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89–517 PDF 2003

S. HRG. 108–165

IRAQ STABILIZATION AND RECONSTRUCTION:

INTERNATIONAL CONTRIBUTIONS AND RESOURCES

HEARING

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

JUNE 4, 2003

Printed for the use of the Committee on Foreign Relations

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

COMMITTEE ON FOREIGN RELATIONS

RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska

LINCOLN CHAFEE, Rhode Island

GEORGE ALLEN, Virginia

SAM BROWNBACK, Kansas

MICHAEL B. ENZI, Wyoming

GEORGE V. VOINOVICH, Ohio

LAMAR ALEXANDER, Tennessee

NORM COLEMAN, Minnesota

JOHN E. SUNUNU, New Hampshire

JOSEPH R. BIDEN, JR., Delaware

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

RUSSELL D. FEINGOLD, Wisconsin

BARBARA BOXER, California

BILL NELSON, Florida

JOHN D. ROCKEFELLER IV, West Virginia

JON S. CORZINE, New Jersey

KENNETH A. MYERS, JR., Staff Director

ANTONY J. BLINKEN, Democratic Staff Director

(II)

CONTENTS

Page

HEARING OF JUNE 4, 2003

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, Ranking Minority

Member .................................................................................................................

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 5

Lugar, Hon. Richard G., U.S. Senator from Indiana, Chairman ......................... 1

Larson, Hon. Alan P., Under Secretary for Economic, Business and Agricultural Affairs, U.S. Department of State ............................................................. 6

Prepared statement .......................................................................................... 9

Natsios, Andrew S., Administrator, U.S. Agency for International Development ...................................................................................................................... 31

Prepared statement .......................................................................................... 35

Taylor, Hon. John B., Under Secretary for International Affairs, U.S. Department of the Treasury ........................................................................................... 25

Prepared statement .......................................................................................... 27

Zakheim, Hon. Dov, Under Secretary of Defense (Comptroller), U.S. Department of Defense .................................................................................................... 18

Prepared statement .......................................................................................... 22

RESPONSES TO ADDITIONAL QUESTIONS SUBMITTED FOR THE RECORD

Question submitted to Under Secretaries Larson (State), Zakheim (Defense),

Taylor (Treasury), and Administrator Natsios (USAID) by Chairman Lugar 80

Response Submitted by Dov Zakheim, Under Secretary of Defense ............ 80

Response Submitted by John B. Taylor, Under Secretary of the Treasury . 80

Response Submitted by Alan Larson, Under Secretary of State .................. 81

Questions for the Record Submitted by Senator Bill Nelson to USAID Administrator Andrew Natsios ...................................................................................... 81

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IRAQ STABILIZATION AND RECONSTRUCTION:

INTERNATIONAL CONTRIBUTIONS AND RESOURCES

Wednesday, June 4, 2002

U.S. SENATE, COMMITTEE ON FOREIGN RELATIONS, WASHINGTON, D.C.

The committee met, pursuant to notice, at 9:36 a.m., in Room SD

419, Dirksen Senate Office Building, Hon. Richard Lugar, presiding.

Present: Senators Lugar, Hagel, Chafee, Alexander, Biden, Sarbanes, Feingold, Nelson, and Corzine.

OPENING STATEMENT OF HON. RICHARD LUGAR,

U.S. SENATOR FROM INDIANA

The CHAIRMAN. This hearing of the Senate Foreign Relations

Committee is called to order.

The committee is pleased this morning to welcome Under Secretary of State Alan Larson, Under Secretary of Defense Dov

Zakheim, Under Secretary of the Treasury John Taylor, and Administrator of the Agency for International Development Andrew

Natsios. Our panel represents a broad range of United States agencies responsible for American stabilization and reconstruction activities in Iraq. The bureaucratic diversity of this panel also underscores how important interagency coordination of the operation is

in our success in Iraq.

The committee is looking forward to this testimony about the

funding required for efforts in Iraq, the administration’s plans for

seeking international contributions, and efforts to ensure that resources are used effectively.

This is the second in our series of hearings on post-conflict Iraq.

The committee greatly appreciated the comprehensive testimony

delivered by Deputy Defense Secretary Paul Wolfowitz and General

Peter Pace on May 22. They helped to clarify United States policy

and plans for stabilization and reconstruction in Iraq and to put in

perspective the difficulties that accompany these efforts. They assured us that the administration is making adjustments to its plan

aimed at accelerating reconstruction and addressing stabilization

problems. I was particularly pleased to hear Secretary Wolfowitz

assure the committee that the administration is committed to the

long term in Iraq and ‘‘will remain there as an essential security

force for as long as we are needed.’’ Up until now, the support of the American public for the war in

Iraq and the war on terrorism has been strong. As we move into

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the expensive and complicated process of rebuilding Iraq, Americans will want to know that their money is being spent effectively

and that other nations are contributing a fair share.

As part of the $79 billion supplemental appropriations bill covering Operation Iraqi Freedom and the war on terrorism, Congress

has already provided $2.5 billion for relief and reconstruction in

Iraq. Most experts anticipate that significant additional appropriations will be needed by year’s end. As we examine what funding

will be needed, we must ask what are the most critical priorities,

how are existing funds being used to meet those priorities, and who

is making the decisions about those expenditures.

We are also intensely interested in the administration’s efforts to

secure contributions from other nations that will reduce long-term

United States financial burdens and broaden the interests of the

international community in a successful outcome in Iraq. During

the military conflict, many nations contributed to the success of the

coalition, some by contributing troops, others by offering logistical

support, material, or shared intelligence. We are grateful for the

partnership and commitment of these nations.

With regard to the rebuilding effort, however, it is still unclear

what international contributions have been offered and what goals

the administration has set for securing both financial and human

resources. Experts have identified the need for peacekeeping forces

along with economic and technical experts, but it remains unclear

who is being asked to provide these personnel. The main criteria

for the involvement of allies and international organizations must

be their ability to make contributions that will advance our goals

in Iraq.

Another issue that we wish to explore in depth is the degree to

which Iraq’s own resources will be available for the rebuilding effort and how Iraqi funds will be administered. These resources include the $1.7 billion in frozen Iraqi assets in the United States,

at least $600 million in Iraqi assets in other nations, plus the more

than $700 million dollars recovered by coalition forces that was

hidden in Iraq by Saddam Hussein’s family and associates. We

would also like to examine funds remaining in the United Nations’

Oil For Food account and revenues from future oil sales. Together,

these assets represent a substantial down payment on Iraq’s future, but the administration of Iraqi assets will require full transparency and a high degree of political sensitivity.

The passage of Resolution 1483 lifting the United Nations’ sanctions on Iraq had added a new dimension to these resource issues.

The winding down of the Oil For Food program over the next six

months and the establishment of the Development Fund for Iraq

with $1 billion in unallocated UN escrow account funds can help

meet immediate reconstruction needs.

The measure of success in Iraq that matters most is what kind

of country and institutions we leave behind. Toward that end, we

should acknowledge that we are engaged in nation-building in Iraq.

The achievement of stability and democracy in Iraq presents an opportunity to catalyze change in the Middle East region that can

greatly improve United States’ national security and help win the

war against terrorism. Achieving such ambitious goals will require

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careful planning by the administration, full participation by the

Congress, and support from the American people.

We look forward to exploring these issues with each of you today.

I call now upon the distinguished ranking member of our committee, Senator Biden, for his opening statement.

STATEMENT OF HON. JOSEPH BIDEN,

U.S. SENATOR FROM DELAWARE

Senator BIDEN. Thank you very much, Mr. Chairman. I think we

have a lot of important hearings but I think this is a truly important hearing. The reason I do is that to state the obvious, but you

are assembled at the table the players who are going to make this

work or not work in Iraq, and we have a lot of questions.

Let me begin, though, by saying that I think this is a moment

of great opportunity both in the war on terrorism generally and

specifically in terms of changing the face of, the climate, and the

circumstances in the Middle East generally.

And I want to begin by complimenting the President. I have been

an open critic of the President and a private critic to him personally for his failure from the time he became President to get deeply

involved in the Palestinian-Israeli conflict, because I believe there

is no possibility of resolution without U.S. leadership there. And I

must say that I have been very positively impressed by his commitment which he made privately as well as publicly to me and to others that he is going to get involved with both feet.

I noted in today’s New York Times one paragraph, and I quote: ‘‘In a remarkable turnaround for the President, who has resisted

taking a personal role in peacemaking in this part of the world, Mr.

Bush spent 90 minutes alone with Arab leaders, leaving Secretary

of State Colin Powell and National Security Advisor Condoleeza

Rice sitting in an ante room as he concluded and conducted talks

with the help of only a translator.’’ That to me is the most significant thing that I have seen or heard of the President’s efforts in

the Middle East thus far, and I want to publicly compliment him.

We all understand, we have been here a while, that a President

who involves himself in this way is putting his political capital at

risk. He has great capital right now and I want to publicly acknowledge that as long as he is working this way, he will get the

support of this senator and I suspect many Democrats in his effort.

The second point I would like to make is that I hope we get by

in this hearing today about, you know, how well you planned this

before. You didn’t plan this well before and this has not been

planned well, it’s understandable why it’s not been planned well.

The thing never got off the ground the right way in terms of the

reconstruction of Iraq. You guys had your hands full. Let’s just go

from here. Please do not bore me with how much planning you did

before you got involved and what this long lead-up was.

The fact of the matter is, it’s understandable that we find ourselves in a situation where all the things that we were privately

told that you and the administration planned on didn’t come to fruition. We were told there was going to be an infrastructure left of

the military, we would have them available to us. An infrastructure left of the various agencies, all we are going to do is decapitate

the bad guys and the Ba’athists, and we would have agencies up

4

and running. Please, let’s not do this, okay? Let’s not go into that.

Let’s talk about what you are really going to do from this point on,

because there is still a chance to make all of this work in a way

that I think with the personal leadership of the President with regard to the Israeli-Palestinian issue, has an opportunity to have a

ripple effect throughout the region, and there is a confluence of a

number of streams here that are working.

And so the question is, how do we get this thing underway. The

things I would like to hear about today, and maybe you won’t have

the answers, I don’t expect all the answers today, is, how are the

various agencies coordinating their efforts here in Washington? Is

there a single office, a single individual in Washington who is

charge of managing the efforts minute-by-minute and day-to-day?

I’m not suggesting there should be, but is there? What’s the plan,

Stan? You know, what’s the deal here, okay? What is the balance

of decision making in Washington versus the decision making made

by Ambassador Bremer and his team in the field? How much unilateral or independent authority do they have? Does Bremer have

the authority to disperse resources as he sees fit? If so, how many

funds does he have control over?

And I would like to know, is the Pentagon’s chief budget officer

going to provide us with working estimates even if they are ranges,

on the size, the length, the cost of maintaining a presence here? If

you haven’t thought that through, if you haven’t thought through

the possibilities, then you shouldn’t be here at the table. And you

owe it to us and to the American public to give us the ranges.

We’re in the deal now. We’re in the deal as to whether or not we

go to war, the Congress, and we gave the President the authority.

From the time he went to war to the time the shooting stopped,

that was his business, he’s the commander in chief. He made the

judgments. Now the reconstruction rests upon us cooperating with

you, and we have to know front end what the ranges are, what’s

the idea, what do you think we’re in for. Because the American

people, if you look at the polling data already, do not sign on to

the idea of staying there for years and spending billions of dollars,

when we know they’re going to have to. It may be a year, it may

be 10 years, but we know it’s more than a day.

