CONTENTS
Letter of Transmittal ..........
Summary/Overview .............
The Economy ..........
Capacity of Iraqi Institutions and the “New” Strategic Plan ........
The New Embassy Compound ......
APPENDIXES
Appendix I. Embassy Staffing Summary .........
Appendix II. Meetings and Interviews .............
(III)


LETTER OF TRANSMITTAL
Dear Colleague:
The committee recently sent Mr. Patrick Garvey of the profes-
sional staff to Baghdad to assess progress in the U.S. mission to
stabilize Iraq.
We are pleased to share with you his trip report, which we be-
lieve provides significant insight into several areas—particularly
economic reconstruction and the capacity of Iraqi governing institu-
tions—that will be key to a stable and democratic Iraq. The report
pays significant attention to the U.S. strategy to improve Iraqi in-
stitutional capacity and engender policy reform that often receive
less attention in the press, providing insight into the successes we
have achieved and the challenges that lay ahead.
The report also provides a number of recommendations that may
be helpful as the Committee on Foreign Relations continues its
oversight of Iraq and the Department of State whose ability to
manage complex stabilization and reconstruction missions is so
critical.
We look forward to continuing to work with you on these issues
and welcome any comments you may have on this report.
Sincerely,
RICHARD G. LUGAR,
Chairman
(V)


IRAQ: ASSESSMENT OF PROGRESS
IN ECONOMIC RECONSTRUCTION AND
GOVERNMENTAL CAPACITY
From November 4–12, 2005, a member of the professional staff
from the United States Senate Committee on Foreign Relations
(SFRC) traveled to Baghdad, Iraq. At the request of the Chairman,
the purpose of the trip was to examine two issues:
1. Reconstruction progress in the area of economic development.
2. Capacity of Iraqi ministries and Iraqi governing institutions,
including those at the provincial level, to function independ-
ently of U.S. assistance.
These two pillars in the reconstruction effort were chosen be-
cause of their importance to the long-term stability of the country,
the relative lack of media attention they receive, and their rel-
evance to the oversight responsibilities of the committee. This re-
port also explores other areas of concern to the SFRC, specifically:
• The “New” Joint Strategic Plan, which includes Provincial Re-
.construction Teams.
• Construction of the new embassy complex, as well as staffing
and security issues.
• The Rule of Law program.
Staff visited with lead Embassy officials, Iraq Reconstruction
Management Office (IRMO) leadership, the Director of the Gulf Re-
gional Division of the Army Corps of Engineers, Project and Con-
tracting Office members, the USAID Mission Director, two mem-
bers of the Iraqi National Assembly, and numerous embassy per-
sonnel (see Appendix II for complete list).
Staff's movement was restricted to the International Zone for se-
curity reasons and Ambassador Khalilzad and many senior Iraqi
government officials were traveling outside the country.
SUMMARY/OVERVIEW
Staff found that U.S. and coalition reconstruction projects, in-
vestments and other program and policy reforms implemented
since 2003 appear to be having a stabilizing effect on the economy.
U.S. officials agreed with recent IMF Executive Board comments
citing Iraq authorities for “having established and maintained a de-
gree of macroeconomic stability under extremely difficult cir-
cumstances, and for having initiated structural reforms."1 While
reliable statistical measurements are hard to come by, embassy
1 IMF Survey, Vol. 24, No. 16, August 29, 2005, p. 251.
(1)


FINANCIAL SECTOR AND PRIVATE INVESTMENT
Officials explained that the financial sector remains constrained.
An estimated 90% of all assets are in the two state-owned banks,
which have “deeply negative net worth” according to detailed as-
sessments. They are not inter-connected. There's no electronic
funds transfer capacity. Salaries are paid in cash (although a direct
deposit system for government workers will soon come online). Pri-
vate banks are more like family-owned investment companies.
There is no foreign investment in the Stock Exchange. There is no
demand for 30-year paper, which could fund long-term liabilities
such as pensions or large capital investments. There is no credit,
which could enable short term loans.
The Senior Consultant for Private Sector Development, who has
been in that position for 21 months, reported that a lending pro-
gram she has overseen, providing loans of up to $25,000 through
Iraqi-trained loan officers working in a dozen neighborhood offices
to provide seed money for small or start up local business, has
made more than 16,000 loans disbursing more than $31 million
with no write-offs in two years. Women make up 9% of the bor-
rowing pool. A program audit is forthcoming.
She explained that it has been her experience that there is tre-
mendous pent-up demand for credit to rebuild and begin entrepre-
neurial endeavors. It is her view that Iraqis respect the loan regi-
men and that she could easily expand the program to enable even
larger businesses to get on their feet. She expressed her frustration
with other programs (i.e. USAID) that provide public sector grants
rather than private sector loans. She said her programs were look-
ing for another $70 million, and demurred when prompted for fur-
ther thoughts on the scalability of the programs to accomplish
large-scale reconstruction.
Recommendation 1–SFRC should formally request a
proposal and feasibility commentary on how aid could be
structured to capitalize on the commercial lending concepts
the Private Sector Development office has implemented. The
question is to what extent these private sector solutions can
be expanded effectively in Iraq.
IMF STANDBY ARRANGEMENTS (SBA)
Iraq has been negotiating with the IMF for standby arrange-
ments (SBA), which are the second step in Iraq's re-entry into the
IMF and the world economy. The first was the Emergency Post-
conflict Agreement (EPCA) entered into in November 2004, which
laid out policy and performance goals to develop fiscal and mone-
tary data; financial management and information systems; a na-
tional payments system; a national budget process; a plan to re-
structure state banks; and a subsidies reform plan. The EPCA al-
lowed small IMF borrowings and led to the first tranche (30%) of
Paris Club debt reductions.
The SBA will govern the Iraq-IMF relationship for the long term.
It requires Iraq to significantly reduce subsidies. On 18 December,
fuel prices for premium gas at the pump will increase from 20-50
ID/iter (about 5 to 13), and according to Embassy Baghdad Eco-
nomic advisors, will step up in 2006 to reach market prices (700


