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[Senate Hearing 108-784]
[From the U.S. Government Publishing Office]

                                                      S. Hrg. 108-784

                    FINANCIAL RECONSTRUCTION IN IRAQ

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

                                HEARINGS

                               before the

                            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

      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                 ______

            Subcommittee on International Trade and Finance

                    CHUCK HAGEL, Nebraska, Chairman

                   EVAN BAYH, Indiana, Ranking Member

MICHAEL B. ENZI, Wyoming             ZELL MILLER, Georgia
MIKE CRAPO, Idaho                    TIM JOHNSON, South Dakota
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       JON S. CORZINE, New Jersey
LINCOLN D. CHAFEE, Rhode Island

                Joseph Cwiklinski, Legislative Assistant

           Catherine Cruz Wojtasik, Democratic Staff Director

                                  (ii)

                            C O N T E N T S

                              ----------                              

                      TUESDAY, SEPTEMBER 16, 2003

                                                                   Page
Opening statement of Senator Hagel...............................     1
Opening statements and comments of:
    Senator Bayh.................................................     3
    Senator Carper...............................................    17

                               WITNESSES

Alan Larson, Under Secretary for Economics, Business, and 
  Agricultural
  Affairs, U.S. Department of State..............................     4
    Prepared statement...........................................    33
    Response to written questions of Senator Hagel...............    46
John B. Taylor, Under Secretary for International Affairs, U.S. 
  Department
  of the Treasury................................................     6
    Prepared statement...........................................    41
Philip Merrill, President and Chairman, Export-Import Bank of the 
  United States..................................................     9
                              ----------                              

                       TUESDAY, NOVEMBER 4, 2003

Opening statement of Senator Hagel...............................    47
Opening statements of:
    Senator Stabenow.............................................    47
    Senator Bayh.................................................    50

                               WITNESSES

M. Peter McPherson, former Director of Economic Development, 
  Coalition
  Provisional Authority in Iraq, President, Michigan State 
    University...................................................    51
    Prepared statement...........................................    71
Mark Malloch Brown, Administrator, United Nations Development 
  Programme (UNDP)...............................................    55
    Prepared statement...........................................    72
                              ----------                              

                      WEDNESDAY, FEBRUARY 11, 2004

Opening statement of Chairman Hagel..............................    75
    Prepared statement...........................................    99
Opening statement of Senator Miller..............................    86

                               WITNESSES

John B. Taylor, Under Secretary for International Affairs, U.S. 
  Department of the Treasury.....................................    76
    Prepared statement...........................................   100
Earl Anthony Wayne, Assistant Secretary, Bureau of Economic and 
  Business
  Affairs, U.S. Department of State..............................    79
    Prepared statement...........................................   103
    Response to written questions from Senator Hagel.............   110
Gordon West, Acting Administrator, Bureau for Asia and the Near 
  East,
  U.S. Agency for International Development......................    82
    Prepared statement...........................................   106

 
                    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 together that we collaborated in the interest of 
justice and democracy. 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 economy 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 economic 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 
estimated that Iraq's reconstruction will cost between $50 and 
$75 billion; $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 
estimates are $70 to $120 billion in foreign debt, and 
approximately $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 
Administration has recognized the critical role that the 
international community must play in the reconstruction of 
Iraq. Secretary Powell 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 November of this year. The CPA 
has chosen a consortium of international banks, led by JP 
Morgan, to handle the operations of the Trade Bank. The Ex-Im 
Bank will play a key role in providing insurance 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 
investment. 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 
reconstruction. 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 southern 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 encourage 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. Secretary, 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 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 
Minority 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 believe, of Argentina and the profound economic and financial 
challenges 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 intractability 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 reconstruction, 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 hopefully 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.
    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 transition 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 
appreciate 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 
shouldered by the United States. In addition, a strong push for 
reconstruction 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, mismanagement, 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 regime 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 magnitude of 
the reconstruction challenges that we face in Iraq, including 
in some of the more important sectors.
    For months, we have been working closely with international 
organizations, key donor governments, and the Coalition 
Provisional Authority to lay the groundwork for a 
reconstruction process with robust international participation 
and support. The Administration 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 European Union, Japan, 
the United Arab Emirates, and the United States. Since then, in 
both face-to-face meetings and weekly conference 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 Government.
    Understanding that some donor countries might prefer to 
make contributions into a fund in which they have a voice in 
the governance, 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 supported reconstruction in Afghanistan.
    As you said, Mr. Chairman, at the end of October, the 
international community will meet at a ministers'-level donors' 
conference 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 assessments in these 14 sectors. We expect to have a 
model of the multilateral 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 information that comes out of this 
donors' conference.
    As a result of these multilateral efforts, we are seeing a 
converging 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 political framework that would 
give the maximum possible encouragement 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 reconstruction of Iraq, about 
a quarter of which will be devoted to security-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 importance and the 
urgency of this task.
    As time proceeds, oil revenues in Iraq and private sector 
investment, both from within Iraq and outside of Iraq, can make 
increasing 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 reconstruction.
    We also believe that with the proper economic policies and 
a rehabilitated infrastructure, Iraq could attract considerable 
foreign investment. CPA, the Governing Council, and the Interim 
Cabinet are working hard to establish the appropriate 
investment and commercial 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 financial 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 testimony 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 fraction 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 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 financial 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 Provisional Authority and the Iraqi people 
since his fall that are responsible for these accomplishments. 
Starting late last year, we began developing a strategy for 
financial reconstruction based on the information 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 reconstruction 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 January. The first wave of people were deployed to 
Kuwait in March and then into Baghdad in April. Early on, we 
decided that a financial 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 remarks. 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 currency should we use to 
make the payments? Where would the funds come from? Would the 
payment system be sufficient to actually 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 discussion and debate. The strategy in the end called for 
paying people 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 President would call for U.S. banks to 
transfer the assets to the Federal Reserve Bank of New York 
near the time the military conflict began.
    To make such a strategy operational, of course, many 
tactical issues and contingencies had to be considered. This 
plan called for the military on the ground to issue public 
statements. These statements were worked out in advance by 
Defense and Treasury. The statements would say that the dinar 
would continue to be accepted as a means of payment after 
Saddam's fall. The plan also called for the first wave of 
financial advisers to go into the country and assess the 
payments mechanism to see if it was capable of making payments 
in dollars.
    Another essential operational issue concerned the shipping 
of the currency to Iraq. We estimated that enough currency was 
in storage in the New York Fed's warehouse in East Rutherford, 
New Jersey. We determined that it was feasible to ship the 
currency by truck to Andrews' Air Force Base and then fly it to 
Kuwait for distribution into Iraq. Many tons of currency were 
involved because of the need for small denominations, $1 or $5 
bills. On the ground, the military would assist in the actual 
shipment of the currency around the country. Financial experts 
would develop lists of people, eligible workers to be paid, and 
then make the actual payments. In some cases, the currency 
would be paid at the government ministries or the state-owned 
enterprises. In other cases, pensioners would come to the local 
banks to get the payments.
    I am pleased to say that this strategy, along with all the 
tactical details I have described, has been carried out with 
great success. Back on March 20, at the start of the conflict, 
President Bush issued an order calling for the vesting of these 
frozen assets, and as planned, about $1.7 billion was sent to 
the New York Fed. With these funds, the first shipments of 
currency were sent from the Fed's warehouse to Kuwait and then 
to Iraq. We were able to make emergency payments to dock 
workers, rail workers, power plant workers, and other essential 
workers essential for restoring basic services. We soon 
transitioned to a regular civil service salary structure and 
pension payments to over 2 million Iraqis.
    Our financial experts in Baghdad considered this to be a 
major force for stability in the country as well as a 
significant spur to the economy. And throughout this period, I 
should add, there has been no collapse of the currency, no 
hyperinflation, and no serious glitch in the process.
    This major and essential success in the financial 
reconstruction was due in large part to preconflict planning 
and to adjustments that were made as we implemented those 
plans. As I indicated, the payment strategy called for the use 
of U.S. dollars on an interim basis only. Our goal was for the 
Iraqi people to ultimately choose a new national currency to 
replace the Saddam dinar and the Swiss dinar. And we would 
provide them with the necessary financial and technical 
logistical assistance to do so. A stable unified currency is 
essential for a market economy, and, therefore, it was a key 
part of our financial reconstruction plans.
    I am happy to say that this part of the financial 
reconstruction strategy is on track as well. This summer, after 
consulting with representatives from the central bank, the 
finance ministry, and Iraqis all over the country, the CPA 
announced that a new currency 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 England, 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 reduce the risk of counterfeiting.
    Mr. Chairman, let me conclude my opening remarks here with 
these examples of how the strategy is working. My written 
testimony documents similar progress in banking, in debt, in 
assessment 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 infrastructure 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 
Subcommittee, I too am very pleased to be here with able 
colleagues to testify on the Bush Administration plan to 
rebuild Iraq and establish 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 
estimates 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 resources, including tremendous oil 
reserves. The Administration 
expects Iraqi oil and other revenues and recovered assets to 
contribute to meeting Iraq's reconstruction needs. The U.S. 
economic contribution is designed to have an immediate and 
significant impact on the sectors critical to stability and 
growth. In this regard, Ex-Im Bank is working on several 
initiatives to help Iraq move toward the utilization of its own 
resources for its own development with its own people.
    While our mandate is to support U.S. exports and U.S. jobs, 
U.S. exports and trade in general are powerful tools of 
economic growth. Re-establishing Iraq's trade with its 
neighbors in the world is a key element in rebuilding Iraq's 
economy, and opening Ex-Im Bank's programs in Iraq will further 
this objective while fulfilling our mission to support U.S. 
exports and exporters.
    Senator, you dealt in your testimony with our proposed $500 
million short-term credit facility, and so I am going to skip 
over it. It is in the written testimony. I am going to skip 
over that part here except to say that this is good for only up 
to 1 year, and part of the reason for that is that under the 
UN-funded oil mandate, Iraqi debt is excluded from creditors 
only for a relatively short period of time, through the end of 
2007, I believe.
    In any event, in the short term the Trade Bank will support 
Iraqi imports funded by the Development Fund of Iraq by current 
Iraqi oil revenues. This facility is also expected to serve as 
a model for other export credit agencies that are interested in 
providing similar support for the Trade Bank, making this a 
multilateral effort. I will come back to this. We expect that 
Ex-Im Bank's program in conjunction with the Trade Bank and 
similar programs initiated by other export credit agencies, 
will help jumpstart the flow of trade into Iraq.
    But after we are done patting ourselves on the back, we 
cannot expect current Iraqi oil revenue to begin to generate 
the money needed now to ensure Iraq's success. Pay-as-you-go is 
simply not going to cut it.
    So, other than the U.S. taxpayer and international donor 
contributions, where can the money come from?
    One answer is foreign investment. Creating the right 
climate for foreign investment can provide dividends directly 
to the citizens of Iraq. This is no small effort. There is a 
historic reluctance on the part of Iraqis, and also most of the 
Muslim world to accept foreign investment, whether it is U.S. 
or anybody else's investment, so this is no small problem for 
Paul Bremer. For the economic stabilization of Iraq, however, 
prompt resolution of Iraq's external debt is absolutely a 
minimal requirement.
    I think the important point to get across is that Iraq's 
potential oil revenues are enormous, on the order of tens of 
billions of dollars per year. Our numbers are consistent. These 
reserves can be tapped if the long-term investment to generate 
them is provided. This money needs to be invested on the 
conditions where the oil and gas business in Iraq will be 
conducted by and for the Iraqi people themselves and for their 
own benefit. But nobody is going to invest long term in Iraq if 
at the end of 3 years whatever they get is going to be seized 
by a plague of creditors in every country in the world, 
including, but by no means limited to, this one.
    One could also envision an Iraqi authority that could 
securitize these revenues were the oil production there, in 
order to raise more money up front.
    As one player in this area, we stand ready to respond. The 
business of Ex-Im Bank is to provide guarantees, insurance, and 
project finance for projects as soon as conditions make such 
financing possible. That means somebody there that you can lend 
to, whatever you call it, DFI, Coalition Provisional Authority, 
or Provisional 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 solutions 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 military 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 framework 
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 policy 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 economic value today in order to establish the physical 
security, political stability, and economic development their 
country needs, and to which the United States is fully 
committed. Time is of the essence, 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 dollars 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.
    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 assessments.
    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 sectoral 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 
Administration 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 numbers 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 
estimate at this stage is for something on the order of $57 to 
$75 billion as the need to meet the reconstruction costs over a 
period of time. We want, with the $20 billion that the 
President is requesting 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 donors 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 
generate 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 reconstruction.
    Senator Hagel. But that means based on your numbers there 
is not going to be very much available if, in fact, those 
numbers would play out, especially when you look at a universe 
of using your numbers again of a shortfall, a gap between $30 
and $55 billion of unaccounted money here for the 
infrastructure of Iraq. Surely, again, adding up your numbers, 
which essentially are 2004 numbers, if you get $12 billion out 
of that, that I suspect goes right back into the government 
operation, which Bremer has talked about.
    So my question is: Where is the Administration looking to 
get an additional $30 to $55 billion for infrastructure cost, 
from our allies?
    Mr. Larson. We are looking to get that from our allies over 
time and from the Iraqi oil proceeds over time. As Secretary 
Taylor and others may be able to get into, there is a little 
bit more to be squeezed out of frozen and found assets, Iraqi 
assets, and we will want to make the most of that. There is a 
little bit to be squeezed out of the transfer of the Oil for 
Food Program. There is a little bit of that existing money that 
could be used to help contribute next year, but it is a very, 
very big lift for the international donor community.
    The one point that I should say is that we do believe that 
foreign investment can contribute to meeting some of these 
reconstruction costs. Some of the reconstruction costs are in 
infrastructure areas and other areas where you can, under 
normal circumstances, attract foreign investment. It really 
points to what Chairman Merrill was saying about the importance 
of getting in place the environment and regime that can start 
attracting foreign investment as well. That means, among other 
things, moving fast on the things the governments have to do 
including security and infrastructure.
    Senator Hagel. Senator Bayh, if I may, I could follow up on 
this. Well, we will leave this point because obviously that $30 
to $55 billion is hanging out there. It is not your fault, but 
there is no 
answer, or at least I have not heard an answer coming from the 
Administration how they are going to fill that, and you 
certainly have not given one today, and again, it is not your 
fault.
    Let me go back to something you just said on oil 
production. You mentioned infrastructure. In order to get to 
where you think we might get to in next year, 2005 and 2006, in 
oil sales, what kind of additional infrastructure investment is 
going to be required to get there, private capital, public 
capital, any infrastructure requirements?
    Mr. Larson. In the 2005-2006 timeframe, there will be some 
requirements for rehabilitation, maintenance, upgrades, that I 
believe will be financed with public money, not private 
investment. Those numbers are being refined, but I would be 
prepared to guess that they would be on the order of a couple 
billion dollars and that that would be part of the needs, part 
of the reconstruction needs that we would consider urgent 
reconstruction needs that we would want to make sure are funded 
because they would help make sure that the stream of oil grows.
    Senator Hagel. Would you say that that $2 billion that you 
have thrown out--and I know that is imprecise and you do not 
have all the pieces--would that be over a 2- or 3-year period 
of time that that would be required, 1 year?
    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 barrels 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 
principal 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 hundreds 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 
Japanese, 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 reconstruction. 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 currently access them because of the state 
of their oil industry, is it not possible for them to 
securitize some of that, to take some ownership 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 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.
    What 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 requirement'' 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 specifically 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 
creditors, 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 
anywhere 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.
    And I would say in general, if I could just comment on your 
general question about cooperation, we have noted in the 
financial area quite a bit of cooperation among governments, 
quite a bit of interest in humanitarian issues. And of course, 
the ultimate beginnings of reconstruction are very close to 
humanitarian. I, at least, with my colleagues in the financial 
area have noted quite a bit of interest in getting involved, 
trying to improve the situation in Iraq, and I hope that that 
continues as the UN Security Council resolutions are moved and 
we go ahead in the next few months. And of course it will be 
essential in the Donors' Conference period.
    Senator Bayh. My time has just about expired, Mr. Chairman. 
If I could ask just one more question.
    Senator Hagel. Yes, go ahead.
    Senator  Bayh. It is also to you, Secretary Taylor, and it 
is related to the question I alluded to in my opening comments 
about the progress we are making toward establishing basic 
financial institutions like a central bank and treasury. In 
large part, our success will depend on the type of policies the 
Iraqi Government in the process of being established will 
choose to pursue in terms of fiscal policies, monetary 
policies, and all the rest. So we are making an investment on 
what comes, so to speak, here.
    When I am asked at home what comfort can we give the 
American people that this new government will choose to pursue 
policies that will ensure that this investment is sustained and 
bears fruit as opposed to being a one-shot infusion that goes 
for naught?
    Mr. Taylor. On the macroeconomic side, we got a budget as 
soon as we possibly could and are making sure that that budget 
is balanced and funded. This is the first time in many years 
there has even been budget data available from that country; 
the budget used to be a state secret, obviously not a good way 
to make sound policy. So there is good progress on the budget.
    I mentioned the currency plans, which is an essential part 
of a sound monetary policy, so that is underway. There is a 
central bank governor who has been appointed by the Governing 
Council. There is a finance minister. Both of those people----
    Senator Bayh. Are they solid individuals in your 
estimation?
    Mr. Taylor. Solid individuals. They will be going to the 
IMF-World Bank meetings in Dubai, is our hope. So that is going 
well.
    But also on the economic issues that are more 
microeconomic, which are also very important, Senator, we are 
hoping that there will be some good laws coming out soon with 
the CPA working with the Governing Council, laws on banking, 
laws on foreign investment, laws on taxes, et cetera. My 
understanding is that there is good discussion and progress 
going on; those are going to be really important for foreign 
investment. And we mentioned the Trade Bank as the beginning of 
a banking system for foreign trade. A lot of the branches of 
the two main banks, Rafidain and Rasheed Banks, were closed at 
the end of the major conflict; those have for the most part 
been reopened so people can do basic cash transactions, and we 
are now moving to get loans made from these banks, small 
business loans. The International Finance Corporation has 
agreed to begin to develop a small business loan program.
    So there is a whole wide range of things like this that are 
so important for a market economy, and we are working on them.
    Next, if I could just say one other thing, because I could 
go on with this, but one other thing--the Donors' Conference 
that Secretary Larson referred to is going to have as part of 
it a whole special 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 sector, 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 enterprises, 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 important 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 response 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 of the most important nuggets that you would 
have us take away from it.
    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 fundamental 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 
resources, 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 governance.
    What we are trying to do, working with other donors and 
international 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 political transfer of full responsibility can be 
made to the Iraqi Government 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 
testimony. 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 
billion 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 billion. 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 
reconstruction 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 we have proceeded in the months 
of this year and especially since the summer, we have made 
progress on that strategy on these financial matters, and I 
think we will continue in the months ahead.
    Senator Carper. Thank you.
    Mr. Merrill.
    Mr. Merrill. Senator, I think the single, most important 
idea that I can leave with you rests on a set of conceptual 
numbers, and I emphasize the word ``conceptual,'' not specific, 
because although we are all dealing from the same number sheet, 
there is the time value of money and so forth. We do not have a 
disagreement on numbers. I think the point we wish to get to is 
the point at which private capital will invest $20 or $30 
billion in Iraq in order to produce in round terms--conceptual 
numbers, I emphasize again--$20 or $30 billion a year in oil 
revenue for them.
    Now, to get there, it sounds simple--because--people pound 
the desk and say ``Let us go into Iraq. We can produce oil. We 
can do this, we can do that''--American and foreign, 
Bulgarians, Rumanians, Czechs, Poles, and so forth. This issue 
is an optical issue of whether Iraq is receptive to Western 
investment, not only in oil but in general.
    So our general idea, and idea I would like you to take 
away, and that Ambassador Bremer has emphasized, rightly, is 
that this has to be the Iraqis' own doing, with their oil, for 
their money, in their country. We can help them do that. The 
idea that I would like you to take away is how can we get the 
private oil and energy companies of the world who are anxious 
to invest in Iraq to put the $20 or $30 billion--whether that 
number is the exact number or not is not the point--into Iraq 
and therefore get what basically amounts to a 100 percent 
return for Iraq.
    Let me add just one more number. Both secretaries here 
essentially said while you were out of the room that a couple 
of million barrels, 2 million barrels a day, produces about $20 
billion a year. The actual number was $19 billion. Our numbers 
are approximately the same. But when you go up from 2 million 
to 5 to 6 million, you go from $19 billion to a very, very 
large number. It is not a straight-line curve because it 
requires more investment, but in the end, at 5 or 6 million a 
year, you get a lot of money back, whether that money is $30 
billion a year, whether it is $25 billion, whether it is $40 
billion--you can get all types of estimates.
    I think the only way to close the gap that Senator Hagel 
just talked about and the gap that the Iraqis seek to close, is 
to find a way to create the political atmosphere so that that 
becomes a practical thing to do. That is the idea.
    Senator Carper. Mr. Merrill, thank you. Gentlemen, thank 
you all very, very much.
    Thank you, Mr. Chairman.
    Senator Hagel. Senator Carper, thank you.
    Gentlemen, if you would each address this question in your 
own respective areas of responsibility: How much progress are 
we making, and just give me some tangible examples of that 
progress, on moving Iraqis into responsible positions in the 
Trade Bank area, financial institutions--obviously, the central 
bank representative is first class, and everyone acknowledges 
that that was a terrific selection--but we hear from the 
Administration, we hear from the 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 running or being prepared to run financial 
institutions and put together 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 sector, 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 engineer, a very thoughtful person who 
understands both the engineering 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 
international 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 number looks inflated,'' that was 
his role, working with the interim government, 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 
illustrate 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 
involvement. 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.
    What we have been trying to do is find ways to train, to 
give the opportunity for the Iraqis to learn more about modern 
financial systems. There has been a lot of cooperation in the 
region. The Bahrainians, the Jordanians, the Emirates are 
willing to provide training to people in the financial sector. 
We are encouraging them to do so.
    With respect to issues like the budget, the finance 
ministry does have a budget process. We are encouraging a 
central treasury function for the people of Iraq to go through 
the same kind of calculations that our OMB does, as Mr. Larson 
was indicated.
    And the other thing is with respect to the financial laws 
that are necessary, the Governing Council is engaged in that 
activity and discussions, and I believe that before too long, 
there will be some announcements of what their decisions are so 
you can provide this legal infrastructure for the economy, such 
as banking, tax, foreign investments, and things like that. And 
I see some progress there, but just to be candid, it takes 
time, and our involvement is very important, and I see a good 
professional engagement when I talk to the Iraqis and when I 
visit Baghdad.
    Mr. Larson. Senator, could I quickly comment on just one 
detail of what John Taylor said?
    Senator Hagel. Yes, go ahead.
    Mr. Larson. I did not mean to leave you with the impression 
that the technology base of the Iraqi oil industry is modern 
and up-to-date. In fact, I would say that what John said about 
the financial system is equally true, at least of the oil 
sector.
    What I am really getting across is that over the years, 
this sector was neglected, and through ingenuity and 
improvisation rather than modern technology, the Iraqi 
engineers were able to keep it going, but one of the real 
challenges that we face now is that there comes a point when 
ingenuity and improvisation has to give way to more modern 
techniques and technology. There is a deficit there. It is just 
that the individuals who are dealing with these problems in 
Baghdad, in my view, are very, very highly skilled.
    Mr. Merrill. Mr. Chairman----
    Senator Hagel. If you will hold for a moment, Chairman 
Merrill, I want to ask Mr. Taylor a couple follow-up questions.
    Mr. Merrill. I apologize. I thought the question was coming 
to me.
    Senator Hagel. On decisionmaking, how many of these Iraqis 
are in decisionmaking positions?
    Mr. Taylor. Well, a minister or a governor would be in a 
decisionmaking position. They are working with the Coalition. 
So for example, on this currency exchange, a lot of that 
involves the help and assistance of the people in the 
Coalition; in fact, we are helping with that here, even in 
Washington, to think about where the currency would be printed, 
how it is going to be shipped there. There will have to be 
assistance in terms of security around the country. There is 
quite a bit of that going on, but we want the central bank to 
be at the center of that.
    The positions are clear, but as you know, decisionmaking is 
one where you have to have the information and the whole 
structure in place. So, I think it is going well, but it is 
something which we 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 
Coalition, and he in turn reports to Secretary Rumsfeld.
    Senator Hagel. What is the status of McPherson? Is he 
coming back?
    Mr. Taylor. Yes. He is going to be returning to his 
position as President of Michigan State University in October, 
and his replacement 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--meaning shortly, not eventually 6 years from now--
be staffed by Iraqis. This process is in place. But based on 
the last round of conversations, 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 
colorful''--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 carburetor, 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 situation 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 
maintenance.'' 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 expensive 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 between time and representation. You and I are both 
entrepreneurs. There is a natural tendency to make things 
happen now. Ambassador Bremer is a ``make it happen now'' 
person. But representative governments in that country and in 
this country are about being representative, and in order to 
get the Iraqis to sign on to 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 additional responsibility our allies would have in 
assisting with the 
reconstruction of Iraq--economic responsibility, political 
responsibility, certainly force structure security 
responsibility.
    What 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 international 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 obviously security-wise.
    Mr. Larson. We are willing to share some decisionmaking 
responsibilities, 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 reconstruction, they would like to feel it is 
going into some type of system 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 contributing funds 
to such a task force, there can be agreement in advance 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 
priorities 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 designed 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 responsibility, and in return for that, stepping up to 
responsibilities, stability, 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 decisionmaking, 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 percentages 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 Nations, 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 legitimate 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 proceeds and other tax revenues are being used, the CPA 
put out contracting 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. 
Government 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 immediate post-war period to address some 
of these pressing infrastructure requirements.
    On those contracts which we need to have an American be the 
lead contractor, we have been working hard to have--where 
appropriate--other countries' companies be subcontractors and 
to see if, where appropriate, as much of the work could be done 
by Iraqi companies and Iraqis as possible. And I know, going 
forward, the expectation is that these contracts would 
virtually always be on a full competition basis except in those 
cases where there might be an emergency need to move quickly 
and to resort to something that would be a more qualified 
competitive process.
    Senator Hagel. Thank you.
    Mr. Taylor.
    Mr. Taylor. That was a very comprehensive answer. I could 
not add anything to it at all.
    With respect to your question on the exact percentage of 
sole-sourcing, I will have to get back to you on that, Senator.
    Senator Hagel. Thank you. Chairman Merrill, I will be right 
with you.
    Let me pursue a couple of dynamics of this. Are we saying 
that the moneys coming out of the Fund now, those contracts 
paid for out of the Fund, are open to qualified bidders from 
around the world?
    Mr. Larson. That is right, and we are trying to do this in 
a way that we are getting best value for the money so that this 
work that needs to be done is done as efficiently and 
competitively as possible.
    If I could just add, we understand that there has been a 
perception--in my view, an incorrect perception, but 
nevertheless a perception that has to be dealt with--that 
somehow, the contracting procedures have been operated in a way 
that is designed to give the business to American companies. I 
must say that I was shocked when I was in Europe during the war 
and was talking about how we needed to work with the Europeans 
to address the upcoming task of reconstruction, and virtually 
all the questions I got during an hour and a half question-and-
answer period were based on the premise that our objective, or 
one of our major objectives, was to attract as much business as 
possible for American companies in the reconstruction process.
    It is not correct, but we understand that is a perception 
that has been out there, and that is why we want to make sure 
that this Multi-Donor Trust Fund is operating under World Bank 
or UN contracting rules. We want to make sure that the DFI is 
operating under an absolutely transparent process so that 
bidders from around the world can find out how to compete for 
contracts that are being funded with Iraqi oil proceeds. And it 
is why we want to make sure that, subject to U.S. Government 
contracting guidelines, we are reaching out as much as 
possible, for example, with money that USAID is contracting 
for, to have participation from other countries' companies, 
albeit as subcontractors rather than prime contractors.
    Senator Hagel. Are we still letting sole-source, no-bid 
contracts?
    Mr. Larson. No. And again, the answer to that is that 
moving forward, it is our expectation that we would have in 
virtually all cases a full competitive process, but just 
reserving the possibility that there could be instances where 
the urgency and the security requirements would call for moving 
in a more expedited basis. But we believe that is the 
exception, and it will not be the standard practice going 
forward.
    Senator Hagel. You noted if anyone is interested in 
participating, you mentioned a website. Let us take that down a 
little 
further into American small businesses. They would get the 
appropriate information through what--the Commerce Department, 
the State Department? Where would they go to participate or to 
find out about what might be available?
    Mr. Taylor. USAID has a lot of information on their website 
about this. That is the first place I would go.
    Senator Hagel. Mr. Taylor, you will get back to the 
Committee on the percentage.
    Mr. Taylor. On the percentage of sole-source, yes.
    Senator Hagel. Is there a percentage of international 
companies today that have won contracts that are working in 
various areas?
    Mr. Larson. Sir, I cannot give you percentages. I know that 
on contracts funded by USAID, there are a large number of 
foreign country companies who are working as subcontractors. I 
may be able with a little bit of research to put a number on 
that either in terms of the dollar value of their work or the 
percentage value. I certainly can undertake to do that.
    On the Multi-Donor Trust Fund, of course, it is not up and 
running yet, so that is a prospective issue.
    On the Development Fund for Iraq, that is really very much 
in the early days. The amounts of money that have flowed 
through that are still relatively minor, and I think it is too 
early to really have much of a baseline on it.
    Senator Hagel. Mr. Taylor, do you want to add anything to 
that?
    Mr. Taylor. No.
    Senator Hagel. Thank you.
    Chairman Merrill.
    Mr. Merrill. I just want to say that as we speak, our chief 
operating officer and a couple of our other senior Bank people 
are in Paris with other OECD export credit agencies explaining 
that the Trade Bank is open for all business, not limited to 
American business. Obviously, the business of the Export-Import 
Bank is to support American exporters, but it is our hope that 
this will serve as an example or as a role model for other 
export credit agencies around the world to deal with Iraq. All 
we seek is to deal on a level playing field. That is, I would 
happily have a couple of French or German contracts in the 
Trade Bank area, and as we go to small and medium enterprises, 
and even larger than $500 million, we would want the same 
dynamics to take place there.
    It comes back to this perception of whether our interest, 
Western, or the United States, in conducting this operation, 
was to take over Iraq and stay there or was it to take over 
Iraq and leave it to the Iraqis. And obviously, to us, it is 
the latter. When we talk to our counterparts around the world, 
you hear a lot of what Al Larson said, which is, ``You want the 
contracts for yourselves.''
    I am certain--I guarantee you--that the Trade Bank will 
award contracts on the best bid basis.
    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 suppose, to clarify it--that we are allowing for 100 
percent ownership as we transition business in Iraq for foreign 
investors and corporations. 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 taking all of the state-
run industries, which was the case in almost every situation 
there as we know, and selling those off to the highest 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 example--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 entity that they invest in.
    That is a private business decision. It is not a 
governmental decision. 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 
previously 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 
foreign 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 questions, 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 Security Council resolution. But right 
now, the Governing Council is very much involved in making a 
decision like this, but the evolution of the governance in Iraq 
is something that is going to play out over the next months and 
years ahead.
    Senator Hagel. So the Governing Council right now would 
have maximum input into any decisions regarding what we have 
just been talking about----
    Mr. Taylor. Yes, most certainly.
    Senator Hagel. --and obviously in the future, the future is 
the future.
    Mr. Taylor. Some other group, or----
    Senator Hagel. I understand.
    Mr. Merrill. I think it is important to add one sentence 
here by way of example. I was in London a few weeks ago, and I 
met with two of the largest oil companies in the world, the 
presidents, and three of the 10 largest banks in the world, 
with substantial experience in funding oil and energy. In all 
five cases, the attitude was let us wait and see--we are 
interested, we have a watch on, we will assign somebody to keep 
an eye on it--but let us see what commercial code, so to speak, 
Iraq comes out with.
    You have on the one hand a desire, yes, we want to be ready 
to invest, and on the other hand, let us not move until we find 
that there is room for private--where there is a framework 
where private capital in the Western sense can operate.
    Mr. Larson. Senator, can I add----
    Senator Hagel. Secretary Larson.
    Mr. Larson. --just a couple of footnotes to what John and 
Phil have said. As John said, the Governing Council, working 
with the CPA, has been working on this investment compact, and 
it is important to stress what a big job this is, both legally 
but also, I think, politically, because you are talking about 
an Iraqi Constitution that presently prohibits foreign 
investment in natural resources and other basic needs of 
production. You are talking about a companies law that 
prohibits investment in and establishment of companies that are 
owned by foreigners that are not residents of Arab states. And 
there is a whole list of things like this that, as John said, 
they are grappling with.
    As Phil, I think, was underscoring, from the standpoint of 
foreign investors, they will want to see laws that address all 
of these issues in a way that provides for an appropriate 
investment environment; at the same time, they are going to 
want to have a sense of assurance that any new laws are going 
to stick. That is why I think this consultative process that 
John noted and that is going on now involving the Governing 
Council, with the CPA, is very important, because it is very 
important that what emerges from that both be good investment 
policy and also be something that is perceived as having 
staying power.
    Now, I have said a little bit about the oil sector here. It 
is interesting to note that the new oil minister has been 
speaking out publicly about the benefits of privatization in 
the oil industry. When I testified back in June, I said this is 
a very, very delicate issue given the nationalism that is 
associated with petroleum. We need to really step back a little 
bit on something like this and let the Iraqis sort it through. 
It is encouraging that the Iraqi who has responsibility for the 
oil sector is in fact speaking out and contributing to a public 
discussion about the benefits of privatization.
    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, pensioners, 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, 
because there are still workers in some state-owned enterprises 
who are really not producing much at all at this point. So that 
is something 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 authorized 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 
International Finance Corporation, provide a small business 
loan program. 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 fraction 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 important to do to make sure that some basic 
services were provided and there was some employment being 
provided to people who otherwise 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 
potentially 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 
today'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, captured, whatever, a country before that came with a 
$15 to $20 billion 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 running 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 ongoing basic services of government, electrical 
workers and so forth, that in itself will generate all kinds of 
new small businesses. So there is a technical issue.
    Fourth, I would call it the WPA issue. One of the 
conceptual issues here is to put people back to work. We have a 
situation in which whatever number you want to use for the 
Iraqi army--nobody knows exactly what it is--I am going to pick 
400,000 and hope that I am in the right ball park--they all 
went home. Well, we would have been delighted to guarantee them 
a payment for life to go home. Instead, they went home, and 
then we cancelled their salaries. So we have 400,000 angry 
people running around Iraq. Some of them, we do not want back, 
but they are better being paid than not being paid, and I 
imagine we will rework that. But the idea is the same--put 
people back to work if necessary in a WPA-type framework.
    And fifth, I want to say something else on the time issue, 
and that is that we have to trade off the interests of Syria, 
Iran, and varying terrorists from wherever they come, whether 
they are called Al Qaeda or something else--their interest in 
our failure in Iraq was stimulated by the extent to which they 
smelled vulnerability.
    The answer is do not give them vulnerability. Make things 
happen now. That is this time versus representation issue I 
referred to before. But I think that we have to make certain 
that the Iraqis feel that they have a stake in their society as 
quickly as possible.
    Let me make one more point on this because I do think it is 
critical. Let me take the view that in these oil fields, in 
round terms, there were 1,000 pumping towers. During the war, 
126 were destroyed. Since the war, 700 were destroyed by people 
seeking copper to melt down. Well, these are thought about in 
terms of being Saddam's oil fields, not their oil fields. We do 
not want them thinking about it being ``our'' oil fields, the 
way you think about insurance company money, rightly or 
wrongly, not being real money. The insurance company is going 
to pay for it. Well, okay, Saddam is going to pay for it, the 
United States is going to pay for it. We have to get them to 
the point where it is their money, their country, and their 
interest in the state. And that is not a problem for which I 
can give you a fighter pilot's checklist.
    Senator Hagel. Chairman Merrill, thank you. You mentioned 
the Alaska oil ownership plan. I was asked about that today in 
a nice little television show, and I said I do not know where 
the Administration is on that. I have heard that concept.
    Mr. Merrill. Nor do I.
    Senator Hagel. Do any of you want to comment on that? Have 
we looked at that possibility? Have we explored it? Where are 
we?
    Mr. Taylor. Sure, there has been lots of discussion of 
those kinds of ideas, and again, this is something that is 
going to be the Iraqi people's decision, ultimately. My 
understanding is that one of the ideas that is most active in 
consideration at this point would be one where the pensions are 
financed through the oil revenues and that that would be made 
explicit to basically get at some of the issues that Phil 
Merrill is referring to, to create some sense of belonging or 
ownership to the resources in the country that the people would 
have.
    That is one of the possibilities that has been discussed, 
but all these issues--and Al Larson mentioned some people 
talking about privatization--but whatever it is, I think it is 
important to have the Iraqi people be very much involved in 
this decision.
    Senator Hagel. Thank you.
    Secretary Larson.
    Mr. Larson. I agree with what John said on this. I think 
there is great force behind the idea of some type of fund like 
this and showing that ultimately, this important resource 
belongs to the Iraqi people, it needs to be used for their 
benefit, and it is tied in some way to their benefit. 
Obviously, in the short run, there are many, many demands on 
those scarce oil export revenues, but I think it is very 
powerful idea; I think it is a very useful idea to have out 
there for the Governing Council, the interim government, and 
the new elected Iraqi Government to be able to consider.
    Senator Hagel. Gentlemen, thank you. You have all been very 
helpful, and I know we will hear back from you on some of the 
other questions, and we will talk with you again.
    Is there any last-minute point that you want to make?
    [No response.]
    Senator Hagel. I do appreciate you taking as much time as 
you have here this afternoon. This has been helpful to 
everyone.
    So thank you, and much success. This is important work.
    Mr. Larson. Thank you.
    Mr. Taylor. Thank you.
    Mr. Merrill. Thank you.
    Senator Hagel. The hearing is adjourned.
    [Whereupon, at 4:50 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]