When we were kids we used to play that game, guess what I

have in mind, bigger than a bread box, smaller than a Mack truck.

Well yeah, give us some ranges. Give us some ammunition, because

we have to go home and tell our folks what you’re going to expect

us to come up with, as you should, the resources needed to get your

job done.

I would also like to know your estimates as to what extent you

believe Iraqi oil will pay for Iraqi reconstruction. Again, there is

this notion out there that this is it, now all we have to do is tap

the well and boom, we don’t have any problems. I believe that not

be to accurate. Some in the administration say what they think it

is. Again, if you have not thought that through, you shouldn’t be

at the table.

What is the Treasury estimate of the size of Iraqi debt? Will

there be an effort to reschedule or write off that debt? If it’s not

written off, what will be the impact on Iraq’s recovery?

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AID published a vision statement in February that identified

benchmarks on a range of sectors of Iraqi reconstruction. I would

like to know from Mr. Natsios whether or not we’re on target and

if not, what do we have to do to get you on target, or have the targets changed?

And what is the plan across a number of areas? How are we

going to get Iraqis back to work, including former military personnel? What’s going to replace the Oil-For-Food program when it’s

phased out over the next six months? What efforts are being made

to rebuild the justice system? How is education to Iraqi children

being managed? Are there new textbooks that will be available to

every Iraqi child the next school year, as AID planned?

These are practical things we’d like to know about. I don’t expect

you personally, I don’t expect you to have all the answers to these

things, but I do expect, and quite frankly respectfully demand that

you let us know what your plans are, who’s in charge, what your

estimates are. We have an absolute right to know that.

And I would ask unanimous consent that my formal statement

be placed in the record at this point, Mr. Chairman.

The CHAIRMAN. Placed in the record in full.

Senator BIDEN. I thank you all for being here, and we look forward to having a conversation with you.

[The prepared statement of Senator Biden follows:]

PREPARED STATEMENT OF SENATOR JOSEPH R. BIDEN, JR.

Mr. Chairman, our witnesses today come from a wide range of agencies within

our government: the Pentagon, the State Department, the Treasury Department

and AID. Even more agencies will have a role in Iraq in the coming months and

years—from the Commerce, Justice, and Energy Departments, to the Office of Management and Budget.

Each has a critical part to play in helping to win the peace in Iraq.

The fact that so many parts of our government will be focusing their time and

resources on Iraq shows just how extensive our effort must be.

But for all this effort, there appears to be no effective structure to coordinate the

activities of these diverse agencies. We have been told that the Defense Department

is in charge. But which office and who in Washington has the sole and exclusive

responsibility minute-by-minute, day-to-day to ensure that decisions are made efficiently, agencies are coordinating their activities, and that Ambassador Bremer is

getting all of the support he needs in the field.

Our superb planning for and execution of the war has not been matched by our

planning for and execution of the peace. It appears there was a failure to comprehend that security would be the sine qua non for progress in all other areas. This

should have come as no surprise after our experience in the Balkans.

This committee, going back to last summer, has been a virtual Groundhog Day

on the question of security and post war planning, repeating over and over again

the need to get our act together before we went into Iraq, not after the fact.

And many of the leading think tanks in town have made the same point, too.

Simply put, without security, people will not return to their jobs, parents will not

send their children to school, doctors and nurses won’t make it to their hospitals,

women will not leave their homes and participate in rebuilding their country, and

engineers cannot make vital repairs to the infrastructure.

So, I’d like to learn today what we are doing to secure international contributions—for police forces like the gendarmes, for more traditional troops, and for funds

to stabilize and rebuild Iraq. I’m glad that President Bush has moved beyond the

finger pointing and talk of retribution with our allies in Europe and is asking for

their help. Marshalling the help of friends and allies in Iraq is the the best way

to spread the risks and reduce the burden on U.S. troops and taxpayers.

I also hope to hear from our witnesses the answers to several fundamental questions today: What are the working estimates for the cost and duration of the occupation? What are the working estimates for the cost of reconstruction?

6

What I do not want to hear is a dodge we’ve heard all too often from the civilian

leadership at the Pentagon that the future is unknowable, so we won’t estimate anything.

I’d also like to explore whether the administration still believes that oil will cover

the reconstruction costs? Leading energy experts, including Dr. Daniel Yergin of

Cambridge Energy Research Associates, estimate that when Iraq achieves its prewar level of oil production, that is expected to generate $15 to $20 billion per year.

Witnesses before this committee have calculated that maintaining a security force

of 100,000—which is significantly less than the number of troops now in Iraq—will

cost approximately $25 billion a year.

And then there are the reconstruction costs, which are expected to be in the tens

of billions of dollars.

What is the size of Iraqi debt and how will it be handled? The Center for Strategic

and International Studies estimates that Iraq’s obligations—be they debts, claims,

or contracts—total some $383 billion. What impact will this burden have on Iraq’s

economic recovery?

Mr. Chairman, we cannot afford to fail in Iraq. Our credibility in a region vital

to our security is at stake.

We have gotten off to a rough start, but there is still time to turn things around.

Doing so will require a lengthy and costly effort in troops and treasure from the

United States. The American people will support that if they are informed of what

is to be expected of them.

As I have said repeatedly, no foreign policy can be sustained without the informed

consent of the American people.

They have not been informed to date.

I hope that today’s hearing provides some of that information. More important,

I hope that the President follows through on the pledge he made to me and tells

the American people that we will be in Iraq for several years at least, with tens

of thousands of troops, at a cost of tens of billions of dollars, but that this high price

is worth paying.

At our last hearing, Deputy Secretary Wolfowitz said that he had heard the President say privately that winning the peace would be even tougher than winning the

war. Well, it is high time he said that publicly to the American people.

If he does that, I am confident the American people will support the effort.

Again, I welcome our witnesses and I look forward to hearing their testimony.

The CHAIRMAN. Thank you very much, Senator Biden.

I will ask the four of you to testify in the order that I introduced

you to begin with. I will commence with Secretary Larson and then

move to Dr. Zakheim, Secretary Taylor, and Mr. Natsios. Let me

just say at the outset, all of your statements will be published in

the record in full. You need not ask for permission to do that; and

please, if you can, reduce your statement or summarize it. We will

not be restrictive in terms of time, but we have asked a lot of questions and we are hopeful that you will be full in your testimony.

We will ask for questions following that.

Secretary Larson.

STATEMENT OF HON. ALAN P. LARSON, UNDER SECRETARY

FOR ECONOMIC, BUSINESS AND AGRICULTURAL AFFAIRS,

U.S. DEPARTMENT OF STATE

Mr. LARSON. Mr. Chairman, Senator Biden, and distinguished

members of the committee, I am pleased to be here today with

Under Secretary Zakheim, Under Secretary Taylor, and Administrator Natsios to discuss Iraq reconstruction. The four of us and

many others have worked long and hard together on this issue and

our close teamwork is representative of the administration’s efforts

to plan and implement reconstruction policy on Iraq.

This is an important task and a challenging task. It’s going to

require concerted efforts of the administration, the Congress, our

partners abroad, and most importantly, the Iraqi people. Even as

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we confront those challenges, we should bear in mind what has

been accomplished so far.

Contrary to fears and expectations of many, the coalition’s military strategy and humanitarian planning did prevent large movements of refugees, significant food shortages, and health crises.

Basic services such as water and electricity are being restored,

with levels of performance now exceeding in many instances those

Iraqis experienced before the war. The oil infrastructure has been

protected and now oil production is being ramped up.

The challenges we now face are those of working with an Iraqi

people who are eager for progress after 25 years of depression and

economic decline. The oil and transportation sectors need significant rehabilitation. The telecommunications system, as detailed in

my written testimony, has been neglected for decades and will need

to be expanded and modernized. The food production and distribution systems will need to be overhauled, moving them from a system of price controls and rationing to one based on free markets

and individual choice.

The commercial need, the commercial regime will need to be revamped in order to encourage trade, promote investment, and facilitate private enterprise.

A national budget is being prepared that will set out priorities

both for recurrent expenditures but also for reconstruction projects.

And all of this needs to be done as we facilitate the formation of

a representative and legitimate Iraqi government. With so much to

do, it’s important that both Americans and Iraqis be somewhat patient, remembering that we cannot undo in a month or six months

the legacy of 25 years of misrule.

The United Nations Security Council Resolution 1483 provides a

crucial framework for reconstruction. Among other things, it recognizes the role of the United States and the United Kingdom as the

responsible authority in Iraq. It ends economic sanctions. It provides a significant role for the United Nations, including through

the creation of a special representative of the Secretary General.

We welcome the appointment to this position of Sergio de Mello,

who will among other things coordinate UN assistance, assist in

the development of representative government institutions, and

promote economic, legal and judicial reform.

The resolution also establishes a development fund for Iraq that

will receive proceeds from export sales of oil and will disburse

these funds in a transparent manner for the benefit of the Iraqi

people.

And finally, the resolution signals through the unanimous voice

of the Security Council that the international community needs

now to rally behind the cause of reconstruction in Iraq.

We know that Congress is eager to have the clearest possible picture of the costs of reconstruction and of the resources that will be

available to cover those costs. As for needs and costs, Peter

McPherson, who is the financial coordinator for the Coalition Provisional Authority working under Ambassador Bremer, is working on

such a budget. We hope that at least a rough estimate of this budget will be available for discussion later this month.

8

In addition, the United Nations Development Program and the

World Bank have agreed to collaborate on a needs assessment that

should be available at the end of the summer.

On the resource side, Iraq itself will rightly shoulder much of the

responsibility. Among the sources of revenues available are $1.7

billion in invested Iraqi assets; the found assets in Iraq, which currently total roughly $600 million; and $1 billion of unallocated OilFor-Food money that will be deposited in the development fund for

Iraq.

In my written testimony I have described in considerable detail

the state of oil production and exports. The Iraqi CEO of the oil

ministry, Mr. Ghadhban, is making very good progress. Mr.

Ghadhban has produced production and export estimates which for

obvious reasons are subject to considerable uncertainty.

Nevertheless, understanding the committee’s interest in having

even a rough frame of reference, my testimony uses Mr.

Ghadhban’s figures to suggest that Iraq’s gross export revenues

from oil could be in the range of $5 billion for the second half of

this year. It also suggests that based on similar rough estimates,

that their gross export proceeds for 2004 could be on the order of

$15 billion. Looking further to the future, it must be left to a new

representative Iraqi government to decide whether to expand productive capacity beyond past levels, which have been roughly 3.5

million barrels per day; that has been their past peak. Any significant expansion of baseline oil product capacity would need to be accommodated by increased demand in the international marketplace

and in my view would most likely be privately financed.

The administration is actively seeking support from other countries. We began this process while the war was still going on. With

strong encouragement from the administration, UNBP, the World

Bank and the United States will be taking a leading role in pulling

together an initial meeting on Iraq reconstruction issues in New

York on June 24. While this meeting is not a pledging session, it

will set in motion a process of collaboration in assessing needs and

in mobilizing the resources to meet those needs. We expect it will

lead to a major ministerial level donors conference, perhaps in September.

I was privileged to attend the G–8 meeting that President Bush

attended over the last few case in France, and at that meeting the

leaders welcomed this conference and agreed that it should be the

starting point for pulling together an international response to the

challenge of reconstruction in Iraq.

