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 (II) 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 re- ceive testimony on this report, the GAO Report, since the Govern- ment Accountability Office released it several weeks ago. GAO re- ports 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 de- velop some insight into Iraq's fiscal situation and its ability to help pay for its own reconstruction. So far the United States has pro- vided 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 recon- struction and security training. În funding the Gulf War, the first President was able to secure much greater cost sharin ng 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 (1) Uunduruction. So far the United State- 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 impor- tance 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 sur- plus. 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 envi- ronment 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 ac- counts, 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 for- ward. Forward to how we budget for finishing the job in Iraq, for- ward to ensuring the security environment in Iraq continues to fos- ter a growing economy, and forward to the day that the Iraq gov- ernment has the capability to stand on its own two feet. I look for- ward 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. (Inaudiblel. 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). 10. example, in 2007, Iraq spent 80 percent of its $29 billion operating budget and 28 percent of its $12 billion investment budget. From 2005 through 2007, Iraq had an estimated cumulative budget surplus of about $29 billion. For 2008, we estimate that Iraq will have an additional surplus of between $38.2 billion to $50.3 billion, which could result in a cumulative budget surplus of $67 billion to $79 billion for 2005 through 2008. Iraq's 2008 budget surplus could be reduced as a result of expenditures from the $22.3 billion supplemental budget Iraq's Council of Representative passed in August 2008. However, based on Iraq's past expenditure performance, the government may not be able to spend all that it has budgeted for 2008. Since fiscal year 2003, the United States has appropriated about $48 billion for stabilization and reconstruction efforts in Iraq; it had obligated about $42 billion of that amount, as of June 2008. U.S. agencies spent about $23.2 billion on four critical sectors-security, oil, electricity, and water. As of June 2008, the United States spent 70 percent of the amount it allocated for these four sectors from fiscal year 2003 through June 2008. Iraq spent 14 percent, or $4.3 billion, of the $30 billion it allocated for similar activities in these sectors from 2005 through June 2008. U.S. government, coalition, and international officials have identified a number of factors that have affected the Iraqi government's ability to spend more of its revenues on capital investments. These factors included the shortage of trained staff; weak procurement and budgeting systems; and violence and sectarian strife. The United States has funded activities to help build the capacity of key civilian and security ministries to improve Iraq's ability to execute its capital project budget. The Department of the Treasury agreed with the findings of our report and stated that the report accurately highlights the substantial growth of Iraq's revenues in recent years. Treasury also stated that the increase in Iraqi revenues places the government of Iraq in a stronger position to shoulder the full burden of its development, reconstruction, and security programs. "This amount includes $2 billion appropriated in June 2008 for reconstruction and stabilization activities in Iraq in the Supplemental Appropriations Act, 2008, P.L. 110-252 (June 30, 2008). This anount does not include $1.1 billion appropriated in the same Act for similar activities in Iraq after October 1, 2008. Page 3 GAO-08-1144T 14 The Iraqi government spent about $947 million, or 1 percent of its total expenditures for the maintenance of Iraqi- and U.S.