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FINANCIAL RECONSTRUCTION IN IRAQ

HEARINGS
SUBCOMMITTEE ON
INTERNATIONAL TRADE AND FINANCE
OF THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST AND SECOND SESSION
ON
ECONOMIC STABILTY, JOB CREATION, AND TRANSITION TO
INDEPENDENCE LEADING TO SELF-GOVERNMENT IN IRAQ

SEPTEMBER 16, NOVEMBER 4, 2003, AND FEBRUARY 11, 2004
, Printed for the use of the Committee on Banking, Housing, and Urban Affairs
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Available at: http://www.access. 0. ov/congress/senate/senate05sh.html


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FINANCIAL RECONSTRUCTION IN IRAQ
TUESDAY, SEPTEMBER 16, 2003
U.S. SENATE,
SUBCOMMITTEE ON INTERNATIONAL TRADE AND FINANCE,
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,
Washington, DC.
The Subcommittee met at 2:55 p.m., in room SD—538, Dirksen
Senate Office Building, Senator Chuck hagel (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF SENATOR CHUCK HAGEL
Senator HAGEL. Good afternoon, gentlemen. We apologize for
starting late, but Senator Bayh and I have just saved the Republic
by voting the right way. We concluded as we were coming over to-
gether that we collaborated in the interest of justice and democ-
racy. So thank you for giving us a few extra minutes.
The development of Iraq’s economy will be a signiﬁcant factor in
Iraq’s transition to stability and democracy. Despite its potential,
including the second largest oil reserves in the world, Iraq’s econ-
omy has been devastated by more than three decades of corruption
and mismanagement by Saddam Hussein’s Government; more than
a decade of international sanctions; three disastrous wars; and the
looting that followed Iraq’s liberation this year.
Financial reconstruction is critical to the future of Iraq. Without
economic stability and the prospects for job creation and growth,
the transition to independence and self-government in Iraq cannot
and will not succeed. Our witnesses today will testify on the eco-
nomic situation in Iraq, as well as the speciﬁc steps that the Bush
Administration is taking to help rebuild Iraq’s economy, Finance
Ministry, Central Bank, banking system, and oil industry. The
United States and its allies face a continuing security challenge in
Iraq. Instability and rising violence have threatened the progress
of Iraq’s economic reconstruction.
The task in Iraq is daunting. The Bush Administration has esti-
mated that Iraq’s reconstruction will cost between $50 and $75 bil-
lion; $20 billion of the Administration’s forthcoming $87 billion
supplemental appropriations request will be speciﬁcally targeted
for Iraq’s reconstruction. Projected oil income from July 2003
through December 2004 is around $14.3 billion. Iraq’s oil revenues
will not cover the budget for the Iraqi Government, which includes
operating expenses of at least $1 billion per month, let alone the
costs of reconstruction.
Iraq faces an enormous debt and reparation burden. Current es-
timates are $70 to $120 billion in foreign debt, and approximately
(1)


2
$116 billion in unpaid reparations claims pending against Iraq
through the United Nations Compensation Commission. There are
assessments underway to determine the exact amount of Iraq’s
debt. I look forward to learning from our witnesses what plans
there are for working with international creditors to provide debt
and reparations relief for Iraq.
America cannot meet Iraq’s reconstruction and development
needs without the help of the international community. The Ad-
ministration has recognized the critical role that the international
community must play in the reconstruction of Iraq. Secretary Pow-
ell and others have been working to seek a new UN resolution that
will help facilitate the political transition to full Iraqi sovereignty.
I also look forward to Under Secretary Larson's update on what we
can expect from the International Donors’ Conference in Madrid,
Spain, October 23 and 24 of this year.
Rebuilding the ﬁnancial sector in Iraq is a complex task. Setting
up a trade-credit system is one of the ﬁrst steps in a broader effort
to help rebuild Iraq’s ﬁnancial system and allow Iraq to trade with
the world. The CPA created the Trade Bank of Iraq on July 17 of
this year to ﬁnance the import and export of goods to and from
Iraq. The Trade Bank will also assist in the transition from the
UN'S Oil for Food Program when that program terminates in No-
vember of this year. The CPA has chosen a consortium of inter-
national banks, led by JP Morgan, to handle the operations of the
Trade Bank. The Ex-Im Bank will play a key role in providing in-
surance for letters of credit issued by this Trade Bank.
The banking system itself must undergo signiﬁcant reforms so
that it can play its role in promoting economic growth and invest-
ment. Also, a legal framework for conducting transactions must be
established to enable commencement of international trade and
contracts.
A stable, uniﬁed currency is a key part of ﬁnancial reconstruc-
tion. The CPA has announced that beginning October 15 of this
year, the Central Bank will oversee a new Iraqi currency. New
Iraqi dinars will replace both the “Saddam” dinars used in south-
ern Iraq as well as the “Swiss” dinars used in the north. This new
currency is an important step in the process to establish a stable,
uniﬁed national currency.
An issue I would like our panelists to consider is how we can en-
courage the emergence of an Iraqi private sector, how we can draw
this sector into our plans, and what are the best means to support
small and medium enterprises in Iraq.
We have one panel of witnesses today to discuss all of these
issues and more. First, we will hear from Under Secretary of State
for Economics, Business, and Agricultural Affairs, Al Larson, who,
by the way, has just returned from Cancun, Mexico, and, Mr. Sec-
retary, we appreciate you making the effort to come before us
today. Secretary Larson will describe the efforts to raise political
support and funds for reconstruction in Iraq. We will then receive
testimony from Under Secretary of the Treasury for International
Affairs, John Taylor, who will give his assessment of the state of
the Iraqi economy, as well as the economic situation on the ground
in Iraq. Then, we will hear from the President and Chairman of
the Ex-Im Bank, Philip Merrill, who will discuss Ex-Im’s role in


3
the economic reconstruction of Iraq, including plans to work with
the newly created Trade Bank of Iraq.
Gentlemen, we appreciate you being here, and at this time I
would like to call upon my friend and colleague, the Ranking Mi-
nority Member of this Subcommittee, Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator BAYH. Thank you very much, Chairman hagel, both for
your friendship and also for calling this hearing today. This issue
before us is both important and timely. And thank you, gentlemen,
in the midst of your busy schedules, for coming to share your
thoughts with us.
I am struck, Chairman hagel, by the fact that the last time this
Subcommittee met to take testimony, it was on the subject, I be-
lieve, of Argentina and the profound economic and ﬁnancial chal-
lenges facing that country. It is, however, my impression that that
is largely a walk in the park compared to the challenges that we
are facing in Iraq today, both the magnitude and the possible in-
tractability of some of these challenges.
We are embarked upon nothing less than Nation building in its
most profound sense. We are dealing with a society that cannot
provide basic security for its citizens, some of the basic elements
of even a rudimentary standard of living—water, electricity, things
of that nature. Some basic elements, basic building blocks of an
economic structure have not existed in the past, a central bank, for
example, and some of the other things that the Chairman just
mentioned that need to be put into place.
They face a crushing debt burden, no foreign investments, and
a variety of other challenges, largely based upon the fact that they
have oil and very little else to offer the rest of the world. So, I am
going to look forward to hearing your thoughts.
I have four questions in the back of my mind. I may have a
chance to pose some of them to you a little bit later.
First, what burden is it appropriate to ask the U.S. taxpayers to
pay in this undertaking? We are willing to pay for the liberation
and the war, but when it comes to economic and ﬁnancial recon-
struction, what burdens should we bear versus what burden is it
appropriate to expect the Iraqi people to bear themselves at some
future date, given the vast petroleum reserves that they will hope-
fully eventually have access to?
Second, what about debt cancellation? They face a crushing debt
burden. What role, if any, are some of our allies willing to play,
particularly with regard to some of the debts rung up by Saddam
for arms purchases and other things used to subjugate the Iraqi
people, unrelated to the Iraq-Iran war?
Third—Secretary Taylor, this may be your ballpark—what about
ensuring that they put into place sound economic institutions and
begin practicing sound macroeconomics so that our assistance does
not just go down the drain but instead will be an investment that
will give them a decent start toward a stable economy? As you
know—and there is some parallel to the Argentine experience
here—you invest in a system that is fundamentally ﬂawed, you do
not tend to get much return.


4
Finally, what is realistic to expect for their petroleum industry,
both in terms of magnitude and timing? That obviously is going to
be a big key here as they try and get back on their feet and transi-
tion to what hopefully will be an economy based on something more
than just petroleum?
Gentlemen, thank you for your time. Again, Chairman hagel,
thank you for your foresight in calling this hearing. I look forward
to working with you.
Senator HAGEL. Senator Bayh, thank you.
Secretary Larson.
STATEMENT OF ALAN LARSON
UNDER SECRETARY FOR
ECONOMICS, BUSINESS, AND AGRICULTURAL AFFAIRS
U.S. DEPARTMENT OF STATE
Mr. LARSON. Thank you very much, Mr. Chairman. I would like,
if I could, to summarize the longer written statement that I will
submit for the record.
Senator HAGEL. Each of your written statements will be included
in the record.
Mr. LARSON. Mr. Chairman and Senator Bayh, we really appre-
ciate the opportunity to testify on the overriding national priority
of reconstruction in Iraq. The task of reconstruction is going to be
a very challenging one and a costly one. At the same time, if we
move decisively to mobilize the necessary resources and speed
reconstruction, we will lower the long-run ﬁnancial burden shoul-
dered by the United States. In addition, a strong push for recon-
struction now will reinforce efforts to establish an effective and
internationally recognized Iraqi Government.
The task of reconstruction is going to be particularly challenging
because of, as you said, Mr. Chairman, the years of neglect, mis-
management, and corruption of Saddam Hussein’s regime. There is
also a huge infrastructure deﬁcit that impedes economic growth.
You also will appreciate, Mr. Chairman, that the heavy-handed
government controls that were practiced by Saddam Hussein’s re-
gime have distorted the economy, particularly in areas like food
and agriculture, in ways reminiscent of the communist societies,
and these distortions may be very difﬁcult to unwind.
In spite of these challenges, we are seeing important signs of
progress in rebuilding Iraq. We are working with the Iraqi people
and have been making progress in meeting immediate needs, such
as a dependable supply of food, reopening schools and hospitals,
and rehabilitating water and electric power infrastructure. At the
State Department, we have been particularly active in supporting
the CPA and the Iraqi people in the analysis of issues related to
oil, transportation, telecommunications, and the transition from the
Oil for Food Program to a more market-based agricultural and food
economy. My written testimony details the nature and the mag-
nitude of the reconstruction challenges that we face in Iraq, includ-
ing in some of the more important sectors.
For months, we have been working closely with international or-
ganizations, key donor governments, and the Coalition Provisional
Authority to lay the groundwork for a reconstruction process with
robust international participation and support. The Administration


5
reached out early on to the administrator of the United Nations
Development Program and vice presidents of the World Bank to
help launch meetings of some 30 donor countries in June of this
year in New York at UN headquarters. This meeting resulted in
the establishment of a core group of countries comprised of the Eu-
ropean Union, Japan, the United Arab Emirates, and the United
States. Since then, in both face-to-face meetings and weekly con-
ference calls that have included the United Nations Development
Program, the World Bank, the IMF, and the CPA, we have worked
through some of the important issues of reconstruction.
For example, at the June 24 meeting, the countries there present
commissioned assessments of the reconstruction needs from the
United Nations, the World Bank, and the IMF. In conducting these
14 assessments, the international institutions have been working
very closely with the CPA, as well as with the interim Iraqi Gov-
ernment.
Understanding that some donor countries might prefer to make
contributions into a fund in which they have a voice in the govern-
ance, we set in motion preparations for a multidonor international
trust fund. The World Bank is taking the lead in helping to design
this fund, which is likely to be similar to the trust fund that sup-
ported reconstruction in Afghanistan.
As you said, Mr. Chairman, at the end of October, the inter-
national community will meet at a ministers’-level donors’ con-
ference in Madrid. At that time we expect to have a much clearer
picture of the budget prospects in Iraq. We expect to have the ﬁnal
results of the United Nations, World Bank, and IMF needs assess-
ments in these 14 sectors. We expect to have a model of the multi-
lateral trust fund, as well as input from other countries on how it
should operate. We expect as well to have the draft budget of the
CPA for 2004, which will be ﬁne-tuned in accordance with informa-
tion that comes out of this donors’ conference.
As a result of these multilateral efforts, we are seeing a con-
verging of assessments about the magnitude and the nature of the
reconstruction challenge in Iraq. In discussing the vital role of
these international institutions, I would like, Mr. Chairman, to
pause to pay tribute to the dedicated men and women of the United
Nations, the World Bank, and the IMF who were killed or injured
in the bombing of the UN headquarters in Iraq on August 19.
Linked with this work on the donor process has been the political
work that the Secretary of State and the Administration have been
pursuing through the Security Council of the United Nations. They
have the UN Security Council resolutions, and basically the polit-
ical framework that would give the maximum possible encourage-
ment and support through the involvement of other donor countries
and the international ﬁnancial institutions.
As the realities of the reconstruction task come into sharper
focus, the task can appear daunting. Fortunately, President Bush
is leading by example. In his September 7 address, he set out for
the American people the need for a large commitment of funds to
ﬁnish the job that our troops have so ably and courageously begun.
As you said, sir, he will be requesting $20 billion for the recon-
struction of Iraq, about a quarter of which will be devoted to secu-


6
rity-related reconstruction needs and the rest for the most urgent
infrastructure needs.
We intend to make the same case as forcefully and as effectively
as we can that our friends and allies need to be fully engaged in
this effort. Congress’ support for the President’s request will
strengthen the hand of the Administration in making the case for
international participation that is commensurate with the impor-
tance and the urgency of this task.
As time proceeds, oil revenues in Iraq and private sector invest-
ment, both from within Iraq and outside of Iraq, can make increas-
ing contributions to Iraq’s development. My testimony says that
export revenues for Iraqi oil could reach $12 billion in 2004, which
would roughly cover the recurrent costs of the government. It also
says that in 2005 and we believe in 2006, those oil export proceeds
could reach $19 billion, which would mean that Iraqi resources
could begin making a signiﬁcant contribution to economic recon-
struction.
We also believe that with the proper economic policies and a re-
habilitated infrastructure, Iraq could attract considerable foreign
investment. CPA, the Governing Council, and the Interim Cabinet
are working hard to establish the appropriate investment and com-
mercial rules and regulations that could make that type of private
sector investment possible.
Mr. Chairman, we know that the President’s request is a large
one. We also believe that it is an urgent and essential one. During
this hearing and in the weeks ahead, we want to do everything we
possibly can to address all of the Congress’ questions so that we
can move forward as quickly as possible.
Thank you.
Senator HAGEL. Mr. Secretary, thank you.
Secretary Taylor.
STATEMENT OF JOHN B. TAYLOR
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
U.S. DEPARTMENT OF THE TREASURY
Mr. TAYLOR. Thank you very much, Senator hagel and Senator
Bayh, for inviting me to testify on ﬁnancial reconstruction in Iraq.
This Committee is an excellent one for discussing trade and ﬁnan-
cial issues in Iraq, and it is also a pleasure for me to be here with
Mr. Merrill and Mr. Larson. It demonstrates the great degree of
government-wide work that is needed to get a job like this done.
The last time I testiﬁed on Iraq reconstruction was on June 4 at
the Senate Foreign Relations Committee, and at that hearing I
stressed two things which I would like to come back to in this testi-
mony based on what has happened over the months of the summer.
The ﬁrst was that the international community and the Iraqi
people face an enormous task in the reconstruction of the economy.
A quarter of a century of repression and economic mismanagement
under Saddam Hussein, cut the size of the economy to a small frac-
tion of what it was before his regime took over. In 1979, GDP in
Iraq was $128 billion. By 2001, it had declined to only $40 billion.
The second thing I stressed was the importance of a strategy for
ﬁnancial reconstruction; that is, the contingency plans developed in


7
advance of the military conﬂict. I also stressed the tactics that
were important on the ground to implement that strategy.
I think much has been accomplished in the ﬁnancial area since
the fall of Saddam’s repressive regime, and many potential ﬁnan-
cial catastrophes have been avoided as well. In my view, it was the
months of advance planning by the U.S. Government before
Saddam’s fall as well as the dedicated work of the Coalition Provi-
sional Authority and the Iraqi people since his fall that are respon-
sible for these accomplishments. Starting late last year, we began
developing a strategy for ﬁnancial reconstruction based on the in-
formation we had at the time. The strategy addressed such issues
as payments to Iraqi workers and pensioners, the currency, the
banking system, the international debt, the assessment of the re-
construction costs, and the international fundraising efforts. My
written testimony reviews how that strategy is playing out, and I
think it shows many successes.
An important part of our advance planning which I would like
to emphasize here was the selection of some extraordinary people
to participate in the effort. We began selecting experts back in Jan-
uary. The ﬁrst wave of people were deployed to Kuwait in March
and then into Baghdad in April. Early on, we decided that a ﬁnan-
cial coordinator is essential, and we are very grateful to Peter
McPherson who serves in that position in Iraq.
My written testimony covers all of the six areas and addresses
some of the questions that both of you raised in your opening re-
marks. I would be happy to come back to those in my question and
answer period. But I would like to in my opening remarks here
stress the strategy that was laid out for just one of the areas, and
that was for paying workers and pensioners and for the currency.
It was clear that we had to have a strategy early on for paying
workers and pensioners in Iraq after Saddam’s fall. It was also
clear that we had to work out a strategy well in advance of his fall.
Keeping workers on a payroll with stable purchasing power would
be essential to preventing severe hardship and economic collapse.
But there are a lot of questions that we had to address: How many
workers were there? How much should they be paid? What cur-
rency should we use to make the payments? Where would the
funds come from? Would the payment system be sufﬁcient to actu-
ally make the payments? What condition was it in? How could we
prevent hyperinﬂation, sharp depreciation of the currency, which
would further impoverish the Iraqi people?
Starting late last year, we developed a payment strategy. The
payment strategy was approved interagency after a lot of good dis-
cussion and debate. The strategy in the end called for paying peo-
ple in U.S. dollars on an interim basis. Using U.S. dollars, we could
create stability and help prevent a collapse of the local currency,
the dinar.
Finding a way to secure the funds for these payments was also
a challenge. In the end, we decided that the best approach was to
use Iraqi regime assets frozen back in 1990. Our estimates were
there was about $1.7 billion of such funds frozen in U.S. banks.
But in order to use those assets, we had to have them vested for
the use of the Iraqi people. So a vesting strategy was worked out,
reviewed, and approved by our legal experts. Under this plan, the