To date, other countries have already pledged an estimated $1.7

billion, most of this for humanitarian assistance in response to a

United Nations appeal. Creditors also will need to make a contribution. Official creditors have already acknowledged that it’s unrealistic to expect Iraq to make payments on its external debt, at least

through the end of 2004.

Mr. Chairman, we appreciate the strong interest and support of

the Congress in the important task of reconstruction. We look forward to cooperating very closely with the committee in the future.

Thank you.

[The prepared statement of Mr. Larson follows:]

9

PREPARED STATEMENT OF ALAN P. LARSON

INTRODUCTION

The liberation of Iraq was a triumph of American armed forces, working with coalition forces. The reconstruction of Iraq must be a triumph of the Iraqi people, working with the coalition and the international community. Our military victory was

swift and decisive. The rebuilding of Iraq after decades of misgovernment will take

longer. Most of this work will—and rightly should—fall to the citizens of Iraq. It

is their country, and they must ultimately decide how it takes shape. The United

States and other friends of the Iraqi people will be there to assist, and to advise.

A free, democratic and prosperous Iraq will remove an island of hatred that long

threatened its neighbors and the United States.

UPDATE

The situation on the ground in Iraq remains tense. Gunfire, looting and the remnants of Saddam’s regime continue to disrupt life in Baghdad and elsewhere. To ensure stability, American troops continue to be deployed throughout the country. In

addition, we will stand up an Iraqi national civilian police force within existing

structures. In Baghdad, there are already over 7,000 Iraqi police patrolling with

U.S. military forces. Until the security situation calms down, it will be difficult for

a genuine redevelopment of the Iraqi economy to gather momentum.

Many of the problems that had been widely anticipated did not materialize. We

did not see mass hunger, widespread medical emergencies or floods of internally displaced persons. The military plans protected the oil fields from sabotage by Saddam

in his final moments.

Looking to the future, there are many things upon which to build. Iraq has a

large cadre of talented, dedicated technocrats anxious to return to work. And we

have offers from many, many countries ready to provide technical assistance and to

do business in Iraq.

We are beginning to see some bright spots. For example:

• water in Baghdad is back at 75 percent of pre-war levels;

• power is being gradually restored;

• mail delivery has begun around parts of the country;

• the Ministry of Health has been re-established and there is currently no major

health crisis;

• primary schools re-opened May 4;

• oil production is increasing;

• the agricultural sector is reviving; and

• shops are open and the retail sector is increasingly active.

My colleagues and I can all tell you of the fine work our people have done on the

ground in dangerous and difficult circumstances. Ambassador Bremer, General Garner and their teams have worked hard to bring order out of a chaotic situation. Ambassador Bremer is moving quickly to establish coalition authority in the country.

State, USAID, Defense, Treasury, Justice and others have experts in the field looking at key reconstruction issues. Ambassador Bremer has made real progress in establishing communications with Washington, and in organizing his own resources

to meet the challenges ahead. We in Washington have also organized ourselves to

be as helpful to Ambassador Bremer and his team as possible, as they progress from

the current situation, where stability and provision of basic services are critical, to

a time when we can address broader policy issues.

Some practical steps have already been achieved by the team in Baghdad. For example, an early goal of ours was to re-start economic activity by getting people back

to work, and to employ the energy and talent of the Iraqi people in rebuilding the

country. In order to get Iraqis untainted by strong links to the Ba’ath Party back

to work, the Office of the Coalition Provisional Authority (OCPA), in consultation

with Defense, Treasury, State and OMB, has begun making ‘‘emergency’’ salary payments to Iraqis in key sectors. These payments have brought port workers back to

work at Umm Qasr, and key civil servants back to critical jobs at important ministries, for example the Ministry of Trade. And putting cash back into pockets

means giving people money to spend on goods and services, which spurs economic

activity.

10

UNSC RESOLUTION 1483: A FRAMEWORK FOR RECONSTRUCTION

President Bush has made clear his desire to work with the United Nations, other

international organizations and other nations to rebuild Iraq. UN Security Council

Resolution 1483 provides an important framework for economic development in Iraq.

UNSCR 1483:

• Recognizes the United States and United Kingdom as the ‘‘Authority’’ and

charges us with carrying out the responsibilities and obligations of this role for

the welfare of the Iraqi people.

• Ends the economic sanctions in place for more than a decade, allowing trade

and financial transactions with the world.

• Provides for a significant role for the United Nations in:

• humanitarian and reconstruction assistance;

• return of refugees;

• restoring and establishing national and local institutions for representative governance;

• formation of an Iraqi interim administration; and

• coordination of humanitarian and reconstruction assistance by a Special Representative of the Secretary General (Mr. Sergio Vieira de Mello

has been named to this position).

• Establishes a Development Fund for Iraq to be used to meet humanitarian

needs, for reconstruction and repair of Iraq’s infrastructure, and other purposes

benefiting the Iraqi people. Specific requirements include:

• receiving proceeds of all export sales of petroleum and natural gas from

Iraq, along with remaining UN funds designated for Iraq, and frozen assets

that had belonged to the Government of Iraq or designated senior officials,

including Saddam Hussein;

• disbursing money in a transparent manner, at the direction of the Coalition Authority, with expenditures to be audited by independent public accountants: the humanitarian needs of the Iraqi people; rebuilding the economy and infrastructure; continued disarmament; the costs of civilian administration; and for other purposes that benefit the people of Iraq; and

• formation of an International Advisory and Monitoring Board, comprising representatives of the UN Secretary General, the IMF Managing Director, the Director General of the Arab Fund for Economic and Social Development and the World Bank President.

• Supports efforts by the Iraqi people to form a representative government based

on equal rights and justice for all Iraqi citizens.

• Calls upon the international community and multilateral institutions to assist

with the reconstruction and development of the Iraqi economy.

• Provides for a six-month winding-down of the Oil for Food Program (OFF), and

removes restrictions on oil exports and sales.

THE JOB AHEAD: KEY CHALLENGES OF RECONSTRUCTION

We speak about the ‘‘reconstruction’’ of Iraq, but that word is misleading. We are

looking not at reconstruction, but at construction, not at rebuilding, but at building.

The Iraqi people must overcome the damage of 25 years of corrupt and vicious tyranny to build their society into a lively and historic center in the Middle East.

As a result of Saddam Hussein’s misrule, Iraq’s economy deteriorated significantly. GDP fell from almost $180 billion in 1979 when Saddam took power to

around $50 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, comparable to El Salvador. 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 is distorted in the way that the

economies of Eastern Europe and the Soviet Union once were. Central control removed incentives for production. Overcoming the legacy of state planning and controlled prices will be arduous and time consuming.There are many tasks ahead, including solving problems in the most critical sectors, properly managing the newly

11

created Development Fund for Iraq, creating a healthy trade and investment climate and transitioning the country off the Oil for Food Program.

Tasks in Four Key Sectors

Oil

The oil sector did not do well 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 power plants, to the pumping stations, to the refineries, and to the

pipelines.

Since the liberation, Iraqi and U.S. engineers have been working around the clock

to restore production so that Iraq will be able to meet domestic needs and begin

earning revenues through exports. A lot of progress has been made already, but

much more remains to be done. Because the oil sector is of such central importance

and the issues it faces so complex, I will provide more details about it later in my

testimony.

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 we rebuild agricultural production to be competitive, we will

also need to ensure that a vibrant trading environment exists.

The government rationing system provided a majority of Iraqi’s with food. Procurement and production of staples, like grains, were by the government. Neither

production nor consumption reflected market prices.

Winding down the Oil for Food program does not mean the end of the need to

feed Iraqis, most of whom have received virtually all their food through OFF. We

are in the process of re-activating the food distribution system to do this. Operational responsibilities of buying, shipping, and distributing food and medicine will

be transferred to us as the occupying power at the end of six months.

In the short run, we must continue food assistance for the Iraqi population dependent on it. In the longer term, we must move the Iraqi economy from the distortions of the Oil for Food program to a market-driven system with cash salaries so

that people can begin to purchase their own food. 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 traded freely in

open markets. Our challenge will be to extend this to grains, wheat and rice, which

are the staples of the Iraqi diet.

USDA and AID have already, begun to think through and implement steps needed to reintroduce competitiveness to Iraqi agriculture. For example, USAID and

USDA have already designed and 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.

Transport

Critical to Iraq’s reconstruction will be the transportation sector, which faces numerous challenges. On May 23, the port of Umm Qasr became the first reconstruction project transferred from military to civilian administration. The basic infrastructure is sound, but has not received proper maintenance for years. Rehabilitation priorities include the port administration buildings, new lighting, utilities, security fences, grain elevators, port dredging so that larger bulk grain vessels can offload near the grain elevators. The adjoining railroad system is also under review

for repair to help move the large amount of cargo projected to arrive through the

port. Major roadways have also sustained conflict-related damage and will need

work.

In civil aviation, the aircraft of Iraqi Airways, the former national carrier, are

parked outside Iraq and are not airworthy. Moreover, Baghdad International Airport has taxi lane craters, broken runway lights, unexploded ordinance, plumbing

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difficulties, and security access control problems. There is also no functioning civil

aviation authority to oversee airport security, flight safety oversight, and the administration of civair services. Despite these obstacles, the Coalition Provisional Authority hopes to resume civair services before July to accelerate the flow of U.S. and

foreign actors involved in reconstruction efforts. We foresee that with the improvement of Iraq’s internal transport system, trade and investment relations with its

neighbors will also improve.

USAID contractors Skylink, Bechtel and Global Securities are making preparations for the possible re-opening of Baghdad International Airport to limited commercial traffic by June 15. As part of an interim operation, Global Securities is to

provide passenger and baggage screening security, Bechtel a temporary passenger

terminal and Skylink airport management. Skylink has also been contracted to assess and make preparations for the re-opening of the Basra Airport. USAID contractor, Stevedoring Services of America, assumed operational responsibility for the

deepwater port of Urn Qasr from the British military on May 23.

Telecommunications

Telecommunications remains a critical requirement for OCPA and the reconstruction effort. Prior to the conflict, Iraq had minimal telecommunications—some three

phones per 100 citizens. Although among the lowest levels in the world, even this

low figure overstates phone penetration experienced by the average Iraqi since the

ruling institutions—Ba’ath Party, military and government offices—controlled many

of the phones. In addition, there was no wireless system, little Internet and few

computers.

In prosecuting the war, command and control systems, and telecommunications

centers, were targeted. The war and subsequent looting and fires destroyed some

50 percent of the telephone switches in Baghdad and severed all intercity and international links. Thus, even though about two-thirds of the 800,000 lines in Iraq remain serviceable; they can connect only with phones in their local exchanges.

As part of its efforts to provide security and operations for OCPA, DoD contracted

with MCI for a small emergency wireless system for Baghdad, initially involving

some 2,000 phones. The United Kingdom Ministry of Defense contracted through

Vodafone for similar wireless coverage in the south.

The Department of State has been active in developing a policy response to address the larger telecommunications requirements. State leads an interagency Telecommunications Support Team to coordinate with and support the operations of

OCPA’s Joint Communications Advisory Board. The interagency team has endorsed

a three-phase approach for telecommunications that addresses (1) emergency requirements, (2) telecommunications needs assessments, and (3) development of a

broad policy framework for the telecommunications sector reconstruction and development.