-funded investments. These expenses included maintenance of roads, bridges, vehicles, buildings, water and electricity installations, and weapons. • Investment expenditures increased at an annual rate of 42 percent in Iraqi dinars. However, most of this increase occurred in 2007 and was due primarily to the increase in investment by the Kurdistan Regional Government (KRG), not by the central ministries responsible for providing critical services such as oil, water, electricity, and security to the Iraqi people. For example, of the $1.8 billion increase in investment expenditures in 2007, $1.3 billion, or more than 70 percent was due to a reported increase in KRG investment. For 2008, we estimate that the Iraqi government could spend between $35.3 billion and $35.9 billion of its $49.9 billion 2008 budget. This estimate is based on the assumption that the expenditure ratio in 2008 will be the same as the average expenditure ratios from 2005 to 2007. This assumption results in a more than 21-percent increase in dinar expenditures in 2008, compared with the annual average of 13 percent over the past 3 years. Iraq's Financial Deposits through 2007 and Budget Surpluses As of December 31, 2007, the Iraqi government had financial deposits of $29.4 billion held in the Development Fund for Iraq (DFI) at the New York Federal Reserve Bank, central government deposits at the CBI, and central government deposits in Iraq's commercial banks, which includes state-owned banks such as Rafidain and Rasheed (see table 4). "DFl deposits consist of cash balances of $2.5 billion in U.S. dollars and $7.4 billion in U.S. Treasury bills that the Iraqi government has purchased. As a U.S. creditor, Iraq has received $435.6 million in interest on those bills since 2003. Iraq central government deposits in the CBI consist of U.S. dollar- and dinar-denominated accounts. Page 7 GAO-08-1144T 15 Table 4: Financial Deposits of the Iraqi Government, as of December 31, 2007 (Billions of U.S. dollars) Location Development Fund for Iraq Central government deposits at the CBI Central government deposits in the banking sector Total Amount (as of Dec. 31, 2007) $9.9 5.7 13.8 $29.4 Source, GAO analysis of Ernst & Young International Advisory and Monitoring Board audit and IMF's international Financial Statistics The balance of these deposits is, in part, the result of an estimated budget surplus of about $29 billion from 2005 to 2007. For 2008, we estimate that Iraq's budget surplus could range from $38.2 billion to $50.3 billion, based on the six scenarios we used to project export oil revenues and assuming Iraq's expenditure ratio will be the same as the average expenditure ratios from 2005 to 2007. (see table 5). This estimate is based on Iraq's regular budget of $49.9 billion for 2008. As of the end of May 2008, Iraq spent $14.5 billion, or 29.1 percent, of the regular 2008 budget of $49.9 billion. Table 5: Estimated Total Revenues, Expenditures, and Surplus, 2005 through 2008 (Bilions of U.S. dollars) 2005-2007 2008 2008 2008 2008 2008 2008 123456 Estimated total revenues $96.0 $73.5 $75.7 $80.2 $82.8 $83.3 $86.2 Estimated total expenditures 67.0 35.3 35.4 35.6 35.8 35.8 35.9 Estimated budget surplus 29.0 38.2 40.3 44.6 47,1 47.6 50.3 Source: GAO analysis of EIA, IMF, Ministry of Finance, and Central Bank of Iraq data. Iraq may accumulate a budget surplus of $67 billion to $79 billion by the end of 2008. This surplus could be reduced as a result of its expenditures of the $22.3 billion supplemental budget that Iraq's Council of Representatives passed in August 2008. The government allocated $14.3 billion of the total supplemental budget for operating expenditures and $8 billion for investment. Iraq's amended budget projects that the government will spend the entire supplemental and regular budget and end 2008 with a $5.1 billion deficit. Iraq made similar assertions in 2005 through 2007, projecting budget deficits of $3.5 billion in 2005, $4.1 billion in 2006, and $8.1 billion in 2007.(see fig. 1). However, as we previously displayed, Iraq ended each of these years with budget surpluses of $6.5 billion in 2005, Page 8 GA0-08-1144T 17 U.S. Cumulative. Expenditures on Stabilization and Reconstruction Activities in Iraq Since 2003 Since fiscal year 2003, Congress has appropriated about $48 billion to U.S. agencies to finance stabilization and reconstruction efforts in Iraq, including developing Iraq's security forces, enhancing Iraq's capacity to govern, and rebuilding Iraq's oil, electricity, and water sectors, among others." As of June 2008, about $42 billion (88 percent) had been obligated and about $32 billion (68 percent) had been spent." Over two-thirds of the $32 billion spent, or $23.2 billion, have supported reconstruction and stabilization activities in four critical sectors-security, oil, water, and electricity. Table 6 compares the allocations and spending of comparable activities by the United States and Iraq in these sectors." The Iraqi government developed its first annual budget in 2005. Table 6: Comparison of Iraq and U.S. Allocations and Spending for Selected Sectors (Billions of U.S. dollars) Government of trag 2005-2008 Allocated $12.8 10.8 1.3 Sectors Security U.S. Government Fiscal year Fiscal year 