[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                         IRAQ'S BUDGET SURPLUS

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, SEPTEMBER 16, 2008

                               __________

                           Serial No. 110-40

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
       http://www.gpoaccess.gov/congress/house/budget/index.html


                     U.S. GOVERNMENT PRINTING OFFICE
44-426 PDF                 WASHINGTON DC:  2008
---------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001

                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut,        PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas                    Ranking Minority Member
JIM COOPER, Tennessee                J. GRESHAM BARRETT, South Carolina
THOMAS H. ALLEN, Maine               JO BONNER, Alabama
ALLYSON Y. SCHWARTZ, Pennsylvania    SCOTT GARRETT, New Jersey
MARCY KAPTUR, Ohio                   MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon              MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas               PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida                  CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts     K. MICHAEL CONAWAY, Texas
NIKI TSONGAS, Massachusetts          JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey        PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia  JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina        RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon               ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington              JIM JORDAN, Ohio
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                 Austin Smythe, Minority Staff Director


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, September 16, 2008...............     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
        Prepared statement of....................................     2
    Hon. Paul Ryan, ranking minority member, House Committee on 
      the Budget.................................................     3
    Joseph Christoff, Director of International Affairs and 
      Trade, Government Accountability Office....................     4
        Prepared statement of....................................     6
    Frederick W. Kagan, Ph.D., resident scholar, American 
      Enterprise Institute.......................................    42
        Prepared statement of....................................    44
    Lawrence J. Korb, Ph.D., senior fellow, Center for American 
      Progress...................................................    48
        Prepared statement of....................................    50
    Christopher M. Blanchard, analyst in Middle Eastern affairs, 
      Congressional Research Service.............................    59
        Prepared statement of....................................    61


                         IRAQ'S BUDGET SURPLUS

                              ----------                              


                      TUESDAY, SEPTEMBER 16, 2008

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 9:35 a.m., in Room 
210, Cannon House Office Building, Hon. John M. Spratt 
presiding.
    Present: Representatives Spratt, Edwards, Schwartz, Kaptur, 
Becerra, Doggett, Berry, McGovern, Scott, Etheridge, Baird, 
Moore of Kansas, Bishop, Ryan, Conaway, Tiberi, Porter, 
Alexander, Smith, and Jordan.
    Chairman Spratt. I call the Committee hearing to order, and 
first of all thank everyone for attending today's hearing on 
Iraq's Budget Surplus, and especially our witnesses.
    This hearing will be the first opportunity for the Congress 
to receive testimony on this report, the GAO Report, since the 
Government Accountability Office released it several weeks ago. 
GAO reports that Iraq is now running a substantial budget 
surplus. It may reach $79 billion. At the same time the CBO 
reported last week that in contrast to Iraq's growing surplus, 
the budget deficit for the United States is expected to be $400 
billion for the current fiscal year. That is the second largest 
deficit in our history. Even bigger deficits are projected next 
year.
    This hearing will give the Budget Committee the chance to 
develop some insight into Iraq's fiscal situation and its 
ability to help pay for its own reconstruction. So far the 
United States has provided more than $650 billion for our 
efforts in Iraq, $50 billion of which is for reconstruction and 
security forces training. We are spending today at the rate of 
more than $10 billion a month, which is by anybody's calculus a 
significant sum of money.
    Given our budget deficits here at home, some find it 
difficult to understand why American taxpayers are still 
funding Iraqi reconstruction and security training. In funding 
the Gulf War, the first President was able to secure much 
greater cost sharing from our allies which greatly reduced the 
bill that the taxpayers ultimately had to pay.
    Let me say at the outset that this hearing is not a debate 
on the war, not a debate on the surge, or the plans for 
redeploying any troops we may have. In fact, even the strictly 
budgetary issues of the total cost of the war, military and 
reconstruction, is larger than today's topic.
    We invited the Department of Defense to address the broader 
budgetary issue in a hearing this fall, but they declined to 
appear. Thus today's hearing is called to examine the issue of 
the Iraqi budget surplus. We on the Budget Committee want to 
assess for the purpose of projecting the bottom line whether 
the burden of Iraq's reconstruction can finally begin to shift 
from the United States to Iraq itself given the surplus they 
are currently enjoying.
    To help us understand the budget surplus we have two 
panels. On the first is Mr. Joseph Christoff, the Director of 
International Affairs and Trade at the Government 
Accountability Office. Mr. Christoff is joining us to present 
GAO's latest information on Iraq's budget surplus. Mr. 
Christoff, thank you for coming and we look forward to your 
testimony. On the second panel we have Mr. Christopher 
Blanchard from CRS, Dr. Larry Korb from the Center for American 
Progress, Dr. Fred Kagan from the American Enterprise 
Institute. The second panel will continue the discussion on 
this topic by giving us their expert opinions. On behalf of the 
Committee I also welcome Mr. Blanchard, Mr. Korb, and Mr. 
Kagan. We will come to you as soon as we finish with this 
panel.
    But before turning to the testimony of the witnesses let me 
turn to my colleague Mr. Ryan from Wisconsin for any comments 
he may care to make. Mr. Ryan?
    [The prepared statement of John Spratt follows:]

       Prepared Statement of Hon. John M. Spratt, Jr., Chairman,
                     House Committee on the Budget

    I would like to thank everyone for coming to today's hearing on 
``Iraq's Budget Surplus,'' particularly our witnesses. This hearing 
will be the first opportunity for Congress to receive testimony on this 
report since the Government Accountability Office released it.
    GAO reports that Iraq is now running a substantial budget surplus 
that may reach $79 billion. At the same time, the Congressional Budget 
Office reported last week that in contrast to Iraq's growing budget 
surplus, the budget deficit for the United States is expected to exceed 
$400 billion for the current fiscal year--the second largest deficit in 
U.S. history--with even bigger deficits projected for next year.
    This hearing will give the Budget Committee the chance to develop 
some insight into Iraq's fiscal situation and its ability to help pay 
for its own reconstruction. So far, the United States has provided more 
than $650 billion for our efforts in Iraq, $50 billion of which is for 
reconstruction and security forces training. We are spending at a rate 
of $10 billion a month--a significant sum of money. Given our budget 
deficits here at home, some find it difficult to understand why 
American taxpayers--rather than Iraqis--are still funding Iraq 
reconstruction projects and security training. In funding the Gulf War, 
the first President Bush was able to secure much greater cost-sharing 
from our allies, greatly reducing the bill that the American taxpayers 
had to fund.
    Let me say at the outset that today's hearing is not a forum to 
debate the war or the surge or the plans for redeploying our troops. In 
fact, even the strictly budgetary issue of the total costs of the war--
military and reconstruction--is broader than today's topic. We invited 
the Department of Defense to address that broader budgetary issue in a 
hearing this fall, but they have declined to appear.
    Thus, today's hearing is called to examine the issue of Iraq's 
budget surplus. We on the Budget Committee want to assess, for the 
purpose of projecting the bottom-line, whether the burden of Iraq's 
reconstruction can finally shift from the U.S. to Iraq, given the 
current budgetary surplus in Iraq.
    To help us understand Iraq's budget surplus, we have two panels. On 
the first panel we have Mr. Joseph Christoff, the Director of 
International Affairs and Trade at GAO. Mr. Christoff is joining us to 
present GAO's latest information on Iraq's budget surplus. Mr. 
Christoff, I thank you for coming and join my colleagues in welcoming 
you here.
    On the second panel we have Mr. Christopher Blanchard from CRS, Dr. 
Lawrence Korb from the Center for American Progress, and Dr. Frederick 
Kagan from the American Enterprise Institute. The second panel will 
continue the discussion on this topic by giving us their expert 
opinions. On behalf of the Committee, I also welcome Mr. Blanchard, Dr. 
Korb and Dr. Kagan. We appreciate their willingness to participate and 
look forward to their testimony.
    I now turn to my colleague, the ranking Member from Wisconsin, Mr. 
Ryan for any statement that he may have.

    Mr. Ryan. Thank you, Mr. Chairman. Also, Mr. Chairman thank 
you for holding this hearing on an issue that is of particular 
importance to this Committee. That is, how do we budget for the 
War on Terrorism, and particularly the war in Iraq? But while 
talking about this is important, with only two weeks left 
before funding for our troops expires it would be wise for this 
Congress to put forward a similar effort into actually 
completing the Defense Appropriations Bill.
    A month or so ago GAO estimated that Iraq will be 
generating significant oil revenues in 2008 and will be running 
a budget surplus. I am very interested to hear from Dr. 
Christoff today on whether or not he believes that that is 
still the case today with the volatility in oil prices such as 
it is today. Clearly our success in Iraq depends largely on the 
establishment of a stable security environment that is 
necessary for a civil society and a growing economy in that 
nation. This report suggests that Iraq is making progress on 
getting its oil industry operating and developing a functioning 
government.
    I view this as progress. I was there a year ago and you had 
black market trucks coming into the biggest refinery at night, 
stealing the oil. And we had to send the 82nd Airborne in just 
to secure an oil refinery. So we are seeing progress going in 
the right direction. And I believe that that progress is due 
largely to the fact that the surge has worked. American troops 
have made remarkable progress in improving ground conditions in 
Iraq. And by most accounts, it appears that we have clearly 
turned a corner.
    I was among those who supported the surge, and many of you 
are here as well. Which I will note that Senator Obama recently 
stated that he believes that it, ``has succeeded beyond our 
wildest dreams.'' And while I have certainly heard the 
arguments of those who insist that now is the right time to 
simply pull out, I would argue the opposite. Now is the time to 
take those incredibly hard fought gains, build upon them, and 
finish the job so our troops can come home with a victory.
    On a final note, if there is one thing I would ask my 
colleagues to keep in mind it is that regardless of which side 
of the aisle you are on none of us wants to be at war. At the 
same time, every one of us wants to ensure the safety and 
security for our nation. In short, I believe we all genuinely 
want to do what is right for our country and for the security 
of our people.
    This hearing offers the Committee an opportunity to look 
forward. Forward to how we budget for finishing the job in 
Iraq, forward to ensuring the security environment in Iraq 
continues to foster a growing economy, and forward to the day 
that the Iraq government has the capability to stand on its own 
two feet. I look forward to hearing from Mr. Christoff and from 
our other witnesses who I would like to thank for coming here 
today. Thank you, Chairman. I yield.
    Protestor. [Inaudible].
    Chairman Spratt. I'm sorry you are out of order and you 
will be removed from the room if you persist in doing what 
you're doing.
    Protestor. [Inaudible].
    Chairman Spratt. Mr. Christoff, the floor is yours. Your 
statement will be made a part of the record so that you can 
summarize it, but we welcome you to expand on it as well and 
explain, number one, how this mission came about, and number 
two how it was conducted as well as the findings of it. I would 
ask before we get started that there be unanimous consent so 
that all members can submit an opening statement, or any who 
care to, which will be entered into the record at this point. 
Without objection, so ordered.
    Mr. Christoff, the floor is yours. Thank you again for 
coming. We look forward to your testimony.

   STATEMENT OF JOSEPH CHRISTOFF, DIRECTOR OF INTERNATIONAL 
      AFFAIRS AND TRADE, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Christoff. I thank you, sir. Thank you Mr. Chairman, 
Mr. Ryan, for inviting me to this important hearing. Iraq has 
an estimated 115 billion barrels of crude oil reserves. It is 
the third largest in the world. And oil revenues are critical 
to Iraq's economy, accounting for over half of the country's 
GDP and over 90 percent of its revenues. My statement today is 
based on the report we issued last month on Iraq's revenues, 
expenditures, and surpluses from 2005 to 2008. To complete our 
work we received revenue data from the Central Bank of Iraq and 
the IMF, and expenditure data from Iraq's Ministry of Finance.
    And let me summarize the findings in our report. First, 
from 2005 to 2007 Iraq generated $96 billion in revenues. Oil 
revenues accounted for over 90 percent of that total. For 2008 
we estimate that Iraq could generate between $73 billion and 
$86 billion in total revenues, nearly as much as it generated 
in the prior three years.
    Second, from 2005 to 2007 Iraq spent $67 billion on 
operating expenses and investments. Operating expenses, such as 
salaries and goods and services, consumed 90 percent of that 
total. The remaining 10 percent was spent on investments, such 
as structures, and vehicles. In general, Iraq has spent less on 
investments than operating expenses. For example, in 2007 the 
government spent only 28 percent of its $12 billion investment 
budget. In contrast, Iraq spent 80 percent of its $29 billion 
operating budget.
    We also found that Iraq spent 1 percent of total 
expenditures on maintaining Iraq and U.S. funded investments. 
These investments included bridges, roads, weapons, and water 
and electricity facilities. Iraq has not spent all of its 
budgeted funds, resulting in a growing surplus, our third key 
finding. We estimate that Iraq will accumulate a budget surplus 
of between $67 billion and $79 billion by the end of this year. 
This includes $29 billion accumulated through the end of 2007 
and between $38 billion and $50 billion projected for 2008.
    This surplus could be reduced if the government spends the 
$22.3 billion supplemental budget it passed last month. The 
government of Iraq projects it will spend its entire budget, 
including the supplemental, and end 2008 with a $5 billion 
deficit. Iraq made similar assertions in its 2005 through 2007 
budgets, projecting deficits of between $3.5 and $8.1 billion. 
However, Iraq ended each of these years with budget surpluses. 
Accordingly, it is unlikely the government will spend its 
entire budget for 2008. Moreover, as of June 2008 the Iraqi 
government had spent only 38 percent of its $50 billion regular 
budget.
    Several factors affect Iraq's ability to spend its budget, 
particularly its investment budget. Iraq has weak budgetary, 
procurement, and accounting systems. In addition, it has a 
shortage of trained staff with experience in preparing budgets, 
soliciting awards, and overseeing capital projects. And 
finally, violence has decreased the number of workers available 
and increased the time needed to plan and complete capital 
projects. Violence has also hindered U.S. efforts to help build 
capacity in Iraq's central ministries.
    In reviewing our report the Treasury Department agreed with 
our findings. The Department stated that with more revenues the 
Iraqi government is in a stronger position to shoulder the 
burden of developing, rebuilding, and securing the country. To 
date, the United States has largely shouldered that burden. For 
example, in four key sectors, security, oil, water, and 
electricity, the United States has spent 70 percent of the $33 
billion it allocated. In comparison, the Iraqi government spent 
14 percent of the $30 billion it allocated for these same 
sectors.
    So in conclusion, Iraq's large surplus and growing oil 
revenues offer it the potential to contribute to the country's 
reconstruction and provide more services to its people. Mr. 
Chairman, that concludes my statement. I would be happy to 
answer your questions.
    [The prepared statement of Joseph Christoff follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman Spratt. Mr. Christoff, thank you very much, sir. 
Would you explain to us just briefly, did you head up this 
audit team yourself?
    Mr. Christoff. Yes.
    Chairman Spratt. Did you go to Iraq?
    Mr. Christoff. Yes, our teams did go to Iraq. We had a team 
that was in Iraq from January to March that we relied on 
heavily to collect some of this information. More importantly, 
we worked with the Treasury Department who gave us the actual 
oil receipts from the Central Bank of Iraq that we used to 
validate the revenues projections in our report.
    Chairman Spratt. Are you satisfied that you saw what you 
needed to see to reach the conclusions you----
    Mr. Christoff. Yes.
    Chairman Spratt. And the Iraqi government cooperated with 
you?
    Mr. Christoff. Yes.
    Chairman Spratt. Did you find any instances that might have 
warranted further investigation as to misappropriation or 
misexpenditure of money, or----
    Mr. Christoff. On this particular engagement, sir, we were 
just focusing on trying to answer the questions that Senators 
Levin and Warner asked us to do some projections about the 
surplus, the revenues, and the expenditures.
    Chairman Spratt. Does the fact that Iraq has been so slow 
to spend this money for infrastructure in particular and for 
investment in capital goods, does that arise from some concern 
that it might be misspent, it might be misused?
    Mr. Christoff. Well, the reasons that were cited for Iraq 
not being able to spend its investment budget were the 
weaknesses in its accounting, its procurement, its budgeting 
systems. The U.S. government has had for the past two years a 
very strong capacity building kind of program, spending about 
$500 million to try to teach the Iraqis how to do a better job 
of budgeting and procurement and contracting.
    Chairman Spratt. Well, that is the reality of it. If you 
look at June 2008, with a big surplus building up in the 
current year, the General Accounting Office, the Government 
Accountability Office, reported low expenditure rates by Iraq. 
Whereas we have spent about 70 percent, Iraq has spent about 14 
percent.
    Mr. Christoff. That is correct.
    Chairman Spratt. And this is a attributable to the fact 
that they do not have the civil service, the sort of disbursing 
and procurement bureau to handle the expenditures?
    Mr. Christoff. Well, I mean that certainly is part of the 
reasons. We certainly have heard the fact that we have been 
generous in the reconstruction dollars. There has been less of 
an incentive on the part of the Iraqi government to spend their 
own dollars as well.
    Chairman Spratt. So they are able to spend. If the will was 
there they could be spending at a faster rate than they are?
    Mr. Christoff. Well, they can spend it on their operating 
budget with no difficulties. They spent a large percent, almost 
80 percent of their operating budget. They can pay salaries. 
They can buy certain operating goods and services. But when it 
comes to the actual investment side, to reconstruct bridges, 
roads, electricity, and water facilities, they fall short.
    Chairman Spratt. Well, if you spend some of that money on 
oil does it not come back to you in dividends?
    Mr. Christoff. Well, all the oil revenues are required to 
go into the Development Fund for Iraq. So all of those are 
captured in a single fund that the Iraqi government can tap 
into.
    Chairman Spratt. And that money is at the New York Fed, I 
understand?
    Mr. Christoff. Yes. The DFI is at the New York Fed, 
correct.
    Chairman Spratt. Is there a reason for putting it at the 
New York Fed?
    Mr. Christoff. That was the agreement that was established 
back in 2003 when the DFI was established. And at that time the 
Coalition of Provisional Authority was responsible for spending 
the funds in the first year.
    Chairman Spratt. So is the Iraq government at will free to 
draw from the $29 billion surplus at the New York Fed?
    Mr. Christoff. Yes.
    Chairman Spratt. Without our approval or approbation or 
oversight?
    Mr. Christoff. Once the transition occurred in June of 2004 
Iraq was allowed to tap into the DFI.
    Chairman Spratt. Do you see any movement towards their, how 
long does it take to establish a civil service that can handle 
the disbursement of money, the procurement of goods and 
services, and things of this nature?
    Mr. Christoff. Well, you know building capacity in any 
ministries is not a short term effort. It is a long term 
effort. I think when you look at the programs that USAID and 
State Department have established, they have a longer term 
perspective.
    You know, one of the, we are also looking at Iraqi 
refugees, for example, and in meeting a lot of the Iraqi 
refugees in Syria and Jordan over the past month, I encountered 
a lot of the civil servants that they need who have had the 
technical expertise in budgeting and accounting and procurement 
that have left the country. So some of the concerns, and some 
of their problems, are the result of brain drain that among the 
2 million Iraqis that have left the country, many of them were 
the Sunni technocrats that had the kinds of skills and 
capabilities.
    Chairman Spratt. They were Sunnis, too, probably?
    Mr. Christoff. Yes, many of them are Sunnis in terms of the 
ones that have left the country.
    Chairman Spratt. Well, notwithstanding that, the United 
States government has appropriated about $48 billion----
    Mr. Christoff. Correct.
    Chairman Spratt [continuing]. And spent about $40 billion 
plus or minus.
    Mr. Christoff. Correct.
    Chairman Spratt. A substantial share of what we have 
provided and allocated. Is that sufficient for our share? Do we 
have ongoing projects that we seek to complete that require the 
appropriation of additional money? Or can we now turn to Iraq 
and say, ``From here on, the obligation to undertake these 
capital projects is your responsibility to fund?''
    Mr. Christoff. Well, first in terms of the $48 billion that 
we have appropriated, about 87 percent of that has been fully 
obligated. So it is covering projects that we have agreed to 
do. There still is money that has not been disbursed that has 
been set aside for projects. Some of these projects are going 
to continue for several years in terms of actually completing 
them.
    Now, you asked the question about at what point do we turn 
over the responsibility for the reconstruction to Iraq? I think 
that Congress has been moving in that direction. When you 
passed the supplemental in June and you provided money for the 
Economic Support Fund, you established a cost sharing formula, 
a dollar for dollar match on the part of the Iraq government. 
So you have begun the process of at least requiring the Iraqis 
to put up a share dollar for dollar on those smaller 
reconstruction projects that are funded under the ESF.
    Chairman Spratt. Two final questions. What level of surplus 
do you expect to be generated this year, 2008? And with this 
year's surplus, what will the total accumulated surplus be, 
including the $29 billion on deposit at the New York Fed?
    Mr. Christoff. When we did our projections, first of all we 
projected that just from total revenues would be between $73 
billion and $86 billion. And that would then result in a 
potential surplus at the end of this year of between $67 
billion and $79 billion.
    Chairman Spratt. To be added to the $29 billion?
    Mr. Christoff. No, that is inclusive of the $29 billion.
    Chairman Spratt. Including? Okay.
    Mr. Christoff. Yes.
    Chairman Spratt. Thank you very much. Before you get 
started, there is a person with a sign in the middle of the 
room. You will have to remove that sign. We cannot allow you to 
have the kind of display in this hearing room. You can either 
remove the sign and leave the room, or we will have you 
removed. Okay. Mr. Ryan?
    Mr. Ryan. Let me try and pick up where the Chairman left 
off. While the numbers that we see in the press are kind of 
treated as definitive, in actually reading your report and 
testimony I see there is a bit of a variance and uncertainty in 
these numbers. You use phrases like, ``for 2008 Iraq could 
generate an estimated $73.5 billion to $86.2 billion in 
revenues.'' Based on the fact that the conditions in the world 
oil markets have changed dramatically since this report was 
published, you know the price of oil has gone down very 
significantly, and based on the fact that Iraq did pass the 
supplemental, the $22.3 billion supplemental, do you still 
think they are going to have a surplus in 2008 since this 
report was published? And if so, what kind of number do you 
think we are going to see, since these things have taken place 
since this report was published?
    Mr. Christoff. Yes, we still believe that there is going to 
be a surplus. But it will probably be more towards the middle 
of our range. And remember, keep in mind that we have a range 
that we are projecting. I realize that the media has taken the 
higher end of the range.
    Mr. Ryan. Right.
    Mr. Christoff. But it is still a range. We went back and we 
did just some checking, trying to take into consideration the 
recent drops in the oil prices. And if you go to page five of 
my statement, and if you look at what our ranges are for the 
amount of oil revenues that would be generated, when we----
    Mr. Ryan. And these are based on different prices per 
barrel of oil, correct?
    Mr. Christoff. Exactly. And when we did some of the 
checking we think that the actual export oil revenues for the 
end of the year would be closer to the range between scenarios 
two and three, now.
    Mr. Ryan. Yes.
    Mr. Christoff. So the high end of the budget surplus will 
not be $79 billion. It will probably go down to about $72 
billion. But there still will be a surplus.
    Mr. Ryan. Now, you use the term cumulative surplus.
    Mr. Christoff. Correct.
    Mr. Ryan. As a budget person that is not a concept that we 
are typically familiar with, or that we use here. When we look 
at a surplus or deficit, we measure them in the year in which 
they take place.
    Mr. Christoff. Yes.
    Mr. Ryan. I notice in your report you kind of roll up the 
years 2005 through 2007, and add them to the projected numbers 
for 2008 which, you know, as we see has some variable. Why do 
you use cumulative surplus numbers like that, which is contrary 
to the way we do budgeting here?
    Mr. Christoff. Well, we do list the surplus at the end of 
each year. It is on the highlights page, the first page. So 
that you do see that in 2005 Iraq had a surplus of $6.5 billion 
rising to $13.3 billion in that year alone. So when we went and 
looked at the actual financial deposits that Iraq had at the 
end of 2007 and we calculated where it was, it had a $29 
billion surplus, cumulative, up to that point in time.
    Mr. Ryan. I know. But why are you using the cumulative 
number?
    Mr. Christoff. Cumulative is a term also that the IMF uses 
in terms of trying to determine exactly what Iraq's surpluses 
and projections might be.
    Mr. Ryan. Okay. Now, so the key to this is budget 
execution, obviously.
    Mr. Christoff. Right.
    Mr. Ryan. And they have done a better job. Obviously, they 
are increasing their expenditures. And the whole point of all 
of this is we train their troops along with them, so we can get 
our troops out and they can take over their government and 
stand on their own two feet. So we all understand that. Let me 
ask you about the, we had the SIGIR here, Bowen I think was his 
name, and Ambassador Saloom, who is sort of in charge of budget 
execution for the State Department last year, just chronicling 
all of these problems that Iraq had in executing their budget. 
To the point where I think we had to deposit some money in the 
New York Fed, make interest on it to buy some equipment. Give 
me a better sense, I know you went into this with the Chairman 
a little bit, about budget execution. That is question number 
one. Question number two, is oil security. How is oil security 
improving? In stemming the black market, in controlling what is 
going on in the refineries, and in pipeline security? How are 
those two things----
    Mr. Christoff. Yeah, let us talk about the latter point. 
Because you brought up the Baiji incident of last year.
    Mr. Ryan. Right.
    Mr. Christoff. Where even the DOD was reporting losses of 
$2 billion through the black market, just from the Baiji 
refinery. That and security for the Baiji refinery has improved 
significantly. I do not have actual numbers of what might be 
the potential losses, but I know it has gone down dramatically. 
Coupled with the fact that there have been these oil protection 
forces that have been along the oil pipelines. Now there are 
still interdictions, they are still occurring, particularly the 
pipelines in the north. But we are doing a better job of 
protecting the actual infrastructure so that you are reducing 
the diversions that might occur, or the losses.
    Mr. Ryan. Okay, budget execution then?
    Mr. Christoff. Budget execution. Budget execution is a very 
interesting term. It is a term, quite frankly, that was 
developed by the State Department to try to give some idea of 
what Iraq might spend. Not what it actually spends, but what it 
might spend in terms of commitments. And Iraq through its 
Minister of Planning puts out what are called these informal or 
unofficial reports to try to tabulate projects that they are 
thinking about spending. And the, both DOD and State report 
budget execution rates that are higher than the actual 
expenditure rates, because they are trying to capture 
intentions.
    We sat down with Treasury, went through those reports. And 
both Treasury and GAO reached the conclusion that they are 
unreliable. The information does not contain reliable----
    Mr. Ryan. You mean, you cannot measure intent very 
accurately, right?
    Mr. Christoff. Exactly. It is difficult to measure intent.
    Mr. Ryan. Yeah.
    Mr. Christoff. Plus, when you just read the reports, things 
do not add up, either.
    Mr. Ryan. So, looking forward to 2009 and watching how the 
Iraqi government is functioning, are they getting that? It was 
sort of, what we found was, you know, the top level was able to 
put together a good budget. We assist them with that.
    Mr. Christoff. Right.
    Mr. Ryan. And then it is down in the mid-levels of 
government where you had that gray area, and you were not 
allowed to apply or execute a budget. I do not mean execute 
from the term you are using it. What is your sense of things at 
that mid-level in government, where they are able to actually 
get, you know, projects moving? Actually get funding to 
employees and actually deliver on executing their budget? 
Executing their budget in the term that I am using.
    Mr. Christoff. You know, one thing that the Iraqi 
government did which was positive was to try to begin 
decentralizing some of the decisions about the threshold for 
contracts, the dollar value of contracts, in terms of who can 
approve them. A year ago they had an incredibly low threshold. 
$10 million for a contract. If a contract exceeded $10 million 
the decision to actually let that contract had to go all the 
way up to the prime minister's level. So they have begun to 
increase those thresholds, to $50 million at a minimum, and to 
allow some of the decision making to occur more in the 
ministries rather at the prime minister's level.
    Mr. Ryan. Okay. Well, that is good to see progress on that 
front. Thank you.
    Chairman Spratt. Mr. Edwards?
    Mr. Edwards. Mr. Christoff, thank you for being here and 
for your report. Could I ask the staff to put up the chart, Mr. 
Wolfowitz's statement from 2003?