The interagency team has also taken the lead in responding to specific telecommunications requests from OCPA, including that from Ambassador Bremer for

an emergency interim nationwide communications system for Iraq. With interagency

agreement, State has recommended that USAID contract for the rapid restoration

of critical emergency telecommunications facilities. This contract would provide a coherent, integrated management approach to emergency telecommunications that

would link 21 cities and provide international connections. It would call for multiple

technologies and not prejudge future decisions by service providers about technology. It would support supervisory control and data acquisition (SCADA) systems

for other critical sectors—power, water, refinery, transportation/airport, as well as

support medical, fire, police and other emergency response operations. And, most

importantly, it would provide these services within 30 days.

In other areas, members of the interagency team are developing a spectrum management plan and a framework for the telecommunications regulatory structure in

Iraq that has as its goal a market based, private sector-led telecommunications sector.

Looking forward, there remain several requirements for getting a modern telecommunications system in Iraq. These include repair and building the wireline system, as well as a registration system leading to competitive licensing of wireless

service providers so the Iraqi people can benefit from this important technology. We

are working, as noted above, to establish the policy infrastructure for this action.

It is difficult to speak with precision as to when these actions can be completed, but

we hope within a matter of months.

As you can see from a very brief overview of key sectors, Iraq will need assistance

to get up and running. Not long-term aid, but shorter-term aid until its economy

can function well, and its citizens prosper.

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MANAGEMENT OF THE COUNTRY’S FINANCES—THE DEVELOPMENT FUND FOR IRAQ

Security Council Resolution 1483 directs that oil proceeds be deposited in a Development Fund for Iraq and be used for the humanitarian needs of the Iraqi people,

for rebuilding the economy and infrastructure, for continued disarmament, and for

the costs of civilian administration. Ambassador Bremer already has created a senior-level Project Review Board, to be chaired by former USAID Director Peter

McPherson, that would approve projects and allocate funding sources. This process

of reviewing and approving expenditures will provide the basis for a national budget

for Iraq; Treasury already has budget experts on the ground in Baghdad working

on these issues. We also expect OCPA to design a transparent procurement mechanism for Development Fund expenditures that is consistent with USG procurement

guides.

We have worked with other agencies to open accounts for the Development Fund

for Iraq in both the Central Bank of Iraq and at the New York Federal Reserve

Bank. The Development Fund for Iraq is now open for deposits of oil sale proceeds

and other revenues, including transfers from the UN. State is also working closely

with the Department of the Treasury to support the work of the International Advisory and Monitoring Board, which will bring representatives of the UN and international financial institutions together to approve auditors for the Development

Fund for Iraq.

CREATING A HEALTHY CLIMATE FOR TRADE AND INVESTMENT

Removing economic and financial sanctions alone will not open trade. We must

reestablish Iraq’s trade with its neighbors and the world, and establish a healthy

business climate for Iraqis and for domestic and foreign investment. Our team in

the field has already made a preliminary identification of several key issues. These

include:

• establishment of a new tariff schedule;

• removal of non-tariff barriers;

• encouragement of foreign investment through drafting of a more open investment code and loosening of restrictions of foreign ownership of private property;

• creation of an effective banking system, and other financial services;

• privatization of substantial means of production and development;

• adoption of effective copyright protections; and

• eventual entry into the WTO.

MOBILIZING RESOURCES FOR IRAQ RECONSTRUCTION

UNSC Resolution 1483 lays a foundation for redevelopment of much of Iraq’s

economy and more work will need to be done over and above that. The American

people and coalition allies paid the price in blood and treasure to liberate Iraq. The

cost of redeveloping Iraq’s economy should be shared by the Iraqi people, the international community and by the coalition.

I cannot give you a figure on how much it will cost to rebuild Iraq. This is a complicated question with a number of component parts. First, there is a need for funding of repairs and rehabilitation following this most recent conflict. Second, is the

larger task of undoing the damage done by decades of Saddam Hussein’s misrule—

corruption, plunder and the distortions of central state planning. Third, the Iraqi

people will need financing—public and private, domestic and foreign—to bring

Iraq—isolated for decades—into the information-rich, technology-driven global economy.

As my comments on the oil, agriculture, transport and telecommunications sectors

imply, it will be some time before we can even begin to estimate accurately all the

forms of damage this country’s economy has sustained. We are not talking about

traditional long-term financial assistance. Iraq needs help to get its economy on a

sound basis, develop a welcoming investment climate and integration into regional

and international trade. The global community has asked the World Bank and

UNDP to send a team of experts to Iraq soon to do a thorough assessment. The instability of the environment hampers our efforts currently, but to the extent we can,

we stand ready to update you at any time on this important issue.

There are a number of resources that we plan on mobilizing to finance the rebuilding of Iraq.

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Found and Vested Assets

First, existing Iraqi state assets and the ill-gotten gains of Saddam Hussein and

his regime will be made available for the benefit of the Iraqi people.

After Saddam Hussein’s invasion of Kuwait in 1990, the United States acted

quickly and decisively to deprive the Iraqi regime of the means and materials to

continue its regional aggression, further develop its weapons of mass destruction

programs, and continue its repression of the Iraqi people. Consistent with UNSC

Resolution 661, the United States blocked all Iraqi state assets legally within its

control.

Today, the United States is using those assets for the benefit of the Iraqi people, as they build a new and better Iraq. The President vested $1.7 billion in Iraqi government assets in the United States. The Secretary of the Treasury has already designated the Secretary of Defense with the authority to use over $573.5 of these assets to meet the immediate humanitarian needs of the Iraqi people.

Since the President signed the March 20 Executive Order vesting Iraqi state assets in the United States, the State Department, in cooperation with our interagency partners, is confirming the status of assets declared frozen by foreign governments in 1991. We have reached out to more than 20 additional countries that

also may have information regarding Iraqi state assets. With the unanimous passage of UNSCR 1483, we are also reminding countries of their obligation under the

new resolution to make available any Iraqi state assets to the Development Fund

for Iraq.

We have had, and continue to have, extensive bilateral and multilateral meetings

with key jurisdictions. For example, the administration took advantage of the IMF/

World Bank meetings held in Washington in April to hold several important bilateral meetings to discuss the matter. Treasury and State officials have contacted

their counterparts in key jurisdictions. My colleagues and I have stressed the need

for all countries to search their financial institutions for ill-gotten gains of Saddam

Hussein and his regime.

The Department of State is working closely with the Departments of the Treasury, Justice, Defense, and Homeland Security, as well as law enforcement and intelligence colleagues across the government, to identify additional assets and front

companies that may be connected to Saddam Hussein or his fallen regime. Our efforts are leading to the identification of funds that can be made available for the

benefit of the Iraqi people. To date more than $1 billion in previously unfrozen assets outside Iraq have been identified.

Revenue from Petroleum Production

Oil sales are 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 on line and to repair and rehabilitate the existing infrastructure. A highly qualified team is ready to take on this work. Thamir

Ghadhban is the CEO of the Oil Ministry and is actively directing the process. He

has a team of experienced and well-qualified Iraqi managers and engineers in place

at the Oil Ministry, the State Oil Marketing Organization (SOMO), and the South

and North Oil Companies, and they have technical support from the Army Corps

of Engineers. Steps are being taken every day by Iraqis working with the Army

Corps to assess the condition of wells, pipelines, pumping stations, gas-oil separation plants, power grids, and refineries, and to make repairs. As the security situation improves, the work will proceed at a faster pace.

Iraq’s entire oil infrastructure was shut down in the face of the American advance. The Iraqis and we have been working diligently since the international coalition liberated Iraq, to bring the sector back on line. Mr. Ghadhban announced on

May 21 that Iraq was already producing 800,000 barrels of oil per day. While there

are many variables that can affect success in meeting production goals, he also said

that production could reach 1.4 or even 1.5 million barrels by June 15. On May 28,

Mr. Ghadhban announced that the northern fields around Kirkuk have been producing 600,000 barrels per day since May 27 but are not expected to increase production above that level in the near term. In the south, the situation is not as far

advanced, but again, progress is being made. He also said that, as of May 27, oil

production in southern Iraq exceeded 200,000 barrels per day, so it seems that Iraq

is well on its way to meeting Mr. Ghadhban’s production goals.

As a point of comparison, Iraq produced between 2 and 3 million barrels per day

in 2002. This is was down from 3.5 million barrels produced at Iraq’s production

peak in 1990. During 2002, Iraq exported an average of 1.7 million barrels per day.

Mr. Ghadhban also announced that the Basra refinery is—or soon will be—operating at full capacity—140,000 barrels per day. The plant is antiquated and the condition of the pipeline that runs to Baghdad is still being assessed. Iraq’s two other

15

major refineries at Baiji and Daura are also operating, but at below capacity, because of damage from looting, the continued lack of stable electrical power, and a

shortage of heavy fuel storage.

Mr. Ghadhban has determined the first task is to ensure that Iraq is able to meet

its own domestic needs for motor fuel and liquefied petroleum gas, which is used

for cooking. Iraq’s domestic needs for refined products require a production level of

some 250,000 barrels of oil per day. But in creating gasoline, Iraq also generates

considerable heavy fuel, which is largely exported. As Iraqi oil production reaches

1.3–1.5 million bpd, this would translate into roughly 1 million barrels of crude oil

available for export every day, plus lesser quantities of refined product/heavy fuel.

SOMO has placed the first crude up for sale and is in the process of collecting

and evaluating bids in expectation of oil listings resuming in the next week, if not

the next few days.

There is ample crude ready for export now through the port at Ceyhan in Turkey,

with over nine million barrels of oil already in storage at the port, over eight million

of which will be ready for export as soon as contracts can be drawn up and signed

by SOMO.

The Mina al-Bakr oil terminal is operational. However, there are a number of

problems that will need to be resolved in the south, not the least being the need

to repair an industrial water plant needed for oil extraction, in order to raise production to pre-war levels of 1.2 million barrels per day.

In order to export these quantities, however, the legal framework of contracts,

guarantees, payments, and credits will need to be finalized. SOMO has been working to draft a model contract. The head of SOMO, Mohammed al-Jibouri, has announced that the new contracts will be similar to those used under the Oil for Food

program, but some important changes are envisioned: most importantly, contracts

will be made transparently, unlike the past when Saddam Hussein sought kickbacks from purchasers.

Al-Jibouri plans to sign direct sales contracts with traders and refiners, cutting

out the middlemen that facilitated the kickback schemes. SOMO will also drop the

UN’s retroactive pricing formula, moving instead to standard market pricing techniques.

The petroleum sector has seen virtually no new investment since 1991, and no

new technology. Upgrades to protect the environment, to enhance efficiency, and to

meet commercial and safety standards are badly needed, both upstream and downstream. There are a number of estimates that have been made regarding the probable costs associated with returning Iraq’s oil production to previous levels. For ex- ample, Cambridge Energy Research Associates recently put a ballpark figure of $3

billion over two years to reach 3.5 million bpd through an intensive program of rehabilitation and modernization. This would bring production back to pre-1990 levels.

In the meantime, Mr. Ghadhban has announced that in the short term Iraq would

need not billions of dollars but ‘‘several hundred million dollars.’’ Under a new Iraqi

Government, Ghadhban has noted that, ‘‘We are going to open the doors for foreign

investment but in accordance with a formula that safeguards the interest of the

Iraqi people.’’

