Im Bank
provided the initial provisional military administration with
loans based on the idea that the future government would be
supported by the United States and was therefore a good risk.
Then Ex-Im Bank President and Chairman, William McChesney
Martin said that Ex-Im Bank would have, ``Reasonable assurance
of repayment because the United States is going to support
Israel in every reasonable way.'' The principle was the same.
Also in the 1990's, the Bank used an oil and gas framework
agreement for Russia so that investment in oil infrastructure
was possible as the Soviet Union evolved into the CIS and then
to Russia. I was at NATO at that point in time. Looking
backward, it seems like everybody knew it was going to go from
the Soviet Union to CIS to Russia. I can only tell you at the
time the picture was a lot less clear. As these cases suggest,
it would be sound policy for Ex-Im Bank and also for export
credit agencies worldwide to support these efforts.
In closing, let me emphasize that Iraqis need to realize
some economic value today in order to establish the physical
security, political stability, and economic development their
country needs, and to which the United States is fully
committed. Time is of the essence, and it is less expensive to
make them rich now than it is to pay to keep 140,000 U.S.
soldiers there for an extended period of time.
I will be happy to answer any questions you may have,
including the four that you posed.
Senator Hagel. Chairman Merrill, thank you.
Again, to all three of you, we appreciate you taking the
time to come up here, as well as your staffs to prepare you for
the hearing.
Senator Bayh, if it is okay, we will go maybe just 7-minute
rounds. That way we can share the time.
Secretary Larson, you mentioned, as you were taking us
through, the donor conference structure possibilities. Would
you define more clearly what the Administration is looking for
in the ways of dollars from our allies at that donor
conference?
Mr. Larson. Mr. Chairman, it is a very fair question. I am
going to give you a more general response than you probably are
looking for. We believe that it is very important for other
donors, as well as the international financial institutions to
make a maximum
effort to pay their share of a challenge that is an
international challenge. It is not our challenge. It is
something that we, the international community, and the Iraqis
together, have to work on.
Part of the reason why I am not in a position to give you a
figure today is that we are still in the process of refining
the estimates that there will be for 2004 and 2005 on
reconstruction costs and needs, and to have those in a form
that they have really reconciled and dovetailed the estimates
that are coming out of Baghdad from the Coalition Provisional
Authority and the interim government, with those that are the
results of these international needs assessments.
I can say that my sense is the assessments that are being
refined in the international institutions end up being very
close to our own when you look at the basic magnitudes and even
some of the sectoral breakdowns. We are going to be pushing
countries to make a large and a maximum effort, but we have not
at this stage set a bar for a specific amount of a specific
percentage, and we think that until we have a little more
finality on the estimates, it is going to be difficult to go
into capital and capital with a specific request for a specific
amount. But I can tell you this: We intend to make this a very
high priority for the entire Administration from the top on
down.
Senator Hagel. If the numbers that you and others in the
Administration have put forward, numbers that were shared here
today, are anywhere near correct, reconstruction costs of $50
to $75 billion. I think those are the Administration numbers.
Some believe it will be over $100 billion, but let us stay with
your numbers. In the President's request that you have just
discussed, that he will be bringing up here, $20 billion is for
reconstruction. In your numbers you have shared with us today,
I believe you said could reach as far as oil sales in 2004, $12
billion. Then you said, I believe, in 2005, 2006, we could see
Iraqi oil flow generating $19 billion. Is that what you said?
Mr. Larson. Correct.
Senator Hagel. So we have a pretty significant gap here as
to where the rest of that money is coming from. Could you tell
us a little bit about how the Administration is going to fill
that gap and where that money is going to come from?
Mr. Larson. Right. Again, as you said, Mr. Chairman, our
estimate at this stage is for something on the order of $57 to
$75 billion as the need to meet the reconstruction costs over a
period of time. We want, with the $20 billion that the
President is requesting from the Congress, to meet those most
urgent security-related and infrastructurerelated costs, so
that the things that really have to get done and get done fast
are getting done. We want to get very major contributions from
international donors, both bilateral donors as well as the
international financial institutions. We believe that if Iraqi
operating costs continue to be on the order of $12 to maybe $14
billion a year, that we are going to being to see in 2005 some
significant capability on the part of the Iraqi economy to
generate some of the resources that are going to be needed, let
us say something on the order of $5 to $6 billion a year.
I am being a little more specific than one realistically
can about those out-year numbers, but to be responsive I am
sharing with you our best estimates at this time for Iraqi oil
receipts and how much of those receipts could be available to
contribute to reconstruction.
Senator Hagel. But that means based on your numbers there
is not going to be very much available if, in fact, those
numbers would play out, especially when you look at a universe
of using your numbers again of a shortfall, a gap between $30
and $55 billion of unaccounted money here for the
infrastructure of Iraq. Surely, again, adding up your numbers,
which essentially are 2004 numbers, if you get $12 billion out
of that, that I suspect goes right back into the government
operation, which Bremer has talked about.
So my question is: Where is the Administration looking to
get an additional $30 to $55 billion for infrastructure cost,
from our allies?
Mr. Larson. We are looking to get that from our allies over
time and from the Iraqi oil proceeds over time. As Secretary
Taylor and others may be able to get into, there is a little
bit more to be squeezed out of frozen and found assets, Iraqi
assets, and we will want to make the most of that. There is a
little bit to be squeezed out of the transfer of the Oil for
Food Program. There is a little bit of that existing money that
could be used to help contribute next year, but it is a very,
very big lift for the international donor community.
The one point that I should say is that we do believe that
foreign investment can contribute to meeting some of these
reconstruction costs. Some of the reconstruction costs are in
infrastructure areas and other areas where you can, under
normal circumstances, attract foreign investment. It really
points to what Chairman Merrill was saying about the importance
of getting in place the environment and regime that can start
attracting foreign investment as well. That means, among other
things, moving fast on the things the governments have to do
including security and infrastructure.
Senator Hagel. Senator Bayh, if I may, I could follow up on
this. Well, we will leave this point because obviously that $30
to $55 billion is hanging out there. It is not your fault, but
there is no
answer, or at least I have not heard an answer coming from the
Administration how they are going to fill that, and you
certainly have not given one today, and again, it is not your
fault.
Let me go back to something you just said on oil
production. You mentioned infrastructure. In order to get to
where you think we might get to in next year, 2005 and 2006, in
oil sales, what kind of additional infrastructure investment is
going to be required to get there, private capital, public
capital, any infrastructure requirements?
Mr. Larson. In the 2005-2006 timeframe, there will be some
requirements for rehabilitation, maintenance, upgrades, that I
believe will be financed with public money, not private
investment. Those numbers are being refined, but I would be
prepared to guess that they would be on the order of a couple
billion dollars and that that would be part of the needs, part
of the reconstruction needs that we would consider urgent
reconstruction needs that we would want to make sure are funded
because they would help make sure that the stream of oil grows.
Senator Hagel. Would you say that that $2 billion that you
have thrown out--and I know that is imprecise and you do not
have all the pieces--would that be over a 2- or 3-year period
of time that that would be required, 1 year?
Mr. Larson. That would be over the next couple years to get
oil production up to this level that we have forecast, and
again, we have been a little bit conservative in projecting oil
exports reaching 2 million barrels a day. Then on top of that
is roughly 500,000 barrels a day of production that is devoted
to domestic use.
But in light of the infrastructure requirements, in light
of some of the challenges we faced on looting and sabotage, we
have tried to go with a number that we think is realistic.
Senator Hagel. Mr. Secretary, thank you.
Senator Bayh.
Senator Bayh. Thank you, Mr. Chairman.
Gentlemen, let me tell you what I hear when I go home, from
my constituents since the Administration made its request. The
principal question that I get is, Senator, why cannot Iraq pay
for more of this themselves? We understand that we needed to
foot the bill for liberating the country. It was unreasonable
to expect them to pay for their own liberation. We continue to
foot the bill for their security, both in terms of treasury and
blood. That is a price we are willing to pay. But in terms of
rebuilding their economy, is that not something that they
should shoulder more of the burden of themselves? We are not
dealing with a country like Afghanistan, with nothing to offer
the rest of world. This is a country with hundreds of billions
of dollars, or hundreds of billions of barrels of proven oil
reserves. Our surplus is now gone and we are put in the
position of having to borrow the money from the Chinese, the
Japanese, and others. This is money our children and
grandchildren will have to repay on behalf of a country that at
some point, God willing, will be pumping out oil again, we will
be buying it from them at a price, at least in part, set by--
they may not be a member of OPEC, but at least affected by
OPEC. How is this equitable?
Mr. Taylor. Senator, if I can take a stab at that. I think,
first of all, the Iraqi people will be the ones that rebuild
their economy. What we are suggesting here with this request of
funds is a way to deal with many of the security issues, many
of the infrastructure issues that have to be addressed so that
we can provide for an economy where it can grow and where they
can build it. Some of the funds that the President has asked
for go to electric power reconstruction. That is obviously
necessary for security and necessary for getting the country in
a situation where we can withdraw.
Senator Bayh. Mr. Secretary, forgive me for interrupting.
Let me put a little finer point on it. Is it not possible,
since they do have very substantial assets in the country,
although they cannot currently access them because of the state
of their oil industry, is it not possible for them to
securitize some of that, to take some ownership interest in
some of the reserves to defray some of these costs?
Mr. Taylor. Ultimately, some of the support, for example,
from the international financial institutions, will be in the
form of loans, and we are actively engaged now with both the
World Bank and the IMF, so that they can bet in the business of
supporting them. Of course, you know both those institutions
provide their resources largely in the form of loans. When they
size up how much support to give, which we are hoping will be
quite large, because as Senator Hagel indicated, there is quite
a cost here, quite a gap. When we talk to them about the
importance of this, it is clearly the attractiveness ultimately
of oil revenues and other sources of wealth in Iraq which will
be there. So that is part of the strategy. But I do think the
Iraqi people will be the ones that reconstruct their economy.
What we need to do is provide the security, the
infrastructure, the electrical system that is at least back to
some semblance of working again after the devastation that
Saddam Hussein caused.
Senator Bayh. The sooner we can get the World Bank and the
IMF involved, the better we will all be. I certainly would
support that.
Let us transition then into the question of the legacy
debt, which, Mr. Merrill, I think you mentioned was; ``an
absolutely minimal requirement'' for starting to get some
forward momentum here. What if anything have the largest debt
holders indicated that they would be willing to do? I would
like to speak just in general and specifically with regard to
the Russians and our friends the French, who I understand hold
a fair amount of this debt. Is it not fair for those who did
not pay for the cost of liberation to not now help with the
cost of peace by removing some of this debt burden?
Mr. Taylor. Let me address the question the following way.
Early on after the conflicts began, we engaged with the other
creditors, including the Russians and the French, and we began
to lay out a strategy, if you like, to deal with this issue.
The first thing that was done was to agree that at least
for a year and a half, so that we could start working on a
budget, no one was going to expect any debt payments from Iraq,
and that was a terrific advantage because you could put a big
zero on that line item in the budget which would have debt
service payments, and that has obviously affected the numbers
that we are talking about right now.
The second thing was to agree to get estimates of how much
debt there really was. So we sent some of our people, who went
into Baghdad and looked through the books; we also had the IMF
do a survey of non-Paris Club figures----
Senator Bayh. The figures I am looking at say it could be
anywhere from $42 to $78 billion. That is a pretty wide range.
Mr. Taylor. The number is a little higher than that right
now.
Senator Bayh. Is that right? Higher than the $78 billion?
Mr. Taylor. Yes, probably higher than 70, yes. But we are
still getting those data, and the next step will be to work out
a way to reschedule, get a substantial reduction in the value
of the debt, and that is what the plan is for the next year.
And by the end of next year when the agreement now to defer the
payments is currently scheduled, there will be a strategy put
in place. I would say we have engaged quite a bit with those
countries that are holding the debt, and I think in the end, it
will work. I think negotiation is going to be tough, but you
have laid out some of the reasons for it, and we will be making
those arguments.
Senator Bayh. On a scale ranging from enthusiastic to
tepid, how would you characterize their response today?
Mr. Taylor. It is mixed. Some are enthusiastic, some are
tepid. But we are going to work this issue very hard, Senator.
It is very important for our effort for the Iraqi people.
And I would say in general, if I could just comment on your
general question about cooperation, we have noted in the
financial area quite a bit of cooperation among governments,
quite a bit of interest in humanitarian issues. And of course,
the ultimate beginnings of reconstruction are very close to
humanitarian. I, at least, with my colleagues in the financial
area have noted quite a bit of interest in getting involved,
trying to improve the situation in Iraq, and I hope that that
continues as the UN Security Council resolutions are moved and
we go ahead in the next few months. And of course it will be
essential in the Donors' Conference period.
Senator Bayh. My time has just about expired, Mr. Chairman.
If I could ask just one more question.
Senator Hagel. Yes, go ahead.
Senator Bayh. It is also to you, Secretary Taylor, and it
is related to the question I alluded to in my opening comments
about the progress we are making toward establishing basic
financial institutions like a central bank and treasury. In
large part, our success will depend on the type of policies the
Iraqi Government in the process of being established will
choose to pursue in terms of fiscal policies, monetary
policies, and all the rest. So we are making an investment on
what comes, so to speak, here.
When I am asked at home what comfort can we give the
American people that this new government will choose to pursue
policies that will ensure that this investment is sustained and
bears fruit as opposed to being a one-shot infusion that goes
for naught?
Mr. Taylor. On the macroeconomic side, we got a budget as
soon as we possibly could and are making sure that that budget
is balanced and funded. This is the first time in many years
there has even been budget data available from that country;
the budget used to be a state secret, obviously not a good way
to make sound policy. So there is good progress on the budget.
I mentioned the currency plans, which is an essential part
of a sound monetary policy, so that is underway. There is a
central bank governor who has been appointed by the Governing
Council. There is a finance minister. Both of those people----
Senator Bayh. Are they solid individuals in your
estimation?
Mr. Taylor. Solid individuals. They will be going to the
IMF-World Bank meetings in Dubai, is our hope. So that is going
well.
But also on the economic issues that are more
microeconomic, which are also very important, Senator, we are
hoping that there will be some good laws coming out soon with
the CPA working with the Governing Council, laws on banking,
laws on foreign investment, laws on taxes, et cetera. My
understanding is that there is good discussion and progress
going on; those are going to be really important for foreign
investment. And we mentioned the Trade Bank as the beginning of
a banking system for foreign trade. A lot of the branches of
the two main banks, Rafidain and Rasheed Banks, were closed at
the end of the major conflict; those have for the most part
been reopened so people can do basic cash transactions, and we
are now moving to get loans made from these banks, small
business loans. The International Finance Corporation has
agreed to begin to develop a small business loan program.
So there is a whole wide range of things like this that are
so important for a market economy, and we are working on them.
Next, if I could just say one other thing, because I could
go on with this, but one other thing--the Donors' Conference
that Secretary Larson referred to is going to have as part of
it a whole special session, almost a whole day, on the private
sector. To my knowledge, this is really the first time where a
donors' conference has devoted so much time--perhaps any time--
to the private sector, because a lot of the funding has come in
from investment, and we are encouraging that. So, I am actually
very excited about that aspect of what we are doing. We are
focusing on the private sector. Ambassador Bremer is
emphasizing that, and we have a good team of individuals
working on transforming the state-owned enterprises, too.
Senator Bayh. Gentlemen, thank you very much.
Thank you, Mr. Chairman.
Senator Hagel. Senator Bayh, thank you.
Senator Carper.
COMMENTS OF SENATOR THOMAS R. CARPER
Senator Carper. Let me just follow up on that last point--
the willingness of the private sector to invest its own money
and the level of violence and disruption that continues in the
country. What is the relationship between those two?
Mr. Taylor. Well, there is certainly a serious concern of
private investors with the security, as well as the things I
mentioned, the banking laws and the foreign investment laws.
Security is very important for those we talk to.
I have noticed myself so many people from the private
sector anxious to get involved. One example of that is the
amazing response we had to this Trade Bank proposal. Many, many
banking consortia put in applications and bids for that
project. So when the CPA made their choice, they had a lot to
choose from, and I think you are going to see that. Now we are
talking about having banks give some advice to these state-
owned banks, and again, we have a lot of interest.
Once this Trade Bank is moving and you get other
facilities, you are going to see some investments. If you are
on the streets of Baghdad, you see a lot of private sector
activity moving already--people selling refrigerators, kids'
toys, and satellite dishes.
Senator Carper. Where do they get them?
Mr. Taylor. They get them from the border; some of it is
coming up from Kuwait, some from Jordan, some from Turkey. And
it is on the streets, they are selling it, and people are
buying it. Some of those dollars we are paying are going to
making people's lives better directly.
Senator Carper. I have been in and out of the hearing in
some other meetings out in the anteroom, and I apologize that I
was not able to listen to your testimony, except just in bits
and pieces, nor to the questions.
So let me just ask all of you--it would be very helpful to
me--if you would just take a minute or two apiece and say, if
there is nothing else that I would take from this hearing,
maybe a couple of the most important nuggets that you would
have us take away from it.
Mr. Larson. Well, thank you, Senator. I think, perhaps
picking up on the spirit of your question to Secretary Taylor,
we believe that the more rapidly we are able to move to address
the fundamental security issues and reconstruction issues that
inevitably have to be addressed by governments, including some
of the basic infrastructure questions that the President would
like to address with the supplemental reconstruction request
that he is making, that the more quickly we can get to the
point where there is an environment where the private sector
investment that we would like to see in Iraq is taking place
and is shouldering more of the responsibility for driving
economic growth and reconstruction.
As has been pointed out, this is a country that does have
resources, not only oil resources but human resources, but
there is a big deficit, a deficit of infrastructure, the type
of social deficit that comes from having had 30 years of
miserable, oppressive governance.
What we are trying to do, working with other donors and
international institutions like the United Nations, the World
Bank, and the IMF, is to make a very aggressive push on the
reconstruction process because we believe that will hasten the
moment when political transfer of full responsibility can be
made to the Iraqi Government and also hasten the day in which
Iraqi development is being driven by Iraqis and by private
investment, both from Iraq and outside of Iraq.
Senator Carper. Thank you.
Mr. Taylor. Senator, I stressed two overall themes in my
testimony. The first was that this job of reconstruction has
been made so difficult because of the damage that Saddam
Hussein caused to his country, with GDP falling from about $128
billion to only $40 billion during a 25-year period. So it is
an immense task, but the rewards are tremendous, too, because
people have so much to gain just to get back to where they
were.
The second was that with respect to financial
reconstruction, which I focused on, I tried to outline the
sense that there has been----
Senator Carper. Could I just interrupt? You said over a 25-
year period, GDP fell from----
Mr. Taylor. One hundred twenty-eight billion in 1979 to $40
billion in 2001.
Senator Carper. And are those nominal dollars, or are those
real dollars?
Mr. Taylor. Those are real dollars, adjusting for
inflation, yes.
Senator Carper. It took 25 years to fall from one level to
$40 billion. How long do you expect it is going to take them to
get back up to where they were 25 years ago?
Mr. Taylor. That is a good question. A lot less time than
it took to fall; a lot less time.
Senator Carper. I interrupted you. Go ahead with your
second point.
Mr. Taylor. The second thing was that the financial
reconstruction has involved a strategy which was laid out
before the conflict which we have stuck to, calling auditors
where appropriate, on such issues as payments of salaries to
Iraqi people on the ground, the workers, the teachers, as well
as a new currency, and that as we have proceeded in the months
of this year and especially since the summer, we have made
progress on that strategy on these financial matters, and I
think we will continue in the months ahead.
Senator Carper. Thank you.
Mr. Merrill.
Mr. Merrill. Senator, I think the single, most important
idea that I can leave with you rests on a set of conceptual
numbers, and I emphasize the word ``conceptual,'' not specific,
because although we are all dealing from the same number sheet,
there is the time value of money and so forth. We do not have a
disagreement on numbers. I think the point we wish to get to is
the point at which private capital will invest $20 or $30
billion in Iraq in order to produce in round terms--conceptual
numbers, I emphasize again--$20 or $30 billion a year in oil
revenue for them.
Now, to get there, it sounds simple--because--people pound
the desk and say ``Let us go into Iraq. We can produce oil. We
can do this, we can do that''--American and foreign,
Bulgarians, Rumanians, Czechs, Poles, and so forth. This issue
is an optical issue of whether Iraq is receptive to Western
investment, not only in oil but in general.
So our general idea, and idea I would like you to take
away, and that Ambassador Bremer has emphasized, rightly, is
that this has to be the Iraqis' own doing, with their oil, for
their money, in their country. We can help them do that. The
idea that I would like you to take away is how can we get the
private oil and energy companies of the world who are anxious
to invest in Iraq to put the $20 or $30 billion--whether that
number is the exact number or not is not the point--into Iraq
and therefore get what basically amounts to a 100 percent
return for Iraq.
Let me add just one more number. Both secretaries here
essentially said while you were out of the room that a couple
of million barrels, 2 million barrels a day, produces about $20
billion a year. The actual number was $19 billion. Our numbers
are approximately the same. But when you go up from 2 million
to 5 to 6 million, you go from $19 billion to a very, very
large number. It is not a straight-line curve because it
requires more investment, but in the end, at 5 or 6 million a
year, you get a lot of money back, whether that money is $30
billion a year, whether it is $25 billion, whether it is $40
billion--you can get all types of estimates.
I think the only way to close the gap that Senator Hagel
just talked about and the gap that the Iraqis seek to close, is
to find a way to create the political atmosphere so that that
becomes a practical thing to do. That is the idea.
Senator Carper. Mr. Merrill, thank you. Gentlemen, thank
you all very, very much.
Thank you, Mr. Chairman.
Senator Hagel. Senator Carper, thank you.
Gentlemen, if you would each address this question in your
own respective areas of responsibility: How much progress are
we making, and just give me some tangible examples of that
progress, on moving Iraqis into responsible positions in the
Trade Bank area, financial institutions--obviously, the central
bank representative is first class, and everyone acknowledges
that that was a terrific selection--but we hear from the
Administration, we hear from the Congress, and we hear from you
that the objective here is to move the Iraqis into a position
where they can govern themselves.
How fast are we doing that, are we doing it, and give me
some examples of how the Governing Council or others are
actually running or being prepared to run financial
institutions and put together an economy and an infrastructure
in Iraq.
Mr. Larson.
Mr. Larson. The last time I had a chance to testify before
you in June, we spoke a little bit about the oil numbers and
the oil sector, and one of the things I said very forthrightly
is my numbers are basically based on what Thamir Ghadban, the
Iraqi CEO of the Iraqi oil industry, has been putting forward.
A couple of weeks after that hearing, I had the chance to sit
down with him in Jordan for a fairly detailed meeting about the
way he was managing the oil sector and how he saw his task
ahead. My assessment was that he was everything he was cracked
up to be--a very skilled engineer, a very thoughtful person who
understands both the engineering side and also the financial
side of his business--and everything we have seen since June is
bearing that out.
The Governing Council has now named Ibrahim El-Alum as the
new minister for petroleum. He is also an oil engineer with
international private sector experience.
We also know that the team below them is very competent,
and they are basically running things in terms of the Iraqi oil
sector--the rehabilitation, the maintenance, the production,
and so forth.
The other comment I would make in response to your question
is that when we went, at the beginning of this month, to
Brussels for the most recent meeting of this Core Group,
included in that meeting were both the CPA and an Iraqi
official who is in the midst of the budget process, and it was
interesting, I think, for other donors, who sometimes are under
the impression that the CPA is running absolutely everything in
Baghdad, to hear from this Iraqi gentleman how he was basically
the guy who was the interface with all the ministries on their
budget numbers. And just as OMB runs a process here where
agencies make submissions and OMB says, ``Wait a minute, this
number looks inflated, that number looks inflated,'' that was
his role, working with the interim government, CPA, and the
standing ministries to work through the numbers that are going
into this 2004 budget that will be finalized later this fall.
Those are two specific examples, Mr. Chairman, that I think
illustrate the point that Iraqis are really deeply involved in
this process, and their role and authority is growing very
rapidly.
Senator Hagel. Thank you.
Mr. Taylor.
Mr. Taylor. In the financial area, there is increasing
involvement. As you mentioned, the central bank governor, the
finance minister, the two large banks, Rafidain and Rasheed,
have many people who have been involved in those banks before
who are still working there.
But I would say that one thing about the financial area is
that there has been a lot of modernization around the world
that has not reached Iraq because it was such a closed place
and so little contact. In some senses, I think this is
different than the oil sector.
What we have been trying to do is find ways to train, to
give the opportunity for the Iraqis to learn more about modern
financial systems. There has been a lot of cooperation in the
region. The Bahrainians, the Jordanians, the Emirates are
willing to provide training to people in the financial sector.
We are encouraging them to do so.
With respect to issues like the budget, the finance
ministry does have a budget process. We are encouraging a
central treasury function for the people of Iraq to go through
the same kind of calculations that our OMB does, as Mr. Larson
was indicated.
And the other thing is with respect to the financial laws
that are necessary, the Governing Council is engaged in that
activity and discussions, and I believe that before too long,
there will be some announcements of what their decisions are so
you can provide this legal infrastructure for the economy, such
as banking, tax, foreign investments, and things like that. And
I see some progress there, but just to be candid, it takes
time, and our involvement is very important, and I see a good
professional engagement when I talk to the Iraqis and when I
visit Baghdad.
Mr. Larson. Senator, could I quickly comment on just one
detail of what John Taylor said?
Senator Hagel. Yes, go ahead.
Mr. Larson. I did not mean to leave you with the impression
that the technology base of the Iraqi oil industry is modern
and up-to-date. In fact, I would say that what John said about
the financial system is equally true, at least of the oil
sector.
What I am really getting across is that over the years,
this sector was neglected, and through ingenuity and
improvisation rather than modern technology, the Iraqi
engineers were able to keep it going, but one of the real
challenges that we face now is that there comes a point when
ingenuity and improvisation has to give way to more modern
techniques and technology. There is a deficit there. It is just
that the individuals who are dealing with these problems in
Baghdad, in my view, are very, very highly skilled.
Mr. Merrill. Mr. Chairman----
Senator Hagel. If you will hold for a moment, Chairman
Merrill, I want to ask Mr. Taylor a couple follow-up questions.
Mr. Merrill. I apologize. I thought the question was coming
to me.
Senator Hagel. On decisionmaking, how many of these Iraqis
are in decisionmaking positions?
Mr. Taylor. Well, a minister or a governor would be in a
decisionmaking position. They are working with the Coalition.
So for example, on this currency exchange, a lot of that
involves the help and assistance of the people in the
Coalition; in fact, we are helping with that here, even in
Washington, to think about where the currency would be printed,
how it is going to be shipped there. There will have to be
assistance in terms of security around the country. There is
quite a bit of that going on, but we want the central bank to
be at the center of that.
The positions are clear, but as you know, decisionmaking is
one where you have to have the information and the whole
structure in place. So, I think it is going well, but it is
something which we are working with, and the Coalition is
there, providing advice and making decisions, too.
Senator Hagel. Do these individuals essentially report to
Peter McPherson and his office--across the board, these
financial----
Mr. Taylor. Yes. The chain of command is Peter McPherson to
Ambassador Bremer. Ambassador Bremer is in charge of the
Coalition, and he in turn reports to Secretary Rumsfeld.
Senator Hagel. What is the status of McPherson? Is he
coming back?
Mr. Taylor. Yes. He is going to be returning to his
position as President of Michigan State University in October,
and his replacement is going to be the former Finance Minister
of Poland, Marek Belka. Marek Belka has been serving in Baghdad
already as the coordinator of the fundraising effort, so he
will be the one who will be taking over at that point, so the
Polish involvement will take place in that way.
Senator Hagel. Thank you.
Chairman Merrill, thank you.
Mr. Merrill. Thank you, Mr. Chairman.
I simply wanted to note that the Trade Bank is already
headed by a new Iraqi appointee and that the bank will
eventually--meaning shortly, not eventually 6 years from now--
be staffed by Iraqis. This process is in place. But based on
the last round of conversations, I think I want to add two more
points, one on modernization.
The Iraqi oil industry--I think Al Larson and I are on the
same page--there is a huge question there of deferred
maintenance, and it is not a small deal. If you will allow me
to be what my people sitting behind me will say ``slightly
colorful''--they shudder when I say that--think of it this way.
You have 100 1957 Chevies, and that is what is running the
pipelines, the oil lines, the pumping stations, and all the
rest of it. You know that if you plug a carburetor, a muffler,
and an oil filter and do a valve job and so forth, you can get
all 100 of those 1957 Chevies running. But you also know that
half of them are going to break down in the next 6 months, even
if you do not know which half. And that is the situation that
the Iraqi oil industry is in at the moment.
There is a choice between what--I think Al Larson used the
word ``modernization''--and let us call it ``plug them up
maintenance.'' Obviously, you have to do both if you want to
get the thing running, but you want to modernize it. But one is
much more expensive than the other, so when the great
construction companies of the world come in to talk to us, some
say modernize a little more, some say we can plug it up a
little more. Ambassador Bremer's view is that this is a factual
question to be determined by Phil Carroll and the other people
on the ground. But you should know that there is an issue there
of modernization versus plugging up the 1957 Chevy, which I
cannot determine as a matter of fact, sitting at this table,
but it is an issue.
The second thing I would point out is that there is a
tradeoff between time and representation. You and I are both
entrepreneurs. There is a natural tendency to make things
happen now. Ambassador Bremer is a ``make it happen now''
person. But representative governments in that country and in
this country are about being representative, and in order to
get the Iraqis to sign on to the things that we want them to do
and they should do for their own benefit, it means they have to
move at a pace that may not be quite as rapid in economic terms
as somebody like me would want them to move. This tradeoff of
time versus political stability is a significant factor.
Senator Hagel. Thank you.
Secretary Larson, Secretary Powell has been working with
our friends, specifically the UN Security Council members, on
crafting a resolution that would accommodate everyone's needs
through the United Nations. A very significant part of that is
what type of additional responsibility our allies would have in
assisting with the
reconstruction of Iraq--economic responsibility, political
responsibility, certainly force structure security
responsibility.
What can you tell us about those conversations, and what
are we looking at in the way of expanding not just involvement,
money and forces from allies, but what would we be asking them
to do, and what would they want to do through an umbrella
organization effort that would lay it out in a resolution?
Mr. Larson. Mr. Chairman, as you said, the Secretary has
been working very hard with the P-5 and Secretary General of
the United Nations on a new Security Council resolution that
would really provide more of a mandate, more of a authorization
for international participation in the security task in Iraq as
well as the task of reconstruction and, we would hope, really
call on donors as well as the international financial
institutions to play a maximum role in the task of
reconstruction.
Those deliberations have reached a very, very intensive
period, and I think over the days ahead, he will be working
very, very hard to see if he can bring this to a successful
resolution. There will be a number of people in New York next
week as the General Assembly begins, so this will be an
extremely active period for that.
Senator Hagel. Excuse me. If I could pursue that for a
moment, are we then willing to in fact engage, as I presume the
Secretary is, on the basis that we are willing to share some
decisionmaking responsibilities with our allies--economically,
politically, and obviously security-wise.
Mr. Larson. We are willing to share some decisionmaking
responsibilities, and let me in the first instance focus on the
economic side of things.
I referred earlier, but briefly, to the idea of a Multi-
Donor Trust Fund. One of the reasons we have worked so hard on
this is that it has become clear to us from comments of others
that for many of them, if they are going to make major
contributions to reconstruction, they would like to feel it is
going into some type of system in which they have a voice, and
there is a good track record of having trust funds that have
their own governance structure where an international
organization like the World Bank or the United Nations can
provide the framework, the fiduciary role, the accountability
about how funds are actually spent. And in contributing funds
to such a task force, there can be agreement in advance about
the types of uses to which those funds will be put.
If you are going to have that task force, you do want the
priorities of it to dovetail with what is going on on the
ground, and that is why the process that we have set out since
spring has been designed to reach a convergence of view about
what these priorities are. So it is not an issue of control,
but it is an issue of reaching a shared assessment of what are
the most urgent priorities that have to be addressed and having
those reflected in the mandate of a trust fund and have that be
in synch with the budget priorities that are identified in the
budget coming out of Baghdad.
That is just one example of where we already are in the
process of encouraging our international partners to have a
larger voice in thinking through what the priorities should be
an being involved in a donor process where they will have a
voice in governance.
Senator Hagel. I would ask this next question of each of
you. It may well be that this is more, Secretary Larson, in
your area, but let us stay on that theme of decisionmaking and
sharing responsibility, and in return for that, stepping up to
responsibilities, stability, and security of Iraq in the
interest of all nations. Certainly, to secure and to stabilize
the Middle East is in the interest of all nations.
Contracts--there has been great speculation and
conversation about sole-source, no-bid contracts. How does this
play into decisionmaking, sharing with allies that would send
money and troops? Would they be given the same opportunities to
bid for contracts? Mr. Taylor, you may be very much a part of
this as well as you, Chairman Merrill. Are we a legitimate
marketplace? What percentages are we talking about? Any part of
that universe that the three of you care to address is
important because this is a big issue.
Also--and maybe, Mr. Taylor, you could give me this
number--what presently is the percentage of sole-source, no-bid
contracts that we are letting in Iraq?
Mr. Larson, we will start with you.