    Mr. Edwards. One of the administration's chief architects 
of the Iraq War was Paul Wolfowitz, President Bush's appointee 
as Deputy Secretary of Defense under Secretary Rumsfeld. This 
is a statement he made to members on March 27, 2003 before the 
House Appropriations Defense Subcommittee. ``We are dealing 
with a country that can really finance its own reconstruction, 
and relatively soon.'' Given the GAO report I guess I rank that 
administration prediction right up there with some of the 
predictions that we would be greeted as liberators, the war 
would be short-lived, it would cost the American taxpayers less 
than $100 billion, and we are turning the corner. We have 
turned so many corners in Iraq I think we are all dizzy from 
that. And every time we turn one corner we find another 
roadblock down the way. I would like to ask you just again to 
get the facts on the table. In fact, let me ask staff to put up 
the chart on how much Iraq has spent and how much less it has 
spent than the U.S.



    Mr. Edwards. I just want to verify, Mr. Christoff, that 
according to this chart the United States taxpayers that are 
now facing historic deficits of over $400 billion this coming 
year, U.S. taxpayers have spent $23.2 billion on Iraq 
reconstruction. Is that correct, Mr. Christoff?
    Mr. Christoff. That is for four sectors that we look at.
    Mr. Edwards. Okay.
    Mr. Christoff. Security, oil, electricity, and water.
    Mr. Edwards. So, reconstruction in those four sectors. And 
the Iraqi government, which now I think has up to a, what, 
approximately $79 billion surplus has spent only $4.3 billion. 
Is that fact----
    Mr. Christoff. That is correct.
    Mr. Edwards [continuing]. Correct?
    Mr. Christoff. Yes, sir.
    Mr. Edwards. So the U.S. taxpayers, in addition to giving 
something you cannot put a dollar value on, we have sacrificed 
over 4,000 of our young men and women in combat there, we have 
then also spent five times what the Iraqis have spent on 
reconstruction. Despite Secretary Wolfowitz' prediction that 
Iraq would very quickly be able to pay for its own 
reconstruction.
    Let me ask you about this. Am I correct in understanding 
from your report that the same Iraq for which we have 
sacrificed over 4,000 American lives has just signed a $3 
billion agreement with the communist Chinese National Petroleum 
Corporation to develop the Ahdab oil field? Is that correct?
    Mr. Christoff. I do not have any firsthand information on 
it, sir. It is just what I have read in the papers, as perhaps 
you have as well.
    Mr. Edwards. Okay. Well I, for the record, I think that is, 
Mr. Chairman, correct. That the Iraqi government, the same one 
that is building up a $79 billion surplus while American 
taxpayers are paying for most of their reconstruction efforts, 
has just signed a $3 billion agreement with the communist 
Chinese National Petroleum Corporation. And Mr. Chairman, it 
just boggles my mind to think that there would be any evidence 
that the communist Chinese ability to develop oil fields is 
better than U.S. corporations' ability to do so. So once again, 
we turn a corner and we are hit in the face with something that 
I consider to be insulting.
    Mr. Christoff, in the minute and a half we have remaining, 
in terms of the 10 to 30 percent of Iraq's refined fuels that 
were believed to have been diverted to the black market or 
smuggled out of Iraq in 2006, that is just an astounding number 
to me. Tell me the first, second, and third most important 
reasons, again, as to why that massive amount of fraud 
occurred?
    Mr. Christoff. Well those were projections that occurred a 
couple years ago. And it was based upon what was then an 
imbalance in the price that Iraqis were paying for their fuel. 
For example, two years ago Iraqis were paying four cents per 
gallon. That has now been increased and subsidies have been 
reduced. So quite frankly, the 10 to 30 percent that was 
projected a couple of years ago probably is less than that. 
Because a lot of the oil and gasoline was diverted because you 
could get a better price outside of Iraq because of the heavy 
subsidies within Iraq.
    Mr. Edwards. Okay. Mr. Christoff, thank you very much. I 
appreciate your report and your testimony. Thank you, Mr. 
Chairman.
    Chairman Spratt. Mr. Conaway?
    Mr. Conaway. Thank you, Mr. Chairman. Mr. Christoff, thank 
you for being with us today. In your testimony you were talking 
about the reasons why they have not been able to spend the 
money. When we talk about whether they execute, or whatever, 
but spending the money, was given in no small part or in large 
part to weak accounting staff, weak accounting systems, 
internal controls, and all those kinds of things. What impact 
did that have on the numbers that you are working with?
    Mr. Christoff. Well, the standards that we were using was 
the Ministry of Finance expenditure reports that have been 
vetted in terms of, by the Treasury Department and others. So 
we went through a vetting process. We actually excluded an 
entire year's worth of expenditure data because we found, and 
Treasury did, found the numbers unreliable. But for 2005 
through 2007 we found that the expenditure data was 
sufficiently reliable to show the trends.
    Mr. Conaway. Okay. So you are confident, what is the 
definition of surplus? That is just not the cash in the bank at 
the Fed. What----
    Mr. Christoff. No, not at all. I mean----
    Mr. Conaway. I mean, how confident are you in the fact that 
commitments and money that has been committed to spend and has 
not been spent has been accurately accounted for in the 
numbers?
    Mr. Christoff. We are confident in terms of the actual 
expenditure data that comes from the Minister of Finance. The 
areas where I talked about where we did not feel that the 
information was reliable is when you try to add up and put a 
dollar value to projects that you might commit to. And those 
are separate reports that come from the Minister of Planning 
that we, when we looked at them, we could not even add up 
columns and rows. But you can do that with the Minister of 
Finance data.
    Mr. Conaway. So----
    Mr. Christoff. On expenditures.
    Mr. Conaway. Sure. But the bills that are due, or payables, 
or commitments that have been made, you are not confident that 
accurately, that all of those numbers have been folded into 
what the net surplus would be?
    Mr. Christoff. Well, no, they should not be folded in that 
surplus.
    Mr. Conaway. So if you have signed a commitment to build 
something and you have signed a contract to do that, that is, 
that would not reduce that surplus?
    Mr. Christoff. No, let me explain. If you did sign a 
contract, Iraq has what are called letters of credit, in which 
Iraq will set aside a certain amount of money that would be 
reserved to cover that letter of credit. When we calculated the 
surplus for the end of 2007 we excluded those letters of credit 
so that the surplus that we tabulate for the end of 2007 is net 
letters of credit.
    Mr. Conaway. Okay. Okay. You are not suggesting, I hope, 
that Iraq would be better off spending the money willy-nilly 
without the proper controls and ways to do it-
    Mr. Christoff. Oh, absolutely not.
    Mr. Conaway [continuing]. Than leaving it in the bank so 
that when they do develop the right infrastructure to be able 
to let contracts and move forward on these infrastructure 
projects that that money would then be available. So you are 
not suggesting they squander the money, are you?
    Mr. Christoff. No, not at all. And in fact the $22.3 
billion supplemental that was just passed, the IMF issued a 
report yesterday in which they expressed even some concerns 
about Iraq spending all of that because of the inflationary 
effect that it could have.
    Mr. Conaway. Oh, okay, the fact that if they were to spend 
it now----
    Mr. Christoff. Right.
    Mr. Conaway [continuing]. That it would push prices up 
unnecessarily. So, okay.
    Mr. Christoff. Right.
    Mr. Conaway. But given, and one final question about the 
accuracy stuff, you said your teams were there January through 
March. Is that a recent enough, that is not a stale----
    Mr. Christoff. Oh, no, not at all.
    Mr. Conaway. Given how dynamic the circumstances are in 
Iraq, in terms of their building capacity and the things that 
are going on at the provincial level, to allow them to quote, 
unquote execute their budgets better?
    Mr. Christoff. No. In fact, we have actual oil receipt data 
through the end of July that we received from the Treasury 
Department that gets it from the Central Bank of Iraq. So, and 
in fact, that statement that you have we updated even the 
expenditure data. Because between when we issued the report and 
today we received the updated expenditure data through the end 
of June. So we have very current data in this statement.
    Mr. Conaway. Okay. So the fact that Iraq is, may not be 
spending it as quickly as we would like them to, you are 
confident that the controls are in place to protect the money 
so that when they do develop the right, Sunni technocrats get 
back into place where they are supposed to be, and all the 
folks are in line to spend money at least as responsibly as we 
do here in this federal government, that the money is going to 
be there to spend?
    Mr. Christoff. Well, there are lots of external auditors 
that are involved in terms of keeping track of Iraq's 
expenditures. The Development Fund for Iraq, where the oil 
revenues go into. There was an international advisory and 
monitoring board that was established in 2004. Ernst and Young 
audits that on a semiannual basis to keep track of it. The one 
concern that I would have is, though, the DFI at the end of 
this year, the oversight of that is going to end because the UN 
Security Counsel resolution that covered the DFI is going to 
expire. So the future auditing of that is going to left to a 
new counsel of financial experts that the Iraqi government has 
to set up. So I think there might be some concerns about the 
continuing oversight after the end of 2008.
    Mr. Conaway. Okay. Well, thank you, Mr. Christoff. Thank 
you, Mr. Chairman.
    Chairman Spratt. Mr. Doggett?
    Mr. Doggett. Mr. Christoff, has the GAO not found that on 
more than one occasion the American taxpayers' money was 
squandered in Iraq and spent willy-nilly?
    Mr. Christoff. Well, I think there have been, when we have 
look at reconstruction efforts in the waters after three years 
ago we found that we made some, quite frankly, some poor 
decisions about turning over reconstruction projects to the 
Iraqis before they were capable of maintaining them. And it has 
been a concern.
    Mr. Doggett. Right. Do I understand from your testimony to 
Mr. Edwards a moment ago that at the time when we were 
squandering our money and the Iraqis were saving theirs, that 
Iraqi citizens were paying about four cents per gallon in 
gasoline?
    Mr. Christoff. Two years ago, that is correct.
    Mr. Doggett. It has risen some since then?
    Mr. Christoff. It is up to about $1.18 per gallon.
    Mr. Doggett. I think there are probably a lot of Americans 
who are paying for this so-called reconstruction in Iraq that 
would be mighty glad if they could get $1.18 a gallon gasoline.
    Did you play a role in the analysis of the benchmarks that 
the Government Accountability Office provided last year?
    Mr. Christoff. Yes, sir.
    Mr. Doggett. What was that role?
    Mr. Christoff. I was the Director in charge of that report.
    Mr. Doggett. And have you also played the same role in 
responding to questions about the benchmark from Chairman 
Skelton this year with the report that you just did within the 
last few weeks?
    Mr. Christoff. Yes. I was the Director on the progress 
report as well.
    Mr. Doggett. All of us remember, except maybe President 
Bush, that in January of 2007 he selected the benchmarks, the 
guidelines, by which to measure success, by which to measure 
victory in Iraq. And when we sought an analysis so we would 
have some objective information instead of just the propaganda 
from the administration about whether those benchmarks have 
been met the Congress turned to the Government Accountability 
Office. And my recollection is that when you came out with your 
report on August 30th of last year that you determined that 
eleven of the eighteen benchmarks that President Bush had set 
were not met. Is that correct?
    Mr. Christoff. Based upon that prior report, correct.
    Mr. Doggett. Yes, sir. And you found that of the eighteen 
benchmarks that the President set himself to measure success in 
Iraq that only three had been met as of August 30, 2007. Now, 
in this year, a year later, you did some evaluation again. You 
did not evaluated every single benchmark. But you really found 
that there had been very little progress in the year. We know 
that fortunately fewer Americans are being killed there. But in 
terms of the objective of the Bush policy in Iraq you had a 
grand amount of success in that they met one more benchmark 
than they had the year before. Isn't that correct?
    Mr. Christoff. Well, we did not go through a benchmark by 
benchmark analysis. But we did provide a report that talked 
about progress on the security front, the legislative front, 
and the economic front in our June report.
    Mr. Doggett. Right. And I believe you found one more 
benchmark met than the year before?
    Mr. Christoff. Again, we did not do a benchmark by 
benchmark analysis, sir.
    Mr. Doggett. Well, if you look at, it may not have been 
called a benchmark by benchmark analysis. But you looked at 
some of the same factors that you had the year before. And just 
to begin to go through them, on the Constitutional Review 
Committee you found that they had formed the Committee but the 
Committee had not done anything. Right?
    Mr. Christoff. And that is still true.
    Mr. Doggett. So they had not met that. On enacting and 
implementing legislation on debaathification, you found that 
they had enacted the legislation but they had not implemented 
any of it, right?
    Mr. Christoff. That is correct.
    Mr. Doggett. So they had not met the second benchmark. On 
the question of enacting the hydrocarbon or oil legislation, 
you concluded that they had not met that again this year, did 
you not?
    Mr. Christoff. Correct. And no progress this year, either.
    Mr. Doggett. On enacting and implementing legislation on 
procedures to form semiautonomous regions, that was the fourth 
benchmark President Bush had. You found that that was only 
partially met. Again, they passed a law to allow the provinces 
to act but it had not been implemented.
    Mr. Christoff. Well, on that one it will be implemented 
when provinces come together to form regions. So that is an 
open----
    Mr. Doggett. Right. But we are not there yet.
    Mr. Christoff. Well, no provinces have voted to form 
regions other than the KRG originally.
    Mr. Doggett. On enacting and implementing legislation for 
an independent high electoral commission you found only 
partially meeting it. Again, they passed a law but had not 
implemented it.
    Mr. Christoff. The Commission is established. The 
provincial election law was, the date was established for 
October 1. But the implementing laws have not been enacted.
    Mr. Doggett. Right. And they will not have the elections 
that they have been promising us for a year they would have in 
October?
    Mr. Christoff. October 1, they will not meet that date.
    Mr. Doggett. On the enacting and implementing legislation 
for a strong militia disarmament program?
    Mr. Christoff. That is not met.
    Mr. Doggett. That is not met. And I see my time is up, but 
Mr. Chairman we can keep going down the objectives that 
President Bush set himself for success for victory in Iraq. And 
you will find that it continues to fail. That this policy has 
been a failure. American taxpayers are having to fund the 
failure while the Iraqis pay a fraction of the price we pay for 
a gallon of gasoline. Thank you.
    Chairman Spratt. The gentleman's point is well taken. Mr. 
Porter? Mr. Porter is not here. Mr. McGovern?
    Mr. McGovern. Thank you, Mr. Chairman. Thank you, Mr. 
Christoff for being here. And like my colleague from Texas, Mr. 
Doggett, I have a great deal of frustration over our policy 
toward Iraq. I believe the War in Iraq was a mistake. I still 
believe that. And I honor the men and women in uniform who have 
served there with great distinction, and they have sacrificed 
an awful lot. And many of them have sacrificed their lives. And 
listening to your testimony, as powerful as it is, only adds to 
my frustration over the way U.S. policy makers have conducted 
this war.
    You know, I believe we need to find a way out. And I 
believe that policy makers, Republicans and Democrats, and the 
administration, need to be talking about how we extricate 
ourselves from the mess in Iraq. And you know, we are spending 
$10 billion a month for Iraq. $10 billion a month. And, you 
know, you tell us that there may be budget surpluses that may 
reach over $70 billion. And, you know, I think that is a 
difficult thing to explain to the American people. Why we are 
sacrificing so much and yet they have these incredible 
surpluses.
    Adding to the frustration is the fact that, you know, those 
in this Congress, you know, who have cheered on this war, 
including this administration, have done so and not asked that 
the money that we spend on Iraq is budgeted. The vast majority 
of dollars that we spend on Iraq is put on our credit card. No 
one has been asked to sacrifice. No one has been asked to 
account for that money. And yet we are told that Iraq has these 
incredible surpluses. Why, you know, and the government of 
Iraq, the Maliki government, I know you did not look at the 
issue of corruption, but it is corrupt. I mean, I would not 
trust them to tell me the correct time. And these people are, 
you know, and here we are hearing people kind of rationalizing 
and explaining away why they do not need to spend their 
surplus. You know, why we need to continue to shoulder the 
burden. Why would the Iraqi government want to change this 
sweet deal that they have with the U.S. government? I mean, we 
are a cheap date in this whole matter. I mean, we are giving 
and giving and giving, and sacrificing and sacrificing and 
sacrificing, and yet they have this incredible surplus.
    So what are the incentives? And what should we be doing? 
What should this administration be doing, what should Congress 
be doing, you know, to kind of force this issue? You have 
obviously talked to the people in the administration and people 
in the departments, what is the plan? What is the plan to kind 
of transition? To kind of force the Iraqi government's hand, 
you know, to take more responsibility so that we can get out, 
we can end our occupation. We can end our involvement here, and 
stop sacrificing so much of our resources in this effort?
    Mr. Christoff. I do not know that I have seen a plan that 
would actually talk about transitioning so that the Iraqis 
begin spending more money. But I think you all have begun that 
debate within the Congress. As I mentioned before, when you 
passed a portion of the supplemental in June you had about $3 
billion for what is called the Economic Support Fund. That was 
the first time that there was legislation that called for Iraq 
to have a dollar for dollar cost share for these small 
reconstruction projects that this ESF Fund supports. I also 
know that in part of the NDAA discussion there is discussion 
about also extending that type of cost sharing to what we 
provide for the continued training and equipping of Iraqi 
security forces. That area alone, we have appropriated, you 
have appropriated $20 billion.
    Mr. McGovern. Well, you know, I realize that that is a step 
in the right direction. But quite frankly, it is kind of a 
modest, or less than modest, step in the right direction. I 
mean, we have been doing this for years, now. We have been 
involved in this war for many years. Nothing, absolutely 
nothing about this war has turned out as advertised by the 
proponents of this war. And it just seems to me that, you know, 
given the nature of the Iraqi government, given the problem of 
corruption in that government, and given what I believe is an 
unwillingness for them to kind of take more responsibility, and 
in light of the fact that they do not need to. I mean, we are 
spending $10 billion a month, $10 billion a month, in Iraq. 
And, you know, they have these surpluses.
    I guess my frustration is that there is not more 
frustration by those who are proponents of this war to force 
the Iraqi government's hand to take more responsibility. But I 
appreciate your testimony. I think it is very helpful. And I 
hope that it will urge, I mean, if not this administration, I 
mean, Mr. Ryan invoked Senator Obama's name. I mean, you know, 
Senator McCain has said we will be there for a hundred years. I 
think we will go bankrupt if we follow that policy. So I 
appreciate very much you being here.
    Chairman Spratt. Mr. Porter? Mr. Porter is not here. Mr. 
Scott? I beg your pardon, Mr. Scott. Mr. Etheridge?
    Mr. Etheridge. Thank you, Mr. Chairman. Mr. Christoff, 
thank you for being here and thank you for your report. I am, I 
guess as I look at that and think of the numbers, and where we 
are, I happen to have, represent a lot of men and women at Fort 
Bragg and Pope who spend an awful lot of time overseas. At the 
same time, their children attend the public schools here in the 
United States. And my question I think sort of fits in a little 
different area from what we have heard, so I will, you know, as 
you mentioned we are spending about $10 billion a month of U.S. 
revenues in Iraq. And your report tells us that the Iraqi 
government is not spending its own funds to maintain these 
reconstruction projects at a level they should. Actually, only 
about 14 percent of the 28 that is allocated for security, 
water, oil, electricity, etcetera. And we have a myriad of 
spending needs here at home. I will not even go through the 
list. I just want to talk about one of them.
    Because we need to be building some school buildings in and 
around my district, where we have got children in trailers, and 
we have got one school that has 50 percent of our military 
children in buildings that ought to, have modern buildings. My 
question to you I guess is what factors are keeping the Iraqis 
from taking more responsibility for its own reconstruction? And 
how can we address that problem? Or how should we address it?
    Mr. Christoff. Well, the factors that were cited in terms 
of their low expenditure rates for investment, that is for 
reconstruction, were the fact, again, that they have weak 
procurement, budgeting, contracting procedures in place. They 
have low thresholds in terms of the approving authorities. They 
have to go to the highest levels to get actual approving 
authority for the contracting. They have a brain drain in terms 
of the many technocrats that left the country that were 
responsible for many of these budgeting procurement issues. I 
have spoken with DOD advisors to the Iraqi Ministries of 
Defense and Interior. They have difficulties just teaching 
basic accounting and spreadsheet technology to some of the 
Iraqis. And also, keep in mind, this is a cash based economy. 
Things are done by cash. They have hand ledgers to keep track. 
There is not, there is not an automated financial management 
system in place within Iraq.
    Mr. Etheridge. I think the thing that bothers me, and I 
think a lot of folks who remember, you know, the U.S. taxpayers 
have financed nearly $50 billion in Iraqi reconstruction in 
addition to all the other funds we have put in place. And now 
we are spending about $10 billion a month. And at the same time 
we see almost $80 billion in surplus.
    Mr. Christoff. Yes.
    Mr. Etheridge. And then I am reminded, and I think most 
folks are, that Deputy Secretary of Defense Paul Wolfowitz said 
in 2003 that the Iraqis could pay for reconstruction themselves 
and relatively soon. And I think we have a chart here, Chart 1, 
that shows that. And it is quite obvious that he was wrong. Or 
overstated it, or something, because we paid twice. We have 
paid a $50 billion reconstruction bill and now we are spending 
$10 billion a month. And we are paying billions of dollars at 
the pump, for gasoline. Is this a fair assessment?
    I mean, I just this weekend had people just climb on my 
shoulders and I do not disagree with them. They are paying a 
ridiculous price for gasoline, and at the same time in Iraq 
they are subsidizing their citizens. And we are paying more for 
it, over there, to keep our troops in Iraq.
    Mr. Christoff. Well, I think in terms of the Secretary's 
original statement, Iraq does have now the capabilities to 
begin financing its reconstruction. It did not have it, you 
know, at the early part of 2003 or 2004. When you are talking 
about paying at the pump, now I mentioned the $1.18 per gallon, 
but quite frankly that is the typical price in the region. That 
is what Kuwaitis pay, Saudis pay. So the IMF goal was to try to 
get them to raise their prices to at least the regional level. 
And they have dramatically reduced their subsidies for 
gasoline, kerosene, and diesel, trying to give them a little 
bit of credit for their achievement.
    Mr. Etheridge. But my concern is that our troops are not 
getting that benefit over there, and we are not getting it in 
terms of paying for it by the American citizens buying that 
fuel to help protect them.
    Mr. Christoff. Yeah, I think in fact when we looked at, you 