9
Iraqis all over the country, the CPA announced that a new cur-
rency would be issued starting in October. The new currency is
now being produced and printed in facilities around the world, and
it is on schedule. It will be shipped from printing facilities in Eng-
land, Spain, Sri Lanka, and other countries, and it is on time.
A public education campaign is underway in Iraq to make sure
the Iraqi people are well informed about the new currency and
about the exchange itself. The new currency will be issued in more
denominations than currently available, six rather than two. It will
have built-in security features to enhance public conﬁdence and re-
duce the risk of counterfeiting.
Mr. Chairman, let me conclude my opening remarks here with
these examples of how the strategy is working. My written testi-
mony documents similar progress in banking, in debt, in assess-
ment of reconstruction costs, and preparations for international
fundraising. We have made considerable progress over the summer
months, and our activities will only intensify in the coming months.
The challenges are formidable. We are on our way to creating great
opportunities for the Iraqi people. President Bush’s request for
$20.3 billion in supplemental funding for security and infrastruc-
ture is essential to this effort, as is the contribution from our
friends and allies and from the international ﬁnancial institutions.
Thank you, Mr. Chairman.
Senator HAGEL. Thank you, Secretary Taylor.
Chairman Merrill.
STATEMENT OF PHILIP MERRILL
PRESIDENT AND CHAIRMAN
EXPORT-IMPORT BANK OF THE UNITED STATES
Mr. MERRILL. Mr. Chairman, Senator Bayh, Members of the Sub-
committee, I too am very pleased to be here with able colleagues
to testify on the Bush Administration plan to rebuild Iraq and es-
tablish the foundation for a stable society. There are three pillars
to this effort: physical security, political stability, and economic
growth. I want to focus on the economic needs of Iraq and how to
pay for them. In particular, I want to discuss the role the Bank is
playing in this effort as it pursues its mission of supporting U.S.
exports and the U.S. jobs they represent.
As you and my colleagues from the Departments of State and the
Treasury have noted in your and their testimony, the cost esti-
mates of what Iraq will need in future years for reconstruction are
in the tens of billions of dollars. So, how will all this be ﬁnanced?
One source is, of course, U.S. funding. I think the President’s
speech demonstrates the high priority the Administration places on
this effort.
Another source is donor support from other countries on which
the Administration, as you have heard, is actively working.
But, of course, Iraq has its own resources. Iraq is a country with
an educated people, a rich heritage, and signiﬁcant natural re-
sources, including tremendous oil reserves. The Administration
expects Iraqi oil and other revenues and recovered assets to con-
tribute to meeting Iraq’s reconstruction needs. The U.S. economic
contribution is designed to have an immediate and signiﬁcant im-
pact on the sectors critical to stability and growth. In this regard,


11
project ﬁnance for projects as soon as conditions make such ﬁnanc-
ing possible. That means somebody there that you can lend to,
whatever you call it, DFI, Coalition Provisional Authority, or Provi-
sional Government. We are willing to meet these challenges to the
extent it beneﬁts U.S. exporters and creates U.S. jobs. That is our
job. But we fully expect the other export credit agencies to do the
same thing for their exporters, again creating the circumstances for
a signiﬁcant multilateral effort.
There are 26 export credit agencies in the OECD and a number
in other countries outside the OECD. The Bank also has a history
I wish to call to your attention, of providing innovative ﬁnancial so-
lutions during times of political transition. It played a major role
in the administration of the Marshall Plan. When Israel was being
formed in 1948, Ex-Im Bank provided the initial provisional mili-
tary administration with loans based on the idea that the future
government would be supported by the United States and was
therefore a good risk. Then Ex-Im Bank President and Chairman,
William McChesney Martin said that Ex-Im Bank would have,
“Reasonable assurance of repayment because the United States is
going to support Israel in every reasonable way.” The principle was
the same. Also in the 1990’s, the Bank used an oil and gas frame-
work agreement for Russia so that investment in oil infrastructure
was possible as the Soviet Union evolved into the CIS and then to
Russia. I was at NATO at that point in time. Looking backward,
it seems like everybody knew it was going to go from the Soviet
Union to CIS to Russia. I can only tell you at the time the picture
was a lot less clear. As these cases suggest, it would be sound pol-
icy for Ex-Im Bank and also for export credit agencies worldwide
to support these efforts.
In closing, let me emphasize that Iraqis need to realize some eco-
nomic value today in order to establish the physical security, polit-
ical stability, and economic development their country needs, and
to which the United States is fully committed. Time is of the es-
sence, and it is less expensive to make them rich now than it is
to pay to keep 140,000 U.S. soldiers there for an extended period
of time.
I will be happy to answer any questions you may have, including
the four that you posed.
Senator HAGEL. Chairman Merrill, thank you.
Again, to all three of you, we appreciate you taking the time to
come up here, as well as your staffs to prepare you for the hearing.
Senator Bayh, if it is okay, we will go maybe just 7-minute
rounds. That way we can share the time.
Secretary Larson, you mentioned, as you were taking us through,
the donor conference structure possibilities. Would you deﬁne more
clearly what the Administration is looking for in the ways of dol-
lars from our allies at that donor conference?
Mr. LARSON. Mr. Chairman, it is a very fair question. I am going
to give you a more general response than you probably are looking
for. We believe that it is very important for other donors, as well
as the international ﬁnancial institutions to make a maximum
effort to pay their share of a challenge that is an international
challenge. It is not our challenge. It is something that we, the
international community, and the Iraqis together, have to work on.


12
Part of the reason why I am not in a position to give you a ﬁgure
today is that we are still in the process of reﬁning the estimates
that there will be for 2004 and 2005 on reconstruction costs and
needs, and to have those in a form that they have really reconciled
and dovetailed the estimates that are coming out of Baghdad from
the Coalition Provisional Authority and the interim government,
with those that are the results of these international needs assess-
ments.
I can say that my sense is the assessments that are being reﬁned
in the international institutions end up being very close to our own
when you look at the basic magnitudes and even some of the sec-
toral breakdowns. We are going to be pushing countries to make
a large and a maximum effort, but we have not at this stage set
a bar for a speciﬁc amount of a speciﬁc percentage, and we think
that until we have a little more ﬁnality on the estimates, it is going
to be difﬁcult to go into capital and capital with a speciﬁc request
for a speciﬁc amount. But I can tell you this: We intend to make
this a very high priority for the entire Administration from the top
on down.
Senator HAGEL. If the numbers that you and others in the Ad-
ministration have put forward, numbers that were shared here
today, are anywhere near correct, reconstruction costs of $50 to $75
billion. I think those are the Administration numbers. Some believe
it will be over $100 billion, but let us stay with your numbers. In
the President’s request that you have just discussed, that he will
be bringing up here, $20 billion is for reconstruction. In your num-
bers you have shared with us today, I believe you said could reach
as far as oil sales in 2004, $12 billion. Then you said, I believe, in
2005, 2006, we could see Iraqi oil ﬂow generating $19 billion. Is
that what you said?
Mr. LARSON. Correct.
Senator HAGEL. So we have a pretty signiﬁcant gap here as to
where the rest of that money is coming from. Could you tell us a
little bit about how the Administration is going to ﬁll that gap and
where that money is going to come from?
Mr. LARSON. Right. Again, as you said, Mr. Chairman, our esti-
mate at this stage is for something on the order of $57 to $75 bil-
lion as the need to meet the reconstruction costs over a period of
time. We want, with the $20 billion that the President is request-
ing from the Congress, to meet those most urgent security-related
and infrastructurerelated costs, so that the things that really have
to get done and get done fast are getting done. We want to get very
major contributions from international donors, both bilateral do-
nors as well as the international ﬁnancial institutions. We believe
that if Iraqi operating costs continue to be on the order of $12 to
maybe $14 billion a year, that we are going to being to see in 2005
some signiﬁcant capability on the part of the Iraqi economy to gen-
erate some of the resources that are going to be needed, let us say
something on the order of $5 to $6 billion a year.
I am being a little more speciﬁc than one realistically can about
those out-year numbers, but to be responsive I am sharing with
you our best estimates at this time for Iraqi oil receipts and how
much of those receipts could be available to contribute to recon-
struction.


14
Mr. LARSON. That would be over the next couple years to get oil
production up to this level that we have forecast, and again, we
have been a little bit conservative in projecting oil exports reaching
2 million barrels a day. Then on top of that is roughly 500,000 bar-
rels a day of production that is devoted to domestic use.
But in light of the infrastructure requirements, in light of some
of the challenges we faced on looting and sabotage, we have tried
to go with a number that we think is realistic.
Senator HAGEL. Mr. Secretary, thank you.
Senator Bayh.
Senator BAYH. Thank you, Mr. Chairman.
Gentlemen, let me tell you what I hear when I go home, from my
constituents since the Administration made its request. The prin-
cipal question that I get is, Senator, why cannot Iraq pay for more
of this themselves? We understand that we needed to foot the bill
for liberating the country. It was unreasonable to expect them to
pay for their own liberation. We continue to foot the bill for their
security, both in terms of treasury and blood. That is a price we
are willing to pay. But in terms of rebuilding their economy, is that
not something that they should shoulder more of the burden of
themselves? We are not dealing with a country like Afghanistan,
with nothing to offer the rest of world. This is a country with hun-
dreds of billions of dollars, or hundreds of billions of barrels of
proven oil reserves. Our surplus is now gone and we are put in the
position of having to borrow the money from the Chinese, the Japa-
nese, and others. This is money our children and grandchildren
will have to repay on behalf of a country that at some point, God
willing, will be pumping out oil again, we will be buying it from
them at a price, at least in part, set by—they may not be a member
of OPEC, but at least affected by OPEC. How is this equitable?
Mr. TAYLOR. Senator, if I can take a stab at that. I think, ﬁrst
of all, the Iraqi people will be the ones that rebuild their economy.
What we are suggesting here with this request of funds is a way
to deal with many of the security issues, many of the infrastructure
issues that have to be addressed so that we can provide for an
economy where it can grow and where they can build it. Some of
the funds that the President has asked for go to electric power re-
construction. That is obviously necessary for security and necessary
for getting the country in a situation where we can withdraw.
Senator BAYH. Mr. Secretary, forgive me for interrupting. Let me
put a little ﬁner point on it. Is it not possible, since they do have
very substantial assets in the country, although they cannot cur-
rently access them because of the state of their oil industry, is it
not possible for them to securitize some of that, to take some own-
ership interest in some of the reserves to defray some of these
costs.
Mr. TAYLOR. Ultimately, some of the support, for example, from
the international ﬁnancial institutions, will be in the form of loans,
and we are actively engaged now with both the World Bank and
the IMF, so that they can bet in the business of supporting them.
Of course, you know both those institutions provide their resources
largely in the form of loans. When they size up how much support
to give, which we are hoping will be quite large, because as Senator
hagel indicated, there is quite a cost here, quite a gap. When we


15
talk to them about the importance of this, it is clearly the
attractiveness ultimately of oil revenues and other sources of
wealth in Iraq which will be there. So that is part of the strategy.
But I do think the Iraqi people will be the ones that reconstruct
their economy.
vvhat we need to do is provide the security, the infrastructure,
the electrical system that is at least back to some semblance of
working again after the devastation that Saddam Hussein caused.
Senator BAYH. The sooner we can get the World Bank and the
IMF involved, the better we will all be. I certainly would support
that.
Let us transition then into the question of the legacy debt, which,
Mr. Merrill, I think you mentioned was; “an absolutely minimal re-
quirement” for starting to get some forward momentum here. What
if anything have the largest debt holders indicated that they would
be willing to do? I would like to speak just in general and speciﬁ-
cally with regard to the Russians and our friends the French, who
I understand hold a fair amount of this debt. Is it not fair for those
who did not pay for the cost of liberation to not now help with the
cost of peace by removing some of this debt burden?
Mr. TAYLOR. Let me address the question the following way.
Early on after the conﬂicts began, we engaged with the other credi-
tors, including the Russians and the French, and we began to lay
out a strategy, if you like, to deal with this issue.
The ﬁrst thing that was done was to agree that at least for a
year and a half, so that we could start working on a budget, no one
was going to expect any debt payments from Iraq, and that was a
terriﬁc advantage because you could put a big zero on that line
item in the budget which would have debt service payments, and
that has obviously affected the numbers that we are talking about
right now.
The second thing was to agree to get estimates of how much debt
there really was. So we sent some of our people, who went into
Baghdad and looked through the books; we also had the IMF do
a survey of non-Paris Club ﬁgures——
Senator BAYH. The ﬁgures I am looking at say it could be any-
where from $42 to $78 billion. That is a pretty wide range.
Mr. TAYLOR. The number is a little higher than that right now.
Senator BAYH. Is that right? Higher than the $78 billion?
Mr. TAYLOR. Yes, probably higher than 70, yes. But we are still
getting those data, and the next step will be to work out a way to
reschedule, get a substantial reduction in the value of the debt, and
that is what the plan is for the next year. And by the end of next
year when the agreement now to defer the payments is currently
scheduled, there will be a strategy put in place. I would say we
have engaged quite a bit with those countries that are holding the
debt, and I think in the end, it will work. I think negotiation is
going to be tough, but you have laid out some of the reasons for
it, and we will be making those arguments.
Senator BAYH. On a scale ranging from enthusiastic to tepid,
how would you characterize their response today?
Mr. TAYLOR. It is mixed. Some are enthusiastic, some are tepid.
But we are going to work this issue very hard, Senator. It is very
important for our effort for the Iraqi people.


17
Next, if I could just say one other thing, because I could go on
with this, but one other thing—-the Donors’ Conference that Sec-
retary Larson referred to is going to have as part of it a whole spe-
cial session, almost a whole day, on the private sector. To my
knowledge, this is really the ﬁrst time where a donors’ conference
has devoted so much time—perhaps any time—to the private sec-
tor, because a lot of the funding has come in from investment, and
we are encouraging that. So, I am actually very excited about that
aspect of what we are doing. We are focusing on the private sector.
Ambassador Bremer is emphasizing that, and we have a good team
of individuals working on transforming the state-owned enter-
prises, too.
Senator BAYH. Gentlemen, thank you very much.
Thank you, Mr. Chairman.
Senator HAGEL. Senator Bayh, thank you.
Senator Carper.
COMMENTS OF SENATOR THOMAS R. CARPER
Senator CARPER. Let me just follow up on that last point—the
willingness of the private sector to invest its own money and the
level of violence and disruption that continues in the country. What
is the relationship between those two?
Mr. TAYLOR. Well, there is certainly a serious concern of private
investors with the security, as well as the things I mentioned, the
banking laws and the foreign investment laws. Security is very im-
portant for those we talk to.
I have noticed myself so many people from the private sector
anxious to get involved. One example of that is the amazing re-
sponse we had to this Trade Bank proposal. Many, many banking
consortia put in applications and bids for that project. So when the
CPA made their choice, they had a lot to choose from, and I think
you are going to see that. Now we are talking about having banks
give some advice to these state-owned banks, and again, we have
a lot of interest.
Once this Trade Bank is moving and you get other facilities, you
are going to see some investments. If you are on the streets of
Baghdad, you see a lot of private sector activity moving already-
people selling refrigerators, kids’ toys, and satellite dishes.
Senator CARPER. Where do they get them?
Mr. TAYLOR. They get them from the border; some of it is coming
up from Kuwait, some from Jordan, some from Turkey. And it is
on the streets, they are selling it, and people are buying it. Some
of those dollars we are paying are going to making people’s lives
better directly.
Senator CARPER. I have been in and out of the hearing in some
other meetings out in the anteroom, and I apologize that I was not
able to listen to your testimony, except just in bits and pieces, nor
to the questions.
So let me just ask all of you—it would be very helpful to me-
if you would just take a minute or two apiece and say, if there is
nothing else that I would take from this hearing, maybe a couple
pf the most important nuggets that you would have us take away
rom it.