Mr. Larson. Sure. In framing this answer, let me make clear
that we have to talk about contracts with whose money. First,
let me start with the Multi-Donor Task Force. The clear
expectation here is that if this is housed in the World Bank or
the United Nations, or if for various reasons we end up having
two, one in each, contracts for using those funds would be
based on the World Bank or the UN international standards, so
they would be open to all legitimate competitive firms that
could be certified as being capable of providing the services
or the tasks that are being tendered. That much is clear.
Second, with respect to the money that is being spent out
of the Development Fund for Iraq, that is, the fund into which
the oil proceeds and other tax revenues are being used, the CPA
put out contracting information in August. It is on their
website. They did it after getting information on both U.S.
contracting procedures as well as the contracting procedures of
the United Nations and the World Bank. And we think that those
arrangements also are very transparent. Again, they can be
consulted by any company that wants to get on the Web and find
out how to compete for contracts that might be funded with DFI
money.
Third, there is the question of contracts funded with U.S.
Government money. I am most familiar with the situation of
USAID. In the early days, there were some contracts that were
let on the basis of limited competition among prequalified
bidders that were designed to make sure that we were able to
move quickly in the immediate post-war period to address some
of these pressing infrastructure requirements.
On those contracts which we need to have an American be the
lead contractor, we have been working hard to have--where
appropriate--other countries' companies be subcontractors and
to see if, where appropriate, as much of the work could be done
by Iraqi companies and Iraqis as possible. And I know, going
forward, the expectation is that these contracts would
virtually always be on a full competition basis except in those
cases where there might be an emergency need to move quickly
and to resort to something that would be a more qualified
competitive process.
Senator Hagel. Thank you.
Mr. Taylor.
Mr. Taylor. That was a very comprehensive answer. I could
not add anything to it at all.
With respect to your question on the exact percentage of
sole-sourcing, I will have to get back to you on that, Senator.
Senator Hagel. Thank you. Chairman Merrill, I will be right
with you.
Let me pursue a couple of dynamics of this. Are we saying
that the moneys coming out of the Fund now, those contracts
paid for out of the Fund, are open to qualified bidders from
around the world?
Mr. Larson. That is right, and we are trying to do this in
a way that we are getting best value for the money so that this
work that needs to be done is done as efficiently and
competitively as possible.
If I could just add, we understand that there has been a
perception--in my view, an incorrect perception, but
nevertheless a perception that has to be dealt with--that
somehow, the contracting procedures have been operated in a way
that is designed to give the business to American companies. I
must say that I was shocked when I was in Europe during the war
and was talking about how we needed to work with the Europeans
to address the upcoming task of reconstruction, and virtually
all the questions I got during an hour and a half question-and-
answer period were based on the premise that our objective, or
one of our major objectives, was to attract as much business as
possible for American companies in the reconstruction process.
It is not correct, but we understand that is a perception
that has been out there, and that is why we want to make sure
that this Multi-Donor Trust Fund is operating under World Bank
or UN contracting rules. We want to make sure that the DFI is
operating under an absolutely transparent process so that
bidders from around the world can find out how to compete for
contracts that are being funded with Iraqi oil proceeds. And it
is why we want to make sure that, subject to U.S. Government
contracting guidelines, we are reaching out as much as
possible, for example, with money that USAID is contracting
for, to have participation from other countries' companies,
albeit as subcontractors rather than prime contractors.
Senator Hagel. Are we still letting sole-source, no-bid
contracts?
Mr. Larson. No. And again, the answer to that is that
moving forward, it is our expectation that we would have in
virtually all cases a full competitive process, but just
reserving the possibility that there could be instances where
the urgency and the security requirements would call for moving
in a more expedited basis. But we believe that is the
exception, and it will not be the standard practice going
forward.
Senator Hagel. You noted if anyone is interested in
participating, you mentioned a website. Let us take that down a
little
further into American small businesses. They would get the
appropriate information through what--the Commerce Department,
the State Department? Where would they go to participate or to
find out about what might be available?
Mr. Taylor. USAID has a lot of information on their website
about this. That is the first place I would go.
Senator Hagel. Mr. Taylor, you will get back to the
Committee on the percentage.
Mr. Taylor. On the percentage of sole-source, yes.
Senator Hagel. Is there a percentage of international
companies today that have won contracts that are working in
various areas?
Mr. Larson. Sir, I cannot give you percentages. I know that
on contracts funded by USAID, there are a large number of
foreign country companies who are working as subcontractors. I
may be able with a little bit of research to put a number on
that either in terms of the dollar value of their work or the
percentage value. I certainly can undertake to do that.
On the Multi-Donor Trust Fund, of course, it is not up and
running yet, so that is a prospective issue.
On the Development Fund for Iraq, that is really very much
in the early days. The amounts of money that have flowed
through that are still relatively minor, and I think it is too
early to really have much of a baseline on it.
Senator Hagel. Mr. Taylor, do you want to add anything to
that?
Mr. Taylor. No.
Senator Hagel. Thank you.
Chairman Merrill.
Mr. Merrill. I just want to say that as we speak, our chief
operating officer and a couple of our other senior Bank people
are in Paris with other OECD export credit agencies explaining
that the Trade Bank is open for all business, not limited to
American business. Obviously, the business of the Export-Import
Bank is to support American exporters, but it is our hope that
this will serve as an example or as a role model for other
export credit agencies around the world to deal with Iraq. All
we seek is to deal on a level playing field. That is, I would
happily have a couple of French or German contracts in the
Trade Bank area, and as we go to small and medium enterprises,
and even larger than $500 million, we would want the same
dynamics to take place there.
It comes back to this perception of whether our interest,
Western, or the United States, in conducting this operation,
was to take over Iraq and stay there or was it to take over
Iraq and leave it to the Iraqis. And obviously, to us, it is
the latter. When we talk to our counterparts around the world,
you hear a lot of what Al Larson said, which is, ``You want the
contracts for yourselves.''
I am certain--I guarantee you--that the Trade Bank will
award contracts on the best bid basis.
Senator Hagel. That is of course one of the purposes of
hearings, so that you can enlighten, inform, and educate. I
know, Chairman Merrill, that you look upon us as your friend
and your ally up here, helping you make that case, but it is
important that you do have forums and opportunities to explain
the procedure.
Chairman Merrill, this may be a question for you. I was
told--and I do not know this, and I am asking you or Mr.
Taylor, I suppose, to clarify it--that we are allowing for 100
percent ownership as we transition business in Iraq for foreign
investors and corporations. Clarify that if you can, because
the question really comes to what role will the Iraqi people
have to play, or what percentage ownership will be open or
reserved for the Iraqi people versus taking all of the state-
run industries, which was the case in almost every situation
there as we know, and selling those off to the highest bidder
without looking out for the interests of the Iraqi people. If
you could clarify that, it would be helpful.
Mr. Merrill. Yes, I can take a stab at it. This comes back
to the question which is true around the world--India, to pick
an example--of whether foreign investment must be done on a 51-
percent-owned basis or on a 49-percent-owned basis. It makes a
very big difference to a lot of investors on whether they can
control the entity that they invest in.
That is a private business decision. It is not a
governmental decision. I am not smart to know the answer to
what commercial code the Iraqis will develop.
Senator Hagel. So that is not going on now.
Mr. Merrill. Oh, it is going on there. The discussions are
going on, but how it is turning out, I do not know.
Senator Hagel. Yes, but I mean turning over an industry, a
previously state-run industry, to the highest bidder, a major
company in Iraq.
Mr. Merrill. No, I have no knowledge of that.
Senator Hagel. Secretary Taylor.
Mr. Taylor. What is happening now is the Governing Council
is considering these questions and will put the answer into the
foreign investment law, the investment law that they are
working on, and we have every expectation that that will be
coming pretty soon; but it is not official yet, it is not done
yet. But that is where that kind of issue will be addressed.
And there may be a separate treatment for the formerly stated-
owned enterprises compared to other investments, but it goes
back to one of your previous questions, Senator, of where the
involvement of the Iraqi people is very evident and actually
happening as we talk.
Senator Hagel. The Governing Council will have the ultimate
control over that to protect the interests of the Iraqi people.
Mr. Taylor. At this time, yes, while they are there.
Senator Hagel. Well, let me go back--when you say ``at this
time,'' what does that mean?
Mr. Taylor. What I mean is the future of the governance of
Iraq is something that is still under discussion; it is
something that the CPA is working on, and it is part of the
discussions at the UN Security Council resolution. But right
now, the Governing Council is very much involved in making a
decision like this, but the evolution of the governance in Iraq
is something that is going to play out over the next months and
years ahead.
Senator Hagel. So the Governing Council right now would
have maximum input into any decisions regarding what we have
just been talking about----
Mr. Taylor. Yes, most certainly.
Senator Hagel. --and obviously in the future, the future is
the future.
Mr. Taylor. Some other group, or----
Senator Hagel. I understand.
Mr. Merrill. I think it is important to add one sentence
here by way of example. I was in London a few weeks ago, and I
met with two of the largest oil companies in the world, the
presidents, and three of the 10 largest banks in the world,
with substantial experience in funding oil and energy. In all
five cases, the attitude was let us wait and see--we are
interested, we have a watch on, we will assign somebody to keep
an eye on it--but let us see what commercial code, so to speak,
Iraq comes out with.
You have on the one hand a desire, yes, we want to be ready
to invest, and on the other hand, let us not move until we find
that there is room for private--where there is a framework
where private capital in the Western sense can operate.
Mr. Larson. Senator, can I add----
Senator Hagel. Secretary Larson.
Mr. Larson. --just a couple of footnotes to what John and
Phil have said. As John said, the Governing Council, working
with the CPA, has been working on this investment compact, and
it is important to stress what a big job this is, both legally
but also, I think, politically, because you are talking about
an Iraqi Constitution that presently prohibits foreign
investment in natural resources and other basic needs of
production. You are talking about a companies law that
prohibits investment in and establishment of companies that are
owned by foreigners that are not residents of Arab states. And
there is a whole list of things like this that, as John said,
they are grappling with.
As Phil, I think, was underscoring, from the standpoint of
foreign investors, they will want to see laws that address all
of these issues in a way that provides for an appropriate
investment environment; at the same time, they are going to
want to have a sense of assurance that any new laws are going
to stick. That is why I think this consultative process that
John noted and that is going on now involving the Governing
Council, with the CPA, is very important, because it is very
important that what emerges from that both be good investment
policy and also be something that is perceived as having
staying power.
Now, I have said a little bit about the oil sector here. It
is interesting to note that the new oil minister has been
speaking out publicly about the benefits of privatization in
the oil industry. When I testified back in June, I said this is
a very, very delicate issue given the nationalism that is
associated with petroleum. We need to really step back a little
bit on something like this and let the Iraqis sort it through.
It is encouraging that the Iraqi who has responsibility for the
oil sector is in fact speaking out and contributing to a public
discussion about the benefits of privatization.
So, I just wanted to stress both the legal challenge but
also the political challenge of getting the investment
framework that we all think would be good for Iraq.
Senator Hagel. Thank you. I believe, Secretary Taylor, in
your testimony, you gave a very good overall analysis which you
did not get into at all in your verbal testimony, but I have
read through your written testimony, and you addressed some of
these issues in that we are concentrating on putting people
back to work, pensioners, the focus that we need to get the
vitality back into society, giving the people some sense of
confidence for their future.
Do you know currently what the unemployment rate is in
Iraq? And then I would ask the three of you to develop for me,
if you can, some general theme in your three specific areas as
to how we get the people of Iraq back to work.
Mr. Taylor. We have heard various estimates of unemployment
rates in Iraq, but I cannot believe any of them. The data are
very hard to come by. I know from surveying unemployment in
other countries, it really depends on definitions. But it is
high.
Also, I would say that you include the underemployment,
because there are still workers in some state-owned enterprises
who are really not producing much at all at this point. So that
is something that--the lack of productivity is obviously a
problem.
In terms of getting jobs created, as in every part of the
world, the most important thing is small business. That is
where jobs get created. So one of the things that is going to
be important for that is the ability to get small business
loans. The CPA has already authorized a plan where each of the
major banks is supposed to be making 250 new small business
loans in each slice of time, kind of a measure of performance.
I mentioned that we were going to have the IFC, the
International Finance Corporation, provide a small business
loan program. That is a very important part and I think just
the ability for people to start businesses and employ people is
going to be where that is going to come from.
The state-owned enterprises and the transformation of those
into regular businesses is going to be important. There is a
person in the CPA now who is focused on that, Mr. Foley, so
that is another place to get those workers more effectively
employed.
It is a whole wide range of things. I think the transition
of the Oil for Food Program is also going to be a source of
employment, because you are really transforming a system where
all the food was coming from outside the country into one where
a major fraction of the food is going to be coming from inside
and distributed through regular distribution channels, retail
stores, supermarkets. It is a great opportunity for people to
get jobs, too.
Senator Hagel. Thank you.
Secretary Larson.
Mr. Larson. Thank you, Chairman.
In the very short run, one of the things Paul Bremer did
was make sure that there was a little bit of money that was
spent on public works, things like garbage collection. That is
not sustainable employment, but it was something that I think
he felt was very important to do to make sure that some basic
services were provided and there was some employment being
provided to people who otherwise would not be actively involved
in some useful activity.
I think as the reconstruction process moves forward, there
is going to be tremendous opportunity for employment. One thing
that we are trying to do is retrain thousands of police
personnel so that they can take over more of the
responsibility, providing the basic security.
As we move into a greater and greater emphasis on
construction and rehabilitation, we know that there are many
Iraqi firms who are already participating in contracting and
working on roads and school repair, and as this process moves
further and faster, there are going to be more and more
opportunities for employment in the construction sector.
Finally, as John very rightly said, I think agriculture is
potentially a promising sector for remunerative employment. It
has been stunted by this system that had food distribution
basically running on a ration card system, so it is going to
need to be revitalized. That is important.
And finally, we have all stressed in various ways that the
basic goal here is to get a self-sustaining economic growth
process going that generates jobs through growth, and I think
one of the more important things that we need to do to achieve
that is to work on both the legal infrastructure and the
physical infrastructure.
Senator Hagel. Thank you.
Chairman Merrill.
Mr. Merrill. I think you are asking the central question of
today's hearing. I do not think it is a technical answer; I
think only in part. It is a conceptual answer.
The first thing is that nobody has ever liberated,
occupied, captured, whatever, a country before that came with a
$15 to $20 billion a year in conceptual cashflow. I mean,
countries have come for gold, for slaves, girls, or territory--
all kinds of things--but not with cashflow.
First, we must try to get the cashflow going, which again
comes back to long-term investment and getting the oil fields
up and running as fast as you possibly can.
Second, we must decide what to do with some of that money.
I have heard ideas, and I have expressed them myself, of paying
dividends to the individual Iraqis like we do in Alaska, so
that each family works for $2 a day, a $10-a-week payment per
person. Two hundred thirty million dollars is not much compared
to what we are spending just to occupy and stabilize militarily
the security there. That money can be put to work buying things
and starting things going.
Third, you have an educated population that has been held
down for 20 or 30 years but which has an entrepreneurial base
and is very secular. So the ticket is to get money into their
hands. And I think my colleagues here have both touched on this
with the banking system. And even if it is WPA-type projects
that put money in their hands, if you have a banking system and
you have people being put to work, even if they are put to work
as policemen or sanitation workers, school teachers, whatever,
that pay, the ongoing basic services of government, electrical
workers and so forth, that in itself will generate all kinds of
new small businesses. So there is a technical issue.
Fourth, I would call it the WPA issue. One of the
conceptual issues here is to put people back to work. We have a
situation in which whatever number you want to use for the
Iraqi army--nobody knows exactly what it is--I am going to pick
400,000 and hope that I am in the right ball park--they all
went home. Well, we would have been delighted to guarantee them
a payment for life to go home. Instead, they went home, and
then we cancelled their salaries. So we have 400,000 angry
people running around Iraq. Some of them, we do not want back,
but they are better being paid than not being paid, and I
imagine we will rework that. But the idea is the same--put
people back to work if necessary in a WPA-type framework.
And fifth, I want to say something else on the time issue,
and that is that we have to trade off the interests of Syria,
Iran, and varying terrorists from wherever they come, whether
they are called Al Qaeda or something else--their interest in
our failure in Iraq was stimulated by the extent to which they
smelled vulnerability.
The answer is do not give them vulnerability. Make things
happen now. That is this time versus representation issue I
referred to before. But I think that we have to make certain
that the Iraqis feel that they have a stake in their society as
quickly as possible.
Let me make one more point on this because I do think it is
critical. Let me take the view that in these oil fields, in
round terms, there were 1,000 pumping towers. During the war,
126 were destroyed. Since the war, 700 were destroyed by people
seeking copper to melt down. Well, these are thought about in
terms of being Saddam's oil fields, not their oil fields. We do
not want them thinking about it being ``our'' oil fields, the
way you think about insurance company money, rightly or
wrongly, not being real money. The insurance company is going
to pay for it. Well, okay, Saddam is going to pay for it, the
United States is going to pay for it. We have to get them to
the point where it is their money, their country, and their
interest in the state. And that is not a problem for which I
can give you a fighter pilot's checklist.
Senator Hagel. Chairman Merrill, thank you. You mentioned
the Alaska oil ownership plan. I was asked about that today in
a nice little television show, and I said I do not know where
the Administration is on that. I have heard that concept.
Mr. Merrill. Nor do I.
Senator Hagel. Do any of you want to comment on that? Have
we looked at that possibility? Have we explored it? Where are
we?
Mr. Taylor. Sure, there has been lots of discussion of
those kinds of ideas, and again, this is something that is
going to be the Iraqi people's decision, ultimately. My
understanding is that one of the ideas that is most active in
consideration at this point would be one where the pensions are
financed through the oil revenues and that that would be made
explicit to basically get at some of the issues that Phil
Merrill is referring to, to create some sense of belonging or
ownership to the resources in the country that the people would
have.
That is one of the possibilities that has been discussed,
but all these issues--and Al Larson mentioned some people
talking about privatization--but whatever it is, I think it is
important to have the Iraqi people be very much involved in
this decision.
Senator Hagel. Thank you.
Secretary Larson.
Mr. Larson. I agree with what John said on this. I think
there is great force behind the idea of some type of fund like
this and showing that ultimately, this important resource
belongs to the Iraqi people, it needs to be used for their
benefit, and it is tied in some way to their benefit.
Obviously, in the short run, there are many, many demands on
those scarce oil export revenues, but I think it is very
powerful idea; I think it is a very useful idea to have out
there for the Governing Council, the interim government, and
the new elected Iraqi Government to be able to consider.
Senator Hagel. Gentlemen, thank you. You have all been very
helpful, and I know we will hear back from you on some of the
other questions, and we will talk with you again.
Is there any last-minute point that you want to make?
[No response.]
Senator Hagel. I do appreciate you taking as much time as
you have here this afternoon. This has been helpful to
everyone.
So thank you, and much success. This is important work.
Mr. Larson. Thank you.
Mr. Taylor. Thank you.
Mr. Merrill. Thank you.
Senator Hagel. The hearing is adjourned.
[Whereupon, at 4:50 p.m., the hearing was adjourned.]
[Prepared statements and response to written questions
supplied for the record follow:]
PREPARED STATEMENT OF ALAN LARSON
Under Secretary for Economic, Business, and Agricultural Affairs
U.S. Department of the State
September 16, 2003
Chairman Hagel, Senator Bayh, and distinguished Members of the
Subcommittee, thank you for the opportunity to testify on recent
developments on the economic reconstruction of Iraq.
Since I appeared before Senator Hagel and other Senators on the
Senate Foreign Relations Committee on June 4, there have been several
major developments affecting Iraq's reconstruction.
On August 14, the UN passed Security Council Resolution 1500 to
deal with two specific issues: The new Governing Council of Iraq and
the United Nations Assistance Mission in that country. In its action,
the Security Council made it clear that the international community
would work with the Governing Council as a broadly
representative partner with whom the United Nations and the
international community can engage to support them in their efforts to
build a better Iraq. The resolution also endorsed the Secretary
General's recommendation to create a United
Nations Assistance Mission for Iraq to better enable the United Nations
to fulfill its important responsibilities under Resolution 1483. You
may recall that UNSCR 1483 had facilitated the participation of the
international community, including the international financial
institutions, in Iraq's reconstruction.
On September 7, President Bush delivered a major speech to the
Nation in which he announced that he would send a supplemental budget
request to the Congress of $87 billion, of which $20 billion would be
used to help secure Iraq's transition to self-government by
establishing the conditions needed for economic investment and
prosperity. After decades of misrule and corruption by the Saddam
Hussein regime, the needs in Iraq are urgent and enormous. Based on
initial estimates from the Coalition Provisional Authority (CPA) and
the World Bank, we believe Iraq will need $50-$75 billion in the next
few years to rebuild a viable economy and allow it to become a vital
member of the world economy once again. The President's proposal
envisages that roughly $5 billion would be devoted to improving
security by training border guards, civilian police, the new Iraqi
army, and supporting a judicial and penal system. The remaining $15
billion in the request would be used to repair crucial infrastructure
that has suffered from many years of neglect and abuse as well as war
damage. These would include medical and educational facilities,
electricity, transportation and telecommunications networks, water and
sanitation, and the oil industry. The reestablishment of safe, modern,
reliable, and efficient services will have an immediate and positive
impact on security and on sectors critical to stability and growth.
Since the President's speech, there has been concern expressed at
the size of the task we are undertaking in Iraq, its difficulties, and
how much it will cost. I won't deny those concerns. We are talking
about a huge amount of money. But our strong engagement in Iraq's
reconstruction will give that long-suffering Nation a chance that it
has never had before--to become a decent and democratic society at the
heart of the Middle East. President Bush was quite clear as to why this
was in America's vital interest: ``The Middle East will either become a
place of progress and peace, or it will be an exporter of violence and
terror that takes more lives in America and in other free Nations. The
triumph of democracy and tolerance in Iraq . . . would be a grave
setback for international terrorism.'' A free, democratic, and
prosperous Iraq will remove an island of hatred that long threatened
its neighbors and the United States. If we move hard and fast on Iraq's
reconstruction now, it will ultimately lower the cost of this
undertaking and hasten the day that our troops can come home. We cannot
fail to meet this challenge.
Though Iraq will provide important resources for its
reconstruction, its needs over the next few years far outweigh its
current ability to meet those needs. The magnitude of the task is such
that it cannot be done by the United States alone, either. We urge the
international community join us and move quickly to invest substantial
funds to ensure success. Thus, a third positive development has been
our collaborative work over the last several months with other
countries and the international community on how we together can help
Iraqis fix their economy. We believe that other countries--both
individually and through international organizations such as the United
Nations--should make major contributions commensurate with the
importance and urgency of the task. The UN, the World Bank, and the IMF
are conducting needs assessments in various sectors in Iraq to help
determine that country's future needs. This information will be used by
the Iraq Reconstruction Donors Conference to be hosted by the Spanish
Government in Madrid on October 23-24 where they will discuss pledges
for the final quarter of 2003 and all of 2004. While some countries may
prefer to make their reconstruction pledges directly to Iraq, we are
working on establishing a Multi-Donor Trust Fund as another way for
countries to provide reconstruction support to Iraq. This follows a
similar model organized to facilitate Afghan assistance. I will talk
more about our international outreach effort later in my testimony.
A fourth milestone has been the efforts that Ambassador Bremer, the
CPA, and representative Iraqis are undertaking in a process to transfer
political authority to Iraqi institutions and establish a process
leading to the establishment of an internationally recognized
representative government. As Secretary Powell said on September 8,
``We have a common goal: To restore sovereignty to the Iraq people as
fast as is possible, as fast as is practicable.''
The first steps have already been taken. Early this summer we saw
the creation of the principal organ of the interim Iraqi
administration, the Governing Council, whose members have been drawn
from a broad spectrum of Iraq's ethnic and sectarian groupings. The
Governing Council has significant authorities, such as naming and
overseeing interim ministers, formulating national budgets, and
appointing Iraqi representatives to international organizations and
bilateral missions. The Governing Council is assisting the CPA in
developing policy on the full range of issues facing Iraq, including
security, economic issues, and reconstruction.
Another step already taken was the creation of the Constitutional
Preparatory Committee to make recommendations to the Governing Council
on writing an Iraqi Constitution. Iraqis will write their country's
Constitution, and it will be subject to approval of the Iraqi people.
The Iraqis are playing an ever-increasing role in making the
decisions that affect their country. The Governing Council on September
1 selected the members of an Interim Cabinet, who are responsible for
the day-to-day management of their respective ministries and who are
working now on their 2004 budgets. The new Cabinet will have real
responsibility.
We envisage several more steps to advance the objective that
everyone shares: The establishment of an internationally recognized
representative Government of Iraq. On September 15, the Constitutional
Preparatory Commission will report to the Governing Council its
recommendations on writing a Constitution. We anticipate a
Constitutional Convention, which will draft a new Constitution that
would be ratified by a vote of all adult Iraqis. The establishment of
an elected Iraqi Government will follow. Once the new government is in
place and prepared to assume full control, the coalition will depart.
Iraqis are responsible for the timetable of these next steps. The
coalition and international community will advise and assist them, and
encourage them to proceed deliberatively.
Finally, the United States is in the midst of negotiations with the
members of the Security Council on a new resolution that would reaffirm
and outline the many areas where we see the United Nations playing a
vital role in Iraq, including in reconstruction and humanitarian
efforts. We also want the UN to work with the CPA, Ambassador Bremer,
and the Governing Council to implement the political transition toward
a representative government. A new resolution would give a broader
mandate for the international community to come together over Iraq.
The Current Situation
Despite continuing paramilitary and terrorist activity, the
situation on the ground throughout most of Iraq is improving. The
bombing of UN headquarters in Baghdad on August 19 was tragic. We pay
tribute to UN Envoy to Iraq, Sergio Vieira de Mello, and the other
courageous and committed UN, World Bank, and IMF officials who were
killed or wounded in that attack. Those who attacked the UN were
attacking the hopes of the Iraqi people for a better future.
As Secretary Powell made clear last week, we take seriously the
challenge that security poses and are taking actions. To augment the
Coalition troops providing security, we are organizing an Iraqi
national civilian police force within existing structures. About 46,000
Iraqi police have been rehired and most are patrolling with U.S.
military forces. About 8,700 guards are on duty in the recently
established Facilities Protection Services to guard fixed sites, such
as banks, universities, or ministry facilities. But more needs to be
done. The CPA has assessed that a minimum of 65,000 officers are
necessary, a goal Ambassador Bremer hopes to reach by the end of 2004.
We eventually hope to have strength of 17,000 guards in the Facilities
Protection Services. Until the security situation stabilizes, it will
be difficult for genuine development and transformation of the Iraqi
economy to gather the necessary momentum.
Fortunately, there are many things upon which to build Iraq's
future. Iraq has a large cadre of talented, dedicated technocrats
anxious to return to work. And we have offers from many countries ready
to provide technical assistance and to do business in Iraq.
We are making real progress. Under the leadership of the CPA and
the Governing Council:
the food situation is stable and improving. Working with the
UN, we arranged for the local purchase of this year's wheat and
barley crop and restarted the public distribution system;
all universities and most secondary schools are open;
all major hospitals and 95 percent of local clinics are open;
power generation is now over 75 percent of prewar levels;
oil production (1.44 million barrels a day in August) and oil
exports (709,000 barrels a day in August) are increasing;
Iraq's civil service are being paid regularly, bringing money
into the local economy;
USAID partners is awarding Iraqi firms contracts worth
millions of dollars;
Iraqis have been hired to rebuild Iraqi municipal services and
infrastructure;
oil infrastructure, airports, ports, telecommunications
networks, highway systems, electrical networks, and water and
sewage systems are being repaired;
an Iraq Central Bank has been created, and the banking system
is operating once again;
millions of dollars stolen by the Hussein regime has been
returned by the coalition so that they can be used for the benefit
of the Iraqi people.
The Job Ahead: Key Challenges of Reconstruction
My testimony speaks about the ``reconstruction'' of Iraq, but that
word can be misleading. In one sense, we are looking not at
reconstruction, but at construction, not at rebuilding, but at
building. The Iraqi people must overcome the damage of almost 30 years
of misrule and mismanagement by a corrupt and vicious tyrant to build
their society into a democratic and prosperous center in the Middle
East.
Under decades of Saddam Hussein's misrule, Iraq's economy
deteriorated significantly. GDP fell from $128 billion in purchasing
power parity terms when Saddam took power in 1979 to around $40 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. 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 has become distorted
in the way that the economies of Eastern Europe and the Soviet Union
once were. Central control removed incentives for rational production.
Overcoming the legacy of state planning and controlled prices will be
arduous and time consuming.
Tasks in Key Sectors
I would like to briefly describe the challenges Iraq faces in
several key sectors.
Oil
The oil sector was stagnant 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 pipelines, to the pumping
stations, and to the refineries.
Since the liberation, Iraqi and U.S. engineers have worked
continuously to restore production so that Iraq will be able to meet
domestic needs and begin earning revenues through exports. The Iraqi
State Oil Marketing Organization (SOMO) has successfully sold crude at
spot tenders and signed long-term export contracts.
Key future tasks include upgrades to oil facilities to protect the
environment, to enhance efficiency, and to meet commercial and safety
standards, both upstream and downstream.
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 Iraq rebuilds agricultural
production to be competitive, it will also need to ensure that a
vibrant trading environment exists.
The government procurement system provided most Iraqis with
essential food and medicines. The government controlled procurement of
and inputs to production of staples such as grains. Neither production
nor consumption costs reflected market prices.
Winding down the UN-mandated Oil for Food (OFF) Program does not
mean the end of the need to feed the Iraqi people, the majority of whom
received virtually all their food through the public distribution
system over the last 12 years. That system has been reactivated to meet
the immediate needs of the population. Operational responsibility for
buying, transporting, and distributing food and medicines will be
transferred from the UN to the CPA on November 22 in accordance with
UNSCR 1483. As of September 5, the UN in consultation with CPA has
``prioritized'' humanitarian and oil services contracts under the OFF
program, valued at $7
billion.
While the food distribution is continuing, consideration must be
given to how best to move the Iraqi economy from a highly centralized,
subsidized system to a market-driven system with cash salaries that
better reflect productivity and people are free to make their open
choices in the purchase of food and items.
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 freely traded in open markets. The
challenge will be to expand this rapidly to grains such as wheat and
rice, which are the staples of the Iraqi diet.
The U.S. Department of Agriculture and USAID 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. Key future tasks include rehabilitation of
irrigation and drainage systems, food production facilities, and
services for pest management and animal health; providing farm inputs
such as seed, feed, and fertilizers; and public food distribution.
Transport
Critical to Iraq's reconstruction will be the transportation
sector, which faces numerous challenges. Basic transportation
infrastructure is sound, but has not
received proper maintenance for years. Rehabilitation priorities being
carried out include port administration buildings, new lighting and
fencing, utilities, security fences, grain elevators, silos, and port
dredging to allow bulk cargo vessels access to grain elevators and
deepwater berths at the port of Umm Qasr, which reopened to commercial
traffic on June 17. Repair of the adjoining railroad system is underway
to allow onward shipment of the large amount of cargo arriving through
the port. Major roadways have also sustained conflict-related damage
and are being repaired or rebuilt.
Baghdad International Airport has received repairs of its tarmac,
runway lights, plumbing, communications, and security access control
systems. The Coalition Provisional Authority is assuming civil aviation
responsibility to oversee airport security and flight safety and the
administration of civil air services. The repairs that have been
completed at Baghdad International Airport have rendered it capable of
hosting civilian air services since the beginning of August. In
addition, rehabilitation has been undertaken on Basrah International
Airport including airport striping, perimeter fence service, and land
radio requirements. However, continuing
security concerns have prevented these two airports from being reopened
to commercial service for the time being.
CPA is coordinating with the State and Transportation Departments,
the Federal Aviation Administration, Transportation Security
Administration, other U.S. Government agencies, and with the
International Civil Aviation Organization on procedures to initiate
commercial aviation. CPA has completed solicitations for service for
Baghdad and Basrah, and announced the carrier selections for Basra in
order to expedite the initiation of commercial aviation once the
security situation is adequate. We foresee that with the improvement of
Iraq's transport system, trade and investment relations with its
neighbors will also improve. Key future tasks include rehabilitation of
roads, bridges, airports, ports, railways, and public transport.
Telecommunications
Telecommunications remains a critical requirement for the
reconstruction effort. Expanding telephone access is a key step to
improving Iraqis' lives and essential for the efficient functioning of
basic services, including the electricity and oil industries and
security. In prosecuting the conflict, command and control systems and
telecommunications centers were targeted. The war destroyed almost 50
percent of the telephone switches in Baghdad, and severed many
intercity and all international links. Thus, even though about three-
quarters of the 1.1 million lines in country remained serviceable, many
of them connected only with phones in their local exchanges.
At this time, telecommunications reconstruction is progressing
steadily. There is telecommunications construction work underway on 12
switches, restoration of fiber connectivity between major cities, and
the reestablishment of an international satellite telephone gateway.
The completion of these projects will put Iraq at prewar levels of
telecommunications. We have a target date of January 2004 for the
completion of this work. The State Department and USAID have worked
closely with CPA to expedite the telecommunication effort. CPA's
selection process for the three regional wireless licenses is
continuing due to the great volume of license applications. Granting of
the licenses will ensure private sector participation in the
telecommunications sector. Key future tasks include rehabilitation of
switches, local access, international connectivity equipment, and the
postal system.