                   PREPARED STATEMENT OF ALAN LARSON

    Under Secretary for Economic, Business, and Agricultural Affairs
                      U.S. Department of the 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 reconstruction 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 affecting 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 Assistance 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 community can engage to support them in their efforts to 
build a better Iraq. The resolution 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 regime, 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 proposal 
envisages that roughly $5 billion would be devoted to improving 
security by training border guards, civilian police, the new Iraqi 
army, and supporting 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, 
electricity, 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 America 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 
prosperous 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 magnitude 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 collaborative 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 conducting needs assessments in various sectors in Iraq to help 
determine that country'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 where they will discuss pledges 
for the final quarter of 2003 and all of 2004. While some countries may 
prefer to make their reconstruction pledges directly to Iraq, we are 
working on establishing 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 internationally recognized 
representative government. As Secretary Powell said on September 8, 
``We have a common goal: To restore sovereignty to the Iraq people as 
fast as is possible, as fast as is practicable.''
    The first steps have already been taken. Early this summer we saw 
the creation of the principal organ of the interim Iraqi 
administration, the Governing Council, whose members have been drawn 
from a broad spectrum of Iraq's ethnic and sectarian groupings. The 
Governing Council has significant authorities, such as naming and 
overseeing interim ministers, formulating national budgets, and 
appointing Iraqi representatives to international organizations and 
bilateral missions. The Governing Council is assisting the CPA in 
developing policy on the full range of issues facing Iraq, including 
security, economic issues, and 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-increasing 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 respective ministries and who are 
working now on their 2004 budgets. The new Cabinet 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 anticipate 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 Government 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 reconstruction and humanitarian 
efforts. We also want the UN to work with the CPA, Ambassador Bremer, 
and the Governing Council to implement the political transition toward 
a representative government. 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 
attacking 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 security, we are organizing an Iraqi 
national civilian police force within existing structures. 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 facilities. 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 
Protection Services. Until the security situation stabilizes, it will 
be difficult for genuine development and transformation of the Iraqi 
economy to gather the necessary momentum.
    Fortunately, there are many things upon which to build Iraq's 
future. Iraq has a large cadre of talented, dedicated technocrats 
anxious to return to work. And we 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:

 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 public 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 barrels a day in August) are increasing;
 Iraq's civil service are being paid regularly, bringing money 
    into the local economy;
 USAID partners is awarding Iraqi firms contracts worth 
    millions of dollars;
 Iraqis have been hired to rebuild Iraqi municipal services and 
    infrastructure;
 oil infrastructure, airports, ports, telecommunications 
    networks, highway systems, electrical networks, and water and 
    sewage systems are being repaired;
 an Iraq Central Bank has been created, and the banking system 
    is operating once again;
 millions of dollars stolen by the Hussein regime has been 
    returned by the coalition 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 misleading. 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 significantly. 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 
$17,000--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 enjoyment 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 maintenance, equipment, and spare parts also affected the 
infrastructure throughout the production chain--from the wellhead to 
the gas-oil separation plants, to the pipelines, 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 revenues through exports. The Iraqi 
State Oil Marketing Organization (SOMO) has successfully 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 principles is well illustrated in the food and agriculture 
sector. Under Saddam, agricultural 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.
    Iraq has not been food-self sufficient, traditionally importing 60-
70 percent of its caloric needs. Thus, as Iraq rebuilds agricultural 
production to be competitive, it will also need to ensure that a 
vibrant trading environment exists.
    The government procurement system provided most Iraqis with 
essential food and medicines. The government controlled procurement of 
and inputs to production of staples such as grains. Neither production 
nor consumption costs reflected market prices.
    Winding down the UN-mandated Oil for Food (OFF) Program does not 
mean the end of the need to feed the Iraqi people, the majority of whom 
received virtually all their food through the public distribution 
system over the last 12 years. That system has been reactivated to meet 
the immediate needs of the population. Operational responsibility for 
buying, transporting, and distributing food and medicines will be 
transferred from the UN to the CPA on November 22 in accordance with 
UNSCR 1483. As of September 5, the UN in consultation with CPA has 
``prioritized'' humanitarian and oil services contracts under the OFF 
program, valued at $7 
billion.
    While the food distribution is continuing, consideration must be 
given to how best to move the Iraqi economy from a highly centralized, 
subsidized system to a market-driven system with cash salaries that 
better reflect productivity and people are free to make their open 
choices in the purchase of food and items.
    When freed of government control, the agricultural sector is one of 
the most responsive to market forces. Locally produced products such as 
fruits and vegetables are now freely traded in open markets. The 
challenge will be to expand this rapidly to grains such as wheat and 
rice, which are the staples of the Iraqi diet.
    The U.S. Department of Agriculture and USAID are putting in place a 
project to assist agricultural production and develop agricultural 
enterprise, credit availability and infrastructure. In the 1980's, the 
United States was Iraq's largest supplier of agricultural products. We 
now look forward to rebuilding cooperation between Iraqi and U.S. 
agricultural sectors. Key future tasks include rehabilitation of 
irrigation and drainage systems, food production facilities, and 
services for pest management and animal health; providing farm inputs 
such as seed, feed, and fertilizers; and public food distribution.

Transport
    Critical to Iraq's reconstruction will be the transportation 
sector, which faces numerous challenges. Basic transportation 
infrastructure is sound, but has not 
received proper maintenance for years. Rehabilitation priorities being 
carried out include port administration buildings, new lighting and 
fencing, utilities, security fences, grain elevators, silos, and port 
dredging to allow bulk cargo vessels access to grain elevators and 
deepwater berths at the port of Umm Qasr, which reopened to commercial 
traffic on June 17. Repair of the adjoining railroad system is underway 
to allow onward shipment of the large amount of cargo arriving through 
the port. Major roadways have also sustained conflict-related damage 
and are being repaired or rebuilt.
    Baghdad International Airport has received repairs of its tarmac, 
runway lights, plumbing, communications, and security access control 
systems. The Coalition Provisional Authority is assuming civil aviation 
responsibility to oversee airport security and flight safety and the 
administration of civil air services. The repairs that have been 
completed at Baghdad International Airport have rendered it capable of 
hosting civilian air services since the beginning of August. In 
addition, rehabilitation has been undertaken on Basrah International 
Airport including airport striping, perimeter fence service, and land 
radio requirements. However, continuing 
security concerns have prevented these two airports from being reopened 
to commercial service for the time being.
    CPA is coordinating with the State and Transportation Departments, 
the Federal Aviation Administration, Transportation Security 
Administration, other U.S. Government agencies, and with the 
International Civil Aviation Organization on procedures to initiate 
commercial aviation. CPA has completed solicitations for service for 
Baghdad and Basrah, and announced the carrier selections for Basra in 
order to expedite the initiation of commercial aviation once the 
security situation is adequate. We foresee that with the improvement of 
Iraq's transport system, trade and investment relations with its 
neighbors will also improve. Key future tasks include rehabilitation of 
roads, bridges, airports, ports, railways, and public transport.

Telecommunications
    Telecommunications remains a critical requirement for the 
reconstruction effort. Expanding telephone access is a key step to 
improving Iraqis' lives and essential for the efficient functioning of 
basic services, including the electricity and oil industries 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 international 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 satellite 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 
completion 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 regional wireless licenses is 
continuing due to the great volume of license applications. Granting of 
the licenses will ensure private sector participation in the 
telecommunications 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 restoration 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 transmission 
lines as part of a plan to increase power to 4,400 MW by 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 off'' power schedule 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 
available. 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 potential 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 neglected infrastructure to assure clean water to citizens 
and industry. We are working 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-pumping 
stations and begun restoring Iraq's largest wastewater treatment 
facility, the 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, benefiting 40,000 
people. USAID is also working to rehabilitate the An Najaf and Al 
Hillah sewage treatment plants, which serve 194,000 Iraqis. 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 people and restore sewage 
treatment plants and the Baghdad pump 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 distributed 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 children have been vaccinated to date during monthly 
vaccination days. USAID has rehabilitated delivery rooms in hospitals 
and primary care centers service 300,000 residents in Basrah and 
500,000 in Nassirya. More than 60 primary health clinics are being 
renovated and over 6,000 re-equipped to provide life saving health 
services at a local level throughout Iraq. We will also train thousands 
of health care providers in the most important life saving techniques. 
We will continue to rehabilitate hospitals, public health centers, and 
delivery rooms in the Baghdad area and nationwide. In addition, a 
hospital burn ward, and dentistry and allergy/asthma centers in Basrah, 
Mosul, and Kirkuk are being repaired. USAID and Iraq's Health Ministry 
are developing a health strategy for the country that has been 
supported by all health donors in Iraq. Key future tasks include the 
rehabilitation and construction of hospitals and health clinics.

Education
    Iraq's children are among its greatest resources for a better 
future. Their education has been severely disrupted during and after 
the recent conflict. A top priority is to get the education system up 
and running again as soon as possible. USAID inventoried all of Iraq's 
3,900 secondary schools in permissive areas and is on target to equip 
and open all secondary schools by the opening of school in early 
October. UNICEF accessed 1,000 primary schools in Iraq. With USAID 
funding, UNESCO has completed revision of 45 math and science 
textbooks. USAID has ordered student/school kits for 1.5 million 
students and 3,900 schools, including furniture and teaching materials. 
USAID also provided supplies for final exams to At Tamim Directorate of 
Public Education, Technical Institute of Kirkuk, Technical College of 
Kirkuk, Kirkuk University, and Basra University. We are working with 
Ministry of Education (MOE) to create a plan for the national exam 
process, including an exam schedule and security requirements. USAID 
also conducted a competition for U.S. universities to partner with 
Iraqi universities under a $20 million grant program. USAID will 
rehabilitate at least 1,000 primary and secondary schools before the 
start of the new school year in early October. UNESCO will print and 
distribute 5 million math and science textbooks during the month of 
October. Key future tasks include the rehabilitation and construction 
of school facilities.

Paying for Reconstruction
    Experts from the CPA, Iraqis in various ministries, and the 
international organizations are fine-tuning detailed estimates for 
Iraqi needs in preparation for the Madrid Donors Conference in late 
October. The analysis that has been accomplished thus far is that they 
will be substantial, as high as $50-$75 billion over the next several 
years. The Iraqi people and the broad international community must now 
share this cost of redeveloping Iraq's economy with the Coalition.
    CPA issued a 2003 budget for Iraq on July 7 of $6.1 billion, a huge 
step in a country where budgets historically were closely guarded state 
secrets and it had been a crime to reveal them. The Governing Council, 
in close consultation with individual Iraqi ministries and budget 
experts from the U.S. Government are coordinating work on a budget for 
2004. This budget should be ready in advance of the October Iraqi 
Donors Conference in Madrid in order to help international donors 
identify funding priorities.
    There are several primary sources of revenue for Iraqi 
reconstruction: Revenue of the Iraqi Government, including from oil 
sales; unfrozen Iraqi assets; funds from the Oil-for-Food program; 
contributions from the United States, including $20 billion request the 
President is making to the Congress; and contributions from foreign 
governments and international organizations.