18
Mr. LARSON. Well, thank you, Senator. I think, perhaps picking
up on the spirit of your question to Secretary Taylor, we believe
that the more rapidly we are able to move to address the funda-
mental security issues and reconstruction issues that inevitably
have to be addressed by governments, including some of the basic
infrastructure questions that the President would like to address
with the supplemental reconstruction request that he is making,
that the more quickly we can get to the point where there is an
environment where the private sector investment that we would
like to see in Iraq is taking place and is shouldering more of the
responsibility for driving economic growth and reconstruction.
As has been pointed out, this is a country that does have re-
sources, not only oil resources but human resources, but there is
a big deﬁcit, a deﬁcit of infrastructure, the type of social deﬁcit
that comes from having had 30 years of miserable, oppressive gov-
ernance.
vvhat we are trying to do, working with other donors and inter-
national institutions like the United Nations, the World Bank, and
the IMF, is to make a very aggressive push on the reconstruction
process because we believe that will hasten the moment when po-
litical transfer of full responsibility can be made to the Iraqi Gov-
ernment and also hasten the day in which Iraqi development is
being driven by Iraqis and by private investment, both from Iraq
and outside of Iraq.
Senator CARPER. Thank you.
Mr. TAYLOR. Senator, I stressed two overall themes in my testi-
mony. The ﬁrst was that this job of reconstruction has been made
so difﬁcult because of the damage that Saddam Hussein caused to
his country, with GDP falling from about $128 billion to only $40
billion during a 25-year period. So it is an immense task, but the
rewards are tremendous, too, because people have so much to gain
just to get back to where they were.
The second was that with respect to ﬁnancial reconstruction,
which I focused on, I tried to outline the sense that there has
been
Senator CARPER. Could I just interrupt? You said over a 25-year
period, GDP fell from
Mr. TAYLOR. One hundred twenty-eight billion in 1979 to $40 bil-
lion in 2001.
Senator CARPER. And are those nominal dollars, or are those real
dollars?
Mr. TAYLOR. Those are real dollars, adjusting for inﬂation, yes.
Senator CARPER. It took 25 years to fall from one level to $40 bil-
lion. How long do you expect it is going to take them to get back
up to where they were 25 years ago?
Mr. TAYLOR. That is a good question. A lot less time than it took
to fall; a lot less time.
Senator CARPER. I interrupted you. Go ahead with your second
point.
Mr. TAYLOR. The second thing was that the ﬁnancial reconstruc-
tion has involved a strategy which was laid out before the conﬂict
which we have stuck to, calling auditors where appropriate, on
such issues as payments of salaries to Iraqi people on the ground,
the workers, the teachers, as well as a new currency, and that as


20
Congress, and we hear from you that the objective here is to move
the Iraqis into a position where they can govern themselves.
How fast are we doing that, are we doing it, and give me some
examples of how the Governing Council or others are actually run-
ning or being prepared to run ﬁnancial institutions and put to-
gether an economy and an infrastructure in Iraq.
Mr. Larson.
Mr. LARSON. The last time I had a chance to testify before you
in June, we spoke a little bit about the oil numbers and the oil sec-
tor, and one of the things I said very forthrightly is my numbers
are basically based on what Thamir Ghadban, the Iraqi CEO of the
Iraqi oil industry, has been putting forward. A couple of weeks
after that hearing, I had the chance to sit down with him in Jordan
for a fairly detailed meeting about the way he was managing the
oil sector and how he saw his task ahead. My assessment was that
he was everything he was cracked up to be——a very skilled engi-
neer, a very thoughtful person who understands both the engineer-
ing side and also the ﬁnancial side of his business—and everything
we have seen since June is bearing that out.
The Governing Council has now named Ibrahim El-Alum as the
new minister for petroleum. He is also an oil engineer with inter-
national private sector experience.
We also know that the team below them is very competent, and
they are basically running things in terms of the Iraqi oil sector—
the rehabilitation, the maintenance, the production, and so forth.
The other comment I would make in response to your question
is that when we went, at the beginning of this month, to Brussels
for the most recent meeting of this Core Group, included in that
meeting were both the CPA and an Iraqi ofﬁcial who is in the
midst of the budget process, and it was interesting, I think, for
other donors, who sometimes are under the impression that the
CPA is running absolutely everything in Baghdad, to hear from
this Iraqi gentleman how he was basically the guy who was the
interface with all the ministries on their budget numbers. And just
as OMB runs a process here where agencies make submissions and
OMB says, “Wait a minute, this number looks inﬂated, that num-
ber looks inﬂated,” that was his role, working with the interim gov-
ernment, CPA, and the standing ministries to work through the
numbers that are going into this 2004 budget that will be ﬁnalized
later this fall.
Those are two speciﬁc examples, Mr. Chairman, that I think il-
lustrate the point that Iraqis are really deeply involved in this
process, and their role and authority is growing very rapidly.
Senator HAGEL. Thank you.
Mr. Taylor.
Mr. TAYLOR. In the ﬁnancial area, there is increasing involve-
ment. As you mentioned, the central bank governor, the ﬁnance
minister, the two large banks, Raﬁdain and Rasheed, have many
people who have been involved in those banks before who are still
working there.
But I would say that one thing about the ﬁnancial area is that
there has been a lot of modernization around the world that has
not reached Iraq because it was such a closed place and so little
contact. In some senses, I think this is different than the oil sector.


22
are working with, and the Coalition is there, providing advice and
making decisions, too.
Senator HAGEL. Do these individuals essentially report to Peter
McPherson and his Office—across the board, these ﬁnancial
Mr. TAYLOR. Yes. The chain of command is Peter McPherson to
Ambassador Bremer. Ambassador Bremer is in charge of the Coali-
tion, and he in turn reports to Secretary Rumsfeld.
b Sleipator HAGEL. vvhat is the status of McPherson? Is he coming
ac .
Mr. TAYLOR. Yes. He is going to be returning to his position as
President of Michigan State University in October, and his replace-
ment is going to be the former Finance Minister of Poland, Marek
Belka. Marek Belka has been serving in Baghdad already as the
coordinator of the fundraising effort, so he will be the one who will
be taking over at that point, so the Polish involvement will take
place in that way.
Senator HAGEL. Thank you.
Chairman Merrill, thank you.
Mr. MERRILL. Thank you, Mr. Chairman.
I simply wanted to note that the Trade Bank is already headed
by a new Iraqi appointee and that the bank will eventually——mean-
ing shortly, not eventually 6 years from now—be staffed by Iraqis.
This process is in place. But based on the last round of conversa-
tions, I think I want to add two more points, one on modernization.
The Iraqi oil industry—I think Al Larson and I are on the same
page—there is a huge question there of deferred maintenance, and
it is not a small deal. If you will allow me to be what my people
sitting behind me will say “slightly colorfu1”—they shudder when
I say that——think of it this way. You have 100 1957 Chevies, and
that is what is running the pipelines, the oil lines, the pumping
stations, and all the rest of it. You know that if you plug a carbu-
retor, a mufﬂer, and an oil ﬁlter and do a valve job and so forth,
you can get all 100 of those 1957 Chevies running. But you also
know that half of them are going to break down in the next 6
months, even if you do not know which half. And that is the situa-
tion that the Iraqi oil industry is in at the moment.
There is a choice between what—I think Al Larson used the
word “modernization”—and let us call it “plug them up mainte-
nance.” Obviously, you have to do both if you want to get the thing
running, but you want to modernize it. But one is much more ex-
pensive than the other, so when the great construction companies
of the world come in to talk to us, some say modernize a little
more, some say we can plug it up a little more. Ambassador
Bremer’s view is that this is a factual question to be determined
by Phil Carroll and the other people on the ground. But you should
know that there is an issue there of modernization versus plugging
up the 1957 Chevy, which I cannot determine as a matter of fact,
sitting at this table, but it is an issue.
The second thing I would point out is that there is a tradeoff be-
tween time and representation. You and I are both entrepreneurs.
There is a natural tendency to make things happen now. Ambas-
sador Bremer is a “make it happen now” person. But representa-
tive governments in that country and in this country are about
being representative, and in order to get the Iraqis to sign on to


23
the things that we want them to do and they should do for their
own beneﬁt, it means they have to move at a pace that may not
be quite as rapid in economic terms as somebody like me would
want them to move. This tradeoff of time versus political stability
is a signiﬁcant factor.
Senator HAGEL. Thank you.
Secretary Larson, Secretary Powell has been working with our
friends, speciﬁcally the UN Security Council members, on crafting
a resolution that would accommodate everyone’s needs through the
United Nations. A very signiﬁcant part of that is what type of addi-
tional responsibility our allies would have in assisting with the
reconstruction of Iraq—economic responsibility, political responsi-
bility, certainly force structure security responsibility.
vvhat can you tell us about those conversations, and what are we
looking at in the way of expanding not just involvement, money
and forces from allies, but what would we be asking them to do,
and what would they want to do through an umbrella organization
effort that would lay it out in a resolution?
Mr. LARSON. Mr. Chairman, as you said, the Secretary has been
working very hard with the P—5 and Secretary General of the
United Nations on a new Security Council resolution that would
really provide more of a mandate, more of a authorization for inter-
national participation in the security task in Iraq as well as the
task of reconstruction and, we would hope, really call on donors as
well as the international ﬁnancial institutions to play a maximum
role in the task of reconstruction.
Those deliberations have reached a very, very intensive period,
and I think over the days ahead, he will be working very, very
hard to see if he can bring this to a successful resolution. There
will be a number of people in New York next week as the General
Assembly begins, so this will be an extremely active period for that.
Senator HAGEL. Excuse me. If I could pursue that for a moment,
are we then willing to in fact engage, as I presume the Secretary
is, on the basis that we are willing to share some decisionmaking
responsibilities with our allies—economically, politically, and obvi-
ously security-Wise.
Mr. LARSON. We are willing to share some decisionmaking re-
sponsibilities, and let me in the ﬁrst instance focus on the economic
side of things.
I referred earlier, but brieﬂy, to the idea of a Multi-Donor Trust
Fund. One of the reasons we have worked so hard on this is that
it has become clear to us from comments of others that for many
of them, if they are going to make major contributions to recon-
struction, they would like to feel it is going into some type of sys-
tem in which they have a voice, and there is a good track record
of having trust funds that have their own governance structure
where an international organization like the World Bank or the
United Nations can provide the framework, the ﬁduciary role, the
accountability about how funds are actually spent. And in contrib-
uting funds to such a task force, there can be agreement in ad-
vance about the types of uses to which those funds will be put.
If you are going to have that task force, you do want the prior-
ities of it to dovetail with what is going on on the ground, and that
is why the process that we have set out since spring has been de-


24
signed to reach a convergence of view about what these priorities
are. So it is not an issue of control, but it is an issue of reaching
a shared assessment of what are the most urgent priorities that
have to be addressed and having those reﬂected in the mandate of
a trust fund and have that be in synch with the budget priorities
that are identiﬁed in the budget coming out of Baghdad.
That is just one example of where we already are in the process
of encouraging our international partners to have a larger voice in
thinking through what the priorities should be an being involved
in a donor process where they will have a voice in governance.
Senator HAGEL. I would ask this next question of each of you. It
may well be that this is more, Secretary Larson, in your area, but
let us stay on that theme of decisionmaking and sharing responsi-
bility, and in return for that, stepping up to responsibilities, sta-
bility, and security of Iraq in the interest of all nations. Certainly,
to secure and to stabilize the Middle East is in the interest of all
nations.
Contracts—-there has been great speculation and conversation
about sole-source, no-bid contracts. How does this play into deci-
sionmaking, sharing with allies that would send money and troops?
Would they be given the same opportunities to bid for contracts?
Mr. Taylor, you may be very much a part of this as well as you,
Chairman Merrill. Are we a legitimate marketplace? What percent-
ages are we talking about? Any part of that universe that the three
of you care to address is important because this is a big issue.
Also——and maybe, Mr. Taylor, you could give me this number-
what presently is the percentage of sole-source, no-bid contracts
that we are letting in Iraq?
Mr. Larson, we will start with you.
Mr. LARSON. Sure. In framing this answer, let me make clear
that we have to talk about contracts with whose money. First, let
me start with the Multi-Donor Task Force. The clear expectation
here is that if this is housed in the World Bank or the United Na-
tions, or if for various reasons we end up having two, one in each,
contracts for using those funds would be based on the World Bank
or the UN international standards, so they would be open to all le-
gitimate competitive ﬁrms that could be certiﬁed as being capable
of providing the services or the tasks that are being tendered. That
much is clear.
Second, with respect to the money that is being spent out of the
Development Fund for Iraq, that is, the fund into which the oil pro-
ceeds and other tax revenues are being used, the CPA put out con-
tracting information in August. It is on their website. They did it
after getting information on both U.S. contracting procedures as
well as the contracting procedures of the United Nations and the
World Bank. And we think that those arrangements also are very
transparent. Again, they can be consulted by any company that
wants to get on the Web and ﬁnd out how to compete for contracts
that might be funded with DFI money.
Third, there is the question of contracts funded with U.S. Gov-
ernment money. I am most familiar with the situation of USAID.
In the early days, there were some contracts that were let on the
basis of limited competition among prequaliﬁed bidders that were
designed to make sure that we were able to move quickly in the


27
Senator HAGEL. That is of course one of the purposes of hearings,
so that you can enlighten, inform, and educate. I know, Chairman
Merrill, that you look upon us as your friend and your ally up here,
helping you make that case, but it is important that you do have
forums and opportunities to explain the procedure.
Chairman Merrill, this may be a question for you. I was told-
and I do not know this, and I am asking you or Mr. Taylor, I sup-
pose, to clarify it-—that we are allowing for 100 percent ownership
as we transition business in Iraq for foreign investors and corpora-
tions. Clarify that if you can, because the question really comes to
what role will the Iraqi people have to play, or what percentage
ownership will be open or reserved for the Iraqi people versus tak-
ing all of the state-run industries, which was the case in almost
every situation there as we know, and selling those off to the high-
est bidder without looking out for the interests of the Iraqi people.
If you could clarify that, it would be helpful.
Mr. MERRILL. Yes, I can take a stab at it. This comes back to the
question which is true around the world—India, to pick an exam-
ple—of whether foreign investment must be done on a 51-percent-
owned basis or on a 49-percent-owned basis. It makes a very big
difference to a lot of investors on whether they can control the enti-
ty that they invest in.
That is a private business decision. It is not a governmental deci-
sion. I am not smart to know the answer to what commercial code
the Iraqis will develop.
Senator HAGEL. So that is not going on now.
Mr. MERRILL. Oh, it is going on there. The discussions are going
on, but how it is turning out, I do not know.
Senator HAGEL. Yes, but I mean turning over an industry, a pre-
viously state-run industry, to the highest bidder, a major company
in Iraq.
Mr. MERRILL. No, I have no knowledge of that.
Senator HAGEL. Secretary Taylor.
Mr. TAYLOR. What is happening now is the Governing Council is
considering these questions and will put the answer into the for-
eign investment law, the investment law that they are working on,
and we have every expectation that that will be coming pretty
soon; but it is not ofﬁcial yet, it is not done yet. But that is where
that kind of issue will be addressed. And there may be a separate
treatment for the formerly stated-owned enterprises compared to
other investments, but it goes back to one of your previous ques-
tions, Senator, of where the involvement of the Iraqi people is very
evident and actually happening as we talk.
Senator HAGEL. The Governing Council will have the ultimate
control over that to protect the interests of the Iraqi people.
Mr. TAYLOR. At this time, yes, while they are there.
Senator HAGEL. Well, let me go back—when you say “at this
time,” what does that mean?
Mr. TAYLOR. What I mean is the future of the governance of Iraq
is something that is still under discussion; it is something that the
CPA is working on, and it is part of the discussions at the UN Se-
curity Council resolution. But right now, the Governing Council is
very much involved in making a decision like this, but the evo-


29
So, I just wanted to stress both the legal challenge but also the
political challenge of getting the investment framework that we all
think would be good for Iraq.
Senator HAGEL. Thank you. I believe, Secretary Taylor, in your
testimony, you gave a very good overall analysis which you did not
get into at all in your verbal testimony, but I have read through
your written testimony, and you addressed some of these issues in
that we are concentrating on putting people back to work, pen-
sioners, the focus that we need to get the vitality back into society,
giving the people some sense of conﬁdence for their future.
Do you know currently what the unemployment rate is in Iraq?
And then I would ask the three of you to develop for me, if you can,
some general theme in your three speciﬁc areas as to how we get
the people of Iraq back to work.
Mr. TAYLOR. We have heard various estimates of unemployment
rates in Iraq, but I cannot believe any of them. The data are very
hard to come by. I know from surveying unemployment in other
countries, it really depends on deﬁnitions. But it is high.
Also, I would say that you include the underemployment, be-
cause there are still workers in some state-owned enterprises who
are really not producing much at all at this point. So that is some-
thing that—the lack of productivity is obviously a problem.
In terms of getting jobs created, as in every part of the world,
the most important thing is small business. That is where jobs get
created. So one of the things that is going to be important for that
is the ability to get small business loans. The CPA has already au-
thorized a plan where each of the major banks is supposed to be
making 250 new small business loans in each slice of time, kind
of a measure of performance.
I mentioned that we were going to have the IFC, the Inter-
national Finance Corporation, provide a small business loan pro-
gram. That is a very important part and I think just the ability for
people to start businesses and employ people is going to be where
that is going to come from.
The state-owned enterprises and the transformation of those into
regular businesses is going to be important. There is a person in
the CPA now who is focused on that, Mr. Foley, so that is another
place to get those workers more effectively employed.
It is a whole wide range of things. I think the transition of the
Oil for Food Program is also going to be a source of employment,
because you are really transforming a system where all the food
was coming from outside the country into one where a major frac-
tion of the food is going to be coming from inside and distributed
through regular distribution channels, retail stores, supermarkets.
It is a great opportunity for people to get jobs, too.
Senator HAGEL. Thank you.
Secretary Larson.
Mr. LARSON. Thank you, Chairman.
In the very short run, one of the things Paul Bremer did was
make sure that there was a little bit of money that was spent on
public works, things like garbage collection. That is not sustainable
employment, but it was something that I think he felt was very im-
portant to do to make sure that some basic services were provided