Electricity
Restoring and expanding Iraq's electricity generation capacity and
the power
distribution grid is critical to Iraqi citizens' well-being, as well as
to the rapid restoration of economic recovery, particularly in the oil
sector. Despite sabotage and criminal activity, Iraqi electricity
generation has been steadily improving and reached its highest point,
3,715 MW, on August 27, or roughly 84 percent of preconflict levels.
CPA and USAID are working to repair power stations and transmission
lines as part of a plan to increase power to 4,400 MW by September 30
and 6,000 MW before the summer of 2004. Iraq's Commission of
Electricity (COE) has implemented a power sharing policy that provides
a predictable ``3 hours on, 3 hours off'' power schedule throughout the
country. Bechtel is providing technical personnel at key power stations
to assist the COE and is converting units at the Bayji and Al Qudas
power plants to burn crude oil until refined fuels are more widely
available. USAID is replacing air conditioning systems and clogged heat
exchangers at four southern power-generating stations and is purchasing
new turbines for the Kirkuk power station. CPA and COE are analyzing
maintenance and inspection schedules to reduce the potential for power
outages during the fall and winter. Key future tasks include
rehabilitation of generation, transmission, and distribution equipment
and providing greater security to protect these facilities.
Water and Sewage
Iraq is blessed with abundant water resources, but saddled with
decrepit and neglected infrastructure to assure clean water to citizens
and industry. We are working hard to improve the situation. USAID
support to water and sanitation projects has already benefited over
14.5 million Iraqis. We have repaired over 1,700 critical breaks in
Baghdad's water network, increasing water flow by 200,000 cubic meters
per day. USAID has begun to expand Baghdad's Saba Nissan water plant,
which will add 225,000 cubic meters of water a day by May 2004. We have
rehabilitated 70 of Baghdad's 90 nonfunctioning wastewater-pumping
stations and begun restoring Iraq's largest wastewater treatment
facility, the Rustimiyah plant, which is southeast of Baghdad. USAID is
dredging Basrah's Sweet Water Canal and partly completed restoration of
the Safwan water pumping station in Khor az Zubayr, benefiting 40,000
people. USAID is also working to rehabilitate the An Najaf and Al
Hillah sewage treatment plants, which serve 194,000 Iraqis. USAID has
provided funds for the purchase of 100 MW generators for Baghdad's
water system, thereby ensuring continuous water supply. Existing USAID
projects will implement plans to increase potable water flow to east
Baghdad by 45 percent, helping 2.5 million people and restore sewage
treatment plants and the Baghdad pump station, serving over 5.5 million
Iraqis. Key future tasks include the repair and rehabilitation of water
pumping stations, wastewater treatment plants, and associated
distribution systems.
Health
While there has been no health crisis thanks to the efforts of
USAID and other agencies, building Iraq's health infrastructure remains
a high priority. USAID has rehabilitated delivery rooms in hospitals
and primary care centers serving 300,000 residents in Basra. Three
million sachets of oral rehydration salts are being distributed to
children with diarrhea. With USAID funding, UNICEF has provided more
than 100,000 pregnant and nursing mothers and malnourished children
under 5 years old with supplementary rations of high protein biscuits
and 1.4 million children have been vaccinated to date during monthly
vaccination days. USAID has rehabilitated delivery rooms in hospitals
and primary care centers service 300,000 residents in Basrah and
500,000 in Nassirya. More than 60 primary health clinics are being
renovated and over 6,000 re-equipped to provide life saving health
services at a local level throughout Iraq. We will also train thousands
of health care providers in the most important life saving techniques.
We will continue to rehabilitate hospitals, public health centers, and
delivery rooms in the Baghdad area and nationwide. In addition, a
hospital burn ward, and dentistry and allergy/asthma centers in Basrah,
Mosul, and Kirkuk are being repaired. USAID and Iraq's Health Ministry
are developing a health strategy for the country that has been
supported by all health donors in Iraq. Key future tasks include the
rehabilitation and construction of hospitals and health clinics.
Education
Iraq's children are among its greatest resources for a better
future. Their education has been severely disrupted during and after
the recent conflict. A top priority is to get the education system up
and running again as soon as possible. USAID inventoried all of Iraq's
3,900 secondary schools in permissive areas and is on target to equip
and open all secondary schools by the opening of school in early
October. UNICEF accessed 1,000 primary schools in Iraq. With USAID
funding, UNESCO has completed revision of 45 math and science
textbooks. USAID has ordered student/school kits for 1.5 million
students and 3,900 schools, including furniture and teaching materials.
USAID also provided supplies for final exams to At Tamim Directorate of
Public Education, Technical Institute of Kirkuk, Technical College of
Kirkuk, Kirkuk University, and Basra University. We are working with
Ministry of Education (MOE) to create a plan for the national exam
process, including an exam schedule and security requirements. USAID
also conducted a competition for U.S. universities to partner with
Iraqi universities under a $20 million grant program. USAID will
rehabilitate at least 1,000 primary and secondary schools before the
start of the new school year in early October. UNESCO will print and
distribute 5 million math and science textbooks during the month of
October. Key future tasks include the rehabilitation and construction
of school facilities.
Paying for Reconstruction
Experts from the CPA, Iraqis in various ministries, and the
international organizations are fine-tuning detailed estimates for
Iraqi needs in preparation for the Madrid Donors Conference in late
October. The analysis that has been accomplished thus far is that they
will be substantial, as high as $50-$75 billion over the next several
years. The Iraqi people and the broad international community must now
share this cost of redeveloping Iraq's economy with the Coalition.
CPA issued a 2003 budget for Iraq on July 7 of $6.1 billion, a huge
step in a country where budgets historically were closely guarded state
secrets and it had been a crime to reveal them. The Governing Council,
in close consultation with individual Iraqi ministries and budget
experts from the U.S. Government are coordinating work on a budget for
2004. This budget should be ready in advance of the October Iraqi
Donors Conference in Madrid in order to help international donors
identify funding priorities.
There are several primary sources of revenue for Iraqi
reconstruction: Revenue of the Iraqi Government, including from oil
sales; unfrozen Iraqi assets; funds from the Oil-for-Food program;
contributions from the United States, including $20 billion request the
President is making to the Congress; and contributions from foreign
governments and international organizations.
Iraq: Revenue from Petroleum Production and Other Local Revenue
Iraq itself will bear an important share of the cost of
reconstruction as its oil proceeds are used for the first time in 30
years for the benefit of the Iraqi people. UN Security Council
Resolution 1483 directs that 95 percent of all oil export proceeds be
deposited in the Development Fund for Iraq to be used for the
humanitarian needs of the Iraqi people, for rebuilding the economy and
infrastructure, for continued disarmament, for the costs of civilian
administration, and for other purposes benefiting the people of Iraq.
(The other 5 percent are applied to a special account for the United
Nations Compensation Commission.)
To ensure transparency Ambassador Bremer has created a senior-level
Project Review Board to approve projects and allocate funding sources
and has issued procurement rules consistent with U.S. Government rules.
Moreover, U.S. Government agencies are working with CPA to initiate the
International Advisory and Monitoring Board (IAMB), created under UNSCR
1483. The IAMB, composed of representatives of the UN, the Arab Fund
for Social and Economic Development, and international financial
institutions, will ensure transparency with respect to expenditures
from the Development Fund for Iraq and to verify that its export sales
are consistent with prevailing international best market practices.
Oil sales are far and away 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 online and to repair and rehabilitate the existing
infrastructure. A highly qualified team has taken on this work. The
Governing Council has named Ibrahim al-Uloum the new Minister for
Petroleum. Al-Uloum is an oil engineer with international private
sector experience. Thamir Ghadhban, a highly dedicated and competent
career Oil Ministry executive, remains in place as CEO. Iraq has in
place a team of experienced and well-qualified Iraqi managers and
engineers at the Oil Ministry, the State Oil Marketing Organization
(SOMO), and the South and North Oil Companies; they have technical
support from the Army Corps of Engineers. Steps are being taken every
day by Iraqis, working with the U.S. Army, to assess the condition of
wells, pipelines, pumping stations, gas-oil separation plants,
associated power grids, and refineries, and to make repairs.
In July, SOMO signed Iraq's first term contracts since the war, for
exports of Basra Light oil from Iraq's southern fields. Iraq's Mina al-
Bakr oil terminal is operational and SOMO is successfully exporting oil
from it. SOMO recently reported that oil exports averaged about 700,000
barrels a day in August.
There obviously is considerable uncertainty surrounding all
production and export projections for Iraq. Raising oil production will
require more rehabilitation of fields and production chains. Since the
security situation is improving slowly, it is difficult to project the
likelihood of success or the likely costs associated with this work.
Estimates of future oil production vary considerably. Domestic needs
are expected to stay in the 500,000-600,000 barrels a day range. The
following chart provides mid-range estimates of oil export levels and
revenue for the next 2 years:
Estimated Oil Exports and Revenue
------------------------------------------------------------------------
2004 2005
------------------------------------------------------------------------
Exports............................. 1.5 million b/d 2 million b/d
Revenues............................ $12 million $19 million
------------------------------------------------------------------------
Assets of the Former Iraqi Regime
In addition to oil, existing Iraqi state assets and the assets
acquired by Saddam Hussein and other senior officials of his regime are
to be used for the benefit of the Iraqi people to reconstruct the
country.
After Saddam Hussein's invasion of Kuwait in 1990, the United
States acted to deprive the Iraqi regime of the means and materials to
continue its regional aggression and to further develop its weapons of
mass destruction programs. Consistent with UNSC Resolution 661, the
United States blocked all Iraqi state assets within its jurisdiction,
for example, in the United States, or held by U.S. persons wherever
located.
The President has vested $1.7 billion in Iraqi Government assets in
the United States, almost all of which have been transferred to the CPA
to meet the immediate humanitarian needs of the Iraqi people. These
funds have been used to pay Iraqis' salaries and pensions, as well as
for humanitarian projects such as replacing hospital generators.
The State Department and other government agencies have also
reached out to many countries that have frozen Iraqi state assets.
Under UNSCR 1483, countries have an obligation to freeze without delay
and immediately transfer Iraqi state assets to the Development Fund for
Iraq. Japan, for instance, turned over $98 million in frozen assets to
the Development Fund for Iraq on August 29.
We continue to have extensive bilateral and multilateral
discussions with key countries, with Treasury and State officials
contacting their counterparts. We have stressed the need for all
countries to search their financial institutions for the assets of
Saddam Hussein and his senior leadership, as well as their family
members, in both face-to-face meetings and in messages delivered by our
embassies overseas. Our efforts are leading to the identification of
funds. Over $1 billion has already been frozen. We are urging that
these funds be transferred to the Development Fund for Iraq so that
they are used for the benefit of the Iraqi people.
Mobilizing Resources from the International Community
In my opening remarks, I referred to our ongoing work with the
international community on Iraqi reconstruction. Many countries have
already 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
humanitarian ``flash'' appeal. 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. Much more will be
needed.
We moved immediately after the end of Operation Iraqi Freedom to
start the work of coordinating and increasing donor efforts in Iraq.
Technical consultations among key donors held at the United Nations on
June 24 in New York confirmed that there was widespread recognition
that repairing the damage of decades of misrule in Iraq must be an
international undertaking. These consultations led to the formation of
a Core Group consisting of the EU (Presidency and the European
Commission), Japan, the United Arab Emirates, and the United States
along with the cooperation of the United Nations Development Group,
World Bank, IMF, and CPA. The Core group is charged with laying the
groundwork for an international donors' conference, to be hosted by
Spain on October 23-24 in Madrid, and provides regular briefings on
progress to over 50 other countries that are also interested in the
success of Iraq reconstruction. At that meeting, we will be looking for
foreign pledges for Iraqi reconstruction commensurate with the
importance and urgency of the task for the remainder of 2003 and all of
2004.
The governments represented at the June 24 meeting in New York
asked the World Bank, the IMF, and the UN to undertake a series of
needs assessments in Iraq. In response, the World Bank is doing
sectoral studies on education, economic management, investment climate,
banking, transportation, and telecommunications; the International
Monetary Fund led a study on the macroeconomic situation and the
overall budget requirements that would be faced by Iraq and the United
Nations Development Group led tasks forces on health, agriculture, mine
action, water supply, electricity, housing, and institutional capacity
building. The fourteen needs assessments are designed to ensure that
the best experts available internationally take a look at the situation
in Iraq. They have gone into Iraq to assess the situation, identify
needs, begin to put a price tag, begin to establish priorities.
The results of these assessments are being fed into the 2004 budget
process, being undertaken by the Coalition, working with the interim
Iraqi cabinet and the new Iraqi ministries. Both the international
organizations, as well as the authorities in Baghdad, agree that the
budget should be the coherent planning tool that guides not only how
operating funds are spent, but also what reconstruction priorities
should be. We are aiming to get a fusion of what reconstruction needs
are between the budget being prepared in Baghdad, on the one hand, and
the results of the needs assessments being done by the international
organizations, on the other.
The Core Group and other donors are also consulting with the World
Bank and UN to develop ideas for a multidonor trust fund into which
donors could make contributions. A technical meeting on the multidonor
trust fund was held in Washington in late August, and that work is
moving forward.
Running in parallel with the Core Group process are meetings of the
Liaison Group at the UN, which is the larger group of countries that
first met in New York in June. About 60 countries as well as several
international organizations are members of the Liaison Group. On
September 5, this Group met in New York to learn about the results of
the Brussels and to invite their input to the issues discussed,
including the governance structure of the trust fund, and the process
of refining of the World Bank, IMF, and UN assessments. The Group
generally made sure that everyone that is likely to participate in the
donor's conference is having a voice in its organization.
Private Sector
Iraq's financing needs for the coming months will need to come
principally from international donors. However, in the longer run
Iraq's development will depend on expanding trade and investment and
the growth of the private sector. Iraq's reestablishment of trading
ties to its neighbors and beyond will generate employment
opportunities, diversify and increase exports, raise revenues, and
facilitate regional
reintegration of its economy. The State, Treasury, and Commerce
Departments, the Office of the U.S. Trade Representative, the Ex-Im
Bank, OPIC, and other agencies are working with CPA and the Iraqis on
measures to establish an environment that is conducive to business,
including:
establishment of a new, open trade regime;
encouragement of foreign investment through a more open
investment regime and loosening of restrictions against foreign and
domestic ownership of private property;
creation of an effective banking system, and other financial
services;
transformation of substantial means of production and
development currently in the hands of the state;
replacing existing currencies with a single new currency;
establishing credit facilities for small businesses;
reviewing and revising commercial laws and regulations to
support a market-driven economic framework.
To help facilitate trade, the CPA is creating the Trade Bank of
Iraq, which was announced in July 2003 and will be established soon.
President Merrill of the Ex-Im Bank is here today to discuss the Trade
Bank during his testimony. Finally, OPIC and the Trade Development
Administration are taking steps that would permit them to operate in
Iraq in support of U.S. investors in Iraq.
Mr. Chairman, you can see from my summary of the economic
reconstruction of Iraq that this is an issue that is getting the
highest priority within the U.S. Government. It is an immensely
complicated effort involving not only the United States, but also the
whole international community and major international institutions,
including the United Nations, the World Bank, and the IMF. I have
outlined the considerable progress we have made over recent months, but
the formidable challenge of restoring Iraq to economic vitality will
continue to require major resources from the United States and the
international community as well as from the Iraqis themselves. The task
will take years to complete. It is an effort that we cannot afford to
lose. We welcome the strong support of Congress as we confront this
challenge.
----------
PREPARED STATEMENT OF JOHN B. TAYLOR
Under Secretary for International Affairs
U.S. Department of the Treasury
September 16, 2003
Chairman Hagel, Ranking Member Bayh, other Members of the
Subcommittee, thank you for inviting me to testify on the financial
reconstruction of Iraq. Given the importance of trade and finance for
Iraq's reconstruction, this Subcommittee is an ideal forum for this
discussion. And the presence of my colleagues, Under Secretary Larson
and Chairman Merrill, further underscores the importance of active
government-wide participation in the reconstruction effort.
When I last testified on this subject, on June 4 before the Senate
Committee on Foreign Relations, I stressed that ``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 . . . by 2001 it had
declined to $40 billion.'' I also stressed the strategy of financial
reconstruction--the contingency plans developed in advance of the
military conflict--and the tactics followed on the ground since the
conflict began. I would like to stress these same issues in my
testimony today, with emphasis on the additional information we have
obtained on the state of the Iraqi economy and on what has happened on
the ground during the summer months.
Much has been accomplished in the financial area since the fall of
Saddam
Hussein's repressive regime, and many potential financial catastrophes
have been avoided. In my view, months of advance planning by the United
States government before Saddam's fall as well as the dedicated work of
the Coalition Provisional Authority and the Iraqi people since Saddam's
fall are responsible for these accomplishments.
Starting late last year, we began developing a strategy for
financial reconstruction based on the information we had at the time.
The strategy addressed such issues as (1) payments to Iraqi workers and
pensioners, (2) the currency, (3) the banking system, (4) Iraq's
international debt, (5) an assessment of reconstruction costs, and (6)
the international fundraising efforts. I want to review how that
strategy is playing out today. But before doing so I must emphasize
that an important part of our advance planning has been the selection
of people to participate in the financial reconstruction effort. We
began selecting financial experts in January; the first wave of people
was deployed to Kuwait in March and to Baghdad in April. Early on we
decided that a financial coordinator was essential and we are very
grateful to Peter McPherson who took leave from the Presidency of
Michigan State University and has served most ably in this position,
advising Ambassador Bremer and the rest of the Coalition Provisional
Authority.
A Strategy for Paying Workers and Pensioners
It was clear that we had to have a strategy for paying Iraqi
workers and pensioners after the fall of Saddam Hussein, and thus we
crafted a strategy well in advance of his fall. Keeping workers on the
payroll with stable purchasing power would be essential to prevent
severe hardship and economic collapse. But how many workers were there
and how much should they be paid? What currency should be used to make
the payments? Where would the funds come from? Would the payments
system be in good enough condition after the conflict to actually make
payments? How could we prevent hyperinflation and a sharp depreciation
of the currency, which would further impoverish people? After all, one
of the reasons for the terrible economic performance under Saddam was
that he resorted to the printing press to finance his spending, causing
high inflation and a drop in the dinar to about 1/5,000th of its former
value.
Starting late last year, we developed such a payments strategy,
which was approved interagency after much valuable discussion and
debate about alternative strategies. The strategy called for paying
workers and pensioners in U.S. dollars on an interim basis. This was
not dollarizing the economy, because the strategy called for the
continued use of local currencies--such as the Saddam dinar in the
center and south and the Swiss dinar in the north--and their eventual
replacement by a new national currency, as described below. Using U.S.
dollars on an interim basis would create stability and would help
prevent a collapse of the dinar.
Finding a way to secure the funds to make these payments in advance
of the conflict proved to be a challenge. After much discussion and
debate, we decided that the best approach was to use Iraqi regime
assets that were frozen at U.S. commercial banks back in 1990 at the
time of the first Gulf War. In order to use the assets for this
purpose, they had to be ``vested'' for the use of the Iraqi people. Our
estimates were that there was about $1.7 billion that could be vested
in the United States and that this amount would probably be sufficient
to last until a new currency could be issued in Iraq. A vesting
strategy was worked out and approved by interagency legal experts.
Under this plan the President would call for the vesting of the assets
in the Federal Reserve Bank of New York near the time that the military
conflict began.
To make such a strategy operational, many tactical issues and
contingencies had to be considered. For example, the plan called for
the military on the ground to issue public statements--worked out with
the Departments of Defense and Treasury--that the dinar would continue
to be accepted as a means of payment after the fall of the Saddam
regime. The plan also called for the first wave of financial advisers
into Baghdad to assess the payments system's capability for making
dollar payments.
Another essential operational issue concerned the actual shipping
of the currency to Iraq, and a plan for making the payments to workers
and pensioners on the ground had to be developed. We estimated that
enough currency in the right denominations was in storage in the New
York Fed's warehouse in East Rutherford, New Jersey, and we determined
that it was feasible to ship the currency by tractor trailer to Andrews
Air Force Base, load it on military aircraft, and fly it to Camp
Arifjan in Kuwait for the last leg into Iraq. Many tons of currency
were involved because of the need for small denominations: one-dollar
or five-dollar bills. On the ground, the military would assist in the
actual shipment of the currency around the country. Financial experts
would develop lists of eligible workers and pensioners who would be
paid. The currency would be distributed to Iraqis who would then
actually make the payments. In some cases, the currency would be paid
at the state-owned enterprises or government ministries. In other
cases, pensioners would come to local banks to receive payments.
I am pleased to say that this strategy along with all its tactical
details has been carried out with great success. On March 20, at the
start of the conflict, President Bush issued an order calling for the
vesting of the frozen assets. As a result, approximately $1.7 billion
was vested in the New York Fed. With these funds at the New York Fed,
the first shipment of currency from the Fed's East Rutherford, New
Jersey warehouse to Camp Arifjan was made on April 13. Even as major
combat operations were winding down, a mechanism for shipment of cash
and distribution of emergency payments was established and began to
function. Thanks to this system, we were able to make monthly emergency
payments to dock workers, rail workers, power plant workers, and others
essential to restoring basic services. We soon transitioned to regular
civil service salary and pension payments to over 2 million Iraqis.
Despite tremendous logistical challenges, the system of payments
has worked well. Our financial experts in Baghdad consider this to be a
major force for stability in the country, as well as a significant spur
to economic growth. As of this date all but $64 million of the vested
assets has been shipped to Iraq where they have been used principally
to support salary and pension payments to the Iraqi people. The
Department of Defense's logistical support has been crucial in this
enormous undertaking.
Throughout this period there has been no collapse of the currency,
no hyperinflation, and no serious glitch in the payments process
itself. In sum, this major and essential success in the reconstruction
was due in large part to preconflict planning and to adjustments that
were made as we implemented the plan and learned from experience.
A New Unified Currency for Iraq
As I indicated, the payments strategy called for the use of U.S.
dollars on an
interim basis only. Our goal was for the Iraqi people to choose a new
national currency to replace the Saddam dinar and the Swiss dinar, and
to provide the necessary financial and logistical assistance to do so.
A stable, unified currency is an essential part of a market economy and
therefore one of the key parts of financial reconstruction.
I am happy to say that this part of the financial reconstruction
strategy is on track as well. Last July 7, after consulting with
representatives from the Central Bank, the finance ministry, and other
interested Iraqis in the north and the south, the Coalition Provisional
Authority announced that a new currency would be issued starting in
October. The new currency would replace the old currencies at fixed
rates that were also announced. Hence, the Coalition Provisional
Authority and Iraqi officials in the Central Bank and the finance
ministry are about to begin one of the most important parts of the
financial reconstruction to date: Issuing a new currency to replace the
Iraqi currencies that are now circulating. The new currency is a key
component in the effort to establish a stable financial system.
The new currency bears the designs of the old Iraqi, or Swiss,
dinar and is being produced at printing facilities around the world on
schedule. There will be six denominations to replace the current two
denominations. About 2,200 tons of currency will be shipped from
printing facilities in England, Spain, and other countries. A
sufficient supply of new notes will be available when they are
introduced.
The exchange period will begin on October 15 and last until January
15. A public education campaign is underway in Iraq to ensure that the
Iraqi people are well informed about the new currency and are prepared
for the currency exchange. The new currency will improve the ease of
transactions, since it will be issued in more denominations than
currently available, and will have built-in security features that will
enhance public confidence by making the notes more difficult to
counterfeit.
Restoring and Revitalizing the Banking Sector
We knew well before hostilities began that strengthening and
modernizing Iraq's financial sector would be central to achieving
overall economic reconstruction, and that a thorough on-the-ground
assessment of Iraq's financial sector would be needed as soon as
conditions allowed. Thanks to extensive prewar planning, Treasury was
able to position advisors in Iraq's finance ministry, Central Bank, and
two main commercial banks even as hostilities were winding down.
The challenges they faced to perform seemingly simple tasks, such
as schedule a meeting with Iraqi bankers, were enormous due to security
concerns, the lack of working phones or faxes, and language barriers.
Despite these difficulties, I am pleased to report some major
successes. One of the most important is the reopening of most of the
branches of Iraq's two large state-owned banks--Rafidain and Rasheed--
which enabled cash-strapped Iraqi families to gain access to their
savings. Opening these branches was no small feat. Many of the banks'
branches were damaged and we were fearful of a bank run once the banks
reopened. Due to careful planning, individual Iraqis now have access to
their deposits and there were no bank runs.
The initial assessments conducted by our advisors have provided
much insight into the operations of Rafidain and Rasheed banks. As our
preplanning analyses indicated, these banks did not function
independently of the former regime. We now know that these banks were
not permitted to make loans based on commercial viability and a
borrower's ability to repay, but instead on the ability of the borrower
to fulfill a Ba'athist party political objective. The Coalition
Provisional Authority, with the support of Treasury, is hard at work
reviewing ideas for restructuring the two major state-owned banks.
Analyses of Iraq's private banks are almost complete. While these
banks are small in relation to the two large state-owned banks, they
will play a role in Iraq's future. We know that remittances through
these banks are starting to occur. Remittances by Iraqis overseas will
soon form a large pool of resources in Iraq that will finance
investment and consumption. According to some estimates, about 4
million Iraqis live abroad, and in recent years they have transferred
over $1 billion per year to relatives in Iraq.
In addition to strengthening specific banks, the financial system
more broadly--including the relevant laws and regulations--will require
significant work to ensure that an efficient and effective system for
financial intermediation is achieved. In consultation with the
International Monetary Fund, we are working with the Iraqi Governing
Council, other Iraqi officials, and the Iraq Bankers' Association on a
revision of Iraq's Central Bank law and commercial banking law.
Creating a sound
supervisory and regulatory regime is also critical to establishing a
strong financial system. We have reached out to countries in the
region, including Jordan, Bahrain, and the UAE, who have offered to
provide technical training to Central Bank and commercial bank
employees.
As work proceeds on these broad objectives, some initial bank
lending has started, with the focus on loans directed toward Iraqi
small- and medium-sized enterprises. Additionally, the Treasury has
approached the International Finance Corporation, the private sector
arm of the World Bank, about setting up a facility in Iraq to provide
loans to micro-, small-, and medium-sized businesses. This would be a
multilateral facility modeled after other highly successful programs in
Russia, Central Asia, and Southeast Europe.
One major initiative that is now getting off the ground is the
creation of the Trade Bank of Iraq. This Iraqi-staffed institution will
facilitate imports to and exports from Iraq by putting in place the
people and systems needed for the country to trade more efficiently and
on a larger scale with the rest of the world. Currently, trade is
taking place at the retail level. In Baghdad's markets one can find
consumer goods--from refrigerators to satellite disks--imported from
neighboring countries. But in order for Iraq's reconstruction to move
forward as quickly as possible, and for private sector activity to take
off, there needs to be an efficient system for importing a broad range
of capital goods and services. Our goal is for Iraqi banks to provide
trade finance services. But as the process of strengthening Iraqi banks
goes forward, there is an immediate need to do this. The Trade Bank of
Iraq is intended to fill that gap.
Following a competitive bidding process, the CPA is negotiating a
contract with a consortium of international banks which will facilitate
the operations of the Trade Bank. Additionally, the Trade Bank will be
the entity by which Export Credit Agencies around the world support
trade with Iraq. There is precedent in creating institutions such as
the Trade Bank in post-war Japan and Germany. Those institutions
evolved and took on functions akin to export-import banks, although how
the Trade Bank evolves will be up to the Iraqi people.
Iraq's International Debt
Early on we recognized that dealing with Iraq's substantial foreign
debt problem would be crucial to the country's medium-term economic
health. We therefore developed a strategy to resolve this problem.
First, using the financial information we had, we ensured that Iraq
would not have to service its debt following the end of the war and
during the critical reconstruction phase. Demands for repayment would
have greatly reduced the resources available to a new Iraqi Government.
Therefore, we secured recognition from the G7 that Iraq would not
service its external debt at least through the end of 2004.
Subsequently, the Paris Club group of official creditors stated their
expectation that Iraq would not make payments over this time period.
Next, we sought to obtain the best possible data on Iraq's foreign
debt and its economic condition. Without any reliable data, it would be
difficult to reach an international consensus on a debt strategy. We
began collecting data by sending several technical assistance advisors
to Iraq to review the government's debt records once the war ended. At
the same time, we worked intensively through the Paris Club and the
International Monetary Fund to obtain data from creditors.
We have made significant progress. The latest available information
indicates that Iraq's external debt amounts to at least $70 billion and
is probably closer to $100 to $120 billion. Paris Club members report
that they are owed roughly $40 billion--$21 billion in principal and
roughly an equivalent amount in late interest. The IMF has polled non-
Paris Club governments and, as of September 10, reports creditor claims
of $28 billion in principal and interest. Since 20 governments have yet
to respond to the IMF poll, this figure is likely to increase.
With better data in hand, we can now proceed with our strategy and
work out a long-term solution to Iraq's debt problem. We will continue
to work with other creditors toward the goal of achieving a substantial
restructuring of Iraq's debt that will permit the Iraqi Government to
channel resources into reconstruction activities.
Assessment of Reconstruction Costs and International Fundraising
Efforts
We also knew at the outset that one of the major priorities
following the conflict would be to produce a comprehensive assessment
of reconstruction costs in Iraq. We recognized that we could not focus
solely on the costs of repairing the damage inflicted during the short
conflict. Saddam Hussein's total disregard for the welfare of his
population likely meant that the needs of the Iraqi people--and the
cost of reversing decades of economic decline--would be substantial.
Because of the extent of Iraq's isolation from the international
community, we had little reliable information regarding the extent to
which critical investments had been neglected. We were concerned that
the absence of economic data and other information would make the job
of producing a timely needs assessment especially challenging. We
engaged early with our fellow shareholders and with senior officials
from the World Bank and the IMF to create a process for making a needs
assessment as soon as the environment was permissible. As a result of
these discussions, these institutions acted quickly to develop the
scope of the assessment, divide up responsibility for different
sectors, and recruit the necessary staff.
We expect that the cost for reconstruction will be in the range of
$50 to $75 billion. This estimate covers critical infrastructure needs
in electricity, public works, transport, telecommunications, health,
education, and agricultural sectors, among others. But it excludes the
annual expenses that have been identified by the Coalition Provisional
Authority to cover the government operating budget.
Clearly, this is a cost that will need to be shared widely, and
underscores the importance of a major donor effort for Iraq. In June,
we established a ``Core Group'' of donors, consisting of Japan, the EC,
and the United Arab Emirates, to consult regularly with the UN, World
Bank, IMF, and CPA, on the planning and preparation for the donor
conference. The members of this group are engaging intensively with
other potential donors to urge them to pledge generously at the donor
meeting in Madrid on October 24. We believe our own substantial
contribution of $20 billion--as reflected in the President's
forthcoming supplemental request--will be critical to leveraging
support from other governments.
In addition, we are encouraging the international financial
institutions to commit their own resources to the people of Iraq. As
you are aware, the IMF and World Bank recalled their staff following
the bombing of UN headquarters where they were also housed. However,
these institutions remain actively engaged on Iraq, and are continuing
to work with CPA and Iraqi officials, providing technical assistance
and finalizing the needs assessment. The World Bank--in conjunction
with the UN--is also completing the design of a multidonor trust fund
that would pool bilateral donations and make them available for
priority needs identified by these agencies in their needs assessments.
In addition to these vital contributions, we have made good progress in
our discussions with the IMF and the World Bank on identifying the type
and amounts of resources that could be made available to the Iraqi
people once the conditions for lending are in place.
In a related exercise, we are reaching out to Export Credit
Agencies (ECA's) around the world, encouraging them to follow the U.S.
Ex-Im Bank's efforts to support investments in Iraq by insuring
repayments. Many other governments have responded positively to this
effort, including Japan and the United Kingdom. Through credit
facilities such as the one proposed by Ex-Im Bank, credit agencies will
be able to provide short-term export credits worth several billion
dollars. Initiatives like this will be very important for supporting
trade, facilitating commercial activity, and spurring growth in Iraq.
Countries other than the United States have been identifying and
freezing assets of the Hussein regime in accordance with UN Security
Council Resolution 1483. Over $1 billion of such assets has been
identified and frozen. We are working hard to encourage countries that
have frozen assets to transfer those funds to the Development Fund for
Iraq (DFI), where they will assist in the reconstruction of the
country. We have already had some success in these efforts, including a
transfer of
approximately $98 million to the DFI announced by Japan on August 29.
Conclusion
Achieving a stable and productive economy is central to our goal of
a unified and prosperous Iraq. We have made considerable progress on
financial reconstruction over the last several months, thanks to
extensive advance planning and the work of many dedicated professionals
from the United States, Coalition partners, and Iraq. Our activities
will only intensify in the coming months. While the challenges are
formidable, we are well on the way to establishing a vibrant economy
that creates opportunities for all Iraqis to achieve a better future
for themselves and their children.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGEL
FROM ALAN PARSON
Q.1. How many sole-source noncompetitive contracts are there?
What is the exact percentage of these contracts?
A.1. To the limited extent to which the Department of State has
access to comprehensive details related to contracting for the
reconstruction of Iraq, we offer the following information on
sole-source noncompetitive contracts being awarded by the U.S.