Oil Ministry officials hope to raise production to over 2 million barrels per day

by the end of this year. This will require more rehabilitation of the Rumaila fields

and production chains in southern Iraq. Since the security situation is only slowly

improving, it is difficult to project the likelihood of success or the likely costs associated with this work.

There obviously is considerable uncertainty surrounding these production and export projections. But we can still use these numbers as a rough basis for estimating

potential revenue earnings from oil exports. In the next few days, as Iraq begins

to sell oil from Ceyhan and the Gulf, we will have a better idea of the price Iraqi

oil can fetch, compared to other blends on the market. Recently, European oil traders were tentatively pegging Kirkuk crude at a price of $3.65 to $3.85 per barrel

lower than Brent, which is the standard against which all European crude is measured. Because of long-term damage to the fields, Kirkuk crude is higher in sulfur

than it used to be. Europe’s strict air quality standards will make the oil a hard

sell there, which is reflected in the lower price.

If, for purposes of estimate, we say that a barrel of Iraqi crude sells for $20, and

if Iraq is able to bring exports up at a stable rate from 1 million bpd in mid-June

to 2 million bpd at the end of the year, Iraq’s gross earnings—before costs are deducted—would be in the range of $5 billion for the second half of 2003. If Iraq is

able to maintain stable production and export rates at 2 million bpd throughout

2004, it could earn, again in gross revenues, about $ 14–15 billion. But potential

earnings are subject to a host of factors both inside and outside the country, including the volatile nature of global oil markets and whether there is sufficient demand

16

for Iraq’s sour crude to keep the price at the projected range. The state of the global

economy is also hard to predict, and this too will have an impact on potential earnings.

In looking toward the longer term, Iraq’s oil ministry has begun to assess its rehabilitation requirements and evaluate existing service contracts against identified

needs. Development contracts with Lukoil and China are being held in abeyance

until a new Iraqi government is in place to determine their future. We would expect

that the new government would also need new contracts to upgrade facilities—including refineries, gas-oil separation plants, power plants, pipelines and pumping

stations, as well as to rehabilitate wells and open new fields to production.

Because Iraq has not had access to investments or new technology over the last

decade, analysts say that the country may not be able to increase its production at

existing fields even to pre-1990 levels, because standard operating procedures used

over the past decade may have caused irreparable damage to the fields, especially

in Kirkuk. The status of these fields will need to be assessed.

Over the long term, Iraq will want to acquire updated technology, and may want

to open new fields (only 15 of the 73 known fields are in production now). It is possible that Iraq will also be looking into options for exploration in other regions.

Other parts of the oil sector infrastructure also need work. According to recent

reports, the Mina al-Bakr export terminal in the Gulf has the potential to handle

1.6 million barrels per day, but we estimate that it cannot be safely run at levels

much above 1.1 million. A second oil terminal, Khor al-Amaya, was destroyed in the

first Gulf War and only partially repaired. It lies in a calmer area of the Gulf, however, and once rehabilitated will provide a useful alternative.

Many commentators are speculating about how much it would cost if Iraq should

seek to raise production above historical levels. For example, experts at Deutsche

Bank, PFC Energy Associates, and Energy Compass, have looked at not only sector

rehabilitation, but also new field production. They have come up with large estimates of the financial cost of raising Iraqi oil production far above its historical

peak.

But it will be up to the new Iraqi government to decide how far it wants to go

and just where it wants to target Iraq’s future production levels. Any large expansion of Iraqi production capacity would have to be accommodated by increased demand in the international oil market; such an increase in production capacity

would, in all probability, need to be privately financed. The focus now is on rehabilitation and repair to help Iraq meet Mr. Ghadhban’s more modest goal of 2 to 2.5

million barrels per day.

Finally, new laws and regulations will be needed to foster investment and facilitate foreign ventures in order to fund new development.

OPEC will hold its next meeting on June 11 in Doha. Mr. Ghadhban has indicated

that Iraq has no plans to leave OPEC, which it helped establish, but he also has

no plans to attend the June 11 meeting. Before the first Gulf War, Iraq was responsible for about 4 percent of world oil sales. Under UN sanctions, Iraq was exempt

from OPEC quotas, and the other OPEC members, especially Saudi Arabia, adjusted

production to compensate for Iraqi oil sales through the UN Oil for Food program

and to maintain their target price of $25 to $28 per barrel.

CONTRIBUTIONS FROM OTHER COUNTRIES

Despite the billions Iraq has in existing assets and expected oil revenues, resources will remain far below what will be needed for the next year or so to help

the Iraqis achieve a stable economic base. We expect that other countries—both individually and through international organizations such as the United Nation—will

make major contributions to this effort. Many countries have 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 appeal. The EU alone has promised $107 million. 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.

Even before the fighting stopped, the State Department, working closely with colleagues from DoD and Treasury, launched a series of quiet consultations with countries that share our interest in helping Iraq rebuild. These consultations confirmed

that there is widespread recognition that repairing the damage of decades of misrule

in Iraq is an international undertaking.

We now are working with the United Nations and the World Bank on a preparatory meeting on reconstruction that will involve a broad cross section of countries. The preparatory meeting will examine not only current needs, but also explore

requirements in coming years. The preparatory meeting will be organized by the

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UINDP, the World Bank and the United States on June 24. One outcome of the

meeting is likely to be a major donors conference in the fall. The meeting should

also underline the urgency of undertaking a World Bank/UNDP needs assessment.

DEBT RELIEF

In addition to the many costs Iraq faces to rebuild its economy, it will also have

to deal with the weight of huge amounts of debt contracted by the previous regime.

Treasury and State are working with other creditor countries on a long-run solution

to Iraq’s debt burden that is responsive to the full range of Iraq’s creditors. Secretary Snow has urged the need for a comprehensive, multilateral debt treatment

for Iraq. The issue was discussed at the spring World Bank/IMF meetings and in

the G–7, where nations agreed on the need to engage the Paris Club, a group of

creditor nations that meet regularly to provide debt relief to debtor countries.

At the April session of the Paris Club, State and Treasury and Paris Club colleagues discussed Iraq and began the process of debt data reconciliation. In their

recent meeting at Deauville, G–8 Finance Ministers recognized that it would be unrealistic to expect Iraq to make payments on its debt at least through the end of

2004. Currently, Iraq is not making payments on its international debt. The G–8

also asked the IMF to assess Iraq’s debt situation.

PRIVATE SECTOR INVESTMENT

In the end, the single largest contributor to Iraq’s economic renewal will be the

Iraqi people, their ingenuity and their determination to improve their lives, now

that the burden of the Saddam regime has been lifted.

Ambassador Bremer has stressed that we must begin to create the conditions for

a free market economy in Iraq now. Our biggest challenges will be creating a secure

environment in which honest Iraqi’s can establish and run businesses, and the

smooth transformation of a state-controlled economy into a free market. But the

Iraqi people are talented and ambitious. And, despite decades of war, Iraq has a

small private sector, which can be nurtured back to health.

We have been studying the legal and economic reforms needed to create a stable

business environment in Iraq. Ambassador Bremer’s team has been cataloging such

reforms—which range from lifting tariffs to WTO accession to creation of a new

legal framework. These and many other practical issues must be addressed before

international trade activity with Iraq will resume and flourish.

In Washington, State’s Assistant Secretary for Economic and Business Affairs has

hosted a series of interagency meetings to look at key economic reconstruction

issues for which Ambassador Bremer’s team in Baghdad needs Washington guidance. Last week, the group conferred over necessary steps to revitalize business and

commerce in Iraq following the lifting of economic sanctions. The group also examined action needed to successfully transition from the current centrally controlled

food distribution system under the UN’s Oil for Food program to a market-based

food distribution system.

We have been drawing on the knowledge and expertise of our embassies in the

region, and are also working to engage regional governments—the idea being to

identify ‘‘best practices’’ and use regional reform models where appropriate.

One of the most important steps we can take is to help Iraq re-integrate with the

broader regional economy. The upcoming June 21–23 special World Economic Forum

event in Amman, Jordan, provides an excellent opportunity to begin this process,

as Secretary Powell will undoubtedly underline during his discussions there. In addition, the international development institutions and the donor community will

focus extensively on steps we can take to re-stimulate private economic activity in

Iraq during June 24 donor’s meeting at the United Nations.

CONCLUSION

The transformation that will take Iraqis from life under a ruler of unimaginable

cruelty to a free and prosperous nation will take time. The American people have

committed to help Iraqis make this transformation, but it will require much more

work on our part. The long-term future of Iraq depends on the establishment of rule

of law, representative government, and sustainable economic development. The

United States, our coalition partners, the United Nations, and most importantly, the

Iraqi people, must work together to finish the job, in order to guarantee peace and

stability in the region, and safety for the American people.

The administration welcomes the strong interest of the Congress in this issue and

its strong support for the important task at hand. We look forward to working closely with the Congress in the months ahead.

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The CHAIRMAN. Thank you very much, Secretary Larson.

Secretary Zakheim.

STATEMENT OF HON. DOV ZAKHEIM, UNDER SECRETARY OF

DEFENSE (COMPTROLLER), U.S. DEPARTMENT OF DEFENSE

Dr. ZAKHEIM. Mr. Chairman, Senator Biden, and distinguished

members of the committee, I am delighted to participate in this important discussion. Let me echo up front what my colleague Secretary Larson has said. We at the table and our agencies are working exceedingly closely together to speed Iraq’s recovery. I can’t underscore that too often.

As Deputy Secretary of Defense Paul Wolfowitz emphasized before this committee about two weeks ago, the Department of Defense is strongly committed to helping the Iraqi people establish an

Iraq that is free and at peace with itself and its neighbors. We continue to work to stabilize the country and to accelerate its recovery.

In particular, we are focusing on humanitarian assistance, reconstruction, and new governance.

DOD and other departments and agencies play a critical role in

ensuring that the Iraqi people get what they need to rebuild their

lives and their nation. Today, I will in brief address DOD support

for recovery in Iraq, the resources available to achieve that recovery, and our efforts to enlist the support of the international community.

Let me begin with the various sources of funding for Iraq’s

speedy recovery. As has been mentioned, in the Emergency Wartime Supplemental Appropriations Act of 2003 the Congress appropriated $2.475 billion for the President’s Iraq relief and reconstruction fund, which is the primary source of appropriated funding for

Iraqi relief and reconstruction activities. The Congress also made

$489 million of the Iraqi Freedom Fund appropriation available to

be used if needed to repair damage to Iraqi oil facilities and to preserve their distribution capability.

Iraqi state assets are a second category. President Bush, as you

heard, has directed that Iraqi state assets under our control, that

is U.S. control, be used only for the benefit of the Iraqi people and

their nation’s recovery. These assets fall into two categories.

One we’ve termed vested assets, and that’s about $1.7 billion in

formerly frozen Iraqi state assets in the United States, which the

President has vested in the Treasury Department for apportionment to federal agencies’ requirements that benefit the Iraqi people. We have shipped $199 million of those vested assets already.

We have another request in for $358 million and almost all of those

funds are for salaries for Iraqi civil servants, pensioners and so on,

and there was about $30 million for ministry start-up costs.

The second category that I mentioned earlier, seized assets.

There are now, to update the estimate you heard, about $798 million so far in Iraqi state assets that were brought under U.S. control in Iraq by U.S. troops pursuant to the laws and usages of war.

