Iraq Report: October 24, 2003

IRAQI DEBT LIKELY TO AFFECT DONOR CONTRIBUTIONS AT MADRID. As the international community gathers in Madrid on 23-24 October to determine aid contributions for the reconstruction of Iraq, it remains unclear whether recent moves by the United States to quell international criticism over the management of donor funds will be enough to solicit the estimated $55 billion needed for Iraqi reconstruction over the next four years.

The conference was co-organized by the United States, the European Union, the United Nations, the International Monetary Fund, Japan, and the United Arab Emirates. Some 200 delegates representing 78 countries are expected to attend, along with 19 international organizations and 11 nongovernmental organizations, ft.com reported on 21 October.

The United States agreed this week to allow the United Nations and World Bank to establish a separate fund facility for the management of international donor funds. This new agency, called the International Reconstruction Fund Facility for Iraq, will be formally announced at the Madrid conference, the World Bank said on 22 October. The facility will actually comprise two independent trust funds, one managed by the World Bank, and the other by the UN. A steering committee will ensure that there is no overlap between projects funded by the World Bank and UN, and a separate committee will coordinate with the Coalition Provisional Authority for the same purpose. U.S. aid to Iraq will remain under the management of the United States, within the Development Fund for Iraq, established under UN Security Council Resolution 1483 in May. Iraqi oil revenues will also continue to go to the U.S.-managed fund.

Although the Development Fund for Iraq was reiterated as the depository for international donations in last week's UN Security Council Resolution 1511, the international community still insisted upon a separate fund facility outside of U.S. control to manage their own donations. Earlier, Resolution 1483 called for the U.S. to work with the United Nations' International Advisory and Monitoring Board (IAMB), which is staffed by UN and World Bank officials. The IAMB would have no say in how funds were spent, but would monitor the spending of funds.

The UN/World Bank-managed fund will reportedly work closely with Iraqi ministries established by the Iraqi Governing Council, and fund the 14 priority sectors identified in a recent UN/World Bank assessment on reconstruction (http://www.worldbank.org). Those sectors include health care, sewage, water, and electricity. The United States has its own set of priority sectors that includes the New Iraqi Army, and various police and security organs, as well as the oil industry.

On the eve of the Madrid conference, it remained unclear whether the international community -- and European donors in particular -- would be forthcoming with funds. Russian Deputy Foreign Minister Yurii Fedotov said on 21 October that his country would not contribute donor funds to Iraq, Interfax reported. "We do not think that assistance to Iraq should be just about donor payments," he said. "And we [believe] that conditions are not right just now for Russia to make donor payments to the restoration of Iraq." However, Fedotov added that Russian companies are enthusiastic about investing in Iraq and may introduce projects there "at their own expense" that could amount to several billion dollars. Fedotov said that at the 23-24 October donors conference in Madrid, where he will represent Russia, he would push for Iraq to fulfill contracts concluded between the former Iraqi government and Russian companies under the UN's oil-for-food program. Donor contributions ahead of the conference stood at: United Kingdom $908 million (over three years), Spain $300 million (over three years), Australia $103.5 million (approximate), Denmark $50 million, Japan $1.5 billion, the United States $20.3 billion, the European Union $235 million, and Germany $59 million -- totaling $23.6 billion. The World Bank has said it would offer between $3 billion to $5 billion in loans to Iraq as well.

Russia's hesitancy to donate to the new Iraq likely stems from the fact that the former Iraqi government owed $12 billion to Russia, and it is unlikely that a new Iraqi government will honor those debts. Many former Iraqi opposition members said even before Operation Iraqi Freedom that a new Iraqi government might not honor debt incurred by the Hussein regime (see "RFE/RL Iraq Report," 9 December 2002). Others suggested Iraq might seek debt forgiveness, but until now Iraq's debts remain frozen, leaving the Russians, and many other nations, in limbo. Iraq's overall debt is estimated to be between $60 billion and $130 billion. The debt does not include an estimated $57.2 billion in pending contracts -- 90 percent of which are Russian -- and around $95 billion from 1991 Gulf War compensation claims according to the UN Compensation Commission website (http://www.unog.ch/uncc/). (To date the UN Compensation Commission has paid out $17,791,034,940 to individuals, corporations, and governments for claims stemming from Iraq's 1990 invasion of Kuwait and the subsequent 1991 Gulf War). Likewise, Iraq is substantially indebted to France ($8 billion) and Germany ($2 billion), as well as the Persian Gulf states ($30 billion), and Kuwait ($17 billion). The U.S. is owed $2.2 billion and Japan $4.1 billion.

France and Germany have said that they might be open to rescheduling Iraq's debt through the Paris Club, a committee of wealthy creditor countries, which earlier this year set Iraq's debt to them at $42 billion -- $21 billion in principal and another $21 billion in interest. Rescheduling would amount to something akin to debt forgiveness, since the debt would be repaid with very large discounts, giving the creditor countries some compensation but not nearly as much as they would have otherwise received. "Given conservative assumptions, we believe debt relief of 75-80 percent from Paris and non-Paris Club country creditors would suffice" for Iraq, Reuters quoted UBS analyst Alex Garrard as saying on 22 October. A 75 percent write-off would result in debts being reduced to $66.2 billion, giving Iraq a debt to imports ratio of 210 percent-227 percent and a debt-service ratio of 13.6 percent-16 percent of exports over the next five years. That rate is on a par with Egypt, Poland, and Serbia, all of which have won considerable debt relief in recent years, Reuters reported.