Iraq: Revenue from Petroleum Production and Other Local Revenue
    Iraq itself will bear an important share of the cost of 
reconstruction as its oil proceeds are used for the first time in 30 
years for the benefit of the Iraqi people. UN Security Council 
Resolution 1483 directs that 95 percent of all oil export proceeds be 
deposited in the Development Fund for Iraq to be used for the 
humanitarian needs of the Iraqi people, for rebuilding the economy and 
infrastructure, for continued disarmament, for the costs of civilian 
administration, and for other purposes benefiting the people of Iraq. 
(The other 5 percent are applied to a special account for the United 
Nations Compensation Commission.)
    To ensure transparency Ambassador Bremer has created a senior-level 
Project Review Board to approve projects and allocate funding sources 
and has issued procurement rules consistent with U.S. Government rules. 
Moreover, U.S. Government agencies are working with CPA to initiate the 
International Advisory and Monitoring Board (IAMB), created under UNSCR 
1483. The IAMB, composed of representatives of the UN, the Arab Fund 
for Social and Economic Development, and international financial 
institutions, will ensure transparency with respect to expenditures 
from the Development Fund for Iraq and to verify that its export sales 
are consistent with prevailing international best market practices.
    Oil sales are far and away the biggest potential source of revenue 
for the new Iraq, as they were for the old, but this time Iraq's oil 
revenues will benefit the Iraqi people. A top priority is to bring the 
industry online and to repair and rehabilitate the existing 
infrastructure. A highly qualified team has taken on this work. The 
Governing Council has named Ibrahim al-Uloum the new Minister for 
Petroleum. Al-Uloum is an oil engineer with international private 
sector experience. Thamir Ghadhban, a highly dedicated and competent 
career Oil Ministry executive, remains in place as CEO. Iraq has in 
place a team of experienced and well-qualified Iraqi managers and 
engineers at the Oil Ministry, the State Oil Marketing Organization 
(SOMO), and the South and North Oil Companies; they have technical 
support from the Army Corps of Engineers. Steps are being taken every 
day by Iraqis, working with the U.S. Army, to assess the condition of 
wells, pipelines, pumping stations, gas-oil separation plants, 
associated power grids, and refineries, and to make repairs.
    In July, SOMO signed Iraq's first term contracts since the war, for 
exports of Basra Light oil from Iraq's southern fields. Iraq's Mina al-
Bakr oil terminal is operational and SOMO is successfully exporting oil 
from it. SOMO recently reported that oil exports averaged about 700,000 
barrels a day in August.
    There obviously is considerable uncertainty surrounding all 
production and export projections for Iraq. Raising oil production will 
require more rehabilitation of fields and production chains. Since the 
security situation is improving slowly, it is difficult to project the 
likelihood of success or the likely costs associated with this work. 
Estimates of future oil production vary considerably. Domestic needs 
are expected to stay in the 500,000-600,000 barrels a day range. The 
following chart provides mid-range estimates of oil export levels and 
revenue for the next 2 years:

                    Estimated Oil Exports and Revenue
------------------------------------------------------------------------
                                            2004              2005
------------------------------------------------------------------------
Exports.............................   1.5 million b/d     2 million b/d
Revenues............................       $12 million       $19 million
------------------------------------------------------------------------

Assets of the Former Iraqi Regime
    In addition to oil, existing Iraqi state assets and the assets 
acquired by Saddam Hussein and other senior officials of his regime are 
to be used for the benefit of the Iraqi people to reconstruct the 
country.
    After Saddam Hussein's invasion of Kuwait in 1990, the United 
States acted to deprive the Iraqi regime of the means and materials to 
continue its regional aggression and to further develop its weapons of 
mass destruction programs. Consistent with UNSC Resolution 661, the 
United States blocked all Iraqi state assets within its jurisdiction, 
for example, in the United States, or held by U.S. persons wherever 
located.
    The President has vested $1.7 billion in Iraqi Government assets in 
the United States, almost all of which have been transferred to the CPA 
to meet the immediate humanitarian needs of the Iraqi people. These 
funds have been used to pay Iraqis' salaries and pensions, as well as 
for humanitarian projects such as replacing hospital generators.
    The State Department and other government agencies have also 
reached out to many countries that have frozen Iraqi state assets. 
Under UNSCR 1483, countries have an obligation to freeze without delay 
and immediately transfer Iraqi state assets to the Development Fund for 
Iraq. Japan, for instance, turned over $98 million in frozen assets to 
the Development Fund for Iraq on August 29.
    We continue to have extensive bilateral and multilateral 
discussions with key countries, with Treasury and State officials 
contacting their counterparts. We have stressed the need for all 
countries to search their financial institutions for the assets of 
Saddam Hussein and his senior leadership, as well as their family 
members, in both face-to-face meetings and in messages delivered by our 
embassies overseas. Our efforts are leading to the identification of 
funds. Over $1 billion has already been frozen. We are urging that 
these funds be transferred to the Development Fund for Iraq so that 
they are used for the benefit of the Iraqi people.

Mobilizing Resources from the International Community
    In my opening remarks, I referred to our ongoing work with the 
international community on Iraqi reconstruction. Many countries have 
already come forward with offers of assistance--either monetary or in-
kind contributions. To date these have been offers nearing $2 billion 
from third countries--much of this pledged through the $2.2 billion UN 
humanitarian ``flash'' appeal. There have also been many pledges of in-
kind contributions--from Albania's 70 peacekeeping troops to Jordan's 
field hospital to a medical team from Lithuania. Much more will be 
needed.
    We moved immediately after the end of Operation Iraqi Freedom to 
start the work of coordinating and increasing donor efforts in Iraq. 
Technical consultations among key donors held at the United Nations on 
June 24 in New York confirmed that there was widespread recognition 
that repairing the damage of decades of misrule in Iraq must be an 
international undertaking. These consultations led to the formation of 
a Core Group consisting of the EU (Presidency and the European 
Commission), Japan, the United Arab Emirates, and the United States 
along with the cooperation of the United Nations Development Group, 
World Bank, IMF, and CPA. The Core group is charged with laying the 
groundwork for an international donors' conference, to be hosted by 
Spain on October 23-24 in Madrid, and provides regular briefings on 
progress to over 50 other countries that are also interested in the 
success of Iraq reconstruction. At that meeting, we will be looking for 
foreign pledges for Iraqi reconstruction commensurate with the 
importance and urgency of the task for the remainder of 2003 and all of 
2004.
    The governments represented at the June 24 meeting in New York 
asked the World Bank, the IMF, and the UN to undertake a series of 
needs assessments in Iraq. In response, the World Bank is doing 
sectoral studies on education, economic management, investment climate, 
banking, transportation, and telecommunications; the International 
Monetary Fund led a study on the macroeconomic situation and the 
overall budget requirements that would be faced by Iraq and the United 
Nations Development Group led tasks forces on health, agriculture, mine 
action, water supply, electricity, housing, and institutional capacity 
building. The fourteen needs assessments are designed to ensure that 
the best experts available internationally take a look at the situation 
in Iraq. They have gone into Iraq to assess the situation, identify 
needs, begin to put a price tag, begin to establish priorities.
    The results of these assessments are being fed into the 2004 budget 
process, being undertaken by the Coalition, working with the interim 
Iraqi cabinet and the new Iraqi ministries. Both the international 
organizations, as well as the authorities in Baghdad, agree that the 
budget should be the coherent planning tool that guides not only how 
operating funds are spent, but also what reconstruction priorities 
should be. We are aiming to get a fusion of what reconstruction needs 
are between the budget being prepared in Baghdad, on the one hand, and 
the results of the needs assessments being done by the international 
organizations, on the other.
    The Core Group and other donors are also consulting with the World 
Bank and UN to develop ideas for a multidonor trust fund into which 
donors could make contributions. A technical meeting on the multidonor 
trust fund was held in Washington in late August, and that work is 
moving forward.
    Running in parallel with the Core Group process are meetings of the 
Liaison Group at the UN, which is the larger group of countries that 
first met in New York in June. About 60 countries as well as several 
international organizations are members of the Liaison Group. On 
September 5, this Group met in New York to learn about the results of 
the Brussels and to invite their input to the issues discussed, 
including the governance structure of the trust fund, and the process 
of refining of the World Bank, IMF, and UN assessments. The Group 
generally made sure that everyone that is likely to participate in the 
donor's conference is having a voice in its organization.

Private Sector
    Iraq's financing needs for the coming months will need to come 
principally from international donors. However, in the longer run 
Iraq's development will depend on expanding trade and investment and 
the growth of the private sector. Iraq's reestablishment of trading 
ties to its neighbors and beyond will generate employment 
opportunities, diversify and increase exports, raise revenues, and 
facilitate regional 
reintegration of its economy. The State, Treasury, and Commerce 
Departments, the Office of the U.S. Trade Representative, the Ex-Im 
Bank, OPIC, and other agencies are working with CPA and the Iraqis on 
measures to establish an environment that is conducive to business, 
including:

 establishment of a new, open trade regime;
 encouragement of foreign investment through a more open 
    investment regime and loosening of restrictions against foreign and 
    domestic ownership of private property;
 creation of an effective banking system, and other financial 
    services;
 transformation of substantial means of production and 
    development currently in the hands of the state;
 replacing existing currencies with a single new currency;
 establishing credit facilities for small businesses;
 reviewing and revising commercial laws and regulations to 
    support a market-driven economic framework.

    To help facilitate trade, the CPA is creating the Trade Bank of 
Iraq, which was announced in July 2003 and will be established soon. 
President Merrill of the Ex-Im Bank is here today to discuss the Trade 
Bank during his testimony. Finally, OPIC and the Trade Development 
Administration are taking steps that would permit them to operate in 
Iraq in support of U.S. investors in Iraq.
    Mr. Chairman, you can see from my summary of the economic 
reconstruction of Iraq that this is an issue that is getting the 
highest priority within the U.S. Government. It is an immensely 
complicated effort involving not only the United States, but also the 
whole international community and major international institutions, 
including the United Nations, the World Bank, and the IMF. I have 
outlined the considerable progress we have made over recent months, but 
the formidable challenge of restoring Iraq to economic vitality will 
continue to require major resources from the United States and the 
international community as well as from the Iraqis themselves. The task 
will take years to complete. It is an effort that we cannot afford to 
lose. We welcome the strong support of Congress as we confront this 
challenge.

                               ----------
                  PREPARED STATEMENT OF JOHN B. TAYLOR

               Under Secretary for International Affairs
                    U.S. Department of the Treasury
                           September 16, 2003

    Chairman Hagel, Ranking Member Bayh, other Members of the 
Subcommittee, thank you for inviting me to testify on the financial 
reconstruction of Iraq. Given the importance of trade and finance for 
Iraq's reconstruction, this Subcommittee is an ideal forum for this 
discussion. And the presence of my colleagues, Under Secretary Larson 
and Chairman Merrill, further underscores the importance of active 
government-wide participation in the reconstruction effort.
    When I last testified on this subject, on June 4 before the Senate 
Committee on Foreign Relations, I stressed that ``the international 
community and the Iraqi people face an enormous task in the 
reconstruction of the Iraqi economy. A quarter century of repression 
and economic mismanagement under Saddam Hussein cut the size of the 
economy to only a small fraction of what it was before his regime took 
over. In 1979 GDP in Iraq was $128 billion . . . by 2001 it had 
declined to $40 billion.'' I also stressed the strategy of financial 
reconstruction--the contingency plans developed in advance of the 
military conflict--and the tactics followed on the ground since the 
conflict began. I would like to stress these same issues in my 
testimony today, with emphasis on the additional information we have 
obtained on the state of the Iraqi economy and on what has happened on 
the ground during the summer months.
    Much has been accomplished in the financial area since the fall of 
Saddam 
Hussein's repressive regime, and many potential financial catastrophes 
have been avoided. In my view, months of advance planning by the United 
States government before Saddam's fall as well as the dedicated work of 
the Coalition Provisional Authority and the Iraqi people since Saddam's 
fall are responsible for these accomplishments.
    Starting late last year, we began developing a strategy for 
financial reconstruction based on the information we had at the time. 
The strategy addressed such issues as (1) payments to Iraqi workers and 
pensioners, (2) the currency, (3) the banking system, (4) Iraq's 
international debt, (5) an assessment of reconstruction costs, and (6) 
the international fundraising efforts. I want to review how that 
strategy is playing out today. But before doing so I must emphasize 
that an important part of our advance planning has been the selection 
of people to participate in the financial reconstruction effort. We 
began selecting financial experts in January; the first wave of people 
was deployed to Kuwait in March and to Baghdad in April. Early on we 
decided that a financial coordinator was essential and we are very 
grateful to Peter McPherson who took leave from the Presidency of 
Michigan State University and has served most ably in this position, 
advising Ambassador Bremer and the rest of the Coalition Provisional 
Authority.

A Strategy for Paying Workers and Pensioners
    It was clear that we had to have a strategy for paying Iraqi 
workers and pensioners after the fall of Saddam Hussein, and thus we 
crafted a strategy well in advance 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 they be paid? What currency should be used to make 
the payments? Where would the funds come from? Would the payments 
system be in good enough condition after the conflict to actually make 
payments? How could we prevent hyperinflation and a sharp depreciation 
of the currency, which would further impoverish people? After all, one 
of the reasons for the terrible economic performance under Saddam was 
that he resorted to the printing 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 approved interagency after much valuable discussion and 
debate about alternative strategies. The strategy called for paying 
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 way to secure the funds to make these payments in advance 
of the conflict 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. commercial 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 
estimates 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 currency 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 military 
conflict began.
    To make such a strategy operational, 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 Treasury--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 advisers 
into Baghdad to assess the payments system's capability for making 
dollar payments.
    Another essential operational issue concerned the actual shipping 
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 denominations 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 shipment of the currency around the country. Financial experts 
would develop lists of eligible workers and pensioners who would be 
paid. The currency would be distributed to Iraqis who would then 
actually 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, approximately $1.7 billion 
was vested in the New York Fed. With these funds at the New York Fed, 
the first shipment of currency from the Fed's East Rutherford, New 
Jersey warehouse to Camp Arifjan was made on April 13. Even as major 
combat operations were winding down, a mechanism for shipment of cash 
and distribution of emergency payments was established and began to 
function. Thanks to this system, 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 million Iraqis.
    Despite tremendous logistical challenges, the system of payments 
has worked well. Our 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 but $64 million of the vested 
assets has been shipped to Iraq where they have been used principally 
to support salary and pension payments to the Iraqi people. The 
Department of Defense's logistical support has been crucial in this 
enormous undertaking.
    Throughout this period there has been no collapse of the currency, 
no hyperinflation, and no serious glitch in the payments process 
itself. In sum, this major and essential success in the reconstruction 
was due in large part to preconflict planning and to adjustments that 
were made as we implemented the plan and learned from experience.

A New Unified Currency for Iraq
    As I indicated, the payments strategy called for the use of U.S. 
dollars on an 
interim basis only. Our goal was for the Iraqi people to choose a new 
national currency to replace the Saddam dinar and the Swiss dinar, and 
to provide the necessary financial and logistical assistance to do so. 
A stable, unified currency is an essential part of a market economy and 
therefore one of the key parts of financial reconstruction.
    I am happy to say that this part of the financial reconstruction 
strategy is on track as well. Last July 7, after consulting with 
representatives from the Central Bank, the finance ministry, and other 
interested Iraqis in the north and the south, the Coalition Provisional 
Authority announced that a new currency would be issued starting in 
October. The new currency would replace the old currencies at fixed 
rates that were also announced. Hence, the Coalition Provisional 
Authority and Iraqi officials in the Central Bank and the finance 
ministry are about to begin one of the most important parts of the 
financial reconstruction to date: Issuing a new currency to replace the 
Iraqi currencies that are now circulating. The new currency is a key 
component in the effort to establish a stable financial system.
    The new currency bears the designs of the old Iraqi, or Swiss, 
dinar and is being produced at printing facilities around the world on 
schedule. There will be six denominations to replace the current two 
denominations. About 2,200 tons of currency will be shipped from 
printing facilities in England, Spain, and other countries. A 
sufficient supply of new notes will be available when they are 
introduced.
    The exchange period will begin on October 15 and last until January 
15. A public education campaign is underway in Iraq to ensure that the 
Iraqi people are well informed about the new currency and are prepared 
for the currency exchange. The new currency will improve the ease of 
transactions, since it will be issued in more denominations than 
currently available, and will have built-in security features that will 
enhance public confidence by making the notes more difficult to 
counterfeit.

Restoring and Revitalizing the Banking Sector
    We knew well before hostilities began that strengthening and 
modernizing Iraq's financial sector would be central to achieving 
overall economic reconstruction, and that a thorough on-the-ground 
assessment of Iraq's financial sector would be needed as soon as 
conditions allowed. Thanks to extensive prewar planning, Treasury was 
able to position advisors in Iraq's finance ministry, Central Bank, and 
two main commercial banks even as hostilities were winding down.
    The challenges they faced to perform seemingly simple tasks, such 
as schedule a meeting with Iraqi bankers, were enormous due to security 
concerns, the lack of working phones or faxes, and language barriers. 
Despite these difficulties, I am pleased to report some major 
successes. One of the most important is the reopening of most of the 
branches of Iraq's two large state-owned banks--Rafidain and Rasheed--
which enabled cash-strapped Iraqi families to gain access to their 
savings. Opening these branches was no small feat. Many of the banks' 
branches were damaged and we were fearful of a bank run once the banks 
reopened. Due to careful planning, individual Iraqis now have access to 
their deposits and there were no bank runs.
    The initial assessments conducted by our advisors have provided 
much insight into the operations of Rafidain and Rasheed banks. As our 
preplanning analyses indicated, these banks did not function 
independently of the former regime. We now know that these banks were 
not permitted to make loans based on commercial viability and a 
borrower's ability to repay, but instead on the ability of the borrower 
to fulfill a Ba'athist party political objective. The Coalition 
Provisional Authority, with the support of Treasury, is hard at work 
reviewing ideas for restructuring the two major state-owned banks.
    Analyses of Iraq's private banks are almost complete. While these 
banks are small in relation to the two large state-owned banks, they 
will play a role in Iraq's future. We know that remittances through 
these banks are starting to occur. Remittances by Iraqis overseas will 
soon form a large pool of resources in Iraq that will finance 
investment and consumption. According to some estimates, about 4 
million Iraqis live abroad, and in recent years they have transferred 
over $1 billion per year to relatives in Iraq.
    In addition to strengthening specific banks, the financial system 
more broadly--including the relevant laws and regulations--will require 
significant work to ensure that an efficient and effective system for 
financial intermediation is achieved. In consultation with the 
International Monetary Fund, we are working with the Iraqi Governing 
Council, other Iraqi officials, and the Iraq Bankers' Association on a 
revision of Iraq's Central Bank law and commercial banking law. 
Creating a sound 
supervisory and regulatory regime is also critical to establishing a 
strong financial system. We have reached out to countries in the 
region, including Jordan, Bahrain, and the UAE, who have offered to 
provide technical training to Central Bank and commercial bank 
employees.
    As work proceeds on these broad objectives, some initial bank 
lending has started, with the focus on loans directed toward Iraqi 
small- and medium-sized enterprises. Additionally, the Treasury has 
approached the International Finance Corporation, the private sector 
arm of the World Bank, about setting up a facility in Iraq to provide 
loans to micro-, small-, and medium-sized businesses. This would be a 
multilateral facility modeled after other highly successful programs in 
Russia, Central Asia, and Southeast Europe.
    One major initiative that is now getting off the ground is the 
creation of the Trade Bank of Iraq. This Iraqi-staffed institution will 
facilitate imports to and exports from Iraq by putting in place the 
people and systems needed for the country to trade more efficiently and 
on a larger scale with the rest of the world. Currently, trade is 
taking place at the retail level. In Baghdad's markets one can find 
consumer goods--from refrigerators to satellite disks--imported from 
neighboring countries. But in order for Iraq's reconstruction to move 
forward as quickly as possible, and for private sector activity to take 
off, there needs to be an efficient system for importing a broad range 
of capital goods and services. Our goal is for Iraqi banks to provide 
trade finance services. But as the process of strengthening Iraqi banks 
goes forward, there is an immediate need to do this. The Trade Bank of 
Iraq is intended to fill that gap.
    Following a competitive bidding process, the CPA is negotiating a 
contract with a consortium of international banks which will facilitate 
the operations of the Trade Bank. Additionally, the Trade Bank will be 
the entity by which Export Credit Agencies around the world support 
trade with Iraq. There is precedent in creating institutions such as 
the Trade Bank in post-war Japan and Germany. Those institutions 
evolved and took on functions akin to export-import banks, although how 
the Trade Bank evolves will be up to the Iraqi people.

Iraq's International Debt
    Early on we recognized that dealing with Iraq's substantial foreign 
debt problem would be crucial to the country's medium-term economic 
health. We therefore developed a strategy to resolve this problem.
    First, using the financial information we had, we ensured that Iraq 
would not have to service its debt following the end of the war and 
during the critical reconstruction phase. Demands for repayment would 
have greatly reduced the resources available to a new Iraqi Government. 
Therefore, we secured recognition from the G7 that Iraq would not 
service its external debt at least through the end of 2004. 
Subsequently, the Paris Club group of official creditors stated their 
expectation that Iraq would not make payments over this time period.
    Next, we sought to obtain the best possible data on Iraq's foreign 
debt and its economic condition. Without any reliable data, it would be 
difficult to reach an international consensus on a debt strategy. We 
began collecting data by sending several technical assistance advisors 
to Iraq to review the government's debt records once the war ended. At 
the same time, we worked intensively through the Paris Club and the 
International Monetary Fund to obtain data from creditors.
    We have made significant progress. The latest available information 
indicates that Iraq's external debt amounts to at least $70 billion and 
is probably closer to $100 to $120 billion. Paris Club members report 
that they are owed roughly $40 billion--$21 billion in principal and 
roughly an equivalent amount in late interest. The IMF has polled non-
Paris Club governments and, as of September 10, reports creditor claims 
of $28 billion in principal and interest. Since 20 governments have yet 
to respond to the IMF poll, this figure is likely to increase.
    With better data in hand, we can now proceed with our strategy and 
work out a long-term solution to Iraq's debt problem. We will continue 
to work with other creditors toward the goal of achieving a substantial 
restructuring of Iraq's debt that will permit the Iraqi Government to 
channel resources into reconstruction activities.

Assessment of Reconstruction Costs and International Fundraising 
        Efforts
    We also knew at the outset that one of the major priorities 
following the conflict would be to produce a comprehensive assessment 
of reconstruction costs in Iraq. We recognized that we could not focus 
solely on the costs of repairing the damage inflicted during the short 
conflict. Saddam Hussein's total disregard for the welfare of his 
population likely meant that the needs of the Iraqi people--and the 
cost of reversing decades of economic decline--would be substantial.
    Because of the extent of Iraq's isolation from the international 
community, we had little reliable information regarding the extent to 
which critical investments had been neglected. We were concerned that 
the absence of economic data and other information would make the job 
of producing a timely needs assessment especially challenging. We 
engaged early with our fellow shareholders and with senior officials 
from the World Bank and the IMF to create a process for making a needs 
assessment as soon as the environment was permissible. As a result of 
these discussions, these institutions acted quickly to develop the 
scope of the assessment, divide up responsibility for different 
sectors, and recruit the necessary staff.
    We expect that the cost for reconstruction will be in the range of 
$50 to $75 billion. This estimate covers critical infrastructure needs 
in electricity, public works, transport, telecommunications, health, 
education, and agricultural sectors, among others. But it excludes the 
annual expenses that have been identified by the Coalition Provisional 
Authority to cover the government operating budget.
    Clearly, this is a cost that will need to be shared widely, and 
underscores the importance of a major donor effort for Iraq. In June, 
we established a ``Core Group'' of donors, consisting of Japan, the EC, 
and the United Arab Emirates, to consult regularly with the UN, World 
Bank, IMF, and CPA, on the planning and preparation for the donor 
conference. The members of this group are engaging intensively with 
other potential donors to urge them to pledge generously at the donor 
meeting in Madrid on October 24. We believe our own substantial 
contribution of $20 billion--as reflected in the President's 
forthcoming supplemental request--will be critical to leveraging 
support from other governments.
    In addition, we are encouraging the international financial 
institutions to commit their own resources to the people of Iraq. As 
you are aware, the IMF and World Bank recalled their staff following 
the bombing of UN headquarters where they were also housed. However, 
these institutions remain actively engaged on Iraq, and are continuing 
to work with CPA and Iraqi officials, providing technical assistance 
and finalizing the needs assessment. The World Bank--in conjunction 
with the UN--is also completing the design of a multidonor trust fund 
that would pool bilateral donations and make them available for 
priority needs identified by these agencies in their needs assessments. 
In addition to these vital contributions, we have made good progress in 
our discussions with the IMF and the World Bank on identifying the type 
and amounts of resources that could be made available to the Iraqi 
people once the conditions for lending are in place.
    In a related exercise, we are reaching out to Export Credit 
Agencies (ECA's) around the world, encouraging them to follow the U.S. 
Ex-Im Bank's efforts to support investments in Iraq by insuring 
repayments. Many other governments have responded positively to this 
effort, including Japan and the United Kingdom. Through credit 
facilities such as the one proposed by Ex-Im Bank, credit agencies will 
be able to provide short-term export credits worth several billion 
dollars. Initiatives like this will be very important for supporting 
trade, facilitating commercial activity, and spurring growth in Iraq.
    Countries other than the United States have been identifying and 
freezing assets of the Hussein regime in accordance with UN Security 
Council Resolution 1483. Over $1 billion of such assets has been 
identified and frozen. We are working hard to encourage countries that 
have frozen assets to transfer those funds to the Development Fund for 
Iraq (DFI), where they will assist in the reconstruction of the 
country. We have already had some success in these efforts, including a 
transfer of 
approximately $98 million to the DFI announced by Japan on August 29.