12
assured staff that the Chief of Mission maintains overall policy
oversight. Nevertheless, several embassy and State Department
personnel shared their concern over this move with staff. They
worry about the long-term stability of perhaps the most crucial
ministry in the law-and-order equation, especially once the military
withdraws. One advisor to the Ministry of Interior told staff that
the “The MOI situation with DOS/DOD is screwed up ..." He
said, “There are a lot of good DOD people working on it but they
have their own faults, and now they don't have any interference
from people who can provide oversight, policy and long term direc-
tion . . .” He shared further his view that “. . . the military
is developing solutions that cost a lot of money, which dramatically
change the way that the Iraqis do things and in my opinion won't
last when we leave.”
Staff also raised questions about the findings made in OIG Re-
port No. ISP-IQO-06-01 of October 2005 regarding the Rule of Law
program. 10 Everyone indicated that a strategy had been put to-
gether to address the first major finding that “a fully integrated ap-
proach to justice sector reform in Iraq does not exist at the
present.” Time limitations prevented a more extensive inquiry, so
progress in addressing the serious shortcomings found in the IG re-
port was difficult to assess. It is important to note, however that
neither the new senior Rule of Law coordinator nor the INL pro-
gram chief have any prior experience in Rule of Law or INL pro-
grams.
Recommendation 3: (a) To ensure success in this area,
the Department of State must put in place experienced INL
experts whom the Iraqis will respect and seek out. They
must engage actively with the military and Iraqis to pro-
vide long-term policy guidance. (6) International donors
must be pressed harder for contributions in this area, not
only financially, but also with experienced trainers and
programs. (c) The SFRC should follow-up with Embassy
Baghdad officials for details on the corrective measures un-
dertaken to address the OIG's findings about the Rule of
Law program.
PROVINCIAL LEVEL CAPACITY
According to embassy officials, the capacity of Iraqi provincial
governments, with the exception of the Kurdish territories, has not
been developed. Their legal mandate is not clear, they lack experi-
ence and resources, and many have been officially in position only
since January 2005. Nevertheless, their capacity is essential to the
long-term success of the Iraqi mission and the stability of the coun-
try. This is where the Provincial Reconstruction Team plan an-
nounced 11 November by Secretary Rice in Mosul is intended to
play a strengthening role.
10 United States Department of State and the Broadcasting Board of Governors Office of In-
spector General, Report of Inspection, Rule-of-Law Programs, Embassy Baghdad, Report Num-
ber ISP-IQO-06-01, October 2005.


26
APPENDIX II.—MEETINGS AND INTERVIEWS
New Embassy Compound Briefing and Tour
Mary French, New Embassy Senior Project Director
Discussion of Embassy Operations and Structure
Clarke Cooper, Legislative Affairs Advisor
Discussion of Human Resources, Staffing & Mission Management
Ambassador Greg Engle, Management Counselor
Discussion of Inspector General Issues
State Department Inspector General Howard J. Krongard
SIGIR discussion
Mike Boisvenue, Chief of Staff; James Connolly, Special Agent-
in-Charge; Brian Flynn, Assistant IG for Special Operations
Privatization, Private Sector Development, Stock Exchange and Se-
curities Commission
Ms. June Reed, Senior Consultant for Private Sector Develop-
ment (IRMO)
Iraq Reconstruction Management Office Briefing
David C. Harris, Chief of Staff and Director of Development; MG
Robert Heine, Deputy Director Civil-Military Regional Operations;
Mr. Brad Higgins, Deputy Director and CFO
Essential Services B;
Oil: Mr. Robert Todor, Senior Consultant Iraqi Ministry of Oil
Electricity: Mr. Scott Hutchins, Senior Ministerial Advisor
Water: Dr. Linda Allen, Water Resources Advisor
Water: Mr. Wayne Curry, Senior Consultant
Reconstruction Management Briefing (PCO/GRD)
BG McCoy, Commander of Gulf Regional Division Army Corps of
Engineers (and staff)
International Republican Institute
Richard Hougton, IRI Resident Governance Program Director
Discussion on Human Rights and the Rule of Law
Dr. Ellen Klein, Human Rights Officer
Rule of Law Program Briefing & Discussion
Ambassador James Yellin, Senior Justice and Rule of Law Coor-
dinator; Ms. Karen Hanrahan, Rule of Law Coordinator; Mr. Rob-
ert Witajewski, Director International Narcotics, Law Enforcement
Ministry of Interior Visit and Briefings (Adnan Palace)
Assistant Deputy Minister Ayden Qadir (Elections Security);
Deputy Minister Ali Ghalib (Police Capabilities and Challenges);
Mr. Thomas Bishop, National Security Advisor to the Ministry of
Interior; Mr. Jerry Burke, International Police Liaison Officer; Mr.
John Bozicevich, International Police Liaison Officer
Police Station Visit (Karida-Marium District Station)
Capt Faiz; Mr. Jerry Burke, International Police Liaison Officer;
Mr. John Bozicevich, International Police Liaison Officer
Saddam Trial Brief & Courthouse Visit
Regime Crimes Liaison Office Staff; Mr. Michael Kulstad, U.S.
Department of Justice