know, we have the receipts where Iraq actually sold its oil. 
And about a third of the oil did come to the United States.
    Mr. Etheridge. Thank you. I see my time has expired, Mr. 
Chairman, I yield back.
    Chairman Spratt. Thank you, Mr. Etheridge. Mr. Moore?
    Mr. Moore of Kansas. Thank you, Mr. Chairman. Mr. 
Christoff, do you know the projected United States deficit for 
this year?
    Mr. Christoff. Well, the latest CBO was approaching over 
$400 billion.
    Mr. Moore of Kansas. So we are approaching, according to 
the CBO projection, a $400 billion deficit as a nation to add 
to our $9.6 trillion national debt now, is that correct?
    Mr. Christoff. Based upon what I have read in the CBO 
projections, that is correct.
    Mr. Moore of Kansas. And Iraq has a projected surplus for 
this year of $79 billion?
    Mr. Christoff. Up to $79 billion.
    Mr. Moore of Kansas. Up to $79 billion. What is wrong with 
this picture? That we have a huge projected deficit, they have 
a good projected surplus, and they are asking us, basically, to 
pay for reconstruction in Iraq. I guess I am asking a 
rhetorical question because I think you have already answered 
that. What incentive from your perspective does the Iraqi 
government have to step up and assume responsibility for this 
if they have got us paying for everything right now. And not 
only money, but 4,000 American lives?
    Mr. Christoff. Well, I think that remains a concern in 
terms of how you incentivize the Iraqi government to begin 
spending of its own money. The incentives are also going to 
have to come on the part of the Iraqi people. They still are 
only getting about ten hours of electricity a day. They are 
still not getting potable water. Only a third of the children 
in Iraq have clean water, even despite our reconstruction 
efforts. So there has to be some incentivizing on the Iraqi 
people to demand more from their own government.
    Mr. Moore of Kansas. And the Iraqi people have to step up 
to the plate and support their own government, do they not?
    Mr. Christoff. Yes.
    Mr. Moore of Kansas. If anything is going to change here?
    Mr. Christoff. Yes.
    Mr. Moore of Kansas. But they do have gasoline for $1.18 a 
gallon, and we have gasoline for $3.50 a gallon in this 
country. Is that about right?
    Mr. Christoff. Yes, I have got a diesel car so I pay a 
little bit more.
    Mr. Moore of Kansas. Good. Good. And so basically right now 
what we are doing, and this is the last question I have, we are 
just charging the reconstruction costs to our national charge 
card and passing the bill on to our children and grandchildren, 
and future generations of this country. Is that not correct?
    Mr. Christoff. Well, we have spent, you have appropriated 
$48 billion for reconstruction and stabilization.
    Mr. Moore of Kansas. Yes, sir.
    Mr. Christoff. The big reconstruction projects are tapering 
off. So the additional money that you have been providing 
through the Economic Support Fund is for smaller reconstruction 
projects. But we still have spent a chunk of change in terms of 
trying to rebuild that country.
    Mr. Moore of Kansas. Yes, sir. Thank you very much, Mr. 
Christoff.
    Chairman Spratt. Thank you, Mr. Moore. Mr. Bishop of New 
York?
    Mr. Bishop. Thank you, Mr. Chairman, and thank you very 
much, Mr. Christoff, for being here. I have a couple of 
questions. My understanding, the first Iraq War, the total cost 
was about $61 billion. The net cost to the United States was 
about $2.1 billion. And the diffence between gross cost and net 
cost was in some cases in kind contributions from some of our 
coalition partners, and in other cases our coalition partners 
simply reimbursed us for monies that we laid out. Does that 
comport with your understanding?
    Mr. Christoff. I do not know, sir. I know we did reports 
back in 1991 and 1992 in which we saw that there are actually, 
we made a bit of a profit on the last war.
    Mr. Bishop. I will not comment. What structural and/or 
legal impediments exist right now, if any, that would prevent 
Iraq from simply reimbursing us from their surplus for some 
portion of what we have already laid out?
    Mr. Christoff. I do not know. I would have to look into 
that and perhaps get back to you for the record.
    Mr. Bishop. Does that not represent a reasonable course of 
action for this country, to try to recoup some of the enormous 
amounts that we have laid out while Iraq is sitting on this 
very substantial surplus?
    Mr. Christoff. Sir, I would think that is a policy decision 
that I would reserve to the Congress. I do not think it is 
appropriate for GAO to comment.
    Mr. Bishop. Secondly, if I understand your summary 
correctly, Iraq has spent approximately $4.3 billion over a 
three-year period on its reconstruction and on provision of 
services. Is that about right?
    Mr. Christoff. The $4.3 billion is for the four critical 
sectors that we looked at.
    Mr. Bishop. And we have spent about $42 billion?
    Mr. Christoff. Well, that is $42 billion in total for all 
of our reconstruction.
    Mr. Bishop. For reconstruction and----
    Mr. Christoff. Beyond those four sectors.
    Mr. Bishop. So if I have done my math correctly, $42 
billion, every dime of which has been borrowed, is, the annual 
interest on that is about $2 billion or thereabouts, if I have 
done my math correctly. And Iraq is spending less than that on 
an annual basis for the four critical areas. So we are spending 
more on interest on the amount we have borrowed to rebuild 
their country than they are spending in total to rebuild their 
country on an annual basis?
    Mr. Christoff. I am for an accountability organization. I 
would have to take your numbers and go back and check them----
    Mr. Bishop. Okay.
    Mr. Christoff [continuing]. Before I could comment on that.
    Mr. Bishop. I am, these are back of the envelope numbers.
    Mr. Christoff. Yes.
    Mr. Bishop. I would acknowledge. But they appear to be 
consistent with what you have reported. One last thing. You and 
Ranking Member Ryan were engaged in a bit of a discussion about 
budget execution.
    Mr. Christoff. Yes.
    Mr. Bishop. To what extent do you believe that the decision 
to debaathify, which deprived the Iraqi government of in effect 
a professional civil servant class, to what extent do you 
believe that decision has contributed to their inability to 
execute their budget plan?
    Mr. Christoff. Debaathify--were you going to interject?
    Mr. Ryan. Yes. I just wanted to tack onto that, because I 
think it is an excellent question. Mr. Bishop, do you mind if I 
just tack onto the end of that question?
    Mr. Bishop. No, I just would like to hear----
    Mr. Ryan. No, it is a good question. And I, and the 
question is, are any of these technocrats coming back now that 
the debaathification reforms have passed, I would like to know 
if you track that as well.
    Mr. Christoff. Sure. Debaathification certainly was a 
factor in terms of the brain drain that has resulted in the 
lack of the kind of technocrats that Iraq needs for the 
administrative capacity, for good budgeting, procurement, and 
contracting. Those types of Sunni technocrats are part of the 
over 2 million refugees in Syria and Jordan. The extent to 
which they are coming back, it is a very small amount. 
Ambassador Foley two days ago said that only about 16,000 of 
the 2 million refugees have actually returned to Iraq. I know, 
I met some doctors when I was in Syria who wanted to return, 
but they have no intentions of returning until they believe 
that the security situation has improved and they have got a 
house.
    Mr. Bishop. One final question. You presided over the 
report that assessed performance on the benchmarks.
    Mr. Christoff. Yes, sir.
    Mr. Bishop. And one of those benchmarks was moving away 
from debaathification and restoring people to their jobs.
    Mr. Christoff. Correct.
    Mr. Bishop. In Mr. Korb's testimony, I do not know if you 
have had the opportunity to see it, he makes the point that the 
current effort to address debaathification may well result in 
fewer Baath party members working in the government under the 
new law than under the old law. To what extent did you address 
that point in your assessment of the benchmarks?
    Mr. Christoff. Two parts in answering that question. First 
of all, Iraq did pass the Debaathification Law, which they 
passed in February.
    Mr. Bishop. The point of my question is, what is the impact 
or efficacy of that law?
    Mr. Christoff. When we issued our progress report in June 
we had classified information that discussed that very issue 
that I could provide later for the record but I could not 
provide in an open session.
    Mr. Bishop. Thank you very much. I appreciate it.
    Chairman Spratt. Mr. Becerra? Mr. Berry?
    Mr. Berry. Thank you, Mr. Chairman. And thank you, Mr. 
Christoff for being here. You have just had the pleasure of 
experiencing the discomfort and pain that is inflicted on the 
messenger. And I regret that that has had to be the case. I 
also think anytime we have a hearing like this we should first 
and foremost recognize the contribution and sacrifice that our 
men and women in uniform and their families have made, and we 
should never, ever fail to be appreciative of that.
    Mr. Christoff. Absolutely.
    Mr. Berry. And show that appreciation in every possible 
way. As I have listened to this testimony, and we can talk 
about numbers, we can talk about policy, and all of those 
things. It seems to me that we are in a situation where, it 
reminds me of a bumper sticker you see from time to time. 
``Don't follow me, I'm lost.'' You just said a while ago that 
there is not a plan. I do not know who does not have a plan. It 
seems to me to be pretty obvious that nobody does. I cannot 
imagine a more ridiculous situation than we are in right now.
    I would like to think from some of the things you said that 
we actually may have a reasonable expectation that it will get 
a little better. But at the same time, we do not have any 
reason to think that it is going to be cleared up and 
everything is going to be in really good shape over there in 
the next few years, depending on how you define few. I would 
say anything under five years. But I just, I do not see any, I 
am like Mr. McGovern, I do not see any way to end this. We just 
keep pouring money into that place. We continue to make deals 
that no responsible person would enter into, it seems to me. 
And we thank you for bringing us this information, at least 
letting us know what really is going on as best as you are able 
to determine it. And I am confident that you have done that. 
And we appreciate all that. Beyond that, I think it is time for 
the Congress, the American people, the administration, and 
anyone else in a position of responsibility to begin to start 
figuring out how we are going to get out of there, and how we 
are going to bring this to a conclusion. Because the American 
people cannot stand much more of it. And I thank you for the 
work that you have done. Thank you, Mr. Chairman.
    Chairman Spratt. Ms. Schwartz?
    Ms. Schwartz. Thank you, Mr. Chairman. And I also thank you 
for the information. And it is important for us to be having 
this hearing today and I thank the Chairman for doing it, 
because we, actually in some ways you are offering a suggestion 
of how we can see our way out of some of this if we actually 
just look at things really quite differently. Which is that, as 
has been pointed out, you pointed out and many of the speakers 
before me have pointed out, that we have, we are looking at 
working with the Iraqis to make sure that they use their almost 
$80 billion surplus to start spending their money on 
reconstruction. And you know, I was particularly struck that 
recently there was, I guess it was back in August, you know, 
some discussion about rebuilding police stations in Iraq. And 
our spending American dollars to do that. I have to say as 
representing the City of Philadelphia and the suburbs, I go to 
police stations and fire stations all across my district. And 
they need reconstruction. And so instead of our President 
saying, ``We are going to spend our dollars on reconstructing 
our police stations and helping our first responders,'' we are 
spending American dollars on reconstruction in Iraq when the 
Iraqis actually are sitting on $79 billion.
    Now you talked about the politics of why it has not 
happened. But my question really is how can we, is there a way 
for us to, one, start to say, and we have tried to in Congress, 
to say that Iraqis should start paying for reconstruction. I 
believe the last bill we passed actually had the condition of 
their spending 50 percent----
    Mr. Christoff. Right.
    Ms. Schwartz [continuing]. Of going forward on that. Is 
there any way that you would actually, that we could insist 
upon that happening? Is there a way that we could maybe get 
back some of these dollars that we are spending now, that are 
committed into the future? You know, we were led to believe 
seven years ago that we would not have to pay for this war at 
all, and that has been pointed out as well. And yet, we are 
right now spending billions of American taxpayer dollars to 
reconstruct Iraq when Iraq has the money. And so adding insult 
to injury we are spending a whole lot, every American family, 
on the price of gasoline that we are buying from the Iraqis. I 
mean, something about this picture just is not right no matter 
how you feel about this war, or going into it.
    And I have been asked, just recently, this weekend, was 
asked about how we could, why we are not doing enough to make 
sure that we get the Iraqis to spend their money on 
reconstruction. And I understand the politics of it, and I 
understand even the difficulty and some of the bureaucrats. But 
even if we lend expertise, even if we help them figure out how 
to do this, why, is there more that we could be doing to make 
sure that going forward the Iraqis are spending their money, 
particularly the surplus, $80 billion surplus, rather than 
American taxpayers on reconstruction of basic infrastructure 
for the Iraqi people? Which we all agree needs to get done. But 
why not the Iraqis? And why are, why is this administration, 
that is political. But what more could we be doing, from even 
your perspective, to make sure that going forward this is 
really a changed world, that we are not spending American 
taxpayers' dollars on reconstruction, the Iraqis are?
    Mr. Christoff. Well, let us just talk about this concept of 
trying to get repayment for perhaps what we did? I think we 
began in 2004 with good intentions. With good intentions to the 
fact that the Iraqis at that time did not have the resources. 
And so when you appropriated the $18.4 billion in IRRF 2. It 
was quote, unquote, to jump start the reconstruction process 
under two premises that generally did not pan out. One, that it 
would be a benign environment where you could do reconstruction 
without violence. Secondly, the Iraqis would step up to the 
plate. And third, the international community would begin to 
contribute. Those premises never really panned out until, quite 
frankly, recently where we see the Iraqis now have a 
substantial amount of money. I should not say recently. They 
had surpluses in 2005, 2006, and 2007 as well because they did 
not spend on the investments.
    Ms. Schwartz. But you are making a good point, because 
things are more secure, the issues around violence, allows them 
to do some of this reconstruction without spending so many 
dollars on security. Can we actually get them to both repay us 
and actually begin to pay going forward?
    Mr. Christoff. Yeah, I do not know if we want to take back 
our generous contributions to try to jump start, because I 
thought they were good intentions back in 2004. But again, 
going forward I think you should have the healthy debate about 
cost sharing. And you began it with the roughly $3 billion that 
you put, and the restrictions you put on the Economic Support 
Fund. That it should be a dollar for dollar cost sharing. The 
State Department in two weeks has to send a report to the 
Congress certifying that the Iraqis are engaged in cost sharing 
on the ESF. So it will be interesting to see exactly how the 
State Department can confirm that that is actually occurring.
    Ms. Schwartz. Okay. Actually, not just interesting but 
really important to both our own financial security here at 
home and to respond to the American people that we have 
actually said they have to be cost sharing dollar for dollar. 
And it will be important for us to see that that is actually 
happening going forward. And of course we would like to see at 
some point the Iraqis pick up much more of the reconstruction, 
if not all of it.
    Mr. Christoff. Yeah, and I think the security situation, I 
mean, that has been a noticeable improvement. I mean, violence 
is down 80 percent from, if you compare the June data of 2007 
to the June data of 2008 there has been an 80 percent drop in 
the number of enemy initiated attacks. So that benign 
environment, it is still not a benign environment----
    Ms. Schwartz. I was going to say, very generous----
    Mr. Christoff [continuing]. It is still a very difficult 
environment. But the improvement in the security situation has 
been noticeable.
    Ms. Schwartz. But having been in Iraq twice I can say 
certainly what all of our generals said, as well as our 
Ambassador said, and unless Iraqis start to see their own 
government, there is another reason for the Iraqis to be 
spending their own dollars. They need to have confidence that 
their own government is actually supporting the, the services 
and, you know, the economy there that is actually creating some 
confidence in the Iraqi government for the Iraqi people. So 
their allegiance, their willingness to maintain the security is 
only as great as their confidence and their working together as 
a government. It certainly starts with their also providing 
these goods and services and support and infrastructure for 
their people with their own dollars.
    Mr. Christoff. I think General Petraeus would agree with 
that statement as well.
    Ms. Schwartz. And that is what he said, and what we pushed 
him to do. Thank you.
    Chairman Spratt. Ms. Kaptur?
    Ms. Kaptur. Thank you, Mr. Chairman. Sorry, I had a little 
trouble there with the microphone. Welcome, Mr. Christoff, it 
is really good to have you this morning. I have been looking 
over one of the charts that we have been provided that 
essentially shows the increase in spending by the people of the 
United States on the war in Iraq. And I think everyone knows 
that every year it gets larger. I remember Secretary Wolfowitz 
coming up before our Defense Committee and saying that we did 
not have to worry about this because it would all be paid for. 
Well, where is he now? I have no idea where he is. But he 
certainly was not correct in those statements which I think 
influenced a lot of members of this Congress to vote in the way 
that they did.
    But one of the bits of information that I have here, that I 
want you to clarify for me, deals with what appears to me to be 
two structures operating in Iraq. One by the United States, and 
one by the government of Iraq. It says, ``While the United 
States has spent 70 percent of the $33 billion that it has 
allocated for key security, oil, water, and electricity 
sectors,'' in other words, we are spending down the money that 
the American people have allocated for this. Iraq has only 
spent 14 percent of the $28 billion it allocated to those 
sectors, or less than 3 percent of the $10 billion that it had 
programmed from the year 2005 to 2008.
    So as I read these numbers, and I am looking at the 
expenditure of our dollars, and we look at how much we have 
spent versus how much they have spent, it seems to me then that 
there may be two structures operating in Iraq. The American 
paid for structure, and then the Iraqi structure. Because how 
can the Iraqis be doing such a poor job? Is my perception 
correct? That in fact there are two separate structures 
operating there?
    Mr. Christoff. Well in terms of----
    Ms. Kaptur. For electricity, for water, for oil, and 
security?
    Mr. Christoff. Well, in terms of how things are spent. 
Obviously, when the U.S. spent its money the majority of that 
is being spent through the Corps of Engineers. They have been 
the big builder using U.S. appropriated dollars. So they are 
using Corps of Engineers contracting, procurement, budgeting 
procedures. When you look at how the Iraqi government is 
spending its resources, it is going through its own ministries. 
Oil and electricity, water, to try to do the types of 
contracting and procurement. So yes, there are separate 
procedures because there are separate pots of money.
    Ms. Kaptur. I appreciate that. Because if in fact oil 
production has gone up it has been because of U.S. 
expenditures. Because obviously the Iraqi expenditures are not 
locking in.
    Mr. Christoff. Right. Most of the money on oil 
infrastructure investment has been the U.S. funding.
    Ms. Kaptur. Then why would Iraq sign its first contract 
with China? Do you have any----
    Mr. Christoff. I do not know.
    Ms. Kaptur [continuing]. Clarity on that?
    Mr. Christoff. No.
    Ms. Kaptur. And Royal Dutch Petroleum, Royal Dutch Shell is 
the next one they signed a deal with. I just find all of this 
very, very strange. Could you also tell me, in terms of the 
sabotage and the smuggling?
    Mr. Christoff. Yes.
    Ms. Kaptur. It is estimated by some that at least a third 
of what is occurring in the oil sector, and again it is unclear 
to me who is really managing the oil sector. Is it the U.S. 
dollars that have been allocated? Or is it the Iraqi dollars 
that really have a handle on what is happening in the oil 
sector? But regardless, if you have any comments on that I 
would appreciate it. Of the dollars being expended, why is so 
much being smuggled out of there? Who does not have control of 
what is happening in the oil fields?
    Mr. Christoff. Well, I think actually the smuggling and the 
diversions have declined over the past couple years. The 
biggest problem that occurred back in 2006 was the massive 
smuggling of, estimates of up to $2 billion out of the Baiji 
Refinery because there was not sufficient protection forces 
around it. The U.S. and the Iraqi government have responded by 
putting more protection forces around the major refinery within 
Iraq, at Baiji. And also trying to set up these oil facility 
police forces that are trying to manage and protect the oil 
pipelines and the infrastructures, particularly in the north. 
But it still, there are still interdictions that are occurring, 
because you cannot cover everything. And I have not seen----
    Ms. Kaptur. Who, may I ask you, sir, who hires those 
security officers for those oil installations?
    Mr. Christoff. Yeah, right now it is the Ministry of Oil. 
But it is supposed to eventually be subsumed within the 
Ministry of Interior's police forces.
    Ms. Kaptur. But if we look at the expenditure of Iraqi 
dollars to do all of this, it looks like the U.S. contracted 
operations are spending their dollars down. Without them, Iraq 
would not be able to function. Am I correct? If you just pulled 
the U.S. contracting, let them fly on their own?
    Mr. Christoff. Well, we have lots of reconstruction 
projects in all of the critical sectors, including the oil 
sector. So we have been investing, over the past several years, 
in trying to build pipelines, trying to improve the refinery 
capacity, a lot of individual projects that have added up to 
billions of dollars. The Iraqis are trying to spend more money 
in terms of the oil sector. One of the problems with the 
Ministry of Oil is that unlike the Ministry of Electricity it 
has not developed any type of a plan to determine what its 
needs are, its priorities, and exactly where it should be 
spending its future resources. And the Minister of Electricity 
has got a pretty good plan. The Minister of Oil does not yet 
have a plan to try to set its own priorities. And he himself 
has estimated that he needs $30 billion to try to improve the 
oil infrastructure in Iraq.
    Ms. Kaptur. I know my time has expired. If I wanted to read 
one clear report on what is really going on inside the Iraqi 
oil sector, what would I read?
    Mr. Christoff. Inside the Iraqi oil sector? I think in----
    Ms. Kaptur. Whose security officers, who is paying for it, 
how much has been smuggled, who did the smuggling, was anybody 
apprehended, where do I find that?
    Mr. Christoff. Well, I probably have to go back to some of 
the CIA reports that I read that you would not be able to read 
in the public domain.
    Ms. Kaptur. Thank you. Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Christoff, thank you for your good 
work and your excellent testimony. We very much appreciate your 
being here today, and we have learned a great deal from what 
you had to tell us.
    Mr. Christoff. Thank you, sir.
    Chairman Spratt. Thank you very much indeed. Now let us 
bring forth the second panel, which consists of Christopher 
Blanchard, who is an analyst in Middle Eastern Affairs for the 
Congressional Research Service; Frederick Kagan, who is a 
Resident Scholar at the American Enterprise Institute; and Dr. 
Lawrence Korb who is a Senior Fellow at the Center for American 
Progress.
    All of you have testimony which we will take and make part 
of the record so that you can summarize it as you see fit. If 
there is no objection, your testimony will be included in its 
entirety in the record. Let us proceed with Dr. Kagan.