Conclusion
    Achieving a stable and productive economy is central to our goal of 
a unified and prosperous Iraq. We have made considerable progress on 
financial reconstruction over the last several months, thanks to 
extensive advance planning and the work of many dedicated professionals 
from the United States, Coalition partners, and Iraq. Our activities 
will only intensify in the coming months. While the challenges are 
formidable, we are well on the way to establishing a vibrant economy 
that creates opportunities for all Iraqis to achieve a better future 
for themselves and their children.

        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 
reconstruction 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 Defense (DOD):

 As of September 12, 2003, USAID had awarded nine 
    reconstruction contracts. Of these, one was a sole-source 
    contract to International Resources Group (IRG) valued at 
    USD 18.3 million of current programming. Out of the USD 
    1.55 billion in USAID contracts funded thus far, this sole-
    source contract award represents 1.2 percent of the total.
 DOD has awarded one reconstruction contract that was 
    not competed. 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 
Department 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 contractors, had awarded 133 subcontracts with the 
    majority (98) going to Iraqi firms.
 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.
 USAID and the Department of Defense as the contracting 
    agencies may be able to provide more complete data.

 
                    FINANCIAL RECONSTRUCTION IN IRAQ

                              ----------                              

                       TUESDAY, NOVEMBER 4, 2003

                               U.S. Senate,
   Subcommittee on International Trade and Finance,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Subcommittee met at 2:33 p.m., in room SD-538, Dirksen 
Senate Office Building, Senator Chuck Hagel (Chairman of the 
Subcommittee) presiding.

            OPENING COMMENTS OF SENATOR CHUCK HAGEL

    Senator Hagel. Good afternoon. I think the order of 
business is for Senator Stabenow to introduce Mr. McPherson, 
but in her absence, I have conferred with the Vice Chairman of 
the Subcommittee, Senator Bayh, and we have concluded, in the 
interest of time--oh, she is here. We just about threw you 
overboard here, Senator Stabenow. But allowing you an 
opportunity to make the presentation, if you would like to sit 
there or down in front, either way you want to do it.
    Senator Stabenow. Well, I would be happy to sit down front.
    Senator Hagel. We will keep all these Michiganders 
together.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. I appreciate 
very much you giving me an opportunity to introduce a 
distinguished constituent of mine. Peter, welcome. Good to see 
you.
    I am not a Member of the Subcommittee, but, of course, Mr. 
Chairman, as a Member of the Banking Committee and, most 
importantly, as a Michiganian, I wanted to be here today to 
introduce Peter McPherson.
    As you know, he is the President of Michigan State 
University, my alma mater, which is one of the many reasons 
that I am pleased that he is here today. But he has a long 
history of leadership in the financial services industry as 
well as in public service and in education.
    Over his impressive career, he has served as Deputy 
Secretary in the Department of the Treasury, Administrator of 
the U.S. Agency for International Development, a leader at the 
Overseas Private Investment Corporation, and as a Special 
Assistant to President Gerald Ford.
    Mr. McPherson has been President of Michigan State 
University since 1993. As head of MSU, he oversees an 
institution of nearly 4,500 faculty and approximately 45,000 
students. Under his leadership, the Spartans have continued 
their impressive track record as a wonderful institution, well 
respected for both innovative teaching and impressive research.
    When I heard that Peter had been called upon back in April 
to serve as the Financial Coordinator for the Iraq 
reconstruction, I knew that we were in good hands. I knew the 
Administration had picked an excellent person for that 
position.
    During his time in Iraq, he has worked closely with Iraqis 
rebuilding their Finance Ministry, their central bank, their 
entire financial services system, and I know that we are 
anxious to hear from him today about his perspectives. I know 
that he came back to Michigan State, and we are glad to have 
him back. I also know he could have spent many more months 
there doing the things that need to be done to rebuild Iraq. 
But we are just pleased that he was willing to step away from 
his duties to go to Iraq and that he is here to share his 
experiences with us today.
    Thank you.
    Mr. McPherson. Thank you, Senator.
    Senator Hagel. Senator Stabenow, thank you. You certainly 
are welcome to stay for a while, or whatever your schedule 
calls for.
    Senator Stabenow. Thank you.
    Senator Hagel. But we appreciate very much your 
introduction of Peter McPherson.
    This is the second hearing that this Subcommittee has held 
on financial and economic reconstruction in Iraq. Under 
Secretary of State Alan Larson, Under Secretary of Treasury 
John Taylor, and Ex-Im Bank Chairman Phil Merrill discussed 
U.S. efforts to bring stability and growth to Iraq's economy.
    Today we will hear from M. Peter McPherson, who has just 
been introduced, and as has been noted, is a former Deputy 
Secretary of the Treasury, current President of Michigan State 
University, and former Director of Economic Development for the 
Coalition Provisional Authority in Iraq; as well as Mr. Mark 
Malloch Brown, current Administrator for the United Nations 
Development Programme. We welcome you both. We appreciate very 
much each of you making an effort to be here. Mr. Brown, 
especially in your case where it is not often we have 
representatives of the United Nations to come before any 
committee of Congress. So we very much appreciate your being 
here. The Committee will be interested in your insights, 
observations, and analysis of Iraq's economic development based 
on your experience.
    America must continue to lead the international effort to 
support the economic and financial reconstruction in Iraq. This 
effort is directly connected to our interest in transferring 
authority as soon as possible to an Iraqi Government that is 
capable of governing and is viewed as legitimate in the eyes of 
the Iraqi people.
    Post-Saddam Iraq has the potential to be a model for 
economic development in the Arab world and throughout the 
Middle East. For success in Iraq, Iraqis must believe that 
their economic future will be brighter, that there will be 
jobs, opportunities, growth, and economic security. And they 
must see a quantifiable improvement in their lives.
    There has been substantial economic progress in Iraq over 
the past 6 months. A trade bank has been established and a new 
Iraqi currency is in circulation. Iraq is also in the process 
of establishing new and more transparent banking and investment 
systems.
    But time is not on our side. There are major challenges 
ahead before Iraq can realize its potential. Iraq faces 
reconstruction costs of at least $56 billion over the next few 
years, according to the assessments of the CPA, the United 
Nations, and the World Bank, an international debt estimated 
between $97 and $124 billion; as well as approximately $96 
billion in war reparation claims against Iraq to be resolved 
through the United Nations Compensation Commission; and an 
unemployment rate of around 60 percent.
    Iraq's economic potential has been set back by more than 
three decades of mismanagement and corruption by Saddam 
Hussein's regime, and as a result of Saddam's disastrous 
policies and decisions, Iraq experienced three wars and more 
than 12 years of international sanctions. The looting and 
destruction that followed Iraq's liberation intensified the 
problems. While Iraq has an educated and professional middle 
class and the second largest proven oil reserves in the world, 
Iraq's economy faces many obstacles and challenges.
    Iraq's oil revenues alone will not be able to meet the 
demands of governance, reconstruction, and debt servicing over 
the next few years. At best, Iraqi oil revenues might be able 
to cover the recurring costs of running the Iraqi Government, 
but probably not much more than that over the next few years. 
We, therefore, should not expect that Iraqi oil revenues will 
be available for reconstruction or debt repayment anytime soon.
    The United States has committed $18.6 billion in grants to 
help rebuild Iraq. Pledges from the international donors in 
Madrid last month include between $3 and $4 billion in grants 
and as much as $14 billion in loans and credits. The infusion 
of approximately $22 billion in grants will have a significant 
impact on Iraq's economy. But there is still a long way to go.
    Providing debt relief must be another urgent priority in 
Iraq, and cannot be disconnected from reconstruction 
initiatives. A substantial debt and reparations burden will 
hinder Iraq's economic development, no matter how much oil Iraq 
has in the ground.
    The Iraqi people should not be burdened with debt incurred 
by Saddam Hussein's regime. Iraq needs significant debt relief 
as soon as possible. But Iraq's debt must be renegotiated 
through international institutions such as the United Nations, 
the World Bank, and the Paris Club.
    Inside Iraq, we must support macroeconomic policies that 
expand opportunities in education and, most importantly, 
increase jobs. Iraqi politics cannot stabilize with more than 
half of Iraq's workforce unemployed. We must work with our 
Iraqi and international partners to strengthen and expand the 
Iraqi private sector and those industries that offer the best 
comparative advantage. The oil sector in Iraq is capital 
intensive, not labor intensive, and provides jobs for less than 
1 percent of Iraq's population. We need to look beyond oil to 
provide jobs and opportunities for all Iraqis.
    Iraq's economic and political development will depend upon 
an improvement in security in Iraq. If security in Iraq 
continues to deteriorate, and the problems spread outside the 
so-called ``Sunni triangle,'' economic development will be very 
difficult. Security in Iraq is not the subject of today's 
hearing, but it is critical to any prospect for economic 
stability and growth.
    We very much appreciate both of your testimony, your 
observations today, and we look forward to your testimony.
    I would now ask the Ranking Minority Member of the 
Subcommittee, Senator Bayh from Indiana, if he would like to 
add his comments.
    Senator Bayh.

                 STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. Thank you very much, Mr. Chairman. I want to 
compliment you for conducting this hearing today following the 
one that we previously held. It is vitally important to 
securing the reconstruction efforts of Iraq, and through that 
eventually securing the peace. So, I thank you for focusing us 
on this topic.
    Also, gentlemen, thank you for your time. We know there are 
other things that you could be doing, so we are grateful to you 
for joining us.
    Mr. McPherson, I would just like to say I hope you enjoyed 
your experience in Indianapolis a few years ago when the 
Spartans won the NCAA Basketball Championship. From our point 
of view, if it cannot be an Indiana school, it may as well be a 
neighbor.
    Mr. McPherson. You were a great host, Senator.
    Senator Bayh. Well, I am glad you think so. I had the 
privilege of being seated next to the Spartan cheering section, 
and my hearing is still recovering. We are happy to have you 
anytime, and we appreciate your presence today, as well as you, 
Mr. Brown, as well.
    I am going to be particularly interested to obviously hear 
statements, but then focus some questions on the status of our 
debt relief efforts. As my colleague mentioned, the amount of 
outstanding debt is unsustainable for the Iraqi economy when 
you include not only the ordinary loans but these war 
reparations, things of that nature. I would like to know what 
our strategy is for going about convincing other countries to 
either relieve some of this debt or to have the newly 
constituted Iraqi Government repudiate some of it. We had an 
example not long ago of Argentina deciding that their 
internationally held debt was unsustainable, and they have 
taken steps unilaterally to deal with that. I would like to 
know what our strategy is for trying to alleviate the Iraqi 
situation as well so they can make a fresh start of it and get 
on.
    I would be interested, as Senator Hagel mentioned, the 
Madrid Conference that generated some additional support for 
the reconstruction efforts. I noted with interest that at a 
time when the Administration was vigorously opposing having 
part, a relatively small fraction of the U.S. assistance, be 
provided in the form of loans, they nevertheless were 
applauding the international effort, two-thirds of which was 
constituted as loans. I am interested to know why, according to 
the Administration, it is apparently all right for the rest of 
the world to be repaid, but the American taxpayer is not to be 
repaid. I am looking for a little consistency here, and perhaps 
you can help to provide it today.
    Also, what do we intend to do with regard to sustainable 
macroeconomic policy, both fiscal and monetary? Vitally 
important. I mentioned Argentina before. All the U.S. 
assistance in the world and from other nations will go for 
naught if they do not have sustainable 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 assessing 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 Madrid. 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 
success 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 
revolutionized 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.
    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 ministries 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 respect 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. There was never a major theft, never a major problem 
that was not solved.
    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 currency. 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 equivalent 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 confirm. 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 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 
credit facility. Unless something is done some of the private 
banks will be doing some work, but Rafideen and Rashid are not 
yet in a position 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 financial 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 Finance, and by August there was an enormous 
involvement by Iraqis in making some key decisions. This 
included sweeping economic reforms, changes that were announced 
by the Finance Minister 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 economies 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 personal 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-Saharan Africa, generally thought not to attract a 
little of foreign investment, 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 certainly 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 
Governing Council, the 25-person, now 24-person-member 
Governing Council appointed by Bremer, is representative in 
terms of religion and geography of the country. I can tell you 
from lots of dealing with these people, they are strong people. 
They stand up and tell you what they think, and they have an 
economic subcommittee of 10 people, many of the very strong, 
forceful people on the Governoring Council. I was Ambassador 
Bremer's representative to work over these issues with that 
subcommittee, and we spent three long meetings working on the 
matter. They very much made it their own. They were working on 
drafts, they took out things, they put things in. There were 
lots of discussions. And the speech that the Finance Minister 
made in Dubai at the World Bank meeting was, in my judgment, an 
Iraqi speech.
    It is premature to speculate on how democracy will work in 
Iraq, of course, but after seeing how these religious groups, 
the individuals, and groups could work together, I really 
believe that, if they are given the time and the opportunity, 
these people can find some common ground.
    It is important to keep on focusing on the fact that 
democratic processes and market forces are mutually supportive, 
perhaps even necessary in Iraq. The democratic process should 
foster individual freedom and economic opportunity. Market 
forces can create widely held resources that give the means for 
people to avoid arbitrary and exploitive government.
    More certainly needs to be done. There needs to be more 
credit available. That is why the foreign banks can be helpful. 
There needs to be more loans by the big domestic banks, and the 
17 private banks. Iraq needs a competition law to prevent undue 
concentration. They need a bankruptcy law. They need a number 
of legal infrastructure changes, and I think those probably 
will be done.
    They also need to continue to cut back on the subsidies. 
This is one of the more messy things that you do in economic 
restructuring because there is this balance between disruption 
of individuals' lives versus the need to cut back on the 
subsidies. This is not one decision. It will be hundreds of 
decisions as time goes on.
    The point is, though, that World Bank has done a 
particularly exhaustive job and this conclude that subsidies 
need to cut back early so that the private sector can have room 
to grow. The sooner you do that, the earlier you get growth.
    One or two quick last comments as to the supplemental which 
has just been voted here in the Senate, there is no question 
that the infrastructure is necessary. And as you pointed out in 
your excellent statement, Senator, the oil money, the $13 to 
$15 billion for next year will basically cover operating 
expenses of the government. The supplemental looks to deal with 
extraordinary requirements. And they absolutely are 
requirements. The expenditures will not only go a long way 
toward addressing these requirements, but also will create 
economic activity during a bridge period before growth occurs. 
We cannot expect substantial real growth soon. There is no 
evidence that early real growth that occurs in situations like 
this. The economic activity bridge is very important.
    Overall, Senator, I come back to the point I began with, 
that we can see today, because of what we have been able to 
achieve, that what can be. There is a clearer outline, a 
clearer view of what can be. Certainly, we need the security 
issues dealt with. But even in 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 PROGRAMME