30
and there was some employment being provided to people who oth-
erwise would not be actively involved in some useful activity.
I think as the reconstruction process moves forward, there is
going to be tremendous opportunity for employment. One thing
that we are trying to do is retrain thousands of police personnel so
that they can take over more of the responsibility, providing the
basic security.
As we move into a greater and greater emphasis on construction
and rehabilitation, we know that there are many Iraqi ﬁrms who
are already participating in contracting and working on roads and
school repair, and as this process moves further and faster, there
are going to be more and more opportunities for employment in the
construction sector.
Finally, as John very rightly said, I think agriculture is poten-
tially a promising sector for remunerative employment. It has been
stunted by this system that had food distribution basically running
on a ration card system, so it is going to need to be revitalized.
That is important.
And ﬁnally, we have all stressed in various ways that the basic
goal here is to get a self-sustaining economic growth process going
that generates jobs through growth, and I think one of the more
important things that we need to do to achieve that is to work on
both the legal infrastructure and the physical infrastructure.
Senator HAGEL. Thank you.
Chairman Merrill.
Mr. MERRILL. I think you are asking the central question of to-
day’s hearing. I do not think it is a technical answer; I think only
in part. It is a conceptual answer.
The ﬁrst thing is that nobody has ever liberated, occupied, cap-
tured, whatever, a country before that came with a $15 to $20 bil-
lion a year in conceptual cashﬂow. I mean, countries have come for
gold, for slaves, girls, or territory—all kinds of things—but not with
cashﬂow.
First, we must try to get the cashﬂow going, which again comes
back to long-term investment and getting the oil ﬁelds up and run-
ning as fast as you possibly can. .
Second, we must decide what to do with some of that money. I
have heard ideas, and I have expressed them myself, of paying
dividends to the individual Iraqis like we do in Alaska, so that each
family works for $2 a day, a $10-a-week payment per person. Two
hundred thirty million dollars is not much compared to what we
are spending just to occupy and stabilize militarily the security
there. That money can be put to work buying things and starting
things going.
Third, you have an educated population that has been held down
for 20 or 30 years but which has an entrepreneurial base and is
very secular. So the ticket is to get money into their hands. And
I think my colleagues here have both touched on this with the
banking system. And even if it is WPA-type projects that put
money in their hands, if you have a banking system and you have
people being put to work, even if they are put to work as policemen
or sanitation workers, school teachers, whatever, that pay, the on-
going basic services of government, electrical workers and so forth,


33
PREPARED STATEMENT OF ALAN LARSON
UNDER SECRETARY FOR ECONOMIC, BUSINESS, AND AGRI('.UI.'I'L'RAL AFFAIRS
U.S. DEPARTMENT or TI-IE STATE
SEPTEMBER 16, 2003
Chairman hagel, Senator Bayh, and distinguished Members of the Subcommittee,
thank you for the opportunity to testify on recent developments on the economic re-
construction of Iraq.
Since I appeared before Senator hagel and other Senators on the Senate Foreign
Relations Committee on June 4, there have been several major developments affect-
ing Iraq’s reconstruction.
On August 14, the UN passed Security Council Resolution 1500 to deal with two
speciﬁc issues: The new Governing Council of Iraq and the United Nations Assist-
ance Mission in that country. In its action, the Security Council made it clear that
the international community would work with the Governing Council as a broadly
representative partner with whom the United Nations and the international com-
munity can engage to support them in their efforts to build a better Iraq. The reso-
lution also endorsed the Secretary General’s recommendation to create a United
Nations Assistance Mission for Iraq to better enable the United Nations to fulﬁll
its important responsibilities under Resolution 1483. You may recall that UNSCR
1483 had facilitated the participation of the international community, including the
international ﬁnancial institutions, in Iraq’s reconstruction.
On September 7, President Bush delivered a major speech to the Nation in which
he announced that he would send a supplemental budget request to the Congress
of $87 billion, of which $20 billion would be used to help secure Iraq’s transition
to self-government by establishing the conditions needed for economic investment
and prosperity. After decades of misrule and corruption by the Saddam Hussein re-
gime, the needs in Iraq are urgent and enormous. Based on initial estimates from
the Coalition Provisional Authority (CPA) and the World Bank, we believe Iraq will
need $50-$75 billion in the next few years to rebuild a viable economy and allow
it to become a vital member of the world economy once again. The President’s pro-
posal envisages that roughly $5 billion would be devoted to improving security by
training border guards, civilian police, the new Iraqi army, and sup orting a judicial
and penal system. The remaining $15 billion in the request would Be used to repair
crucial infrastructure that has suffered from many years of neglect and abuse as
well as war damage. These would include medical and educational facilities, elec-
tricity, transportation and telecommunications networks, water and sanitation, and
the oil industry. The reestablishment of safe, modern, reliable, and efficient services
will have an immediate and positive impact on security and on sectors critical to
stability and growth.
Since the President’s speech, there has been concern expressed at the size of the
task we are undertaking in Iraq, its difﬁculties, and how much it will cost. I won’t
deny those concerns. We are talking about a huge amount of money. But our strong
engagement in Iraq’s reconstruction will give that long-suffering Nation a chance
that it has never had before—to become a decent and democratic society at the
heart of the Middle East. President Bush was quite clear as to why this was in
America’s vital interest: “The Middle East will either become a place of progress and
peace, or it will be an exporter of violence and terror that takes more lives in Amer-
ica and in other free Nations. The triumph of democracy and tolerance in Iraq . . .
would be a grave setback for international terrorism.” A free, democratic, and pros-
perous Iraq will remove an island of hatred that long threatened its neighbors and
the United States. If we move hard and fast on Iraq’s reconstruction now, it will
ultimately lower the cost of this undertaking and hasten the day that our troops
can come home. We cannot fail to meet this challenge.
Though Iraq will provide important resources for its reconstruction, its needs over
the next few years far outweigh its current ability to meet those needs. The mag-
nitude of the task is such that it cannot be done by the United States alone, either.
We urge the international community join us and move quickly to invest substantial
funds to ensure success. Thus, a third positive development has been our collabo-
rative work over the last several months with other countries and the international
community on how we together can help Iraqis ﬁx their economy. We believe that
other countries—both individually and through international organizations such as
the United Nations—should make major contributions commensurate with the
importance and urgency of the task. The UN, the World Bank, and the IMF are con-
ducting needs assessments in various sectors in Ira to help determine that coun-
try’s future needs. This information will be used by the Iraq Reconstruction Donors
Conference to be hosted by the Spanish Government in Madrid on October 23-24


34
where they will discuss {pledges for the ﬁnal quarter of 2003 and all of 2004. While
some countries may pro er to make their reconstruction pledges directly to Iraq, we
are working on estab ishing a Multi-Donor Trust Fund as another way for countries
to provide reconstruction support to Iraq. This follows a similar model organized to
facilitate Afghan assistance. I will talk more about our international outreach effort
later in my testimony.
A fourth milestone has been the efforts that Ambassador Bremer, the CPA, and
representative Iraqis are undertaking in a process to transfer political authority to
Iraqi institutions and establish a process leading to the establishment of an inter-
nationally recognized representative government. As Secretary Powell said on Sep-
tember 8, “We have a common goal: To restore sovereignty to the Iraq people as
fast as is possible, as fast as is racticable.”
The ﬁrst ste s have already 'Been taken. Early this summer we saw the creation
of the principall organ of the interim Iraqi administration, the Governing Council,
whose members have been drawn from a broad s ectrum of Iraq’s ethnic and sec-
tarian groupings. The Governing Council has significant authorities, such as naming
and overseeing interim ministers, formulating national budgets, and aplpointing
Iraqi re resentatives to international organizations and bilateral missions. he Gov-
erning Council is assisting the CPA in developing olicy on the full range of issues
facing Iraq, including security, economic issues, anrf) reconstruction.
Another step already taken was the creation of the Constitutional Preparatory
Committee to make recommendations to the Governing Council on writing an Iraqi
Constitution. Iraqis will write their country’s Constitution, and it will be subject to
approval of the Iraqi people.
The Iraqis are playing an ever-increasin role in making the decisions that affect
their country. The Governing Council on September 1 selected the members of an
Interim Cabinet, who are responsible for the day-to-day management of their re-
spective ministries and who are working now on their 2004 budgets. The new Cabi-
net will have real responsibility.
We envisage several more steps to advance the objective that everyone shares:
The establishment of an internationally recognized representative Government of
Iraq. On September 15, the Constitutional Preparatory Commission will report to
the Governing Council its recommendations on writing a Constitution. We antici-
ate a Constitutional Convention, which will draft a new Constitution that would
Be ratiﬁed by a vote of all adult Iraqis. The establishment of an elected Iraqi Gov-
ernment will follow. Once the new government is in place and prepared to assume
full control, the coalition will depart. Iraqis are responsible for the timetable of
these next steps. The coalition and international community will advise and assist
them, and encourage them to proceed deliberatively.
Finally, the United States is in the midst of negotiations with the members of the
Security Council on a new resolution that would reaffirm and outline the many
areas where we see the United Nations playing a vital role in Iraq, including in re-
construction and humanitarian efforts. We also want the UN to work with the CPA,
Ambassador Bremer, and the Governing Council to implement the political transi-
tion toward a representative govemment. A new resolution would give a broader
mandate for the international community to come together over Iraq.
The Current Situation
Despite continuing paramilitary and terrorist activity, the situation on the ground
throughout most of Iraq is improving. The bombing of UN headquarters in Baghdad
on August 19 was tragic. We pay tribute to UN Envoy to Iraq, Sergio Vieira de
Mello, and the other courageous and committed UN, World Bank, and IMF officials
who were killed or wounded in that attack. Those who attacked the UN were attack-
ing the hopes of the Iraqi people for a better future.
As Secretary Powell made clear last week, we take seriously the challenge that
security poses and are taking actions. To augment the Coalition troops providing se-
curity, we are organizing an Ira i national civilian police force within existing struc-
tures. About 46,000 Iraqi police have been rehired and most are patrolling with U.S.
military forces. About 8,700 guards are on duty in the recently established Facilities
Protection Services to guard ﬁxed sites, such as banks, universities, or ministry fa-
cilities. But more needs to be done. The CPA has assessed that a minimum of
65,000 officers are necessary, a goal Ambassador Bremer hopes to reach by the end
of 2004. We eventually hope to have strength of 17,000 guards in the Facilities Pro-
tection Services. Until the security situation stabilizes, it will be difficult for genuine
development and transformation of the Iraqi economy to gather the necessary mo-
mentum.
Fortunately, there are many things upon which to build Iraq’s future. Iraq has
a large cadre of talented, dedicated technocrats anxious to retum to work. And we


35
have offers from many countries ready to provide technical assistance and to do
business in Iraq.
We are making real progress. Under the leadership of the CPA and the Governing
Council:
0 the food situation is stable and improving. Working with the UN, we arranged
for the local purchase of this year’s wheat and barley crop and restarted the pub-
lic distribution system;
all universities and most secondary schools are open;
all major hospitals and 95 percent of local clinics are open;
power generation is now over 75 percent of prewar levels;
oil production (1.44 million barrels a day in August) and oil exports (709,000 bar-
rels a day in August) are increasing;
Iraq’s civil service are being paid regularly, bringing money into the local econ-
omy;
0 USAID partners is awarding Iraqi ﬁrms contracts worth millions of dollars;
I Iraqis have been hired to rebuild Iraqi municipal services and infrastructure;
0 oil infrastructure, airports, ports, telecommunications networks, highway systems,
electrical networks, and water and sewage systems are being repaired;
0 an Iraq Central Bank has been created, and the banking system is operating once
again;
0 millions of dollars stolen by the Hussein regime has been returned by the coali-
tion so that they can be used for the beneﬁt of the Iraqi people.
The Job Ahead: Key Challenges of Reconstruction
My testimony speaks about the “reconstruction” of Iraq, but that word can be mis-
leading. In one sense, we are looking not at reconstruction, but at construction, not
at rebuilding, but at building. The Iraqi people must overcome the damage of almost
30 years of misrule and mismanagement by a corrupt and vicious tyrant to build
their society into a democratic and prosperous center in the Middle East.
Under decades of Saddam Hussein’s misrule, Iraq’s economy deteriorated signiﬁ-
cantly. GDP fell from $128 billion in purchasing power parity terms when Saddam
took power in 1979 to around $40 billion in 2001. Twenty-ﬁve years ago, per capita
income was approximately $l7,000—on a par with Italy—based on purchasing
power. Today, per capita income is around $2,000. Moreover, the United Nations
Development Programme’s Arab Development Report 2002 ranked Iraq in 110th
place among 111 countries on its Alternative Human Development Index, which
measures such things as life expectancy at birth, educational attainment, and enjoy-
ment of civil and political liberties.
Iraq’s economy today not only has shrunk, it has become distorted in the way that
the economies of Eastern Europe and the Soviet Union once were. Central control
removed incentives for rational production. Overcoming the legacy of state planning
and controlled prices will be arduous and time consuming.
Tasks in Key Sectors
I would like to brieﬂy describe the challenges Iraq faces in several key sectors.
Oil
The oil sector was stagnant in Saddam Hussein’s Iraq. The infrastructure suffered
from years of neglect, forcing Iraqi engineers to exercise ingenuity and ﬁnd creative
solutions to keep oil production levels as high as possible. The technologies applied
to boosting production have in some cases damaged the oil ﬁelds. The lack of main-
tenance, equipment, and spare parts also affected the infrastructure throughout the
production chain—¢from the wellhead to the gas-oil separation plants, to the pipe-
Ines, to the pumping stations, and to the reﬁneries.
Since the liberation, Iraqi and U.S. engineers have worked continuously to restore
production so that Iraq will be able to meet domestic needs and begin earning reve-
nues through exports. The Iraqi State Oil Marketing Organization (SOMO) has suc-
cessfully sold crude at spot tenders and signed long-term export contracts.
Key future tasks include upgrades to oil facilities to protect the environment, to
enhance efficiency, and to meet commercial and safety standards, both upstream
and downstream.
Food and Agriculture
The complexity of the task of reconstruction and reintroduction of market prin-
ciples is well illustrated in the food and agriculture sector. Under Saddam, agricul-
tural productivity suffered from low investment, input shortages, poor agricultural
and irrigation practices, droughts, and soil salinity. Returning Iraqi agriculture to
productivity and competitiveness is a major challenge we face.