Now there are the international contributions, yet another category. The UN, other international institutions, and the United

States and its coalition partners continue to urge all nations to contribute to the recovery in Iraq in any way they can. And the public

pledges to date, again to give you an updated estimate, are now

19

about $2 billion. We anticipate other contributions as well, including troop contributions to create multinational divisions of peacekeeping forces.

As you heard, the UN Security Council Resolution 1483 adopted

on May 22 directs certain monies to be placed in the Development

Fund for Iraq. These monies include the unencumbered funds from

the UN’s Oil-For-Food escrow account, including an initial transfer

of a billion dollars that has already been deposited in the Development Fund. Proceeds from the sale of petroleum, petroleum products and natural gas, have returned Iraqi assets from UN member

states. And this is significant. The Development Fund may be used

only in a transparent manner for the purpose of benefiting the people of Iraq.

The funding is obviously not enough. We have to identify the

most pressing and promising requirements for recovery. That is to

say, programs, projects and other uses that will benefit the Iraqi

people and help transform that country. We look to the Coalition

Provisional Authority (CPA) to identify these requirements. The

presidential envoy, Ambassador Paul Bremer, who is the administrator of the CPA, oversees and coordinates all executive, legislative and judicial functions necessary for temporary governments in

Iraq, including humanitarian relief, reconstruction, and assisting in

the formation of an Iraqi interim authority.

Now the CPA, this Coalition Provisional Authority, includes representatives from both coalition nations and U.S. government agencies, all of whom are involved in identifying and prioritizing recovery requirements in Iraq. Ambassador Bremer is also getting substantial input from the leaders of the Iraqi people. Agencies or entities outside the CPA can propose requirements, but these have to

be submitted to Ambassador Bremer for his review.

For funding from vested or seized assets, and again, vested are

the ones that were frozen, seized are the ones that were found out

in Iraq, the CPA submits its proposed requirements to the Office

of the Secretary of Defense and specifically to my office.

Requests for funds appropriated through the Defense Department from the $2.47 billion appropriation are also submitted to my

office, which as in all cases, evaluates them and then forwards

them to the Office of Management and Budget.

For funding for non-DOD appropriated funds, the CPA submits

its proposed requirements directly to OMB. OMB consults with the

Secretary of Defense and other appropriate federal offices on policy

and program issues.

Now my office has organized a liaison cell to help Ambassador

Bremer and his people fulfill its responsibilities. This cell will be

led by my office and includes representatives from outside the Defense Department, OMB, AID, and the General Accounting Office

as well. Within DOD, the Inspector General, the Joint Staff, and

several defense agencies such as our contract managers and our

contract auditors will also have representatives.

This cell will help the CPA expedite coordination and approval

of requirements for recovery in Iraq. It will provide on-cite expertise in budgeting, financial plan development, costing, accounting,

and other needs.

20

Now the President has directed that the DOD in consultation

with OMB and my colleagues at State and Treasury, adopt procedures to ensure that Iraqi state or achieved owned assets are used

only to assist the Iraqi people and support the reconstruction of

Iraq, and are properly accounted for, and we at DOD have adopted

strong measures to uphold the President’s direction. We are using

longstanding proven safeguards for handling and accounting for

Iraqi state assets. We’re emphasizing transparency, rigorous accounting and auditing procedures, and the process includes on-site

audit testing, of course the use of signatures, and standard financial and management controls.

And toward that objective, on May 21, Deputy Secretary

Wolfowitz designated the Secretary of the Army as the DOD executive agent for all support of the CPA. This includes contracting

support of all DOD agencies. Notably the Defense Contract Auditing Agency, which is part of my organization, are presently supporting all known Iraqi contracting requirements, and will fully

support the Army as it transitions to a permanent contracting presence in the Iraq theater of operations.

To the maximum extent practicable, vested and seized assets are

being administered and accounted for under controls that are

equivalent to those applicable to DOD appropriated funds. DOD

procedures cover the full range of asset handling, from the initial

seizure of assets all the way through final disbursement of those

assets. Safeguarding foreign national assets is not new to the U.S.

nor to the Department of Defense.

It’s impossible to overestimate the importance of accountability

for Iraqi state assets under U.S. control. The Iraqi people, the

American people, and the international community must be satisfied that these assets are being used only to help Iraq recover and

that funds go to the most pressing requirements, and that a proper

accounting be done.

With the recent delegation by Deputy Secretary Wolfowitz naming the Army as executive agent, I am confident that the Army will

stand up a highly confident and practicable organization to centrally integrate all current and future Iraq reconstruction contracting requirements. I believe that the Deputy Secretary’s directive was the one key action needed to ensure that there is no duplication of Iraqi construction requirements and that appropriate financial controls will be established and deployed.

I will be meeting with the Secretary of the Army and his staff

to offer my support throughout the efforts. I’m personally and absolutely committed to an integrated well-managed contracting process in Iraq, a transparent process equal to the very best military

acquisition centers in this country. All financial and audit issues

serviced by DCAA, that’s the Contract Audit Agency, and other

DOD components will be brought to my immediate attention, and

have been, for appropriate action.

I would like to give you some detail, because particularly Senator

Biden asked for it, without going on at length, about the nature of

the international contributions. These contributions, both cash and

in kind, are obviously going to be critical to Iraq’s recovery. I have

been designated as the Department of Defense coordinator for

international assistance in post-conflict Iraq. I work jointly in that

21

regard with my colleagues at this table, Under Secretaries Larson

and Taylor, and Mr. Natsios, and their offices, as well as some offices outside the U.S. government.

We are working closely with multinational institutions, notably

the UN, the World Bank, and the IMF, who will play critical roles

in facilitating the assistance to Iraq recovery. As you already heard

from Secretary Larson, these international institutions are developing needs assessments, which I think goes to some of Senator

Biden’s concerns about coming up with longer range estimates. It

takes time and that is what they are undertaking. And finally, I

should add that we have daily coordination with the Office of the

Coalition Provisional Authority.

As I mentioned, the international community has publicly offered something over $2 billion for reconstruction assistance for Iraq.

About $800 million of that has been meant in response to the UN

flash appeal for urgent requirements, and the remaining $1.2 billion has been offered outside the flash appeal.

Let me give you some examples. Japan has agreed to contribute more than $150 million in emergency humanitarian aid. Australia

has delivered more than $26 million dollars, include 100,000 metric

tons of wheat, shipping costs as well. Australia is also providing

agricultural expertise. Canada has delivered more than 41 million

U.S. dollars for critical water sanitation, food, shelter and health

requirements. The United Kingdom has pledged $338 million in

humanitarian assistance. Spain has pledged $56 million, primarily

in humanitarian supplies, and Spain has also initiated its own

needs assessment which is certainly kind of preliminary to what

could be done from here on out, and the Spanish have just sent to

the CPA proposals for six new projects that they want to undertake

in Iraq. The Netherlands is contributing $14 million in response to

the flash appeal and that will be provided through Dutch non-governmental organizations. Norway is donating up to $21.5 million

for humanitarian assistance. The European Union has so far

pledged $107 million, of which $14.5 million has been delivered, including 10 tons of medical supplies that has been airlifted to Baghdad.

Jordan has deployed a field hospital to Baghdad for emergency

medical services. United Arab Emirates has set up water purification plants. It has an adoptive program we have worked on here

as well as internationally, kind of like adopt a highway that you’re

aware of, adopt a hospital, adopt a school, adopt a day care center,

and the United Arab Emirates has adopted 8 hospitals in that way.

So these are just some examples of what the international community is doing to respond to the humanitarian and reconstruction

needs. We, my colleagues and I here will continue to engage the

international community to come together to assist the Iraqi people

to rebuild their lives and their country.

So, in closing, I want to emphasize that the Department of Defense is intensely focused on advancing stabilization and recovery

in Iraq as rapidly and as smoothly as possible. We recognize, as

you do, that the stakes cannot be higher. The emergence of an Iraq

that protects the right of its citizens, that represents all of its diverse ethnic and religious groups, that prospers economically for

the benefit of all its people, all of that would be a profoundly imVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 89517 SFRELA2 PsN: SFRELA2
22

portant model for the Middle East and the entire world. To help

the Iraqi people meet this challenge, President Bush has pledged

America’s commitment to stay the course and there is no doubt,

success will be very expensive and it will take years and not

months.

This committee is helping the American people and the international community understand the criticality and difficulty of

building a new Iraq, and I look forward to contributing to the important work and be of assistance as I can. Thank you.

[The prepared statement of Dr. Zakheim follows:]

PREPARED STATEMENT OF DOV S. ZAKHEIM

Iraq Stabilization and Reconstruction

Mr. Chairman, members of the committee, I am delighted to participate in this

important discussion. As Deputy Secretary of Defense Paul Wolfowitz emphasized

before this committee two weeks ago, the Department of Defense (DoD) is strongly

committed to helping the Iraqi people establish an Iraq that is free and at peace

with itself and its neighbors. We continue to work to stabilize the country and to

accelerate its recovery. In particular, we are focusing on humanitarian assistance,

reconstruction, and new governance.

The Department of Defense, working closely with other departments and agencies,

plays a critical role in ensuring that the Iraqi people get what they need to rebuild

their lives and their nation. Today I will address DoD’s support for recovery in Iraq,

the resources available to achieve that, and our efforts to enlist the support of the

international community.

Funding Sources for Recovery

Let me begin with the various sources of funding for Iraq’s speedy recovery and

renewal.

Appropriations. In the Emergency Wartime Supplemental Appropriations Act,

2003, Congress appropriated $2.475 billion for the President’s Iraq Relief and Reconstruction Fund, which is the primary source of appropriated funding for Iraqi relief and reconstruction activities. Congress also made $489 million of the Iraqi Freedom Fund appropriation available to be used if needed to repair damage to Iraq oil

facilities and to preserve a petroleum distribution capability.

Iraqi state assets. President Bush has directed that Iraqi state assets under U.S.

control will be used only for the benefit of the Iraqi people and their nation’s recovery. These assets fall into two categories:

Vested assets: $1.7 billion in formerly frozen Iraqi state assets in the U.S.,

which the President has vested in the Treasury Department for apportionment to federal agencies for requirements that benefit the Iraqi people;

Seized assets: About $800 million so far in Iraqi state assets brought

under U.S. control in Iraq by U.S. troops, pursuant to the laws and usages

of war.

International contributions. The UN, other international institutions, and the U.S.

and its coalition partners continue to urge all nations to contribute to recovery in

Iraq in any way they can. Public pledges from the international community exceed

$2 billion. We anticipate other contributions as well—including troop contributions

to create Multi-National divisions of peacekeeping forces.

Development Fund for Iraq. UN Security Council Resolution 1483, adopted on

May 22, directs certain monies to be placed in the Development Fund for Iraq.

These monies include unencumbered funds from the UN’s ‘‘Oil for Food’’ escrow account including an initial transfer of $1 billion that has already been deposited in

the Development Fund; proceeds from the sale of petroleum, petroleum products and

natural gas; and returned Iraqi assets from UN Member States. Significantly, the

Development Fund may be used only in a transparent manner for purposes benefiting the people of Iraq.

Determining Requirements for Recovery

Funding is not enough. We must identify the most pressing and promising requirements for recovery: programs, projects, and other uses that will benefit the

Iraqi people and help transform Iraq. We look to the Coalition Provisional Authority

(CPA) to identify these requirements. Presidential envoy Ambassador L. Paul

23

Bremer—as Administrator of the CPA—oversees and coordinates all executive, legislative, and judicial functions necessary for temporary governance of Iraq including

humanitarian relief, reconstruction, and assisting in the formation of an Iraqi interim authority.