    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 
Conference 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 country, 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 profoundly 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 Committee 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, but because anybody who seeks to 
bring help and assistance to the Iraqi people at this time is a 
potential target for these groups.
    We did have last week for us, a very troubling independent 
report on the security arrangements that we had in Iraq since 
the end of the conflict there, which cast doubt on our own 
internal procedures for managing risk adequately, and we wanted 
our people to come out and have frank conversations with us 
about whether or not we have adequate security arrangements in 
place.
    But the point is we want those conversations because we are 
going to stay in Iraq and we are going to stay carrying out our 
mission and taking the risks that we recognize are inherent in 
that mission.
    Let me say that there is a role for the UN in three areas, 
what you might call the political, humanitarian, and the 
development and reconstruction. Let me quickly touch on each.
    First, the political, has always been in a sense the 
difficult one for us because the CPA is tasked with the 
ultimate responsibility for the political evolution of Iraqi 
political life, the move via elections and a constitution to a 
sovereign government. We can support that with advice on 
elections. We can support Iraqis in constitution writing. But 
there is nothing in the most recent Security Council Resolution 
1511 which changes our fundamental view that this is the 
responsibility of the CPA and we must support them in it, but 
we are not the prime actors.
    Second, on the humanitarian, we have been carrying out, 
particularly through my colleagues in the World Food Programme, 
a huge feeding operation. The Iraq that Peter McPherson has 
described, an Iraq of subsidies not incomes, is one where at 
least 60 percent of Iraqis were wholly dependent on food 
rations and all Iraqis to some extent dependent on food 
rations. Nevertheless, this subsidy-based economy cannot and 
must not last. Mr. McPherson is entirely right. We have to 
press for a transformation of the economy where subsidies go 
down and incomes go up. And we need to get there as quickly as 
possible. And then the basic wealth of this country, which 25 
years ago had a per capita income of $3,600, a per capita 
income that has fallen now to only about $600, won't need a 
major humanitarian operation. Humanitarian support is a 
consequence of years of accumulated economic mismanagement, not 
because the country is poor.
    But that then leads us to the third area, which is where I 
think the major critical intervention of the UN must take place 
in the coming months and years, and that is in the development/
reconstruction area, where obviously to reverse that situation 
of mismanagement imposing poverty on a naturally rich country 
needs to be addressed. And my own view is that the conference 
in Madrid has laid the basic framework for that.
    Let me, therefore, start with the $56 billion, Senator, and 
is that a realistic assessment of needs. I was at pains in 
Madrid to remind the other sponsors, organizers, and attendees 
at the conference that $56 billion was not what we or, the 
United States, felt was needed in grant assistance. It was, 
rather, what Iraq would spend over the next 4 years on the 
nonrecurrent capital investment in the reconstruction of the 
country. In other words, oil income would pay for the recurrent 
expenditures, as you made clear, but the capital 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 investment, 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 investment 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 enormous 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 
access, as I say, foreign direct investment, loans, other 
sources of capital, 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 Administration 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 
difficult 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 harder 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 European countries, Poland or Hungary, 
for example, over the early years after 1989. Looking back, 
this amount was spent. But it certainly was not all spent out 
of grant finance from the United States or its European allies. 
As an estimate of spending, it is realistic. As an estimate of 
grant resources over the next few years, I think it is 
misleading.
    Having said that, let me just very quickly make two further 
points. One, how in this security situation will the UN carry 
out our role of supporting Iraq in its reconstruction? We are 
very lucky. We have 4,000 national staff operating in the 
country, many of them highly skilled. They have been the human 
capital of our operation there for many years. We started 
development operations in Iraq 40 years ago, and we have been 
running humanitarian operations for the last 20 years. So we 
have not only a very experienced staff, but also an 
extraordinary network of National partners now playing leading 
roles at the technical level in National ministries, and also 
in the municipalities and in the emerging civil society. So we 
feel we have ways of mobilizing Iraqi partners to work with us, 
and, of course, with the CPA.
    Two, we believe that we can do this with a light 
international presence. We have to be very prudent with the 
number of international staff we have there. We have to 
recognize that every person we put there is an individual at 
risk in this current security situation. So we will be careful 
about those we put there, and we will make sure we have 
adequate security arrangements to manage the risk for those who 
are there. And we will extensively support them with back-up 
operations from Amman, Jordan; Larnaca, Cyprus; and from Kuwait 
City. This is the model that we had to use during the Taliban 
years in Afghanistan, where we had a small international 
presence in Kabul, but supported it from Islamabad; or that we 
use today for Somalia where the majority of our operations are 
not in Mogadishu but in Nairobi, Kenya. It is not ideal. It is 
not the way one wants to work. But we have to manage this vis-
a-vis the risk of kidnapping and armed attack.
    Let me finally just suggest two longer-term lessons from 
all of this. The first is obviously American public opinion has 
been shocked by the $87 billion figure, and perhaps within 
that, for the $20 billion for reconstruction. It is a very high 
sticker price, and I think many people have been dismayed by 
it. It is worth, though, putting it in context. Iraq, it is 
estimated, needs to spend $56 billion over the next 4 years. If 
that indeed had been grant money, which many in the media read 
it to be, that would be more than we spent in grant money for 
Africa over the last 4 years, where we spent as a global 
community, not just the United States but all donors combined, 
about $50 billion. Africa is a region with 25 times the 
population of Iraq. Does that mean we are spending too much in 
Iraq or too little in Africa? And it may not surprise you that 
I would argue we are spending too little in Africa.
    We believe we could achieve the Millennium Development 
Goals around the world of halving poverty, getting every boy 
and girl into school globally, if the United States contributed 
$25 billion a year. In other words, a little bit more than Iraq 
for the whole world as a contribution to a $75 billion annual 
spend by all donors toward achieving those goals.
    Maybe we should be expecting the next President, in his 
State of the Union address in 2005, be it President Bush or a 
Democratic 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 international 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 systems and 
constitutions, to delivering basic services such as health care 
or education. Throughout these sets of tasks, a neutral 
multilateral partner is a much easier way to deliver it than 
through the same power force to provide the military 
arrangement in such a situation.
    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 exercised 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.''
    The Governing Council feels to me like a legislative body 
with the CPA being an executive body. It is not quite that way 
because the Council have initiated, for example, the names for 
the central bank and the Finance Minister, so it is a hybrid. 
My work with the Council felt like, when I was in the 
Administration in the Reagan years, coming here with some 
smallish group of a committee and working out some key issues.
    Senator Hagel. So as the Finance Minister's role becomes 
more apparent in decisionmaking as the banking structure starts 
to develop with leadership in each bank, those decisionmaking 
elements will be transferred, and I assume much of this is 
being placed in the acceleration of that decisionmaking by the 
Iraqis themselves.
    Mr. McPherson. Absolutely. In my AID days, I worked all 
over the world, and in a few countries I felt they waited for 
you to tell them what to do or at least to tell them what you 
thought. By the time I left Iraq, I did not feel that at all. 
There are, of course, intelligent people all over the world, 
but in Iraq there are many very educated people, and in some 
cases quite sophisticated. They are more and more assertive. I 
see this to be an advantage.
    Senator Hagel. What industries or economic sectors would 
you point out that represent the best possibilities for jobs, 
opportunities, exports in the near-term for Iraq, other than 
oil?
    Mr. McPherson. I think that has to shake out. I have 
thought a lot about that. Agriculture has to play a role, 
though there are major reforms that are going to be necessary 
there. I believe that a whole range of manufacturing industries 
certainly can evolve.
    Those that have a petroleum component to it would be 
natural, though petrolem subsidies must be cut back.
    There is no reason why there should not be more refineries 
in the country rather than exporting most of the crude oil. The 
refineries in the country now are for domestic consumption.
    Senator Hagel. Thank you.
    Mr. Malloch Brown, you noted the Madrid conference, which 
was a very critical point in this long journey to put Iraq back 
on its feet, and your involvement was critical to the success 
of that conference. Tell us what we do now to process, to move 
forward on collecting on the commitments, on those billions of 
dollars. What has to be done? And how do you do that?
    Mr. Malloch Brown. Well, I think they fall into two or 
perhaps even three categories. The one is the United States , 
which I do not think the United States needs any advice from 
me. It is anxious to get that money out into the field and get 
spending against the priorities that the CPA has established 
with the Iraqis.
    The second two components are the grant monies committed by 
donors, a lot of which will go through a multilateral trust 
fund, part of which is managed by my organization, UNDP, on 
behalf of the UN, and part by the World Bank. And ours will 
tend to address the quicker, faster disbursing items identified 
in the needs assessment. The Bank's will be more aimed at the 
longer-term, slightly bigger projects. Both, however, will 
require some quick work with the Iraqis to determine first 
priorities.
    The third component is the lending program, which, as I 
say, I think you know, there will be a lot of planning for it 
and perhaps some early mixed grant-loans. The World Bank has 
so-called blend monies which are part grant, part loans, which 
may start this coming year. But the majority of the loans which 
are from the World Bank and the IMF, the only other big loan 
provider at this stage is Japan, and I should add, some export 
loans from the Gulf. But all of those may take a little bit 
longer to come online.
    The key final challenge is just to link the spending 
priorities of this multilateral effort with the United States' 
priorities, to make sure that we are not falling over each 
other, that the thing is done in close coordination and that we 
have set up or proposed, at least, a basic coordination 
structure so that we can see what the United States is spending 
out of the so-called development fund and supplement it rather 
than repeat it in terms of the use of this multilateral fund.
    Senator Hagel. Thank you.
    Senator Bayh.
    Senator Bayh. Thank you, gentlemen. I am sorry I had to 
step out to take a phone call during your testimony.
    Let me begin by something I mentioned in my own opening 
comments about debt relief on the part of the other nations. 
Either one of you, I would be interested in your views, Mr. 
Malloch Brown, perhaps beginning with you. I was deeply 
disappointed to see that coming out of Madrid, other than the 
$231 million, I think, from the European Union, which is fairly 
de minimis, the French were good for nothing, the Germans were 
good for nothing, the Russians were good for nothing. Having 
played no role in liberating the Iraqi people, in good 
conscience the least they can do is to relieve the debts that 
they extended to the regime of Saddam Hussein to prop up his 
dictatorship.
    When do you expect that they will do that?
    Mr. Malloch Brown. I think, Senator, there was actually a 
clear strategic decision by the organizers of the Conference to 
make sure that did not mutate into being a debt relief 
conference, because there was a fear that then there wouldn't 
be the fresh, up-front cash needed for the immediate needs of 
the people.
    Senator Bayh. How much fresh, up-front cash was there, not 
including the loans?
    Mr. Malloch Brown. There was about $3.5 billion of up-front 
cash for this coming--most of it concentrated in the next year, 
2004.
    Senator Bayh. The strategic decision does not seem to have 
worked terribly well if it only generated $3.5 billion.
    Mr. Malloch Brown. Well, it depends what we think Iraq can 
spend in 2004. My own view is that the United States by saying 
it is going to spend perhaps half of its $20 billion in 2004, 
combined with this $3.6 billion, which, you are quite right, is 
much less than the usual burden-sharing proportion where you 
would expect something like a 3:1 ratio. Nevertheless, that is 
probably as much as Iraq can absorb next year.
    Senator Bayh. When do you expect the debt relief decisions 
to be addressed? And what result do you think we can 
anticipate?
    Mr. Malloch Brown. First there is the debt moratorium until 
the end of 2004, and the earlier Security Council resolution 
said no debt relief--I mean, no debt payments to any debtors 
until we can get this sorted out. The French have made it clear 
that the Paris Club, which is the basic forum for this type of 
debt meeting, should now, you know, come together quickly and 
start working through this debt. And they were at pains to come 
and see me at Madrid, and I imagine they went to see the United 
States as well, to say, look, you know, we plan to help on the 
debt side, and I think all the debtors seemed to be in the same 
room on this. So, I think the next stage debt relief, in other 
words.
    Senator Bayh. How much of a haircut do you expect that they 
could be willing to take?
    Mr. Malloch Brown. They should take a big one. Everybody 
should take a big one. When you are talking debt of something 
between $120 and $200 billion, depending how you count it and 
how you treat reparations, against a GDP per year at the moment 
estimated by the IMF at $15 billion, you have got a debt ratio 
overhand 10 times the size of GDP. There is no other country in 
the world which comes close.
    Senator Bayh. How do we define ``big?'' It is my 
understanding the Argentines are insisting upon a 75- to 90-
percent haircut?
    Mr. Malloch Brown. Let me just say, I mean, there are two 
things about big. First, is it a haircut or the head severed 
off from the body? And there is a critical point of difference 
here because, you know, the IMF and others are very worried 
that there not be such an odious debt solution which says all 
of this debt should be wiped off because of the manner in which 
it was incurred--dictator spending it on things which did not 
benefit the people.
    The fear is that if you went that route, where does it 
stop? Which country could not at some point in its history 
claim the same things?
    There is a view that you have to try and do this within the 
normal debt parameters; in other words, it is relief but it 
does not treat Iraq as completely sui generis, because very 
quickly you would have countries, whether, say President Mobutu 
of Zaire, others who could come back and make a similar 
argument about their debt.
    Senator Bayh. Let me ask a couple of questions about that. 
As I understand it, is it their point of view that the 
Provisional Authority is not the sovereign--I think you alluded 
to this--sovereign entity capable of taking on debt? Is that 
their position?
    Mr. Malloch Brown. It is not that it cannot take on debt. 
It is not clear that it can restructure debt for the future 
because a future debt restructuring is something that successor 
governments have to respect. In other words, if you say, 
instead of paying 100 percent, you are going to agree to pay 20 
percent, but you are going to pay that 20 percent, and it is 
very important that the Iraqi authority, which enters into that 
commitment can commit its successes.
    And there is a view that you cannot do that until you have 
an Iraqi Sovereign Government, just as it would be hard for the 
CPA to offer an oil concession of 10 or 20 years to an oil 
company because could it bind its successors to honor that 
concession?
    Senator Bayh. Could Saddam Hussein bind his successors? Was 
he the duly constituted Sovereign Government of Iraq? Who was 
he elected by?
    Mr. Malloch Brown. I am afraid he was because, and I think 
it is a tragedy that he was allowed to stay in office for as 
long as he did, but the fact is that the countries of Africa 
are being made to repay debt which was incurred by dictators 
over many years. Either we decide that democracy is the basic 
of legitimate debt and any debt incurred by a Communist 
Government, a military dictator, is therefore eligible to be 
written off.
    Many of us in the development community would love to go 
that route, but I think you should just pause and think of the 
consequences to the international financial system of a 
situation where a Government which incurs debt, that its 
successors are not bound to be responsible for that debt. It 
would undermine the whole premise of the international 
borrowing system.
    Senator Bayh. I am not sure I agree with that, but I 
understand your point of view.
    Mr. McPherson. Let me get into this. This is a subject 
which I have thought about for years. My first job at Bank of 
America after I left the U.S. Treasury was, in fact, to run 
their bad debt portfolio, then largely Latin American.
    I think you can get largely where you wish to go within 
conventional procedures. I really do. I believe that there 
needs to be very, very substantial debt reduction by the 
international creditor community for Iraq. I have talked to 
Ambassador Bremer about this numerous times probably and he 
agrees.
    I believe you do not want to repudiate the debt because it 
is going to make it harder to borrow after that under 
international creditor conventions.
    Senator Bayh. I have exceeded my time, and I do not want to 
intrude on the Chairman's time. Mr. McPherson, correct me if I 
am wrong, did Argentina not walk away from its sovereign debt?
    Mr. McPherson. But let us see how much credit and at what 
cost they are going to get in the future.
    Senator Bayh. And within 48 hours was rewarded by a new 
agreement with the International Monetary Fund?
    Mr. McPherson. They have not gone to the international 
creditor community yet, though. It is a stigma to repudiate 
debt. If you, thereafter go to the bond or the bank market, the 
stigma will be hard to overcome.
    Senator, you do have to take your position to get 
substantial debt reduction.
    Senator Bayh. I missed your----
    Mr. McPherson. --you do not have to take the position to 
repudiate debt in order to have restructured debt that is very 
deep.
    Senator Bayh. I understand your point, but it seems to me 
you do business with murderous dictators, you run the risk of a 
future democracy choosing to repudiate the debt.
    Mr. McPherson. Well, my hope is the international community 
will understand----
    Senator Bayh. That is a risk, as a creditor, you assume.
    Mr. McPherson. My hope is the international community will 
now recognize that this debt is what it is, and there should be 
huge reduction to it within normal procedures. I think that is 
very possible.
    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 
Kuwaitis 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 historical 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 
reduction.
    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 
reduction do you think is possible? I would like to hear from 
both of you.
    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 something 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 particularly gruesome periods of his rule are going 
to find themselves subject 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.
    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 reparations, 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 
community 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 paying 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 
recently.
    Mr. McPherson. I think there is some regional interest, for 
example, 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 
mentioned 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 collection structure being restructured. There 
is a huge push to get this done because a new tax rate is 
effective January 1, 2004.
    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 reconstruction 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 Iraq?
    Mr. Malloch Brown. Of course, in Afghanistan, a big 
complaint was, and remains, that there is not an adequate 
international security force to keep the peace across the 
country. Whatever the difficulties 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 proving 
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 without 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 
understands, every Iraqi, whatever their political position, 
the international 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 second 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 accelerated 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 
extensively 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 here.
    The Arab countries' assistance to Iraq, I do not know what 
measurement 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 around that we did not see more financial 
commitment from the Arab countries.
    Are you aware of any specific effort the United Nations is 
undertaking to try to engage other Arab Nations to get them 
more directly involved in helping reconstruct Iraq?
    Mr. Malloch Brown. First, I think you are right. I think 
there was disappointment that there was not more funds pledged 
from the region at Madrid, Senator.
    Second, my late colleague, Sergio Vieira de Mello, probably 
one of the most significant contributions he made as the 
Secretary General's Special Representative in Iraq, was to try 
and get the region involved. He had just, at the time of his 
assassination, completed a round of meetings with visits to the 
regional capitals, both looking for their financial support, 
but frankly even more their political endorsement of the 
political process in Iraq, recognition of the Governing 
Council, the participation of the Governing Council in regional 
political meetings, all of which are the other side of the coin 
of financial contributions to reconstruction, and I think he 
felt that that was moving forward, and I think the United 
States has tried to keep that momentum subsequently. But there 
is no escaping the deep ambivalence and skepticism in the 
region toward what is happening in Iraq.
    Senator Hagel. Thank you.
    Peter, do you want to add anything to that?
    Mr. McPherson. I think that what is happening in Iraq is 
likely to have a dramatic impact on the whole region if we are 
even halfway successful because what we are saying is that we 
need a democratic process, we need market forces, we need open 
economies. And my hope is that we will continue and that there 
will be more and more help from the other countries.
    I certainly felt that there was a willingness to keep, for 
example, in talking to regional central banks for help for our 
central bank.
    By the way, let me get back to the debt for a moment. I 
absolutely disagree with the idea that the current governmental 
structure cannot negotiate the sovereign debt. In fact, we 
cannot take that because it will be excuses to the Russians, 
French, and these others that they do not have to do debt now. 
Debt negotiations has to be done reasonably quick. I disagree 
with the legal position, and I think it is very important for 
us to say, look, this has to be done now, and we need to move 
on.
    There will be some creditors that will try to claim that 
they cannot negotiate with this government before there is an 
election. I, frankly, think any government that does that is 
hypocritical and does not really want to negotiate.
    Senator Hagel. Well, does that not also apply to loans? I 
mean, who are you going to sign a loan agreement with?
    Mr. McPherson. Yes, countries are going to provide loans. 
They are going to send loans. There was this huge debate about 
what the CPA could do. Some people said the CPA should not do 
the currency. Well, we had to do the currency. Every time we 
turned around, there was somebody, for example, the French or 
would say, a proposed action was beyond the authority of the 
occupying power.
    It really does seem odd that Saddam can do anything and 
find it internationally acceptable, including decide what to 
buy with the 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 completely 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 Government 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 representative 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 
legitimate 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 
recognized and some thought his actions to be legitimate 
sovereign actions, 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 anybody off the hook on prompt 
negotiations of debt fast.
    We wanted to get by the Donor Conference, before we had 
serious 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 because 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 fundamentally a lot of 
Iraq's international economic relations, its ability to 
leverage its wealth with new loans and new foreign direct 
investment, rests on a sovereign government.
    And I think the United States equally needs to hear that 
pressure. 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.
    Senator Hagel. Well, I think we have gotten the point.
    [Laughter.]
    Thank you very much.
    I am not going to keep either of you here much longer, 
but----
    Mr. McPherson. It is a good thing we are such good friends.
    [Laughter.]
    Senator Hagel. This, actually, you remember your old days 
up here, Peter, when you used to testify, this actually is 
rather timid and serene compared to some of it.
    The U.N. Oil for Food Program, where are we with all of 
that?
    Mr. McPherson. The Oil for Food Program ends, has ended, in 
the sense no more money is going into it. The oil proceeds are 
going into the new account. There is still a substantial amount 
of goods purchased from the old program and they are in 
arriving. The old program is a vast structure, and I do not 
know all the details.
    A very important part of the Oil for Food Program was the 
delivery of food, some 60 percent of the people depending 
almost totally for their food on program. There is enough food 
purchased in the pipeline to go through this spring.
    The Trade Bank was set up to pick up the slack for new 
purchases out of the new oil money.
    The Oil for Food Program is beyond the scope of this 
hearing, but a good audit would be appropriate.
    Senator Hagel. I heard your comment.
    Mr. Malloch Brown.
    Mr. Malloch Brown. Well, Peter is being, knowing his views 
on this program, very gracious. But let me just say that this 
is a program which was micromanaged by one man and one 
committee. The one man was Saddam Hussein, who was only 
restricted in the areas of the country he controlled, by the 
fact that we had to ensure that what he ordered was actually 
delivered, but the price he paid for goods and the countries 
from which he procured them were his decisions to make.
    The approval of the lists of goods he could procure and the 
detailed management of the program was in the hands of a 
committee at the UN, a committee at the Security Council, 
called the 661 Committee, of which the United States was an 
extremely active participant.
    And I think the whole program was a reflection of a lousy, 
terrible moment in international affairs, where a clean-cut 
decision would have led to Saddam Hussein's much earlier 
removal from power, either by the hands of the Iraqi people or 
of the international community.
    But absent that and a lot of cynicism surrounding it, the 
program reflects an effort to square the circle of how on earth 
you sought to put some control over the procurement activities 
of a corrupt leader who was still in power, and it was 
undoubtedly not the perfect solution. But I think for all of us 
it was the best effort we could make under impossible 
circumstances.
    Mr. McPherson. I wish the United Nations, several years 
ago, had said, enough is enough. We are not going to stand for 
this any more. I mean, the United Nations, good people, worked 
hard at it--a committee of, what, 15 people. The British and 
the United States were, by far, the most concerned.
    If historical lessons are here, one of them is that the UN 
should have said we are not going to be part of such situation 
as this became.
    Mr. Malloch Brown. Yes. I think it is just worth saying, it 
is not 15 people, it is 15 governments of Security Council 
members which approved every contract. My own view is the 
governments should have said, enough is enough. This system 
does not work.
    Mr. McPherson. The United States and the United Kingdom 
did, vigorously again, and again, and again. It is a matter 
that, sitting over there and being in the middle of this, I 
became interested in it. We are where we are, and it is good 
for everybody money is now going to the new fund.
    Senator Hagel. Well, gentlemen, that is a good, 
constructive way to end the hearing.
    Julia Taft, nice to see you. Thank you for your good work. 
We appreciate always what you are doing for our country.
    Unless you have additional comments, we are grateful, as 
always, and we may call upon you again soon.
    Mr. McPherson. Keep probing.
    Senator Hagel. This hearing is adjourned.
    [Whereupon, at 4:05 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]

                PREPARED STATEMENT OF M. PETER McPHERSON

                Former Director of Economic Development
                Coalition Provisional Authority in Iraq
                  President, Michigan State Univeristy
                            November 4, 2003

    I recently came back from about 5 months in Iraq, serving as CPA 
Administrator Bremer's Economic Adviser. Security certainly is critical 
for longer-term success for Iraq. The progress with the economy as well 
with schools healthcare and other areas puts in stark relief what is at 
stake. The people of Iraq and the region can have a country that really 
works.
    A foundation for a revolutionized economy is being put in place in 
Iraq. This new economy will challenge the economic policies and the 
politics of the whole region. From first-hand observation, I know it is 
an imperfect world there, often messy, but progress is real. Americans 
will see it over time, once the terrorists are held at bay.
    You can see and feel progress from month to month. These stories of 
progress have been swept off the front page by coverage of the violence 
against democracy and reform. They represent significant building 
blocks for a country that works for all people of Iraq.
     In June, we started paying 1.3 million government employees. This 
was a real accomplishment considering that our first steps were to find 
out who the employees were and then to deliver the cash all over the 
country. In July, another milestone was reached when a new Iraqi 
currency was announced. The swap of the old for the new started 
throughout the country on October 15. The 2003 and 2004 budget was 
developed for the national government, put together by a CPA team and 
Iraqis. They started out with almost no budget information, no surprise 
since Saddam's budget prewar was a state secret.
     Banks were all closed just a few months ago, but now almost all 
are open. Checks are being cashed and some small loans are being 
extended. Shops on the street are busy. Electricity production is at 
prewar levels and oil production is up substantially. A few weeks ago, 
sweeping economic reforms unlike any in the Middle East were announced 
by the finance minister.
     Iraq wants jobs. The Iraqis concluded that an open economy would, 
in time, bring the investment to help create the jobs. The World Bank 
told Iraqis that in 2002, the Middle East attracted only $4 billion in 
foreign investment as opposed to $7 billion in Sub-Saharan Africa and 
approximately $42 billion in Latin America.
     However, Iraq cannot borrow its way into prosperity. It needs 
investment. The plan is to provide an edge in the global and domestic 
competition for investment. A new law allows for foreign investment up 
to 100 percent of foreign ownership, full repatriation of investment 
and profits, national treatment and no screening committee. Six foreign 
banks can come into the country and take deposits immediately. There 
will be a fast rack admission for two of these banks, looking to early 
and substantial loans by those banks. Several banks are showing 
interest.
     The top bracket for individual and corporate taxes will be 15 
percent. Low rates will make it possible to collect the taxes and will 
encourage investment. Tariffs are to be at a flat rate of 5 percent, 
with the exception of food, medicine, and a few other items with 
tariffs at zero.
    These proposals were approved by the Governing Council, a very 
diverse and independent minded group. As Bremer's representative to the 
Economic Committee of the Governing Council, I worked closely with this 
group on various drafts of economic policy proposals for hours at a 
time. The meetings had the collaborative and democratic feel of an 
executive session of a legislative committee.
    It is premature to speculate on how democracy will work in Iraq. 
However, from seeing the process of agreeing to economic reform, I see 
great potential. Religious groups and individuals can work together if 
they are given enough time and opportunity. A democratic process and 
market forces are mutually supportive perhaps both are necessary in 
Iraq. A democratic process should foster individual freedom and 
economic opportunity. Market forces can create widely held resources 
that give the means to avoid an arbitrary and exploitative government.
     More certainly needs to be done. More credit needs to be made 
available through local and foreign banks, including to Iraqis who will 
need assistance to compete with or be part of foreign investments. Iraq 
needs a competition law to prevent undue concentration of economic 
power and several other legal changes are necessary.
     Also there is a need to continue to cut back on subsidies to 
government-owned companies and give the private sector room to grow. 
The World Bank has carefully studied post-war and post-communist 
transition economies. Those studies make it clear that the sooner 
subsidies are reduced the quicker an economic recovery.
    In any case, historic progress can be made on these matters. 
However, it will take time. Studies show that substantial economic 
growth occurs in post-transition economies over extended time periods. 
We can expect difficulty for a while in Iraq. There will be 
controversy. It is in the nature of change. A strong safety net for the 
poor, of course, must continue to be in place during this period of 
change.
     The supplemental appropriations bill before Congress is important. 
It includes $15 billion for infrastructure. The infrastructure was 
nearly destroyed by lack of maintenance for a generation, the war 
itself, and the looting afterward. The infrastructure is critical for 
the economic recovery. For example, more electricity is 
central to economic production. Construction of the infrastructure and 
other needed expenditures will help spur economic activity. This 
activity will help to sustain political will in the country and allow 
time for the economic changes required to bring about economic growth 
that benefits the Iraqi people.
    Change will not be easy, but the impact of an open economy, paired 
with some type of democratic process in Iraq, will change the lives of 
the Iraqi people and impact the whole region.

                               ----------
                PREPARED STATEMENT OF MARK MALLOCH BROWN

       Administrator, United Nations Development Programme (UNDP)
                            November 4, 2003

    Mr. chairman, excellencies, honored guests, as Secretary-General 
Kofi Annan observed yesterday, we are gathered here for a proud 
purpose: To help the people of Iraq build the democratic and prosperous 
nation that has been denied to them through years of brutal 
dictatorship.
    The Needs Assessment, prepared under the leadership of the United 
Nations and the World Bank, tells the story of a country brought down 
from a per capita income of $3,600 25 years ago, to less than $600 
today; from a per student education expenditure of $620 to $47. In 
short, a nation whose collapse is written in its social indicators as 
well as in the violence on some of its streets.
    How do we help its people put their country back together again? As 
we have gathered here, the media headlines have screamed an answer: 
``Give them $56 billion over the next 4 years,'' together with a 
preemptive verdict on our Conference. ``Bet you won't raise that 
much!''
    This is a sum that happens to be rather more than the world gave 
sub-Saharan Africa over the last 4 years, a region with a population 
some 25 times bigger than Iraq's.
    Why $56 billion? Because it is the combined sum of the UN/World 
Bank Needs Assessment and the additional sectors, notably oil and 
security, covered by a Coalition Provisional Authority (CPA).
     And yes, there is no doubt that Iraq needs a capital injection of 
this scale. But we made it clear in the Needs Assessment, and ``the 
Assessment notes that the $36 billion (in addition to the $20 billion 
that was assessed separately by the CPA) is not the same as the 
financing gap; that is, not all of the identified needs may require 
external donor assistance. It is expected that, over time, investment 
will be increasingly covered by Iraqi Government revenues or private 
sector financing, thereby diminishing the needs for donor support.''
    Let me spell out clearly what, at least this author, meant by those 
words: First, in 2004, Iraq and its Governing Council will be totally 
dependent on donor grant financing for almost everything above its day-
to-day costs, which will be met from oil revenue. We estimated for our 
sectors, not the CPA's, that $9 billion would ideally be needed for the 
first year, but warned that a realistic implementation rate, given the 
insecurity and our more general post-conflict experience, was that 
perhaps only $5 billion of that could actually be implemented in 2004. 
So the grant finance needs for 2004, particularly when the CPA sectors 
are added in, are considerable, but not beyond the reach of this 
Conference.
    Second, after 2004, for the years 2005-2007, the financing mix must 
change, as a grant finance effort alone would surely be an 
unsustainable distortion of aid flows from poor countries and other 
crises.
     I think we could meet both of these benchmarks today, a strong 
grant package for 2004; and the elements of a mixed financing model 
thereafter. If there had been a Madrid Conference in 1989 for Eastern 
Europe and a UN/World Bank Needs Assessment, the participants would 
have had sticker shock. But with hindsight, the transition was carried 
out by the markets. If the political track of Iraqi Sovereign 
Government is aggressively pursued in 2004, we can indeed look to a 
more creative financing package for 2005-2007. Then imagine what full 
progress toward Iraqi Sovereign Government by the end of 2004 would 
allow. In our Iraqi colleagues here with us we have seen the promise of 
the new leadership.

 Iraq could enter into negotiations with the Paris Club and 
    other creditors to renegotiate the debt overhang, which at more 
    than four time GDP, stifles, even concessional, lending.
 Liberalization of the economy including the disposal of state 
    assets.
 A new foreign investment framework, particularly for the oil 
    sector, that will be respected and honoured by future governments.
 An easing of the internal tensions that feed the instability 
    and violence that are impeding reconstruction and deterring foreign 
    investment.
 Above all Iraq, as the Iraqi delegation today has already been 
    so effectively doing, would take full leadership and ownership of 
    the development and reconstruction effort.

    Together, these steps by an Iraqi Government enjoying full domestic 
and international legitimacy can convert Iraq quickly from a land of 
subsidies and state control to one of rising incomes and market 
opportunity. In doing so, it will herald in the kind of mix of 
financing that transformed the countries that emerged in 1989 from 
behind the Berlin Wall. Yes, grant finance counted, but even more, 
technical assistance and capacity building to adjust to a modern market 
economy and a global economy beyond; and a growing flow of initially 
concessional finance increasingly supplemented by foreign direct 
investment portfolio, and bond flows as well as domestic savings. That 
is not aid alone. It is Iraq's future. And we have to reach for it 
boldly and urgently together.
     By promoting loans as part of the solution I do not want to be 
misunderstood. I am aware that in the capital of the most generous 
donor today, the United States, a debate has raged about grants versus 
loans to Iraq. Let me side with the Administration that has insisted 
its assistance be grants. For the United States, to convert its 
generosity to a tied loan would surely risk terrible resentment and 
opposition in Iraq in today's circumstances.
     The economic transformation that Iraq now faces will be 
dislocating and very painful for many groups. We must therefore be 
ready.

 Through UNICEF, WHO, the World Bank and others, we must assist 
    in maintaining and improving basic services and target support to 
    vulnerable groups.
 Unless the security sector is effectively addressed, any 
    reconstruction programme is jeopardized.
 The governance technical assistance and capacity building that 
    UNDP and others specialize in is vital, we believe, to creating the 
    honest, transparent policy and institutional environment in which 
    the new economics and politics of Iraq can flourish.
 The multidonor facility with a common governance structure and 
    two fund windows, a UN and a World Bank one, offers donors real 
    options for spending in coordinated, but segregated mechanisms, 
    parallel to the Development Fund for Iraq. We see our UN window 
    providing flexible, fast implementation arrangements to meet the 
    grant needs for 2004, as well as longer-term technical assistance 
    requirements.