2003 2003-June June 2008 2008 Allocated Spent' $22.5 $13.7 2.7 2.5 2005- June 2008 Spente $3.1 Oild 0.4 0.4 2.9 2.2 Water resources Electricity Total 5.2 0.4 5.3 4.8 $30.0 $4.3 $33.4 $23.2 Source. GAO analysis of Iraq Ministy of Finance budgets and expenditures and State, DOO, USAID, and Treasury daja Note: Totals may not sum due to rounding This includes Iraq-specitic appropriations for the tray Reconstruction and Relief Fund, Iraq Security Forces fund, Economic Support Fund, Commander's Emergency Response Program, Iraq Freedom Fund, Democracy Fund, other agency program funds used for Iran activities, and operating expenses for the Coalition Provisional Authority. This amount includes $2 billion appropriated in June 2008 for reconstruction and stabilization activities in Iraq in the Supplemental Appropriations Act, 2008, P.L. 110-252 (June 30, 2008). This amount does not include $1.1 billion appropriated in the saine Act for similar activities in Iraq after October 1, 2008. "'For U.S. funds, we use the term "spent” for funds that have been disbursed. "Allocations are a portion of appropriated funds provided to U.S. agencies. Page 10 GA0-08-1144T *These amounts include $2.1 billion that has been allocated for investments in these four sectors as part of Iraq's $22.3 billion supplemental budget that Iraq's Council of Representatives passed in August 2008 *This refers to funds disbursed by U.S. agencies and funds expended by the respective Iraqi ministries For security ministries, the Iraq figures for allocated and spent exclude employee compensation, *For oil, water, and electricity ministries, the fraq figures refer to investment. As of June 2008, the United States had spent 70 percent of the amount it allocated for these four sectors from fiscal year 2003 through June 2008. In contrast, as of June 2008, Iraq had spent 14 percent of the $30 billion it allocated from 2005 through 2008. Factors Affecting Iraq's Efforts to Accelerate Spending U.S. government, coalition, and international officials have identified a number of factors that have affected the Iraqi government's ability to spend more of its revenues on the capital investments needed to rebuild its infrastructure. First, Iraq has a shortage of trained staff with budgetary experience to prepare and execute budgets and a shortage of staff with procurement expertise to solicit, award, and oversee capital projects. Second, Iraq has weak procurement, budgetary, and accounting systems. These systems must balance efficient execution of capital projects while protecting against reported corruption. Third, violence has contributed to a decrease in the number of workers available, increased the amount of time needed to plan and complete capital projects, and has hindered U.S. advisors' ability to provide the ministries with assistance and monitor capital project performance, As we previously reported," since 2005, the United States has funded activities to help build the capacity of key civilian and security ministries and thereby improve the Iraqi government's ability to execute its budget for capital projects. However, we found multiple U.S. agencies leading individual efforts and recommended that Congress consider conditioning future appropriations on the completion of an integrated strategy for U.S. capacity development efforts. Sce: GAO, Stabilizing and Rebuilding Iraq: U.S. Ministry Capacity Derxlopment Efforts Need An Overall Integrated Strategy To Guide Efforts and Manage Risk GAO-08-117 (Washington, D.C.: Oct. 1, 2007). Page 11 GA0-08-1144T 21 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 over- sight? 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 dis- bursement of money, the procurement of goods and services, and things of this nature? Mr. CHRISTOFF. Well, you know building capacity in any min- istries 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 serv- ants that they need who have had the technical expertise in budg- eting 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 re- sponsibility to fund?” Mr. CHRISTOFF. Well, first in terms of the $48 billion that we have appropriated, about 87 percent of that has been fully obli- gated. 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 Con- gress has been moving in that direction. When you passed the sup- plemental in June and you provided money for the Economic Sup- port Fund, you established a cost sharing formula, a dollar for dol- 27 Corporation. And Mr. Chairman, it just boggles my mind to think that there would be any evidence that the communist Chinese abil- ity 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 be- lieved 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 cou- ple 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 prob- ably is less than that. Because a lot of the oil and gasoline was di- verted 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 ap- preciate your report and your testimony. Thank you, Mr. Chair- man. 