Agency for International Development (USAID) and the Department
of Defense (DOD):
As of September 12, 2003, USAID had awarded nine
reconstruction contracts. Of these, one was a sole-source
contract to International Resources Group (IRG) valued at
USD 18.3 million of current programming. Out of the USD
1.55 billion in USAID contracts funded thus far, this sole-
source contract award represents 1.2 percent of the total.
DOD has awarded one reconstruction contract that was
not competed. The Army Corps of Engineers awarded one sole-
source contract to Kellogg, Brown, and Root. The total
contract award is not to exceed USD 7 billion. DOD has
awarded 1.6 billion in contracts to Kellogg, Brown, and
Root through September 12, 2003.
The General Accounting Office (GAO) has produced two
reports on Iraq reconstruction contracting--one through July
31, 2003 and the other through September 30, 2003.
Q.2. What are the numbers of foreign contract and subcontracts
awarded?
A.2. According to publicly available information and the
Department of State's best efforts to obtain additional
information from other agencies, the Department offers the
following information:
The United States Agency for International Development
(USAID) has awarded all of its prime contracts (9) to U.S.
firms. As of September 19, 2003 Bechtel, one of USAID's
prime contractors, had awarded 133 subcontracts with the
majority (98) going to Iraqi firms.
The Department of Defense requires Kellogg, Brown, and
Root (KBR) to competitively bid the subcontracts for each
individual order placed against its overall contract. We
are unable to prove an exact determination of the number of
foreign subcontractors working with KBR but there are many,
including a number of small Iraqi subcontractors.
USAID and the Department of Defense as the contracting
agencies may be able to provide more complete data.
FINANCIAL RECONSTRUCTION IN IRAQ
----------
TUESDAY, NOVEMBER 4, 2003
U.S. Senate,
Subcommittee on International Trade and Finance,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 2:33 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Chuck Hagel (Chairman of the
Subcommittee) presiding.
OPENING COMMENTS OF SENATOR CHUCK HAGEL
Senator Hagel. Good afternoon. I think the order of
business is for Senator Stabenow to introduce Mr. McPherson,
but in her absence, I have conferred with the Vice Chairman of
the Subcommittee, Senator Bayh, and we have concluded, in the
interest of time--oh, she is here. We just about threw you
overboard here, Senator Stabenow. But allowing you an
opportunity to make the presentation, if you would like to sit
there or down in front, either way you want to do it.
Senator Stabenow. Well, I would be happy to sit down front.
Senator Hagel. We will keep all these Michiganders
together.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman. I appreciate
very much you giving me an opportunity to introduce a
distinguished constituent of mine. Peter, welcome. Good to see
you.
I am not a Member of the Subcommittee, but, of course, Mr.
Chairman, as a Member of the Banking Committee and, most
importantly, as a Michiganian, I wanted to be here today to
introduce Peter McPherson.
As you know, he is the President of Michigan State
University, my alma mater, which is one of the many reasons
that I am pleased that he is here today. But he has a long
history of leadership in the financial services industry as
well as in public service and in education.
Over his impressive career, he has served as Deputy
Secretary in the Department of the Treasury, Administrator of
the U.S. Agency for International Development, a leader at the
Overseas Private Investment Corporation, and as a Special
Assistant to President Gerald Ford.
Mr. McPherson has been President of Michigan State
University since 1993. As head of MSU, he oversees an
institution of nearly 4,500 faculty and approximately 45,000
students. Under his leadership, the Spartans have continued
their impressive track record as a wonderful institution, well
respected for both innovative teaching and impressive research.
When I heard that Peter had been called upon back in April
to serve as the Financial Coordinator for the Iraq
reconstruction, I knew that we were in good hands. I knew the
Administration had picked an excellent person for that
position.
During his time in Iraq, he has worked closely with Iraqis
rebuilding their Finance Ministry, their central bank, their
entire financial services system, and I know that we are
anxious to hear from him today about his perspectives. I know
that he came back to Michigan State, and we are glad to have
him back. I also know he could have spent many more months
there doing the things that need to be done to rebuild Iraq.
But we are just pleased that he was willing to step away from
his duties to go to Iraq and that he is here to share his
experiences with us today.
Thank you.
Mr. McPherson. Thank you, Senator.
Senator Hagel. Senator Stabenow, thank you. You certainly
are welcome to stay for a while, or whatever your schedule
calls for.
Senator Stabenow. Thank you.
Senator Hagel. But we appreciate very much your
introduction of Peter McPherson.
This is the second hearing that this Subcommittee has held
on financial and economic reconstruction in Iraq. Under
Secretary of State Alan Larson, Under Secretary of Treasury
John Taylor, and Ex-Im Bank Chairman Phil Merrill discussed
U.S. efforts to bring stability and growth to Iraq's economy.
Today we will hear from M. Peter McPherson, who has just
been introduced, and as has been noted, is a former Deputy
Secretary of the Treasury, current President of Michigan State
University, and former Director of Economic Development for the
Coalition Provisional Authority in Iraq; as well as Mr. Mark
Malloch Brown, current Administrator for the United Nations
Development Programme. We welcome you both. We appreciate very
much each of you making an effort to be here. Mr. Brown,
especially in your case where it is not often we have
representatives of the United Nations to come before any
committee of Congress. So we very much appreciate your being
here. The Committee will be interested in your insights,
observations, and analysis of Iraq's economic development based
on your experience.
America must continue to lead the international effort to
support the economic and financial reconstruction in Iraq. This
effort is directly connected to our interest in transferring
authority as soon as possible to an Iraqi Government that is
capable of governing and is viewed as legitimate in the eyes of
the Iraqi people.
Post-Saddam Iraq has the potential to be a model for
economic development in the Arab world and throughout the
Middle East. For success in Iraq, Iraqis must believe that
their economic future will be brighter, that there will be
jobs, opportunities, growth, and economic security. And they
must see a quantifiable improvement in their lives.
There has been substantial economic progress in Iraq over
the past 6 months. A trade bank has been established and a new
Iraqi currency is in circulation. Iraq is also in the process
of establishing new and more transparent banking and investment
systems.
But time is not on our side. There are major challenges
ahead before Iraq can realize its potential. Iraq faces
reconstruction costs of at least $56 billion over the next few
years, according to the assessments of the CPA, the United
Nations, and the World Bank, an international debt estimated
between $97 and $124 billion; as well as approximately $96
billion in war reparation claims against Iraq to be resolved
through the United Nations Compensation Commission; and an
unemployment rate of around 60 percent.
Iraq's economic potential has been set back by more than
three decades of mismanagement and corruption by Saddam
Hussein's regime, and as a result of Saddam's disastrous
policies and decisions, Iraq experienced three wars and more
than 12 years of international sanctions. The looting and
destruction that followed Iraq's liberation intensified the
problems. While Iraq has an educated and professional middle
class and the second largest proven oil reserves in the world,
Iraq's economy faces many obstacles and challenges.
Iraq's oil revenues alone will not be able to meet the
demands of governance, reconstruction, and debt servicing over
the next few years. At best, Iraqi oil revenues might be able
to cover the recurring costs of running the Iraqi Government,
but probably not much more than that over the next few years.
We, therefore, should not expect that Iraqi oil revenues will
be available for reconstruction or debt repayment anytime soon.
The United States has committed $18.6 billion in grants to
help rebuild Iraq. Pledges from the international donors in
Madrid last month include between $3 and $4 billion in grants
and as much as $14 billion in loans and credits. The infusion
of approximately $22 billion in grants will have a significant
impact on Iraq's economy. But there is still a long way to go.
Providing debt relief must be another urgent priority in
Iraq, and cannot be disconnected from reconstruction
initiatives. A substantial debt and reparations burden will
hinder Iraq's economic development, no matter how much oil Iraq
has in the ground.
The Iraqi people should not be burdened with debt incurred
by Saddam Hussein's regime. Iraq needs significant debt relief
as soon as possible. But Iraq's debt must be renegotiated
through international institutions such as the United Nations,
the World Bank, and the Paris Club.
Inside Iraq, we must support macroeconomic policies that
expand opportunities in education and, most importantly,
increase jobs. Iraqi politics cannot stabilize with more than
half of Iraq's workforce unemployed. We must work with our
Iraqi and international partners to strengthen and expand the
Iraqi private sector and those industries that offer the best
comparative advantage. The oil sector in Iraq is capital
intensive, not labor intensive, and provides jobs for less than
1 percent of Iraq's population. We need to look beyond oil to
provide jobs and opportunities for all Iraqis.
Iraq's economic and political development will depend upon
an improvement in security in Iraq. If security in Iraq
continues to deteriorate, and the problems spread outside the
so-called ``Sunni triangle,'' economic development will be very
difficult. Security in Iraq is not the subject of today's
hearing, but it is critical to any prospect for economic
stability and growth.
We very much appreciate both of your testimony, your
observations today, and we look forward to your testimony.
I would now ask the Ranking Minority Member of the
Subcommittee, Senator Bayh from Indiana, if he would like to
add his comments.
Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you very much, Mr. Chairman. I want to
compliment you for conducting this hearing today following the
one that we previously held. It is vitally important to
securing the reconstruction efforts of Iraq, and through that
eventually securing the peace. So, I thank you for focusing us
on this topic.
Also, gentlemen, thank you for your time. We know there are
other things that you could be doing, so we are grateful to you
for joining us.
Mr. McPherson, I would just like to say I hope you enjoyed
your experience in Indianapolis a few years ago when the
Spartans won the NCAA Basketball Championship. From our point
of view, if it cannot be an Indiana school, it may as well be a
neighbor.
Mr. McPherson. You were a great host, Senator.
Senator Bayh. Well, I am glad you think so. I had the
privilege of being seated next to the Spartan cheering section,
and my hearing is still recovering. We are happy to have you
anytime, and we appreciate your presence today, as well as you,
Mr. Brown, as well.
I am going to be particularly interested to obviously hear
statements, but then focus some questions on the status of our
debt relief efforts. As my colleague mentioned, the amount of
outstanding debt is unsustainable for the Iraqi economy when
you include not only the ordinary loans but these war
reparations, things of that nature. I would like to know what
our strategy is for going about convincing other countries to
either relieve some of this debt or to have the newly
constituted Iraqi Government repudiate some of it. We had an
example not long ago of Argentina deciding that their
internationally held debt was unsustainable, and they have
taken steps unilaterally to deal with that. I would like to
know what our strategy is for trying to alleviate the Iraqi
situation as well so they can make a fresh start of it and get
on.
I would be interested, as Senator Hagel mentioned, the
Madrid Conference that generated some additional support for
the reconstruction efforts. I noted with interest that at a
time when the Administration was vigorously opposing having
part, a relatively small fraction of the U.S. assistance, be
provided in the form of loans, they nevertheless were
applauding the international effort, two-thirds of which was
constituted as loans. I am interested to know why, according to
the Administration, it is apparently all right for the rest of
the world to be repaid, but the American taxpayer is not to be
repaid. I am looking for a little consistency here, and perhaps
you can help to provide it today.
Also, what do we intend to do with regard to sustainable
macroeconomic policy, both fiscal and monetary? Vitally
important. I mentioned Argentina before. All the U.S.
assistance in the world and from other nations will go for
naught if they do not have sustainable fiscal and monetary
policies. What leverage do we have to try and convince the new
Iraqi authorities to take not the path of least resistance but
the difficult course of providing sound fiscal and monetary
policies for themselves in the longer-run and no just curry
temporary favor with the crowd by pursuing policies that are
not sustainable in the long-run?
Finally, I would be interested to know if you concur with
the cost estimate for reconstruction over the next 4 to 5 years
that Senator Hagel mentioned of $55 to $56 billion. Is that, in
your estimate, an accurate assessment? Or if it is not, how
would you go about assessing the cost of reconstruction?
Again, thank you for your presence. We look forward to
hearing from you. And I again thank the Chairman.
Senator Hagel. Senator Bayh, thank you.
Senator Stabenow, would you like to add any comments?
Senator Stabenow. No, thank you.
Senator Hagel. Well, thank you again, and I would add I
have known Peter McPherson for not quite 30 years, but close to
that. He is one of the genuine public servants of our time,
and, again, we appreciate the time that he invested in helping
this country once again over the last few months. We look
forward to his words as well as Mr. Malloch Brown's words after
we hear from Mr. McPherson.
Mr. McPherson, please begin your testimony. You both can
either paraphrase it, work from notes, or read it. We will
assure you that your full testimony will be included in the
record.
STATEMENT OF M. PETER McPHERSON
FORMER DIRECTOR OF ECONOMIC DEVELOPMENT
COALITION PROVISIONAL AUTHORITY IN IRAQ
PRESIDENT, MICHIGAN STATE UNIVERSITY
Mr. McPherson. Thank you very much, Senator, and, Senator
Stabenow, thank you for your comments. It is good to see you
and have your long support for Michigan State and other
matters. We appreciate it.
I am particularly happy to be here with my old colleague
Mark Malloch Brown. We have worked together on a number of
things, and he and his organization were so important in
putting together the needs assessment as we ran up to the donor
conference in Madrid. Senator, I know this is in no way a
passing interest of yours to really look at the economic side
of what is happening in Iraq, and I think it is important. It
is much appreciated.
Security certainly is a critical component of our long-term
success there. I do think, though, that what has been achieved
in areas such as health and education and the economy begins to
put in fairly stark relief what Iraq can be if we deal with the
security matter. It is no longer just theory and possibilities.
We can see what can be in what we can have when the job is
done.
We are beginning to put in place the foundation for a
revolutionized economy. The new economy will challenge the
whole region, where the economic policies frequently have not
been as sound, and market forces have not played nearly as
important a role.
The situations is pretty messy. It is a very imperfect
world. But in my judgment, the progress is real.
In June, we began to pay the government employees--there
are 1.3 million of them--and about 1 million pensioneers. It
was a real accomplishment to get this all done, because as we
started off, we did not even have the names of the people. The
government ministries were not open. And in many cases, we
actually could not work out of those ministries. We finally
found together individual employees that had taken lists home,
or we patched lists together here and there, and over a few
weeks we put together a list of all the government employees.
We then got some key people in the Ministry of Finance who had
worked on this before. I came to respect a couple men
particularly. Through their honesty and their 24-hour work at
this, they signed off on the integrity of lists all over the
country.
Senators, to get $100-million-plus in value distributed all
over the country in June, was something of which I am still
proud of. There was never a major theft, never a major problem
that was not solved.
One part of this that has almost never been mentioned is
that we paid that first payroll in the Saddam dinar. There was
some discussion about that because Saddam's picture was on the
old currency. The decision was made that to pay in the old
currency in part to tell the country that we were not going to
let their currency, the value that they had in that currency,
just drop through the floor. Everybody remembered what happened
in Germany after World War I where the currency essentially
came to have no value. We would have destroyed whatever value
was left in the hands of the people if we had done so. The
Saddam dinar fluctuated in the months since, but it has
maintained its value within a range. It is a success hardly
spoken of, and I think it was quite key for progress.
In fact, on July 7, the decision was announced to create a
new currency. There was lots of discussion about that. At the
time there was much back and forth, but the Iraqi businessmen
and others were clamoring to do something, and after the fact,
everyone has been really very satisfied that we did. In all but
the North of Iraq, there were only two denominations of the
currency, one worth about a dime, the other about $5. Think if
we had to operate in our country, or any country, with only a
dime and a $5 bill, the new currency was. We began to print it.
On October 15, the swap begin through January 15. There is a
couple billion dollars equivalent being moved into the country.
You swap during these 3 months or all you have left are
souvenirs. Actually, this is going very smoothly. I talked to
my replacement this morning just to confirm. There have been
bumps, of course, but overall things ahve gone very well.
Something we did helped. The central bank pushed hard to
urge people to put money in the banks prior to the swap and
have that money automatically swapped and so people did not
have to stand in line to get it done. But once more, billions
of dollars moved around the country at over 200 sites. That has
been quite a feat.
We put together a 2003 budget. We announced that on July 7
at first. We could not find the prewar budget, because it was a
state secret under the old regime. We found it a few weeks
after we had put together the new budget. The 2004 is now in
place along with the supplemental budget.
When we arrived the banks were all closed. Frankly,
virtually nothing was open. The two big banks, Rafideen and
Rashid, have now opened. At most of their branches, checks are
being cashed. Eighty sites, through a satellite, now connect
the banking system and the central bank are so that we can get
information about what is happening around the country. That
has been a significant achievement.
You mentioned the trade bank a moment ago. When the Oil for
Food Program ends we would not have had in place any trade
credit facility. Unless something is done some of the private
banks will be doing some work, but Rafideen and Rashid are not
yet in a position to do that work. So the trade credit
facility, so-called trade bank, is an important tool.
One of the first things that countries need as a step out
of financial extremis, is trade credit. And so this facility,
which should go out of existence in a couple years, is meant to
be a short-term measure, not to replace the regular banking
system.
Now, as time went on, the Iraqis played a steadily bigger
role in things. When we got there, they had a very limited
role, but the ministries began to operate, the central bank,
the Ministry of Finance, and by August there was an enormous
involvement by Iraqis in making some key decisions. This
included sweeping economic reforms, changes that were announced
by the Finance Minister in Dubai at the World Bank-IMF
meetings. Those changes make the Iraqi economy, under the law
of Iraq, the most open economy in the region--and, frankly, one
of the more open economies in the world.
What it provides is an across-the-board tariff at 5 percent
with a few exceptions that go down to zero. It provides a
maximum personal income tax of 15 percent and corporate rate at
15 percent. It allows foreign investment of 100 percent,
foreign corporations treated as national corporations, full
repatriation of profits and so forth.
The investment provisions were strongly urged by the World
Bank that pointed out how little foreign investment the Middle
East is getting. In fact, in 2002, the last annual figures, the
Middle East received only $4 billion of foreign investment. All
of Sub-Saharan Africa, generally thought not to attract a
little of foreign investment, attracted $7 billion and Latin
America about $44 billion.
The World Bank said you must open up this economy. The
Iraqis were saying, ``We need jobs. And how do we create an
edge? We do not want to be just the same as everybody else, but
how can we be something special?'' Well, the sweeping economic
reforms certainly put that into place.
By the way, I neglected to mention a moment ago, part of
those reforms was allowing foreign banks in to enter the
country and to compete with the state banks, the two big state
banks. There is a lot of interest already being displayed by
some Middle East.
The process of adopting these reforms is instructive. The
Governing Council, the 25-person, now 24-person-member
Governing Council appointed by Bremer, is representative in
terms of religion and geography of the country. I can tell you
from lots of dealing with these people, they are strong people.
They stand up and tell you what they think, and they have an
economic subcommittee of 10 people, many of the very strong,
forceful people on the Governoring Council. I was Ambassador
Bremer's representative to work over these issues with that
subcommittee, and we spent three long meetings working on the
matter. They very much made it their own. They were working on
drafts, they took out things, they put things in. There were
lots of discussions. And the speech that the Finance Minister
made in Dubai at the World Bank meeting was, in my judgment, an
Iraqi speech.
It is premature to speculate on how democracy will work in
Iraq, of course, but after seeing how these religious groups,
the individuals, and groups could work together, I really
believe that, if they are given the time and the opportunity,
these people can find some common ground.
It is important to keep on focusing on the fact that
democratic processes and market forces are mutually supportive,
perhaps even necessary in Iraq. The democratic process should
foster individual freedom and economic opportunity. Market
forces can create widely held resources that give the means for
people to avoid arbitrary and exploitive government.
More certainly needs to be done. There needs to be more
credit available. That is why the foreign banks can be helpful.
There needs to be more loans by the big domestic banks, and the
17 private banks. Iraq needs a competition law to prevent undue
concentration. They need a bankruptcy law. They need a number
of legal infrastructure changes, and I think those probably
will be done.
They also need to continue to cut back on the subsidies.
This is one of the more messy things that you do in economic
restructuring because there is this balance between disruption
of individuals' lives versus the need to cut back on the
subsidies. This is not one decision. It will be hundreds of
decisions as time goes on.
The point is, though, that World Bank has done a
particularly exhaustive job and this conclude that subsidies
need to cut back early so that the private sector can have room
to grow. The sooner you do that, the earlier you get growth.
One or two quick last comments as to the supplemental which
has just been voted here in the Senate, there is no question
that the infrastructure is necessary. And as you pointed out in
your excellent statement, Senator, the oil money, the $13 to
$15 billion for next year will basically cover operating
expenses of the government. The supplemental looks to deal with
extraordinary requirements. And they absolutely are
requirements. The expenditures will not only go a long way
toward addressing these requirements, but also will create
economic activity during a bridge period before growth occurs.
We cannot expect substantial real growth soon. There is no
evidence that early real growth that occurs in situations like
this. The economic activity bridge is very important.
Overall, Senator, I come back to the point I began with,
that we can see today, because of what we have been able to
achieve, that what can be. There is a clearer outline, a
clearer view of what can be. Certainly, we need the security
issues dealt with. But even in this unstable, uncertain
condition, schools are open, health care is delivered, currency
is there, and so on.
I believe that this is a historical time. The opportunity
is there, and if we can stick to it, we achieve something that
a generation from now will be regarded as enormously
significant for the region and the world.
Thank you.
Senator Hagel. Mr. McPherson, thank you very much.
Mr. Malloch Brown.
STATEMENT OF MARK MALLOCH BROWN
ADMINISTRATOR, UNITED NATIONS
DEVELOPMENT PROGRAMME
Mr. Malloch Brown. Thank you very much first, Mr. Senator,
for the invitation to address this hearing today, and let me
just congratulate Peter McPherson for the extraordinary job he
has done in Iraq, along with his colleagues in the CPA. I
actually think this should be required duty for every
university president because they come back and recognize
running a university is not such a bad job after all.
But let me start, if I could, with a very obvious point but
one which someone such as myself, who worked very hard to try
and support the United States and others to make the Madrid
Conference a success, believes in profoundly. I should perhaps
add, so does my colleague Julia Taft, who is with me and known
to you, Senator, I think, from her previous stint at the State
Department. But it is something that, nevertheless, I feel I
have to say here, which is that all of us in the United Nations
profoundly want to see the United States succeed in Iraq. We
certainly want to see that for the well-being of the people of
Iraq, as it remains the only way to establish a successful,
sustainable democracy in the country, that this venture that
the United States leads is seen through to a successful
conclusion.
But also, those of us in the leadership of the UN feel
equally profoundly that the United States must succeed in Iraq
for the health of the overall international system, not just
for the fight against terrorism, vital though that is, but for
broader confidence and faith in the international order of
which we are all part.
And in that context, coming out of Madrid, I equally firmly
want to say that we in UNDP--but I speak more broadly for the
UN when I say this--want to step up our operations in Iraq in
support of the reconstruction and rehabilitation of that
country, that the
reports in the media of our departure are wrong, a bit like the
character who reads his obituary in that morning's newspaper
and complains he is still very much alive. We strongly believe
this about our operations in Iraq.
It is the case that last week in Baghdad, following in
August the attack on our own headquarters, two events forced us
to call our international staff out for brief consultations.
One was the bombing of the Red Cross Headquarters in Iraq, of
the International Committee Red Cross and the Federation of Red
Cross offices, which, by the way, demonstrated that the attack
on the UN had not been because we play a political role in
Iraq, as many had suggested, but because anybody who seeks to
bring help and assistance to the Iraqi people at this time is a
potential target for these groups.
We did have last week for us, a very troubling independent
report on the security arrangements that we had in Iraq since
the end of the conflict there, which cast doubt on our own
internal procedures for managing risk adequately, and we wanted
our people to come out and have frank conversations with us
about whether or not we have adequate security arrangements in
place.
But the point is we want those conversations because we are
going to stay in Iraq and we are going to stay carrying out our
mission and taking the risks that we recognize are inherent in
that mission.
Let me say that there is a role for the UN in three areas,
what you might call the political, humanitarian, and the
development and reconstruction. Let me quickly touch on each.
First, the political, has always been in a sense the
difficult one for us because the CPA is tasked with the
ultimate responsibility for the political evolution of Iraqi
political life, the move via elections and a constitution to a
sovereign government. We can support that with advice on
elections. We can support Iraqis in constitution writing. But
there is nothing in the most recent Security Council Resolution
1511 which changes our fundamental view that this is the
responsibility of the CPA and we must support them in it, but
we are not the prime actors.
Second, on the humanitarian, we have been carrying out,
particularly through my colleagues in the World Food Programme,
a huge feeding operation. The Iraq that Peter McPherson has
described, an Iraq of subsidies not incomes, is one where at
least 60 percent of Iraqis were wholly dependent on food
rations and all Iraqis to some extent dependent on food
rations. Nevertheless, this subsidy-based economy cannot and
must not last. Mr. McPherson is entirely right. We have to
press for a transformation of the economy where subsidies go
down and incomes go up. And we need to get there as quickly as
possible. And then the basic wealth of this country, which 25
years ago had a per capita income of $3,600, a per capita
income that has fallen now to only about $600, won't need a
major humanitarian operation. Humanitarian support is a
consequence of years of accumulated economic mismanagement, not
because the country is poor.
But that then leads us to the third area, which is where I
think the major critical intervention of the UN must take place
in the coming months and years, and that is in the development/
reconstruction area, where obviously to reverse that situation
of mismanagement imposing poverty on a naturally rich country
needs to be addressed. And my own view is that the conference
in Madrid has laid the basic framework for that.
Let me, therefore, start with the $56 billion, Senator, and
is that a realistic assessment of needs. I was at pains in
Madrid to remind the other sponsors, organizers, and attendees
at the conference that $56 billion was not what we or, the
United States, felt was needed in grant assistance. It was,
rather, what Iraq would spend over the next 4 years on the
nonrecurrent capital investment in the reconstruction of the
country. In other words, oil income would pay for the recurrent
expenditures, as you made clear, but the capital expenditures
could amount to as much as $56 billion over the next 4 years.
But it is certainly my view that only a portion of that
will come in grant assistance, that as the years pass by, the
country will be able to access loans, it will be able to
attract foreign direct investment, and its own tax base will
grow, therefore, giving it other sources of paying for this.
The need for grant finance is up front, and it is
particularly in the year 2004 when it will not be able to
access loans because, first, there will still not be an Iraqi
Sovereign Government able to access loans from the capital
market, or even possibly from the World Bank and the IMF,
although that is a point of some debate.
Second, it will have difficulty in attracting foreign
direct investment into the oil sector, let alone other sectors
of the economy, on any very great scale.
And, third, and critical to those first two goals, it will
have enormous difficulty restructuring its debt before there is
a Sovereign Iraqi Government.
So, for my mind, there have always been two phases to the
next few years. There is the immediate phase where the
Governing Council, under the CPA, can manage in a relatively
short-term way and introduce major early steps toward
liberalizing the economy, but is unable to do the big
irreversible steps of restructuring, such as privatizing assets
or restructuring debt, until it has transitioned into a
sovereign government. Once it does so, it will be able to
access, as I say, foreign direct investment, loans, other
sources of capital, and not be solely dependent on grants.
Our view is that of the $56 billion, a significant portion
is grants, but much of that is front-ended into the first year
or so, which brings me to the question--whether or not we
should be angry with the non-U.S. donors for providing such a
large proportion of their funds in loans rather than grants.
Let me say I made the case in Madrid that, while for the 4-
year period that we were looking at in this funding, 2004 was
grants but 2005 to 2007 would have a significant loan portion
as well as grant finance in it. I went on to argue that I
strongly supported the Administration in its proposal that the
$20 billion be in the form of grants. This is not, Mr. Senator,
some European double standard, despite my accent. It is
actually because the United States had first promised to put
its money up front to, in a sense, be financing this early
period when loans are not so practical. But also, I think it
goes with the whole nature of the U.S. role, that the already
difficult relations between the United States and many segments
of Iraqi public opinion would be further complicated if
suddenly what appeared to be a grant became a tied loan. And I
think it would have all kinds of consequences to make the
political situation harder to manage for the United States in
the immediate short- and medium-term.
Ultimately, therefore, on the $56 billion, let me,
therefore, again conclude that by saying that, yes, I think it
is what will be spent in Iraq over the next 4 years in the same
way, if you look back over your shoulder and said how much was
spent in many Eastern European countries, Poland or Hungary,
for example, over the early years after 1989. Looking back,
this amount was spent. But it certainly was not all spent out
of grant finance from the United States or its European allies.
As an estimate of spending, it is realistic. As an estimate of
grant resources over the next few years, I think it is
misleading.
Having said that, let me just very quickly make two further
points. One, how in this security situation will the UN carry
out our role of supporting Iraq in its reconstruction? We are
very lucky. We have 4,000 national staff operating in the
country, many of them highly skilled. They have been the human
capital of our operation there for many years. We started
development operations in Iraq 40 years ago, and we have been
running humanitarian operations for the last 20 years. So we
have not only a very experienced staff, but also an
extraordinary network of National partners now playing leading
roles at the technical level in National ministries, and also
in the municipalities and in the emerging civil society. So we
feel we have ways of mobilizing Iraqi partners to work with us,
and, of course, with the CPA.
Two, we believe that we can do this with a light
international presence. We have to be very prudent with the
number of international staff we have there. We have to
recognize that every person we put there is an individual at
risk in this current security situation. So we will be careful
about those we put there, and we will make sure we have
adequate security arrangements to manage the risk for those who
are there. And we will extensively support them with back-up
operations from Amman, Jordan; Larnaca, Cyprus; and from Kuwait
City. This is the model that we had to use during the Taliban
years in Afghanistan, where we had a small international
presence in Kabul, but supported it from Islamabad; or that we
use today for Somalia where the majority of our operations are
not in Mogadishu but in Nairobi, Kenya. It is not ideal. It is
not the way one wants to work. But we have to manage this vis-
a-vis the risk of kidnapping and armed attack.
Let me finally just suggest two longer-term lessons from
all of this. The first is obviously American public opinion has
been shocked by the $87 billion figure, and perhaps within
that, for the $20 billion for reconstruction. It is a very high
sticker price, and I think many people have been dismayed by
it. It is worth, though, putting it in context. Iraq, it is
estimated, needs to spend $56 billion over the next 4 years. If
that indeed had been grant money, which many in the media read
it to be, that would be more than we spent in grant money for
Africa over the last 4 years, where we spent as a global
community, not just the United States but all donors combined,
about $50 billion. Africa is a region with 25 times the
population of Iraq. Does that mean we are spending too much in
Iraq or too little in Africa? And it may not surprise you that
I would argue we are spending too little in Africa.
We believe we could achieve the Millennium Development
Goals around the world of halving poverty, getting every boy
and girl into school globally, if the United States contributed
$25 billion a year. In other words, a little bit more than Iraq
for the whole world as a contribution to a $75 billion annual
spend by all donors toward achieving those goals.
Maybe we should be expecting the next President, in his
State of the Union address in 2005, be it President Bush or a
Democratic successor, to be calling for $25 billion for the
rest of the world to achieve the Millennium Development Goals
because, as I say, it is not that we think the Iraq figure is
big. We think the rest of the world is small.
Let me make one other final observation, which is that I
think this operation, the extraordinary leadership of Mr.
Bremer, Peter McPherson, and others in the CPA, has perhaps
demonstrated to them, as I think it has to us outside, that we
need a standing international capacity for peace building at
times like this. It is easier, whether you are France in Cote
d'Ivoire or the United States in Iraq, to be able to rely on
multilateral partners to undertake many of these tasks,
everything from demobilization to early justice systems and
constitutions, to delivering basic services such as health care
or education. Throughout these sets of tasks, a neutral
multilateral partner is a much easier way to deliver it than
through the same power force to provide the military
arrangement in such a situation.
Why not through the leadership of the United States, for
what we are learning here in Iraq, support the creation of this
stand-by multilateral capacity, probably centered on the UN and
the World Bank, to be able to provide this support not just on
a case-by-case basis, but whenever an Iraq or a Cote d'Ivoire
or a Liberia or an East Timor emerges, that we have the money
and the resources to step in and the lessons learned and the
experience to do it right each time.
Thank you very much.
Senator Hagel. Mr. Malloch Brown, thank you.
Senator Bayh, why don't I begin the questions, and we will
go back and forth, maybe 7 minutes each, and that way they
won't get bored with either one of us too much.
Senator Bayh. Let's hope.
Senator Hagel. Let's hope.
Mr. McPherson, you mentioned the CPA decisionmaking process
and the critical nature of that. In your testimony, you went
into some detail as to how it affected what you were doing and
how you were part of that. And you mentioned the Governing
Council, and you noted the diversity of the council, among
other observations.
Tell us in your opinion how much authority is actually
being exercised by the Governing Council in the economic
sector. What, in fact, are they doing? Are they monthly taking
on more and more responsibility for the economy decisionmaking?
Mr. McPherson. I am certain that the economic reform
package would not have gone forth if they had not agreed. And
they not only agreed, but there were significant components of
it which they either modified or they put in.
The cabinet members, for example, the Minister of Finance,
and the central bank president, were their decisions. Bremer
approved them, acted upon them, but they were names initiated
by them. They weren't names initiated by the CPA.
As to the trade bank, it is very clear to me they are
making the critical decisions in the final stages. And my
colleague George Wolf said to me today, ``Peter, their role
continues to accelerate in the weeks after.''
The Governing Council feels to me like a legislative body
with the CPA being an executive body. It is not quite that way
because the Council have initiated, for example, the names for
the central bank and the Finance Minister, so it is a hybrid.
My work with the Council felt like, when I was in the
Administration in the Reagan years, coming here with some
smallish group of a committee and working out some key issues.