The CPA includes representatives from both coalition nations and U.S. government agencies that are involved in identifying and prioritizing recovery requirements in Iraq. Ambassador Bremer also is getting substantial input from leaders

of the Iraqi people. Agencies or entities outside the CPA can propose requirements,

but these must be submitted to Ambassador Bremer for review.

For funding from vested or seized assets, the CPA submits its proposed requirements to the Office of the Secretary of Defense (OSD)—specifically to my office. Requests for funds appropriated to DoD are also submitted to my office which, as in

all cases, evaluates them and forwards approved requests to the Office of Management and Budget (OMB). For funding from non-DoD appropriated funds, the CPA

submits its proposed requirements directly to OMB. OMB consults with OSD and

other appropriate federal offices on policy and program issues.

My office has organized a liaison cell to help the CPA fulfill its responsibilities.

This cell will be led by my office and includes representatives from outside DoD:

OMB, the U.S. Agency for International Development (USAID), and the General Accounting Office. Within DoD, the Inspector General, Joint Staff, and several defense

agencies will have representatives. The cell will help the CPA expedite coordination

and approval of requirements for recovery in Iraq. It will provide on-site expertise

on budgeting, financial plan development, costing, accounting, and other needs.

Accountability for Iraqi State Assets Controlled by the U.S.

The President has directed that the Department of Defense—in consultation with

OMB and the Departments of State and Treasury—adopt procedures to ensure that

Iraqi state or regime-owned assets are used only to assist Iraqi people and support

the reconstruction of Iraq, and are properly accounted for. DoD has adopted strong

measures to fulfill the President’s direction.

The Department is using long-standing, proven safeguards for handling and accounting for Iraqi state assets. We are emphasizing transparency and rigorous accounting and auditing procedures. The process includes on-site audit testing, and

the use of signatures and other strong financial and management controls. Towards

that objective, on May 21, 2003, Deputy Secretary Wolfowitz designated the Secretary of the Army as the DoD Executive Agent for all CPA support. This includes

contracting support. All DoD agencies, notably the Defense Contract Audit Agency,

are presently supporting all known Iraq contracting requirements, and will fully

support the Army as it transitions to a permanent contracting presence in the Iraq

theater of operations. To the maximum extent practicable, vested and seized assets

are being administered and accounted for under controls that are equivalent to

those applicable to DoD appropriated funds.

DoD procedures cover the full range of asset handling—from initial seizing of assets, all the way through final disbursement of those assets. Safeguards for foreign

national assets is not new for the U.S. government and Department of Defense.

It is impossible to overestimate the importance of accountability for Iraqi state assets under U.S. control. The Iraqi people, the American people, and the international community must be satisfied that these assets are being used only to help

Iraq recover, that funds go for the most pressing requirements, and that proper accounting is done.

Defense Contract Audit Agency (DCAA) Support of Iraq Reconstruction

The DCAA mission is to provide all contract audit and financial advisory services

related to the Department of Defense acquisition of goods and services. DCAA provides similar services, on a reimbursable basis, to most civilian agencies including

the State Department and USAID. In total, DCAA has 3500 contract auditors at 82

field audit offices, and a total of 350 resident DCAA locations. Thirty-six percent of

DCAA auditors are licensed CPAs and 21 percent have advanced degrees.

DCAA is playing a major audit role in support of Iraq reconstruction and is responding with real time audit assistance for all known Iraq contracting requirements:

• A team of seven DCAA auditors is currently reviewing over 500 United Nations

Oil-for-Food contracts for price reasonableness and value received. The review

has identified numerous inconsistencies with the contracts and noted significant

areas of potential contract overpricing. A total of $11 billion is being evaluated,

and a trip will be taken in early June to the United Nations to evaluate UN

contract file documentation.

24

• A team of six DCAA auditors is currently evaluating audit documentation and

contracting actions by Washington Headquarters Services in support of CPA

contract requirements. DCAA is also providing related audit assistance to assure that contractor proposal estimates are properly prepared, and that ongoing

contract awards are properly priced.

• A team of nine DCAA auditors has been deployed to Iraq/Kuwait to support current mission requirements of the U.S. Army and the Corps of Engineers.

• DCAA has selected ten additional auditors who will be embedded with Corps

of Engineers, Army Material Command, USAID, and wherever future customer

workload dictates. Three of these auditors are now in-theater, with the remainder going through required training.

• DCAA is the contract auditor for USAID in Iraq. There are currently eight

USAID contracts valued at $1.0 Billion. Bechtel National Industries has the

largest contract, with a total value up to $680 million for road, electricity,

power, and bridge reconstruction.

• DCAA is a member of a financial oversight cell being deployed to Iraq. A DCAA

senior manger will provide the cell with audit and financial counsel.

• Finally, DCAA is building an audit universe of all known Iraq/Kuwait related

contract requirements, and will brief senior DoD and CPA representatives in

mid June. DCAA will use this data for future Iraq planning and staffing requirements.

I have authorized the DCAA Director to stand-up a DCAA field audit office in

Baghdad and Kuwait as soon as practicable. This office will not only service all intheater reconstruction contracting, but will initiate any assist audit requests at U.S.

contractor locations, where most contractors retain the accounting records.

With the recent delegation by Deputy Secretary Wolfowitz naming the U.S. Army

as the Executive Agent for all Iraq Reconstruction effort, I am confident that the

Army will stand-up a highly competent contracting organization to centrally integrate all current and future Iraq Reconstruction contracting requirements. I believe

that the Deputy Secretary’s directive was the one key action needed to assure that

there is no duplication of Iraq Reconstruction requirements; and that appropriate

financial controls will be established and employed. I will be meeting with the Secretary of the Army and his staff to offer my support and assistance throughout this

effort.

I am absolutely committed to an integrated, well managed contracting process in

Iraq—a process that is transparent and the equal of the very best military acquisition centers in this country. All financial and audit issues surfaced by DCAA or

other DoD components will be brought to my immediate attention for appropriate

action.

International Contributions to Recovery in Iraq

Contributions from the international community—both cash and in kind—will be

critical to recovery in Iraq. I have been designated as DoD coordinator for international assistance to post-conflict Iraq. I work jointly in that regard with my colleagues at this table, Under Secretaries Larson and Taylor, and with their offices

as well as with USAID. We also are working closely with multilateral institutions— notably the UN, World Bank, and IMF—who will play critical roles in facilitating

the international assistance to Iraq recovery efforts. Finally, we have daily coordination with the Office of the Coalition Provisional Authority. To date, the international community has publicly offered over $2 billion for hu- manitarian and reconstruction assistance for Iraq. About $800 million of this has

been in response to the UN Flash Appeal to meet urgent requirements in Iraq. The

remaining $1.2 billion has been offered outside the flash appeal.

Examples of these international contributions include:

• Japan intends to contribute more than $150 million in emergency humanitarian

aid.

• Australia has delivered more than $26 million—100 thousand metric tons of

wheat, including shipping costs. Australia is also providing expertise in agriculture.

• Canada has delivered more than $41 million (US$), for critical water, sanitation, food, shelter, and health requirements.

• The United Kingdom has pledged $338 million in humanitarian assistance.

• Spain has pledged $56 million, primarily in humanitarian supplies.

• The Netherlands is contributing $14 million in response to the UN Flash appeal. Assistance will be provided to Iraq through Dutch NGOs.

25

• Norway is donating up to $21.6 million for humanitarian assistance.

• The European Union (EU) has pledged $107 million, of which $14.5 million has

been delivered, including 10 tons of medical supplies that have been airlifted

to Baghdad.

• Jordan deployed a field hospital to Baghdad to provide emergency medical services.

These are just several examples of the international community and its response

to the humanitarian and reconstruction needs of Iraq. My colleagues here and I will

continue to engage the international community in coming together to assist the

Iraqi people to rebuild their lives and their country.

Closing

In closing, I want to emphasize that the Department of Defense is focused intensely on advancing stabilization and recovery in Iraq as rapidly and smoothly as

possible. The stakes could not be higher. The emergence of an Iraq that protects the

rights of its citizens, that represents all of its diverse ethnic and religious groups,

that prospers economically for the benefit of all its people—this would be a profoundly important model for the Middle East and for the entire world.

To help the Iraqi people meet this historic challenge, President Bush has pledged

America’s commitment to stay the course. Clearly, success will be very expensive

and take years, not months. This committee is helping the American people and

international community understand the criticality and difficulty of building a new

Iraq, and I look forward to contributing to your important work. Thank you.

The CHAIRMAN. Thank you very much, sir. That was very helpful

testimony. Secretary Taylor.

STATEMENT OF HON. JOHN B. TAYLOR, UNDER SECRETARY

FOR INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE

TREASURY

Mr. TAYLOR. Thank you, Mr. Chairman, Senator Biden, and

members of the committee. My testimony is about the economic

and financial issues related to reconstruction and I want to focus

on some of the accomplishments and some of the plans for the future.

The international community and the people of Iraq face an enormous task in this reconstruction effort. A quarter century of repression and economic mismanagement under Saddam Hussein has cut

the size of the Iraq economy to a small fraction of what it was before his regime took over. In 1979, ADP in Iraq was $128 billion.

In 2001 it had declined to about $40 billion, and income per capita

has plummeted, people have been impoverished, and this is during

a period where the world economy has expanded. The economy of

Iraq has shrunk drastically.

So the reconstruction task is challenging, but for the same reason the challenges are great, simply restoring the economy to what

it was before Saddam will be a tremendous improvement for the

Iraqi people. But establishing a large economy based on clear property rights, upon a sound rule of law, upon economic freedom, I

think will unleash a long tradition of entrepreneurship and build

on an abundant human potential and natural resources of the

country.

There is still much to do, to be sure, but I believe we should

mention some of the successes that we have achieved since the end

of the military operations. Over 1.5 million workers and pensioners

have received salaries and emergency payments. Our financial experts in Baghdad report that Iraqis and other observers consider

this act alone to be a turning point in the mood of many in the city.

These payments have enabled Iraqis to return to work to run the

26

railroads, to teach school children, and to help in the payment of

other Iraqis.

There are other successes, some of which my colleagues have al- ready mentioned. Just since March 20th, $1.7 billion of Saddam’s

assets have been vested in New York and made available to the

Iraqi people. Another $1.2 billion have been newly frozen around

the world. We have approximately $1 billion in cash found in Iraq,

excluding funds in the Central Bank.

Working intensely with the international community, we have

achieved the removing of the sanctions on selling Iraqi oil and we

have agreement with the international financial institutions to provide needs assessments and provide technical assistance.

Later this month, as Under Secretaries Larson and Zakheim indicated, there will be a donors conference. It’s already scheduled for

June 24th, to make plans for international support of the country.

I think it’s also important to emphasize that we have achieved

successes by avoiding catastrophic events that could have occurred,

and in fact these were events we were concerned about, events

which we took actions to try to prevent. For example, instead of

collapsing, as many had feared, the Iraqi currency has recovered

from low levels at the beginning of the war. Hyper inflation has

been avoided, another concern we had going into this. As has already been mentioned, oil fields have been saved from destruction

and there has been no humanitarian crisis.

And I should add from the Treasury perspective, that the crippling burden of debt service payments has been lifted at least

through the end of 2004, so that Iraq can focus on reconstruction

needs.