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 spend- ing 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 num- bers 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 num- bers? Mr. CHRISTOFF. We are confident in terms of the actual expendi- ture 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 ac- curately, 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 sur- plus. 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 th 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 con- tracts 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 sup- plemental 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 unnec- essarily. So, okay. Mr. CHRISTOFF. Right. Mr. CONAWAY. But given, and one final question about the accu- racy 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 De- partment that gets it from the Central Bank of Iraq. So, and in fact, that statement that you have we updated even the expendi- ture 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. 30 Iraq. And when we sought an analysis so we would have some ob- jective information instead of just the propaganda from the admin- out whether those benchmarks have been met the Con- gress 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 cor- rect? Mr. CHRISTOFF. Based upon that prior report, correct. Mr. DOGGETT. Yes, sir. And you found that of the eighteen bench- marks 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 eval- uated 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 objec- tive 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 be- fore. 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 eco- nomic front in our June report. Mr. DOGGETT. Right. And I believe you found one more bench- mark 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 imple- menting 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 con- cluded 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 pro- cedures to form semiautonomous regions, that was the fourth benchmark President Bush had. You found that that was only par- tially 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. 50 Testimony of Lawrence J. Korb Senior Fellow, Center for American Progress Action Fund Before the House Budget Committee September 16, 2008 Introduction Chairman Spratt, Ranking Member Ryan, and other members of the committee, I appreciate the opportunity to testify before you today to discuss the Iraqi government's huge and growing budget surplus and to place it in the context of the horrendous costs of the war in Iraq to our troops, their families, the Iraqi people, and the American taxpayer. I commend the committee for holding this hearing at such a critical moment in America's long and unanticipated involvement in Iraq. Violence in Iraq is at its lowest levels since 2004. By almost every measure, ethno- sectarian violence in the country has declined from the horrific levels of a year ago. Shiite militias, such as Muqtada Al-Sadr's Mahdi Army, have been weakened because Sunni insurgents began cooperating with us against Al Qaeda in Iraq, or AQI, as a result of the U.S. midterm elections in 2006 and the horrible practices of AQI. AQI, which was only supported by some Iraqis because of their fear of an indefinite American occupation, has lost that support and is no longer able to operate in many parts of the country. And General James Dubik, the American general in charge of training the Iraqi Security Forces, has stated that the Iraqi army and police will be able to assume full responsibility for internal security as early as April 2009. But while the reduction in violence has produced tenuous security gains in Iraq, it has not yet resulted in a sustainable political equilibrium that is able to lock in what progress has been made. Rather than creating breathing room for the Iraqi government to undertake meaningful political reconciliation between Iraq's competing ethnic and sectarian groups--the objective of the increase in American combat troops—the continued large- scale American troop presence has allowed the Iraqi government to stall on making the tough choices that a timetable for an American withdrawal would force them to confront. While there has been apparent progress on some uncontroversial legislation, the Iraqi government has yet to set a date for much-needed provincial elections originally scheduled for October, pass an oil-sharing law, meaningfully