Russia has not committed to the issue of debt forgiveness, and it is unlikely that the country would forgive substantial amounts of the debt. Russian Finance Minister Aleksei Kudrin said on 20 September that Russia would write off some -- but not all -- of Iraq's debt. He said he had discussed the issue with International Monetary Fund Managing Director Horst Koehler after G-7 ministers agreed to restructure Iraq's debt by the end of 2004. "We are against writing all of it off," Kudrin told reporters in Dubai. "We think that this debt must be worked out...which [we] are ready to do in the framework of the Paris Club," Reuters quoted Kudrin as saying in a 22 September report. (Kathleen Ridolfo)

FUND MISMANAGEMENT ALLEGED. An October report issued by George Soros's Open Society Institute's Iraq Revenue Watch project (http://www.iraqrevenuewatch.org) has criticized the Bush administration for it's handling of Iraqi revenue, because it claims the administration has failed to manage the reconstruction funds in a transparent manner, as required under UN Security Council Resolution 1483 (May). Under the resolution, the U.S. was to establish the Development Fund for Iraq (DFI). The DFI would hold all Iraqi oil revenues (save 5 percent that is still funneled to the UN Compensation Commission for 1991 Gulf War reparations), as well as international contributions to the reconstruction of Iraq, and assets of the former regime seized from overseas banks, as required under Resolution 1483.

The transparency standards outlined in the Security Council resolution were echoed in the Coalition Provisional Authority's (CPA) Regulation No. 2 on the establishment of DFI (http://www.cpa-iraq.org). "The Development Fund for Iraq shall be used in a transparent manner to meet the humanitarian needs of the Iraqi people, for the economic reconstruction and repair of Iraq's infrastructure, for the continued disarmament for Iraq, and for the costs of Iraqi civilian administration, and for other purposes benefiting the people of Iraq," the regulation stated.

The CPA regulation also calls for the establishment of an International Advisory and Monitoring Board (IAMB) for DFI, with members representing the UN secretary-general, the managing director of the International Monetary Fund, the director-general of the Arab Fund for Social and Economic Development, the president of the World Bank, and three additional members appointed by the IAMB. "The IAMB shall approve independent public accountants responsible for auditing the Fund...and shall perform functions similar to those of outside audit committees."

According to iraqrevenuewatch.org, the IAMB was never established, and CPA administrator L. Paul Bremer had not approved the terms of reference for the board. Instead, a Program Review Board has managed DFI expenditures. The review board is comprised of CPA-appointed members, and only one Iraqi, Finance Minister Kamil Mubdir al-Kaylani, the report notes (see the CPA website for the minutes of board meetings). The Open Society Institute's report also criticizes the Pentagon, the Office of Management and Budget, and "other" U.S. agencies for refusing to disclose basic information about large purchase contracts and DFI expenditures in Iraq. A UN Security Council diplomat told iraqrevenuewatch.org, "The international community knows absolutely nothing about the Fund's management." Moreover, an Iraqi businessman complained that it is difficult for Iraqi vendors to compete with their U.S. counterparts when bidding on contracts.

The CPA addressed the issue on 21 October when CPA spokesman Charles Heatley announced that the IAMB would be formed "very shortly." According to a 22 October report on ft.com, the IAMB's creation was delayed by disagreements between the CPA and the UN over its audit powers. Those disagreements reportedly related to CPA administrator Bremer's insistence upon approving the auditing plans for the monitoring board (again see CPA Regulation No, 2, posted on the CPA website), ft.com said. According to ft.com, the United States has taken control of $2.8 billion in revenues from the DFI. Some $1 billion came from the UN oil-for-food program, another $300 million from seized Iraqi assets, and the rest from Iraq's sale of oil, Heatley said. Heatley stressed that transparency would not be an issue, since the IAMB would be able to audit all previous expenditures by the DFI.

Despite the CPA's measures to fulfill its commitment to transparency, the British aid organization Christian Aid claimed on 23 October that U.S. and British administrators have failed to account for some $4 billion in oil revenues that went into the DFI, according to Reuters. All but $1 billion of more than $5 billion of Iraqi funds had disappeared into a "financial black hole," it said. In Baghdad, CPA spokeswoman Karen Triggs responded to the accusation in a 23 October statement saying, "The CPA is unequivocally committed to maintaining the highest standards of transparency and accountability in stewarding Iraqi funds," Reuters reported. According to thescotsman.co.uk, the British Foreign Office also dismissed the allegations, calling them groundless.

Speaking to reporters in Madrid on 22 October, UN Secretary-General Kofi Annan appeared unaffected by the allegations, telling reporters, "I think we have in place enough mechanisms and arrangements that should assure people that the [donor] money will not only be properly used but there will be a good oversight mechanism." Annan discussed the mechanisms, telling reporters, "First of all, you have an auditing board, which is made up of an international group -- the World Bank, the IMF, the UN and the Arab [Development] Bank, which will form an auditing board that will oversee the use of these funds. And besides, there will be a mechanism where the UN and the World Bank will be involved in the disbursements of some of the funds which are going to be raised. Of course, the U.S. has its own bilateral arrangements, including the $20 billion that the president has asked for from the U.S. Congress." (Kathleen Ridolfo)