     Through the UN system, our experienced international and 4,000 
Iraqi national staff, and our 20 years of partnership with Iraqi 
national and municipal officials and civil society leaders, we believe 
we can innovate implementation arrangements which will be effective 
even in today's difficult security environment.
    We all have hopes for Iraq. Many of my UN colleagues were at the 
Canal Hotel discussing this Needs Assessment when the office was bombed 
on August 19. So for us in the UN, this is a particularly precious 
piece of work; but so is our relationship with Iraq. We have known you 
through war and sanctions, through tragedy on both our sides, to the 
hope of peace and liberation. From the ashes of the Canal Hotel, we 
dream of helping you build a new Iraq.
     Thank you.

 
                    FINANCIAL RECONSTRUCTION IN IRAQ

                              ----------                              

                      WEDNESDAY, FEBRUARY 11, 2004

                               U.S. Senate,
   Subcommittee on International Trade and Finance,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Subcommittee met at 1:03 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. This is the third hearing on 
Economic and Financial Reconstruction in Iraq that we have held 
in this Subcommittee since last September.
    The transition to a stable and democratic Iraq will greatly 
depend on economic development and job creation. The economic 
track in Iraq cannot be considered in a vacuum. Iraq's economic 
reconstruction is directly linked to both security inside Iraq 
and to the political transition to a new and sovereign Iraqi 
Government.
    The economic reconstruction of Iraq presents a historic 
opportunity to help chart a new course in Iraq and the greater 
Middle East. America has invested precious lives, resources, 
and credibility in Iraq. The long-term strategic interests of 
America and our international and regional allies depend on 
getting it right in Iraq.
    There is good news in Iraq's economy. Schools and hospitals 
are reopening, and visitors report increasing economic activity 
in Baghdad and other Iraqi cities. Iraq's oil sector and 
infrastructure are beginning to stabilize. And Iraq's public 
and private banking sectors are being rebuilt. In March, three 
major foreign banks will begin operating in Iraq. The New York 
Times, on Sunday, February 8, cited a report by The Economist 
Intelligence Unit which predicted that Iraq's GDP could grow by 
25 percent this year, the result of American spending on 
reconstruction, the recovery of Iraq's oil industry, and 
increased trade.
    However, despite Iraq's potential Iraq's economic 
reconstruction and stability are far from assured. The 
assessments last fall of the United Nations/World Bank and the 
Coalition Provisional Authority estimated capital investment 
needs for Iraq of $55.3 billion over the next 4 years. Of that 
amount, the World Bank identified $17.5 billion in 
``immediate'' reconstruction needs for 2004. To help meet these 
needs, the Bush Administration plans to spend $12.7 billion on 
Iraq's reconstruction this year.
    A report last month by the Congressional Budget Office, 
``Paying for Iraq's Reconstruction,'' concluded that projected 
Iraqi revenues 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 reconstruction 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 encouraged that former 
Secretary of State James Baker has undertaken 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 economic governance. The CPA should support 
concrete steps by Iraq to build strong and transparent 
regulatory and oversight institutions to assure that Iraq's 
potential is not again squandered by corruption and 
mismanagement.
    Iraq's economic potential will ultimately be realized by 
empowering 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 
empower and employ Iraqis. America must set an example with 
transparent 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 
witnesses: John Taylor, Under Secretary of the Treasury for 
International Affairs. Secretary Taylor, welcome. You have been 
on a fast pace and have come from a meeting, I understand, at 
the White House, and we appreciate your efforts to be here.
    Also included in our witnesses today, E. Anthony Wayne, 
Assistant Secretary of State for Economic and Business Affairs. 
Tony, welcome again. And Mr. Gordon West, Acting Assistant 
Administrator, Bureau for Asia and Near East, U.S. Agency for 
International 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 economic reconstruction issues in Iraq. I last 
testified here in September of last year, and I am happy to say 
that, coming back, there is much significant progress on the 
financial front since then, and I welcome the opportunity to be 
here to report on some of this progress.
    Just this last weekend, during the G-7 finance ministers' 
meeting in Florida, we had an opportunity to hear from the 
Governor of the Central Bank of Iraq, from the Finance Minister 
of Iraq, Minister Gailani, about their reform priorities. Both 
these officials told Secretary Snow, who chaired the meeting, 
Alan Greenspan, and the other ministers and central bank 
governors of the G-7 about their plans for sound, market-
oriented reforms that will underpin private sector-led growth 
in Iraq.
    In fact, they are already taking actions on these 
statements. The Iraq Central Bank Governor recently announced 
several major actions, including the selection of three foreign 
banks to come in and do business in Iraq; a plan to remove all 
interest rate controls in the financial sector to free up the 
financial sector; and the announcement of a new central bank 
law which will soon be passed through the Governing Council.
    My written testimony provides substantially more detail 
about these important actions, and in these opening remarks I 
would like to touch on some other important accomplishments 
during the last few months.
    One of the most important accomplishments in our view is 
the successful introduction of a new currency in Iraq. When I 
last spoke here in September, I laid out a strategy and some 
tactics for replacing the old Saddam dinar. At that time, the 
currency exchange was just about to begin. In fact, it began on 
October 15, 2003 and finished on January 15, 2004. I am happy 
to report that this plan was implemented, finished last month 
right on time, and was an enormous success.
    I must say, printing and delivering currency of this 
magnitude in a short period of time was a huge feat. It 
required coordination. It required international cooperation in 
complex logistical efforts. For example, the amount of currency 
consisted of 27 747 planeloads of currency, printed in seven 
different locations around the world, including Sri Lanka and 
Malta, sent in to Baghdad, distributed to 250 exchange sites 
around the country. Millions of Iraqis came and exchanged those 
old Saddam dinars and their old Swiss dinars for this brand-new 
currency.
    The Iraqis have not only exchanged their old money for the 
new, but they have also wholeheartedly embraced the new 
currency. The notes are much more difficult to counterfeit. 
There are six denominations rather than the measly two. And, 
importantly, the value of the currency has increased since its 
introduction. Now the challenge is to operate a monetary policy 
to manage this new currency and to provide a stable monetary 
foundation for the economy.
    The Trade Bank of Iraq is another important accomplishment 
since I testified here in September. As you know, Mr. Chairman, 
we sent a group of Treasury experts into Iraq last April, soon 
after the major conflict ended and Saddam fell, to assess the 
financial situation. They reported on a financial system which 
had very limited capabilities. For that reason, we decided 
early on to set up a Trade Bank in Iraq in order to facilitate 
imports and exports of urgently needed goods to support Iraq's 
reconstruction.
    When I reported on this initiative in September, it was 
just under way, so I am happy to report today that the Bank 
opened on December 4 of last year. It is now fully operational. 
To date, the Trade Bank has issued over 200 letters of credit 
worth $190 million to facilitate the import of important goods 
into Iraq.
    I would like to mention the international debt, which you 
raised in your introductory remarks, Mr. Chairman. Last 
September, the G-7 finance ministers committed to resolve this 
issue by the end of 2004. But we have made significant progress 
since then. And as you indicated, the indication of the high 
priority on this issue in the Administration is that President 
Bush asked former Secretary of State and Treasury James Baker 
to serve as a special envoy to work with the world's 
governments at the highest levels and to seek the restructuring 
of Iraq's official debt.
    Over the past 2 months, Secretary Baker has successfully 
secured commitments from leaders throughout Western Europe, 
Asia, and the Gulf States to provide at least substantial debt 
reduction for Iraq this year. Final agreement on the amount and 
the terms of this reduction will be negotiated between the 
Iraqi Government and its creditors through the Paris Club 
during the course of this year.
    We are also continuing our efforts to get the best possible 
data on how much debt Iraq owes. Our estimates now put the 
total at about $120 billion, but more information needs to come 
in.
    I would like to also update you on the efforts to mobilize 
international financial support that has occurred since last 
September. As you know, last October, Secretary Powell and 
Secretary Snow led a U.S. delegation to an Iraqi Donors' 
Conference in Madrid. Seventy-three countries participated in 
this effort. We succeeded in accumulating $32 billion of 
pledges, including the important $18.4 billion commitment from 
the United States.
    The World Bank had pledged to provide between $3 billion 
and $5 billion of its resources over a 4-year period, and 
already the World Bank's private sector arm, the IFC, has 
approved the establishment of a small business loan facility in 
Iraq. And we are hopeful this facility will be operational by 
midyear.
    The IMF is also laying the groundwork to provide financial 
support for Iraq. At the Madrid Donors' Conference, the IMF 
announced that total assistance could range from $2.5 to $4.25 
billion over a 3-year period. Iraqi finance officials met here 
in Washington this week with IMF staff subsequent to the 
meeting with the finance ministers and central bank governors 
of the G-7 in Florida.
    Finally, I am pleased to report that our efforts to 
persuade governments to transfer assets of the former Iraqi 
regime back to Iraq, to the Iraqi people, have yielded results. 
To date, more than 10 countries have transferred approximately 
$650 million in such assets back to Iraq, to the Development 
Fund for Iraq, and we are continuing to press other governments 
to do the same, especially Iraq's neighbors, so they can move 
quickly to find, freeze, and ultimately transfer those assets 
back to the Iraqi people.
    In closing, I would like to stress that, despite a 
difficult security situation, challenging working conditions, 
and limited capacity, the Iraqis are beginning to overcome the 
terribly grim economic legacy of Saddam Hussein. I cannot give 
enough praise and credit to the dedication of individuals in 
our Government and in the coalition governments, including Olin 
Wethington, who is now coordinating economic issues at the CPA, 
I cannot give them enough credit for the important work they 
have done to make all this possible.
    Thank you, Mr. Chairman.
    Senator Hagel. Mr. Secretary, thank you.
    Secretary Wayne.

                STATEMENT OF EARL ANTHONY WAYNE

  ASSISTANT SECRETARY, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS

                    U.S. DEPARTMENT OF STATE

    Mr. Wayne., Chairman Hagel, Senator Miller, thank you very 
much. It is a pleasure to be here today, and I thank you very 
much for holding this series of hearings on what is, in fact, 
one of the very important pillars of our efforts in Iraq: To 
support their economic and financial reconstruction.
    Not surprisingly, you will hear a bit of overlap in some of 
the topics we talk about because we really are working as a 
very tight economic team here--between AID, State, Treasury, 
CPA, the CPA backup, and DOD--as we work to really accomplish 
all these goals on a daily basis. This is a team effort, and 
not only in the U.S. Government. We are really working with a 
host of international partners and, of course, the Iraqis to 
revive their economy, to overcome the legacy of decades of 
mismanagement, corruption, war, and sanctions. It is a big 
task, but there has been, as Under Secretary Taylor said, very 
significant progress since he and my boss, Under Secretary 
Larson, had the pleasure of being here in September before this 
Committee.
    We are doing a great deal to facilitate additional 
assistance from foreign countries, from international 
institutions, and from the United States to help Iraqis as they 
start on this new path to build their future.
    The United States did play a very major role in organizing 
the highly successful Donors' Conference in Madrid last 
October. The result of that meeting, with pledges of at least 
$32 billion over the next 4 years, I am told, is the largest 
tally ever achieved in such a donor gathering.
    We are now working very hard to secure the rapid and 
effective disbursement of the funds that were pledged in 
Madrid, while ensuring that we have good coordination with the 
donors and with the Iraqis. This means a very intensive process 
of interaction between Iraqi officials, the Minister of 
Finance, the Minister of Planning, with CPA, with the Core 
Donors, with the World Bank, the UN, and the IMF.
    We are working now to organize a gathering of key donors in 
Abu Dhabi for the end of February, where we would discuss the 
operation of two trust funds that have just recently been 
established by the UN and the World Bank. These could serve as 
a means for some of the donors who choose that way, to make 
their money available to Iraq. We will also discuss other aid 
coordination issues.
    Of course, as Under Secretary Taylor mentioned, a vital 
step forward in this was the action of Congress, last November, 
to approve the President's request for $18.4 billion in 
supplemental monies for Iraq's reconstruction. Working closely 
with Iraqi officials, and especially the Ministry of Planning 
and Development Cooperation, the Coalition Provisional 
Authority is in the process of allocating the reconstruction 
funds in accordance with Iraqi priorities. The Iraqis and the 
CPA have set up several mechanisms to promote this process and 
to assure that there is good on-the-ground coordination among 
ministries and with international donors. And as you know, sir, 
from previous donor efforts, it is very important to make sure 
that there is an effective use of the money.
    The U.S. assistance is predicated on and directed toward 
reforming Iraq's economy. We all agree, I think, that a new, 
prosperous, and peaceful Iraq needs to be one that is 
democratic, that has a free enterprise basis, that is fully 
integrated into the community of nations. And we are working 
hard to help develop the legal and regulatory system that will 
encourage that kind of integration and encourage the kind of 
economic growth that we want and to attract foreign investment. 
And this includes putting in place modern regimes for trade, 
for investment, for banking, for tax and corporate law.
    There is good news, as I am sure my colleague Mr. West will 
tell you, on the infrastructure front also. We are boosting 
electricity generation. Oil production is up. Rebuilding of the 
Iraqi telecommunications and transport network is under way. 
Hospitals and schools have reopened. Potable water and 
medicines are more widely available than before. Inflation is 
low, judging from the strengthening exchange rate that Under 
Secretary Taylor mentioned for the new Iraqi dinar.
    Iraq really has started well down the path to a responsible 
fiscal policy by producing balanced budgets, and Iraqi oil 
production is now sustained at about 2.2 to 2.3 million barrels 
a day, with exports ranging from 1.5 to 1.7 million barrels a 
day.
    Our top priority, as you mentioned, Senator, in your 
introductory remarks, is to create new jobs, to improve lives 
through the spending of the money that we have on 
reconstruction projects, because unemployment remains 
unacceptably high, and underemployment is a key challenge, too. 
The United States is priori-
tizing and accelerating work on projects funded by the 
supplemental that can produce jobs and visible economic benefit 
to the largest number of Iraqis possible.
    About 60 percent of Iraq's 27 million people, I think as 
you know, Senator, have been wholly dependent on food provided 
through the food ration system, which was largely supplied by 
goods imported under the United Nations Oil for Food Program.
    The United Nations turned over administration of the OFF 
program to the CPA on November 21, and I am pleased to note 
here that that transition is going smoothly. The World Food 
Program has agreed to work with CPA and the Iraqi Ministry of 
Trade to manage the shipment and the distribution of the 
remaining OFF contracts through June 2004. But Iraqi officials 
are assuming increasing responsibility for managing the system 
and preparing the way for a transition to a market-based 
system.
    One of the keys to successful reconstruction of Iraq, as 
Under Secretary Taylor mentioned, is to secure a multilateral 
debt reduction 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 economic rebuilding takes place as rapidly as possible.
    We are also working hard and working very closely with our 
colleagues 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 Development 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 revenue collection, on monetary policy, and, very 
importantly, on building capacity. These activities aim at the 
resumption of international 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 assistance 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 
accepted 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 effectively 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 prosperity.
    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 rebuild 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 continued strong support in this task.
    Thank you very much, sir.
    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, education and health, economic growth, 
and governance. Based on those observations, we developed 
initial scopes of work for two contracts--one in the area of 
economic growth, one in the area of agriculture.
    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 eventually 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 requirements 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 Secretary 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 approximately October.
    Under the economic reform program, we have done a 
considerable amount of work with the banking sector, building 
the technical 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, helping establish a currency auction system, 
and building the statistical capacity of the central bank and 
the Central Statistics Office.
    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 
administration planning, legislative efforts, and training in 
the tax area.
    In the area of private sector development, one of the major 
programs that Bearing Point is involved in is a bank training 
program. 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 focused on bank lending that will directly 
feed into job creation programs.
    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 laws.
    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. 
Bearing 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 transition. We have assisted with an oil and gas 
study to give the country 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 infrastructure sector, which is a clear and very 
important component of economic 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 
looking at developing a strategy for CPA for immediate needs on 
agriculture inputs that meets the needs currently and looking 
at a more long- or medium-term, 3- to 5-year strategy of how to 
get stability and growth in the agriculture sector. We have 
been involved in immediate needs of the wheat crop, restoration 
of the date plantations. We work with prevention of foot-and-
mouth disease and 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 marshland 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 vocational 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: ``Agriculture 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 unemployment.
    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 agriculture 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 impact on the future of agriculture. We also 
note there is a large amount of infrastructure which includes 
rural infrastructure including 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 creation 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 not able to fully fund the contract 
which is awarded under the first supplemental, and there is 
discussion under way of whether there are other means or ways 
to continue in agriculture.
    As it is noted from the second supplemental budget, there 
are just a large number of issues and priorities facing the 
CPA, and we are one of the many trying to seek resources for 
future programs.
    Senator Hagel. I understand your limitations regarding 
resources, but it is a little puzzling to have you come before 
this Committee and highlight as you have agricultural, rural 
economy and development, but you do not have any money to 
implement the programs.
    Mr. West. We have initial funding. We are working very 
closely with the Ministry of Agriculture. Australia and other 
countries are involved. We believe we still can have a key 
policy and directional role in this sector, even to the extent 
we do not have large sums of money. Presently, we have 
approximately $10 million worth of funding in that contract. 
Small as it may be, compared to the total budget in Iraq, in 
many countries that would be a reasonable agriculture program 
and we think we are having some impact. Thank you.
    Senator Hagel. Certainly it is not your fault you do not 
have the resources, but this is not any regular country. We 
have 130,000 American troops. We have over 500 dead, and $18.5 
billion in supplemental appropriations from this Congress last 
year, so this is not just your run-of-the-mill country. We have 
a little more investment than that in it. I am not sure if it 
is CPA not understanding the priorities, or what would you 
attribute to the lack of resources for agriculture and 
development especially since you have noted it in your 
testimony, that it is important, not just for jobs, but for 
stability.
    Mr. West. Basically, I believe the priorities have really 
focused on infrastructure, governance issues, and again, there 
are many, many competing demands. I really cannot speak for the 
CPA further than that.
    Senator Hagel. Thank you.
    I noted in my statement, and I am sure you saw the piece in 
The Washington Post yesterday that I referred to, that was a 
rather lengthy article quoting the Iraqi Ambassador Designate, 
Ms. Francke, about her displeasure with the contracting 
process, lack of Iraqi participation, job development. Would 
you care to respond to that? Is there a problem?
    Mr. West. To me?
    Senator Hagel. Yes. And I am going to ask each of you the 
question, but, Mr. West, if you would answer the question as 
best you can. Is there a problem? Is Ambassador Designate 
Francke right?
    Mr. West. Concerning Iraqi participation first, I might say 
that we have guidance under all our contracts for a strong 
preference for both the involvement and the training and the 
development of Iraqi subcontractors. As an instance, under the 
Bechtel infrastructure contract we have over 100 Iraqi 
subcontractors with over 35,000 employees working on programs. 
Through our grantees such as RTI, Community Action Program 
Grants, OFTA grants, and others, we clearly are involving both 
local groups in terms of job creation and subgrants and 
subcontracts to Iraqi firms. The same goes in health and 
education. I believe it is having a substantial impact on the 
development of the capacity of local institutions and 
businesses 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 request for an exception in the area of governance 
related to election assistance, but other than that, we are 
already fully unfolding contracts 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 
legitimate 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 
constraints. As I noted, we are now moved into full and open 
competition. 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 
Ambassador 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 involved 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 
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 familiar 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 transition 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 
administration of the Oil for Food Program will be turned over 
to the Coalition Provisional Authority on November 21, 2003.
    Mr. Wayne. Right.
    Senator Miller. You state the Minister of Trade will 
increasingly assume responsibility for the management of the 
food pipeline 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 
specifics 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.
    What 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 administration 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 domestic, to make sure that it 
continues on effectively, after June 30. Then we went to think 
through what are the right ways to transition 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 number 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.
    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 
planning 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 helping 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 
purchases 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 
noncoalition 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 
sector section that--if I can just read a line here. ``The 
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 
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 hampered 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-
Amaya, 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 additional export capacity of 1.1 
million barrels a day, so that would significantly increase the 
long-term export capacity.
    Exactly when and how that will be reopened, however, I am 
far from an expert to tell you that, sir because it has to be 
based on the actual security in that area. But I do know they 
have been learning from other experiences around the world, 
probably including Colombia, where there have been pipelines 
that have been exposed to sabotage, and trying to put together 
the response team that would be effective in response to that 
threat, as well as all that you read about the daily sacrifices 
people are undertaking to try to bring the security situation 
under better control.
    Senator Hagel. Thank you. Once a sovereign government is in 
place in Iraq--and I would be interested in Secretary Taylor's 
comments on this as well--do you think it would be in the best 
interest of Iraq to join OPEC?
    Mr. Wayne. I think that is a decision really that the Iraqi 
authorities need to take, and I would not want to be in the 
position of dictating to them that decision. Iraq has 
previously been a member of OPEC. They have now, in the 
interim, have been attending the meetings again. I think I 
really want to leave it that they have to take that decision.
    As you know, however, we believe in principle that it 
should be the market that determines the effective price of 
oil, that is really the mechanism for matching supply and 
demand, and that, of course, is based on our whole approach to 
market economies.
    Senator Hagel. Thank you.
    Secretary Taylor.
    Mr. Taylor. Certainly is going to be a decision for the 
Iraqi people, and the idea of having production determined by a 
group is not as attractive as production determined in the 
markets. But that is going to be their decision, and we are 
going to be helping them work in the markets, work to produce 
more, understanding the implications for their own economy at 
different levels of production. But that is going to be their 
decision, sir.
    Senator Hagel. Thank you. Secretary Taylor, would you--and 
you noted this in your testimony--give us an update on the 
Madrid Conference pledges. Are we on target on the timetables 
set at the Conference? Are our allies forthcoming with the 
resources they have pledged? Are they behind schedule? If they 
are, what are we doing to address that issue?
    Mr. Taylor. We are actually working in a way which I think 
is really unprecedented in following up from a donors 
conference, in bringing the key donors together, continuing to 
discuss the implementation, the disbursement of funds. Phone 
calls are regular with the key donors, and in fact the meeting 
was taking place as Assistant Secretary Wayne said in the 
Middle East to make sure they were moving ahead on the 
disbursements.
    With respect to the World Bank and the IMF, which of course 
are big components of that donors' conference, $3 to $5 billion 
from the World Bank and up to $4.25 billion from the IMF. They 
are actively engaged in getting things ready so they can start 
disbursing as soon as the transition occurs on July 1. Even, as 
I mentioned, the IFC, the private sector arm of the World Bank, 
is moving ahead with a small business loan program. The World 
Bank has a whole strategy in place about how to work on 
programs and projects so they can begin as soon as possible. 
Then finally, the 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 
carefully, 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 accomplished? 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 reduction, 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 program is the quantitative way to describe what 
level of debt reduction 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 payments. 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 through? Anything that you can 
do to enlarge on our understanding 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 
resolving this issue this year, so that is a commitment that 
the key governments 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 
sustainability 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 eventually become the more detailed calculations of 
what the percentage amounts are and how they take place and 
when over the course of the year. Those are some of the 
specifics that have happened 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 
estimates of the debt are correct too. We have got estimates 
from external 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 making sure nothing is missing or that the numbers are 
correct by having a team work through the records in Baghdad 
now. We sent Treasury experts to work with the Iraqis to go 
over those documents. That is the microdetailed level that is 
happening simultaneous with what Secretary Baker is doing at 
the highest levels.
    Senator Hagel. You are satisfied with the progress of that 
effort?
    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 coming 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 revenues. 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 additional 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.
    Secretary Wayne, in your opinion, would a greater UN role 
in Iraq or even a UN resolution, another UN resolution, make it 
easier to get more international support in Iraq?
    Mr. Wayne. Senator, I would say that on the economic 
reconstruction side there has been already established since 
before Madrid a very important UN role in that they have been 
one of our main partners in planning for the donor conference 
and the post-Conference effort. I think, as you know, Secretary 
General Annan has a team right now in Baghdad working to come 
up with ideas for how the transition might proceed.
    So, I would say that a UN role is important to help us move 
forward on the economic side. We look forward really to 
building on that. One of the things that came out of Madrid was 
a UN trust fund and a World Bank trust fund where donors who 
did not have a big enough aid program of their own to actually 
go into Iraq, or who chose, they said not to go into Iraq and 
set up an aid program, could use these trust fund facilities. 
We have used them effectively, as you know, sir, in East Timor, 
in Afghanistan, and elsewhere to help channel reconstruction 
funds.
    So, to go back and also answer one of your earlier 
questions about other donors, one of the things that has just 
recently happened is that the UN and the World Bank have 
finished their proposals for their trust funds. They have now 
come up with proposals for how to spend that money if you put 
it in the trust fund, and they are now just going out to the 
donors and saying, ``okay, if you like the structure and you 
like what you see as projects.'' They have been working with 
the Iraqis on this--``please now put some of your money 
forward.'' So only now are we getting to the point where a 
number of the Madrid pledges will really be tested, and we will 
be urging people to actually come forward and start putting 
money of the table.
    Coincident with this, in Iraq and Baghdad there has been a 
process going on to revisit the initial list of projects 
prepared by the Iraqi ministers and ministries that they worked 
with CPA on, to really take another look at those, to 
prioritize them, to sort out the ones that we are going to 
focus on with our funds, and then to make available to the 
other donors and to the UN and the World Bank, projects that 
the Iraqis believe are top priorities. That is, right now, an 
intense process that is going on in Baghdad with the Ministry 
of Planning, working with the Ministry of Finance, and then 
with all the ministries and CPA, to come up with that priority 
list.
    There is a structure that has been established that 
involves the Governing Council, the CPA, the key ministers in 
approving that priority list of projects. So again, that list 
of projects will then be available for the donors other than 
the United States to look and the Iraqis can say, ``okay, here 
is the opportunity to put your money on the table.''
    In all of that, the UN, and in all of these phone calls 
that we have been having internationally, the UNDP, UN 
Development Programme has been a key player and a very 
constructive player in all of that.
    Senator Hagel. Thank you. Following on with what you just 
said, partly what you just described is a transitional process 
leading to hopefully a sovereign Iraqi Government or at least 
some semblance of one June 30 so that economic decisions, 
policy decisions, other decisions will be handed off as you are 
working through this process; is that correct?
    Mr. Wayne. That is correct. Along with Under Secretary 
Taylor, I had the pleasure to meet with the Central Bank 
Governor and the Minister of Finance this week when they were 
in Washington, and 2 weeks ago with the Minister of Planning 
and Development Cooperation who was here. All of them, in fact, 
see their roles as now expanding and as a full partner in 
decisionmaking on the projects, on the way money should be 
spent.
    There has been something that is called the Iraqi Strategic 
Review Board that has been set up to actually look at strategic 
spending. It has two members appointed by the Governing 
Council, the Minister of Development and Cooperation, and the 
Minister of Finance and a CPA representative who will be Marek 
Belka of Poland, former Finance Minister of Poland who is 
working in the CPA on the economic side. They will look at all 
of the proposals that come together to bless them, the Iraqi 
proposals, to assure coherence between how we are going to 
spend money, what the other projects are, and then to try to 
effectively draw in the other international money that is 
available.
    Indeed, as you say, Senator, this is viewed as a 
transitioning to the interim government or the transitional 
government starting July 1.
    Senator Hagel. Thank you. I want to get Secretary Taylor's 
comments on this as well, but I want to ask another question in 
regard to this. Does this give you any concern that 
unintentionally we are placing a great amount of power, 
centralized power in the ministry planning, in a command 
economy and the things that we want to get away from?
    Mr. Wayne. I would say no, because at the same time what we 
are doing is working, and not only us but also the World Bank 
and others, working to build the capacity of the several line 
ministries to understand what that role needs to be in a 
noncommand economy situation. Here really what we are doing is 
creating an effective interagency process, because you do need 
interagency coordination and you do need to merge the 
considerations of the budget into the considerations of how you 
are spending the development money that might be coming in.
    So we, the CPA, the World Bank, and other institutions are 
going to be putting a lot of effort in the months ahead into 
helping the Iraqis learn the effective way to do this, and at 
the same time to have a free market emerge and a democratic 
system emerge.
    Senator Hagel. Thank you.
    Secretary Taylor.
    Mr. Taylor. Mr. Chairman, on the question of the 
transition, we focused mainly on the central bank and the 
ministry of finance areas that have been our focus, at least 
from the Treasury, and have worked quite extensively with the 
central bank governor. As I mentioned, we asked him to come to 
Florida to meet with all the central bank governors of the G-7. 
It was quite a historic thing, if you can think about it. Here 
is a man just recently chosen to run the central bank of a 
country that is just starting out being grilled by the top 
central bankers in the world such as Chairman Greenspan, 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 actually 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 happen 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 
independence 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 recognizing 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 governor 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 Governing 
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 Governing 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 investment. In that regard, there was a decision made 
just in the last 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 
inflation 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 priority 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 prospects 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 
reconstruction is the biggest part coming forth. We have some 
data that even just our civil affairs teams, CJTF-7 report that 
they have already created 394,000 jobs. We know that our 
payment of $1.7 billion 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 opportunity---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 
meetings 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 natural person to ask about how things 
are going. He is very positive about what is happening in the 
private business sector, and did not comment about contracting 
so much, just about the activity that is happening in the 
economy.
    To me that is reassuring, but again, you cannot pay 
attention to any one thing. It is a cumulation of evidence and 
we just need to get more and more evidence like that. But that 
offsets, I think to some extent, the views you were getting and 
asking Mr. Wayne about that you got from The Washington Post. 
So other kind of anecdotal information is important.
    Senator Hagel. Thank you.
    Secretary Wayne.
    Mr. Wayne. I would agree with Under Secretary Taylor both 
in reconstruction and then in the SME area, small and medium 
enterprises, there is a great deal of potential to create jobs. 
As we do see this transition to a market economy, both in the 
food and medicines area, and potentially under a new Iraqi 
Government in other sectors, I think there is a lot of 
potential if we look at those smaller business opportunities. 
As we know in the United States, that is a big job creator.
    In the longer-term, also not only the low tariff level but 
also the very forthcoming foreign direct investment policy that 
has been established will, I think, start attracting more and 
more interest. There are already, as you may have seen from the 
many different conferences that are held, many businesses that 
are interested in going into and working in Iraq as soon as 
they feel that it is the right thing to do. I think that will 
be a big job creator also.
    In the various sectors--in addition to dates--barley, 
wheat, cotton, and rice are areas apparently where Iraq was 
very productive previously before Iraq went into this rationing 
system that really undercut all the production. Poultry and 
livestock apparently also they could export a bit to their 
neighbors.
    In the natural resources, in addition to oil, sulfur and 
phosphates are potential exports. And then, they did have a 
large chemical and fertilizer industry. As we remember, some of 
it was misused at some point, but there is a potential there 
again that they could export in some of those areas.
    Senator Hagel. Thank you.
    Mr. West.
    Mr. West. No general disagreement with what has been said. 
I think basically the jobs are going to be created where the 
money is. First will, obviously, be oil and gas. Second, real 
estate is substantially undervalued throughout the country and 
I think real estate and the construction industry will be the 
second largest source of new funding. Third, I think 
agriculture will be a boom area.
    I might just add to what was earlier said in agriculture, 
unlike some of the traditional countries we work in, there 
really were some major structural and, frankly, intentional 
constraints. The lifting of those constraints, export controls, 
the fact that Saddam really tried to suppress the south and the 
Shi'a population and really cut off their incomes, the lifting 
of those constraints, a lot will happen without any outside 
assistance just by the changing of oil for food export 
controls, access to irrigation, water.
    The last area really is related to oil for food but it is 
not the agriculture sector. There are $6 billion to $8 billion 
worth of important that were coming through this UN system, and 
the small and large trading houses are already starting to 
boom. As that transitions out I think the trade business in 
Iraq will continue to expand.
    Senator Hagel. Thank you.
    Secretary Taylor, what is the status of the law allowing 
100 percent foreign ownership in various companies in Iraq?
    Mr. Taylor. That was a law that was promulgated back in 
September, and it is still there. The only examples I know 
where it specifically has been taken up is in the banking area, 
which I mentioned, those three banks. But that is the law that 
they put through. I remember the finance minister presenting 
that at the international conference in Dubai in September.
    Senator Hagel. But other than the banking industry you do 
not see much evidence of that law being taken advantage of ?
    Mr. Taylor. It is better to say I do not know rather than I 
do not think it is there. I do know that there is just a lot of 
interest in foreign investment, but I do not know if actually 
it is taking place. I do not have any specific evidence.
    At that Madrid Conference there was actually, I think for 
the first time at one of these donor conferences, a whole day 
for the private sector to come through and see what 
opportunities there were. We tended to emphasize the foreign 
investment opportunities in Iraq. Of course, there is a lot on 
the oil side.
    This is not really so much foreign investment, but in order 
to produce this currency we had to get a firm to print the 
currency. They printed the currency and that was a very 
successful operation. But I just do not have good information 
except for the sectors that I am focusing on which is the 
financial sector.
    Senator Hagel. Thank you. One additional status question. 
What is the status of the proposal that had been floated 
regarding a flat tax in Iraq?
    Mr. Taylor. The proposal was again made back in September 
and it was something that was worked through--more than a 
proposal. It was a part of the policy for the tax system. It 
was a maximum 15 percent rate, not simply that all the rates 
had to be 15, but the maximum was 15. In principle it could be 
graduated from 7 to 15 percent, but the maximum was 15 percent. 
They also had a maximum tariff rate of 5 percent as part of 
that.
    Neither the 5 nor the 15 percent has been implemented 
explicitly in the law yet, because that requires that tax forms 
be set up and a system of payment.
    With respect to the customs, there is the most progress is 
on that front. They are training the customs officials, they 
are getting the computers ready to go at the main ports of 
entry. My expectation is that could be put into place in the 
spring. It is a high priority for us because if they can begin 
to generate their own revenues it will be a way that the 
American taxpayers have to worry less about that, and the donor 
community worries less about it. So it is a high priority. 
Customs is the first thing and then after that the income tax 
on both individuals and firms. It is mainly an implementation 
issue right now.
    Senator Hagel. Thank you.
    Gentlemen, any of you wish to make any further comments? 
Secretary Wayne?
    Mr. Wayne. I just might add one other area where there has 
been direct foreign investment, and I was reminded because 
there was an article in USA Today about the mobile cell phone 
system. As you know, there were three licenses given out to 
three different consortia. They have a responsibility to build 
a system in their own area and then they can expand and compete 
nationally. I would just note that the system in Baghdad is now 
up and running for the first time. There were, again, plenty of 
bidders for that system also.
    I think there will be a great deal of interest as the 
opportunities open and as we move forward.
    Senator Hagel. These are 100 percent private licenses?
    Mr. Wayne. They are licenses. They are not Iraqi Government 
owned. I think, and I will have to check on this, there may be 
as part of some of the consortium, there may be national 
telephone companies from other countries. But I know several of 
them have Iraqi partners and at least one of them has two 
foreign partners working together with others in it too.
    Senator Hagel. Gentlemen, you have been generous with your 
time, and you have been very helpful to this Committee. We 
appreciate what you have contributed today and also the good 
work of you and your colleagues throughout the year. Thank you 
very much.
    The hearing is adjourned.
    [Whereupon, at 2:32 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]