37

)


k .
rm i
_._r_
-,_m-.
tries and security. In prosecuting the conﬂict, command and control systems and
telecommunications centers were targeted. The war destroyed almost 50 percent of
the telephone switches in Baghdad, and severed many intercity and all inter-
national links. Thus, even though about three-quarters of the 1.1 million lines in
country remained serviceable, many of them connected only with phones in their
local exchanges.
At this time, telecommunications reconstruction is progressing steadily. There is
telecommunications construction work underway on 12 switches, restoration of ﬁber
connectivity between major cities, and the reestablishment of an international sat-
ellite telephone gateway. The completion of these projects will put Iraq at prewar
levels of telecommunications. We have a target date of January 2004 for the comple-
tion of this work. The State Department and USAID have worked closely with CPA
to expedite the telecommunication effort. CPA’s selection process for the three re-
giona wireless licenses is continuing due to the great volume of license applications.
Granting of the licenses will ensure private sector participation in the telecommuni-
cations sector. Key future tasks include rehabilitation of switches, local access,
international connectivity equipment, and the postal system.
Electricity
Restoring and expanding Iraq’s electricity generation capacity and the power
distribution grid is critical to Iraqi citizens’ well-being, as well as to the rapid res-
toration of economic recovery, particularly in the oil sector. Despite sabotage and
criminal activity, Iraqi electricity generation has been steadily improving and
reached its highest point, 3,715 MW, on August 27, or roughly 84 percent of
preconﬂict levels. CPA and USAID are working to repair power stations and trans-
mission lines as part of a plan to increase power to 4,400 MW b September 30 and
6,000 MW before the summer of 2004. Iraq’s Commission of Electricity (COE) has
implemented a (Power sharing policy that provides a predictable “3 hours on, 3 hours
o ’ power sche ule throughout the country. Bechtel is providing technical personnel
at key power stations to assist the COE and is converting units at the Bayji and
Al Qudas power plants to burn crude oil until reﬁned fuels are more widely avail-
able. USAID is replacing air conditioning systems and clogged heat exchangers at
four southern power-generating stations and is purchasing new turbines for the
Kirkuk power station. CPA and COE are analyzing maintenance and inspection
schedules to reduce the otential for power outages during the fall and winter. Key
future tasks include rehabilitation of generation, transmission, and distribution
equipment and providing greater security to protect these facilities.
Water and Sewage
Iraq is blessed with abundant water resources, but saddled with decrepit and ne-
glected infrastructure to assure clean water to citizens and industry. We are work-
ing hard to improve the situation. USAID support to water and sanitation projects
has already beneﬁted over 14.5 million Iraqis. We have repaired over 1,700 critical
breaks in Baghdad’s water network, increasing water flow by 200,000 cubic meters
per day. USAID has begun to expand Baghdad’s Saba Nissan water plant, which
will add 225,000 cubic meters of water a day by May 2004. We have rehabilitated
70 of Baghdad’s 90 nonfunctioning wastewater-pum ing stations and begun restor-
ing Iraq’s largest wastewater treatment facility, tiie Rustimiyah plant, which is
southeast of Baghdad. USAID is dredging Basrah’s Sweet Water Canal and partly
completed restoration of the Safwan water pumping station in Khor az Zubayr, ben-
eﬁting 40,000 people. USAID is also working to rehabilitate the An Najaf and Al
Hillah sewage treatment plants, which serve 194,000 Ira is. USAID has provided
funds for the purchase of 100 MW generators for Baghdad's water system, thereby
ensuring continuous water supply. Existing USAID projects will implement plans to
increase potable water ﬂow to east Baghdad by 45 percent, helping 2.5 million peo-
ple and restore sewage treatment plants and the Baghdad pum station, serving
over 5.5 million Iraqis. Key future tasks include the repair and) rehabilitation of
water pumping stations, wastewater treatment plants, and associated distribution
systems.
Health
While there has been no health crisis thanks to the efforts of USAID and other
agencies, building Iraq’s health infrastructure remains a high priority. USAID has
rehabilitated delivery rooms in hospitals and primary care centers serving 300,000
residents in Basra. Three million sachets of oral rehydration salts are being distrib-
uted to children with diarrhea. With USAID funding, UNICEF has provided more
than 100,000 pregnant and nursing mothers and malnourished children under 5
years old with supplementary rations of high protein biscuits and 1.4 million chil-
dren have been vaccinated to date during monthly vaccination days. USAID has re-


42
A Strategy for Paying Workers and Pensioners
It was clear that we had to have a strategy for payin Iraqi workers and pen-
sioners after the fall of Saddam Hussein, and thus we crafgted a strategy well in ad-
vance of his fall. Keeping workers on the payroll with stable purchasing power
would be essential to prevent severe hardship‘ and economic collapse. But how many
workers were there and how much should t ey be paid? What currency should be
used to make the payments? Where would the funds come from? Would the pay-
ments system be in good enough condition after the conﬂict to actually make
payments? How could we prevent hyperinﬂation and a sharp de reciation of the cur-
rency, which would further impoverish people? After all, one of the reasons for the
terrible economic performance under Saddam was that he resorted to the rinting
press to ﬁnance his spending, causing high inﬂation and a drop in the dinar to
about 1./5,000th of its former value.
Starting late last year, we developed such a payments strategy, which was ap-
proved interagency after much valuable discussion and debate about alternative
strategies. The strategy called for aying workers and pensioners in U.S. dollars on
an interim basis. This was not dollarizing the economy, because the strategy called
for the continued use of local currencies—such as the Saddam dinar in the center
and south and the Swiss dinar in the north—and their eventual replacement by a
new national currency, as described below. Using U.S. dollars on an interim basis
would create stability and would help prevent a collapse of the dinar.
Finding a wa to secure the funds to make these payments in advance of the con-
ﬂict proved to be a challenge. After much discussion and debate, we decided that
the best approach was to use Iraqi regime assets that were frozen at U.S. commer-
cial banks back in 1990 at the time of the ﬁrst Gulf War. In order to use the assets
for this purpose, they had to be “vested” for the use of the Iraqi people. Our esti-
mates were that there was about $1.7 billion that could be vested in the United
States and that this amount would probably be sufﬁcient to last until a new cur-
rency could be issued in Iraq. A vesting strategy was worked out and approved by
interagency legal experts. Under this plan the President would call for the vesting
of the assets in the Federal Reserve Bank of New York near the time that the mili-
tary conﬂict began.
To make such a strategy 0 erational, many tactical issues and contingencies had
to be considered. For example, the plan called for the military on the ground to
issue public statements—worked out with the Departments of Defense and Treas-
ury—that the dinar would continue to be accepted as a means of payment after the
fall of the Saddam regime. The plan also called for the ﬁrst wave of ﬁnancial advis-
ers into Baghdad to assess the payments system’s capability for making dollar pay-
ments.
Another essential operational issue concerned the actual ship ing of the currency
to Iraq, and a plan for making the payments to workers and) pensioners on the
ground had to be developed. We estimated that enough currency in the right de-
nominations was in storage in the New York Fed’s warehouse in East Rutherford,
New Jersey, and we determined that it was feasible to ship the currency by tractor
trailer to Andrews Air Force Base, load it on military aircraft, and ﬂy it to Camp
Arifjan in Kuwait for the last leg into Iraq. Many tons of currency were involved
because of the need for small denominations: one-dollar or ﬁve-dollar bills. On the
ground, the military would assist in the actual shi ment of the currency around the
country. Financial ex erts would develop lists ofEli 'ble workers and ensioners
who would be paid. Tffe currency would be distributed to Iraqis who would then ac-
tually make the payments. In some cases, the currency would be paid at the state-
owned enterprises or government ministries. In other cases, pensioners would come
to local banks to receive payments.
I am pleased to say that this strategy along with all its tactical details has been
carried out with great success. On March 20, at the start of the conﬂict, President
Bush issued an order calling for the vesting of the frozen assets. As a result, ap-
pfoximately $1.7 billion was vested in the New York Fed. With these funds at the
ew York Fed, the ﬁrst shipment of currency from the Fed’s East Rutherford, New
Jersey warehouse to Camdp Arifjan was made on April 13. Even as ma'or combat
operations were winding own, a mechanism for shipment of cash and distribution
o emergency payments was established and began to function. Thanks to this sys-
tem, we were able to make monthly emergency payments to dock workers, rail
workers, power plant workers, and others essential to restoring basic services. We
soon transitioned to regular civil service salary and pension payments to over 2 mil-
lion Iraqis.
Des ite tremendous logistical challenges, the system of payments has worked
well. Sur ﬁnancial experts in Baghdad consider this to be a major force for stability
in the country, as well as a signiﬁcant spur to economic growth. As of this date all


46
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGEL
FROM ALAN PARSON
Q.1. How many sole-source noncompetitive contracts are there?
What is the exact percentage of these contracts?
A.1. To the limited extent to which the Department of State has
access to comprehensive details related to contracting for the recon-
struction of Iraq, we offer the following information on sole-source
noncompetitive contracts being awarded by the U.S. Agency for
International Development (USAID) and the Department of De-
fense (DOD):
I As of September 12, 2003, USAID had awarded nine reconstruc-
tion contracts. Of these, one was a sole-source contract to Inter-
national Resources Group (IRG) valued at USD 18.3 million of
current programming. Out of the USD 1.55 billion in USAID con-
tracts funded thus far, this sole-source contract award represents
1.2 percent of the total.
0 DOD has awarded one reconstruction contract that was not com-
peted. The Army Corps of Engineers awarded one sole-source
contract to Kellogg, Brown, and Root. The total contract award
is not to exceed USD 7 billion. DOD has awarded 1.6 billion in
contracts to Kellogg, Brown, and Root through September 12,
2003.
The General Accounting Ofﬁce (GAO) has produced two reports
on Iraq reconstruction contracting—one through July 31, 2003 and
the other through September 30, 2003.
Q.2. What are the numbers of foreign contract and subcontracts
awarded?
A.2. According to publicly available information and the Depart-
ment of State’s best efforts to obtain additional information from
other agencies, the Department offers the following information:
¢ The United States Agency for International Development
(USAID) has awarded all of its prime contracts (9) to U.S. ﬁrms.
As of September 19, 2003 Bechtel, one of USAID’s prime contrac-
tors, had awarded 133 subcontracts with the majority (98) going
to Iraqi ﬁrms.
0 The Department of Defense requires Kellogg, Brown, and Root
(KBR) to competitively bid the subcontracts for each individual
order placed against its overall contract. We are unable to prove
an exact determination of the number of foreign subcontractors
working with KBR but there are many, including a number of
small Iraqi subcontractors.
0 USAID and the Department of Defense as the contracting agen-
cies may be able to provide more complete data.


51
and from other nations will go for naught if they do not have sus-
tainable ﬁscal and monetary policies. What leverage do we have to
try and convince the new Iraqi authorities to take not the path of
least resistance but the difﬁcult course of providing sound ﬁscal
and monetary policies for themselves in the longer-run and no just
curry temporary favor with the crowd by pursuing policies that are
not sustainable in the long-run?
Finally, I would be interested to know if you concur with the cost
estimate for reconstruction over the next 4 to 5 years that Senator
hagel mentioned of $55 to $56 billion. Is that, in your estimate, an
accurate assessment? Or if it is not, how would you go about as-
sessing the cost of reconstruction?
Again, thank you for your presence. We look forward to hearing
from you. And I again thank the Chairman.
Senator HAGEL. Senator Bayh, thank you.
Senator Stabenow, would you like to add any comments?
Senator STABENOW. No, thank you.
Senator HAGEL. Well, thank you again, and I would add I have
known Peter McPherson for not quite 30 years, but close to that.
He is one of the genuine public servants of our time, and, again,
we appreciate the time that he invested in helping this country
once again over the last few months. We look forward to his words
as well as Mr. Malloch Brown’s words after we hear from Mr.
McPherson.
Mr. McPherson, please begin your testimony. You both can either
paraphrase it, work from notes, or read it. We will assure you that
your full testimony will be included in the record.
STATEMENT OF M. PETER MCPHERSON
FORMER DIRECTOR OF ECONOMIC DEVELOPMENT
COALITION PROVISIONAL AUTHORITY IN IRAQ
PRESIDENT, MICHIGAN STATE UNIVERSITY
Mr. MCPHERSON. Thank you very much, Senator, and, Senator
Stabenow, thank you for your comments. It is good to see you and
have your long support for Michigan State and other matters. We
appreciate it.
I am particularly happy to be here with my old colleague Mark
Malloch Brown. We have worked together on a number of things,
and he and his organization were so important in putting together
the needs assessment as we ran up to the donor conference in Ma-
drid. Senator, I know this is in no way a passing interest of yours
to really look at the economic side of what is happening in Iraq,
and I think it is important. It is much appreciated.
Security certainly is a critical component of our long-term suc-
cess there. I do think, though, that what has been achieved in
areas such as health and education and the economy begins to put
in fairly stark relief what Iraq can be if we deal with the security
matter. It is no longer just theory and possibilities. We can see
what can be in what we can have when the job is done.
We are beginning to put in place the foundation for a revolution-
ized economy. The new economy will challenge the whole region,
where the economic policies frequently have not been as sound, and
market forces have not played nearly as important a role.


52
The situations is pretty messy. It is a very imperfect world. But
in my judgment, the progress is real.
In June, we began to pay the government employees——there are
1.3 million of them—and about 1 million pensioneers. It was a real
accomplishment to get this all done, because as we started off, we
did not even have the names of the people. The government min-
istries were not open. And in many cases, we actually could not
work out of those ministries. We ﬁnally found together individual
employees that had taken lists home, or we patched lists together
here and there, and over a few weeks we put together a list of all
the government employees. We then got some key people in the
Ministry of Finance who had worked on this before. I came to re-
spect a couple men particularly. Through their honesty and their
24-hour work at this, they signed off on the integrity of lists all
over the country.
Senators, to get $100-million-plus in value distributed all over
the country in June, was something of which I am still proud of.
Therel was never a major theft, never a major problem that was not
solve .
One part of this that has almost never been mentioned is that
we paid that ﬁrst payroll in the Saddam dinar. There was some
discussion about that because Saddam’s picture was on the old cur-
rency. The decision was made that to pay in the old currency in
part to tell the country that we were not going to let their currency,
the value that they had in that currency, just drop through the
ﬂoor. Everybody remembered what happened in Germany after
World War I where the currency essentially came to have no value.
We would have destroyed whatever value was left in the hands of
the people if we had done so. The Saddam dinar ﬂuctuated in the
months since, but it has maintained its value within a range. It is
a success hardly spoken of, and I think it was quite key for
progress.
In fact, on July 7, the decision was announced to create a new
currency. There was lots of discussion about that. At the time there
was much back and forth, but the Iraqi businessmen and others
were clamoring to do something, and after the fact, everyone has
been really very satisﬁed that we did. In all but the North of Iraq,
there were only two denominations of the currency,. one worth
about a dime, the other about $5. Think if we had to operate in
our country, or any country, with only a dime and a $5 bill, the
new currency was. We began to print it. On October 15, the swap
begin through January 15. There is a couple billion dollars equiva-
lent being moved into the country. You swap during these 3
months or all you have left are souvenirs. Actually, this is going
very smoothly. I talked to my replacement this morning just to con-
ﬁrm. There have been bumps, of course, but overall things ahve
gone very well.
Something we did helped. The central bank pushed hard to urge
people to put money in the banks prior to the swap and have that
money automatically swapped and so people did not have to stand
in line to get it done. But once more, billions of dollars moved
around the country at over 200 sites. That has been quite a feat.
We put together a 2003 budget. We announced that on July 7 at
ﬁrst. We could not ﬁnd the prewar budget, because it was a state


53
secret under the old regime. We found it a few weeks after we had
put together the new budget. The 2004 is now in place along with
the supplemental budget.
When we arrived the banks were all closed. Frankly, virtually
nothing was open. The two big Banks, Raﬁdeen and Rashid, have
now opened. At most of their branches, checks are being cashed.
Eighty sites, through a satellite, now connect the banking system
and the central bank are so that we can get information about
what is happening around the country. That has been a signiﬁcant
achievement.
You mentioned the trade bank a moment ago. When the Oil for
Food Program ends we would not have had in place any trade cred-
it facility. Unless something is done some of the private banks will
be doing some work, but Raﬁdeen and Rashid are not yet in a posi-
tion to do that work. So the trade credit facility, so-called trade
Bank, is an important tool.
One of the ﬁrst things that countries need as a step out of ﬁnan-
cial extremis, is trade credit. And so this facility, which should go
out of existence in a couple years, is meant to be a short-term
measure, not to replace the regular banking system.
Now, as time went on, the Iraqis played a steadily bigger role in
things. When we got there, they had a very limited role, but the
ministries began to operate, the central Bank, the Ministry of Fi-
nance, and by August there was an enormous involvement by
Iraqis in making some key decisions. This included sweeping eco-
nomic reforms, changes that were announced by the Finance Min-
ister in Dubai at the World Bank—IMF meetings. Those changes
make the Iraqi economy, under the law of Iraq, the most open
economy in the region—and, frankly, one of the more open econo-
mies in the world.
What it provides is an across-the-board tariff at 5 percent with
a few exceptions that go down to zero. It provides a maximum per-
sonal income tax of 15 percent and corporate rate at 15 percent. It
allows foreign investment of 100 percent, foreign corporations
treated as national corporations, full repatriation of proﬁts and so
forth.
The investment provisions were strongly urged by the World
Bank that pointed out how little foreign investment the Middle
East is getting. In fact, in 2002, the last annual ﬁgures, the Middle
East received only $4 billion of foreign investment. All of Sub-Saha-
ran Africa, generally thought not to attract a little of foreign in-
vestment, attracted $7 billion and Latin America about $44 billion.
The World Bank said you must open up this economy. The Iraqis
were saying, “We need jobs. And how do we create an edge? We do
not want to be just the same as everybody else, but how can we
be something special?” Well, the sweeping economic reforms cer-
tainly put that into place.
By the way, I neglected to mention a moment ago, part of those
reforms was allowing foreign banks in to enter the country and to
compete with the state Banks, the two big state Banks. There is a
lot of interest already being displayed by some Middle East.
The process of adopting these reforms is instructive. The Gov-
erning Council, the 25-person, now 24-person-member Governing
Council appointed by Bremer, is representative in terms of religion


55
this unstable, uncertain condition, schools are open, health care is
delivered, currency is there, and so on.
I believe that this is a historical time. The opportunity is there,
and if we can stick to it, we achieve something that a generation
from now will be regarded as enormously signiﬁcant for the region
and the world.
Thank you.
Senator HAGEL. Mr. McPherson, thank you very much.
Mr. Malloch Brown.
STATEMENT OF MARK MALLOCH BROWN
ADMINISTRATOR, UNITED NATIONS
DEVELOPMENT PROGRAMIVIE
Mr. MALLOCH BROWN. Thank you very much ﬁrst, Mr. Senator,
for the invitation to address this hearing today, and let me just
congratulate Peter McPherson for the extraordinary job he has
done in Iraq, along with his colleagues in the CPA. I actually think
this should be required duty for every university president because
they come back and recognize running a university is not such a
bad job after all.
But let me start, if I could, with a very obvious point but one
which someone such as myself, who worked very hard to try and
support the United States and others to make the Madrid Con-
ference a success, believes in profoundly. I should perhaps add, so
does my colleague Julia Taft, who is with me and known to you,
Senator, I think, from her previous stint at the State Department.
But it is something that, nevertheless, I feel I have to say here,
which is that all of us in the United Nations profoundly want to
see the United States succeed in Iraq. We certainly want to see
that for the well-being of the people of Iraq, as it remains the only
way to establish a successful, sustainable democracy in the coun-
try, that this venture that the United States leads is seen through
to a successful conclusion.
But also, those of us in the leadership of the UN feel equally pro-
foundly that the United States must succeed in Iraq for the health
of the overall international system, not just for the ﬁght against
terrorism, vital though that is, but for broader conﬁdence and faith
in the international order of which we are all part.
And in that context, coming out of Madrid, I equally ﬁrmly want
to say that we in UNDP—but I speak more broadly for the UN
when I say this-—want to step up our operations in Iraq in support
of the reconstruction and rehabilitation of that country, that the
reports in the media of our departure are wrong, a bit like the
character who reads his obituary in that morning’s newspaper and
complains he is still very much alive. We strongly believe this
about our operations in Iraq.
It is the case that last week in Baghdad, following in August the
attack on our own headquarters, two events forced us to call our
international staff out for brief consultations. One was the bombing
of the Red Cross Headquarters in Iraq, of the International Com-
mittee Red Cross and the Federation of Red Cross ofﬁces, which,
by the way, demonstrated that the attack on the UN had not been
because we play a political role in Iraq, as many had suggested,