Senator Hagel. So as the Finance Minister's role becomes
more apparent in decisionmaking as the banking structure starts
to develop with leadership in each bank, those decisionmaking
elements will be transferred, and I assume much of this is
being placed in the acceleration of that decisionmaking by the
Iraqis themselves.
Mr. McPherson. Absolutely. In my AID days, I worked all
over the world, and in a few countries I felt they waited for
you to tell them what to do or at least to tell them what you
thought. By the time I left Iraq, I did not feel that at all.
There are, of course, intelligent people all over the world,
but in Iraq there are many very educated people, and in some
cases quite sophisticated. They are more and more assertive. I
see this to be an advantage.
Senator Hagel. What industries or economic sectors would
you point out that represent the best possibilities for jobs,
opportunities, exports in the near-term for Iraq, other than
oil?
Mr. McPherson. I think that has to shake out. I have
thought a lot about that. Agriculture has to play a role,
though there are major reforms that are going to be necessary
there. I believe that a whole range of manufacturing industries
certainly can evolve.
Those that have a petroleum component to it would be
natural, though petrolem subsidies must be cut back.
There is no reason why there should not be more refineries
in the country rather than exporting most of the crude oil. The
refineries in the country now are for domestic consumption.
Senator Hagel. Thank you.
Mr. Malloch Brown, you noted the Madrid conference, which
was a very critical point in this long journey to put Iraq back
on its feet, and your involvement was critical to the success
of that conference. Tell us what we do now to process, to move
forward on collecting on the commitments, on those billions of
dollars. What has to be done? And how do you do that?
Mr. Malloch Brown. Well, I think they fall into two or
perhaps even three categories. The one is the United States ,
which I do not think the United States needs any advice from
me. It is anxious to get that money out into the field and get
spending against the priorities that the CPA has established
with the Iraqis.
The second two components are the grant monies committed by
donors, a lot of which will go through a multilateral trust
fund, part of which is managed by my organization, UNDP, on
behalf of the UN, and part by the World Bank. And ours will
tend to address the quicker, faster disbursing items identified
in the needs assessment. The Bank's will be more aimed at the
longer-term, slightly bigger projects. Both, however, will
require some quick work with the Iraqis to determine first
priorities.
The third component is the lending program, which, as I
say, I think you know, there will be a lot of planning for it
and perhaps some early mixed grant-loans. The World Bank has
so-called blend monies which are part grant, part loans, which
may start this coming year. But the majority of the loans which
are from the World Bank and the IMF, the only other big loan
provider at this stage is Japan, and I should add, some export
loans from the Gulf. But all of those may take a little bit
longer to come online.
The key final challenge is just to link the spending
priorities of this multilateral effort with the United States'
priorities, to make sure that we are not falling over each
other, that the thing is done in close coordination and that we
have set up or proposed, at least, a basic coordination
structure so that we can see what the United States is spending
out of the so-called development fund and supplement it rather
than repeat it in terms of the use of this multilateral fund.
Senator Hagel. Thank you.
Senator Bayh.
Senator Bayh. Thank you, gentlemen. I am sorry I had to
step out to take a phone call during your testimony.
Let me begin by something I mentioned in my own opening
comments about debt relief on the part of the other nations.
Either one of you, I would be interested in your views, Mr.
Malloch Brown, perhaps beginning with you. I was deeply
disappointed to see that coming out of Madrid, other than the
$231 million, I think, from the European Union, which is fairly
de minimis, the French were good for nothing, the Germans were
good for nothing, the Russians were good for nothing. Having
played no role in liberating the Iraqi people, in good
conscience the least they can do is to relieve the debts that
they extended to the regime of Saddam Hussein to prop up his
dictatorship.
When do you expect that they will do that?
Mr. Malloch Brown. I think, Senator, there was actually a
clear strategic decision by the organizers of the Conference to
make sure that did not mutate into being a debt relief
conference, because there was a fear that then there wouldn't
be the fresh, up-front cash needed for the immediate needs of
the people.
Senator Bayh. How much fresh, up-front cash was there, not
including the loans?
Mr. Malloch Brown. There was about $3.5 billion of up-front
cash for this coming--most of it concentrated in the next year,
2004.
Senator Bayh. The strategic decision does not seem to have
worked terribly well if it only generated $3.5 billion.
Mr. Malloch Brown. Well, it depends what we think Iraq can
spend in 2004. My own view is that the United States by saying
it is going to spend perhaps half of its $20 billion in 2004,
combined with this $3.6 billion, which, you are quite right, is
much less than the usual burden-sharing proportion where you
would expect something like a 3:1 ratio. Nevertheless, that is
probably as much as Iraq can absorb next year.
Senator Bayh. When do you expect the debt relief decisions
to be addressed? And what result do you think we can
anticipate?
Mr. Malloch Brown. First there is the debt moratorium until
the end of 2004, and the earlier Security Council resolution
said no debt relief--I mean, no debt payments to any debtors
until we can get this sorted out. The French have made it clear
that the Paris Club, which is the basic forum for this type of
debt meeting, should now, you know, come together quickly and
start working through this debt. And they were at pains to come
and see me at Madrid, and I imagine they went to see the United
States as well, to say, look, you know, we plan to help on the
debt side, and I think all the debtors seemed to be in the same
room on this. So, I think the next stage debt relief, in other
words.
Senator Bayh. How much of a haircut do you expect that they
could be willing to take?
Mr. Malloch Brown. They should take a big one. Everybody
should take a big one. When you are talking debt of something
between $120 and $200 billion, depending how you count it and
how you treat reparations, against a GDP per year at the moment
estimated by the IMF at $15 billion, you have got a debt ratio
overhand 10 times the size of GDP. There is no other country in
the world which comes close.
Senator Bayh. How do we define ``big?'' It is my
understanding the Argentines are insisting upon a 75- to 90-
percent haircut?
Mr. Malloch Brown. Let me just say, I mean, there are two
things about big. First, is it a haircut or the head severed
off from the body? And there is a critical point of difference
here because, you know, the IMF and others are very worried
that there not be such an odious debt solution which says all
of this debt should be wiped off because of the manner in which
it was incurred--dictator spending it on things which did not
benefit the people.
The fear is that if you went that route, where does it
stop? Which country could not at some point in its history
claim the same things?
There is a view that you have to try and do this within the
normal debt parameters; in other words, it is relief but it
does not treat Iraq as completely sui generis, because very
quickly you would have countries, whether, say President Mobutu
of Zaire, others who could come back and make a similar
argument about their debt.
Senator Bayh. Let me ask a couple of questions about that.
As I understand it, is it their point of view that the
Provisional Authority is not the sovereign--I think you alluded
to this--sovereign entity capable of taking on debt? Is that
their position?
Mr. Malloch Brown. It is not that it cannot take on debt.
It is not clear that it can restructure debt for the future
because a future debt restructuring is something that successor
governments have to respect. In other words, if you say,
instead of paying 100 percent, you are going to agree to pay 20
percent, but you are going to pay that 20 percent, and it is
very important that the Iraqi authority, which enters into that
commitment can commit its successes.
And there is a view that you cannot do that until you have
an Iraqi Sovereign Government, just as it would be hard for the
CPA to offer an oil concession of 10 or 20 years to an oil
company because could it bind its successors to honor that
concession?
Senator Bayh. Could Saddam Hussein bind his successors? Was
he the duly constituted Sovereign Government of Iraq? Who was
he elected by?
Mr. Malloch Brown. I am afraid he was because, and I think
it is a tragedy that he was allowed to stay in office for as
long as he did, but the fact is that the countries of Africa
are being made to repay debt which was incurred by dictators
over many years. Either we decide that democracy is the basic
of legitimate debt and any debt incurred by a Communist
Government, a military dictator, is therefore eligible to be
written off.
Many of us in the development community would love to go
that route, but I think you should just pause and think of the
consequences to the international financial system of a
situation where a Government which incurs debt, that its
successors are not bound to be responsible for that debt. It
would undermine the whole premise of the international
borrowing system.
Senator Bayh. I am not sure I agree with that, but I
understand your point of view.
Mr. McPherson. Let me get into this. This is a subject
which I have thought about for years. My first job at Bank of
America after I left the U.S. Treasury was, in fact, to run
their bad debt portfolio, then largely Latin American.
I think you can get largely where you wish to go within
conventional procedures. I really do. I believe that there
needs to be very, very substantial debt reduction by the
international creditor community for Iraq. I have talked to
Ambassador Bremer about this numerous times probably and he
agrees.
I believe you do not want to repudiate the debt because it
is going to make it harder to borrow after that under
international creditor conventions.
Senator Bayh. I have exceeded my time, and I do not want to
intrude on the Chairman's time. Mr. McPherson, correct me if I
am wrong, did Argentina not walk away from its sovereign debt?
Mr. McPherson. But let us see how much credit and at what
cost they are going to get in the future.
Senator Bayh. And within 48 hours was rewarded by a new
agreement with the International Monetary Fund?
Mr. McPherson. They have not gone to the international
creditor community yet, though. It is a stigma to repudiate
debt. If you, thereafter go to the bond or the bank market, the
stigma will be hard to overcome.
Senator, you do have to take your position to get
substantial debt reduction.
Senator Bayh. I missed your----
Mr. McPherson. --you do not have to take the position to
repudiate debt in order to have restructured debt that is very
deep.
Senator Bayh. I understand your point, but it seems to me
you do business with murderous dictators, you run the risk of a
future democracy choosing to repudiate the debt.
Mr. McPherson. Well, my hope is the international community
will understand----
Senator Bayh. That is a risk, as a creditor, you assume.
Mr. McPherson. My hope is the international community will
now recognize that this debt is what it is, and there should be
huge reduction to it within normal procedures. I think that is
very possible.
And by the way, I believe, now, I speak as an individual
today, not as a representative of the U.S. Government, but I
think the reparations should be largely or wholly forgiven.
The Kuwaitis and the other people in the region, but the
Kuwaitis particularly, need to understand that as a tiny
country next to this huge country that the last thing they want
to do is to try to insist upon payment when, in fact, they have
got generations ahead of them, as neighbors. The Kuwaitis have
done more than they have been given credit for. They have not
been dramatic enough about it. It is my view forgiving those
reparations would be a historical and important step, and I
hope they do it.
Senator Bayh. I agree with that strongly. I would just
conclude by saying we have stepped forward here trying to do
the right thing. What the Iraqi people need is a fresh start.
The reason for my line of inquiry is I think we should do
whatever we can to try and alleviate as much of this debt
burden as humanly possible, to allow them to get on with the
future development of the country, rather than paying for the
sins of the past, and it is going to be difficult.
Mr. McPherson. And the Russians need to provide deep debt
reduction.
Senator Bayh. I agree with that, I am not holding my
breath, but I hope to share your optimism, Mr. McPherson.
And thank you, gentlemen, both of you.
Mr. Chairman, I apologize for running on here.
Senator Hagel. Senator Bayh, thank you.
Staying on the debt issue for a moment, what range of debt
reduction do you think is possible? I would like to hear from
both of you.
Mr. Malloch Brown. Well, perhaps, I would just say, because
I must say I find myself in a completely unaccustomed position
having to defend debt because I am completely with you, Senator
Bayh. In fact, I am going to get a medal of sound financial----
[Laughter.]
Because all of my instincts are on your side for a massive
write-down, but just to give you a sense what I think can be
achieved under best current practice, under the HIPC initiative
for poor countries, the governing principle is that a poor
country can afford to service a debt which is something like
one-and-a-half times its GDP. The current debt of Iraq is 10 to
15 times its GDP. So, for me, if I was advising the Iraqi
negotiators, my starting point would be to reduce the annual
service and to reduce the volume to something close to that
HIPC level. So we are talking a real hair cut.
And I think if you cannot get there, then, frankly,
countries which incurred their portion of the credit, I mean,
became creditors because they were supporting Saddam Hussein
during the particularly gruesome periods of his rule are going
to find themselves subject to probably unilateral write-off
because I do not think they will have the sympathy of the
international community. Some of those countries are not
themselves likely to be major extenders of future credit, so it
would not necessarily, have the punitive effect that Peter
refers to in the case of Argentina.
So, I think there will be a huge pressure for rapid,
dramatic debt reduction, even under conventional procedures.
Senator Hagel. Thank you.
Peter.
Mr. McPherson. Someone was telling me the other day that
the Iraqi secondary debt market was about 21 cents on the
dollar of debt and interest, and I said I would not buy it.
There will be a lot of push-and-shove between here and
there, but I think the parallel we should think about on this
is Versailles, 1919. France particularly at Versailles,
insisted upon huge reparations, a big burden on Germany. It was
not the only reason Hitler came to power, but it certainly
helped him.
And the Kuwaitis with their reparations and the world
community needs to see, okay, it is impossible to pay debt the
next few years in any large amount. The usual inclination of
bankers, and I have been a banker, will be to say, ``All right
so you are not paying a few years, let's push it off and pay
later.''
But, if we are having Iraqis pay for Saddam 25 years from
now in a big way, that is a geopolitical mistake. We did not go
into Iraq to make money. We did it for a whole set of reasons,
and we need to come out of this with an Iraq that has something
of a democracy, a stable economy, including a debt structure
which is realistic and which the people will see as realistic.
I would not buy debt at 21 cents on the dollar.
Senator Hagel. Thank you. Would you describe the intent and
what you think will be the short-term impact of the 100-percent
foreign ownership law that the governing council approved
recently.
Mr. McPherson. I think there is some regional interest, for
example, some regional banks. If, in fact, as the security
situation gets under control, there will be great global
interest. There were companies from all over the world that
were inquiring about Iraq even before the law, but it will take
foreign investment, especially investment outside the region,
will take a little time. It always does. By the way, the tax
and tariff measures involved here are very important as well.
Senator Hagel. Thank you.
The tax-tariff measure issues you just mentioned, and you
mentioned during your testimony, the 15-percent flat tax----
Mr. McPherson. Actually, the top marginal rate is 15
percent. So, below that, including some people of low incomes
that will not pay income taxes. The details are to be worked
out. However, the law now provides that the top marginal tax
rate will be no more than 15 percent.
As it is not only what rate you pay that is on the books,
but also the compliance. The prior rate was like 45 percent.
Most did not say that. It is important that you have a rate low
enough so most people do pay, and I think 15 percent will work,
as well as in my judgment it is important for growth.
Senator Hagel. What structurally, institutionally is being
put in place in order to assure that compliance?
Mr. McPherson. The Ministry of Finance is responsible for
tax collection. There is a unit within the Ministry, not
separate. The whole tax code is being reworked, and the
compliance and collection structure being restructured. There
is a huge push to get this done because a new tax rate is
effective January 1, 2004.
Senator Hagel. Thank you.
Mr. Brown, you mentioned some of the past experiences you
have had, the United Nations has had, that we are applying to
Iraq reconstruction and economic growth development. Each is
different, we all understand that, each situation. What lessons
would you note that we have learned as we are working our way
along in Iraq from donor projects in Afghanistan, East Timor,
and Bosnia? Is there anything we can draw from those
experiences and apply to Iraq?
Mr. Malloch Brown. Of course, in Afghanistan, a big
complaint was, and remains, that there is not an adequate
international security force to keep the peace across the
country. Whatever the difficulties the United States is having,
it is enormously important that there is that nationwide
coalition force keeping the peace. It is hard to imagine how
much more difficult the situation would be if it was not there.
I think what is often criticized is nevertheless a basic of
peace-building, that the peace is kept, even if it is proving
difficult in the case of Iraq.
I also think it is fair to say--it has been much commented
on in the press--that the general experience of peace-building
is it is very imprudent to demobilize the army of the defeated
power without a strategy for reintegrating it effectively into
civilian life and without a strategy for jobs and well-being
for soldiers and their families in the interim.
Another lesson that I think we are learning is the enormous
importance of a clear political time table, which everybody
understands, every Iraqi, whatever their political position,
the international community, the CPA, the governing council,
that there is a clear blueprint with a timeline on the process
to be followed.
Constantly, the name Mountbatten rings in the back of my
mind because when Mountbatten was sent to India at the end of
the second World War, he made one quick snap decision: Let us
do this quickly. It will only get worse the longer we take.
I think, as I watch events in Iraq, I would urge my friends
in the United States to really think about how this process can
be accelerated as rapidly as possible, obviously, without a
loss of control because the quicker you have Iraqis empowered
to make decisions for Iraqis, the quicker there is the
potentially stable base for easing the political violence which
is so difficult at the moment.
Senator Hagel. Thank you.
Peter, would you want to comment on any of this?
Mr. McPherson. Well, I would not want to engage too
extensively with my British colleague on Mountbatten's decision
in 1949, but I am not sure everybody would agree with this
being a good case study on making quick decisions on new
governments in India and Pakistan.
No, I am fine. Thank you.
Senator Hagel. Now, remember, Peter, you do not represent a
government. You speak for yourself, so that gives you some
latitude here.
The Arab countries' assistance to Iraq, I do not know what
measurement or standard we went into the Madrid Conference with
regarding the Arab Nations as to what we expected or a range of
expectations, but I suspect there was some sense of
disappointment around that we did not see more financial
commitment from the Arab countries.
Are you aware of any specific effort the United Nations is
undertaking to try to engage other Arab Nations to get them
more directly involved in helping reconstruct Iraq?
Mr. Malloch Brown. First, I think you are right. I think
there was disappointment that there was not more funds pledged
from the region at Madrid, Senator.
Second, my late colleague, Sergio Vieira de Mello, probably
one of the most significant contributions he made as the
Secretary General's Special Representative in Iraq, was to try
and get the region involved. He had just, at the time of his
assassination, completed a round of meetings with visits to the
regional capitals, both looking for their financial support,
but frankly even more their political endorsement of the
political process in Iraq, recognition of the Governing
Council, the participation of the Governing Council in regional
political meetings, all of which are the other side of the coin
of financial contributions to reconstruction, and I think he
felt that that was moving forward, and I think the United
States has tried to keep that momentum subsequently. But there
is no escaping the deep ambivalence and skepticism in the
region toward what is happening in Iraq.
Senator Hagel. Thank you.
Peter, do you want to add anything to that?
Mr. McPherson. I think that what is happening in Iraq is
likely to have a dramatic impact on the whole region if we are
even halfway successful because what we are saying is that we
need a democratic process, we need market forces, we need open
economies. And my hope is that we will continue and that there
will be more and more help from the other countries.
I certainly felt that there was a willingness to keep, for
example, in talking to regional central banks for help for our
central bank.
By the way, let me get back to the debt for a moment. I
absolutely disagree with the idea that the current governmental
structure cannot negotiate the sovereign debt. In fact, we
cannot take that because it will be excuses to the Russians,
French, and these others that they do not have to do debt now.
Debt negotiations has to be done reasonably quick. I disagree
with the legal position, and I think it is very important for
us to say, look, this has to be done now, and we need to move
on.
There will be some creditors that will try to claim that
they cannot negotiate with this government before there is an
election. I, frankly, think any government that does that is
hypocritical and does not really want to negotiate.
Senator Hagel. Well, does that not also apply to loans? I
mean, who are you going to sign a loan agreement with?
Mr. McPherson. Yes, countries are going to provide loans.
They are going to send loans. There was this huge debate about
what the CPA could do. Some people said the CPA should not do
the currency. Well, we had to do the currency. Every time we
turned around, there was somebody, for example, the French or
would say, a proposed action was beyond the authority of the
occupying power.
It really does seem odd that Saddam can do anything and
find it internationally acceptable, including decide what to
buy with the Oil for Food Program, and the CPA in its best
efforts to get things done, would be criticized for taking
steps like the currency.
Senator Hagel. Mr. Brown, do you want to add anything?
Mr. Malloch Brown. Look, the last thing I want to do is
pick a fight with Peter on this because I do not want to do
anything to disempower the current reform movements in Iraq,
and I completely agree with him that we have got to push with
economic change now and a lot cannot wait.
The issue on debt is that we do have a moratorium until the
end of next year. It gives us time to do it and to allow an
Iraqi Government to do it. As we have repeatedly made clear, we
think that, like in Afghanistan, you can have a sovereign
government before elections. It is the CPA which believes that
elections must come first and then a sovereign government. We
think that a representative Iraqi body could emerge based on
the governing council well before that time which could
exercise full sovereignty and complete a debt restructuring.
But, as I say, we have a point of view based on
international law, and we know we disagree with the United
States on this, but----
Mr. McPherson. But it is really important, Mark, there is a
legitimate debate, as to what the CPA can do under the law. But
as I say, I always found it a little really odd that Saddam was
recognized and some thought his actions to be legitimate
sovereign actions, even if they were illegitimate at their very
core, and the CPA gets critized for taking needed steps. I know
you are a person, and Julia Taft who is behind us here, worked
so very hard to get this needs assessment done. However, I do
not think we should let anybody off the hook on prompt
negotiations of debt fast.
We wanted to get by the Donor Conference, before we had
serious debt negotiations, and now we should move, in my
judgment. The longer this goes on, the tougher it is going to
be. If we did not have serious negotiations for a year, it will
be tougher to get the debt reduction necessary. The calendar is
not on the side of the deep reductions required. I believe
that.
Mr. Malloch Brown. I mean, there is no doubt that Peter is
right, that with debt reduction, the sooner you do it, the
better. Strike while the iron is hot.
We are trying to, ourselves, be as flexible as possible. I
mean, I think the practical line in the sand is that it is very
hard for an occupying power to do things which tie the hands of
its sovereign successors indefinitely. The currency arguably
did not do that. You could even, in a way, argue that debt
restructuring does not because it frees you of future
obligations rather than increasing them. So maybe we will find
a way around even this, but at the end of the day, you cannot
pretend there is not a line there in the sand. You can shuffle
it around a bit, move it a bit, but fundamentally a lot of
Iraq's international economic relations, its ability to
leverage its wealth with new loans and new foreign direct
investment, rests on a sovereign government.
And I think the United States equally needs to hear that
pressure. If France needs to hear that it needs to do a good
debt deal and soon, the United States needs to hear that the
sooner there is a Sovereign Government in Iraq, the easier a
lot of this is going to become.
Senator Hagel. Well, I think we have gotten the point.
[Laughter.]
Thank you very much.
I am not going to keep either of you here much longer,
but----
Mr. McPherson. It is a good thing we are such good friends.
[Laughter.]
Senator Hagel. This, actually, you remember your old days
up here, Peter, when you used to testify, this actually is
rather timid and serene compared to some of it.
The U.N. Oil for Food Program, where are we with all of
that?
Mr. McPherson. The Oil for Food Program ends, has ended, in
the sense no more money is going into it. The oil proceeds are
going into the new account. There is still a substantial amount
of goods purchased from the old program and they are in
arriving. The old program is a vast structure, and I do not
know all the details.
A very important part of the Oil for Food Program was the
delivery of food, some 60 percent of the people depending
almost totally for their food on program. There is enough food
purchased in the pipeline to go through this spring.
The Trade Bank was set up to pick up the slack for new
purchases out of the new oil money.
The Oil for Food Program is beyond the scope of this
hearing, but a good audit would be appropriate.
Senator Hagel. I heard your comment.
Mr. Malloch Brown.
Mr. Malloch Brown. Well, Peter is being, knowing his views
on this program, very gracious. But let me just say that this
is a program which was micromanaged by one man and one
committee. The one man was Saddam Hussein, who was only
restricted in the areas of the country he controlled, by the
fact that we had to ensure that what he ordered was actually
delivered, but the price he paid for goods and the countries
from which he procured them were his decisions to make.
The approval of the lists of goods he could procure and the
detailed management of the program was in the hands of a
committee at the UN, a committee at the Security Council,
called the 661 Committee, of which the United States was an
extremely active participant.
And I think the whole program was a reflection of a lousy,
terrible moment in international affairs, where a clean-cut
decision would have led to Saddam Hussein's much earlier
removal from power, either by the hands of the Iraqi people or
of the international community.
But absent that and a lot of cynicism surrounding it, the
program reflects an effort to square the circle of how on earth
you sought to put some control over the procurement activities
of a corrupt leader who was still in power, and it was
undoubtedly not the perfect solution. But I think for all of us
it was the best effort we could make under impossible
circumstances.
Mr. McPherson. I wish the United Nations, several years
ago, had said, enough is enough. We are not going to stand for
this any more. I mean, the United Nations, good people, worked
hard at it--a committee of, what, 15 people. The British and
the United States were, by far, the most concerned.
If historical lessons are here, one of them is that the UN
should have said we are not going to be part of such situation
as this became.
Mr. Malloch Brown. Yes. I think it is just worth saying, it
is not 15 people, it is 15 governments of Security Council
members which approved every contract. My own view is the
governments should have said, enough is enough. This system
does not work.
Mr. McPherson. The United States and the United Kingdom
did, vigorously again, and again, and again. It is a matter
that, sitting over there and being in the middle of this, I
became interested in it. We are where we are, and it is good
for everybody money is now going to the new fund.
Senator Hagel. Well, gentlemen, that is a good,
constructive way to end the hearing.
Julia Taft, nice to see you. Thank you for your good work.
We appreciate always what you are doing for our country.
Unless you have additional comments, we are grateful, as
always, and we may call upon you again soon.
Mr. McPherson. Keep probing.
Senator Hagel. This hearing is adjourned.
[Whereupon, at 4:05 p.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF M. PETER McPHERSON
Former Director of Economic Development
Coalition Provisional Authority in Iraq
President, Michigan State Univeristy
November 4, 2003
I recently came back from about 5 months in Iraq, serving as CPA
Administrator Bremer's Economic Adviser. Security certainly is critical
for longer-term success for Iraq. The progress with the economy as well
with schools healthcare and other areas puts in stark relief what is at
stake. The people of Iraq and the region can have a country that really
works.
A foundation for a revolutionized economy is being put in place in
Iraq. This new economy will challenge the economic policies and the
politics of the whole region. From first-hand observation, I know it is
an imperfect world there, often messy, but progress is real. Americans
will see it over time, once the terrorists are held at bay.
You can see and feel progress from month to month. These stories of
progress have been swept off the front page by coverage of the violence
against democracy and reform. They represent significant building
blocks for a country that works for all people of Iraq.
In June, we started paying 1.3 million government employees. This
was a real accomplishment considering that our first steps were to find
out who the employees were and then to deliver the cash all over the
country. In July, another milestone was reached when a new Iraqi
currency was announced. The swap of the old for the new started
throughout the country on October 15. The 2003 and 2004 budget was
developed for the national government, put together by a CPA team and
Iraqis. They started out with almost no budget information, no surprise
since Saddam's budget prewar was a state secret.
Banks were all closed just a few months ago, but now almost all
are open. Checks are being cashed and some small loans are being
extended. Shops on the street are busy. Electricity production is at
prewar levels and oil production is up substantially. A few weeks ago,
sweeping economic reforms unlike any in the Middle East were announced
by the finance minister.
Iraq wants jobs. The Iraqis concluded that an open economy would,
in time, bring the investment to help create the jobs. The World Bank
told Iraqis that in 2002, the Middle East attracted only $4 billion in
foreign investment as opposed to $7 billion in Sub-Saharan Africa and
approximately $42 billion in Latin America.
However, Iraq cannot borrow its way into prosperity. It needs
investment. The plan is to provide an edge in the global and domestic
competition for investment. A new law allows for foreign investment up
to 100 percent of foreign ownership, full repatriation of investment
and profits, national treatment and no screening committee. Six foreign
banks can come into the country and take deposits immediately. There
will be a fast rack admission for two of these banks, looking to early
and substantial loans by those banks. Several banks are showing
interest.
The top bracket for individual and corporate taxes will be 15
percent. Low rates will make it possible to collect the taxes and will
encourage investment. Tariffs are to be at a flat rate of 5 percent,
with the exception of food, medicine, and a few other items with
tariffs at zero.
These proposals were approved by the Governing Council, a very
diverse and independent minded group. As Bremer's representative to the
Economic Committee of the Governing Council, I worked closely with this
group on various drafts of economic policy proposals for hours at a
time. The meetings had the collaborative and democratic feel of an
executive session of a legislative committee.
It is premature to speculate on how democracy will work in Iraq.
However, from seeing the process of agreeing to economic reform, I see
great potential. Religious groups and individuals can work together if
they are given enough time and opportunity. A democratic process and
market forces are mutually supportive perhaps both are necessary in
Iraq. A democratic process should foster individual freedom and
economic opportunity. Market forces can create widely held resources
that give the means to avoid an arbitrary and exploitative government.
More certainly needs to be done. More credit needs to be made
available through local and foreign banks, including to Iraqis who will
need assistance to compete with or be part of foreign investments. Iraq
needs a competition law to prevent undue concentration of economic
power and several other legal changes are necessary.
Also there is a need to continue to cut back on subsidies to
government-owned companies and give the private sector room to grow.
The World Bank has carefully studied post-war and post-communist
transition economies. Those studies make it clear that the sooner
subsidies are reduced the quicker an economic recovery.
In any case, historic progress can be made on these matters.
However, it will take time. Studies show that substantial economic
growth occurs in post-transition economies over extended time periods.
We can expect difficulty for a while in Iraq. There will be
controversy. It is in the nature of change. A strong safety net for the
poor, of course, must continue to be in place during this period of
change.
The supplemental appropriations bill before Congress is important.
It includes $15 billion for infrastructure. The infrastructure was
nearly destroyed by lack of maintenance for a generation, the war
itself, and the looting afterward. The infrastructure is critical for
the economic recovery. For example, more electricity is
central to economic production. Construction of the infrastructure and
other needed expenditures will help spur economic activity. This
activity will help to sustain political will in the country and allow
time for the economic changes required to bring about economic growth
that benefits the Iraqi people.
Change will not be easy, but the impact of an open economy, paired
with some type of democratic process in Iraq, will change the lives of
the Iraqi people and impact the whole region.
----------
PREPARED STATEMENT OF MARK MALLOCH BROWN
Administrator, United Nations Development Programme (UNDP)
November 4, 2003
Mr. chairman, excellencies, honored guests, as Secretary-General
Kofi Annan observed yesterday, we are gathered here for a proud
purpose: To help the people of Iraq build the democratic and prosperous
nation that has been denied to them through years of brutal
dictatorship.
The Needs Assessment, prepared under the leadership of the United
Nations and the World Bank, tells the story of a country brought down
from a per capita income of $3,600 25 years ago, to less than $600
today; from a per student education expenditure of $620 to $47. In
short, a nation whose collapse is written in its social indicators as
well as in the violence on some of its streets.
How do we help its people put their country back together again? As
we have gathered here, the media headlines have screamed an answer:
``Give them $56 billion over the next 4 years,'' together with a
preemptive verdict on our Conference. ``Bet you won't raise that
much!''
This is a sum that happens to be rather more than the world gave
sub-Saharan Africa over the last 4 years, a region with a population
some 25 times bigger than Iraq's.
Why $56 billion? Because it is the combined sum of the UN/World
Bank Needs Assessment and the additional sectors, notably oil and
security, covered by a Coalition Provisional Authority (CPA).
And yes, there is no doubt that Iraq needs a capital injection of
this scale. But we made it clear in the Needs Assessment, and ``the
Assessment notes that the $36 billion (in addition to the $20 billion
that was assessed separately by the CPA) is not the same as the
financing gap; that is, not all of the identified needs may require
external donor assistance. It is expected that, over time, investment
will be increasingly covered by Iraqi Government revenues or private
sector financing, thereby diminishing the needs for donor support.''
Let me spell out clearly what, at least this author, meant by those
words: First, in 2004, Iraq and its Governing Council will be totally
dependent on donor grant financing for almost everything above its day-
to-day costs, which will be met from oil revenue. We estimated for our
sectors, not the CPA's, that $9 billion would ideally be needed for the
first year, but warned that a realistic implementation rate, given the
insecurity and our more general post-conflict experience, was that
perhaps only $5 billion of that could actually be implemented in 2004.
So the grant finance needs for 2004, particularly when the CPA sectors
are added in, are considerable, but not beyond the reach of this
Conference.
Second, after 2004, for the years 2005-2007, the financing mix must
change, as a grant finance effort alone would surely be an
unsustainable distortion of aid flows from poor countries and other
crises.
I think we could meet both of these benchmarks today, a strong
grant package for 2004; and the elements of a mixed financing model
thereafter. If there had been a Madrid Conference in 1989 for Eastern
Europe and a UN/World Bank Needs Assessment, the participants would
have had sticker shock. But with hindsight, the transition was carried
out by the markets. If the political track of Iraqi Sovereign
Government is aggressively pursued in 2004, we can indeed look to a
more creative financing package for 2005-2007. Then imagine what full
progress toward Iraqi Sovereign Government by the end of 2004 would
allow. In our Iraqi colleagues here with us we have seen the promise of
the new leadership.
Iraq could enter into negotiations with the Paris Club and
other creditors to renegotiate the debt overhang, which at more
than four time GDP, stifles, even concessional, lending.
Liberalization of the economy including the disposal of state
assets.
A new foreign investment framework, particularly for the oil
sector, that will be respected and honoured by future governments.
An easing of the internal tensions that feed the instability
and violence that are impeding reconstruction and deterring foreign
investment.
Above all Iraq, as the Iraqi delegation today has already been
so effectively doing, would take full leadership and ownership of
the development and reconstruction effort.