               PREPARED STATEMENT OF SENATOR CHUCK HAGEL

    This is the third hearing on Economic and Financial Reconstruction 
in Iraq that we have held in this Subcommittee since last September.
    The transition to a stable and democratic Iraq will greatly depend 
on economic development and job creation. The economic track in Iraq 
cannot be considered in a vacuum. Iraq's economic reconstruction is 
directly linked to both security inside Iraq and to the political 
transition to a new and sovereign Iraqi Government.
    The economic reconstruction of Iraq presents a historic opportunity 
to help chart a new course in Iraq and the Middle East. America has 
invested precious lives, resources, and credibility in Iraq. The long-
term strategic interests of America and our international and regional 
allies depend on our getting in right in Iraq.
    There is some good news in Iraq's economy. Schools and hospitals 
are reopening, and visitors report increasing economic activity in 
Baghdad and other Iraqi cities. Iraq's oil sector and infrastructure 
are beginning to stabilize. And Iraq's public and private banking 
sectors are being rebuilt. In March, three major foreign banks will 
begin operating in Iraq. The New York Times, on Sunday, February 8, 
cited a report by The Economist Intelligence Unit which predicted that 
Iraq's GDP could grow by 25 percent this year, the result of American 
spending on reconstruction, the recovery of Iraq's oil industry, and 
increased trade.
    However, despite Iraq's potential, Iraq's economic reconstruction 
and stability are far from assured. The assessments last fall of the 
United Nations (UN)/World Bank and the Coalition Provisional Authority 
(CPA) estimated capital investment needs for Iraq of $55.3 billion over 
the next 4 years. Of that amount, the World Bank identified $17.5 
billion in ``immediate'' reconstruction needs for 2004. To help meet 
these needs, the Bush Administration plans to spend $12.7 billion on 
Iraqi reconstruction this year.
    A report last month by the Congressional Budget Office, Paying for 
Iraq's Reconstruction, concluded that projected Iraqi revenues alone 
will probably not be sufficient to cover capital investment and 
reconstruction through 2007. Iraqi oil revenues are likely to only 
cover recurring Iraqi Government costs, with little remaining for 
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 reconstruction over the next 4 years.
    Iraq's economy will also depend on substantial relief from debt and 
reparations. This is an absolute priority for out international 
diplomacy on Iraq. Iraq's debt, not including unresolved or unpaid 
reparations claims from the Gulf War, is estimated at $125 billion. 
Iraq's budget, and Iraq's international credit worthiness, will be 
crippled if Iraq's creditors do not agree on substantial debt relief. I 
am encouraged that former Secretary of State James Baker has undertaken 
this critical diplomatic mission, and I am optimistic about his 
progress so far.
    The financial and economic reconstruction of Iraq will also depend 
on the development of transparent and accountable institutions of 
economic governance. The CPA should support concrete steps by Iraq to 
build strong and transparent regulatory and oversight institutions to 
assure that Iraq's potential is not again squandered by corruption and 
mismanagement.
    Iraq's economic potential will ultimately be realized by empowered 
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 Ambassadors-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 empower and 
employ Iraqis. America must set an example with transparent 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.''
    I look forward to the testimony of today's witnesses: John Taylor, 
Under Secretary of the Treasury for International Affairs; E. Anthony 
Wayne, Assistant Secretary of State for Economic and Business Affairs; 
and Mr. Gordon West, Acting Assistant Administrator, Bureau for Asia 
and Near East, U.S. Agency for International Development.

                  PREPARED STATEMENT OF JOHN B. TAYLOR

               Under Secretary for International Affairs
                    U.S. Department of the Treasury
                           February 11, 2004

Introduction
    Chairman Hagel, Ranking Member Bayh, and other Members of the 
Subcommittee, thank you for inviting me back to testify on the 
financial reconstruction of Iraq. There have been many significant, 
positive developments since I last testified in September, and I 
welcome the opportunity to discuss them with you today.
    Just this weekend, during the G-7 finance ministers' meeting in 
Boca Raton, we had an opportunity to hear from Iraq's Central Bank 
Governor, Sinan Shabibi, and Finance Minister, Kamel Gailani, about 
their reform priorities. Both officials participated in a session with 
the G-7 ministers, and took the opportunity to underscore their 
commitment to moving ahead with sound, market-oriented reforms that 
will underpin private sector-led growth.
    They also stressed that their vision of a new Iraqi economy shares 
the following key principles: Openness and transparency of Iraq's 
institutions; the creation of strong incentives for private sector 
development; close economic and financial integration with the 
international community; implementation of international standards and 
best practices; and a social safety net that addresses the needs of all 
Iraqis.
    These officials are already taking meaningful actions to back up 
their statements. For example, Iraq's Central Bank Governor recently 
announced three major actions that will have far-reaching consequences 
for the development of Iraq's financial sector: The selection of three 
foreign banks to receive a license to operate in Iraq; a plan to 
liberalize interest rates by March 1; and passage, soon, of a new 
Central Bank law.
    Today, I would like to tell you more about these developments, as 
well as update you on the progress that has been made on currency 
reform, reducing Iraq's international debt burden, and mobilizing 
international support to meet Iraq's reconstruction needs.

Currency Reform
    I would like to begin by highlighting one of the most important 
accomplishments in the financial sector--the successful introduction of 
a new currency in Iraq. When I last spoke before this Committee, I laid 
out our strategy for replacing the old national currencies--the Swiss 
dinar and the Saddam dinar--with a new, unified national currency. I am 
happy to report that this plan was successfully implemented as 
scheduled between October 15 and January 15.
    Printing and delivering this currency on time was an enormous 
feat--the equivalent of 27 747 plane loads of currency were delivered 
to Iraq and distributed to the public through approximately 240 
exchange sites, mostly bank branches, under a significant security 
threat.
    By all accounts, the Iraqis have wholeheartedly embraced their new 
dinars. Not only are the new notes much more difficult to counterfeit--
a chronic problem under the old currency regime--but also the Iraqis 
now have six denominations available, up from only two. And the value 
of the currency has steadily increased since its introduction. Now the 
challenge is to manage this new currency in such a way as to provide a 
stable monetary foundation for a healthy financial system and vigorous 
reconstruction.

Restoring and Revitalizing the Banking Sector
    Another area where meaningful progress has been made is in the 
banking sector. In my last testimony, I reported that Treasury advisers 
were assessing the conditions of Iraqi's state-owned and private banks. 
Since then, we have learned that Rasheed and Rafidain banks--the two 
large state-owned banks which controlled over 85 percent of banking 
assets--are at best marginally capitalized, and have loan portfolios 
with a high concentration of non-performing loans. Compounding these 
problems is the lack of comprehensive, modern accounting standards and 
systems. We also discovered that although these two banks have an 
extensive network of more than 360 branches throughout the country, 
each branch has operated largely as an independent unit. As a result, 
Iraq lacks centralized management and an integrated system for making 
and clearing payments.
    An evaluation of the private banks uncovered significant problems 
as well. It turns out the 17 private banks in Iraq served predominantly 
to take deposits rather than finance investments, and that the largest 
of these private banks had only $1 million in capital. Finally, our 
evaluation of Iraq's legal regime showed that Iraq lacked a competent 
supervisory or effective regulatory structure to oversee the financial 
sector.
    Despite this bleak assessment, the Iraqi bankers we engaged with 
from the private and public sectors--as well as key finance officials--
shared an eagerness to adopt the reforms necessary to develop a modern, 
efficient financial sector. Though they lack technology, resources and 
experience, after only a few months, significant progress has already 
been made toward this goal.
    First, the Iraqis are moving towards the establishment of a modern 
legal and regulatory framework for the financial sector. For example, 
working with experts from central banks and other governments and the 
International Monetary Fund, we helped Iraq to prepare a modern banking 
law and a new central bank law, both based on international best 
practices. The banking law was enacted in late September and contains 
many provisions designed to support the development of a strong, robust 
banking sector, including higher minimum capital requirements (10 
billion dinars, or more than $6 million), and more rigorous standards 
for bank licensing and for bank governance.
    We expect the central bank law to be adopted soon by the Iraqi 
Governing Council. It will not only confirm the independence of the 
Central Bank established by a July 7 CPA order, but will also prevent 
the Central Bank from engaging in inflationary financing of the 
government. Indeed, it establishes price stability as the primary 
macroeconomic objective of monetary policy.
    Second, the Central Bank Governor announced that interest rates on 
all domestic financial instruments--loans, deposits, and securities--
will be fully liberalized by March 1. This measure is an important step 
in the direction of creating a modern, efficient financial sector, 
because it will enable lenders and borrowers to make their own 
decisions rather than having them determined by fiat and top-down 
directives issued by the Central Bank.
    And third, the Iraqis have taken significant steps to reinvigorate 
private banks in Iraq. Under Saddam's regime, private banks fared 
poorly--they controlled less than 8 percent of total banking assets, 
used antiquated technology, and offered very limited services. Despite 
their weaknesses, Iraq's private bank mangers have been eager to 
develop their capacity to operate as modern, commercial bankers. As 
provided under the new banking law, these banks can now provide new 
services to their clients. Already, ten banks are receiving 
international payments and remittances, and issuing letters of credit. 
With 143 functioning branches, international payments and remittances 
are now estimated at more than $5 million per day into Iraq. This 
influx of funds will play a major role in financing investment and 
consumption.
    While some of the existing private banks are expected to develop 
into fully functioning financial institutions, Iraqi authorities 
decided that it would be important for foreign banks to operate in Iraq 
because of the experience, technology, and resources they can offer. 
The new bank law permits up to six foreign banks to enter the Iraqi 
market over the next 4 years. This is in sharp contract to the previous 
regime, which permitted only Arab banks to enter Iraq's market.
    Following a request for applications issued in November, Iraq 
received fifteen applications for a foreign bank license. On January 
31, the Central Bank Governor announced the three finalists for the 
first set of licenses to be awarded--Hong Kong Shanghai Banking 
Corporation, the National Bank of Kuwait, and Standard Chartered Bank 
from the United Kingdom. The Central Bank anticipates that all three 
will be granted a license by mid-March. Already, the National Bank of 
Kuwait has announced its intent to purchase 85 percent of one of the 
existing private banks.
    Next on the agenda is reform of the state-owned banks. Substantial 
and sustained restructuring of management, organization, personnel and 
systems is needed to make these banks competitive. The Iraqi 
authorities are now working with Treasury advisers to develop a 
strategy for dealing with the state-owned banks so they can operate 
profitably and provide a wide array of financial services to the Iraqi 
economy. In the meantime, we are working with the Iraqis to ensure that 
the state-owned banks can provide basic services, such as taking 
deposits, clearing checks, and making loans to support business 
activity. For the quarter ending November 30, 2003, Iraq's two large 
state-owned commercial banks, Rafidain and Rasheed, extended loans 
totaling about $6 million, primarily to small and medium enterprises.

Trade Bank of Iraq
    Given the limited capacity of the Iraqi banking system, we also 
went forward with a plan to open a trade bank in order to facilitate 
the imports and exports urgently needed to support Iraq's 
reconstruction and the transition from the UN's Oil for Food program. 
When I reported on this initiative last September, the CPA had 
completed a competitive bidding process for management of the bank, and 
negotiations for its establishment were underway. The Bank opened on 
December 4, 2003, and is now fully operational. To date, the Trade Bank 
of Iraq has issued over 200 letters of credit worth $190 million for 
most ministries and several state-owned enterprises. In addition, 
sixteen export credit agencies have signed an agreement with the CPA 
and the trade bank under which they will provide guarantees and short-
term credit lines valued at $2.4 billion.

Iraq's International Debt
    I want to turn now to the issue of Iraq's substantial foreign debt 
problem. Last September, the G-7 finance ministers committed to making 
their best efforts to resolve this issue by the end of 2004. We have 
made significant progress towards this goal.
    As an indication of the priority we place on this issue, the 
President asked former Secretary of the Treasury and of State James 
Baker to serve as his Special Presidential Envoy to work with the 
world's governments at the highest levels in seeking to restructure 
Iraq's official debt burden. Over the past two months, Secretary Baker 
successfully secured commitments from leaders throughout Western 
Europe, Asia, and the Gulf States to provide at least substantial debt 
reduction for Iraq in 2004. Final agreement on the amount and terms of 
this reduction will be negotiated between Iraq and its creditors, 
including through the Paris Club.
    We are also continuing our efforts to obtain the best possible data 
on how much debt Iraq owes. Current estimates put Iraq's external debt 
burden around $120 billion. Paris Club members are owed roughly $40 
billion--$21 billion in principal and roughly an equivalent amount in 
late interest. Non-Paris Club governments, chiefly the Gulf States, and 
private creditors hold the rest.
    To further the data gathering effort, the Iraqi Government recently 
issued a request for proposals from accounting firms and financial 
organizations to assist in the process of gathering and reconciling 
data on Iraq's external debt. With this data in hand, all parties will 
be better able to reach a resolution on reducing Iraq's unsustainable 
debt burden.

Assessment of Reconstruction Costs and International Fundraising 
        Efforts
    Before concluding, I would like to update you on our efforts to 
mobilize international financial support for the reconstruction and 
recovery of Iraq. In October, Secretaries Snow and Powell led the U.S. 
delegation to the Iraq donors' conference in Madrid. Seventy-three 
countries participated in this conference, which succeeded in raising 
over $32 billion, including the $18.4 billion commitment from the 
United States.
    Donors also called on the World Bank and United Nations to 
establish a vehicle to channel their resources and help coordinate 
assistance for reconstruction and development activities. Working with 
key donors, CPA and the Iraqi authorities, the World Bank, and the 
United Nations established two trust funds within an International 
Reconstruction Facility for Iraq (IRFF). We plan to contribute $10 
million to the Facility, which will be equally divided between the 
World Bank and UNDP trust funds. The World Bank has met several times 
with Iraqi authorities to identify priority programs and projects under 
this Facility, and hopes to begin disbursements by July 2004.
    In addition, the World Bank has pledged to provide between $3 and 
$5 billion of its own resources over a 4-year period. In consultation 
with Iraqi authorities, the World Bank will prepare a lending program 
in support of Iraq's economic development with particular attention to 
health, education, and the creation of a strong social safety-net.
    The World Bank's sister agency, the IFC, has already approved the 
establishment of a Small Business Finance Facility in Iraq. This 
Facility will be funded by resources from the IFC, as well as bilateral 
donors, the Overseas Private Investment Corporation, and private banks, 
to provide credit to micro and small businesses on a transparent, 
commercial, and sustainable basis. We are hopeful that this facility 
will be operational by mid-year.
    The International Monetary Fund (IMF) is also laying the groundwork 
to provide financial support for Iraq. At the Madrid donor conference, 
the IMF announced that total assistance could range from $2.5 billion 
to $4.25 billion over a 3-year period. Iraqi finance officials met with 
Managing Director Kohler in Boca Raton over the weekend before 
traveling to Washington for additional meetings with IMF staff. The 
purpose of these meetings was to initiate discussions on a policy 
framework that could become the basis for a funded program later this 
year.