   STATEMENTS OF CHRISTOPHER M. BLANCHARD, ANALYST IN MIDDLE 
 EASTERN AFFAIRS, CONGRESSIONAL RESEARCH SERVICE; FREDERICK W. 
KAGAN, PH.D., RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE; 
AND LAWRENCE J. KORB, PH.D., SENIOR FELLOW, CENTER FOR AMERICAN 
                            PROGRESS

                STATEMENT OF FREDERICK W. KAGAN

    Mr. Kagan. Mr. Chairman, members of this Committee, it is 
an honor to be appearing before you speaking about this very 
important issue that concerns us all. It is a particularly 
interesting day to be holding this hearing. This is the day 
that General David Petraeus relinquished command in Baghdad to 
General Raymond Odierno. And General Petraeus will be heading 
on to take command of CENTCOM in November, I believe. And this 
marks the end of General Petraeus' nineteen-month tenure as 
Commander of Multinational Forces in Iraq. And I think it is 
worth noting not only the sacrifices that our men and women in 
uniform have made, but also the remarkable successes that have 
been achieved in that period, beginning with the reversal of 
the sectarian civil war that looked as if it was about to 
engulf the country completely, the defeat of an Al Qaeda in 
Iraq organization that was in the process of declaring victory, 
and even rather surprisingly the defeat of Shia militias and 
the Iranian backed special groups this year, primarily by the 
Iraqi government itself and the Iraqi security forces.
    All of these accomplishments were the result of joint 
efforts between Iraqis and Americans. The Iraqis stood up, 
fought hard, met all of the security benchmarks that were put 
in front of them, and surpassed them. Iraqis have been taking 
casualties at the rate of about three times what American 
forces have been taking and they have been fighting very well.
    I am a little bit puzzled by some of the testimony that I 
have heard, or some of the conversation that I have heard 
previously which suggest that no one is making a serious effort 
to get the Iraqis to spend their money. And I find that odd. I 
have made five trips to Iraq since last April and one of the 
things that has consistently been the case is that not only is 
the American Embassy in Iraq working very hard and very 
diligently to get the Iraqis to spend their money and to help 
the Iraqis to spend their money, but American soldiers on the 
ground, soldiers and Marines every day, are working with the 
Iraqis to overcome some of the very significant problems that 
they have as they attempt to spend their money. So I would like 
to take issue with any notion that it has not been a priority 
of multinational forces in Iraq and U.S. Embassy in Iraq to get 
the Iraqis to spend their money. On the contrary, it has been.
    And I think that as we think about the problems that have 
prevented the Iraqis from spending their money, one thing that 
has not been mentioned is that we are not just dealing with a 
country that was wracked by sectarian civil war at the end of 
2006, although that was not mentioned. It is a little bit odd 
to talk about budget execution figures in 2005, 2006, 2007 
without recognizing that there was an extremely intense war 
going on which tends to play havoc with anybody's budget 
execution processes however well conceived they might be when 
it is an internal war. And now we have got that under control 
and the question will be what does it look like going forward? 
In addition to the brain drain which occurred, and some of the 
problems with debaathification. We have to remember that Iraq 
was also making the transition from a very poorly managed, 
centralized, command economy that had been under sanctions for 
more than a decade, to a market economy that had to rebuild a 
lot of decrepit infrastructure that had not been invested in 
properly for a very long time.
    We also have to recognize that in the process of 
transitioning that command economy to a market economy we were 
helping the Iraqis to replace an entirely centralized Baghdad 
driven budget development and execution process with a process 
that included decentralized budget development, decentralized 
budget execution. We have had to help Iraqi provincial 
governments stand up and learn what it is to make a budget and 
learn how to execute funds. We have had to help local Iraqi 
organs understand how to do that. And we have had to help them 
all understand how to link up with the traditional ministerial 
structures, which remain focused on directors general that come 
from the Iraqi ministries.
    This is all rather difficult to do, and it is not something 
that can happen in a few months. And it is particularly not 
something that can happen in the context of the sort of 
violence that we saw, frankly, through the end of last year and 
into the beginning of this year. It is something that I think 
we can expect to see accelerating. But we have to have 
realistic expectations about this. And measuring from 2003 on 
is frankly not very informative.
    We were losing the war from 2003 to 2006, unquestionably. I 
have said it many times. I am not here to defend the 
administration. I do not speak for anyone but myself. In the 
context of losing the war we did a lot of, made a lot of 
decisions that were wrong decisions. Now the question is, we 
have turned the situation around in Iraq on the ground. We have 
seen very significant progress in the Iraqi political system 
and also in budget execution measures and so forth. But we have 
not seen the complete accomplishment of all our objectives, 
which is not surprising because the war is not over.
    The question is, what do we do? I think everyone agrees 
that it is desirable to have the Iraqis spend their money, and 
it is much more desirable for the Iraqis to be spending their 
money than for us to be spending our money. I do not think 
anyone disputes that. I think the argument that we can have, or 
the discussion that we can have that would be helpful is really 
to focus on what are the problems that actually hinder the 
Iraqis from doing this? I think we need to get past the notion 
that the Iraqis are lazy freeloaders, which has been booted 
about not in this Committee, which has had an intelligent, 
respectful discussion, but in the press, and recognize that 
there are some actual problems.
    And there are incentives for the Iraqis to spend their own 
money because the Iraqis are going into an election period, 
whenever these elections precisely are going to be held. Within 
the next year, not only are all provincial leaders going to 
have to be reelected but the Parliament will have to be 
reelected as well. And let me tell you, Iraqi politicians are 
very cognizant of the fact, as American congressmen are, that 
spending in their districts translates into electoral success 
at the end of the day in many respects. And they understand 
that American spending in their districts does not help them 
get elected. So the more we have the transition to a political 
process in Iraq the more we see pressure on Iraq's elected 
officials to spend their budget, which they have been trying to 
do. And we have been helping with.
    And I think one of the last questioners made the excellent 
point. If we simply pulled all of our stuff out and stopped 
doing anything for the Iraqis would the country collapse? I do 
not know if it would collapse. But I know that it would set 
back any kind of progress in Iraq very, very dramatically. 
Because the role that we are playing at this point is a 
guarantor, it is a peacekeeping role, in some places a peace 
enforcement role, and an assistance role in helping the Iraqis 
plan and execute budgets. In other words, we are now currently 
engaged in a process of trying to accomplish the very 
objectives, asking about which I think this hearing was called 
for. Thank you.
    [The prepared statement of Frederick Kagan follows:]

       Prepared Statement of Frederick W. Kagan, Kimberly Kagan,
                             and Jack Keane