Together, these steps by an Iraqi Government enjoying full domestic
and international legitimacy can convert Iraq quickly from a land of
subsidies and state control to one of rising incomes and market
opportunity. In doing so, it will herald in the kind of mix of
financing that transformed the countries that emerged in 1989 from
behind the Berlin Wall. Yes, grant finance counted, but even more,
technical assistance and capacity building to adjust to a modern market
economy and a global economy beyond; and a growing flow of initially
concessional finance increasingly supplemented by foreign direct
investment portfolio, and bond flows as well as domestic savings. That
is not aid alone. It is Iraq's future. And we have to reach for it
boldly and urgently together.
By promoting loans as part of the solution I do not want to be
misunderstood. I am aware that in the capital of the most generous
donor today, the United States, a debate has raged about grants versus
loans to Iraq. Let me side with the Administration that has insisted
its assistance be grants. For the United States, to convert its
generosity to a tied loan would surely risk terrible resentment and
opposition in Iraq in today's circumstances.
The economic transformation that Iraq now faces will be
dislocating and very painful for many groups. We must therefore be
ready.
Through UNICEF, WHO, the World Bank and others, we must assist
in maintaining and improving basic services and target support to
vulnerable groups.
Unless the security sector is effectively addressed, any
reconstruction programme is jeopardized.
The governance technical assistance and capacity building that
UNDP and others specialize in is vital, we believe, to creating the
honest, transparent policy and institutional environment in which
the new economics and politics of Iraq can flourish.
The multidonor facility with a common governance structure and
two fund windows, a UN and a World Bank one, offers donors real
options for spending in coordinated, but segregated mechanisms,
parallel to the Development Fund for Iraq. We see our UN window
providing flexible, fast implementation arrangements to meet the
grant needs for 2004, as well as longer-term technical assistance
requirements.
Through the UN system, our experienced international and 4,000
Iraqi national staff, and our 20 years of partnership with Iraqi
national and municipal officials and civil society leaders, we believe
we can innovate implementation arrangements which will be effective
even in today's difficult security environment.
We all have hopes for Iraq. Many of my UN colleagues were at the
Canal Hotel discussing this Needs Assessment when the office was bombed
on August 19. So for us in the UN, this is a particularly precious
piece of work; but so is our relationship with Iraq. We have known you
through war and sanctions, through tragedy on both our sides, to the
hope of peace and liberation. From the ashes of the Canal Hotel, we
dream of helping you build a new Iraq.
Thank you.
FINANCIAL RECONSTRUCTION IN IRAQ
----------
WEDNESDAY, FEBRUARY 11, 2004
U.S. Senate,
Subcommittee on International Trade and Finance,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 1:03 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Chuck Hagel (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. Good afternoon. This is the third hearing on
Economic and Financial Reconstruction in Iraq that we have held
in this Subcommittee since last September.
The transition to a stable and democratic Iraq will greatly
depend on economic development and job creation. The economic
track in Iraq cannot be considered in a vacuum. Iraq's economic
reconstruction is directly linked to both security inside Iraq
and to the political transition to a new and sovereign Iraqi
Government.
The economic reconstruction of Iraq presents a historic
opportunity to help chart a new course in Iraq and the greater
Middle East. America has invested precious lives, resources,
and credibility in Iraq. The long-term strategic interests of
America and our international and regional allies depend on
getting it right in Iraq.
There is good news in Iraq's economy. Schools and hospitals
are reopening, and visitors report increasing economic activity
in Baghdad and other Iraqi cities. Iraq's oil sector and
infrastructure are beginning to stabilize. And Iraq's public
and private banking sectors are being rebuilt. In March, three
major foreign banks will begin operating in Iraq. The New York
Times, on Sunday, February 8, cited a report by The Economist
Intelligence Unit which predicted that Iraq's GDP could grow by
25 percent this year, the result of American spending on
reconstruction, the recovery of Iraq's oil industry, and
increased trade.
However, despite Iraq's potential Iraq's economic
reconstruction and stability are far from assured. The
assessments last fall of the United Nations/World Bank and the
Coalition Provisional Authority estimated capital investment
needs for Iraq of $55.3 billion over the next 4 years. Of that
amount, the World Bank identified $17.5 billion in
``immediate'' reconstruction needs for 2004. To help meet these
needs, the Bush Administration plans to spend $12.7 billion on
Iraq's reconstruction this year.
A report last month by the Congressional Budget Office,
``Paying for Iraq's Reconstruction,'' concluded that projected
Iraqi revenues alone will probably not be sufficient to cover
capital investment and reconstruction through 2007. Iraqi oil
revenues are likely to cover only recurring Iraqi Government
costs, with little remaining for the capital investment
required in the UN/World Bank and CPA assessments. The world
community, led by the United States, has pledged between $32
and $36 billion toward Iraq's reconstruction over the next 4
years.
Iraq's economy will also depend on substantial relief from
debt and reparations. This is an absolute priority for our
international diplomacy on Iraq. Iraq's debt, not including
unresolved or unpaid reparations from the Gulf War, is estimate
at $125 billion. Iraq's budget, and Iraq's international
creditworthiness, will be crippled if Iraq's creditors do not
agree on substantial debt relief. I am encouraged that former
Secretary of State James Baker has undertaken this critical
diplomatic mission, and I am optimistic about his progress so
far.
The financial and economic reconstruction of Iraq will
depend on the development of transparent and accountable
institutions of economic governance. The CPA should support
concrete steps by Iraq to build strong and transparent
regulatory and oversight institutions to assure that Iraq's
potential is not again squandered by corruption and
mismanagement.
Iraq's economic potential will ultimately be realized by
empowering Iraqis. The CPA has budgeted $184 million for
private sector development. But in yesterday's Washington Post,
Ms. Rend Rahim Francke, the Iraqi Governing Council's
Ambassador-designate to the United States, said that the CPA is
not doing enough to employ Iraqis. She added that, ``jobs for
Iraq will create stability and peace . . . and curb
terrorism.''
The contracting and subcontracting process in Iraq must
empower and employ Iraqis. America must set an example with
transparent rules and procedures. The Middle East has seen
enough deal brokers and ``middle men'' looking for a piece of
the action. The contracting process cannot, in Ms. Francke's
words, be ``shrouded in mystery.''
The Committee looks forward to the testimony of today's
witnesses: John Taylor, Under Secretary of the Treasury for
International Affairs. Secretary Taylor, welcome. You have been
on a fast pace and have come from a meeting, I understand, at
the White House, and we appreciate your efforts to be here.
Also included in our witnesses today, E. Anthony Wayne,
Assistant Secretary of State for Economic and Business Affairs.
Tony, welcome again. And Mr. Gordon West, Acting Assistant
Administrator, Bureau for Asia and Near East, U.S. Agency for
International Development. Mr. West, welcome.
We are grateful that each of you are here and look forward
to your testimony.
Secretary Taylor.
STATEMENT OF JOHN B. TAYLOR
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
U.S. DEPARTMENT OF THE TREASURY
Mr. Taylor. Thank you very much, Chairman Hagel, for
inviting me back to your Committee to testify about the
financial and economic reconstruction issues in Iraq. I last
testified here in September of last year, and I am happy to say
that, coming back, there is much significant progress on the
financial front since then, and I welcome the opportunity to be
here to report on some of this progress.
Just this last weekend, during the G-7 finance ministers'
meeting in Florida, we had an opportunity to hear from the
Governor of the Central Bank of Iraq, from the Finance Minister
of Iraq, Minister Gailani, about their reform priorities. Both
these officials told Secretary Snow, who chaired the meeting,
Alan Greenspan, and the other ministers and central bank
governors of the G-7 about their plans for sound, market-
oriented reforms that will underpin private sector-led growth
in Iraq.
In fact, they are already taking actions on these
statements. The Iraq Central Bank Governor recently announced
several major actions, including the selection of three foreign
banks to come in and do business in Iraq; a plan to remove all
interest rate controls in the financial sector to free up the
financial sector; and the announcement of a new central bank
law which will soon be passed through the Governing Council.
My written testimony provides substantially more detail
about these important actions, and in these opening remarks I
would like to touch on some other important accomplishments
during the last few months.
One of the most important accomplishments in our view is
the successful introduction of a new currency in Iraq. When I
last spoke here in September, I laid out a strategy and some
tactics for replacing the old Saddam dinar. At that time, the
currency exchange was just about to begin. In fact, it began on
October 15, 2003 and finished on January 15, 2004. I am happy
to report that this plan was implemented, finished last month
right on time, and was an enormous success.
I must say, printing and delivering currency of this
magnitude in a short period of time was a huge feat. It
required coordination. It required international cooperation in
complex logistical efforts. For example, the amount of currency
consisted of 27 747 planeloads of currency, printed in seven
different locations around the world, including Sri Lanka and
Malta, sent in to Baghdad, distributed to 250 exchange sites
around the country. Millions of Iraqis came and exchanged those
old Saddam dinars and their old Swiss dinars for this brand-new
currency.
The Iraqis have not only exchanged their old money for the
new, but they have also wholeheartedly embraced the new
currency. The notes are much more difficult to counterfeit.
There are six denominations rather than the measly two. And,
importantly, the value of the currency has increased since its
introduction. Now the challenge is to operate a monetary policy
to manage this new currency and to provide a stable monetary
foundation for the economy.
The Trade Bank of Iraq is another important accomplishment
since I testified here in September. As you know, Mr. Chairman,
we sent a group of Treasury experts into Iraq last April, soon
after the major conflict ended and Saddam fell, to assess the
financial situation. They reported on a financial system which
had very limited capabilities. For that reason, we decided
early on to set up a Trade Bank in Iraq in order to facilitate
imports and exports of urgently needed goods to support Iraq's
reconstruction.
When I reported on this initiative in September, it was
just under way, so I am happy to report today that the Bank
opened on December 4 of last year. It is now fully operational.
To date, the Trade Bank has issued over 200 letters of credit
worth $190 million to facilitate the import of important goods
into Iraq.
I would like to mention the international debt, which you
raised in your introductory remarks, Mr. Chairman. Last
September, the G-7 finance ministers committed to resolve this
issue by the end of 2004. But we have made significant progress
since then. And as you indicated, the indication of the high
priority on this issue in the Administration is that President
Bush asked former Secretary of State and Treasury James Baker
to serve as a special envoy to work with the world's
governments at the highest levels and to seek the restructuring
of Iraq's official debt.
Over the past 2 months, Secretary Baker has successfully
secured commitments from leaders throughout Western Europe,
Asia, and the Gulf States to provide at least substantial debt
reduction for Iraq this year. Final agreement on the amount and
the terms of this reduction will be negotiated between the
Iraqi Government and its creditors through the Paris Club
during the course of this year.
We are also continuing our efforts to get the best possible
data on how much debt Iraq owes. Our estimates now put the
total at about $120 billion, but more information needs to come
in.
I would like to also update you on the efforts to mobilize
international financial support that has occurred since last
September. As you know, last October, Secretary Powell and
Secretary Snow led a U.S. delegation to an Iraqi Donors'
Conference in Madrid. Seventy-three countries participated in
this effort. We succeeded in accumulating $32 billion of
pledges, including the important $18.4 billion commitment from
the United States.
The World Bank had pledged to provide between $3 billion
and $5 billion of its resources over a 4-year period, and
already the World Bank's private sector arm, the IFC, has
approved the establishment of a small business loan facility in
Iraq. And we are hopeful this facility will be operational by
midyear.
The IMF is also laying the groundwork to provide financial
support for Iraq. At the Madrid Donors' Conference, the IMF
announced that total assistance could range from $2.5 to $4.25
billion over a 3-year period. Iraqi finance officials met here
in Washington this week with IMF staff subsequent to the
meeting with the finance ministers and central bank governors
of the G-7 in Florida.
Finally, I am pleased to report that our efforts to
persuade governments to transfer assets of the former Iraqi
regime back to Iraq, to the Iraqi people, have yielded results.
To date, more than 10 countries have transferred approximately
$650 million in such assets back to Iraq, to the Development
Fund for Iraq, and we are continuing to press other governments
to do the same, especially Iraq's neighbors, so they can move
quickly to find, freeze, and ultimately transfer those assets
back to the Iraqi people.
In closing, I would like to stress that, despite a
difficult security situation, challenging working conditions,
and limited capacity, the Iraqis are beginning to overcome the
terribly grim economic legacy of Saddam Hussein. I cannot give
enough praise and credit to the dedication of individuals in
our Government and in the coalition governments, including Olin
Wethington, who is now coordinating economic issues at the CPA,
I cannot give them enough credit for the important work they
have done to make all this possible.
Thank you, Mr. Chairman.
Senator Hagel. Mr. Secretary, thank you.
Secretary Wayne.
STATEMENT OF EARL ANTHONY WAYNE
ASSISTANT SECRETARY, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS
U.S. DEPARTMENT OF STATE
Mr. Wayne., Chairman Hagel, Senator Miller, thank you very
much. It is a pleasure to be here today, and I thank you very
much for holding this series of hearings on what is, in fact,
one of the very important pillars of our efforts in Iraq: To
support their economic and financial reconstruction.
Not surprisingly, you will hear a bit of overlap in some of
the topics we talk about because we really are working as a
very tight economic team here--between AID, State, Treasury,
CPA, the CPA backup, and DOD--as we work to really accomplish
all these goals on a daily basis. This is a team effort, and
not only in the U.S. Government. We are really working with a
host of international partners and, of course, the Iraqis to
revive their economy, to overcome the legacy of decades of
mismanagement, corruption, war, and sanctions. It is a big
task, but there has been, as Under Secretary Taylor said, very
significant progress since he and my boss, Under Secretary
Larson, had the pleasure of being here in September before this
Committee.
We are doing a great deal to facilitate additional
assistance from foreign countries, from international
institutions, and from the United States to help Iraqis as they
start on this new path to build their future.
The United States did play a very major role in organizing
the highly successful Donors' Conference in Madrid last
October. The result of that meeting, with pledges of at least
$32 billion over the next 4 years, I am told, is the largest
tally ever achieved in such a donor gathering.
We are now working very hard to secure the rapid and
effective disbursement of the funds that were pledged in
Madrid, while ensuring that we have good coordination with the
donors and with the Iraqis. This means a very intensive process
of interaction between Iraqi officials, the Minister of
Finance, the Minister of Planning, with CPA, with the Core
Donors, with the World Bank, the UN, and the IMF.
We are working now to organize a gathering of key donors in
Abu Dhabi for the end of February, where we would discuss the
operation of two trust funds that have just recently been
established by the UN and the World Bank. These could serve as
a means for some of the donors who choose that way, to make
their money available to Iraq. We will also discuss other aid
coordination issues.
Of course, as Under Secretary Taylor mentioned, a vital
step forward in this was the action of Congress, last November,
to approve the President's request for $18.4 billion in
supplemental monies for Iraq's reconstruction. Working closely
with Iraqi officials, and especially the Ministry of Planning
and Development Cooperation, the Coalition Provisional
Authority is in the process of allocating the reconstruction
funds in accordance with Iraqi priorities. The Iraqis and the
CPA have set up several mechanisms to promote this process and
to assure that there is good on-the-ground coordination among
ministries and with international donors. And as you know, sir,
from previous donor efforts, it is very important to make sure
that there is an effective use of the money.
The U.S. assistance is predicated on and directed toward
reforming Iraq's economy. We all agree, I think, that a new,
prosperous, and peaceful Iraq needs to be one that is
democratic, that has a free enterprise basis, that is fully
integrated into the community of nations. And we are working
hard to help develop the legal and regulatory system that will
encourage that kind of integration and encourage the kind of
economic growth that we want and to attract foreign investment.
And this includes putting in place modern regimes for trade,
for investment, for banking, for tax and corporate law.
There is good news, as I am sure my colleague Mr. West will
tell you, on the infrastructure front also. We are boosting
electricity generation. Oil production is up. Rebuilding of the
Iraqi telecommunications and transport network is under way.
Hospitals and schools have reopened. Potable water and
medicines are more widely available than before. Inflation is
low, judging from the strengthening exchange rate that Under
Secretary Taylor mentioned for the new Iraqi dinar.
Iraq really has started well down the path to a responsible
fiscal policy by producing balanced budgets, and Iraqi oil
production is now sustained at about 2.2 to 2.3 million barrels
a day, with exports ranging from 1.5 to 1.7 million barrels a
day.
Our top priority, as you mentioned, Senator, in your
introductory remarks, is to create new jobs, to improve lives
through the spending of the money that we have on
reconstruction projects, because unemployment remains
unacceptably high, and underemployment is a key challenge, too.
The United States is priori-
tizing and accelerating work on projects funded by the
supplemental that can produce jobs and visible economic benefit
to the largest number of Iraqis possible.
About 60 percent of Iraq's 27 million people, I think as
you know, Senator, have been wholly dependent on food provided
through the food ration system, which was largely supplied by
goods imported under the United Nations Oil for Food Program.
The United Nations turned over administration of the OFF
program to the CPA on November 21, and I am pleased to note
here that that transition is going smoothly. The World Food
Program has agreed to work with CPA and the Iraqi Ministry of
Trade to manage the shipment and the distribution of the
remaining OFF contracts through June 2004. But Iraqi officials
are assuming increasing responsibility for managing the system
and preparing the way for a transition to a market-based
system.
One of the keys to successful reconstruction of Iraq, as
Under Secretary Taylor mentioned, is to secure a multilateral
debt reduction agreement that the new Iraqi Government could
ratify after the political transition. As Under Secretary
Taylor mentioned, we estimate that debt right now at about $120
billion.
After Secretary Baker was appointed by President Bush as
his special envoy for Iraqi debt, he has had very successful
meetings in Europe, in Asia, and the Gulf over the past 2
months, and he has won commitments for at least substantial
debt reduction for Iraq in 2004.
We will continue to pursue this issue energetically because
it is, as you mentioned, Senator, essential to help assure that
Iraq's economic rebuilding takes place as rapidly as possible.
We are also working hard and working very closely with our
colleagues in Treasury to track down and secure the return of
assets that were disbursed by the regime of Saddam Hussein so
that they can be used for the benefit of the Iraqi people. So
far, from Europe, Asia, the Middle East, and North Africa, we
have had transfers of about $650 million in such assets that
have gone into the Development Fund for Iraq. As you remember,
Senators, we transferred about $1.9 billion in frozen Iraqi
assets that were in the United States. And there has been found
in Iraq, about $1.3 billion worth of assets. We need to, and we
will, keep up a vigorous effort here to find and return
additional assets.
Also, as Under Secretary Taylor mentioned, we very much are
promoting the active involvement of the World Bank and the IMF
in this process. They have already been working intensely with
key Iraqi ministers and ministries on critical budget planning,
on revenue collection, on monetary policy, and, very
importantly, on building capacity. These activities aim at the
resumption of international lending to Iraq as soon as possible
after the transition on June 30, as well as building up the
basic ability of Iraqi ministries to more effectively manage
the economy and the international assistance that is being made
available.
I am also very pleased today to report that the 146-member
World Trade Organization has just this morning in Geneva
accepted Iraq's request to become an observer. As an observer
at the WTO, Iraq can now really start engaging again and
learning how the international trade system works. It can start
to more effectively begin preparations for its own eventual
accession. And it will be able to avail itself of trade-related
technical assistance. This is another important signpost on the
way to Iraq reintegrating into the international community in
ways that will help Iraq build prosperity.
Just to conclude on the note that the State Department is
one part of really a global team. It is an interagency team, it
is a United States-Iraqi team, it is an international team that
is really working together to mobilize the resources necessary
for Iraq to rebuild itself to start on a new path of
prosperity. We are working very hard and very closely with our
colleagues in Washington, in Baghdad, and in capitals around
the world on a regular basis to pursue this policy, and we very
much welcome Congress's continued strong support in this task.
Thank you very much, sir.
Senator Hagel. Secretary Wayne, thank you.
Mr. West.
STATEMENT OF GORDON WEST
ACTING ASSISTANT ADMINISTRATOR
BUREAU FOR ASIA AND THE NEAR EAST
U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT
Mr. West. Chairman Hagel, Senator Miller, I thank you for
this opportunity to testify before the Subcommittee concerning
USAID's role in the reconstruction of Iraq, particularly
concerning our role in economic reform and growth programs. We
have some detail in my prepared statement that I ask be put in
the record.
Senator Hagel. Your complete statement will be included in
the record.
Mr. West. USAID, in September, October, before the war in
Iraq, began a planning process for what might be a
reconstruction and rehabilitation program. We had divided
priorities based on what we perceived in those days in the
areas of infrastructure, education and health, economic growth,
and governance. Based on those observations, we developed
initial scopes of work for two contracts--one in the area of
economic growth, one in the area of agriculture.
As we developed our relationships with Office of
Reconstruction and Humanitarian Assistance in the early days,
we vetted out a contract basically under the direction of the
Department of the Treasury, who was the lead in that area at
that time, and eventually awarded in July a contract to Bearing
Point. This was funded under the supplemental one. It had a
ceiling of $80 million.
At that point, we actually were doing a transition as the
CPA had taken over from ORHA, and we developed what basically
is a work order construct where, rather than a typical USAID
mission construct, we really were responding to the niches and
the requirements of CPA on how to implement policies and
implementation programs in the economic growth area.
In that respect, Treasury still had a very key role in that
it has many senior advisors in the CPA itself. As noted by
Assistant Secretary Wayne, we also have a very active
coordination mechanism back in Washington where we participate
at least twice weekly in very intensive dialogue. You will see
that there are many areas where we are involved in programs
where there is a lead, whether it is bank reform,
implementation of job creation programs, the Oil for Food, and
many of the programs. But basically we are trying to respond to
the implementation needs of the CPA.
In the area of agriculture, we eventually awarded a
contract to Development Alternatives, Incorporated. That was
awarded in approximately October.
Under the economic reform program, we have done a
considerable amount of work with the banking sector, building
the technical infrastructure of state-owned banks, developing a
financial sector regulatory framework and helping with the
implementation of that framework, working on an interbank
payment system, helping establish a currency auction system,
and building the statistical capacity of the central bank and
the Central Statistics Office.
In the fiscal area, we have worked on budget planning
software installation and staff training, working on a budget
classification system, and on a financial management
information system that also relates to the ability for World
Bank, IMF, and other donors to begin operations come this
summer.
We are also involved in coordination with Treasury on tax
administration planning, legislative efforts, and training in
the tax area.
In the area of private sector development, one of the major
programs that Bearing Point is involved in is a bank training
program. We are actively involved with both the two main state
banks and with six private banks in a bank training program
that really involves a broad area of their total operations,
but specifically is focused on bank lending that will directly
feed into job creation programs.
We oversee currently $21 million in microfinance programs
that are done under CPA grants to NGO's, and Bearing Point
works on bankruptcy, labor, consumer protection, securities,
and competition laws.
We also have worked together with the Ministry of Public
Works on a job creation program, which is really a public works
program for temporary jobs for up to 100,000 people.
We have been very active in the area of utility regulation.
Bearing Point plays a key role in developing plans for the
electricity regulation over a 10-year period. We are also
looking at how that relates to the more immediate needs of
getting electricity up to maximum amounts by this summer, when
the hot season comes.
We are also getting ready to initiate work in
telecommunications regulatory work, and as that comes out, to
develop an umbrella regulatory utility framework for the
country.
We have also been able to respond through the contracts to
not just the economic reform and private sector groups. There
are other groups active in the CPA who need this type of
assistance. Some examples are the Oil for Food Program, where
we have helped to staff and manage the central and now northern
offices of the transition. We have assisted with an oil and gas
study to give the country options on the type of regulatory
framework and programs that they wish to have in the future in
the oil and gas sectors.
We are working in trade capacity building related to future
needs for the WTO. And as noted, outside of this area in
particular, we are, so far at least, the lead implementing
agency in the infrastructure sector, which is a clear and very
important component of economic growth. We are the lead in
electricity, in water, in roads and bridges, as well as ports.
We will be seeing a transition, however, over to the PMO in
terms of infrastructure. We currently have a bridge contract,
and PMO will begin to take on the heavy lifting in the
infrastructure.
Within agriculture, we have a small contract that really is
looking at developing a strategy for CPA for immediate needs on
agriculture inputs that meets the needs currently and looking
at a more long- or medium-term, 3- to 5-year strategy of how to
get stability and growth in the agriculture sector. We have
been involved in immediate needs of the wheat crop, restoration
of the date plantations. We work with prevention of foot-and-
mouth disease and getting vaccinations in veterinarian centers
up and on their feet. We are also beginning on a rural credit
program that focuses on farm families. In addition, we have
been part of the planning and now initial implementation in the
marshlands in the south of Iraq and restoration and
reestablishment of basic services in the marshland areas.
These programs come to a close roughly July of this year.
We are working with the CPA now on what are the follow-on
generation of programs that may be implemented under USAID. The
one area it seems of agreement right now is work on what would
be a vocational and skills training program to be implemented
under a host of centers throughout the country to promote job
creation.
Thank you, Mr. Chairman.
Senator Hagel. Mr. West, thank you.
Senator Miller, if it is agreeable with you, we will just
bounce back and forth, maybe 7 minutes at a time, and it gives
us enough time to develop some of these questions.
Senator Miller. Sure.
Senator Hagel. Thank you again, each of you, for appearing.
Mr. West, to pick up on a couple of your comments, in
particular agriculture, I noted in your written testimony, then
what you said here, let me quote just a moment from your
written testimony: ``Agriculture can absorb a substantial
amount of labor and provide world jobs which are particularly
important when they keep young men employed in the villages,''
and then you developed that theme. Of course, that also goes
back to a couple of points that Secretaries Taylor and Wayne
made about underemployment and unemployment.
My question is: What are we doing specifically to promote
Iraqi agriculture exports, support rural development programs,
jobs, and in particular how are you doing that if you do not
have any budget for it? Because I do not believe the
President's budget included any authority, any request, any
line item request for specific agriculture programs in Iraq?
Thank you.
Mr. West. First, I would just note that although there is
no line item specifically, there are a variety of programs, the
largest being the water in irrigation sector, which have a
major and direct impact on the future of agriculture. We also
note there is a large amount of infrastructure which includes
rural infrastructure including reliable electricity which has
largely heretofore focused on Baghdad in particular, whereas
irrigation pumps, et cetera were very much under utilized or
not utilized at all because of the lack of electricity in the
rural areas. So a lot that is going on under the infrastructure
sector is key to the future of agriculture.
Second, there are areas in terms of finance and other areas
of private sector which are applicable, and we are focusing on
rural economies. For instance, the SME credit programs and the
job creation programs are being carried out in all governance,
many of which are rural governance, and are targeted on both
market towns and agriculture families.
Under the first supplemental we did have the initial
funding for the agriculture contract that I mentioned. You are
correct, there was not a line item in the second supplemental
for agriculture. There are currently discussions, but at least
as of right now, we are not able to fully fund the contract
which is awarded under the first supplemental, and there is
discussion under way of whether there are other means or ways
to continue in agriculture.
As it is noted from the second supplemental budget, there
are just a large number of issues and priorities facing the
CPA, and we are one of the many trying to seek resources for
future programs.
Senator Hagel. I understand your limitations regarding
resources, but it is a little puzzling to have you come before
this Committee and highlight as you have agricultural, rural
economy and development, but you do not have any money to
implement the programs.
Mr. West. We have initial funding. We are working very
closely with the Ministry of Agriculture. Australia and other
countries are involved. We believe we still can have a key
policy and directional role in this sector, even to the extent
we do not have large sums of money. Presently, we have
approximately $10 million worth of funding in that contract.
Small as it may be, compared to the total budget in Iraq, in
many countries that would be a reasonable agriculture program
and we think we are having some impact. Thank you.
Senator Hagel. Certainly it is not your fault you do not
have the resources, but this is not any regular country. We
have 130,000 American troops. We have over 500 dead, and $18.5
billion in supplemental appropriations from this Congress last
year, so this is not just your run-of-the-mill country. We have
a little more investment than that in it. I am not sure if it
is CPA not understanding the priorities, or what would you
attribute to the lack of resources for agriculture and
development especially since you have noted it in your
testimony, that it is important, not just for jobs, but for
stability.
Mr. West. Basically, I believe the priorities have really
focused on infrastructure, governance issues, and again, there
are many, many competing demands. I really cannot speak for the
CPA further than that.
Senator Hagel. Thank you.
I noted in my statement, and I am sure you saw the piece in
The Washington Post yesterday that I referred to, that was a
rather lengthy article quoting the Iraqi Ambassador Designate,
Ms. Francke, about her displeasure with the contracting
process, lack of Iraqi participation, job development. Would
you care to respond to that? Is there a problem?
Mr. West. To me?
Senator Hagel. Yes. And I am going to ask each of you the
question, but, Mr. West, if you would answer the question as
best you can. Is there a problem? Is Ambassador Designate
Francke right?
Mr. West. Concerning Iraqi participation first, I might say
that we have guidance under all our contracts for a strong
preference for both the involvement and the training and the
development of Iraqi subcontractors. As an instance, under the
Bechtel infrastructure contract we have over 100 Iraqi
subcontractors with over 35,000 employees working on programs.
Through our grantees such as RTI, Community Action Program
Grants, OFTA grants, and others, we clearly are involving both
local groups in terms of job creation and subgrants and
subcontracts to Iraqi firms. The same goes in health and
education. I believe it is having a substantial impact on the
development of the capacity of local institutions and
businesses to perform.
In terms of transparency in the contracting process, we
have committed to the Administration and Congress to proceed
with full and open competition on all contracts under the
supplemental to funding. We are well along in that process. We
have had one request for an exception in the area of governance
related to election assistance, but other than that, we are
already fully unfolding contracts that we believe represent the
U.S. Government well.
Senator Hagel. Do you think Ambassador Designate Francke
just does not understand all that, or do you think she has a
legitimate point?
Mr. West. There are a host of contracts. We are one of many
agencies. We awarded contracts under the first supplemental
under what was termed limited competition because of the time
constraints. As I noted, we are now moved into full and open
competition. It is clearly an admonition that all of the
elements of the CPA, ourselves included, know we need to pay
attention with and it is sound advice and it is being listened
to.
Senator Hagel. Do you know if that story yesterday
attracted the attention of senior policymakers in Iraq?
Mr. West. I cannot----
Senator Hagel. I mean it is rather significant to have the
Ambassador Designate of Iraq given an interview and say what
she did. At least it hit me that way.
Mr. West. Clearly, it would be great if we could do a lot
more with Iraq institutions. Having seen firsthand the
situation on the ground and the limitations to get out in many
of the rural areas, there is always more that could be done,
and particularly in terms of involving Iraqi firms, and we hope
as we learn and proceed, and particularly as the Iraq
ministries get much and much more involved on a daily basis,
that more can be done in the future and will be done.
Senator Hagel. Thank you.
Senator Miller.
STATEMENT OF SENATOR ZELL MILLER
Senator Miller. Thank you, Mr. Chairman.
Thank you for being with us, and for your testimony and for
the job that you do. You have a gigantic job. I was in Iraq
recently, and it is mind boggling. It is overwhelming, the work
that has to be done and needs to be done. I am not here to
complicate things, but to better understand what you are doing
and your thinking for it.
It may seem minor in the big scheme of things, but I can
assure you that to those of us who represent farmers and
ranchers, it is not. Increasingly I am concerned with the CPA
policy of permitting nations that are not members of the
Coalition to bid on Iraq food tenders administered by the World
Food Program. It seems to me that the CPA policy on food
tenders should be consistent with the reconstruction policy,
and restrict contracts to the countries that made the
sacrifices and have invested in the coalition effort to free
Iraq. Can you explain to the Subcommittee why the CPA may be
purchasing food from countries that did not participate in
coalition activities?
Mr. Wayne. Senator, let me take a first cut at that. I am
not familiar with the procedures right now for food tender
policies. I can commit to ask and look into that. I know that
as part of the transition of replacing the OFF program, we and
CPA have taken over that process. So maybe I could just commit
to getting an answer for you and being back in touch.
Senator Miller. I would appreciate it if you would.
In your testimony you talked about, as you said, the
administration of the Oil for Food Program will be turned over
to the Coalition Provisional Authority on November 21, 2003.
Mr. Wayne. Right.
Senator Miller. You state the Minister of Trade will
increasingly assume responsibility for the management of the
food pipeline and transition to a market-based system. That is
what I am trying to get some elaboration upon. Is that what you
are going to get back with me on?
Mr. Wayne. I can talk to you a bit about what we are doing
and the mechanics of doing that, but I honestly do not know the
specifics for the tendering process. I know there was a UN
tendering process which, by the rules, was I believe open to a
very wide range of nations, and there are still contracts being
fulfilled under that process, which I think was open for
bidding from most anybody around the world. But I do not know
for sure the details, Senator, so I do not want to mislead you
on that part of it.
What we are trying to do generally in the transition
process is to make sure that there are not any gaps that happen
in the food and medicine distribution during this period of
transition, and I think we have done a very good job in handing
over from UN administration to CPA and Iraqi administration.
Then, at the same time as we are moving forward and making sure
there are no gaps coming up, we are trying to ensure that the
Iraqis are fully trained to take over all the aspects of this
process, international and domestic, to make sure that it
continues on effectively, after June 30. Then we went to think
through what are the right ways to transition from this ration
system to a market-based system. You claim, in fact, to reduce
the number of people and the groups that have to get special
care, and you enlarge the role of the market in that process.
So, the market will play a larger and larger role in Iraq's
supply of agricultural goods, which will also increase the
incentives inside Iraq for agricultural production and return
them to their strengths in certain areas. Traditionally, they
did produce a number of products for export and they have the
potential to do that again. But they did not produce enough to
feed the whole country in all areas. So, we will be
transitioning over.