Frozen Assets
    Finally, I am pleased to report that our efforts to persuade 
governments to transfer assets of the former Iraqi regime back to Iraq 
have yielded results. To date, more than ten countries have transferred 
approximately $650 million in such assets to the Development Fund for 
Iraq. We are continuing to press other governments--especially Iraq's 
neighbors--to move quickly to find, freeze, and transfer Iraqi assets 
so they can be put to use for the benefit of the Iraqi people.
Conclusion
    In closing, I would like to stress that despite a difficult 
security situation, challenging working conditions and limited 
capacity, the Iraqis are beginning to overcome the grim legacy of 
Saddam Hussein's regime. With the strong support of the international 
community, Iraq is making tangible progress towards the establishment 
of an open, robust market economy that will offer its citizens a 
promising and prosperous future.

                               ----------
                PREPARED STATEMENT OF EARL ANTHONY WAYNE

         Assistant Secretary for Economic and Business Affairs
                        U.S. Department of State
                           February 11, 2004

    Mr. Chairman, distinguished Members of the Subcommittee, I 
appreciate the opportunity to testify on the economic and financial 
reconstruction of Iraq. There has been excellent progress since Under 
Secretary of State Larson appeared before this Committee on September 
16.

Introduction
    The United States and its coalition partners are working with the 
Iraqis in a massive effort to revive their economy after decades of 
mismanagement, corruption, war, and sanctions. We are boosting 
electricity generation and oil production and rebuilding Iraq's 
telecommunications and transportation network. We are helping Iraq 
develop a legal and regulatory system to encourage economic growth, 
attract foreign investment, and facilitate economic and technical 
assistance from foreign countries and international financial 
institutions. We are tracking down and returning assets of Saddam's 
regime to Iraq so they will be used for the benefit of the Iraqi 
people.

International Assistance
    Under the leadership of Secretary of State Powell and Treasury 
Secretary Snow, the United States played a major role in organizing the 
highly successful Madrid Donors' Conference in October, which has 
cemented international support for Iraq's reconstruction. 
Representatives of 73 countries and 20 international organizations 
attended the meeting as well as members of the Iraqi Governing Council.
    The official tally of the Conference's results, as compiled by the 
World Bank, showed final pledges of at least $32 billion, including our 
own pledge of $18.4 billion in grants from the fiscal year 2004 
supplemental. The huge amount pledged in Madrid is by far the highest 
ever obtained at an international pledging Conference.
    Non-U.S. pledges of a minimum of $13 billion will be a mixture of 
grants and loans to be disbursed during 2004-2007. Not included in the 
pledge numbers for other donors are offers of trade credits, in-kind 
assistance, and technical assistance (including training).
    We are working hard to secure rapid and effective disbursement of 
funds pledged at Madrid, while ensuring good donor coordination. Many 
donors are now finalizing how they will implement their pledges. In 
conjunction with the Conference, the World Bank and the United Nations 
Development Program have just established trust funds within an 
International Reconstruction Fund Facility for Iraq (IRFFI). Similar 
mechanisms have been used effectively for channeling foreign donations 
in post-conflict situations, including Kosovo, East Timor, and 
Afghanistan. We expect that Japan, the European Union, Spain, Canada, 
Korea, Sweden, Australia, the United Kingdom, and other donors will 
disburse at least part of their Madrid pledges through the Facility.
    The United States will contribute $10 million to the Facility from 
funds appropriated in the April 2003 supplemental. These funds will be 
equally divided between the World Bank and UNDP trust funds. The 
donation earns us a seat on the Facility's Donors' Committee so we can 
help guide and coordinate those trust funds within the overall 
assistance effort for Iraq.
    The Iraqi Governing Council, working with the Coalition Provisional 
Authority (CPA), has established a mechanism to work with bilateral and 
multilateral donors to ensure that Iraqi priorities are fully reflected 
in donor activities. The new Ministry of Planning and Development 
Cooperation has the lead on donor coordination on the ground in 
cooperation with the Ministry of Finance and other Iraqi Ministries. 
Senior Iraqi officials, along with a U.S. Government team, will meet 
with other major donors in Abu Dhabi at the end of February to discuss 
the functioning of the trust funds and other aid coordination issues.

U.S. Supplemental for Iraq Reconstruction
    Congress took a vital step forward in helping Iraq when it passed 
in November the President's request for a supplemental for Iraq's 
reconstruction. On January 5, the CPA, through the Office of Management 
and Budget, reported to Congress on how it plans to allocate the $18.4 
billion appropriated in the Supplemental for Iraq. The Administration 
will make quarterly reports to Congress on the status of the spending.
    Working closely with Iraqi officials, especially in the Ministry of 
Planning and Development Cooperation and other Ministries, the CPA is 
in the process of allocating the reconstruction funds in accordance 
with Iraqi priorities.
    For example, USAID in early January awarded Bechtel a $1.8 billion 
contract for engineering, procurement, and construction services for 
infrastructure projects, including electric power systems, municipal 
water and sanitation services, road networks and rail systems, public 
buildings, and ports and waterways. The Army Corps of Engineers also 
recently awarded, on the behalf of the CPA, contracts for oil sector 
repairs valued up to $2 billion.
    In total, $8 to $9 billion are being allocated for infrastructure 
in areas such as telecommunications, power generation, sanitation, 
transportation, public buildings, and oil repairs. This includes the $5 
billion in Requests for Proposals announced by the CPA's Program 
Management Office (PMO) on January 7. These contracts are for 
construction and projects in key sectors that have an immediate impact 
in improving the lives of the Iraqi people such as power generation, 
water, sanitation, telecommunications, transportation, and public 
buildings. The PMO anticipates awarding these contracts in March. We 
anticipate that $6 billion will be directed to non-construction 
projects, such as police training, military equipment, and democracy/
governance activities. Four billion dollars will be held in reserve to 
spend as priorities change and unanticipated demands arise.

Reform and Reconstruction
    U.S. assistance is predicated on and directed toward reforming 
Iraq's society and economy. A new, prosperous, peaceful Iraq must be a 
democratic, free enterprise Iraq, fully integrated into the community 
of nations. The Governing Council and the CPA are working to establish 
a solid foundation on which future Iraqi governments can build.
    To establish a prosperous, dynamic, and competitive Iraqi economy, 
Iraqi and CPA officials are hard at work putting into place modern 
regimes for trade, investment, banking, tax, and corporate law.

 The CPA successfully introduced a unified, reliable new 
    currency, the Iraqi dinar, between October and January, which is 
    helping to promote commerce and unite the Iraqi economy.
 The Central Bank of Iraq will soon be independent. A Trade 
    Bank of Iraq has been established.
 Iraq opened up to foreign investment, dropping all 
    restrictions except those on industries associated with extraction 
    and primary processing of natural resources, including oil, and the 
    financial sector.
 The Central Bank of Iraq chose an initial set of three foreign 
    banks as candidates for licenses to operate in Iraq (Hong Kong 
    Shanghai Banking Corporation, National Bank of Kuwait, and Standard 
    Chartered Bank from Great Britain). Others are under consideration.
 Iraq has slashed tariffs to 5 percent, with humanitarian and 
    reconstruction goods being allowed to enter Iraq duty-free. Today 
    the World Trade Organization welcomed and accepted Iraq's request 
    to become an observer.

    The International Finance Corporation, a part of the World Bank, is 
working with OPIC to establish a credit facility to encourage credit 
for small businesses, which will help generate needed employment 
opportunities for Iraqis and bolster the financial system.
    Full reform will take years, but by the time the Transitional Iraqi 
Administration assumes authority this summer, Iraq will be well 
embarked on reforms.

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 to pre-war levels (4,023 MW on February 
5). While this is still below total demand of about 5,500 MW, we are 
making progress on expanding power transmission capability 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 production, and demand.
    Hospitals and schools have re-opened. Potable water and medicines 
are more widely available than before. During the last several months, 
over 16,000 reconstruction 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 country, stimulating economic activity and providing 
employment. Inflation is low, judging from the strengthening exchange 
rate for the new Iraqi dinar.
    Iraq has started down the path to a responsible fiscal policy by 
producing balanced 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 unacceptably 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 number of 
Iraqis as quickly as possible. The CPA's micro, small, and medium 
credit 
programs aim at stimulating private sector economic activity, 
development, and employment by providing credit to viable small labor-
intensive businesses.

Oil Sector
    The Iraqis are developing the framework and institutions to manage 
their oil sector, 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 
government 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 
procurement) 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 responsibility 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 months, Secretary Baker won commitments 
for at least ``substantial debt reduction'' for Iraq in 2004.
    In addition, by sponsoring United Nations Security Council 
Resolution (UNSCR) 1483, the United States helped ease Iraq's yearly 
obligation to pay reparations to individuals and businesses from more 
than 35 countries who were victims of Saddam Hussein's 1990-1991 
aggression. Previously, Iraq was required to pay 25 percent of its oil 
export proceeds into a victims compensation fund. UNSCR 1483 pared that 
requirement to only 5 percent.

Iraqi Assets
    The United Nations Security Council has stressed Iraq's right to 
the return of assets plundered by Saddam Hussein and his associates, 
currently located in other countries, so they can be used at last for 
the benefit of the Iraqi people. The U.S. Government is facilitating 
the expeditious identification and transfer of those assets. The State 
and Treasury Departments are working together to encourage all UN 
Member States to comply with the requirement of UNSCR 1483 to freeze 
and transfer to the Development Fund for Iraq (DFI) all assets of the 
former Iraqi Government and its senior officials.
    So far, countries in Europe, Asia, the Middle East, and North 
Africa have transferred approximately $650 million in such assets to 
the DFI. The United States has made $1.9 billion in frozen Iraqi assets 
available for reconstruction and other purposes benefiting the Iraqi 
people. Moreover, roughly $1.3 billion worth of assets have been found 
within Iraq.
    The State Department and our embassies continue to approach 
governments around the world to identify, freeze, and transfer Iraqi 
assets. In particular, we have been focusing on Lebanon, Syria, and 
Jordan and have had some success.
    We are looking at how DFI provisions in UNSCR 1483 may need to be 
revised for the post-June 30 environment. The International Advisory 
and Monitoring Board (IAMB), which was formed pursuant to UNSCR 1483, 
is proceeding with its task of hiring an independent public accountant 
to audit the DFI and export oil sales. We expect the members of the 
IAMB to have their third meeting on February 12. The IAMB's role is to 
ensure transparency with respect to Iraq's oil revenues.

The Role of International Financial Institutions
    We are strongly promoting IMF and World Bank engagement in Iraq. 
The United States and major partners such as the United Kingdom have 
urged the IMF and the World Bank to begin working with key Iraqi 
Ministries to build critical budget planning, revenue collection, and 
monetary policy and banking capacity. These activities aim at the 
resumption of international lending to Iraq as soon as possible after 
the transition on June 30.
    The IMF and the World Bank have expertise and experience--including 
in post-conflict situations--as well as credibility. Their work will 
further internationalize support for Iraq, and these institutions are 
well placed to help Iraq formulate and implement sound economic, 
monetary, and fiscal policies.
Conclusion
    The State Department is part of an interagency, United States-
Iraqi, and international team effort to mobilize the resources 
necessary to promote Iraq's economic and financial reconstruction. We 
are working extremely hard and harmoniously with colleagues at Treasury 
and USAID, who are present here today, as well as thers at DOD, the 
NSC, the CPA, and Commerce to tackle the formidable challenge of 
returning Iraq to economic prosperity and allowing it, once again, to 
take its proper place as a productive member of the community of 
nations. We welcome Congress' continued strong support in this 
important task.

                               ----------

                   PREPARED STATEMENT OF GORDON WEST

   Acting Assistant Administrator, Bureau for Asia and the Near East
               U.S. Agency for International Development
                           February 11, 2004

Introduction
    Through the provision of expert policy and technical assistance the 
Agency for International Development (USAID) is helping to promote U.S. 
foreign policy goals in the reconstruction of Iraq. USAID activities in 
Iraq are fully coordinated with the Coalition Provisional Authority and 
its Administrator, Ambassador Paul Bremer.
    Currently, USAID has 16 direct hire staff, 54 contract staff, and 
60 Iraqi staff in Iraq. Ten of our expatriates are located in regional 
offices outside of Baghdad. Contractors and grantees funded by USAID 
have an additional 700 expatriate and 3,000 Iraqi staff, and have a 
presence in every province.

Overview
    USAID began its reconstruction activities in January 2003 under the 
Office of Reconstruction and Humanitarian Assistance (ORHA), the 
predecessor agency to the Coalition Provisional Authority. The first 
phase of USAID programs aimed to repair the most essential 
infrastructure and restore the most important social and governmental 
functions. These efforts are to be completed in June 2004 and are on 
schedule to achieve their planned objectives.
    With the advent of the Coalition Provisional Authority in July 
2003, USAID prepared a 2-year program to extend the reconstruction 
program beyond post-conflict triage. USAID is presently working in four 
areas of concentration:

 Infrastructure repair: Primarily electricity, water, and 
    transportation sectors (including capital-intensive major projects 
    and community-based small projects).
 Education and health: Primary and secondary schools, 
    university partnerships, primary health care, and reduction of 
    childhood deaths.
 Governance: Introduction of viable, legitimated provincial and 
    city governments that represent their constituents, promotion of a 
    vibrant civil society, support the political transition at the 
    national level.
 Economic growth: Macroeconomics, government finance, banking, 
    private sector development, trade, rural economics, and food 
    security.

    During the 6 months immediately following the war, USAID strongly 
supported public health activities and emergency food delivery to avoid 
a potential humanitarian disaster. For example, USAID assisted the 
World Food Program to deliver 516,000 tons of grain to ensure that the 
population was fed, and enough medical supplies and equipment for 1 
million persons.
    USAID was tasked by the Administration to manage $2.4 billion of 
the April 2003 supplemental appropriation. USAID is currently 
coordinating with CPA on planning activities it will manage with the 
fiscal year 2004 supplemental. Presently, the CPA has directed $1.7 
billion of these new resources to USAID. USAID is coordinating closely 
with CPA on how to implement these funds and on the issue of whether 
USAID will receive and manage further funds from the fiscal year 2004 
supplemental.
    USAID has eleven contracts for reconstruction through April, but 
will be scaling back to nine contracts over the summer. (The airport 
and seaport management contracts will not be renewed, as Iraqi 
ministries take over operation of the ports.) We have grants to the 
United Nations (UNICEF, WHO, UNESCO, and WFP), to five U.S. 
universities, and nine international non-governmental organizations. As 
conditions improve in Iraq, CPA, and USAID would like to see a greater 
number of 
non-governmental organizations become active with U.S. funding. Through 
USAID contractors and grantees, USAID have provided financial support 
to over 600 Iraqi nongovernmental organizations.
Economic Development in Post Conflict Situations
    As the lead development agency for the United States, USAID has 
considerable practical and policy experience in dealing with post-
conflict situations. In Iraq, we are applying the economic reform 
lessons learned in the early 1990's from the former Soviet Union and 
Eastern Europe. One example of this direct application was a conference 
held in Baghdad in October, which brought together Eastern European 
economic leaders, who had a hand in their countries' transition to 
market economies, with Iraqi economic leaders.
    Reform programs in conflict areas require special handling, and 
USAID brings years of experience from numerous countries: El Salvador, 
southern Mexico, Guatemala, Colombia, Peru, Bolivia, Angola, Sudan, 
Congo, Afghanistan, Philippines, Nepal, West Bank, Sri Lanka, Bosnia, 
and Kosovo.
    There are five common themes in all these experiences:

 Avoid a humanitarian disaster. The United States has done 
    that.
 Reactivate food production and markets. We are assisting the 
    Ministry of Trade to maintain the public ration distribution 
    system, smoothing the importation of food, and working with the 
    Ministry of Agriculture on grain and other food production. Private 
    food markets are functioning.
 Involve the private sector early on. Economic growth is good 
    for the poor, and agricultural growth is even better for them.
 Link economic development with democratic governance. Good 
    economic governance boosts economic growth. We are reforming the 
    legal and regulatory framework and promoting a transparent tax 
    system.
 Transparency in government finance and procurements. 
    Successful introduction of democracy will require the confidence in 
    the probity of public officials and faith in the equity of public 
    investment.

Macroeconomics
    At the Central Bank of Iraq, USAID in coordination with Treasury 
advisers and CPA staff has helped reinforce the independence of this 
key financial institution. To unify the national currency and reissue 
banknotes, the Central Bank used a model developed by USAID in 
Afghanistan. USAID experts managed the logistics of the banknote 
exchange, helped set up daily currency auctions to maintain control of 
the exchange rate, and are training the bank staff. At the Central 
Statistics Office, USAID-financed experts are creating a consumer price 
index for inflation measurement, setting up national income accounts, 
and gathering employment information. All these activities assist in 
enabling the International Monetary Fund to promptly re-engage in Iraq, 
which will ultimately benefit Iraqi reconstruction.

Government Finance and Procurement
    Working with the Ministry of Finance, USAID is putting a financial 
management information system in place to allow tracking of public 
funds through the national ministries. This system is also a condition 
for assistance from the IMF and the World Bank. USAID-financed experts 
are assisting the Ministry of Finance and provincial authorities to 
prepare and roll up executive branch budgets that are consistent with 
the Governing Council's priorities. Our experts are working with the 
Iraqis on an equitable tax policy--presently a tax called the 
Reconstruction Levy--as well as options for a variety of income and use 
taxes and customs duties. We want the tax system to be transparent to 
the public, so that tax cheats will be identified more easily.
    The Ministry of Finance is being prepared to share national revenue 
with governorates and municipalities. USAID is also financing the 
introduction of international accounting standards, reliable property 
inventories, and a public procurement law.

Banking
    Iraqi banks have little recent experience with modern practices in 
financial systems. To help commercial banks function more efficiently, 
USAID-financed experts are developing a mechanism for interbank funds 
transfers. The state-owned banks are receiving improved systems in 
accounting, cash flow management, interest accrual, and 
computerization. USAID coordinates its work in the banking sector with 
technical assistance provided by the Treasury.

Private Sector Development
    Together with other Federal agencies, USAID is assisting the CPA, 
the Governing Council, Ministries, and business groups to establish a 
legal and regulatory framework for the new Iraqi economy. This 
framework includes a commercial code, a labor law, and foreign and 
domestic company registration. Leasing, contracts, insurance, and 
mediation laws also are planned.
    For electricity, USAID is helping the Ministry of Electricity 
estimate growth in demand, costs of providing service, and possible 
user tariffs to finance electricity. In addition, we are advising on 
accounting, internal controls, billing, and staffing. Iraqi banks are 
not structured to successfully lend to private enterprise. To finance 
private businesses, USAID has begun a substantial reform of bank 
lending processes, staff training, and lending policy aimed at micro-, 
small-, and medium-sized enterprises. USAID partners manage two 
microenterprise loan programs that have made over 2,000 loans.
    To deal with state-owned enterprises, CPA tasked USAID experts to 
assess the financial and commercial viability of numerous enterprises. 
CPA is still considering when and if to restructure these enterprises. 
USAID also provided analyses of best practices implemented by national 
oil and refining companies around the world--including several in the 
Gulf Region--to assist the Iraqi Oil Ministry in evaluation the present 
structure of its petroleum sector.

Trade and Competitiveness
    Among the lessons from other post-conflict countries is the need to 
avoid dependence on a single export commodity. While oil will continue 
to dominate export earnings, Iraq can become competitive in at least 
two agricultural crops. Northern Iraq produces high quality durum 
wheat, poorly suited for bread but excellent for noodles, that in the 
past has been exported to Turkey and Iran. Southern Iraq has 16 million 
date palms. USAID is assisting the Ministry of Agriculture to increase 
the quality and quantity of the bahri date, which is the most valuable.

Food security
    Iraq needs a sustainable way of ensuring that its people have 
secure access to affordable food. Presently, the Iraqi Public 
Distribution System, managed by the Ministry of Trade, attempts to feed 
the entire nation. To visualize the complexity of this task, imagine 
the U.S. Department of Agriculture issuing ration cards, and then 
providing subsidized food, to everyone in the United States. As many as 
10 million Iraqis do not depend on the basket of publicly supplied 
foods.
    Reform of the food subsidy will have political ramifications. For 
instance, continued importation and distribution of subsidized grains 
will continue to stunt rural employment and drive down rural incomes. A 
stable, financially sustainable safety net ought to remain under the 
truly needy, and could incorporate a substantial role for private 
sector purchases in lieu of 100 percent government procurement. It is 
important for Iraqis begin discussion of alternatives to an open-ended 
subsidy during the transitional administration, to avoid the 
perpetuation of a costly entitlement program.

Agriculture and the Rural Economy
    Agriculture can absorb a substantial amount of labor, while 
increasing food production and incomes for the poor at the same time. 
Rural jobs are particularly 
important when they help keep young men employed in the villages. 
There, they remain under the moderating influence of family, mullahs, 
and others. When unemployed young men migrate to cities in search of 
work, these influences are lost and the youth can gravitate towards 
gangs and militant groups. Stimulating the rural economy will stem this 
urban migration and keep men in the rural areas. USAID's agriculture 
program aims to improve farm production, support business development, 
and rehabilitate irrigation systems.
    Title to land and water define the property rights in rural Iraq. A 
family's investment in house and production depend on clear land title. 
Irrigation water lies under the control of Ministries that own the 
pumps and village elders that control distribution. Poorly maintained 
irrigation systems concentrate natural salts in agricultural soils, 
rendering them too saline for cultivation. The October 2004 goals for 
USAID's agricultural assistance include increased grain and 
horticultural crop production, vaccination of dairy cattle for hoof-
and-mouth disease, 1,000 loans to small agricultural businesses, and a 
25 percent increase in irrigated land through repaired equipment.

Conclusion
    USAID is helping Iraqi Ministries apply the lessons of numerous 
post-conflict states to the Iraqi economy. Timely but judicious reforms 
can be expected to generate jobs, both in cities and on farms. These 
reforms underlie the conditions that attract donor and private 
investment as well as providing the conditions for a private sector to 
flourish. Transformation of the Iraqi economy will be one of the 
lasting benefits of the post-war reconstruction.

        RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGEL 
                    FROM EARL ANTHONY WAYNE

Q.1. What is the CPA's policy on food tenders administered by 
the World Food Program? Can non-members of the Iraq coalition 
bid on contracts?

A.1. WFP food tenders are done under WFP tendering rules and 
are open to international competition.
    All companies on WFP's Registered Vendors List are invited 
to bid on contracts. (The list is based on performance.) In 
addition, all rice vendors on USDA's Registered Vendors List 
are invited to bid on rice contracts.
    CPA and WFP are working closely to ensure that United 
States suppliers can fully participate in procurement 
competitions.

Q.2. Does Iraq have enough food to last until June 2004? If 
not, how are the food purchases going to be handled until then?

A.2. The CPA, the Iraqi Ministry of Trade (MOT), and the World 
Food Program (WFP) are working together to ensure that the food 
pipeline for the Iraqi people will continue to be filled.
    Pursuant to an agreement signed in January, the WFP is 
procuring urgently needed new commodities and is working with 
the CPA and the MOT to complete the delivery of outstanding Oil 
for Food (OFF) contracts. The MOT is scheduled to take over all 
new procurement from WFP as of April 1.
    The CPA's plan includes building 3 months of buffer stocks 
by the time of the transition to Iraqi management of the food 
Public Distribution System in July. Changes in contract 
specifications, problems in coordination between MOT and CPA, 
and delays in the release of funds for procurement, however, 
initially hampered WFP's ability to build those buffer stocks. 
These problems appear to have been resolved.
    The WFP and the CPA are also engaged in capacity building 
for the MOT in order that the Ministry can adequately carry on 
its new responsibilities for procuring and distributing food to 
the Iraqi people.
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