    On September 16, General Raymond Odierno will succeed General David 
Petraeus as commander of U.S. and coalition forces in Iraq. The surge 
strategy Petraeus and Odierno developed and executed in 2007 achieved 
its objectives: reducing violence in Iraq enough to allow political 
processes to restart, economic development to move forward, and 
reconciliation to begin. Violence has remained at historic lows even 
after the withdrawal of all surge forces and the handover of many areas 
to Iraqi control. Accordingly, President Bush has approved the 
withdrawal of 8,000 additional troops by February 2009.
    With Barack Obama's recent declaration that the surge in Iraq has 
succeeded, it should now be possible to move beyond that debate and 
squarely address the current situation in Iraq and the future. 
Reductions in violence permitting political change were the goal of the 
surge, but they are not the sole measure of success in Iraq.
    We must see Iraq through the upcoming two elections, pressing the 
government to conduct them fairly and inclusively as well as ensuring 
that enemy groups do not disrupt them with violence.
    The United States seeks a free, stable, independent Iraq, with a 
legitimately elected representative government that can govern and 
defend its territory, is at peace with its neighbors, and is an ally of 
the United States in the war on terror. The Iraqi leadership has made 
important strides toward developing a new and inclusive political 
system that addresses the concerns of all Iraq's ethnic and sectarian 
groups. But it has also taken steps in the wrong direction. An 
understandable desire to seize on the reduction in violence to justify 
overly hasty force reductions and premature transfer of authority to 
Iraqis puts the hard-won gains of 2007 and 2008 at risk. Thus, the 
president's announcement of new troop withdrawals has come before we 
even know when Iraq's provincial elections will occur.
    Reducing our troop strength solely on the basis of trends in 
violence also misses the critical point that the mission of American 
forces in Iraq is shifting rapidly from counterinsurgency to peace 
enforcement. The counter-insurgency fight that characterized 2007 
continues mainly in areas of northern Iraq. The ability of organized 
enemy groups, either Sunni or Shia, to conduct large-scale military or 
terrorist operations and to threaten the existence of the Iraqi 
government is gone for now. No area of Iraq today requires the massive, 
violent, and dangerous military operations that American and Iraqi 
forces had to conduct over the last 18 months in order to pacify 
various places or restore them to government control. Although enemy 
networks and organizations have survived and are regrouping, they will 
likely need considerable time to rebuild their capabilities to levels 
that pose more than a local challenge--and intelligent political, 
economic, military, and police efforts can prevent them from rebuilding 
at all.
    American troops continue to conduct counterterrorism operations 
against Al Qaeda in Iraq, which has not given up, and against Iranian-
backed Special Groups, which are also reconstituting. U.S. forces 
support Iraqi forces conducting counterinsurgency operations in the 
handful of areas where any significant insurgent capability remains. 
But mostly our troops are enforcing the peace.
    In ethnically mixed areas, American troops are seen as impartial 
arbiters and mediators. In predominantly Shia or Sunni areas, they are 
seen as guarantors of continued safety, destroying the justification 
for illegal militias. American brigades also play critical roles in 
economic reconstruction, not by spending American money but by helping 
Iraqis spend their own money. American staffs help local Iraqi leaders 
develop prioritized lists of their needs, budgets to match those 
priorities, and plans for executing those budgets. American troops 
support the Provincial Reconstruction Teams that mentor Iraqi 
provincial leaders and help local communities communicate their needs 
to the central government. American soldiers provide essential support 
to Iraqi soldiers and police working hard to develop their ability to 
function on their own.
    Indeed, American combat brigades have become the principal enablers 
of economic and political development in Iraq. When an American brigade 
is withdrawn from an area, there is nothing to take its place--all of 
these functions go unperformed. Clearly, then, the number of brigades 
needed in Iraq should be tied not to the level of violence but to the 
roles the Americans perform and the importance of those roles to the 
further development of Iraq as a stable and peaceful state.
    But American brigades do more than that. They also give us leverage 
at every level to restrain malign actors within the Iraqi government 
and to insist that Iraqi leaders make concessions and take political 
risks they would rather avoid. The notion, popular in some American 
political discussions, that withdrawing our forces increases our 
leverage is nonsensical. The presence of 140,000 American troops on the 
ground in Iraq requires the Iraqi leadership to pay attention to 
America's suggestions in a way that nothing else can. Every brigade 
that leaves reduces our leverage just when we need it most.
    For all the progress made to date, the next president will face 
significant challenges in Iraq. In recent testimony, Secretary of 
Defense Robert Gates enumerated them: ``the prospect of violence in the 
lead-up to elections, worrisome reports about sectarian efforts to slow 
the assimilation of the Sons of Iraq into the Iraqi security forces, 
Iranian influence, the very real threat that al Qaeda continues to 
pose, and the possibility that Jaysh al-Mahdi could return.''
    The existence of malign sectarian actors in the Iraqi parliament 
and in the prime minister's inner circle is not news. Nor is it news 
that Iraqi politicians, elected under a closed-list system that 
emphasized ethnosectarian identity at the expense of political 
interest, have weak electoral bases and much reason to fear the results 
of open and honest elections. It is similarly well known that Iran 
seeks to drive the United States out of Iraq and has been putting 
tremendous pressure on Iraq's leaders to obey Tehran and reject 
Washington. These three factors help explain the development of 
significant negative trends in Iraq in recent months: the downward 
spiral of negotiations over the Strategic Framework Agreement, delays 
in the passage of an electoral law, escalating tensions along the Arab-
Kurd border, and Iraqi government attacks on certain Sons of Iraq 
groups in and around Baghdad.
    American errors have contributed to these developments. At the 
outset of negotiations over the Strategic Framework Agreement, for 
instance, we should have offered Iraq a security guarantee. Iraq's 
signing a Strategic Framework Agreement would have openly and publicly 
committed themselves to the United States--and against Iran, in the 
zero-sum thinking of Tehran. It was only reasonable that Maliki and 
others in the Iraqi government should have expected an American 
commitment to match their own, and we should have given it to them. But 
American domestic politics made that impossible.
    Leading congressmen and senators insisted that a security guarantee 
would raise the Strategic Framework Agreement to the level of a treaty 
requiring Senate ratification--which is true. They also made clear that 
no such ratification would be forthcoming if the document bound the 
next administration. The Bush administration therefore had to tell 
Baghdad at the outset that America would not match the commitment we 
were asking the Iraqis to make with an equal commitment of our own. 
American domestic politics also prevented the administration from 
placing the security agreement in the larger context of a U.S.-Iraqi 
strategic partnership, since that concept was ridiculed by those who 
refused to accept the possibility of success in Iraq.
    The Iranians sensed an opportunity and responded with a massive 
public information campaign in Iraq and a virulent private campaign to 
put pressure on Iraq's leaders. America's refusal to offer a long-term 
security guarantee gave weight to the constant Iranian refrain that 
Iran will always be there, while America will ultimately leave Iraq to 
its fate. Shrewdly refusing to admit the degree of direct Iranian 
pressure, Maliki and his associates used the cloak of ``Iraqi 
sovereignty'' to conceal their uneasiness at taking responsibility for 
making a deal with the United States--uneasiness not before their own 
people, but before Tehran. As a result, the negotiations have dragged 
on, Iraqi demands have increased, and it is possible that Maliki will 
now wait until after the American election to see who wins--all because 
domestic political constraints prevented the Bush administration from 
making the necessary opening bid.
    Maliki has been using ``Iraqi sovereignty'' to do more than delay 
those negotiations, however. He has also used it to insist on the 
accelerated transfer of Iraq's cities, especially Baghdad, to Iraqi 
control and the withdrawal of American forces from those cities. As a 
result, the problems that premature transition can cause are on display 
in the city of Baquba, the capital of Diyala Province northeast of 
Baghdad.
    Diyala has always been one of the most challenging provinces in 
Iraq because of its swirling mix of Kurds with Sunni and Shia Arabs and 
its proximity to Baghdad. It served in the past as a staging area for 
Shia militias and al Qaeda terrorists launching attacks in Baghdad. It 
was pacified in 2007 with a great deal of hard fighting that resulted 
in the defeat of illegal Shia militias and the capitulation of the 
local Sunni insurgent groups, many of whom joined the Sons of Iraq, 
volunteer security forces organized and initially paid by the United 
States. More remained to be done in Diyala as the surge ended, however. 
Surge operations had cleared Baquba and areas further east, but not the 
rim of the province from Khanaqin along the Iranian border and then 
through Balad Ruz toward Baghdad. The end of the surge meant the 
withdrawal of significant American forces from Diyala, so U.S. troops 
largely turned responsibility for the city of Baquba over to the Iraqis 
and moved out to clear the peripheral areas of the province.
    Rumors began circulating that the Iraqi government believed it 
would have to re-clear Baquba, even though violence remained low and 
American leaders did not agree. In August 2008, the Iraqi security 
forces, with limited support from American troops, did re-clear the 
city--but their targets were primarily leaders in the Sons of Iraq 
movement and members of the local government and community that had 
supported them. This action--which could not have taken place if 
American forces had continued to patrol the city--was part of a larger 
effort by Maliki to weaken the urban Sons of Iraq. It appears that the 
current Iraqi leadership has recognized that it must allow the Sunni 
tribal movements, particularly in Anbar, to organize and gain power in 
their own communities, but it sees the urban Sons of Iraq movements as 
political threats to its power.
    The return of the Sunni Iraq Islamic party (IIP) to the government 
appears to have created an unholy alliance between Maliki and IIP 
leader (and Iraqi vice president) Tariq al-Hashimi aimed at weakening 
grassroots Sunni political movements in and around Baghdad and ensuring 
that the unpopular and unrepresentative IIP continues to wield power 
after provincial elections. A similar alliance is operating in Ninewa 
Province, where Kurdish leaders appear to have joined with the IIP to 
ensure that they will continue to have influence in the largely Arab 
province when provincial elections eliminate the current 
disproportionate Kurdish sway in the provincial government. This 
Kurdish-IIP alliance helps explain why there are virtually no Sons of 
Iraq in Ninewa. The extremely limited American presence in Ninewa, as 
in Baquba, has enabled these developments, which may call into question 
the legitimacy of the upcoming provincial elections in some areas.
    Maliki's actions may reflect the continued powerful influence of 
malign sectarian actors among his advisers, or it may reflect the 
determination of a temporarily strong political leader confronting 
elections that are likely to weaken his base. The specter of Iranian 
power combines with the enormous question mark hanging over the future 
of American support to make Maliki look to his own resources to 
stabilize his position. Again, contrary to conventional wisdom, the 
threat of American withdrawal and America's refusal to guarantee the 
security of Iraq and its constitutional processes presses Iraq's 
leaders to make bad decisions, not good ones.
    Whatever Maliki's motivations, however, the bottom line is clear. 
Although a dramatic increase in violence or the rebirth of a large-
scale Sunni insurgency in the next six months is unlikely, it is 
possible that American policies are combining with Iraqi mistakes to 
undermine the long-term prospects for success. These trends can be 
reversed, with care, over the coming months if the United States can 
summon some strategic patience.
    There is no question that we should be able to start withdrawing 
significant numbers of American forces from Iraq in 2009 and 
accelerating our withdrawal in 2010. Assuming that Iraqi provincial 
elections in 2008 or early 2009, and parliamentary elections in 2009 or 
2010, are accepted as legitimate by the Iraqi people and the 
international community, it is also highly likely that we can continue 
to withdraw from Iraq's cities, including Baghdad, and move from a 
patrolling role to an advisory and support role in the same period. But 
the timing of force reductions and withdrawals from urban areas is 
critical, and the current pace is too fast.
    It appears from media reports that General Petraeus initially 
proposed no reduction in the number of U.S. brigades below the pre-
surge levels, and that was certainly the right recommendation. Current 
force levels may, in fact, already be too low. At all events, we must 
see Iraq through the upcoming two elections, pressing the government to 
conduct them fairly and inclusively as well as ensuring that enemy 
groups do not disrupt them with violence. Doing so requires a 
significant American presence on the ground in Iraq's population 
centers, where, in addition to all the other key non-combat roles they 
play, American soldiers are the canaries in the mine shaft. They know 
before anyone else when Iraqi leaders at any level are starting to play 
games that can undermine mission success.
    We should therefore not withdraw any brigades from Iraq before the 
provincial elections have occurred and the results have been certified 
and accepted. We should not accept timelines for the departure of 
American troops from Iraq's cities, particularly Baghdad, before the 
parliamentary elections of 2009. We should continually press the Iraqi 
government not simply to pay the Sons of Iraq (as it has announced it 
will do beginning in October), but to bring most of them into the 
political process. Some of the Sons of Iraq were leaders of the 
insurgency and should have no place in Iraqi politics, but in its 
Baquba operation, the Iraqi government was not sufficiently 
discriminating in whom it sought to exclude (much less detain). We must 
also support the Iraqi government in its efforts to push Kurdish 
militias out of Diyala and Ninewa provinces.
    This is not a matter of Iraqi sovereignty. American troops will not 
stay anywhere in Iraq if ordered by the Iraqi government to leave. We 
are not going to depose Maliki or retake control of Baghdad. We are not 
going to force the Iraqis to do anything. And, above all, we are not 
going to maintain a large military presence in Iraq indefinitely. But 
we are engaged in continual negotiations with the Iraqi government 
about what our forces will do and what Iraqi forces will do, and we 
have tremendous leverage in those negotiations.
    For too long, we have allowed domestic American political 
considerations to reduce our leverage and weaken our bargaining 
position, and we have refused to recognize the critical role the 
presence of our combat forces plays in keeping us in the game at all. 
When America provides combat forces to maintain internal or external 
security in a foreign state, it acquires the right to bargain hard for 
what it thinks is best for the common interest, even when the host 
state's government does not agree. We have engaged in such hard 
bargaining in South Korea and in Europe, and it is a normal part of 
alliance relationships. We must bargain harder in Iraq and give 
ourselves the tools and leverage we need to succeed.
    Above all, we must recognize that there is never a glide path in 
war. As long as the outcome remains in doubt, we must never imagine 
that the situation is under control and we can put it on autopilot and 
ignore it. The relief of getting Iraqi violence under control and 
American casualties down turns naturally into a desire to declare 
victory and withdraw. That is a danger to be avoided at all costs. This 
administration must ensure that it hands its successor not only a 
relatively peaceful Iraq, but an Iraq that is headed in the right 
direction.

                 STATEMENT OF LAWRENCE J. KORB

    Chairman Spratt. Thank you, Mr. Kagan. Mr. Korb?
    Mr. Korb. Thank you very much, Mr. Chairman.
    Chairman Spratt. Thank you.
    Mr. Korb. It is a privilege to be here with you today. I 
think in terms of looking at the surplus you have to put it in 
the context of the horrendous costs of this war. As has been 
pointed out several times already, we were told that the Iraqis 
would pay for their own reconstruction, this war would be quick 
and easy, and would not cost the taxpayer very much. And I 
think had we known then what the costs would be we never would 
have gone to war. It is clear basically from the opinion polls 
of the American people.
    And there is no doubt about the fact that violence today is 
lower than the horrendous levels that it reached in June 2007. 
However, remember the purpose of our military operations there 
are to bring about political reconciliation. And if you take a 
close look at it you will find that the Iraqis are still not 
making the tough choices that they need to bring about 
meaningful reconciliation. And I think the budget is one of 
those areas where they are not doing what they need to do. They 
are generating the revenues but they are really not executing 
them. And as I think has been pointed out here, until they do 
that the Maliki government is not going to get the support from 
its own people. So it is not only in our interest that we 
relieve the burden on the U.S. taxpayer but I think it is also 
in the interests of the Iraqi government.
    Now if you take a look at the trends they are not helpful. 
The revenues are up, there is no doubt about it. But the 
percentage each year that they spend is down. If you take a 
look at where they spend the money, the percentage spent on 
investment is down. In other words, they are spending much more 
on overhead than actually improving the lives of the Iraqi 
people.
    Now we talked a lot about the capacity of the government. 
There is no doubt about the fact that the debaathification 
policy undermined the capacity of the Iraqis to actually 
perform effectively in government. But the fact of the matter 
is, you have had a debaathification law. And while I have not 
seen the classified report, just from the open reports in the 
press it is clear there are less Baathists back in the 
government now than there were before the debaathification law 
was passed. Similarly, there is an awful lot of corruption. In 
fact, if you, they rank countries according to corruption and 
Iraq, there is only two countries more corrupt than Iraq 
according to the rankings, Myanmar and Somalia. We also know 
that a lot of the money in the Iraqi government is ending up in 
the hands of insurgents, people who do not wish us well or the 
Iraqi people.
    So the question becomes basically what do we do about it? 
And let me make a couple of recommendations. The first, and it 
has been alluded to here but I do not think it has been focused 
on enough, we need to provide a soft landing for the Sunni 
militias. Remember that in the fall of 2006, as General Allen 
the commander of the Marines in Anbar Province and now General 
McFarland said, once the Iraqis saw what was happening in this 
country, particularly with the election, the Sunnis in Anbar 
Province began to come over to us. And there we made a big 
mistake. Why were we paying them? Why did the Iraqi government 
not pay them then? We have now come 1 October the Iraqi 
government is taking over that, and I think that is a good 
thing.
    But if you take a look at some of the things that the 
Maliki government is doing in terms of integrating them into 
the security forces, giving them government jobs, or actually 
turning on them. Because, remember, we could have had this deal 
as early as 2005. But the National Security Council turned it 
down because these insurgents would not pledge loyalty to the 
Iraqi government. And there are press reports that the Maliki 
government is going after some of these people who have been 
working with us.
    Second, we have got to fully implement debaathification. 
Again, as of June 2008 the government of Iraq has not yet 
appointed members to the committee slated to replace the old 
debaathification apparatus. And the current committee has 
received conflicting instructions from the Iraqi government 
about whether to proceed with the reinstatement petitions. We 
have got to make this happen.
    Number three, we have got to pursue anticorruption within 
the Iraqi government. The Special Inspector General for Iraqi 
Reconstruction, appointed by President Bush, calls corruption 
the second insurgency. And you have got to be able to deal with 
that.
    There is a joint task force on capacity development that 
was set up to correct these shortfalls. However, the Inspector 
General found that it has, and I quote, ``limited authority to 
coordinate the various activities and to establish an overall 
capacity development agenda.
    And then finally, we have got to set a timetable to get 
out. Until you do, the Iraqi government is not going to 
seriously do what they need to do. We are asking them to do 
difficult things. And they keep kicking the can down the road. 
They will say one thing, but then when you look at the fine 
print things do not get carried out. And I am absolutely 
convinced that until you do that they are not going to do, 
whether it is spend their budget on investment, or meet all of 
the other benchmarks that the administration has laid down, 
until you give them a timetable to get out.
    Now in conclusion let me say that this budget problem is a 
symptom of a much larger problem with the way the war was 
justified and conducted. And although we cannot undo the damage 
to our national security, our reputation in the world, and the 
sacrifices of our military men and women and their families, 
and the cost to the American taxpayer, we can take a small step 
by demanding that the Maliki government begin now to pay for 
its own reconstruction and stabilization. Thank you.
    [The prepared statement of Lawrence Korb follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
               STATEMENT OF CHRISTOPHER BLANCHARD

    Chairman Spratt. Dr. Korb, thank you very much. Mr. 
Blanchard?
    Mr. Blanchard. Thank you, Chairman Spratt, Ranking Member 
Ryan, and members of the Committee. Thank you for inviting me 
to testify before you today on Iraq's budget surplus. My name 
is Christopher Blanchard. I am an analyst in Middle Eastern 
Affairs with the Congressional Research Service. In the time 
allotted I would like to summarize the main points from my 
written testimony by discussing four factors that may affect 
the Iraqi oil sector's ability to fund Iraq's reconstruction. 
Those factors are security, Iraqi politics, market conditions, 
and revenue management.
    The U.S. Department of the Treasury and the International 
Monetary Fund have expressed confidence that Iraq's oil 
revenues are likely to be sufficient to meet the country's 
development needs if underlying conditions remain favorable for 
the expansion of oil production and if Iraqis manage their oil 
revenues effectively. The prevailing level of security in Iraq 
has a direct effect on oil production and exports. 
Infrastructure attacks and persistent violence have hindered 
efforts to develop the oil sector since 2003. In turn, 
corruption in the oil sector has helped fund insurgent violence 
and criminal activity. U.S. and Iraqi investments in 
infrastructure security have contributed to increased oil 
exports over the last year. In turn, the improvement in the 
overall level of security in the country has reduced some 
threats to oil output.
    Looking forward, U.S. military leaders have made clear 
statements about the potential reversibility of recent security 
gains. The establishment of an overall level of security in the 
country that could allow U.S. forces to draw down may still 
leave the Iraqi government with internal security challenges 
that could complicate oil operations.
    Since 2003 Iraqis have struggled to reach political 
consensus about decision making powers in the energy sector and 
the terms of a national energy policy. This includes debates 
over revenues sharing, and the degree and terms of potential 
foreign participation in oil development. To date, Iraq's 
Council of Representatives has not taken up draft energy 
framework legislation because of continuing disagreement 
between the national government and the Kurdistan regional 
government over their respective decision making powers. 
Parallel disputes over the status of the City of Kirkuk, its 
large Kurdish population, and nearby oil resources further 
complicate these matters. Nevertheless, both the National 
Ministry of Oil and the Kurdistan Regional Government have 
moved forward with oil and natural gas development by signing 
service and production contracts with several foreign 
companies. The Ministry of Oil is now planning to conduct an 
international bidding round, the development of six major oil 
fields, with contract awards expected some time in 2009.
    Fluid global market conditions will ultimately determine 
the demand for Iraq's energy exports, the revenue potential of 
those exports, and the availability of investment capital. An 
IMF report released yesterday referred to by Mr. Christoff 
earlier highlighted the ``fiscal opportunity'' that higher 
global oil prices have granted Iraq in 2008. The report, 
however, builds on the IMF's January 2008 warning that the 
Iraqi government has ``little room for fiscal slippage'' until 
its oil output increases. Recent declines in global oil prices, 
if sustained with steady exports, will likely lower Iraq's 2008 
surplus revenue projections.
    According to U.S. and international auditors, as we have 
heard, the Iraqi government has proven unable to spend budgeted 
funds effectively, to maintain current or planned investment 
programs. According to observers, the factors that have 
prevented effective Iraqi spending thus far may continue to 
hinder reconstruction if left unaddressed. Midway through the 
so called year of transition, the U.S. Department of Defense 
warned in a June 2008 report to Congress that the Iraqi 
government ``lacks the ability to execute programs on the scale 
required.'' Administration officials recently created a public 
financial management assistance group to better coordinate 
interagency budget assistance programs in Iraq. The Iraqi 
government also has amended its contracting procedures to 
facilitate spending at all levels of government. However, 
officials report that much remains to be done. And Iraqi 
willingness to continue to accept U.S. advice and assistance on 
revenue management and in other areas may prove limited.
    In Congress legislative proposals pending in both houses 
reflect the broad sentiment that seeks to require the Iraqi 
government to pay more of its own reconstruction and security 
costs. As the confidence of the Iraqi government increases and 
nationalist sentiment among some Iraqis grows more vocal, 
contract bases assistance from U.S. or other international 
partners may emerge as a politically viable solution to Iraq's 
administrative and reconstruction challenges.
    Again, thank you for the opportunity to present this 
testimony. I look forward to your questions.
    [The prepared statement of Christopher Blanchard follows:]

       Prepared Statement of Christopher M. Blanchard, Analyst in
         Middle Eastern Affairs, Congressional Research Service

    Iraq holds the world's third-largest proven oil reserves, and 
revenues from the sale of oil resources are the engine of Iraq's 
national economy and the lifeblood of its national budget. Iraq's 
state-owned oil production and marketing system ensures that revenue 
from the export and sale of Iraqi oil accrues to the Iraqi government, 
and the Iraqi people's elected representatives are now responsible for 
administering that revenue to meet the country's considerable 
development needs. Iraq's energy resources and potential export 
revenues offer the country an undeniable opportunity for economic 
growth, if conditions prevail that allow those resources to be 
developed efficiently and if Iraqi leaders manage export revenues 
effectively. This statement analyzes the recent U.S. policy debate over 
Iraq's current budget surplus, reviews relevant recent developments in 
Iraq's oil and natural gas sector, and discusses factors that may 
affect the oil sector's ability to continue to serve as an engine of 
economic growth and public revenue for Iraqis.

                      CURRENT REVENUE ARRANGEMENTS

    Iraq's State Oil Marketing Organization (SOMO) is responsible for 
the sale and export of Iraqi crude oil. Under the terms of United 
Nations Security Council resolution (UNSCR) 1483 (and renewed through 
subsequent Security Council resolutions), revenue from Iraq's oil 
exports is deposited into an Iraq-controlled account at the Federal 
Reserve Bank of New York (FRBNY). Five percent of the funds are 
reserved for a United Nations Compensation Fund for reparations to the 
victims of the 1990 Iraqi invasion and occupation of Kuwait. The 
remaining 95% is deposited into the Development Fund for Iraq (DFI) 
account at the FRBNY and is then transferred to an Iraqi Ministry of 
Finance account at the Central Bank of Iraq for further distribution to 
Iraqi government ministries.
    Under the terms of UNSCR1546 (and renewed by subsequent 
resolutions), the DFI is monitored by an International Advisory and 
Monitoring Board (IAMB), which provides periodic reports on Iraq's oil 
export revenue, Iraq's use of its oil revenues, and its oil production 
practices. According to the IAMB, as of December 31, 2007, $23.43 
billion had been disbursed from the United Nations Compensation Fund; 
Iraq owes $28.95 billion to the Fund. The IAMB estimates that ``at the 
present rate of Iraqi oil sales, it would take approximately 17 years 
for the compensation award to be fully paid.'' \1\ As of June 2008, the 
balance in the DFI was approximately $17 billion.
    UNSCR 1790 of December 18, 2007, extended the IAMB monitoring of 
the DFI until December 31, 2008. In October 2006, the Iraqi cabinet 
approved the creation of an oversight body known as the Committee of 
Financial Experts (COFE) to monitor oil revenue collection and 
administration. The president of the COFE inaugurated its activities in 
April 2007, and the committee currently is working alongside the IAMB 
on audit procedures. When the mandate of the IAMB expires in December, 
the COFE will assume its duties. Immunity provisions contained in 
standing UN Security Council resolutions prevent Iraqi funds deposited 
in the DFI from being subject to property attachment motions in lieu of 
legal judgments rendered against the former Iraqi regime. Many 
observers expect those immunity provisions to be renewed in a new UN 
resolution, and the IAMB has encouraged the Iraqi government to pursue 
continued immunity protection.

             IRAQ'S BUDGET SURPLUS: SOURCES AND MANAGEMENT

    Revenue projections for governments that rely on oil exports are 
based on variables such as price and export volume, which may be 
subject to significant or rapid changes in domestic or global market 
conditions. Iraq's recent surpluses have accumulated based in large 
part on rapid increases in oil prices over the last year and higher 
levels of oil production and exports attributable to improved security. 
The August 2008 Government Accountability Office (GAO) report on Iraq's 
budget surplus illustrates these relationships by laying out several 
revenue projections for Iraq's potential 2008 surplus based on variable 
price and export levels.\2\
    At present, Iraq's steady oil export levels and a relative decline 
in world oil prices from recent highs have moved revenue projections 
closer to the more pessimistic assumptions outlined in the GAO report: 
The GAO's lower estimate for Iraq's 2008 budget surplus assumed Iraq 
would export an average of 1.89 million barrels per day and that the 
average price received would be $96.88 per barrel. As of September 10, 
2008, the U.S. State Department reported that Iraq's Basra Light Crude 
was priced at $100.15 per barrel and that Iraq was exporting 1.93 
million barrels of oil per day. Coupled with Iraq's recently adopted 
Supplemental Budget of $22 billion, these market trends suggest that 
Iraq's 2008 budget surplus may remain well below the upper limit 
projected in the August 2008 GAO report, pending the result of 
expenditures through the rest of 2008.