57
expenditures could amount to as much as $56 billion over the next
4 years.
But it is certainly my view that only a portion of that will come
in grant assistance, that as the years pass by, the country will be
able to access loans, it will be able to attract foreign direct invest-
ment, and its own tax base will grow, therefore, giving it other
sources of paying for this.
The need for grant ﬁnance is up front, and it is particularly in
the year 2004 when it will not be able to access loans because, ﬁrst,
there will still not be an Iraqi Sovereign Government able to access
loans from the capital market, or even possibly from the World
Bank and the IMF, although that is a point of some debate.
Second, it will have difﬁculty in attracting foreign direct invest-
ment into the oil sector, let alone other sectors of the economy, on
any very great scale.
And, third, and critical to those ﬁrst two goals, it will have enor-
mous difﬁculty restructuring its debt before there is a Sovereign
Iraqi Government.
So, for my mind, there have always been two phases to the next
few years. There is the immediate phase where the Governing
Council, under the CPA, can manage in a relatively short-term way
and introduce major early steps toward liberalizing the economy,
but is unable to do the big irreversible steps of restructuring, such
as privatizing assets or restructuring debt, until it has transitioned
into a sovereign government. Once it does so, it will be able to ac-
cess, as I say, foreign direct investment, loans, other sources of cap-
ital, and not be solely dependent on grants.
Our view is that of the $56 billion, a signiﬁcant portion is grants,
but much of that is front-ended into the ﬁrst year or so, which
brings me to the question—whether or not we should be angry with
the non-U.S. donors for providing such a large proportion of their
funds in loans rather than grants.
Let me say I made the case in Madrid that, while for the 4-year
period that we were looking at in this funding, 2004 was grants but
2005 to 2007 would have a signiﬁcant loan portion as well as grant
ﬁnance in it. I went on to argue that I strongly supported the Ad-
ministration in its proposal that the $20 billion be in the form of
grants. This is not, Mr. Senator, some European double standard,
despite my accent. It is actually because the United States had
ﬁrst promised to put its money up front to, in a sense, be ﬁnancing
this early period when loans are not so practical. But also, I think
it goes with the whole nature of the U.S. role, that the already dif-
ﬁcult relations between the United States and many segments of
Iraqi public opinion would be further complicated if suddenly what
appeared to be a grant became a tied loan. And I think it would
have all kinds of consequences to make the political situation hard-
er to manage for the United States in the immediate short- and
medium-term.
Ultimately, therefore, on the $56 billion, let me, therefore, again
conclude that by saying that, yes, I think it is what will be spent
in Iraq over the next 4 years in the same way, if you look back over
your shoulder and said how much was spent in many Eastern Eu-
ropean countries, Poland or Hungary, for example, over the early
years after 1989. Looking back, this amount was spent. But it cer-


59
successor, to be calling for $25 billion for the rest of the world to
achieve the Millennium Development Goals because, as I say, it is
not that we think the Iraq ﬁgure is big. We think the rest of the
world is small.
Let me make one other ﬁnal observation, which is that I think
this operation, the extraordinary leadership of Mr. Bremer, Peter
McPherson, and others in the CPA, has perhaps demonstrated to
them, as I think it has to us outside, that we need a standing inter-
national capacity for peace building at times like this. It is easier,
whether you are France in Cote d'ivoire or the United States in
Iraq, to be able to rely on multilateral partners to undertake many
of these tasks, everything from demobilization to early justice sys-
tems and constitutions, to delivering basic services such as health
care or education. Throughout these sets of tasks, a neutral multi-
lateral partner is a much easier way to deliver it than through the
same power force to provide the military arrangement in such a sit-
uation.
Why not through the leadership of the United States, for what
we are learning here in Iraq, support the creation of this stand-by
multilateral capacity, probably centered on the UN and the World
Bank, to be able to provide this support not just on a case-by-case
basis, but whenever an Iraq or a Cote d'ivoire or a Liberia or an
East Timor emerges, that we have the money and the resources to
step in and the lessons learned and the experience to do it right
each time.
Thank you very much.
Senator HAGEL. Mr. Malloch Brown, thank you.
Senator Bayh, why don’t I begin the questions, and we will go
back and forth, maybe 7 minutes each, and that way they won’t get
bored with either one of us too much.
Senator BAYH. Let’s hope.
Senator HAGEL. Let’s hope.
Mr. McPherson, you mentioned the CPA decisionmaking process
and the critical nature of that. In your testimony, you went into
some detail as to how it affected what you were doing and how you
were part of that. And you mentioned the Governing Council, and
you noted the diversity of the council, among other observations.
Tell us in your opinion how much authority is actually being ex-
ercised by the Governing Council in the economic sector. What, in
fact, are they doing? Are they monthly taking on more and more
responsibility for the economy decisionmaking?
Mr. MCPHERSON. I am certain that the economic reform package
would not have gone forth if they had not agreed. And they not
only agreed, but there were signiﬁcant components of it which they
either modiﬁed or they put in.
The cabinet members, for example, the Minister of Finance, and
the central bank president, were their decisions. Bremer approved
them, acted upon them, but they were names initiated by them.
They weren’t names initiated by the CPA.
As to the trade Bank, it is very clear to me they are making the
critical decisions in the ﬁnal stages. And my colleague George Wolf
said to me today, “Peter, their role continues to accelerate in the
weeks after.”


64
And by the way, I believe, now, I speak as an individual today,
not as a representative of the U.S. Government, but I think the
reparations should be largely or wholly forgiven.
The Kuwaitis and the other people in the region, but the Kuwai-
tis particularly, need to understand that as a tiny country next to
this huge country that the last thing they want to do is to try to
insist upon payment when, in fact, they have got generations ahead
of them, as neighbors. The Kuwaitis have done more than they
have been given credit for. They have not been dramatic enough
about it. It is my view forgiving those reparations would be a his-
torical and important step, and I hope they do it.
Senator BAYH. I agree with that strongly. I would just conclude
by saying we have stepped forward here trying to do the right
thing. What the Iraqi people need is a fresh start. The reason for
my line of inquiry is I think we should do whatever we can to try
and alleviate as much of this debt burden as humanly possible, to
allow them to get on with the future development of the country,
rather than paying for the sins of the past, and it is going to be
difﬁcult.
Mr. MCPHERSON. And the Russians need to provide deep debt re-
duction.
Senator BAYH. I agree with that, I am not holding my breath, but
I hope to share your optimism, Mr. McPherson.
And thank you, gentlemen, both of you.
Mr. Chairman, I apologize for running on here.
Senator HAGEL. Senator Bayh, thank you.
Staying on the debt issue for a moment, what range of debt re-
duction do you think is possible? I would like to hear from both of
ou.
y Mr. MALLOCH BROWN. Well, perhaps, I would just say, because
I must say I ﬁnd myself in a completely unaccustomed position
having to defend debt because I am completely with you, Senator
Bayh. In fact, I am going to get a medal of sound ﬁnancial——
[Laughter.]
Because all of my instincts are on your side for a massive write-
down, but just to give you a sense what I think can be achieved
under best current practice, under the HIPC initiative for poor
countries, the governing principle is that a poor country can afford
to service a debt which is something like one-and-a-half times its
GDP. The current debt of Iraq is 10 to 15 times its GDP. So, for
me, if I was advising the Iraqi negotiators, my starting point would
be to reduce the annual service and to reduce the volume to some-
thing close to that HIPC level. So we are talking a real hair cut.
And I think if you cannot get there, then, frankly, countries
which incurred their portion of the credit, I mean, became creditors
because they were supporting Saddam Hussein during the particu-
larly gruesome periods of his rule are going to ﬁnd themselves sub-
ject to probably unilateral write-off because I do not think they will
have the sympathy of the international community. Some of those
countries are not themselves likely to be major extenders of future
credit, so it would not necessarily, have the punitive effect that
Peter refers to in the case of Argentina.
So, I think there will be a huge pressure for rapid, dramatic debt
reduction, even under conventional procedures.


65
Senator HAGEL. Thank you.
Peter.
Mr. MCPHERSON. Someone was telling me the other day that the
Iraqi secondary debt market was about 21 cents on the dollar of
debt and interest, and I said I would not buy it.
There will be a lot of push-and-shove between here and there,
but I think the parallel we should think about on this is Versailles,
1919. France particularly at Versailles, insisted upon huge repara-
tions, a big burden on Germany. It was not the only reason Hitler
came to power, but it certainly helped him.
And the Kuwaitis with their reparations and the world commu-
nity needs to see, okay, it is impossible to pay debt the next few
years in any large amount. The usual inclination of bankers, and
I have been a banker, will be to say, “All right so you are not pay-
ing a few years, let’s push it off and pay later.”
But, if we are having Iraqis pay for Saddam 25 years from now
in a big way, that is a geopolitical mistake. We did not go into Iraq
to make money. We did it for a whole set of reasons, and we need
to come out of this with an Iraq that has something of a democracy,
a stable economy, including a debt structure which is realistic and
which the people will see as realistic. I would not buy debt at 21
cents on the dollar.
Senator HAGEL. Thank you. Would you describe the intent and
what you think will be the short-term impact of the 100-percent
foreign ownership law that the governing council approved re-
cently.
Mr. MCPHERSON. I think there is some regional interest, for ex-
ample, some regional Banks. If, in fact, as the security situation
gets under control, there will be great global interest. There were
companies from all over the world that were inquiring about Iraq
even before the law, but it will take foreign investment, especially
investment outside the region, will take a little time. It always
does. By the way, the tax and tariff measures involved here are
very important as well.
Senator HAGEL. Thank you.
The tax-tariff measure issues you just mentioned, and you men-
tioned during your testimony, the 15-percent ﬂat tax
Mr. MCPHERSON. Actually, the top marginal rate is 15 percent.
So, below that, including some people of low incomes that will not
pay income taxes. The details are to be worked out. However, the
law now provides that the top marginal tax rate will be no more
than 15 percent.
As it is not only what rate you pay that is on the books, but also
the compliance. The prior rate was like 45 percent. Most did not
say that. It is important that you have a rate low enough so most
people do pay, and I think 15 percent will work, as well as in my
judgment it is important for growth.
Senator HAGEL. What structurally, institutionally is being put in
place in order to assure that compliance?
Mr. MCPHERSON. The Ministry of Finance is responsible for tax
collection. There is a unit within the Ministry, not separate. The
whole tax code is being reworked, and the compliance and collec-
tion structure being restructured. There is a huge push to get this
done because a new tax rate is effective January 1, 2004.


66
Senator HAGEL. Thank you.
Mr. Brown, you mentioned some of the past experiences you have
had, the United Nations has had, that we are applying to Iraq re-
construction and economic growth development. Each is different,
we all understand that, each situation. What lessons would you
note that we have learned as we are working our way along in Iraq
from donor projects in Afghanistan, East Timor, and Bosnia? Is
there; anything we can draw from those experiences and apply to
raq.
Mr. MALLOCH BROWN. Of course, in Afghanistan, a big complaint
was, and remains, that there is not an adequate international secu-
rity force to keep the peace across the country. Whatever the dif-
ﬁculties the United States is having, it is enormously important
that there is that nationwide coalition force keeping the peace. It
is hard to imagine how much more difﬁcult the situation would be
if it was not there. I think what is often criticized is nevertheless
a basic of peace-building, that the peace is kept, even if it is prov-
ing difﬁcult in the case of Iraq.
I also think it is fair to say——it has been much commented on in
the press—that the general experience of peace-building is it is
very imprudent to demobilize the army of the defeated power with-
out a strategy for reintegrating it effectively into civilian life and
without a strategy for jobs and well-being for soldiers and their
families in the interim.
Another lesson that I think we are learning is the enormous
importance of a clear political time table, which everybody under-
stands, every Iraqi, whatever their political position, the inter-
national community, the CPA, the governing council, that there is
a clear blueprint with a timeline on the process to be followed.
Constantly, the name Mountbatten rings in the back of my mind
because when Mountbatten was sent to India at the end of the sec-
ond World War, he made one quick snap decision: Let us do this
quickly. It will only get worse the longer we take.
I think, as I watch events in Iraq, I would urge my friends in
the United States to really think about how this process can be ac-
celerated as rapidly as possible, obviously, without a loss of control
because the quicker you have Iraqis empowered to make decisions
for Iraqis, the quicker there is the potentially stable base for easing
the political violence which is so difﬁcult at the moment.
Senator HAGEL. Thank you.
Peter, would you want to comment on any of this?
Mr. MCPHERSON. Well, I would not want to engage too exten-
sively with my British colleague on Mountbatten’s decision in 1949,
but I am not sure everybody would agree with this being a good
case study on making quick decisions on new governments in India
and Pakistan.
No, I am ﬁne. Thank you.
Senator HAGEL. Now, remember, Peter, you do not represent a
government. You speak for yourself, so that gives you some latitude
ere.
The Arab countries’ assistance to Iraq, I do not know what meas-
urement or standard we went into the Madrid Conference with
regarding the Arab Nations as to what we expected or a range of
expectations, but I suspect there was some sense of disappointment


68
Oil for Food Program, and the CPA in its best efforts to get things
done, would be criticized for taking steps like the currency.
Senator HAGEL. Mr. Brown, do you want to add anything?
Mr. MALLOCH BROWN. Look, the last thing I want to do is pick
a ﬁght with Peter on this because I do not want to do anything to
disempower the current reform movements in Iraq, and I com-
pletely agree with him that we have got to push with economic
change now and a lot cannot wait.
The issue on debt is that we do have a moratorium until the end
of next year. It gives us time to do it and to allow an Iraqi Govern-
ment to do it. As we have repeatedly made clear, we think that,
like in Afghanistan, you can have a sovereign government before
elections. It is the CPA which believes that elections must come
ﬁrst and then a sovereign government. We think that a representa-
tive Iraqi body could emerge based on the governing council well
before that time which could exercise full sovereignty and complete
a debt restructuring.
But, as I say, we have a point of view based on international law,
and we know we disagree with the United States on this, but
Mr. MCPHERSON. But it is really important, Mark, there is a le-
gitimate debate, as to what the CPA can do under the law. But as
I say, I always found it a little really odd that Saddam was recog-
nized and some thought his actions to be legitimate sovereign ac-
tions, even if they were illegitimate at their very core, and the CPA
gets critized for taking needed steps. I know you are a person, and
Julia Taft who is behind us here, worked so very hard to get this
needs assessment done. However, I do not think we should let any-
body off the hook on prompt negotiations of debt fast.
We wanted to get by the Donor Conference, before we had seri-
ous debt negotiations, and now we should move, in my judgment.
The longer this goes on, the tougher it is going to be. If we did not
have serious negotiations for a year, it will be tougher to get the
debt reduction necessary. The calendar is not on the side of the
deep reductions required. I believe that.
Mr. MALLOCH BROWN. I mean, there is no doubt that Peter is
right, that with debt reduction, the sooner you do it, the better.
Strike while the iron is hot.
We are trying to, ourselves, be as ﬂexible as possible. I mean, I
think the practical line in the sand is that it is very hard for an
occupying power to do things which tie the hands of its sovereign
successors indeﬁnitely. The currency arguably did not do that. You
could even, in a way, argue that debt restructuring does not be-
cause it frees you of future obligations rather than increasing
them. So maybe we will ﬁnd a way around even this, but at the
end of the day, you cannot pretend there is not a line there in the
sand. You can shufﬂe it around a bit, move it a bit, but fundamen-
tally a lot of Iraq’s international economic relations, its ability to
leverage its wealth with new loans and new foreign direct invest-
ment, rests on a sovereign government.
And I think the United States equally needs to hear that pres-
sure. If France needs to hear that it needs to do a good debt deal
and soon, the United States needs to hear that the sooner there is
a Sovereign Government in Iraq, the easier a lot of this is going
to become.