implement de- Baathification reform and the amnesty law, and finalize the legal status of the disputed city of Kirkuk. Nowhere is this failure to govern responsibly more apparent than in the implementation of the budget by the government of Prime Minister Nuri al-Maliki. While Iraq's ability to generate revenue continues to grow, its capability and willingness to effectively and efficiently execute its budget is virtually non-existent. As I will note below, Iraqi budgets have been passed but only a fraction of Iraq's revenue has been spent. After more than five years of having the American taxpayer bear the full cost of Iraq's reconstruction and stabilization, it is time for the Iraqi government to take budgetary responsibility, especially since the Bush administration is forced to borrow money from abroad to pay these bills. As Mr. Christoff noted, Iraq's revenues and its budget surplus are large and growing. Transferring more of Iraq's financial burden to the Iraqis is not only a fiscal necessity for the United States; it is also a way for the Maliki government to gain the trust of the Iraqi 56 Testimony of Lawrence J. Korb Senior Fellow, Center for American Progress Action Fund Before the House Budget Committee September 16, 2008 and request reinstatement. Finally, in the beginning of 2008, after much foot dragging, the Maliki government finally approved the Accountability and Justice Law, also known as the de-Baathification law, which replaced the old de-Baathification guidelines. Unfortunately, as the International Center for Transitional Justice discovered, this new law will bring about only small changes. For example, it opens the appeals process to a larger number of Iraqis, and allows most workers fired under the law to collect government pensions. On balance though, it does not significantly change the old system. In fact, the law extends de-Baathification standards to a number of organizations not previously affected, including the Iraqi judiciary.”!? In effect, there will be fewer former Baath party members in government under the new law than under the old one. Addressing Iraqi corruption Even if budget funds can be competently and effectively allocated, the United States must ensure that money allocated for reconstruction and stabilization is stolen by corrupt officials. In Transparency International's 2007 Corruption Perceptions Index, Iraq was ranked 178 out of 180 countries, with only Myanmar and Somalia perceived as more corrupt." In July 2008, SIGIR released an updated assessment of anticorruption efforts in the country. While this document commended the Iraqi government for ratifying the U.N. Convention Against Corruption, or UNCAC, and noted that the U.S. Embassy in Iraq had taken steps toward strengthening its anticorruption programs, the report made clear that there is still a great deal of room for improvement." In 2006, Stuart Bowen, the head of SIGIR, correctly labeled corruption Iraq's "second insurgency."'. At that time, the Maliki government estimated that corruption was costing it $4 billion per year.' Moreover, in some cases, corruption provided a direct benefit to insurgents. In November 2006, The New York Times uncovered a classified U.S. government report, which estimated that Iraqi insurgent groups were taking in between $25 million and $100 million a year “from oil smuggling and other criminal activity involving the state-owned oil industry, aided by 'corrupt and complicit' Iraqi officials."!! Although the Maliki government claims that it is trying to reign in corruption, it does not yet have an effective system for doing so. 12 International Center for Transitional Justice, "Iraq's New 'Accountability and Justice Law," (January 2008), available at http://www.icti.org/images/content 7/6/764.pdf 1. Transparency International, “Corruption Perceptions Index 2007," available at http://www.transparency.org/policy research/surveys indices/cpi/2007 M Office of the Special Inspector General for Iraq Reconstruction, “Anticomiption Efforts in Iraq," (July 2008), available at http://www.sigir.mil/reports/pdf/audits/08-023.pdf. 15 “Statement of Stuart W. Bowen, Jr, Special Inspector General for Irag Reconstruction," (June 2006), available at http://www.sigir.mil/reports/pdfitestimony/SIGIR Testimony 06-0031.pdf. 14 Borger, Julian, “Corruption: the second insurgency costing $4bn a year,” The Guardian, December 2, 2006, available at http://www.guardian.co.uk/world/2006/dec/02/usa.iraq. ?? Burns, John F. and Kirk Semple. “U.S. Finds Iraq Insurgency Has Funds to Sustain Itself," New York Times, November 26, 2006, available at http://www.nyimes.com/2006/11/26/world/middlecast/26insurgency.html.