                                       TABLE 1.--IRAQ: KEY OIL INDICATORS
----------------------------------------------------------------------------------------------------------------
                                        Oil                                                          Oil Revenue
  Oil Production (current weekly     Production  Oil Exports  Oil Exports  Oil Revenue  Oil Revenue   (2008, to
               avg.)                 (pre-2003)   (current)    (pre-2003)     (2006)       (2007)       date)
----------------------------------------------------------------------------------------------------------------
2.48 million barrels per day (mbd)      2.5 mbd     1.93 mbd      2.2 mbd        $31.3  $41 billion        $50.5
                                                                               billion                   billion
----------------------------------------------------------------------------------------------------------------
Note: Figures in the table from the U.S. Department of State ``Iraq Weekly Status Report,'' September 10, 2008.
  'Oil Revenue' is net of a 5% deduction for reparations to the victims of the 1990 Iraqi invasion and
  occupation of Kuwait, as provided for in U.N. Security Council Resolution 1483.

    The U.S. Department of the Treasury and the International Monetary 
Fund have expressed confidence that, over time, Iraq's oil revenues are 
likely to be sufficient to meet the country's development needs, if 
underlying conditions remain favorable for the expansion of oil 
production and if revenues are managed effectively. However, the IMF 
warned in a January 2008 report that Iraq's public finances have been 
``fragile'' in recent years and added that, in light of considerable 
operations and reconstruction needs, the Iraqi government has ``little 
room for fiscal slippage'' until oil output increases. The IMF report 
explains how higher oil prices have compensated for missed oil 
production expansion targets that undermined revenue generation and how 
these factors otherwise would have ``depleted'' the $9.9 billion 
balance in the Development Fund for Iraq ``by the end of 2007.'' \3\
    While reports about Iraq's current and projected budget surplus 
have raised questions in Congress about the relative overall size of 
Iraqi and U.S. expenditures, shortcomings in Iraqi revenue management 
practices and capabilities also have contributed to the accumulation of 
surpluses. According to U.S., Iraqi, and international observers, these 
shortcomings have prevented capital investment budgets from being spent 
effectively thus far and may continue to hinder reconstruction progress 
if left unaddressed. The U.S. Department of Defense (DoD) June 2008 
Measuring Security and Stability in Iraq report noted ``marginal 
improvement'' in the Government of Iraq's ability to spend its 
resources, although the report concluded that ``budget execution rates 
continue to be relatively low, limiting Iraq's ability to increase 
economic development and deliver essential services to its citizens.'' 
\4\ Among the ``considerable challenges'' facing efforts to improve the 
performance of Iraq's ministries identified in the report were 
``cumbersome budgetary approval and complex funding processes'', 
limited experience among available staff, and the ``limited 
availability of resident contractors.''
    The U.S. State Department made similar assessments in July 2008. 
According to the Department's latest Section 2207 Report on Iraq Relief 
and Reconstruction, impediments to effective budgetary expenditure in 
Iraq ``persist at all levels.'' \5\ The report concluded that 
``continued assistance is needed to address impediments to capital 
budget execution.'' \6\ The Special Inspector General for Iraq 
Reconstruction (SIGIR) reported in July 2008 that U.S. funded 
ministerial capacity development programs had been hindered by ``weak 
coordination'' among multiple agencies that ``tended to implement their 
own programs with little prioritization of projects or coordinated 
planning.'' The SIGIR concluded that U.S. investments in capacity 
building are ``at risk'' unless more integrated programming is 
implemented.\7\
    In light of these assessments, both the U.S. and Iraqi governments 
have undertaken initiatives in recent months to improve public 
financial management and the coordination of U.S. assistance programs. 
Iraq has issued new decrees and reformed administrative bodies to grant 
greater contracting authority to ministries and provinces.\8\ Iraq's 
2008 Budget Law allows provinces and government agencies to carry over 
their unused budget authority into the current fiscal year. The U.S. 
Embassy in Baghdad and the commanders of Multi-National Forces-Iraq 
also have reorganized the management of existing U.S and coalition 
budget assistance programs to improve coordination.
    In late June 2008, the interagency Public Finance Management 
Assistance Group (PFMAG) began its work. The PFMAG's civilian-military 
Policy and Operations Committees now direct the activities of paired 
teams of Action Officers and Treasury Technical Assistance Advisors who 
work alongside Iraqis, collecting and analyzing data and helping to re-
engineer and expedite payments and other budgetary processes.\9\ These 
activities build on existing programs such as USAID's National Capacity 
Development Program (more commonly known by the name Tatweer, the 
Arabic word for development), the U.S. Embassy Iraq Transition 
Assistance Office (ITAO) Ministerial Capacity Development Program, and 
the work of the Multi-National Security Transition Command-Iraq (MNSTC-
I) Embedded Advisory and Functional Capability Teams. Coalition 
partners, such as the United Kingdom's Department for International 
Development (DFID), participate in PFMAG decision-making, and U.S. 
officials report that expanded PFMAG coordination with international 
bodies such as the IMF and World Bank is planned.

                RECENT DEVELOPMENTS IN IRAQ'S OIL SECTOR

    The concept of federalism has been incorporated into Iraq's 
constitution and law, and Iraqi attitudes toward the oil sector often 
correspond with regional differences of opinion about the proper role 
and power of the national government and regional and governorate 
authorities to make oil policy and revenue decisions. However, the 
constitution's ambiguity about the roles and powers of federal, 
regional, and governorate authorities has contributed significantly to 
the ongoing impasse over these issues. Articles 111 and 112 of the 
Iraqi constitution state that Iraq's natural resources are the property 
of ``all the people of Iraq in all regions and governorates,'' and that 
``the federal government, with the producing governorates and regional 
governments, shall undertake the management of oil and gas extracted 
from present fields (italics added).'' These provisions were included 
as a means of ensuring consensus among Iraqis and the adoption of the 
constitution.
    Further complicating matters are Article 115, which provides 
regional authorities the power to override federal law in the event of 
conflicts with regional legislation, and Article 110, which grants 
powers to Iraq's federal government to formulate ``foreign sovereign 
economic and trade policy'' and regulate ``commercial policy across 
regional and governorate boundaries'' similar to those granted to the 
United States Congress by the commerce clause of the U.S. Constitution. 
According to the U.S. Department of Defense, Iraq's Constitutional 
Review Commission ``continues to review almost 50 amendments addressing 
the authority of the federal government and governorates,'' including 
provisions addressing ``the extent of governorate powers under Article 
115'' and the ``status and management of oil and gas.'' \10\
    To date, draft legislation to establish a new framework for the 
development of Iraq's hydrocarbon sector has not been placed on the 
parliament's legislative calendar because of continuing political 
differences between the national government and the Kurdistan Regional 
Government (KRG) over their relative powers and other constitutional 
issues, such as the administrative status of the city of Kirkuk. KRG 
Prime Minister Nechirvan Barzani and Iraqi Prime Minister Nouri al 
Maliki met in April and June 2008 to negotiate terms for moving forward 
on the draft hydrocarbon laws, Kirkuk, and other outstanding issues. 
According to Barzani, a political committee has been formed to continue 
negotiations on the framework legislation.\11\ The June 2008 Measuring 
Security and Stability in Iraq report states that the Chairman of the 
Iraqi Council of Representatives Oil and Gas Committee does not plan to 
proceed with a first reading of the draft legislation until the federal 
government and the KRG reach a political agreement on the hydrocarbon 
sector.\12\ The previous report in March 2008 observed that the Iraqi 
government ``continues to distribute oil revenues equitably to the 
provinces in the absence of this comprehensive legislation.'' \13\
    Iraqi, U.S., and other international observers have expressed 
concern that the potential for renewed violence and the atmosphere of 
unresolved political tension prevailing in Iraq may not be conducive to 
careful consideration of hydrocarbon sector legislation or to inclusive 
decision making about long-term oil development contracts. 
Nevertheless, in the absence of new oil legislation and regulation, the 
Ministry of Oil and the KRG have moved forward with hydrocarbon sector 
investment and development. New national and KRG contracts have 
contributed to the persistence of an atmosphere of political 
controversy surrounding the hydrocarbon sector. In turn, several 
international companies have chosen to pursue investment opportunities 
is Iraq in an uncertain legal environment. This includes China's 
National Petroleum Corporation, which recently modified a Saddam-era 
production contract into a 20-year service contract to improve 
production in southern Iraq's Al Ahdab oilfield. Similarly, Shell has 
launched negotiations to develop systems for capturing and marketing 
associated natural gas in Iraq's southern oilfields; the gas currently 
is being wasted at a cost estimated by the Iraqi government to be $40 
million per day.\14\ The KRG has signed over twenty production sharing 
agreements with international oil companies, but the limited amount of 
oil currently being produced in KRG territory is not exported.
    Overall, the Ministry of Oil has set a goal of nearly doubling 
current oil production to 4.5 million barrels per day within 5 years, 
and expanding production thereafter to 6 million barrels per day within 
10 years. To reach these goals, the Ministry of Oil is moving forward 
with plans to conduct an international bidding round for the 
development of six major oil fields, with contract awards expected some 
time in 2009. A pre-qualification round held in early 2008 attracted 
strong interest from U.S. and international bidders: 41 firms were 
qualified, including six unnamed state-owned firms.\15\ However, the 
recent collapse and cancellation of an interim process to award short-
term service contracts for production expansion demonstrates the 
difficulty Iraq's government and international bidders may have in 
reaching mutually agreed contract terms and gaining public support in 
the absence of new legislation and political consensus.

             FACTORS AFFECTING IRAQ'S OIL REVENUE POTENTIAL

    As Iraq and the United States look to the future, four key factors 
may affect the Iraqi oil sector's ability to continue to provide 
adequate financial resources to the Iraqi people. The first and most 
fundamental of these factors is the security of the country. General 
insecurity and infrastructure attacks have hindered efforts to 
rehabilitate and develop Iraq's oil sector since 2003. Oil sector 
corruption also has contributed to the insecurity of the country, 
according to U.S. officials. For example, according to DoD, until mid-
2007, corruption and siphoning at the refinery at Bayji resulted in 
``as much as 70% of the fuel processed'' being sold on the black market 
at a value of up to $2 billion a year.\16\ U.S. military leaders have 
made clear statements about the potential reversibility of the recent 
security gains that have enabled oil output to increase since 2007. 
During that time, U.S. and Iraqi investments in infrastructure security 
for oil production facilities and pipelines have contributed to 
increased export levels, and U.S. and Iraqi officials are expanding 
existing projects to extend these gains.
    Second, Iraqis face the challenge of coming to a greater degree of 
political consensus about the powers and responsibilities of various 
levels of government in determining national energy policy and about 
various issues related to energy development. This includes reaching 
agreements about the degree and terms of foreign participation and 
models for revenue sharing. In late 2007, the KRG finalized its own 
regional oil and gas investment law and signed new production sharing 
agreements with several international companies, including U.S.-based 
Hunt Oil.\17\ Some analysts believe that the Kurdish moves signal the 
KRG's intention to begin large scale oil development activities 
regardless of progress on federal legislation. The KRG has stated its 
opposition to proposals to require federal approval of its existing or 
future contracts, but notes that it is committed to revenue sharing as 
defined in the constitution and the draft revenue sharing law. As noted 
above, these issues remain the subject of ongoing negotiation.
    In September 2007 a State Department spokesman stated the 
Administration's view that the KRG deals ``elevate tensions between the 
Kurdish regional government and the Government of Iraq,'' and ``aren't 
particularly helpful'' to the extent that they hinder consideration of 
a national oil law.\18\
    Iraqi government officials from other parties have reacted 
negatively to the impasse and the KRG's recent activities. On September 
8, 2007, Iraqi Oil Minister Hussein al Shahristani stated that the 
national government considers contracts signed by the KRG to have ``no 
standing''.\19\
    Tensions appeared to escalate further after Minister Al Shahristani 
warned international oil companies that the national government would 
not allow the export of oil produced under KRG contracts.\20\ The KRG 
responded by accusing Minister Al Shahristani of mismanaging the Oil 
Ministry budget and restated its opinion that its contracts were both 
constitutional and legal.\21\ In November 2007, 60 Iraqi oil sector 
leaders wrote to the Council of Representatives to state that the KRG's 
unilateral signing of contracts constituted a ``deliberate and 
dangerous action'' and had no ``legal or political standing 
whatsoever.'' \22\ At least 120 members of the Council of 
Representatives from a wide range of political parties endorsed a 
January 2008 joint statement underscoring their opposition to the KRG 
contracts.\23\ The Ministry of Oil has since refined its position 
slightly to emphasize its opposition to contracts signed by the KRG 
after February 2007. Contracts signed before February 2007 with firms 
currently producing oil for domestic consumption would be considered 
valid after review and potential amendments.
    Third, fluid global market conditions ultimately determine the 
demand for Iraq's energy resources, the revenue potential of those 
resources, and the availability of domestic and external investment 
capital. As noted earlier, recent declines in global oil prices have 
lowered this year's surplus revenue projections for Iraq. However, the 
abundance of energy resources in Iraq and their relative ease of 
production will likely sustain the attractiveness of Iraq's oil sector 
to international investors over the long-term. The U.S. Embassy's Iraqi 
Transition Assistance Office estimated in 2007 that Iraq's oil sector 
could require $100 billion in investment to meet the Iraqi government's 
production goals.
    In light of Iraq's transition from conflict and in light of strong 
economic growth in the more stable countries of the Persian Gulf 
region, Iraq may struggle relative to its neighbors in attracting 
international investment and expertise to assist in its non-energy 
related reconstruction. DoD has reported that projects for critical 
ministries require ``multi-year, large-scale strategic infrastructure 
upgrades'' that may require the involvement of international firms; 
those firms could remain reluctant to engage in Iraq.\24\
    Lastly, Iraqi leaders are working to address what the U.S. 
government and international auditors have described as significant 
weaknesses in Iraq's current public financial management practices. The 
United States has financial advisory programs in place for many of 
Iraq's key ministries, including with civilian leaders of security 
ministries. However, these programs remain limited in scope and funding 
in spite of their recently reorganized coordination. From Iraq's 
perspective, the availability of significant oil revenues is fortunate 
in light of the country's remaining development needs. In addition to 
planned physical infrastructure investments, investment in human 
capital and management assistance may prove equally important.

                        OPTIONS FOR U.S. POLICY

    As Iraqi officials and their coalition partners preside over the 
latter half of the so-called ``Year of Transition in Iraq'', U.S. 
spending on large-scale reconstruction projects is coming to a close: 
the State Department reports that the funds available in the Iraq 
Relief and Reconstruction Fund have been almost entirely obligated or 
expended as of early September 2008.
    Pending legislative proposals in both houses of Congress reflect 
broad and growing sentiment that seeks to require the Iraqi government 
to pay more of the cost of reconstituting Iraq's security forces and 
providing for reconstruction needs. Proposed defense authorization 
language in both houses would reduce authorized spending from the Iraq 
Security Forces Fund (ISFF) relative to the Administration's request 
($2 billion) and last year's bridge fund ($1.5 billion).\25\ The 
Appropriation Committees require ``equal cost-sharing'' for all 
reconstruction projects above $750,000 in report language as well as 
prohibiting the use of these funds for salaries for Iraqi military 
personnel.\26\ Senate authorizers would prohibit using ISFF monies for 
``large-scale'' infrastructure above $2 million; House authorizers 
would prohibit the use of ISFF funds for any facilities construction 
and argue that ``the Iraqi Government is well able to afford to finance 
its own infrastructure needs at this point.'' \27\
    As noted above, U.S. and international auditors have not expressed 
doubt about the Iraqi government's ability to afford taking on more of 
the costs of its reconstruction and security sector development, if oil 
production expands and export conditions remain favorable. Those 
auditors and observers have expressed significant doubts about the 
Iraqi government's current ability to expend available funds at a 
sufficient rate or level of efficiency to maintain the complex, long-
term, and large-scale programs required. By most public accounts, 
Iraqis in many areas of the country remain somewhat dissatisfied with 
the scope and pace of ongoing reconstruction programs, particularly 
with regard to the delivery of essential services such electricity and 
water. Midway through the ``Year of Transition'', DoD warned that:
    ``Future progress in essential services could be at risk since the 
U.S. will transition large-scale infrastructure projects to the Iraqis 
to fund and execute. While the Government of Iraq acknowledges it has 
the revenues to support these projects, budget and program execution 
rates indicate that the Government lacks the ability to execute 
programs on the scale required.'' \28\
    As such, Members of Congress concerned about relative scope and 
effectiveness Iraqi contributions to reconstruction and security goals 
may wish to consider options to encourage or enable the Iraqi 
government to improve its public financial management capabilities. As 
described above, Administration officials have already taken steps to 
improve the coordination and performance of U.S. financial management 
assistance programs in Iraq by creating the interagency Public 
Financial Management Assistance Group (PFMAG). Congress can influence 
the operations of the PFMAG and its constituent programs through 
consideration of pending appropriations and authorization legislation 
or through the exercise of targeted oversight and evaluation.
    Existing U.S. programs to improve the performance and capabilities 
of the security forces of allied governments in the Middle East also 
offer potential models for the structuring future of the U.S. 
assistance and advisory relationships with Iraq. Significant U.S. 
foreign assistance programs for Israel and Egypt are funded through 
annual appropriations of Foreign Military Financing, Economic Support 
Fund, and other assistance, and the annual appropriations process 
offers opportunities for Members of Congress to evaluate progress 
toward stated bilateral goals and respond to changing political and 
economic conditions. Alternatively, long-standing U.S. security 
assistance programs for Saudi Arabia are financed through Saudi 
government purchases of U.S. training and services through the Foreign 
Military Sales program. Iraq has begun using the FMS program for its 
acquisition needs, and may soon make large arms purchases worth up to 
$11 billion according to arms sale proposals recently notified to 
Congress by the Administration. The U.S. Army Corp of Engineers, which 
is currently carrying out U.S. funded reconstruction work in Iraq, 
carried out construction projects in Saudi Arabia on a contract basis 
during the 1970s and 1980s, funded by Saudi government oil revenues.
    Similar direct or contract-based bilateral assistance programs 
could help Iraq complete its transition and reconstruction and would 
likely make U.S.-Iraqi relations subject to more conventional 
congressional concerns about human rights, the end use of U.S. military 
equipment, the regional military balance, and the efficiency and 
transparency of contract assistance programs. Increasing confidence 
within Iraq's political leadership and competition among some Iraqi 
political groups to harness popular nationalist sentiment may limit the 
attractiveness or utility of official bilateral assistance efforts over 
time, making contract-based solutions with U.S. or other international 
partners more appealing or effective.