76
alone will probably not be sufficient to cover capital investment
and reconstruction through 2007. Iraqi oil revenues are likely to
cover only recurring Iraqi Government costs, with little remaining
for the capital investment required in the UN-World Bank and
CPA assessments. The world community, led by the United States,
has pledged between $32 and $36 billion toward Iraq’s reconstruc-
tion over the next 4 years.
Iraq’s economy will also depend on substantial relief from debt
and reparations. This is an absolute priority for our international
diplomacy on Iraq. Iraq’s debt, not including unresolved or unpaid
reparations from the Gulf War, is estimate at $125 billion. Iraq’s
budget, and Iraq’s international creditworthiness, will be crippled
if Iraq’s creditors do not agree on substantial debt relief. I am en-
couraged that former Secretary of State James Baker has under-
taken this critical diplomatic mission, and I am optimistic about
his progress so far.
The ﬁnancial and economic reconstruction of Iraq will depend on
the development of transparent and accountable institutions of eco-
nomic governance. The CPA should support concrete steps by Iraq
to build strong and transparent regulatory and oversight institu-
tions to assure that Iraq’s potential is not again squandered by cor-
ruption and mismanagement.
Iraq’s economic potential will ultimately be realized by empow-
ering Iraqis. The CPA has budgeted $184 million for private sector
development. But in yesterday’s Washington Post, Ms. Rend Rahim
Francke, the Iraqi Governing Council’s Ambassador-designate to
the United States, said that the CPA is not doing enough to employ
Iraqis. She added that, “jobs for Iraq will create stability and peace
. . . and curb terrorism.”
The contracting and subcontracting process in Iraq must em-
power and employ Iraqis. America must set an example with trans-
parent rules and procedures. The Middle East has seen enough
deal brokers and “middle men” looking for a piece of the action.
The contracting process cannot, in Ms. Francke’s words, be
“shrouded in mystery.”
The Committee looks forward to the testimony of today’s wit-
nesses: John Taylor, Under Secretary of the Treasury for Inter-
national Affairs. Secretary Taylor, welcome. You have been on a
fast pace and have come from a meeting, I understand, at the
Vvhite House, and we appreciate your efforts to be here.
Also included in our witnesses today, E. Anthony Wayne, Assist-
ant Secretary of State for Economic and Business Affairs. Tony,
welcome again. And Mr. Gordon West, Acting Assistant Adminis-
trator, Bureau for Asia and Near East, U.S. Agency for Inter-
national Development. Mr. West, welcome.
We are grateful that each of you are here and look forward to
your testimony.
Secretary Taylor.
STATEMENT OF JOHN B. TAYLOR
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
U.S. DEPARTMENT OF THE TREASURY
Mr. TAYLOR. Thank you very much, Chairman hagel, for inviting
me back to your Committee to testify about the ﬁnancial and eco-


81
One of the keys to successful reconstruction of Iraq, as Under
Secretary Taylor mentioned, is to secure a multilateral debt reduc-
tion agreement that the new Iraqi Government could ratify after
the political transition. As Under Secretary Taylor mentioned, we
estimate that debt right now at about $120 billion.
After Secretary Baker was appointed by President Bush as his
special envoy for Iraqi debt, he has had very successful meetings
in Europe, in Asia, and the Gulf over the past 2 months, and he
has won commitments for at least substantial debt reduction for
Iraq in 2004.
We will continue to pursue this issue energetically because it is,
as you mentioned, Senator, essential to help assure that Iraq’s eco-
nomic rebuilding takes place as rapidly as possible.
We are also working hard and working very closely with our col-
leagues in Treasury to track down and secure the return of assets
that were disbursed by the regime of Saddam Hussein so that they
can be used for the beneﬁt of the Iraqi people. So far, from Europe,
Asia, the Middle East, and North Africa, we have had transfers of
about $650 million in such assets that have gone into the Develop-
ment Fund for Iraq. As you remember, Senators, we transferred
about $1.9 billion in frozen Iraqi assets that were in the United
States. And there has been found in Iraq, about $1.3 billion worth
of assets. We need to, and we will, keep up a vigorous effort here
to ﬁnd and return additional assets.
Also, as Under Secretary Taylor mentioned, we very much are
promoting the active involvement of the World Bank and the IMF
in this process. They have already been working intensely with key
Iraqi ministers and ministries on critical budget planning, on rev-
enue collection, on monetary policy, and, very importantly, on
building capacity. These activities aim at the resumption of inter-
national lending to Iraq as soon as possible after the transition on
June 30, as well as building up the basic ability of Iraqi ministries
to more effectively manage the economy and the international as-
sistance that is being made available.
I am also very pleased today to report that the 146-member
World Trade Organization has just this morning in Geneva accept-
ed Iraq’s request to become an observer. As an observer at the
WTO, Iraq can now really start engaging again and learning how
the international trade system works. It can start to more effec-
tively begin preparations for its own eventual accession. And it will
be able to avail itself of trade-related technical assistance. This is
another important signpost on the way to Iraq reintegrating into
the international community in ways that will help Iraq build pros-
perity.
Just to conclude on the note that the State Department is one
part of really a global team. It is an interagency team, it is a
United States-Iraqi team, it is an international team that is really
working together to mobilize the resources necessary for Iraq to re-
build itself to start on a new path of prosperity. We are working
very hard and very closely with our colleagues in Washington, in
Baghdad, and in capitals around the world on a regular basis to
pursue this policy, and we very much welcome Congress’s contin-
ued strong support in this task.
Thank you very much, sir.


82
Senator HAGEL. Secretary Wayne, thank you.
Mr. West.
STATEMENT OF GORDON WEST
ACTING ASSISTANT ADMINISTRATOR
BUREAU FOR ASIA AND THE NEAR EAST
U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT
Mr. WEST. Chairman hagel, Senator Miller, I thank you for this
opportunity to testify before the Subcommittee concerning USAID’s
role in the reconstruction of Iraq, particularly concerning our role
in economic reform and growth programs. We have some detail in
my prepared statement that I ask be put in the record.
Senator HAGEL. Your complete statement will be included in the
record.
Mr. WEST. USAID, in September, October, before the war in
Iraq, began a planning process for what might be a reconstruction
and rehabilitation program. We had divided priorities based on
what we perceived in those days in the areas of infrastructure, edu-
cation and health, economic growth, and governance. Based on
those observations, we developed initial scopes of work for two con-
tracts—one in the area of economic growth, one in the area of agri-
culture.
As we developed our relationships with Ofﬁce of Reconstruction
and Humanitarian Assistance in the early days, we vetted out a
contract basically under the direction of the Department of the
Treasury, who was the lead in that area at that time, and eventu-
ally awarded in July a contract to Bearing Point. This was funded
under the supplemental one. It had a ceiling of $80 million.
At that point, we actually were doing a transition as the CPA
had taken over from ORHA, and we developed what basically is a
work order construct where, rather than a typical USAID mission
construct, we really were responding to the niches and the require-
ments of CPA on how to implement policies and implementation
programs in the economic growth area.
In that respect, Treasury still had a very key role in that it has
many senior advisors in the CPA itself. As noted by Assistant Sec-
retary Wayne, we also have a very active coordination mechanism
back in Washington where we participate at least twice weekly in
very intensive dialogue. You will see that there are many areas
where we are involved in programs where there is a lead, whether
it is bank reform, implementation of job creation programs, the Oil
for Food, and many of the programs. But basically we are trying
to respond to the implementation needs of the CPA.
In the area of agriculture, we eventually awarded a contract to
Development Alternatives, Incorporated. That was awarded in ap-
proximately October.
Under the economic reform program, we have done a consider-
able amount of work with the banking sector, building the tech-
nical infrastructure of state-owned banks, developing a ﬁnancial
sector regulatory framework and helping with the implementation
of that framework, working on an interbank payment system, help-
ing establish a currency auction system, and building the statis-
tical capacity of the central bank and the Central Statistics Ofﬁce.


83
In the ﬁscal area, we have worked on budget planning software
installation and staff training, working on a budget classiﬁcation
system, and on a ﬁnancial management information system that
also relates to the ability for World Bank, IMF, and other donors
to begin operations come this summer.
We are also involved in coordination with Treasury on tax ad-
ministration planning, legislative efforts, and training in the tax
area.
In the area of private sector development, one of the major pro-
grams that Bearing Point is involved in is a bank training pro-
gram. We are actively involved with both the two main state banks
and with six private banks in a bank training program that really
involves a broad area of their total operations, but speciﬁcally is fo-
cused on bank lending that will directly feed into job creation pro-
grams.
We oversee currently $21 million in microﬁnance programs that
are done under CPA grants to NGO’s, and Bearing Point works on
bankruptcy, labor, consumer protection, securities, and competition
aws.
We also have worked together with the Ministry of Public Works
on a job creation program, which is really a public works program
for temporary jobs for up to 100,000 people.
We have been very active in the area of utility regulation. Bear-
ing Point plays a key role in developing plans for the electricity
regulation over a 10-year period. We are also looking at how that
relates to the more immediate needs of getting electricity up to
maximum amounts by this summer, when the hot season comes.
We are also getting ready to initiate work in telecommunications
regulatory work, and as that comes out, to develop an umbrella
regulatory utility framework for the country.
We have also been able to respond through the contracts to not
just the economic reform and private sector groups. There are other
groups active in the CPA who need this type of assistance. Some
examples are the Oil for Food Program, where we have helped to
staff and manage the central and now northern ofﬁces of the tran-
sition. We have assisted with an oil and gas study to give the coun-
try options on the type of regulatory framework and programs that
they wish to have in the future in the oil and gas sectors.
We are working in trade capacity building related to future needs
for the WTO. And as noted, outside of this area in particular, we
are, so far at least, the lead implementing agency in the infrastruc-
ture sector, which is a clear and very important component of eco-
nomic growth. We are the lead in electricity, in water, in roads and
bridges, as well as ports. We will be seeing a transition, however,
over to the PMO in terms of infrastructure. We currently have a
bridge contract, and PMO will begin to take on the heavy lifting
in the infrastructure.
Within agriculture, we have a small contract that really is look-
ing at developing a strategy for CPA for immediate needs on agri-
culture inputs that meets the needs currently and looking at a
more long- or medium-term, 3- to 5-year strategy of how to get sta-
bility and growth in the agriculture sector. We have been involved
in immediate needs of the wheat crop, restoration of the date plan-
tations. We work with prevention of foot-and-mouth disease and


84
getting vaccinations in veterinarian centers up and on their feet.
We are also beginning on a rural credit program that focuses on
farm families. In addition, we have been part of the planning and
now initial implementation in the marshlands in the south of Iraq
and restoration and reestablishment of basic services in the marsh-
land areas.
These programs come to a close roughly July of this year. We are
working with the CPA now on what are the follow-on generation
of programs that may be implemented under USAID. The one area
it seems of agreement right now is work on what would be a voca-
tional and skills training program to be implemented under a host
of centers throughout the country to promote job creation.
Thank you, Mr. Chairman.
Senator HAGEL. Mr. West, thank you.
Senator Miller, if it is agreeable with you, we will just bounce
back and forth, maybe 7 minutes at a time, and it gives us enough
time to develop some of these questions.
Senator MILLER. Sure.
Senator HAGEL. Thank you again, each of you, for appearing.
Mr. West, to pick up on a couple of your comments, in particular
agriculture, I noted in your written testimony, then what you said
here, let me quote just a moment from your written testimony: “Ag-
riculture can absorb a substantial amount of labor and provide
world jobs which are particularly important when they keep young
men employed in the villages,” and then you developed that theme.
Of course, that also goes back to a couple of points that Secretaries
Taylor and Wayne made about underemployment and unemploy-
ment.
My question is: What are we doing speciﬁcally to promote Iraqi
agriculture exports, support rural development programs, jobs, and
in particular how are you doing that if you do not have any budget
for it? Because I do not believe the President’s budget included any
authority, any request, any line item request for speciﬁc agri-
culture programs in Iraq? Thank you.
Mr. WEST. First, I would just note that although there is no line
item speciﬁcally, there are a variety of programs, the largest being
the water in irrigation sector, which have a major and direct im-
pact on the future of agriculture. We also note there is a large
amount of infrastructure which includes rural infrastructure in-
cluding reliable electricity which has largely heretofore focused on
Baghdad in particular, whereas irrigation pumps, et cetera were
very much under utilized or not utilized at all because of the lack
of electricity in the rural areas. So a lot that is going on under the
infrastructure sector is key to the future of agriculture.
Second, there are areas in terms of ﬁnance and other areas of
private sector which are applicable, and we are focusing on rural
economies. For instance, the SME credit programs and the job cre-
ation programs are being carried out in all governance, many of
which are rural governance, and are targeted on both market
towns and agriculture families.
Under the ﬁrst supplemental we did have the initial funding for
the agriculture contract that I mentioned. You are correct, there
was not a line item in the second supplemental for agriculture.
There are currently discussions, but at least as of right now, we are


86
in health and education. I believe it is having a substantial impact
on the development of the capacity of local institutions and busi-
nesses to perform.
In terms of transparency in the contracting process, we have
committed to the Administration and Congress to proceed with full
and open competition on all contracts under the supplemental to
funding. We are well along in that process. We have had one re-
quest for an exception in the area of governance related to election
assistance, but other than that, we are already fully unfolding con-
tracts that we believe represent the U.S. Government well.
Senator HAGEL. Do you think Ambassador Designate Francke
just does not understand all that, or do you think she has a legiti-
mate point?
Mr. WEST. There are a host of contracts. We are one of many
agencies. We awarded contracts under the ﬁrst supplemental under
what was termed limited competition because of the time con-
straints. As I noted, we are now moved into full and open competi-
tion. It is clearly an admonition that all of the elements of the
CPA, ourselves included, know we need to pay attention with and
it is sound advice and it is being listened to.
Senator HAGEL. Do you know if that story yesterday attracted
the attention of senior policymakers in Iraq?
Mr. WEST. I cannot?
Senator HAGEL. I mean it is rather signiﬁcant to have the Am-
bassador Designate of Iraq given an interview and say what she
did. At least it hit me that way.
Mr. WEST. Clearly, it would be great if we could do a lot more
with Iraq institutions. Having seen ﬁrsthand the situation on the
ground and the limitations to get out in many of the rural areas,
there is always more that could be done, and particularly in terms
of involving Iraqi ﬁrms, and we hope as we learn and proceed, and
particularly as the Iraq ministries get much and much more in-
volved on a daily basis, that more can be done in the future and
will be done.
Senator HAGEL. Thank you.
Senator Miller.
STATEMENT OF SENATOR ZELL MILLER
Senator MILLER. Thank you, Mr. Chairman.
Thank you for being with us, and for your testimony and for the
job that you do. You have a gigantic job. I was in Iraq recently, and
it is mind boggling. It is overwhelming, the work that has to be
done and needs to be done. I am not here to complicate things, but
to better understand what you are doing and your thinking for it.
It may seem minor in the big scheme of things, but I can assure
you that to those of us who represent farmers and ranchers, it is
not. Increasingly I am concerned with the CPA policy of permitting
nations that are not members of the Coalition to bid on Iraq food
tenders administered by the World Food Program. It seems to me
that the CPA policy on food tenders should be consistent with the
reconstruction policy, and restrict contracts to the countries that
made the sacriﬁces and have invested in the coalition effort to free
Iraq. Can you explain to the Subcommittee why the CPA may be


87
purchasing food from countries that did not participate in coalition
activities?
Mr. WAYNE. Senator, let me take a ﬁrst cut at that. I am not fa-
miliar with the procedures right now for food tender policies. I can
commit to ask and look into that. I know that as part of the transi-
tion of replacing the OFF program, we and CPA have taken over
that process. So maybe I could just commit to getting an answer
for you and being back in touch.
Senator MILLER. I would appreciate it if you would.
In your testimony you talked about, as you said, the administra-
tion of the Oil for Food Program will be turned over to the Coali-
tion Provisional Authority on November 21, 2003.
Mr. WAYNE. Right.
Senator MILLER. You state the Minister of Trade will increas-
ingly assume responsibility for the management of the food pipe-
line and transition to a market-based system. That is what I am
trying to get some elaboration upon. Is that what you are going to
get back with me on?
Mr. WAYNE. I can talk to you a bit about what we are doing and
the mechanics of doing that, but I honestly do not know the spe-
ciﬁcs for the tendering process. I know there was a UN tendering
process which, by the rules, was I believe open to a very wide range
of nations, and there are still contracts being fulﬁlled under that
process, which I think was open for bidding from most anybody
around the world. But I do not know for sure the details, Senator,
so I do not want to mislead you on that part of it.
vvhat we are trying to do generally in the transition process is
to make sure that there are not any gaps that happen in the food
and medicine distribution during this period of transition, and I
think we have done a very good job in handing over from UN ad-
ministration to CPA and Iraqi administration. Then, at the same
time as we are moving forward and making sure there are no gaps
coming up, we are trying to ensure that the Iraqis are fully trained
to take over all the aspects of this process, international and do-
mestic, to make sure that it continues on effectively, after June 30.
Then we went to think through what are the right ways to transi-
tion from this ration system to a market-based system. You claim,
in fact, to reduce the number of people and the groups that have
to get special care, and you enlarge the role of the market in that
process. So, the market will play a larger and larger role in Iraq’s
supply of agricultural goods, which will also increase the incentives
inside Iraq for agricultural production and return them to their
strengths in certain areas. Traditionally, they did produce a num-
ber of products for export and they have the potential to do that
again. But they did not produce enough to feed the whole country
in all areas. So, we will be transitioning over.
Senator, I would have to take back and get back to you on the
speciﬁcs of what the procurement policy is right now.
Senator MILLER. It is my understanding that there is going to
be—and correct me if I am wrong-—-that there is going to be a $600
million purchase for buffer stocks right away. Do you know if that
is right or wrong?
Mr. WAYNE. Sorry, I do not, sir.