Senator, I would have to take back and get back to you on
the specifics of what the procurement policy is right now.
Senator Miller. It is my understanding that there is going
to be--and correct me if I am wrong--that there is going to be
a $600 million purchase for buffer stocks right away. Do you
know if that is right or wrong?
Mr. Wayne. Sorry, I do not, sir.
Senator Miller. Does Iraq have enough food to last until
June 2004, and if not, how are the food purchases going to be
handled until then?
Mr. Wayne. My understanding is that there is--that in the
planning pipeline that is being foreseen, there is assurance
that that pipeline will continue to meet all the needs, and
that there may in fact be needs for additional purchases, and
probably will, and that is part of the job which the team, that
USAID and others are helping to staff out in Baghdad, are
doing. They are now managing that, working with the Iraqi
Ministry of Trade, looking at the food needs, the medicine
needs, the OFF contracts that exist and what new contracts have
to be let.
But I do not, sir, very honestly, have the specifics of the
purchases upcoming. I will be happy to take that and add that
as part of what we get back to you with, sir.
Senator Miller. I would appreciate it. I have to sum up, so
let me just say that I think maintaining a policy of allowing
noncoalition nations to bid on World Food Program food tenders
for Iraq, can be justified, and I think that it should be
changed immediately. I just do not understand that line of
thinking.
Thank you.
Senator Hagel. Senator Miller, thank you.
Secretary Wayne, you noted in your testimony under the oil
sector section that--if I can just read a line here. ``The
continuing security problems in Northern Iraq have prevented
the reopening of the oil export pipeline to Ceyhan on the
Turkish Coast and reduced oil exports by at least 400,000
barrels per day. At present, all oil exports are via the
Persian Gulf.''
Could you give us a bit of a status on security for the oil
pipeline in the north, what projections are as to when it might
be secured to the point where we can see oil flowing to Ceyhan,
and any other thoughts that you have on the estimates that CPA
is looking at right now. I noted your dollar number down here.
You say could exceed one billion per month, and you talk about
the possibility of 3 million barrels a day.
Mr. Wayne. Yes, Senator. Oil production and exports have
been steadily increasing as I noted in my testimony, and they
now have reached the 2002 levels. But it is not secret that
sabotage has hampered the efforts to boost production. As I
said, currently there are about 2.3 million barrels a day
produced. Exports are about 1.6 million a day. The target that
the Iraqis have set for themselves is to reach a production of
about 3 million barrels a day by the end of 2004, and then
exports, if they meet that target, would be about 2.2 to 2.4
million barrels a day.
But you are correct that right now all of the oil is going
out via the Mina al Basra port on the Persian Gulf. There is
work under way to expand export capacity by using an additional
terminal nearby that has not been operational, called Khor al-
Amaya, and there has been work under way on the Northern
Pipeline. A rapid pipeline repair team is being organized and
is expected to be ready to go in the next 2 months, which would
help to move toward being ready there. If that line is reopened
again, you would have an additional export capacity of 1.1
million barrels a day, so that would significantly increase the
long-term export capacity.
Exactly when and how that will be reopened, however, I am
far from an expert to tell you that, sir because it has to be
based on the actual security in that area. But I do know they
have been learning from other experiences around the world,
probably including Colombia, where there have been pipelines
that have been exposed to sabotage, and trying to put together
the response team that would be effective in response to that
threat, as well as all that you read about the daily sacrifices
people are undertaking to try to bring the security situation
under better control.
Senator Hagel. Thank you. Once a sovereign government is in
place in Iraq--and I would be interested in Secretary Taylor's
comments on this as well--do you think it would be in the best
interest of Iraq to join OPEC?
Mr. Wayne. I think that is a decision really that the Iraqi
authorities need to take, and I would not want to be in the
position of dictating to them that decision. Iraq has
previously been a member of OPEC. They have now, in the
interim, have been attending the meetings again. I think I
really want to leave it that they have to take that decision.
As you know, however, we believe in principle that it
should be the market that determines the effective price of
oil, that is really the mechanism for matching supply and
demand, and that, of course, is based on our whole approach to
market economies.
Senator Hagel. Thank you.
Secretary Taylor.
Mr. Taylor. Certainly is going to be a decision for the
Iraqi people, and the idea of having production determined by a
group is not as attractive as production determined in the
markets. But that is going to be their decision, and we are
going to be helping them work in the markets, work to produce
more, understanding the implications for their own economy at
different levels of production. But that is going to be their
decision, sir.
Senator Hagel. Thank you. Secretary Taylor, would you--and
you noted this in your testimony--give us an update on the
Madrid Conference pledges. Are we on target on the timetables
set at the Conference? Are our allies forthcoming with the
resources they have pledged? Are they behind schedule? If they
are, what are we doing to address that issue?
Mr. Taylor. We are actually working in a way which I think
is really unprecedented in following up from a donors
conference, in bringing the key donors together, continuing to
discuss the implementation, the disbursement of funds. Phone
calls are regular with the key donors, and in fact the meeting
was taking place as Assistant Secretary Wayne said in the
Middle East to make sure they were moving ahead on the
disbursements.
With respect to the World Bank and the IMF, which of course
are big components of that donors' conference, $3 to $5 billion
from the World Bank and up to $4.25 billion from the IMF. They
are actively engaged in getting things ready so they can start
disbursing as soon as the transition occurs on July 1. Even, as
I mentioned, the IFC, the private sector arm of the World Bank,
is moving ahead with a small business loan program. The World
Bank has a whole strategy in place about how to work on
programs and projects so they can begin as soon as possible.
Then finally, the IMF is working with the Iraqis now to develop
a program which could disburse, in the first part of the period
at the transition.
So it is going well, and we are going to keep working it
hard. I think there is an understanding that the pledges can
fall behind if we are not on top of it working with the other
donors to watch that. It is one thing to pledge, it is one
thing to disburse. I must say, even on top of the
disbursements, it is actually getting specific results done. We
would like to have certain numbers of schools built, a certain
number of hospitals repaired, et cetera, and so to focus on
these visible, measurable on-the-ground results is where we are
moving on this, and I am pleased with the way things are moving
at this point, sir.
Senator Hagel. You believe that the commitments made, the
pledges made, have been forthcoming, are on target, and that is
not an issue?
Mr. Taylor. It is an issue in the sense we need to watch it
carefully, but now things are on track and we are going to
continue to monitor it carefully. But it is an issue. It is an
important issue for us to keep track of, and I appreciate your
question about it.
Senator Hagel. Mr. Secretary, back to your comments
regarding the World Bank and IMF and their pledges. You
mentioned the date of June 30 obviously as a key date for many
reasons if we are to hold to that date. Would you review for
this Committee what conditions must be in place for the IMF and
World Bank to make loans, to come forward with their
commitments and pledges? For example, does significant debt
reduction have to have been accomplished? Obviously, a
sovereign government has to be in place, but I mean I am
particularly interested in are there stipulations on the debt
issue, so substantial debt reduction have to have been agreed
to or taken place or factored in before the IMF and World Bank
will come forward with their assistance?
Mr. Taylor. With respect to the IMF, it is necessary to
have the IMF program in place as part of the agreement to do
the debt reduction, so it is more of a simultaneous occurrence
than a sequenced one. What we are hoping is that the IMF
program can be in place and ready to go soon after July 1, and
that provides the structure for the debt relief. The reason is
that the IMF program is the quantitative way to describe what
level of debt reduction is needed for the debt to be
sustainable again in Iraq so Iraq is not in a position where it
is burdened by these heavy debt payments. So the IMF program is
part of that.
Likewise, the World Bank, they can begin disbursing with
the recognition that there is a process in place to deal with
the debt. But I would characterize it, Senator, as a more
simultaneous thing where you have the debt reduction process in
place, you have the IMF program, which is very much something
we are working on now, and then finally the World Bank itself
moving ahead.
Senator Hagel. I know you have done a significant amount of
work on the debt relief issue, and as we have noted and
certainly you know, Secretary Baker has been asked to take on a
significant part of that responsibility. Can you give us an
update on where we are and how effective those meetings that
the Secretary has had over the last 2 months have been? Maybe a
timetable on where we go next, when debt relief is actually
going to be worked out, worked through? Anything that you can
do to enlarge on our understanding of that issue, we appreciate
it.
Mr. Taylor. Sure. Secretary Baker has reported that his
travels to Europe, Asia, and the Gulf have resulted in
statements by these governments that represent at least
substantial debt reduction, that is, commitments to at least
substantial debt reduction. That is number one.
Number two, the governments already have committed to
resolving this issue this year, so that is a commitment that
the key governments have made, the key players in this whole
process.
Now, what remains to be done with those commitments for at
least substantial reduction, is to get the IMF to do a debt
sustainability analysis so we have a measure of how much debt
relief there should be. That is going to play out during the
year.
Now, we have the important marker of the end of the year.
We also have the important marker that the transition is to
take place July 1. So what we are doing is trying to sequence
what will eventually become the more detailed calculations of
what the percentage amounts are and how they take place and
when over the course of the year. Those are some of the
specifics that have happened already and some of the things
that we think will happen.
Senator Hagel. So there are ongoing meetings working toward
what you have just described?
Mr. Taylor. Yes, there are. Just some more color on that,
we are working with the Iraqis in Baghdad to make sure that the
estimates of the debt are correct too. We have got estimates
from external sources. The Paris Club and the IMF did surveys
of what governments said that the Iraqis owed them, and we are
also checking those against the Iraqis' records, double check
and making sure nothing is missing or that the numbers are
correct by having a team work through the records in Baghdad
now. We sent Treasury experts to work with the Iraqis to go
over those documents. That is the microdetailed level that is
happening simultaneous with what Secretary Baker is doing at
the highest levels.
Senator Hagel. You are satisfied with the progress of that
effort?
Mr. Taylor. Yes, I am, and it is something that has been--
we thought about it very early after Saddam fell. It was one of
the first examples I think of the G-7 pulling together and
saying: We have to deal with this, and that included in that
case both France and Germany saying we need to deal with this
issue. So it is coming along, and it seems to me pretty much on
track, sir.
Senator Hagel. What about the war reparation claims?
Mr. Taylor. Those are being handled through a process at
the UN. They agreed, as one of the resolutions, to limit the
amount to 5 percent of revenues. That is a maximum 5 percent of
oil revenues. But now the claims are being handled as part of
the UN and we are letting that play out at this point. There
may be some additional work that needs to be done at that
point, but that is now on a separate track from the debt
relief.
Senator Hagel. Is that part of Secretary Baker's portfolio?
Mr. Taylor. To my knowledge, Secretary Baker is not dealing
explicitly with that part of it.
Senator Hagel. Thank you.
Secretary Wayne, in your opinion, would a greater UN role
in Iraq or even a UN resolution, another UN resolution, make it
easier to get more international support in Iraq?
Mr. Wayne. Senator, I would say that on the economic
reconstruction side there has been already established since
before Madrid a very important UN role in that they have been
one of our main partners in planning for the donor conference
and the post-Conference effort. I think, as you know, Secretary
General Annan has a team right now in Baghdad working to come
up with ideas for how the transition might proceed.
So, I would say that a UN role is important to help us move
forward on the economic side. We look forward really to
building on that. One of the things that came out of Madrid was
a UN trust fund and a World Bank trust fund where donors who
did not have a big enough aid program of their own to actually
go into Iraq, or who chose, they said not to go into Iraq and
set up an aid program, could use these trust fund facilities.
We have used them effectively, as you know, sir, in East Timor,
in Afghanistan, and elsewhere to help channel reconstruction
funds.
So, to go back and also answer one of your earlier
questions about other donors, one of the things that has just
recently happened is that the UN and the World Bank have
finished their proposals for their trust funds. They have now
come up with proposals for how to spend that money if you put
it in the trust fund, and they are now just going out to the
donors and saying, ``okay, if you like the structure and you
like what you see as projects.'' They have been working with
the Iraqis on this--``please now put some of your money
forward.'' So only now are we getting to the point where a
number of the Madrid pledges will really be tested, and we will
be urging people to actually come forward and start putting
money of the table.
Coincident with this, in Iraq and Baghdad there has been a
process going on to revisit the initial list of projects
prepared by the Iraqi ministers and ministries that they worked
with CPA on, to really take another look at those, to
prioritize them, to sort out the ones that we are going to
focus on with our funds, and then to make available to the
other donors and to the UN and the World Bank, projects that
the Iraqis believe are top priorities. That is, right now, an
intense process that is going on in Baghdad with the Ministry
of Planning, working with the Ministry of Finance, and then
with all the ministries and CPA, to come up with that priority
list.
There is a structure that has been established that
involves the Governing Council, the CPA, the key ministers in
approving that priority list of projects. So again, that list
of projects will then be available for the donors other than
the United States to look and the Iraqis can say, ``okay, here
is the opportunity to put your money on the table.''
In all of that, the UN, and in all of these phone calls
that we have been having internationally, the UNDP, UN
Development Programme has been a key player and a very
constructive player in all of that.
Senator Hagel. Thank you. Following on with what you just
said, partly what you just described is a transitional process
leading to hopefully a sovereign Iraqi Government or at least
some semblance of one June 30 so that economic decisions,
policy decisions, other decisions will be handed off as you are
working through this process; is that correct?
Mr. Wayne. That is correct. Along with Under Secretary
Taylor, I had the pleasure to meet with the Central Bank
Governor and the Minister of Finance this week when they were
in Washington, and 2 weeks ago with the Minister of Planning
and Development Cooperation who was here. All of them, in fact,
see their roles as now expanding and as a full partner in
decisionmaking on the projects, on the way money should be
spent.
There has been something that is called the Iraqi Strategic
Review Board that has been set up to actually look at strategic
spending. It has two members appointed by the Governing
Council, the Minister of Development and Cooperation, and the
Minister of Finance and a CPA representative who will be Marek
Belka of Poland, former Finance Minister of Poland who is
working in the CPA on the economic side. They will look at all
of the proposals that come together to bless them, the Iraqi
proposals, to assure coherence between how we are going to
spend money, what the other projects are, and then to try to
effectively draw in the other international money that is
available.
Indeed, as you say, Senator, this is viewed as a
transitioning to the interim government or the transitional
government starting July 1.
Senator Hagel. Thank you. I want to get Secretary Taylor's
comments on this as well, but I want to ask another question in
regard to this. Does this give you any concern that
unintentionally we are placing a great amount of power,
centralized power in the ministry planning, in a command
economy and the things that we want to get away from?
Mr. Wayne. I would say no, because at the same time what we
are doing is working, and not only us but also the World Bank
and others, working to build the capacity of the several line
ministries to understand what that role needs to be in a
noncommand economy situation. Here really what we are doing is
creating an effective interagency process, because you do need
interagency coordination and you do need to merge the
considerations of the budget into the considerations of how you
are spending the development money that might be coming in.
So we, the CPA, the World Bank, and other institutions are
going to be putting a lot of effort in the months ahead into
helping the Iraqis learn the effective way to do this, and at
the same time to have a free market emerge and a democratic
system emerge.
Senator Hagel. Thank you.
Secretary Taylor.
Mr. Taylor. Mr. Chairman, on the question of the
transition, we focused mainly on the central bank and the
ministry of finance areas that have been our focus, at least
from the Treasury, and have worked quite extensively with the
central bank governor. As I mentioned, we asked him to come to
Florida to meet with all the central bank governors of the G-7.
It was quite a historic thing, if you can think about it. Here
is a man just recently chosen to run the central bank of a
country that is just starting out being grilled by the top
central bankers in the world such as Chairman Greenspan, really
doing extraordinarily well and providing what he wants to do,
asking tough questions about the currency, his own currency,
for example. So, I think it is coming along very well.
We have people working with them closely and I am going to
be going to Iraq next week to look for myself, making sure from
my perspective at least that the monetary policy operation is
working well. The fact that the currency exchange worked so
remarkably well is a good sign but we want to make sure that
the policy is actually operating as well too. They have
deregulated the interest rates; as of March 1 there will be no
controls on interest rates. That, I think, will help bank
lending and the use of the financial system more efficiently.
But it is something that I would think that we are not
going to simply just disappear with respect to this advice
giving and helping them on July 1. They certainly hope we are
not. We have got a good relationship.
I could just say again, maybe a little more color, this
last Sunday night, the person who is our economic coordinator
had the minister and the governor to his house here in the DC
area, invited all of the Treasury people who have been working
with them. You could just see the remarkable degree of
friendliness and wanting to work together. It is a very
positive sign, I think of what is going to happen after the
transition. But we keep working on that.
Senator Hagel. What is the status of the central bank law,
which if I understand it, grants independence to private banks
as well as other things?
Mr. Taylor. It is a good law. It does grant central bank
independence to the Central Bank of Iraq so they do not get
into the business of printing money to finance the deficit. It
has got some good strategies with respect to focusing on price
stability, and recognizing the importance of financial market
stability. It is a good law. It has been widely discussed in
the international community and people have had lots of
comments on it. The central bank governor and his staff are
happy with it. There is just one last step, and that is for the
Governing Council to approve it. It has already been approved
by their financial committee, if you like, of the Governing
Council, but very soon we hope it will actually go through and
be finished in the Governing Council.
Senator Hagel. Is there some difficulty within the
Governing Council as to why they have not approved it yet?
Mr. Taylor. I do not believe so, it is just these things
take time. As far as I know, it could happen any day, but I do
not want to make any predictions of these kinds of things. But
it is a good law. We have heard nothing but favorable things
coming from the Governing Council now, so for all I know it
could simply be that they did not have a quorum on the day they
met to deal with this. But we hope it is soon.
Senator Hagel. That has not inhibited the progress of
private banks looking at wanting to move into Iraq?
Mr. Taylor. No, in fact I do not believe it has had any
impact because there is also the banking law which was passed
earlier with respect to foreign bank entry and the rules of
foreign investment. In that regard, there was a decision made
just in the last week to allow three foreign banks to come in
and do business de novo, 100 percent, if they want, of
ownership, into Iraq. They chose three banks, Standard
Chartered, National Bank of Kuwait, and HSBC. There were many,
many other banks who applied. A lot of interest.
This is actually one of the major foreign investment
activities that are happening right now. I must admit it is
very pleasing to see such interest from the banking community.
In the trade bank of Iraq that I mentioned earlier, there was a
lot of interest in that.
So, I think in terms of the bank law itself, it is not
inhibiting any activity at this point. Of course, it is always
important to have a good central bank law for monetary
independence and keeping inflation low. As far as we know,
things are stable in the economy.
I could just add briefly about this, we need better data in
the economy. You were asking questions about the employment and
unemployment. There just are not good statistics. Even the
inflation statistics are quite poor. So those are high
priorities. It is hard to run a central bank if you do not have
good inflation data, good employment data, or good production
data, so that is a high priority for us working with the
central bank.
Senator Hagel. Thank you. A question for each of you. In
your opinions, where do you believe the most significant
potential prospects lie in Iraq for exports, employment over
the next few years? Obviously, the oil sector is probably
foremost. Mr. West and I had an exchange regarding agriculture.
But in the opinions of the three of you, where do you think
some of the greatest potential rests for their economy,
exports, jobs, development?
Mr. Taylor. For jobs in the country it is going to be the
reconstruction is the biggest part coming forth. We have some
data that even just our civil affairs teams, CJTF-7 report that
they have already created 394,000 jobs. We know that our
payment of $1.7 billion in cash to people early on created a
lot of economic activity. The small business loan program is
going to generate jobs.
I believe the conversion of the Oil for Food program to a
market-based system is really the key to reviving agriculture
in Iraq,
because basically when the Oil for Food program was established
domestic agriculture production just basically plummeted. So
when that becomes replaced by production largely in Iraq and
they have the capabilities that will be a great boon. And of
course, there are lots of opportunities in some old businesses
that Iraq used to be in; the date plantations around the south.
There is perhaps an opportunity---that used to be a great
export for Iraq in the past.
I think it is very promising that they have agreed to have
very low tariffs, 5 percent maximum tariff. It is very much of
a free trade, open trade perspective.
Then maybe just one last thing on this. With respect for
the fact that we do not have a lot of data, I think it is hard
to pay too much attention to anecdotes that people have. That
is the only thing you can base things on, but the impressions
of one person, they are just one thing.
Just for example, the finance minister who we had many
meetings and discussions with in the last 5 days, he is a
former Iraqi businessman. That is what he was doing, running a
business. He put his business aside to become the finance
minister, so, he is a natural person to ask about how things
are going. He is very positive about what is happening in the
private business sector, and did not comment about contracting
so much, just about the activity that is happening in the
economy.
To me that is reassuring, but again, you cannot pay
attention to any one thing. It is a cumulation of evidence and
we just need to get more and more evidence like that. But that
offsets, I think to some extent, the views you were getting and
asking Mr. Wayne about that you got from The Washington Post.
So other kind of anecdotal information is important.
Senator Hagel. Thank you.
Secretary Wayne.
Mr. Wayne. I would agree with Under Secretary Taylor both
in reconstruction and then in the SME area, small and medium
enterprises, there is a great deal of potential to create jobs.
As we do see this transition to a market economy, both in the
food and medicines area, and potentially under a new Iraqi
Government in other sectors, I think there is a lot of
potential if we look at those smaller business opportunities.
As we know in the United States, that is a big job creator.
In the longer-term, also not only the low tariff level but
also the very forthcoming foreign direct investment policy that
has been established will, I think, start attracting more and
more interest. There are already, as you may have seen from the
many different conferences that are held, many businesses that
are interested in going into and working in Iraq as soon as
they feel that it is the right thing to do. I think that will
be a big job creator also.
In the various sectors--in addition to dates--barley,
wheat, cotton, and rice are areas apparently where Iraq was
very productive previously before Iraq went into this rationing
system that really undercut all the production. Poultry and
livestock apparently also they could export a bit to their
neighbors.
In the natural resources, in addition to oil, sulfur and
phosphates are potential exports. And then, they did have a
large chemical and fertilizer industry. As we remember, some of
it was misused at some point, but there is a potential there
again that they could export in some of those areas.
Senator Hagel. Thank you.
Mr. West.
Mr. West. No general disagreement with what has been said.
I think basically the jobs are going to be created where the
money is. First will, obviously, be oil and gas. Second, real
estate is substantially undervalued throughout the country and
I think real estate and the construction industry will be the
second largest source of new funding. Third, I think
agriculture will be a boom area.
I might just add to what was earlier said in agriculture,
unlike some of the traditional countries we work in, there
really were some major structural and, frankly, intentional
constraints. The lifting of those constraints, export controls,
the fact that Saddam really tried to suppress the south and the
Shi'a population and really cut off their incomes, the lifting
of those constraints, a lot will happen without any outside
assistance just by the changing of oil for food export
controls, access to irrigation, water.
The last area really is related to oil for food but it is
not the agriculture sector. There are $6 billion to $8 billion
worth of important that were coming through this UN system, and
the small and large trading houses are already starting to
boom. As that transitions out I think the trade business in
Iraq will continue to expand.
Senator Hagel. Thank you.
Secretary Taylor, what is the status of the law allowing
100 percent foreign ownership in various companies in Iraq?
Mr. Taylor. That was a law that was promulgated back in
September, and it is still there. The only examples I know
where it specifically has been taken up is in the banking area,
which I mentioned, those three banks. But that is the law that
they put through. I remember the finance minister presenting
that at the international conference in Dubai in September.
Senator Hagel. But other than the banking industry you do
not see much evidence of that law being taken advantage of ?
Mr. Taylor. It is better to say I do not know rather than I
do not think it is there. I do know that there is just a lot of
interest in foreign investment, but I do not know if actually
it is taking place. I do not have any specific evidence.
At that Madrid Conference there was actually, I think for
the first time at one of these donor conferences, a whole day
for the private sector to come through and see what
opportunities there were. We tended to emphasize the foreign
investment opportunities in Iraq. Of course, there is a lot on
the oil side.
This is not really so much foreign investment, but in order
to produce this currency we had to get a firm to print the
currency. They printed the currency and that was a very
successful operation. But I just do not have good information
except for the sectors that I am focusing on which is the
financial sector.
Senator Hagel. Thank you. One additional status question.
What is the status of the proposal that had been floated
regarding a flat tax in Iraq?
Mr. Taylor. The proposal was again made back in September
and it was something that was worked through--more than a
proposal. It was a part of the policy for the tax system. It
was a maximum 15 percent rate, not simply that all the rates
had to be 15, but the maximum was 15. In principle it could be
graduated from 7 to 15 percent, but the maximum was 15 percent.
They also had a maximum tariff rate of 5 percent as part of
that.
Neither the 5 nor the 15 percent has been implemented
explicitly in the law yet, because that requires that tax forms
be set up and a system of payment.
With respect to the customs, there is the most progress is
on that front. They are training the customs officials, they
are getting the computers ready to go at the main ports of
entry. My expectation is that could be put into place in the
spring. It is a high priority for us because if they can begin
to generate their own revenues it will be a way that the
American taxpayers have to worry less about that, and the donor
community worries less about it. So it is a high priority.
Customs is the first thing and then after that the income tax
on both individuals and firms. It is mainly an implementation
issue right now.
Senator Hagel. Thank you.
Gentlemen, any of you wish to make any further comments?
Secretary Wayne?
Mr. Wayne. I just might add one other area where there has
been direct foreign investment, and I was reminded because
there was an article in USA Today about the mobile cell phone
system. As you know, there were three licenses given out to
three different consortia. They have a responsibility to build
a system in their own area and then they can expand and compete
nationally. I would just note that the system in Baghdad is now
up and running for the first time. There were, again, plenty of
bidders for that system also.
I think there will be a great deal of interest as the
opportunities open and as we move forward.
Senator Hagel. These are 100 percent private licenses?
Mr. Wayne. They are licenses. They are not Iraqi Government
owned. I think, and I will have to check on this, there may be
as part of some of the consortium, there may be national
telephone companies from other countries. But I know several of
them have Iraqi partners and at least one of them has two
foreign partners working together with others in it too.
Senator Hagel. Gentlemen, you have been generous with your
time, and you have been very helpful to this Committee. We
appreciate what you have contributed today and also the good
work of you and your colleagues throughout the year. Thank you
very much.
The hearing is adjourned.
[Whereupon, at 2:32 p.m., the hearing was adjourned.]
[Prepared statements and response to written questions
supplied for the record follow:]
PREPARED STATEMENT OF SENATOR CHUCK HAGEL
This is the third hearing on Economic and Financial Reconstruction
in Iraq that we have held in this Subcommittee since last September.
The transition to a stable and democratic Iraq will greatly depend
on economic development and job creation. The economic track in Iraq
cannot be considered in a vacuum. Iraq's economic reconstruction is
directly linked to both security inside Iraq and to the political
transition to a new and sovereign Iraqi Government.
The economic reconstruction of Iraq presents a historic opportunity
to help chart a new course in Iraq and the Middle East. America has
invested precious lives, resources, and credibility in Iraq. The long-
term strategic interests of America and our international and regional
allies depend on our getting in right in Iraq.
There is some good news in Iraq's economy. Schools and hospitals
are reopening, and visitors report increasing economic activity in
Baghdad and other Iraqi cities. Iraq's oil sector and infrastructure
are beginning to stabilize. And Iraq's public and private banking
sectors are being rebuilt. In March, three major foreign banks will
begin operating in Iraq. The New York Times, on Sunday, February 8,
cited a report by The Economist Intelligence Unit which predicted that
Iraq's GDP could grow by 25 percent this year, the result of American
spending on reconstruction, the recovery of Iraq's oil industry, and
increased trade.
However, despite Iraq's potential, Iraq's economic reconstruction
and stability are far from assured. The assessments last fall of the
United Nations (UN)/World Bank and the Coalition Provisional Authority
(CPA) estimated capital investment needs for Iraq of $55.3 billion over
the next 4 years. Of that amount, the World Bank identified $17.5
billion in ``immediate'' reconstruction needs for 2004. To help meet
these needs, the Bush Administration plans to spend $12.7 billion on
Iraqi reconstruction this year.
A report last month by the Congressional Budget Office, Paying for
Iraq's Reconstruction, concluded that projected Iraqi revenues alone
will probably not be sufficient to cover capital investment and
reconstruction through 2007. Iraqi oil revenues are likely to only
cover recurring Iraqi Government costs, with little remaining for
capital investment required in the UN/World Bank and CPA assessments.
The world community, led by the United States, has pledged between $32
and $36 billion toward Iraq's reconstruction over the next 4 years.
Iraq's economy will also depend on substantial relief from debt and
reparations. This is an absolute priority for out international
diplomacy on Iraq. Iraq's debt, not including unresolved or unpaid
reparations claims from the Gulf War, is estimated at $125 billion.
Iraq's budget, and Iraq's international credit worthiness, will be
crippled if Iraq's creditors do not agree on substantial debt relief. I
am encouraged that former Secretary of State James Baker has undertaken
this critical diplomatic mission, and I am optimistic about his
progress so far.
The financial and economic reconstruction of Iraq will also depend
on the development of transparent and accountable institutions of
economic governance. The CPA should support concrete steps by Iraq to
build strong and transparent regulatory and oversight institutions to
assure that Iraq's potential is not again squandered by corruption and
mismanagement.
Iraq's economic potential will ultimately be realized by empowered
Iraqis. The CPA has budgeted $184 million for private sector
development. But in yesterday's Washington Post, Ms. Rend Rahim
Francke, the Iraqi Governing Council's Ambassadors-designate to the
United States, said that the CPA is not doing enough to employ Iraqis.
She added that, ``jobs for Iraq will create stability and peace . . .
and curb terrorism.''
The contracting and subcontracting process in Iraq must empower and
employ Iraqis. America must set an example with transparent rules and
procedures. The Middle East has seen enough deal brokers and ``middle
men'' looking for a piece of the action. The contracting process
cannot, in Ms. Francke's words, be ``shrouded in mystery.''
I look forward to the testimony of today's witnesses: John Taylor,
Under Secretary of the Treasury for International Affairs; E. Anthony
Wayne, Assistant Secretary of State for Economic and Business Affairs;
and Mr. Gordon West, Acting Assistant Administrator, Bureau for Asia
and Near East, U.S. Agency for International Development.
PREPARED STATEMENT OF JOHN B. TAYLOR
Under Secretary for International Affairs
U.S. Department of the Treasury
February 11, 2004
Introduction
Chairman Hagel, Ranking Member Bayh, and other Members of the
Subcommittee, thank you for inviting me back to testify on the
financial reconstruction of Iraq. There have been many significant,
positive developments since I last testified in September, and I
welcome the opportunity to discuss them with you today.
Just this weekend, during the G-7 finance ministers' meeting in
Boca Raton, we had an opportunity to hear from Iraq's Central Bank
Governor, Sinan Shabibi, and Finance Minister, Kamel Gailani, about
their reform priorities. Both officials participated in a session with
the G-7 ministers, and took the opportunity to underscore their
commitment to moving ahead with sound, market-oriented reforms that
will underpin private sector-led growth.
They also stressed that their vision of a new Iraqi economy shares
the following key principles: Openness and transparency of Iraq's
institutions; the creation of strong incentives for private sector
development; close economic and financial integration with the
international community; implementation of international standards and
best practices; and a social safety net that addresses the needs of all
Iraqis.
These officials are already taking meaningful actions to back up
their statements. For example, Iraq's Central Bank Governor recently
announced three major actions that will have far-reaching consequences
for the development of Iraq's financial sector: The selection of three
foreign banks to receive a license to operate in Iraq; a plan to
liberalize interest rates by March 1; and passage, soon, of a new
Central Bank law.
Today, I would like to tell you more about these developments, as
well as update you on the progress that has been made on currency
reform, reducing Iraq's international debt burden, and mobilizing
international support to meet Iraq's reconstruction needs.
Currency Reform
I would like to begin by highlighting one of the most important
accomplishments in the financial sector--the successful introduction of
a new currency in Iraq. When I last spoke before this Committee, I laid
out our strategy for replacing the old national currencies--the Swiss
dinar and the Saddam dinar--with a new, unified national currency. I am
happy to report that this plan was successfully implemented as
scheduled between October 15 and January 15.
Printing and delivering this currency on time was an enormous
feat--the equivalent of 27 747 plane loads of currency were delivered
to Iraq and distributed to the public through approximately 240
exchange sites, mostly bank branches, under a significant security
threat.
By all accounts, the Iraqis have wholeheartedly embraced their new
dinars. Not only are the new notes much more difficult to counterfeit--
a chronic problem under the old currency regime--but also the Iraqis
now have six denominations available, up from only two. And the value
of the currency has steadily increased since its introduction. Now the
challenge is to manage this new currency in such a way as to provide a
stable monetary foundation for a healthy financial system and vigorous
reconstruction.
Restoring and Revitalizing the Banking Sector
Another area where meaningful progress has been made is in the
banking sector. In my last testimony, I reported that Treasury advisers
were assessing the conditions of Iraqi's state-owned and private banks.
Since then, we have learned that Rasheed and Rafidain banks--the two
large state-owned banks which controlled over 85 percent of banking
assets--are at best marginally capitalized, and have loan portfolios
with a high concentration of non-performing loans. Compounding these
problems is the lack of comprehensive, modern accounting standards and
systems. We also discovered that although these two banks have an
extensive network of more than 360 branches throughout the country,
each branch has operated largely as an independent unit. As a result,
Iraq lacks centralized management and an integrated system for making
and clearing payments.