                               CONCLUSION

    Thank you for the invitation to testify and I look forward to your 
questions.
                                ENDNOTES

    \1\ Ernst & Young, Development Fund for Iraq--Summary of Audit 
Results for the year ended December 31, 2007, May 12-13, 2008.
    \2\ Government Accountability Office, GAO-08-1031--Stabilizing And 
Rebuilding Iraq: Iraqi Revenues, Expenditures, and Surplus, August 
2008.
    \3\ International Monetary Fund, Country Report No. 08/17, ``Iraq: 
Request for Stand-By Arrangement and Cancellation of Current 
Arrangement--Staff Report,'' January 2008, p. 9.
    \4\ U.S. Department of Defense (DoD), Measuring Stability and 
Security in Iraq--June 2008, Report to Congress in accordance with the 
Department of Defense Appropriations Act 2007 (Section 9010, P.L. 109-
289), p. 10.
    \5\ U.S. Department of State, Section 2207 Report on Iraq Relief 
and Reconstruction, July 2008, Report to Congress in accordance with 
the National Defense Authorization Act for Fiscal Year 2006 (U.S. 
Policy in Iraq Act, Section 1227, P.L. 109-163).
    \6\ U.S. Department of State, Section 2207 Report on Iraq Relief 
and Reconstruction, July 2008.
    \7\ Special Inspector General for Iraq Reconstruction (SIGIR) 
Report 08-020, ``Key Recurring Management Issues Identified in Audits 
of Iraq Reconstruction Efforts,'' July 2008.
    \8\ A Central Contracts Committee has now replaced Iraq's former 
contract approving authority. Decrees issued since January 2008 granted 
Governors and selected Ministers and Heads of Agencies authority to 
enter into contracts worth $50 million. The ministries selected were 
Defense, Interior, Oil, Trade, Health, Electricity, Industry and 
Minerals, Water Resources, Municipalities, and Public Works. Agencies 
not attached to ministries have been granted a $30 million contract 
approval ceiling. Iraq's governorates can now approve contracts worth 
up to $10 million. SIGIR Report 08-020, ``Key Recurring Management 
Issues Identified in Audits of Iraq Reconstruction Efforts,'' July 
2008.
    \9\ Information provided to CRS by U.S. Treasury Attache, Baghdad, 
Iraq, September 13, 2008.
    \10\ U.S. Department of Defense, Measuring Stability and Security 
in Iraq--June 2008, p. 3.
    \11\ Kurdistan Regional Government (KRG), Press Release: ``PM 
Barzani announces political committee to discuss Iraqi federal 
hydrocarbons law,'' June 28, 2008.
    \12\ U.S. Department of Defense, Measuring Stability and Security 
in Iraq--June 2008, p. 3.
    \13\ U.S. Department of Defense, Measuring Stability and Security 
in Iraq--March 2008, p. 4.
    \14\ Reuters, ``Iraq approves preliminary gas deal with Shell,'' 
September 7, 2008.
    \15\ Reuters, ``Firms pre-qualified for Iraq long-term oil deals,'' 
June 30, 2008.
    \16\ U.S. Department of Defense, Measuring Stability and Security 
in Iraq--June 2007, p. 13.
    \17\ Bloomberg News, ``Dallas Oil Company Approved to Drill in 
Kurdistan,'' September 10, 2007.
    \18\ U.S. Department of State Daily Press Briefing, Tom Casey, 
Deputy Spokesman, Washington, DC, September 28, 2007.
    \19\ Ben Lando, ``Deeper Than an Oil Law in Iraq,'' UPI, September 
10, 2007.
    \20\ Platts Commodity News, ``Iraq's Shahristani Says Hydrocarbon 
Law not Expected Soon,'' November 15, 2007.
    \21\ Kurdistan Regional Government, ``KRG responds to Dr 
Shahristani's threats to international oil companies,'' November 20, 
2007.
    \22\ Radio Free Europe Documents and Publications, ``Iraq: Baghdad, 
Kurds At Odds Over Oil Deals,'' November 30, 2007.
    \23\ Ned Parker, ``Iraqi Political Factions Jointly Pressure 
Kurds,'' Los Angeles Times, January 14, 2008; and, UPI, ``Iraq Factions 
Join Against Kurd Oil Deals,'' January 15, 2008.
    \24\ U.S. Department of Defense, Measuring Stability and Security 
in Iraq--June 2008, p. 10.
    \25\ The Senate recommends $200 million while both the House 
authorization bill and the previously-enacted supplemental 
appropriations act (P.L.110-252) provide $1 billion.
    \26\ Section entitled ``Iraq Security Forces'' in P.L. 110-252 and 
report language on p. S4337, Congressional Record, May 19, 2008.
    \27\ Sec. 1616 in S. 3001 as reported and S.Rept. 110-335, p. 428; 
see also Sec. 1512 in H.R. 5658 as passed by the House. Section 1613 in 
S. 3001 as reported by the Senate lists equipment, supplies, services, 
and training as the only types of expenses that can be funded in the 
ISFF; Sec. 1616 applies the prohibition to any ``large-scale 
infrastructure projects'' above $2 million.
    \28\ DoD, Measuring Stability and Security in Iraq--June 2008, p. 
vi.