88
Senator MILLER. Does Iraq have enough food to last until June
2004, and if not, how are the food purchases going to be handled
until then?
Mr. WAYNE. My understanding is that there is—that in the plan-
ning pipeline that is being foreseen, there is assurance that that
pipeline will continue to meet all the needs, and that there may in
fact be needs for additional purchases, and probably will, and that
is part of the job which the team, that USAID and others are help-
ing to staff out in Baghdad, are doing. They are now managing
that, working with the Iraqi Ministry of Trade, looking at the food
needs, the medicine needs, the OFF contracts that exist and what
new contracts have to be let.
But I do not, sir, very honestly, have the speciﬁcs of the pur-
chases upcoming. I will be happy to take that and add that as part
of what we get back to you with, sir.
Senator MILLER. I would appreciate it. I have to sum up, so let
me just say that I think maintaining a policy of allowing noncoali-
tion nations to bid on World Food Program food tenders for Iraq,
can be justiﬁed, and I think that it should be changed immediately.
I just do not understand that line of thinking.
Thank you.
Senator HAGEL. Senator Miller, thank you.
Secretary Wayne, you noted in your testimony under the oil sec-
tor section that——if I can just read a line here. “The continuing se-
curity problems in Northern Iraq have prevented the reopening of
the oil export pipeline to Ceyhan on the Turkish Coast and reduced
oil exports by at least 400,000 barrels per day. At present, all oil
exports are via the Persian Gulf.”
Could you give us a bit of a status on security for the oil pipeline
in the north, what projections are as to when it might be secured
to the point where we can see oil ﬂowing to Ceyhan, and any other
thoughts that you have on the estimates that CPA is looking at
right now. I noted your dollar number down here. You say could
exceed one billion per month, and you talk about the possibility of
3 million barrels a day.
Mr. WAYNE. Yes, Senator. Oil production and exports have been
steadily increasing as I noted in my testimony, and they now have
reached the 2002 levels. But it is not secret that sabotage has ham-
pered the efforts to boost production. As I said, currently there are
about 2.3 million barrels a day produced. Exports are about 1.6
million a day. The target that the Iraqis have set for themselves
is to reach a production of about 3 million barrels a day by the end
of 2004, and then exports, if they meet that target, would be about
2.2 to 2.4 million barrels a day.
But you are correct that right now all of the oil is going out via
the Mina al Basra port on the Persian Gulf. There is work under
way to expand export capacity by using an additional terminal
nearby that has not been operational, called Khor al-Arnaya, and
there has been work under way on the Northern Pipeline. A rapid
pipeline repair team is being organized and is expected to be ready
to go in the next 2 months, which would help to move toward being
ready there. If that line is reopened again, you would have an addi-
tional export capacity of 1.1 million barrels a day, so that would
signiﬁcantly increase the long-term export capacity.


90
IMF is working with the Iraqis now to develop a program which
could disburse, in the ﬁrst part of the period at the transition.
So it is going well, and we are going to keep working it hard. I
think there is an understanding that the pledges can fall behind
if we are not on top of it working with the other donors to watch
that. It is one thing to pledge, it is one thing to disburse. I must
say, even on top of the disbursements, it is actually getting speciﬁc
results done. We would like to have certain numbers of schools
built, a certain number of hospitals repaired, et cetera, and so to
focus on these visible, measurable on-the-ground results is where
we are moving on this, and I am pleased with the way things are
moving at this point, sir.
Senator HAGEL. You believe that the commitments made, the
pledges made, have been forthcoming, are on target, and that is not
an issue?
Mr. TAYLOR. It is an issue in the sense we need to watch it care-
fully, but now things are on track and we are going to continue to
monitor it carefully. But it is an issue. It is an important issue for
us to keep track of, and I appreciate your question about it.
Senator HAGEL. Mr. Secretary, back to your comments regarding
the World Bank and IMF and their pledges. You mentioned the
date of June 30 obviously as a key date for many reasons if we are
to hold to that date. Would you review for this Committee what
conditions must be in place for the IMF and World Bank to make
loans, to come forward with their commitments and pledges? For
example, does signiﬁcant debt reduction have to have been accom-
plished? Obviously, a sovereign government has to be in place, but
I mean I am particularly interested in are there stipulations on the
debt issue, so substantial debt reduction have to have been agreed
to or taken place or factored in before the IMF and World Bank
will come forward with their assistance?
Mr. TAYLOR. With respect to the IMF, it is necessary to have the
IMF program in place as part of the agreement to do the debt re-
duction, so it is more of a simultaneous occurrence than a
sequenced one. What we are hoping is that the IMF program can
be in place and ready to go soon after July 1, and that provides
the structure for the debt relief. The reason is that the IMF pro-
gram is the quantitative way to describe what level of debt reduc-
tion is needed for the debt to be sustainable again in Iraq so Iraq
is not in a position where it is burdened by these heavy debt pay-
ments. So the IMF program is part of that.
Likewise, the World Bank, they can begin disbursing with the
recognition that there is a process in place to deal with the debt.
But I would characterize it, Senator, as a more simultaneous thing
where you have the debt reduction process in place, you have the
IMF program, which is very much something we are working on
now, and then ﬁnally the World Bank itself moving ahead.
Senator HAGEL. I know you have done a signiﬁcant amount of
work on the debt relief issue, and as we have noted and certainly
you know, Secretary Baker has been asked to take on a signiﬁcant
part of that responsibility. Can you give us an update on where we
are and how effective those meetings that the Secretary has had
over the last 2 months have been? Maybe a timetable on where we
go next, when debt relief is actually going to be worked out, worked


91
through? Anything that you can do to enlarge on our under-
standing of that issue, we appreciate it.
Mr. TAYLOR. Sure. Secretary Baker has reported that his travels
to Europe, Asia, and the Gulf have resulted in statements by these
governments that represent at least substantial debt reduction,
that is, commitments to at least substantial debt reduction. That
is number one.
Number two, the governments already have committed to resolv-
ing this issue this year, so that is a commitment that the key gov-
ernments have made, the key players in this whole process.
Now, what remains to be done with those commitments for at
least substantial reduction, is to get the IMF to do a debt sustain-
abiﬂity analysis so we have a measure of how much debt relief
there should be. That is going to play out during the year.
Now, we have the important marker of the end of the year. We
also have the important marker that the transition is to take place
July 1. So what we are doing is trying to sequence what will even-
tually become the more detailed calculations of what the percent-
age amounts are and how they take place and when over the
course of the year. Those are some of the speciﬁcs that have hap-
pened already and some of the things that we think will happen.
Senator HAGEL. So there are ongoing meetings working toward
what you have just described?
Mr. TAYLOR. Yes, there are. Just some more color on that, we are
working with the Iraqis in Baghdad to make sure that the esti-
mates of the debt are correct too. We have got estimates from ex-
ternal sources. The Paris Club and the IMF did surveys of what
governments said that the Iraqis owed them, and we are also
checking those against the Iraqis’ records, double check and mak-
ing sure nothing is missing or that the numbers are correct by hav-
ing a team work through the records in Baghdad now. We sent
Treasury experts to work with the Iraqis to go over those docu-
ments. That is the microdetailed level that is happening simulta-
neous with what Secretary Baker is doing at the highest levels.
Senator HAGEL. You are satisﬁed with the progress of that ef-
fort?
Mr. TAYLOR. Yes, I am, and it is something that has been-we
thought about it very early after Saddam fell. It was one of the
ﬁrst examples I think of the G—7 pulling together and saying: We
have to deal with this, and that included in that case both France
and Germany saying we need to deal with this issue. So it is com-
ing along, and it seems to me pretty much on track, sir.
Senator HAGEL. What about the war reparation claims?
Mr. TAYLOR. Those are being handled through a process at the
UN. They agreed, as one of the resolutions, to limit the amount to
5 percent of revenues. That is a maximum 5 percent of oil reve-
nues. But now the claims are being handled as part of the UN and
we are letting that play out at this point. There may be some addi-
tional work that needs to be done at that point, but that is now
on a separate track from the debt relief.
Senator HAGEL. Is that part of Secretary Baker’s portfolio?
Mr. TAYLOR. To my knowledge, Secretary Baker is not dealing
explicitly with that part of it.
Senator HAGEL. Thank you.


94
by the top central bankers in the world such as Chairman Green-
span, really doing extraordinarily well and providing what he
wants to do, asking tough questions about the currency, his own
currency, for example. So, I think it is coming along very well.
We have people working with them closely and I am going to be
going to Iraq next week to look for myself, making sure from my
perspective at least that the monetary policy operation is working
well. The fact that the currency exchange worked so remarkably
well is a good sign but we want to make sure that the policy is ac-
tually operating as well too. They have deregulated the interest
rates; as of March 1 there will be no controls on interest rates.
That, I think, will help bank lending and the use of the ﬁnancial
system more efﬁciently.
But it is something that I would think that we are not going to
simply just disappear with respect to this advice giving and helping
them on July 1. They certainly hope we are not. We have got a
good relationship.
I could just say again, maybe a little more color, this last Sunday
night, the person who is our economic coordinator had the minister
and the governor to his house here in the DC area, invited all of
the Treasury people who have been working with them. You could
just see the remarkable degree of friendliness and wanting to work
together. It is a very positive sign, I think of what is going to hap-
pen after the transition. But we keep working on that.
Senator HAGEL. What is the status of the central bank law,
which if I understand it, grants independence to private banks as
well as other things?
Mr. TAYLOR. It is a good law. It does grant central bank inde-
pendence to the Central Bank of Iraq so they do not get into the
business of printing money to ﬁnance the deﬁcit. It has got some
good strategies with respect to focusing on price stability, and rec-
ognizing the importance of ﬁnancial market stability. It is a good
law. It has been widely discussed in the international community
and people have had lots of comments on it. The central bank gov-
ernor and his staff are happy with it. There is just one last step,
and that is for the Governing Council to approve it. It has already
been approved by their ﬁnancial committee, if you like, of the Gov-
erning Council, but very soon we hope it will actually go through
and be ﬁnished in the Governing Council.
Senator HAGEL. Is there some difﬁculty within the Governing
Council as to why they have not approved it yet?
Mr. TAYLOR. I do not believe so, it is just these things take time.
As far as I know, it could happen any day, but I do not want to
make any predictions of these kinds of things. But it is a good law.
We have heard nothing but favorable things coming from the Gov-
erning Council now, so for all I know it could simply be that they
did not have a quorum on the day they met to deal with this. But
we hope it is soon.
Senator HAGEL. That has not inhibited the progress of private
banks looking at wanting to move into Iraq?
Mr. TAYLOR. No, in fact I do not believe it has had any impact
because there is also the banking law which was passed earlier
with respect to foreign bank entry and the rules of foreign invest-
ment. In that regard, there was a decision made just in the last


95
week to allow three foreign banks to come in and do business de
novo, 100 percent, if they want, of ownership, into Iraq. They chose
three Banks, Standard Chartered, National Bank of Kuwait, and
HSBC. There were many, many other banks who applied. A lot of
interest.
This is actually one of the major foreign investment activities
that are happening right now. I must admit it is very pleasing to
see such interest from the banking community. In the trade bank
of Iraq that I mentioned earlier, there was a lot of interest in that.
So, I think in terms of the bank law itself, it is not inhibiting
any activity at this point. Of course, it is always important to have
a good central bank law for monetary independence and keeping
inﬂation low. As far as we know, things are stable in the economy.
I could just add brieﬂy about this, we need better data in the
economy. You were asking questions about the employment and
unemployment. There just are not good statistics. Even the inﬂa-
tion statistics are quite poor. So those are high priorities. It is hard
to run a central bank if you do not have good inﬂation data, good
employment data, or good production data, so that is a high pri-
ority for us working with the central Bank.
Senator HAGEL. Thank you. A question for each of you. In your
opinions, where do you believe the most signiﬁcant potential pros-
pects lie in Iraq for exports, employment over the next few years?
Obviously, the oil sector is probably foremost. Mr. West and I had
an exchange regarding agriculture. But in the opinions of the three
of you, where do you think some of the greatest potential rests for
their economy, exports, jobs, development?
Mr. TAYLOR. For jobs in the country it is going to be the recon-
struction is the biggest part coming forth. We have some data that
even just our civil affairs teams, CJTF—7 report that they have al-
ready created 394,000 jobs. We know that our payment of $1.7 bil-
lion in cash to people early on created a lot of economic activity.
The small business loan program is going to generate jobs.
I believe the conversion of the Oil for Food program to a market-
based system is really the key to reviving agriculture in Iraq,
because basically when the Oil for Food program was established
domestic agriculture production just basically plummeted. So when
that becomes replaced by production largely in Iraq and they have
the capabilities that will be a great boon. And of course, there are
lots of opportunities in some old businesses that Iraq used to be in;
the date plantations around the south. There is perhaps an oppor-
tunity—-that used to be a great export for Iraq in the past.
I think it is very promising that they have agreed to have very
low tariffs, 5 percent maximum tariff. It is very much of a free
trade, open trade perspective.
Then maybe just one last thing on this. With respect for the fact
that we do not have a lot of data, I think it is hard to pay too much
attention to anecdotes that people have. That is the only thing you
can base things on, but the impressions of one person, they are just
one thing.
Just for example, the ﬁnance minister who we had many meet-
ings and discussions with in the last 5 days, he is a former Iraqi
businessman. That is what he was doing, running a business. He
put his business aside to become the ﬁnance minister, so, he is a


105
Improvements in Critical Infrastructure
There is good news on the economic infrastructure front as well. The restoration
of essential services is gaining momentum. Power generation in Iraq is now back
ll?‘ plre-v€%r;8-.6/els (4,023 MW oil; February 5). While tlzliis is still below to_tal_ demand
o a ou , MW, we are ma ng pro ess on expan ng power ransmissron capa-
bility and improving distribution. We Hope to reach our goal of 6,000 MW by the
summer, a level of generation that anticipates future economic growth, industrial
pri(3iluct*itmi'andddehi1ani1' h d P t bl t d <1" "
ospi a s an sc oo s ave re-opene . o a e wa er an me rcines are more
widely available than before. During the last several months, over 16,000 recon-
struction projects across Iraq, from repairing schools and hospitals to rebuilding
roads and bridges, have been completed.
This pump priming has generated thousands of new businesses all over the coun-
try, stimulating economic activity and providing employment. Inﬂation is low, judg-
ing frorrlrl the ptrgpngtgeningﬁaxchaallget rate for theigpwflraqli dinar. b d _ b 1
raq as s a e own e pa o a responsi e isca poicy y pro ucing a-
anced budgets for 2003 and 2004. The 2005 budget is now in preparation.
Our top priority is to create new jobs and improve lives through reconstruction
projects since unemployment remains unacceptab y high. Underemployment is a key
challenge, too. We are prioritizing and accelerating work on projects funded by the
supplemental that can produce jobs and visible economic beneﬁt to the largest num-
ber of Iraqis as quickly as possible. The CPA’s micro, small, and medium credit
programs aim at stimulating private sector economic activity, development, and em-
ployment by providing credit to viable small labor-intensive businesses.
Oil Sector
The Iraqis are developing the framework and institutions to manage their oil sec-
tor, which has 112 billion proven barrels of reserves, the third largest in the world
behind Saudi Arabia and Canada. This sector is important because production from
Iraq’s oil wealth provides about 95 percent of the country’s export revenues and 95
percent of its govemment revenues. After months of repairs by United States and
Iraqi engineers, Iraqi oil production is now sustained at 2.2 to 2.3 million barrels
a day (b/d); exports range from 1.5 to 1.7 million b/d. Continuing security problems
in northern Iraq have prevented the reopening of the oil export pipeline to Ceyhan
on the Turkish coast and reduced oil exports by at least 400,000 b/d. At present,
all oil exports are via the Persian Gulf. The Oil Ministry target is to produce 3.0
million b/d by the end of 2004, with exports of 2.2 million b/d. If exports are not
badly interrupted, oil revenues could exceed $1 billion per month.
It will be up to the Iraqis to determine their future role in OPEC, their invitation
to foreign oil companies, and their overall oil policy. However, we hope to work with
them to foster “best practices” in the sector.
Oil for Food Transition
About 60 percent of Iraq’s 27 million people have been wholly dependent on food
provided through a food ration system program largely supplied by goods imported
under the United Nations’ Oil for Food (OFF) program, which began operations in
1996. Every Iraqi is supplied a monthly ration of staples such as wheat, rice, dried
milk, sugar, tea, and soap. This is distributed through a network of about 45,000
local grocers and other agents, with the food imported (with some local procure-
ment) and supplied to the distribution network through Iraq’ s Ministry of Trade.
The UN turned over administration of the OFF program to the CPA on November
21. This transition is going smoothly. The World Food Program (WFP) is helping
the CPA manage the shipment and distribution of remaining OFF food contracts
through June 2004. Over time, the Ministry of Trade will increasingly assume re-
sponsibility for the procurement and overall management of the food pipeline and
prepare for a transition to a market-based system.
Iraqi Debt
One key to the successful reconstruction of Iraq is to secure a multilateral debt
reduction arrangement that the new Iraqi government could ratify after the political
transition. Of the approximately $120 billion in Iraqi debt, roughly one third of it
is held by Paris Club countries such as Japan, Germany, Russia, France, and the
United States, about a third is with Gulf countries (mostly Saudi Arabia), and the
rest is divided among non-Paris Club countries, the private sector, and International
Financial Institutions.
In early December 2003, the President appointed former Secretary of State and
Treasury Secretary James Baker as his Special Presidential Envoy on Iraqi Debt.
During his meetings with leaders in Europe, Asia, and the Gulf over the past 2