An evaluation of the private banks uncovered significant problems
as well. It turns out the 17 private banks in Iraq served predominantly
to take deposits rather than finance investments, and that the largest
of these private banks had only $1 million in capital. Finally, our
evaluation of Iraq's legal regime showed that Iraq lacked a competent
supervisory or effective regulatory structure to oversee the financial
sector.
Despite this bleak assessment, the Iraqi bankers we engaged with
from the private and public sectors--as well as key finance officials--
shared an eagerness to adopt the reforms necessary to develop a modern,
efficient financial sector. Though they lack technology, resources and
experience, after only a few months, significant progress has already
been made toward this goal.
First, the Iraqis are moving towards the establishment of a modern
legal and regulatory framework for the financial sector. For example,
working with experts from central banks and other governments and the
International Monetary Fund, we helped Iraq to prepare a modern banking
law and a new central bank law, both based on international best
practices. The banking law was enacted in late September and contains
many provisions designed to support the development of a strong, robust
banking sector, including higher minimum capital requirements (10
billion dinars, or more than $6 million), and more rigorous standards
for bank licensing and for bank governance.
We expect the central bank law to be adopted soon by the Iraqi
Governing Council. It will not only confirm the independence of the
Central Bank established by a July 7 CPA order, but will also prevent
the Central Bank from engaging in inflationary financing of the
government. Indeed, it establishes price stability as the primary
macroeconomic objective of monetary policy.
Second, the Central Bank Governor announced that interest rates on
all domestic financial instruments--loans, deposits, and securities--
will be fully liberalized by March 1. This measure is an important step
in the direction of creating a modern, efficient financial sector,
because it will enable lenders and borrowers to make their own
decisions rather than having them determined by fiat and top-down
directives issued by the Central Bank.
And third, the Iraqis have taken significant steps to reinvigorate
private banks in Iraq. Under Saddam's regime, private banks fared
poorly--they controlled less than 8 percent of total banking assets,
used antiquated technology, and offered very limited services. Despite
their weaknesses, Iraq's private bank mangers have been eager to
develop their capacity to operate as modern, commercial bankers. As
provided under the new banking law, these banks can now provide new
services to their clients. Already, ten banks are receiving
international payments and remittances, and issuing letters of credit.
With 143 functioning branches, international payments and remittances
are now estimated at more than $5 million per day into Iraq. This
influx of funds will play a major role in financing investment and
consumption.
While some of the existing private banks are expected to develop
into fully functioning financial institutions, Iraqi authorities
decided that it would be important for foreign banks to operate in Iraq
because of the experience, technology, and resources they can offer.
The new bank law permits up to six foreign banks to enter the Iraqi
market over the next 4 years. This is in sharp contract to the previous
regime, which permitted only Arab banks to enter Iraq's market.
Following a request for applications issued in November, Iraq
received fifteen applications for a foreign bank license. On January
31, the Central Bank Governor announced the three finalists for the
first set of licenses to be awarded--Hong Kong Shanghai Banking
Corporation, the National Bank of Kuwait, and Standard Chartered Bank
from the United Kingdom. The Central Bank anticipates that all three
will be granted a license by mid-March. Already, the National Bank of
Kuwait has announced its intent to purchase 85 percent of one of the
existing private banks.
Next on the agenda is reform of the state-owned banks. Substantial
and sustained restructuring of management, organization, personnel and
systems is needed to make these banks competitive. The Iraqi
authorities are now working with Treasury advisers to develop a
strategy for dealing with the state-owned banks so they can operate
profitably and provide a wide array of financial services to the Iraqi
economy. In the meantime, we are working with the Iraqis to ensure that
the state-owned banks can provide basic services, such as taking
deposits, clearing checks, and making loans to support business
activity. For the quarter ending November 30, 2003, Iraq's two large
state-owned commercial banks, Rafidain and Rasheed, extended loans
totaling about $6 million, primarily to small and medium enterprises.
Trade Bank of Iraq
Given the limited capacity of the Iraqi banking system, we also
went forward with a plan to open a trade bank in order to facilitate
the imports and exports urgently needed to support Iraq's
reconstruction and the transition from the UN's Oil for Food program.
When I reported on this initiative last September, the CPA had
completed a competitive bidding process for management of the bank, and
negotiations for its establishment were underway. The Bank opened on
December 4, 2003, and is now fully operational. To date, the Trade Bank
of Iraq has issued over 200 letters of credit worth $190 million for
most ministries and several state-owned enterprises. In addition,
sixteen export credit agencies have signed an agreement with the CPA
and the trade bank under which they will provide guarantees and short-
term credit lines valued at $2.4 billion.
Iraq's International Debt
I want to turn now to the issue of Iraq's substantial foreign debt
problem. Last September, the G-7 finance ministers committed to making
their best efforts to resolve this issue by the end of 2004. We have
made significant progress towards this goal.
As an indication of the priority we place on this issue, the
President asked former Secretary of the Treasury and of State James
Baker to serve as his Special Presidential Envoy to work with the
world's governments at the highest levels in seeking to restructure
Iraq's official debt burden. Over the past two months, Secretary Baker
successfully secured commitments from leaders throughout Western
Europe, Asia, and the Gulf States to provide at least substantial debt
reduction for Iraq in 2004. Final agreement on the amount and terms of
this reduction will be negotiated between Iraq and its creditors,
including through the Paris Club.
We are also continuing our efforts to obtain the best possible data
on how much debt Iraq owes. Current estimates put Iraq's external debt
burden around $120 billion. Paris Club members are owed roughly $40
billion--$21 billion in principal and roughly an equivalent amount in
late interest. Non-Paris Club governments, chiefly the Gulf States, and
private creditors hold the rest.
To further the data gathering effort, the Iraqi Government recently
issued a request for proposals from accounting firms and financial
organizations to assist in the process of gathering and reconciling
data on Iraq's external debt. With this data in hand, all parties will
be better able to reach a resolution on reducing Iraq's unsustainable
debt burden.
Assessment of Reconstruction Costs and International Fundraising
Efforts
Before concluding, I would like to update you on our efforts to
mobilize international financial support for the reconstruction and
recovery of Iraq. In October, Secretaries Snow and Powell led the U.S.
delegation to the Iraq donors' conference in Madrid. Seventy-three
countries participated in this conference, which succeeded in raising
over $32 billion, including the $18.4 billion commitment from the
United States.
Donors also called on the World Bank and United Nations to
establish a vehicle to channel their resources and help coordinate
assistance for reconstruction and development activities. Working with
key donors, CPA and the Iraqi authorities, the World Bank, and the
United Nations established two trust funds within an International
Reconstruction Facility for Iraq (IRFF). We plan to contribute $10
million to the Facility, which will be equally divided between the
World Bank and UNDP trust funds. The World Bank has met several times
with Iraqi authorities to identify priority programs and projects under
this Facility, and hopes to begin disbursements by July 2004.
In addition, the World Bank has pledged to provide between $3 and
$5 billion of its own resources over a 4-year period. In consultation
with Iraqi authorities, the World Bank will prepare a lending program
in support of Iraq's economic development with particular attention to
health, education, and the creation of a strong social safety-net.
The World Bank's sister agency, the IFC, has already approved the
establishment of a Small Business Finance Facility in Iraq. This
Facility will be funded by resources from the IFC, as well as bilateral
donors, the Overseas Private Investment Corporation, and private banks,
to provide credit to micro and small businesses on a transparent,
commercial, and sustainable basis. We are hopeful that this facility
will be operational by mid-year.
The International Monetary Fund (IMF) is also laying the groundwork
to provide financial support for Iraq. At the Madrid donor conference,
the IMF announced that total assistance could range from $2.5 billion
to $4.25 billion over a 3-year period. Iraqi finance officials met with
Managing Director Kohler in Boca Raton over the weekend before
traveling to Washington for additional meetings with IMF staff. The
purpose of these meetings was to initiate discussions on a policy
framework that could become the basis for a funded program later this
year.
Frozen Assets
Finally, I am pleased to report that our efforts to persuade
governments to transfer assets of the former Iraqi regime back to Iraq
have yielded results. To date, more than ten countries have transferred
approximately $650 million in such assets to the Development Fund for
Iraq. We are continuing to press other governments--especially Iraq's
neighbors--to move quickly to find, freeze, and transfer Iraqi assets
so they can be put to use for the benefit of the Iraqi people.
Conclusion
In closing, I would like to stress that despite a difficult
security situation, challenging working conditions and limited
capacity, the Iraqis are beginning to overcome the grim legacy of
Saddam Hussein's regime. With the strong support of the international
community, Iraq is making tangible progress towards the establishment
of an open, robust market economy that will offer its citizens a
promising and prosperous future.
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PREPARED STATEMENT OF EARL ANTHONY WAYNE
Assistant Secretary for Economic and Business Affairs
U.S. Department of State
February 11, 2004
Mr. Chairman, distinguished Members of the Subcommittee, I
appreciate the opportunity to testify on the economic and financial
reconstruction of Iraq. There has been excellent progress since Under
Secretary of State Larson appeared before this Committee on September
16.
Introduction
The United States and its coalition partners are working with the
Iraqis in a massive effort to revive their economy after decades of
mismanagement, corruption, war, and sanctions. We are boosting
electricity generation and oil production and rebuilding Iraq's
telecommunications and transportation network. We are helping Iraq
develop a legal and regulatory system to encourage economic growth,
attract foreign investment, and facilitate economic and technical
assistance from foreign countries and international financial
institutions. We are tracking down and returning assets of Saddam's
regime to Iraq so they will be used for the benefit of the Iraqi
people.
International Assistance
Under the leadership of Secretary of State Powell and Treasury
Secretary Snow, the United States played a major role in organizing the
highly successful Madrid Donors' Conference in October, which has
cemented international support for Iraq's reconstruction.
Representatives of 73 countries and 20 international organizations
attended the meeting as well as members of the Iraqi Governing Council.
The official tally of the Conference's results, as compiled by the
World Bank, showed final pledges of at least $32 billion, including our
own pledge of $18.4 billion in grants from the fiscal year 2004
supplemental. The huge amount pledged in Madrid is by far the highest
ever obtained at an international pledging Conference.
Non-U.S. pledges of a minimum of $13 billion will be a mixture of
grants and loans to be disbursed during 2004-2007. Not included in the
pledge numbers for other donors are offers of trade credits, in-kind
assistance, and technical assistance (including training).
We are working hard to secure rapid and effective disbursement of
funds pledged at Madrid, while ensuring good donor coordination. Many
donors are now finalizing how they will implement their pledges. In
conjunction with the Conference, the World Bank and the United Nations
Development Program have just established trust funds within an
International Reconstruction Fund Facility for Iraq (IRFFI). Similar
mechanisms have been used effectively for channeling foreign donations
in post-conflict situations, including Kosovo, East Timor, and
Afghanistan. We expect that Japan, the European Union, Spain, Canada,
Korea, Sweden, Australia, the United Kingdom, and other donors will
disburse at least part of their Madrid pledges through the Facility.
The United States will contribute $10 million to the Facility from
funds appropriated in the April 2003 supplemental. These funds will be
equally divided between the World Bank and UNDP trust funds. The
donation earns us a seat on the Facility's Donors' Committee so we can
help guide and coordinate those trust funds within the overall
assistance effort for Iraq.
The Iraqi Governing Council, working with the Coalition Provisional
Authority (CPA), has established a mechanism to work with bilateral and
multilateral donors to ensure that Iraqi priorities are fully reflected
in donor activities. The new Ministry of Planning and Development
Cooperation has the lead on donor coordination on the ground in
cooperation with the Ministry of Finance and other Iraqi Ministries.
Senior Iraqi officials, along with a U.S. Government team, will meet
with other major donors in Abu Dhabi at the end of February to discuss
the functioning of the trust funds and other aid coordination issues.
U.S. Supplemental for Iraq Reconstruction
Congress took a vital step forward in helping Iraq when it passed
in November the President's request for a supplemental for Iraq's
reconstruction. On January 5, the CPA, through the Office of Management
and Budget, reported to Congress on how it plans to allocate the $18.4
billion appropriated in the Supplemental for Iraq. The Administration
will make quarterly reports to Congress on the status of the spending.
Working closely with Iraqi officials, especially in the Ministry of
Planning and Development Cooperation and other Ministries, the CPA is
in the process of allocating the reconstruction funds in accordance
with Iraqi priorities.
For example, USAID in early January awarded Bechtel a $1.8 billion
contract for engineering, procurement, and construction services for
infrastructure projects, including electric power systems, municipal
water and sanitation services, road networks and rail systems, public
buildings, and ports and waterways. The Army Corps of Engineers also
recently awarded, on the behalf of the CPA, contracts for oil sector
repairs valued up to $2 billion.
In total, $8 to $9 billion are being allocated for infrastructure
in areas such as telecommunications, power generation, sanitation,
transportation, public buildings, and oil repairs. This includes the $5
billion in Requests for Proposals announced by the CPA's Program
Management Office (PMO) on January 7. These contracts are for
construction and projects in key sectors that have an immediate impact
in improving the lives of the Iraqi people such as power generation,
water, sanitation, telecommunications, transportation, and public
buildings. The PMO anticipates awarding these contracts in March. We
anticipate that $6 billion will be directed to non-construction
projects, such as police training, military equipment, and democracy/
governance activities. Four billion dollars will be held in reserve to
spend as priorities change and unanticipated demands arise.
Reform and Reconstruction
U.S. assistance is predicated on and directed toward reforming
Iraq's society and economy. A new, prosperous, peaceful Iraq must be a
democratic, free enterprise Iraq, fully integrated into the community
of nations. The Governing Council and the CPA are working to establish
a solid foundation on which future Iraqi governments can build.
To establish a prosperous, dynamic, and competitive Iraqi economy,
Iraqi and CPA officials are hard at work putting into place modern
regimes for trade, investment, banking, tax, and corporate law.
The CPA successfully introduced a unified, reliable new
currency, the Iraqi dinar, between October and January, which is
helping to promote commerce and unite the Iraqi economy.
The Central Bank of Iraq will soon be independent. A Trade
Bank of Iraq has been established.
Iraq opened up to foreign investment, dropping all
restrictions except those on industries associated with extraction
and primary processing of natural resources, including oil, and the
financial sector.
The Central Bank of Iraq chose an initial set of three foreign
banks as candidates for licenses to operate in Iraq (Hong Kong
Shanghai Banking Corporation, National Bank of Kuwait, and Standard
Chartered Bank from Great Britain). Others are under consideration.
Iraq has slashed tariffs to 5 percent, with humanitarian and
reconstruction goods being allowed to enter Iraq duty-free. Today
the World Trade Organization welcomed and accepted Iraq's request
to become an observer.
The International Finance Corporation, a part of the World Bank, is
working with OPIC to establish a credit facility to encourage credit
for small businesses, which will help generate needed employment
opportunities for Iraqis and bolster the financial system.
Full reform will take years, but by the time the Transitional Iraqi
Administration assumes authority this summer, Iraq will be well
embarked on reforms.
Improvements in Critical Infrastructure
There is good news on the economic infrastructure front as well.
The restoration of essential services is gaining momentum. Power
generation in Iraq is now back to pre-war levels (4,023 MW on February
5). While this is still below total demand of about 5,500 MW, we are
making progress on expanding power transmission capability and
improving distribution. We hope to reach our goal of 6,000 MW by the
summer, a level of generation that anticipates future economic growth,
industrial production, and demand.
Hospitals and schools have re-opened. Potable water and medicines
are more widely available than before. During the last several months,
over 16,000 reconstruction projects across Iraq, from repairing schools
and hospitals to rebuilding roads and bridges, have been completed.
This pump priming has generated thousands of new businesses all
over the country, stimulating economic activity and providing
employment. Inflation is low, judging from the strengthening exchange
rate for the new Iraqi dinar.
Iraq has started down the path to a responsible fiscal policy by
producing balanced budgets for 2003 and 2004. The 2005 budget is now in
preparation.
Our top priority is to create new jobs and improve lives through
reconstruction projects since unemployment remains unacceptably high.
Underemployment is a key challenge, too. We are prioritizing and
accelerating work on projects funded by the supplemental that can
produce jobs and visible economic benefit to the largest number of
Iraqis as quickly as possible. The CPA's micro, small, and medium
credit
programs aim at stimulating private sector economic activity,
development, and employment by providing credit to viable small labor-
intensive businesses.
Oil Sector
The Iraqis are developing the framework and institutions to manage
their oil sector, which has 112 billion proven barrels of reserves, the
third largest in the world behind Saudi Arabia and Canada. This sector
is important because production from Iraq's oil wealth provides about
95 percent of the country's export revenues and 95 percent of its
government revenues. After months of repairs by United States and Iraqi
engineers, Iraqi oil production is now sustained at 2.2 to 2.3 million
barrels a day (b/d); exports range from 1.5 to 1.7 million b/d.
Continuing security problems in northern Iraq have prevented the
reopening of the oil export pipeline to Ceyhan on the Turkish coast and
reduced oil exports by at least 400,000 b/d. At present, all oil
exports are via the Persian Gulf. The Oil Ministry target is to produce
3.0 million b/d by the end of 2004, with exports of 2.2 million b/d. If
exports are not badly interrupted, oil revenues could exceed $1 billion
per month.
It will be up to the Iraqis to determine their future role in OPEC,
their invitation to foreign oil companies, and their overall oil
policy. However, we hope to work with them to foster ``best practices''
in the sector.
Oil for Food Transition
About 60 percent of Iraq's 27 million people have been wholly
dependent on food provided through a food ration system program largely
supplied by goods imported under the United Nations' Oil for Food (OFF)
program, which began operations in 1996. Every Iraqi is supplied a
monthly ration of staples such as wheat, rice, dried milk, sugar, tea,
and soap. This is distributed through a network of about 45,000 local
grocers and other agents, with the food imported (with some local
procurement) and supplied to the distribution network through Iraq' s
Ministry of Trade.
The UN turned over administration of the OFF program to the CPA on
November 21. This transition is going smoothly. The World Food Program
(WFP) is helping the CPA manage the shipment and distribution of
remaining OFF food contracts through June 2004. Over time, the Ministry
of Trade will increasingly assume responsibility for the procurement
and overall management of the food pipeline and prepare for a
transition to a market-based system.
Iraqi Debt
One key to the successful reconstruction of Iraq is to secure a
multilateral debt reduction arrangement that the new Iraqi government
could ratify after the political transition. Of the approximately $120
billion in Iraqi debt, roughly one third of it is held by Paris Club
countries such as Japan, Germany, Russia, France, and the United
States, about a third is with Gulf countries (mostly Saudi Arabia), and
the rest is divided among non-Paris Club countries, the private sector,
and International Financial Institutions.
In early December 2003, the President appointed former Secretary of
State and Treasury Secretary James Baker as his Special Presidential
Envoy on Iraqi Debt. During his meetings with leaders in Europe, Asia,
and the Gulf over the past 2 months, Secretary Baker won commitments
for at least ``substantial debt reduction'' for Iraq in 2004.
In addition, by sponsoring United Nations Security Council
Resolution (UNSCR) 1483, the United States helped ease Iraq's yearly
obligation to pay reparations to individuals and businesses from more
than 35 countries who were victims of Saddam Hussein's 1990-1991
aggression. Previously, Iraq was required to pay 25 percent of its oil
export proceeds into a victims compensation fund. UNSCR 1483 pared that
requirement to only 5 percent.
Iraqi Assets
The United Nations Security Council has stressed Iraq's right to
the return of assets plundered by Saddam Hussein and his associates,
currently located in other countries, so they can be used at last for
the benefit of the Iraqi people. The U.S. Government is facilitating
the expeditious identification and transfer of those assets. The State
and Treasury Departments are working together to encourage all UN
Member States to comply with the requirement of UNSCR 1483 to freeze
and transfer to the Development Fund for Iraq (DFI) all assets of the
former Iraqi Government and its senior officials.
So far, countries in Europe, Asia, the Middle East, and North
Africa have transferred approximately $650 million in such assets to
the DFI. The United States has made $1.9 billion in frozen Iraqi assets
available for reconstruction and other purposes benefiting the Iraqi
people. Moreover, roughly $1.3 billion worth of assets have been found
within Iraq.
The State Department and our embassies continue to approach
governments around the world to identify, freeze, and transfer Iraqi
assets. In particular, we have been focusing on Lebanon, Syria, and
Jordan and have had some success.
We are looking at how DFI provisions in UNSCR 1483 may need to be
revised for the post-June 30 environment. The International Advisory
and Monitoring Board (IAMB), which was formed pursuant to UNSCR 1483,
is proceeding with its task of hiring an independent public accountant
to audit the DFI and export oil sales. We expect the members of the
IAMB to have their third meeting on February 12. The IAMB's role is to
ensure transparency with respect to Iraq's oil revenues.
The Role of International Financial Institutions
We are strongly promoting IMF and World Bank engagement in Iraq.
The United States and major partners such as the United Kingdom have
urged the IMF and the World Bank to begin working with key Iraqi
Ministries to build critical budget planning, revenue collection, and
monetary policy and banking capacity. These activities aim at the
resumption of international lending to Iraq as soon as possible after
the transition on June 30.
The IMF and the World Bank have expertise and experience--including
in post-conflict situations--as well as credibility. Their work will
further internationalize support for Iraq, and these institutions are
well placed to help Iraq formulate and implement sound economic,
monetary, and fiscal policies.
Conclusion
The State Department is part of an interagency, United States-
Iraqi, and international team effort to mobilize the resources
necessary to promote Iraq's economic and financial reconstruction. We
are working extremely hard and harmoniously with colleagues at Treasury
and USAID, who are present here today, as well as thers at DOD, the
NSC, the CPA, and Commerce to tackle the formidable challenge of
returning Iraq to economic prosperity and allowing it, once again, to
take its proper place as a productive member of the community of
nations. We welcome Congress' continued strong support in this
important task.
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PREPARED STATEMENT OF GORDON WEST
Acting Assistant Administrator, Bureau for Asia and the Near East
U.S. Agency for International Development
February 11, 2004
Introduction
Through the provision of expert policy and technical assistance the
Agency for International Development (USAID) is helping to promote U.S.
foreign policy goals in the reconstruction of Iraq. USAID activities in
Iraq are fully coordinated with the Coalition Provisional Authority and
its Administrator, Ambassador Paul Bremer.
Currently, USAID has 16 direct hire staff, 54 contract staff, and
60 Iraqi staff in Iraq. Ten of our expatriates are located in regional
offices outside of Baghdad. Contractors and grantees funded by USAID
have an additional 700 expatriate and 3,000 Iraqi staff, and have a
presence in every province.
Overview
USAID began its reconstruction activities in January 2003 under the
Office of Reconstruction and Humanitarian Assistance (ORHA), the
predecessor agency to the Coalition Provisional Authority. The first
phase of USAID programs aimed to repair the most essential
infrastructure and restore the most important social and governmental
functions. These efforts are to be completed in June 2004 and are on
schedule to achieve their planned objectives.
With the advent of the Coalition Provisional Authority in July
2003, USAID prepared a 2-year program to extend the reconstruction
program beyond post-conflict triage. USAID is presently working in four
areas of concentration:
Infrastructure repair: Primarily electricity, water, and
transportation sectors (including capital-intensive major projects
and community-based small projects).
Education and health: Primary and secondary schools,
university partnerships, primary health care, and reduction of
childhood deaths.
Governance: Introduction of viable, legitimated provincial and
city governments that represent their constituents, promotion of a
vibrant civil society, support the political transition at the
national level.
Economic growth: Macroeconomics, government finance, banking,
private sector development, trade, rural economics, and food
security.
During the 6 months immediately following the war, USAID strongly
supported public health activities and emergency food delivery to avoid
a potential humanitarian disaster. For example, USAID assisted the
World Food Program to deliver 516,000 tons of grain to ensure that the
population was fed, and enough medical supplies and equipment for 1
million persons.
USAID was tasked by the Administration to manage $2.4 billion of
the April 2003 supplemental appropriation. USAID is currently
coordinating with CPA on planning activities it will manage with the
fiscal year 2004 supplemental. Presently, the CPA has directed $1.7
billion of these new resources to USAID. USAID is coordinating closely
with CPA on how to implement these funds and on the issue of whether
USAID will receive and manage further funds from the fiscal year 2004
supplemental.
USAID has eleven contracts for reconstruction through April, but
will be scaling back to nine contracts over the summer. (The airport
and seaport management contracts will not be renewed, as Iraqi
ministries take over operation of the ports.) We have grants to the
United Nations (UNICEF, WHO, UNESCO, and WFP), to five U.S.
universities, and nine international non-governmental organizations. As
conditions improve in Iraq, CPA, and USAID would like to see a greater
number of
non-governmental organizations become active with U.S. funding. Through
USAID contractors and grantees, USAID have provided financial support
to over 600 Iraqi nongovernmental organizations.
Economic Development in Post Conflict Situations
As the lead development agency for the United States, USAID has
considerable practical and policy experience in dealing with post-
conflict situations. In Iraq, we are applying the economic reform
lessons learned in the early 1990's from the former Soviet Union and
Eastern Europe. One example of this direct application was a conference
held in Baghdad in October, which brought together Eastern European
economic leaders, who had a hand in their countries' transition to
market economies, with Iraqi economic leaders.
Reform programs in conflict areas require special handling, and
USAID brings years of experience from numerous countries: El Salvador,
southern Mexico, Guatemala, Colombia, Peru, Bolivia, Angola, Sudan,
Congo, Afghanistan, Philippines, Nepal, West Bank, Sri Lanka, Bosnia,
and Kosovo.
There are five common themes in all these experiences:
Avoid a humanitarian disaster. The United States has done
that.
Reactivate food production and markets. We are assisting the
Ministry of Trade to maintain the public ration distribution
system, smoothing the importation of food, and working with the
Ministry of Agriculture on grain and other food production. Private
food markets are functioning.
Involve the private sector early on. Economic growth is good
for the poor, and agricultural growth is even better for them.
Link economic development with democratic governance. Good
economic governance boosts economic growth. We are reforming the
legal and regulatory framework and promoting a transparent tax
system.
Transparency in government finance and procurements.
Successful introduction of democracy will require the confidence in
the probity of public officials and faith in the equity of public
investment.
Macroeconomics
At the Central Bank of Iraq, USAID in coordination with Treasury
advisers and CPA staff has helped reinforce the independence of this
key financial institution. To unify the national currency and reissue
banknotes, the Central Bank used a model developed by USAID in
Afghanistan. USAID experts managed the logistics of the banknote
exchange, helped set up daily currency auctions to maintain control of
the exchange rate, and are training the bank staff. At the Central
Statistics Office, USAID-financed experts are creating a consumer price
index for inflation measurement, setting up national income accounts,
and gathering employment information. All these activities assist in
enabling the International Monetary Fund to promptly re-engage in Iraq,
which will ultimately benefit Iraqi reconstruction.
Government Finance and Procurement
Working with the Ministry of Finance, USAID is putting a financial
management information system in place to allow tracking of public
funds through the national ministries. This system is also a condition
for assistance from the IMF and the World Bank. USAID-financed experts
are assisting the Ministry of Finance and provincial authorities to
prepare and roll up executive branch budgets that are consistent with
the Governing Council's priorities. Our experts are working with the
Iraqis on an equitable tax policy--presently a tax called the
Reconstruction Levy--as well as options for a variety of income and use
taxes and customs duties. We want the tax system to be transparent to
the public, so that tax cheats will be identified more easily.
The Ministry of Finance is being prepared to share national revenue
with governorates and municipalities. USAID is also financing the
introduction of international accounting standards, reliable property
inventories, and a public procurement law.
Banking
Iraqi banks have little recent experience with modern practices in
financial systems. To help commercial banks function more efficiently,
USAID-financed experts are developing a mechanism for interbank funds
transfers. The state-owned banks are receiving improved systems in
accounting, cash flow management, interest accrual, and
computerization. USAID coordinates its work in the banking sector with
technical assistance provided by the Treasury.
Private Sector Development
Together with other Federal agencies, USAID is assisting the CPA,
the Governing Council, Ministries, and business groups to establish a
legal and regulatory framework for the new Iraqi economy. This
framework includes a commercial code, a labor law, and foreign and
domestic company registration. Leasing, contracts, insurance, and
mediation laws also are planned.
For electricity, USAID is helping the Ministry of Electricity
estimate growth in demand, costs of providing service, and possible
user tariffs to finance electricity. In addition, we are advising on
accounting, internal controls, billing, and staffing. Iraqi banks are
not structured to successfully lend to private enterprise. To finance
private businesses, USAID has begun a substantial reform of bank
lending processes, staff training, and lending policy aimed at micro-,
small-, and medium-sized enterprises. USAID partners manage two
microenterprise loan programs that have made over 2,000 loans.
To deal with state-owned enterprises, CPA tasked USAID experts to
assess the financial and commercial viability of numerous enterprises.
CPA is still considering when and if to restructure these enterprises.
USAID also provided analyses of best practices implemented by national
oil and refining companies around the world--including several in the
Gulf Region--to assist the Iraqi Oil Ministry in evaluation the present
structure of its petroleum sector.
Trade and Competitiveness
Among the lessons from other post-conflict countries is the need to
avoid dependence on a single export commodity. While oil will continue
to dominate export earnings, Iraq can become competitive in at least
two agricultural crops. Northern Iraq produces high quality durum
wheat, poorly suited for bread but excellent for noodles, that in the
past has been exported to Turkey and Iran. Southern Iraq has 16 million
date palms. USAID is assisting the Ministry of Agriculture to increase
the quality and quantity of the bahri date, which is the most valuable.
Food security
Iraq needs a sustainable way of ensuring that its people have
secure access to affordable food. Presently, the Iraqi Public
Distribution System, managed by the Ministry of Trade, attempts to feed
the entire nation. To visualize the complexity of this task, imagine
the U.S. Department of Agriculture issuing ration cards, and then
providing subsidized food, to everyone in the United States. As many as
10 million Iraqis do not depend on the basket of publicly supplied
foods.
Reform of the food subsidy will have political ramifications. For
instance, continued importation and distribution of subsidized grains
will continue to stunt rural employment and drive down rural incomes. A
stable, financially sustainable safety net ought to remain under the
truly needy, and could incorporate a substantial role for private
sector purchases in lieu of 100 percent government procurement. It is
important for Iraqis begin discussion of alternatives to an open-ended
subsidy during the transitional administration, to avoid the
perpetuation of a costly entitlement program.
Agriculture and the Rural Economy
Agriculture can absorb a substantial amount of labor, while
increasing food production and incomes for the poor at the same time.
Rural jobs are particularly
important when they help keep young men employed in the villages.
There, they remain under the moderating influence of family, mullahs,
and others. When unemployed young men migrate to cities in search of
work, these influences are lost and the youth can gravitate towards
gangs and militant groups. Stimulating the rural economy will stem this
urban migration and keep men in the rural areas. USAID's agriculture
program aims to improve farm production, support business development,
and rehabilitate irrigation systems.
Title to land and water define the property rights in rural Iraq. A
family's investment in house and production depend on clear land title.
Irrigation water lies under the control of Ministries that own the
pumps and village elders that control distribution. Poorly maintained
irrigation systems concentrate natural salts in agricultural soils,
rendering them too saline for cultivation. The October 2004 goals for
USAID's agricultural assistance include increased grain and
horticultural crop production, vaccination of dairy cattle for hoof-
and-mouth disease, 1,000 loans to small agricultural businesses, and a
25 percent increase in irrigated land through repaired equipment.
Conclusion
USAID is helping Iraqi Ministries apply the lessons of numerous
post-conflict states to the Iraqi economy. Timely but judicious reforms
can be expected to generate jobs, both in cities and on farms. These
reforms underlie the conditions that attract donor and private
investment as well as providing the conditions for a private sector to
flourish. Transformation of the Iraqi economy will be one of the
lasting benefits of the post-war reconstruction.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGEL
FROM EARL ANTHONY WAYNE
Q.1. What is the CPA's policy on food tenders administered by
the World Food Program? Can non-members of the Iraq coalition
bid on contracts?
A.1. WFP food tenders are done under WFP tendering rules and
are open to international competition.
All companies on WFP's Registered Vendors List are invited
to bid on contracts. (The list is based on performance.) In
addition, all rice vendors on USDA's Registered Vendors List
are invited to bid on rice contracts.
CPA and WFP are working closely to ensure that United
States suppliers can fully participate in procurement
competitions.
Q.2. Does Iraq have enough food to last until June 2004? If
not, how are the food purchases going to be handled until then?
A.2. The CPA, the Iraqi Ministry of Trade (MOT), and the World
Food Program (WFP) are working together to ensure that the food
pipeline for the Iraqi people will continue to be filled.
Pursuant to an agreement signed in January, the WFP is
procuring urgently needed new commodities and is working with
the CPA and the MOT to complete the delivery of outstanding Oil
for Food (OFF) contracts. The MOT is scheduled to take over all
new procurement from WFP as of April 1.
The CPA's plan includes building 3 months of buffer stocks
by the time of the transition to Iraqi management of the food
Public Distribution System in July. Changes in contract
specifications, problems in coordination between MOT and CPA,
and delays in the release of funds for procurement, however,
initially hampered WFP's ability to build those buffer stocks.
These problems appear to have been resolved.
The WFP and the CPA are also engaged in capacity building
for the MOT in order that the Ministry can adequately carry on
its new responsibilities for procuring and distributing food to
the Iraqi people.