    Chairman Spratt. Thank you very much, all three of you 
presenting today expressing your views on this subject. Let me 
just make clear of why the Chair and the Committee is holding 
this hearing. First of all, some of us were here in the first 
Gulf War and we recall the way the financing of it was arranged 
through the good offices of President Bush, the first President 
Bush, and Jim Baker. Namely we went to the allies in the region 
and asked them for in kind contributions as well as cash 
contributions, and they came through handsomely. We also went 
to allies from Germany to Japan, and they paid substantial sums 
partly in return for the fact that they were not making big 
troop commitments. As a result the cost of that war out of 
pocket to the United States was $2 billion to $4 billion, 
depending on how you tally up those various contributions and 
our outlays.
    Begging the question, why have we not been able to achieve 
the same kind of sharing, cost sharing here, especially now 
that it appears that the country of Iraq is generating cash 
reserves, cash surpluses, that are over and above its immediate 
requirements.
    And finally, we passed this year a supplemental 
appropriation bill of $185 billion, $160 billion of it goes to 
Iraq and Afghanistan. Everyone in this room knows, given the 
deficit projections we have got as recently as last week from 
CBO, that that level of commitment simply cannot be sustained 
on the basis that we have maintained it for the last five or 
six years, that is without borrowing every penny of it so that 
it goes straight to the bottom line. After all, our economy is 
our first instrument of a national defense. And our budget is a 
key element, a vital element of that economy. And we simply 
cannot keep building debt on top of debt and expect to be the 
world's superpower and also be the world's largest debtor 
nation.
    So this is all part of our purpose in having the hearing 
today. To ask, is this a source that we can now be relying upon 
so that we can begin using Iraqi funds to do what Wolfowitz 
said before this Committee and said before the Defense 
Subcommittee, they should be able to pay for it themselves, and 
relatively soon, given their vast mineral wealth. And that is 
what we are trying to explore today.
    So we appreciate your testimony and your observations about 
it. And let me turn to Mr. Conaway now.
    Mr. Conaway. Well, thank you, Mr. Chairman, and our 
witnesses. Thank you for coming today and talking. And I do not 
have an extended statement in the interest of time and 
listening to what they have got to tell us rather than us 
continuing to do our normal pontification and talk to each 
other, comments we already know each other are going to say. I 
would rather hear from the witnesses themselves. It may be a 
bit of a departure from our standard operating procedure, but I 
appreciate you guys being here and I look forward to the 
questions.
    Chairman Spratt. Mr. Doggett?
    Mr. Doggett. Thank you, Mr. Chairman, and thanks to all of 
our witnesses. Dr. Korb, I have three questions for you about 
violence, about success, and about the future. First on 
violence, while there does appear to be some consensus, some 
evidence that the addition of troops contributed to a reduction 
in violence, you know, we have heard the administration boast 
so often that it does not negotiate with terrorists. We have 
heard President Bush and his cohorts, even just heap scorn on 
anyone who wanted to talk with people who do not agree with us. 
And we hear the importance of the United States refusing to 
blink. But is not the decrease in the number of deaths in Iraq 
in large measure the result of the Bush administration's 
decision to bribe, to pay off, the very organizations that were 
killing and executing our servicemen and women?
    Mr. Korb. There is no doubt about the fact that the so 
called Anbar Awakening, remember Anbar was the most violent 
province, and creating the group called the Sons of Iraq 
composed of a lot of people who had killed Americans as well as 
Iraqi government officials, has been a big factor in getting 
the violence down because it took place initially in the most 
violent province.
    Mr. Doggett. Well, the decision may have worked in part. 
But I have not heard the administration boasting of the reality 
that when President Bush said, ``Bring it on,'' he responded by 
pouring on American money to the very people that had the 
finger on the trigger killing our young Americans in Iraq and 
accounting for some of these 4,000 plus deaths.
    Now, the second question concerns success. The objective we 
were told was not that fewer Americans would be killed in Iraq 
but that no Americans were being killed in Iraq, and success 
was certainly not defined as continuing to pour out $10 billion 
or $12 billion every single month of American dollars in Iraq. 
And yet that is the situation of success of the surge we have 
today. If instead we measure the success of the surge using 
President Bush's own benchmarks as he announced them back in 
January of last year, is it not correct that he cannot meet his 
own benchmarks? That is why he never talks about them anymore. 
And that what he deserves in terms of the objective as he 
defined it with those eighteen benchmarks is a big fat F for 
failure?
    Mr. Korb. Well I think, as I pointed out in my testimony, 
the Iraqis, I was over there as part of the AID project to 
assess the capacity of the Iraqi government. And one of the 
things I found in talking to a lot of them, they are very 
clever politicians. And they know what is happening back here, 
at home. And so if you get a benchmark like debaathification 
they will go ahead and pass the law. But then when you go and 
find out whether it is implemented it is not. And I think that 
is, if you take a look at the GAO analysis what happens is, 
yes, they will do a lot of these things. But then they really 
do not carry them out. Or whether it is corruption, or whatever 
it might be.
    I mean, take the example of the provincial elections. Well, 
the provincial elections, we are going to have them in October. 
Well, they still have not set a date, you know, for them. That 
is a very, very, very critical, critical thing. And unless they 
implement these benchmarks you are not going to have political 
reconciliation, which is the whole purpose of all of our 
military activities. And I think it is important to keep in 
mind that even with the numbers of troops reductions that 
President Bush announced last week, you will still have more 
troops there when these reductions occur than you had before 
the latest build up occurred in January 2007.
    Mr. Doggett. As you know, it has become conventional wisdom 
to brag about the success of the surge. But if you evaluate it 
in terms of the objectives that President Bush set out at the 
beginning he has failed to meet those objectives, has he not?
    Mr. Korb. I would say the majority of them have not been 
met and that is why you really do not have political 
reconciliation. In fact, what I worry about now, again, is the 
Maliki government not incorporating these Sons of Iraq.
    Mr. Doggett. And I wanted to talk to you about that because 
that gets to the future. You say that without a timetable we 
are going to continue to have that spigot of dollars just 
continue to be wide open. And of course there is a timetable 
there because most of the so-called group of willing, some 
would call it billing, the people that we cajoled or bribed 
into sending troops into Iraq, they have got a timetable. They 
are either all gone or they are going from Iraq, are they not? 
Other than maybe the two or three from Estonia, and some of the 
other major powers that have contributed in the dozens instead 
of in the hundreds of thousands.
    Mr. Korb. The vast majority of the 40,000 troops from other 
countries who went into Iraq with us are gone.
    Mr. Doggett. And is it not, your testimony, I believe you 
used the word stalled, that as long as we have a significant 
American troop presence there the Iraqis will never meet the 
standards that President Bush set for them last January that he 
has failed to achieve. And that that spigot will be wide open 
with American dollars and American blood because we have got 
the wrong policy there and cannot achieve the objectives that 
he set without getting a timetable to get our troops out?
    Mr. Korb. I do not believe that they will ever undertake 
meaningful political reconciliation unless you have that hammer 
over them.
    Mr. Doggett. Thank you for your testimony.
    Chairman Spratt. Mr. Conaway, did you have a question you 
wanted to ask?
    Mr. Conaway. I did have some questions, Mr. Chairman. I 
just did not want to make an opening statement.
    Chairman Spratt. Okay.
    Mr. Conaway. So, thank you. Mr. Kagan, in contrast to the 
phased withdrawal that Mr. Korb was talking about, you 
mentioned that the U.S. would lose leverage if we did that. Do 
you want to flush that out some?
    Mr. Kagan. Yes, Congressman, I would be happy to. I have to 
say that I completely disagree with the analysis that says that 
the U.S., the threat of a U.S. timetable to withdraw is a 
hammer in some way to hold over the Iraqis. On the contrary, it 
completely misunderstands what we are actually doing in Iraq to 
say that. We are currently engaged in primarily in peace 
keeping, peace enforcement operations in Iraq. And our troops 
play an extremely important role. They are seen widely by the 
Iraqi population as being relatively impartial and as being 
able to defend sectors of the Iraqi society from other malign 
actors in the government, outside the government, and so forth. 
And they do provide us with tremendous leverage toward the 
Iraqi government. I can guarantee you that whatever degree of 
accommodation we get out of the Iraqi government in the things 
that we want the Iraqi government to do is higher with more 
American troops in the country than it would be with fewer 
American troops in the country. Now that is not an argument for 
keeping American troops there forever. I think that we should 
have American troops in Iraq as they are needed. But I do think 
that we, it is important to understand the dynamic there.
    Mr. Conaway. Thank you. Dr. Korb, you obviously have a 
different opinion on that. The eight to ten month time line 
that you would argue for based on all of the evidence you have, 
based on years of experience in the arena, is there a guarantee 
associated with that?
    Mr. Korb. There is no guarantees associated with anything.
    Mr. Conaway. Okay.
    Mr. Korb. I think that, let me----
    Mr. Conaway. Well, I will. I just want to make my point.
    Mr. Korb. I do want to make----
    Mr. Conaway. Just one second. I will let you speak. Five 
years from now, do you think someone will look on this 
testimony the way we are currently looking back on Paul 
Wolfowitz' testimony from five years ago and act like as if he 
had given some kind of galactic guarantee that that was going 
to happen. So I would argue that, you know, your position is 
yours but you are not going to implement it. You are not going 
to be responsible for that. And you do not have any skin in 
that game and there is no guarantee. So what happens during 
that ten months, if circumstances are different? Do you stick 
to your guns? Or is there opportunity that the vacuum does 
create some sort of ruckus that has got to be responded to 
differently? What happens in that regard?
    Mr. Korb. Well, as I pointed out in my testimony, General 
James Dubik, the American general in charge of training the 
Iraqi security forces said that the Iraqi Army and police will 
be able, and these are his words, to assume full responsibility 
for internal security as early as April of 2009. So that is one 
indication.
    The others I pointed out in my testimony. And I have 
testified before other committees. I just referenced it very 
briefly here. That in addition to us setting a timetable to 
withdraw I think you need a diplomatic surge, because all of 
the countries in the region have a vested interest in Iraq not 
becoming a failed state. Even Iran does not want to see it 
become a failed state because they will have the refugees 
coming in. If it becomes a haven for Al Qaeda which people, you 
know, point out, Al Qaeda is not a group that Iran likes which 
is why they were very helpful to us in Afghanistan. But are 
there any guarantees? No. I do not think there are any 
guarantees in terms, but I do not think there is a guarantee if 
you continue to keep expending American blood and treasure that 
you are going to get what the administration says is a, you 
know, victory, which is a stable, democratic Iraq that becomes 
an ally in the War Against Terror and a bulwark against Iran 
either.
    Mr. Conaway. But you are open to the argument that should 
this phased withdrawal be announced and we start walking down 
that path that something unforeseen today happens that that 
might need to be altered at some point. In other words, you are 
not casting this in absolutely concrete the way some of the 
comments get thrown back at us from, that we all make from time 
to time as if we have got some guarantee. But there is an 
opportunity that circumstances would not work out the way you 
think they are?
    Mr. Korb. Well, again, I go back to testimony I have given 
before the Committee over the last couple of years. We are not 
leaving the region, okay? That is a big difference. In other 
words, you are leaving Iraq but you are not leaving the region. 
And so therefore you have the capability, for example, if there 
should be an external invasion. But if General Dubik is right 
and they can provide for their own internal security, and this 
is a whole other subject here, the Iraqis want us to go. This 
is why we are negotiating with them on the status of forces 
agreement. Okay? They are the ones that have asked for the time 
line. Because the Maliki government, and I think feels quite 
correctly, as long as it looks like we are in charge in fact 
they are not going to be seen as legitimate by their own 
people.
    Mr. Conaway. Right. I think we all agree on the end goal. 
It is just how do we get there? How do we orchestrate this 
dance? Dr. Blanchard, one quick question for you. In terms of 
the oil markets, is there anything sinister about Iraq going to 
companies who are experts in developing large projects like 
Royal Dutch Shell, like Exxon Mobil, like the Chinese 
government. Is there anything sinister in terms of them looking 
towards trying to find expertise in the arena to actually 
increase their oil production, and modernize an infrastructure 
that by all arguments has been totally neglected for some 
twenty to thirty years?
    Mr. Blanchard. I think the Iraqi government has pursued 
those service, in particular, contract opportunities, based on 
a recognition that it lacks either the expertise or the 
technical capability to rehabilitate its oil production and to 
meet its immediate short term goals. I think over the longer, 
or medium term run, so if you look at these long term oil deals 
that will come up for bidding next year, I think the 
administration has taken the position, and I imagine many in 
the Congress would agree, that that should be conducted through 
an open bidding process that is free and fair.
    Mr. Conaway. But that is something a sovereign government 
would do with----
    Mr. Blanchard. Indeed, these are sovereign government 
decisions. And, you know, I think as an observer of Iraq's oil 
politics the sort of only caveat I would add to that is that 
these do not represent necessarily broadly discussed, you know, 
there is a, as I said, there is a lack of political consensus 
about really how to move forward with these things. So, you 
know, a decision by the Maliki government to move forward with 
a certain contract or a decision by the KRG to move forward 
with a certain contract does not necessarily represent the, you 
know, broadly shared vision of what Iraq's energy future should 
be.
    Mr. Conaway. Sure. Thank you, Mr. Chairman. Thank you, Mr. 
Conaway. Mr. Doggett has had his opportunity but we will come 
back to you if necessary. Mr. McGovern is not here. Mr. Scott 
is not here. Etheridge, Moore, Bishop, Mr. Berry?
    Mr. Berry. Thank you, Mr. Chairman. Dr. Kagan it says in 
this information that I have in front of me that you were one 
of the architects of the President's surge policy. Is that 
correct?
    Mr. Kagan. Congressman, I am uncomfortable with any 
particular designation of that. I was an early proponent of the 
surge. I put out a report recommending something very much like 
the surge. But I did not have an official position in 
government.
    Mr. Berry. Was part of the idea or the plan that you had to 
go into the neighborhoods and pay people not to cause trouble?
    Mr. Kagan. I am sorry. I did not understand your last part?
    Mr. Berry. Go into the neighborhoods and pay people not to 
cause trouble?
    Mr. Kagan. No, Congressman. We did not recommend in our 
plan the Sons of Iraq initiative, although I think it was a 
very good initiative and I stand by it. But we did not 
recommend it.
    Mr. Berry. If I understood you correctly, you recommend 
continuing with whatever troop levels is necessary to maintain 
some kind of stability in Iraq for as long as it takes, 
basically, or certainly until there is a better alternative 
that comes along?
    Mr. Kagan. Well, Congressman, since my analysis tells me 
that rapidly withdrawing American forces at this point would 
lead to probably a resumption of violence and certainly a 
failure of current Iraqi political efforts and a failure of our 
mission, right now my recommendation is that we maintain forces 
at levels necessary to continue to move forward in Iraq.
    Mr. Berry. So at what point would you consider that it is 
time to start pulling our forces out?
    Mr. Kagan. When I believe that that is in the best interest 
of the United States of America, I would recommend that, sir.
    Mr. Berry. And how are you going to define that?
    Mr. Kagan. Well, you have to make an evaluation of what the 
likelihood of success is in Iraq, what the consequences of 
particular force levels would be, what the new strategy would 
be, what its likelihood of success is, what the various 
spoilers and enemies would do in response to it, and come to a 
reasoned conclusion about this. From my perspective the issues 
is remaining focused on what our objectives are, making sure 
that we have a strategy that makes sense to move us toward 
those objectives, and maintaining that we have adequate force 
levels and other resources, including non-kinetic measures, to 
support that strategy. And that is the only way to do force 
planning as far as I am concerned, sir.
    Mr. Berry. And how would you propose to pay for this?
    Mr. Kagan. Congressman, I am a strategist, not a budget 
expert.
    Mr. Berry. Oh, yes, okay.
    Mr. Kagan. How would you propose to win the war, 
Congressman, if we withdraw the troops?
    Mr. Berry. We are not questioning the members. Thank you, 
Mr. Chairman.
    Chairman Spratt.*Thank you, Mr. Berry. Mr. Alexander of 
Louisiana?
    Mr. Alexander. Thank you, Mr. Chairman. Dr. Kagan you used 
two terms a while ago. Peacekeeping and peace enforcement. 
Would you describe in your opinion the difference in the two?
    Mr. Kagan. Congressman, you engage in peacekeeping 
operations in situations where violence is either low or 
nonexistent, and where the main priority of your military 
presence is to deter the resumption of violence by forces that 
have put down their weapons and helped to make progress toward 
permanent reconciliation. Peace enforcement is a term of art 
that is used when you have violence that is going on that you 
are working to reduce. And it is a level generally of violence 
that you would say is below significant insurgency. And I think 
in most areas of Iraq that is where we are.
    Mr. Alexander. Okay. Look at the entire picture and in your 
opinion, on a percentage basis, are our troops engaged in which 
one the most?
    Mr. Kagan. I would say, Congressman, it is very, I cannot 
give you a definitive answer on that. I would say that it is 
probably about fifty-fifty. Our troops, we put our troops 
disproportionately in areas where there is violence, of course, 
because our purpose is to bring it under control. So in areas 
such as Diyala and Ninawa Province we have been focusing very 
much on going after violence. In Baghdad for the most part, I 
think, our forces are engaged in peacekeeping in a lot of 
areas. In Anbar they are certainly engaged in peacekeeping, in 
the south in Babel Province and so forth, they are engaged in 
peacekeeping. I think in Basra our forces are largely engaged 
in peacekeeping. So in large areas of the country we are 
engaged in peacekeeping. But in terms of what the percentage of 
troops that is I cannot say offhand.
    Mr. Alexander. Okay. Thank you.
    Chairman Spratt. Ms. Kaptur?
    Ms. Kaptur. Thank you, Mr. Chairman. I wanted to ask any of 
the panelists to comment, when we look back at the chart on how 
much the American people have spent on this War, nearly three-
quarters of a trillion dollars, $653 billion and still 
counting. How much of that money possibly could have ended up 
in the wrong hands? There has been a lot of talk about 
corruption. Congressman Berry talked about money being handed 
out in order to buy people's behavior. From what you know of 
the diversion of dollars in any society, even our own in any 
federal program, where we have major institutions in place to 
check corruption and even then we do not stop it. In a society 
like Iraq, where lawlessness is more the order of the day than 
a rule of law, what would be your guesstimate on how much of 
that might have been misspent? Have you ever thought about 
that? Diverted? Stolen?
    Mr. Korb. Well, I think the Special Inspector General for 
Iraq has given you some really good figures on that. And I 
would, I think that his is probably the best analysis. And in 
fact, you may remember that some members of the Congress were 
so upset about his reports that they tried to do away with the 
office, okay, in terms of, you know, the things that he was 
saying. So I think his estimates are probably the, the best of 
how much money has been wasted.
    Ms. Kaptur. Thank you, Dr. Korb. Let me ask, of the number 
of U.S. troops that have been killed in Iraq the rate of death 
has been going down. Can we say the same about Iraqi civilians?
    Mr. Korb. It has. I mean, the number of attacks on all 
Iraqis as well as Americans has gone down dramatically. But I 
think it is important to keep in mind that it went up 
tremendously in 2007. So when you compare 2007 to 2008, June of 
both years, yes, it is down. But that was a very, very high 
number. And I think if you say in terms of are the levels of 
violence where they were then? No, they are not. But it is 
still not a safe place. And I think that is the key thing to 
keep in mind. And that is why I think it is important that the 
Iraqis take over their security. And if the head of the 
training is correct then they can provide that security.
    Remember now, there are close to 600,000 members of the 
Iraqi security forces. And what we are talking about is 
basically, we do not even have an estimate. But this is not a 
large scale, conventional military threat they are dealing 
with. They are dealing with violence and basically doing police 
work. So I think, you know, General Dubik is correct that that 
in fact could occur.
    Ms. Kaptur. When you saw the death of the Sunni leader in 
Baghdad this week, what did you say to yourself? Who was 
cooperating with us.
    Mr. Korb. Well, what concerns me about that is the attitude 
of the Maliki government toward the so-called Sunni insurgents, 
Sons of Iraq. They were never happy with this. This was not 
their idea. This was something our on scene commanders did well 
even before the surge. They are the ones who begin working with 
these groups. And General Petraeus has been pressuring the 
Maliki government to take more and more of them in. But the 
fact of the matter is, it has been very, very, very slow. And I 
do worry about the fact that we have created a ticking time 
bomb there because these people do not support the central 
government who we are supporting. And so while they have been 
working with us to get rid of Al Qaeda in Iraq, because Al 
Qaeda in Iraq over stepped their boundaries, and they saw the 
results of the 2006 election, I think that in fact if they are 
not accommodated they can cause an awful lot of problems.
    Ms. Kaptur. I viewed it as a sign of the fragility of the 
situation there. I do not know if you----
    Mr. Korb. Yes, I do.
    Ms. Kaptur [continuing]. Share that view to some extent. 
Let me just say, I wanted to make this comment on the record. 
It has been really amazing to me that the insiders who promoted 
this war as a simple task, and I want to say their names, Paul 
Wolfowitz, George Tenet, Douglas Feith, and Donald Rumsfeld, 
have largely disappeared. Where are they? Are they 
editorializing? Are they writing op-eds? Are they on the 
evening news? Now you would think that if these were courageous 
men they would stand by their position. But what has been 
amazing to me is, it is as though they have vaporized. Where 
are they? Why are they not up here? Why are they not giving 
speeches? It is amazing to me, one of the greatest disappearing 
acts I have ever seen.
    Now, Colin Powell has sort of been on occasion seen. There 
has been a sighting now and then, and of course I think Vice 
President Cheney is one of the most hidden vice presidents I 
have ever seen. But where is the courage of their conviction? 
And I just wanted to say on the record. It is very upsetting to 
me. I did not agree with them on their position. But where are 
they? Do the American people not have a right to hear from them 
now? And I hope if, you know, they are listening today or 
someone says something to them, I hope that they hear this 
member from Ohio,because many of her constituents are dead 
because of them. And I can remember when Mr. Rumsfeld and Mr. 
Powell appeared before our Defense Committee and I asked Mr. 
Powell the question, ``Sir, do you view what is going to happen 
as a liberation or an occupation? How will you know the 
difference?'' Mr. Chairman, I view this now as an occupation in 
the way that it is functioning, not a liberation. And what is 
amazing to me is how these gentlemen have not stood by the 
courage of their convictions. Though I disagree with them 
completely, where are they? Thank you, Mr. Chairman.
    Chairman Spratt. We have got some votes coming up. We want 
to make sure everyone has an opportunity to ask questions. So 
Mr. Jordan?
    Mr. Jordan. Thank you, Mr. Chairman. I will be quick. I 
want to thank you all for coming. I did not get a chance to 
catch everyone's testimony. But Dr. Kagan, I just want to go 
back to this public timetable, time line, deadline, debate. 
Which to me just does not make sense. And this is coming from 
someone, I mean, on the surface you can recognize it. You know, 
I always say deadlines influence behavior. The first piece of 
legislation I ever did back in the General Assembly in Ohio was 
welfare reform legislation. And I did the amendment. I remember 
offering it on the floor, and the big debate. I did the 
amendment that said after a certain point in time, able bodied 
adults would not longer receive cash payments from the state. 
Made sense, deadlines impact behavior.
    But in this context it just scares me because of the 
message it sends A, to the bad guys, and probably more 
importantly, and I want your comments on this, more importantly 
to the citizens and government of Iraq. Are they going to have 
the full commitment they need to get where they need to get so 
this country, and our troops get home like we all want to see 
happen.
    So elaborate on that if you would, and then I will yield 
back, Mr. Chairman.
    Mr. Kagan. Thank you, Congressman, I appreciate the 
opportunity to elaborate on that. The, first of all I want to 
make the point that Iraq has been so far by far the best ally 
in the war on Terror that we have had in terms of the number of 
troops Iraq has put into the field against terrorists and the 
number of casualties that Iraq has suffered. And I think it is 
very important to remember that. Because it is important to 
remember that the Iraqi security forces and the Iraqi 
government really, and the Iraqi people, really have chosen our 
side on the whole against our own worst enemy, Al Qaeda in 
Iraq, and also against Iranian backed militias.
    Mr. Jordan. In fact, when I was there you saw that, you 
witnessed that, when we were in Iraq last summer.
    Mr. Kagan. Absolutely. Absolutely. And it was a very 
positive sign when we were, when I was last down near Amara as 
the special groups had fled from the Iraqi security forces 
attack in that city. One of them had written graffiti on one of 
the bridges hear the border saying, ``We will be back.'' And 
one of the Iraqi soldiers who had chased them out wrote 
underneath it, ``We will be waiting.'' So there is a real 
commitment on their part to fighting our common foes. And what 
the Iraqis across the board are looking for from us is a 
commitment to them. And what they are hearing from Washington, 
D.C. is the exact opposite of that. They are hearing arguments 
that we should make no commitment to them. That we should 
hector them, that we should bully them, and we should punish 
them, but that under no circumstances should we guarantee that 
we will stand with them if they continue to fight against Al 
Qaeda, that we will stand with them if they continue to fight 
against Iranian backed and controlled militias.
    And I think the more time that goes on when we leave open 
the question whether or not we will stand by this ally, the 
longer they are going to have to make some choices that I think 
we are not going to enjoy. Choices about how long do they want 
to be on the firing line alone, and how long do they want to 
wait before they start cutting deals with these various 
enemies. And I think we have already seen the very nefarious 
effect of this. Because the truth is one of the main reasons we 
have been having a hard time with this strategic framework 
agreement, which was initially supposed to be a SOFA is because 
at the outset we could not meet, the administration could not 
meet the Iraqis' asking price. The Iraqis' asking price was a 
security guarantee. And their point was that if they sign any 
kind of deal with us the Iranians, who see the world in a very 
black and white, zero sum game, would see them as siding with 
us against Tehran. And the Iraqis said, ``We are willing to do 
that. Are you willing to back us?'' And right up front, because 
of resistance within this Congress, the administration had to 
say no. And that has already led to very negative effects.
    Now, if we set a timetable and say we are unconditionally 
pulling out by a certain period, whatever the situation on the 
ground, we will be sending the additional signal to the Iraqis 
that we do not plan to be there. We do not plan to back them 
and they need to make their own decisions. And I do not 
understand why anyone imagines in that circumstance, given the 
threats they face, and given what the Iranians tell them on a 
daily basis, why if we abandon them we think that they will 
choose us and do what we want.
    Mr. Jordan. Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Scott?
    Mr. Scott. Thank you, Mr. Chairman. We were told going into 
this war, just a couple of months before, not to worry about 
budgeting for the war. The cost would be so insignificant when 
you considered that oil revenues were not listed in the budget 
and the cost of the war was not listed in the budget. So as the 
Budget Committee we were told by this administration not to 
worry about it. We have now spent over $600 billion and when 
you consider the future health costs for troops and replacement 
costs for equipment the estimates are in trillions. What 
happened?
    Mr. Korb. Well, I think what happened is that we got 
carried away. We did not understand what we were dealing with. 
I think also what happened, and again if you go back and you 
look you may remember Larry Lindsey, who I had the privilege of 
serving with in the Reagan administration, who said, ``You 
know, this could be $100 billion to $200 billion.'' They got 
rid of him. And then the head of OMB, now Governor of Indiana, 
Mitch Daniels said, ``No, no, that is way too high.'' You know, 
it could not be even, you know, more than a hundred. And then 
of course Wolfowitz said it.
    I think what happened, and this goes to Congresswoman 
Kaptur's point here that I think is very important. We talked 
about people who admitted they made a mistake. One of them is 
Francis Fukuyama, who wrote the book The End of History, is now 
the Dean at SAIS. He basically supported the war. And, but he 
said a couple of years later, I think, if you had told the 
American people that we were going to go to Iraq and have over 
4,000 dead, spend whatever the number is, some, you know, could 
be up to $3 trillion, hundreds of thousands of Iraqis would 
die. And these were his words, ``So Iraq could have an 
election,'' which was basically what happened, you would have 
been laughed out of the ballpark. I mean, and that is what 
happened. People were trying to convince the American people 
that it was necessary to go to war with a country that had 
nothing to do with 9/11. And so therefore, they presented a 
case.
    And, you know, we are talking about Paul Wolfowitz here. He 
is also quoted as saying, ``Well, I never believed there were 
weapons of mass destruction. But that sold. So that is why we 
emphasized that.'' I mean, that is the type of thing that we 
had to deal with. And I think had the American people known 
this, had all of you known this, in terms of the votes I think 
the vote would have been a lot different in the Congress.
    But we believed our own propaganda. I mean, there was this 
character Chalabi here that convinced the administration we 
would be greeted as liberators. Do you remember that we thought 
we would be down to 30,000 troops by the end of 2003? I 
remember when I went to Iraq the first time in November the 
troops all thought they were coming home by Christmas, okay? I 
mean, they were told that. And then when General Abizaid said, 
``No, we have got an insurgency.'' Secretary Rumsfeld said, 
``No, you cannot use that word.'' Okay? And then, you know, I 
mean, so all of these things happened. You know, there were a 
number of mistakes made.
    But I think the original one was overestimating our ability 
to go into a foreign country and achieve a quick, relatively 
easy military victory. And we are all paying the price for it. 
I did not support the war. But I think it is important to keep 
in mind that this is the first significant conflict we have 
ever fought in our history where we do not have a draft and we 
have not raised taxes. And therefore, the problems that 
Chairman Spratt was talking about earlier in terms of our 
overall economic position is in terrible, terrible shape.
    And that is also one indicator of our economic power. In 
terms of, what about the costs of not being able to do what you 
need in Afghanistan? Afghanistan is deteriorating rapidly and 
you do not have the wherewithal to deal with that situation.
    Mr. Scott. The costs of reconstruction, what portion of 
that cost is due to the damage done by the war and how much of 
that is new and improved infrastructure?
    Mr. Korb. Again, if you go back and you take a look, after 
they said they had no idea how bad the Iraqi infrastructure was 
before we went in. And again, I am thinking, how could you miss 
that? You had, you know, CNN was there, you had newspaper 
reporters, not to know how, so I think the infrastructure was 
not in very good shape before we went in. We did not realize 
that. Had we realized that we would have known that the costs 
would have been much greater to rebuild. I do not think, in 
fact I think there is a credit to our troops, they minimized 
the damage to the Iraqi infrastructure when they went in. Now, 
subsequently with the development of the insurgency you have 
had a lot more damage.
    Mr. Scott. Iraq has a surplus. Have they ever committed to 
using the surplus to do the construction rather than have us do 
the construction? I mean, I do not remember them inviting us in 
with their representation that they would spend their money. 
What, on what basis are they committed to spend their money and 
not ours?
    Mr. Kagan. Congressman, the Iraqis do seem to be committed 
to spending their own money. They are having a variety of 
problems doing that. They do budget annually for infrastructure 
projects and they have said that they want to spend their own 
money and also bring in foreign investment. They have repeated 
on many occasions, it is their objective to spend their own 
money to build their own country. I do not think there is any 
question about the intention.
    The issue is the pragmatic difficulties that they face in 
actually doing that spending on infrastructure. And I think we 
can get a little bit carried away talking about the trivial 
amount that they have spent on reconstruction. The fact is, if 
you go back and look at the GAO report they have spent tens of 
billions of dollars of their revenue. They have spent a lot of 
their revenue. They have spent it primarily on operations and 
maintenance funds, which is to say salaries.
    Now in the context of the sort of insurgency that we were 
dealing with that was fueled for a long time by people who were 
simply unemployed, that was a direct contribution to our 
efforts to bring violence under control. Now we are working 
them toward the process of developing the systems that they 
need in order to spend infrastructure money responsibly without 
having excessive corruption, but that takes time.
    Mr. Scott. Who decides who gets the contracts?
    Mr. Kagan. The Iraqi government decides who get Iraqi 
government contracting, sir.
    Mr. Scott. And the American contracts?
    Mr. Kagan. We decide.
    Mr. Scott. No further questions.
    Chairman Spratt. Mr. Baird
    Mr. Baird. Thanks, Mr. Chairman. I just want to start by 
stipulating I think this invasion and conduct of it were some 
of the worst foreign policy mistakes in the history of the 
country. But once we are there we have to deal with that 
reality. In the context, I just want to put things in the 
context. Because I hear things said here on Capitol Hill and 
back home that are just sort of out of context.
    In the context of our total annual deficit, which CBO now 
estimates at over $400 billion plus another 150 borrowing from 
social security, what is the annual spending on Iraq?
    Mr. Korb. It is about $10 billion to $12 billion, at least 
$10 billion a month. So that----
    Mr. Baird. So the point being, the point being if we 
completely withdrew, spent not another penny on Iraq, would we 
still be in deficit or not?
    Mr. Korb. Well I think, yes, you would.
    Mr. Baird. We would be substantially, we would not, I do 
not think we should waste a penny of the taxpayers' money. But 
people have argued back home, ``Gosh, if we were not in Iraq we 
could rebuild our infrastructure, blah, blah, blah.'' We would 
still be in deficit, friends. We need to be clear about that.
    Secondly, in Iraq, U.S. dollars what percentage goes to 
reconstruction now versus security?
    Mr. Kagan. Congressman, I do not have the exact number for 
you. But we have made policy decisions sometime hence and we 
were going to stop investing in long term infrastructure 
projects in Iraq. And we were to focus very heavily on 
security. And so whatever the percentage is now, and I think it 
is heavily weighted toward security at this point, you will see 
that it will be even more heavily weighted that way in the 
future based on decisions that have already been taken in 
theater and in the administration.
    Mr. Baird. I believe that to be accurate. It is heavily 
weighted toward the security side. The reason I say that is 
people also say, ``Why are we spending such vast funds to 
rebuild the Iraqi infrastructure when our own infrastructure is 
hurting?'' I understand the concern. I wish we were not 
spending so much money in Iraq. But we need to be clear, at 
least for the facts, the vast majority of U.S. funding is not 
going to rebuild Iraq's schools, or roads, etcetera. And the 
Iraqis are doing more of that.
    Mr. Korb, a year ago at this time were you suggesting that 
there was progress in the security situation in Iraq? Or were 
you skeptical at that time?
    Mr. Korb. Well, a year ago the violence had not yet come 
down, okay? So it does not really start until late in 2007. 
Okay? When a combination of factors, Sons of Iraq, more troops, 
Sadr laying down his arms.
    Mr. Baird. Did you foresee that and say, ``I see all these 
things happening and therefore I expect casualty numbers of 
U.S., Iraqi, and civilians to go down?'' Or were you rather 
skeptical that that was going to happen a year ago at this 
time?
    Mr. Korb. Well, I was mainly focused on the political 
reconciliation. That is what I was concerned about because the 
whole purpose of the increase in troops and the other things 
was the get the political reconciliation.
    Mr. Baird. Did you make any comments a year ago about the 
security situation?
    Mr. Korb. Again, a year ago in September?
    Mr. Baird. Yeah.
    Mr. Korb. I did not think that the violence was going to 
come down the way that it did, no.
    Mr. Baird. I appreciate that. That is correct. If we had 
pulled out, it is correct you said that. It is not correct that 
you were correct. If we had pulled out one year ago, or if we 
had begun a withdrawal, a year ago some people were saying, 
``Let's begin to withdraw one to two brigades a month and let 
us finish it up by 2008.'' So no U.S. combat, very small 
physical presence, 30,000 or so. Even that, some said zero. 
What do you think would have happened? Mr. Kagan, and we will 
go on down the line. Do you think we would be seeing low 
numbers of casualties? Do you think we would be seeing chaos? 
What do you think, Mr. Kagan?
    Mr. Kagan. Congressman, I am very confident that if we had 
begun a year ago as General Petraeus was testifying about what 
he thought needed to happen, withdrawing a brigade or two a 
month, sectarian violence would have rapidly begun to increase. 
The Iraqi government probably would have collapsed. The Iraqi 
security forces definitely would have collapsed. They were not 
in a position to function on their own. As the Jones Report at 
that time made very clear and as our own observations on the 
ground made clear. And I think all of the progress that had 
been made to that point in 2007 would have been undone. And I 
think the situation might well have become irretrievable very 
rapidly at that point because it would have been seen as the 
final betrayal by the Americans of the Iraqi people.
    Mr. Baird. What would have happened to surrounding 
countries, like Jordan?
    Mr. Kagan. You would have seen increased refugee flows. I 
think Michael O'Hanlon at Brookings Institute wrote an 
excellent report about the likely spillover effects of this. 
And you would have seen significant destabilization. I think 
you would have started to see much more aggressive intervention 
on the part of Iraq's neighbors both to stem the tide of 
refugees and also to try to protect their coreligionists and so 
forth. So I think you saw a real danger. And again, I think it 
was probably Ken Pollack who laid this out. You saw a real 
danger that a situation in Iraq spiraling out of control could 
well have become a regional conflagration.
    Mr. Baird. Mr. Korb, do you want to comment on that?
    Mr. Korb. I think if you go back and you take a look in 
2006, when President Bush met Prime Minister Maliki in Jordan. 
And Prime Minister Maliki said the following, ``Let us take 
control of Baghdad, my troops, and you, you move yours to the 
outskirts.'' If in fact that happened and you also had the so-
called Anbar Awakening----
    Mr. Baird. Let me just, I try not to be discourteous. But 
my question was, if one year ago, not in 2006, in 2007 we had 
begun to withdraw one to two brigades a month, and to this 
point where we were very, very low troop strength. Mr. Kagan is 
of the belief, I actually share that belief, that we would have 
had substantial infighting, chaos in the ground, possible 
genocidal violence, a number of U.S. troops killed in the 
withdrawal process, and resurgence of Al Qaeda, and the 
strengthening of Iran.
    Mr. Korb. I disagree.
    Mr. Baird. Uh-huh. What do you think would have happened?
    Mr. Korb. As I have said all along, basically, and 
obviously you have looked up some of the things I have said 
because----
    Mr. Baird. Well, you said it about me at the time so I 
remembered it.
    Mr. Korb. Basically, if you set a withdraw date and 
undertook a diplomatic surge with the countries in the region, 
none of whom wanted to see Iraq become a failed state, they 
would have been involved constructively. And I also 
demonstrated in the reports, the Americans would not have had 
any casualties if you had done it the same way that you put in 
over 200,000 troops in 2004. So that, there would not have been 
increased American casualties. And it would have, in my view, 
given the Iraqis the incentive to do what they need to do. I 
think, I cannot emphasize, this is a very, you know, 
distinguished group of people. These people are, you know, have 
long traditions. And I think it would have given them the 
incentives to do what they need to do, which they still have 
not done. And with that----
    Mr. Baird. Well, the National Intelligence Estimate at the 
time took a somewhat different perspective on that in a line 
that got very little attention. The line basically said that 
the threat of U.S. withdrawal and a U.S. timetable is probably 
causing people to retrench rather than reach out and work 
together. Anyway, I am thankful, at least, that the casualty 
numbers have gone down. I think it is a credit to our soldiers, 
it is a credit to the Iraqi people, it is a credit to the 
change in tactics by General Petraeus and Ambassador Crocker. 
Thankfully, we did not have to test the other hypothesis. We 
did not have to run the risk of genocide, etcetera, etcetera. 
And it is still fragile. But the fragility in my judgment does 
not justify the claims of and the calls that we now withdraw 
one to two brigades a month. Because how, saying an edifice 
propped up by certain things that it is finally getting 
stronger if we just pull out the props, that will suddenly 
force it to strengthen itself, it does not work in architecture 
and I do not think it would work in foreign policy. I thank the 
Chair and thank the witnesses.
    Chairman Spratt. Thank you, Mr. Baird. And to our three 
witnesses for your diligence and cooperation in preparing your 
testimony and the testimony you have given and the answers you 
have forthrightly stated, we very much appreciate it. We have 
learned from your contribution and we appreciate your 
participation.
    Before we conclude I would ask unanimous consent at this 
point that anyone who did not have the opportunity to ask 
questions be permitted to do so by submitting them for the 
record within the next seven days.
    Thank you once again for coming and for your participation. 
The Committee is now adjourned.
    [Whereupon, at 12:00 p.m., the Committee was adjourned.

                                  