I believe these successes are due to the work of experienced and

dedicated people and to contingency plans laid out months in advance of the war. We began selecting people for our financial teams

back in January. The first wave was deployed to Kuwait in March.

These were some of the first people who went into Baghdad in

April. We have since sent additional financial experts with expertise ranging from budgets to payment systems to monitoring policy.

And Peter McPherson has been designated the financial coordinator. Peter McPherson is a former U.S. AID Administrator and

former Deputy U.S. Treasury Secretary. He is giving advice to Ambassador Bremer on the ground. He and his team have responsibility for working with the Iraqis to get the Central Bank running

again, the finance ministry running again, the commercial banks

and other institutions up and running. Their very first task on the

ground, which has largely been accomplished, was to assess the

conditions and evaluate the basic economic infrastructure, including the payment systems. I am in nearly constant contact with

them through telephone, e-mail, providing support and advice with

the help of a financial task force set up in Treasury by our Office

of Technical Assistance, and of many others stationed here in

Washington.

I would like to spend just a minute in my opening remarks with

a description of the mechanism we put in place to restart payments, because I think it indicates the kind of plans that have been

underway and which will continue to be underway. This is the top

reconstruction priority, that is, to make emergency payments and

27

salary payments to government workers and pensioners. Starting

late last year, we developed a contingency plan for such payments.

The plan called for paying workers and pensioners in U.S. dollars

on an interim basis. Making payments in dollars, we thought on an

interim basis was a good way to get things started. It is not

dollarizing the economy. On the contrary, the plan calls for the continued use of the local currency, the dinar.

But to make this plan operational, we had to have some funds,

some resources, so the first step in making this plan operational

was to invest the Iraqi regime assets that were frozen back in

1990.

That plan also required an assessment of the payroll system, how

are you actually going to make payments to workers in Iraq. Our

priority was for our first wave of people to assess what the payment system was like, how could you actually get payments of dollars to people. I’m pleased to say that this plan is basically on track

and has been successful so far. On March 20th, President Bush did

vest $1.7 billion in assets, placed them in an account in New York.

Treasury representatives in close cooperation with the New York

Fed and the Department of Defense have arranged for delivery of

already $199 million U.S. dollars, currencies from these vested assets, and to make shipments from the storage facility in New Jersey, shipped down the turnpike to Andrews Air Force Base, and off

on an airplane into the region.

A mechanism for making these emergency payments also had to

be set up, and was quickly established on the ground so the payments could commence for dock workers, for rail workers, for power

workers and others. While this system will have to be upgraded

over time, it provides a basic infrastructure for making salary and

pension payments. So despite tremendous logistical challenge, this

system of payments has been a success. Pensioners, civil servants,

workers crucial to the function of essential public services have received payments, an initial financial lifeline for these people.

I will end with this example, Mr. Chairman, and will be very

happy to take your questions.

[The prepared statement of Mr. Taylor follows:]

PREPARED STATEMENT OF JOHN B. TAYLOR

RECONSTRUCTION IN IRAQ: ECONOMIC AND FINANCIAL ISSUES

Chairman Lugar, Ranking Member Biden, and other members of the committee,

thank you for inviting me to testify on the reconstruction of Iraq. I will discuss economic and financial issues, focusing on accomplishments since the end of major military operations and on our plans for the future.

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 in Purchasing Power Parity (PPP) terms; by 2001, it had declined to about

$40 billion. And income per capita has plummeted, impoverishing the Iraqi people.

While the world economy expanded, the Iraqi economy shrunk. As a consequence,

the Iraqi people fell way behind, from a rank of 76 in 1990 to a rank of 127 in 2001

on the UN Human Development Index.

While the reconstruction task is significant, the opportunities are great. Simply

restoring the economy to what it was before Saddam will be a tremendous improvement in the well being of the Iraq people. Establishing a market economy based on

clear property rights, a sound rule of law, and economic freedom will unleash a long

tradition of entrepreneurship and build on the abundant human potential and natVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 89517 SFRELA2 PsN: SFRELA2
28

ural resources of Iraq. I am confident that if these resources are used effectively,

economic growth will soon be above, rather than well below, the world average.

Though there is much to do, I believe that we have already achieved important

successes since the end of the major military operations, especially in the economic

and financial areas. Over 1.5 million workers and pensioners have received salaries

and emergency payments. Our financial experts in Baghdad report that Iraqis and

other observers consider this act alone as a turning point in the mood of the city

for many. These payments have enabled Iraqis to return to work to run the railroads, teach school children, or help in the payment of other Iraqis. There are other successes. Since March 20, $1.7 billion of Saddam’s assets have

been vested; $1.2 billion have been frozen; and $0.9 billion in cash has been found

in Iraq. Working with the international community, we have removed sanctions on

the selling of Iraqi oil and we have agreed that the international financial institutions should provide needs assessments and technical assistance. Later this month

in New York we will convene the first meeting of donors. I will provide more details

on these and other accomplishments later in my testimony.

We have also achieved successes in avoiding catastrophic events that could have

occurred; we were concerned about such events and took actions to prevent them.

Instead of collapsing as many had feared, the Iraqi currency has recovered from its

low levels at the start of the war. Hyperinflation has been avoided. Oil fields have

been saved from destruction. There has been no humanitarian crisis. And the crippling burden of debt service payments has been lifted through the end of 2004 so

that Iraq can focus on reconstruction needs.

These successes are due to the work of experienced and dedicated people and to

the contingency plans laid out months in advance of the war. We began selecting

members for our team of Treasury advisors back in January; the first wave was deployed to Kuwait in March and arrived in Baghdad in April. We have since sent

over a dozen additional advisors with expertise in areas ranging from budgets, to

payments systems, to monetary policy. Peter McPherson—former USAID Administrator and former Deputy Treasury Secretary—now serves as financial coordinator

and adviser to Ambassador Bremer on economic and financial issues. He and his

team have responsibility for working with Iraqis to get the Central Bank, the Finance Ministry, commercial banks and other financial institutions up and running.

Their very first task on the ground was to assess conditions and evaluate the basic

economic infrastructure, including the payments system. The work they are doing

is similar to some of the tasks that we undertook in Afghanistan; indeed, while

Treasury’s work continues in Afghanistan, some of the same people who worked

there have brought their experience to Iraq. I am in nearly constant contact with

them through telephone and email, providing support and advice with the help of

our Iraq Financial Task Force, Office of Technical Assistance, and others stationed

here in Washington.

A Plan to Pay Workers and Pensioners

A top reconstruction priority from the start was to make emergency and salary

payments to government workers and pensioners. Starting late last year we developed a contingency plan for such payments. The plan called for paying workers and

pensioners in U.S. dollars on an interim basis. Making payments in dollars on an

interim basis was not an attempt to dollarize the economy. On the contrary, the

plan called for the continued use of dinars as an acceptable means of payment.

Using dollars on an interim basis would create stability immediately after the war,

as the dollar is a stable medium of exchange and a good store of value. By making

sure that the spending on salaries was matched by the revenues available, the dollar payment plan also was a way to prevent inflationary financing.

To make this payment plan operational, financial resources were required. Hence,

the first step in the plan was to vest the Iraqi regime assets that were frozen in

the United States over a decade ago. The plan also required some functioning payroll system, so a high priority of our first wave of people on the ground was to assess the state of this system.

This plan is basically on track and has been successful thus far.

On March 20, President Bush vested $1.7 billion of assets and placed them in an

account at the New York Fed to be used to support reconstruction. Treasury representatives, in close cooperation with the New York Fed and the Department of Defense, arranged the delivery of $199 million of these vested assets in three shipments from a storage facility in New Jersey to Andrews Air Force Base, where the

currency was loaded on a transport and flown to the region. A fourth shipment of

$358 million will be made shortly.

A mechanism for making emergency payments was quickly established on the

ground, so that payments could commence for dock workers, rail workers, power

29

plant workers, and others. At the same time, upon arriving in Iraq, our advisors

conducted an assessment of the existing payroll system for salaries and pensions

and found that adequate, functional procedures already existed. While this system

will have to be updated over time, it provides the basic infrastructure for making

salary and pension payments.

Despite tremendous logistical challenges, the system of payments has been a success. To date, over 1.5 million pensioners, civil servants, and workers crucial to the

functioning of essential public services have received payments. Our advisors have

played a key role, working closely with counterparts from the Defense Department

and other agencies, in extending this initial financial life-line to the Iraqi people.

Establishing a Stable Currency

One of the most important objectives in the near-term is to promote the establishment of a stable, unified national currency. A currency that has the full faith and

confidence of the Iraqi people, and which can be used as a store of value, is a prerequisite for establishing a vibrant economy.

The pre-existing currency situation in Iraq makes this a complex and difficult

task. Iraq has not had a stable currency for some time; several currencies circulate

widely in Iraq, including the Iraqi (or ‘‘Saddam’’) dinar in central and southern Iraq,

the Old Iraqi (or ‘‘Swiss’’) dinar in the northern part of the country, and the U.S.

dollar. The Saddam dinar has fallen dramatically in value over the past dozen years

due to the policies of the Saddam Hussein regime. One dollar used to purchase only

a third of a Saddam dinar under the official exchange rate; now, it will purchase

about 1,200 dinars in the market.

One of our primary concerns was that the conflict and its aftermath would result

in a massive depreciation of the Saddam dinar and hyperinflation. There were concerns about losing control over large warehouses of Saddam dinar notes and currency printing facilities. And with the fall of the regime, there was the risk that

the currency would cease to serve as an accepted means of exchange.

For these reasons, early action was taken to secure currency stocks and currencyprinting facilities and stop the printing of the Saddam dinar. The military made

public announcements that existing currencies in Iraq would continue to be accepted

as means of payment. These measures helped stabilize the Saddam dinar and avert

a monetary crisis. In fact, the Saddam dinar has actually strengthened in recent

weeks—from a low of about 5,000 dinars per U.S. dollar during the conflict to approximately 1,200 per dollar today.

This achievement notwithstanding, a stable, unified currency system is essential

for Iraq’s long-run economic prospects. Several options exist for currency reform, including the introduction of a new currency or the replacement of Saddam dinars

with Old Iraqi dinars. We stand ready to assist in the implementation of whichever

option the people of Iraq choose through a representative, elected Iraqi government.

Development of an Iraqi Budget

Prior to the war, no Iraqi government budget was published. The lack of transparency and accountability in fiscal operations made it difficult to determine how

resources were allocated or how revenues were raised.

Development of an integrated and transparent Iraqi government budget is necessary for ensuring that essential government services and reconstruction needs can

be financed without resorting to printing money. Our advisors are working with personnel within the Ministry of Finance to develop an interim budget and to implement a centralized treasury mechanism for government spending. In addition, several Treasury advisors with expertise in tax systems will be working with Iraqi officials to revise the tax code and build the capacity of revenue agencies.

Initially, budgetary resources will derive primarily from returned Iraqi assets, oil

sales, and donor contributions.

With the initiation of military action, the United States and its coalition partners

acted to secure the Saddam Hussein regime’s assets for the benefit of the Iraqi people. In addition to the rapid vesting of $1.7 billion of assets in the United States,

we have spearheaded bilateral efforts that have led to the identification and freezing

of about $1.2 billion of Iraqi assets outside of the United States since the beginning

of the war. We are working with these countries to return them to the Iraqi people,

as required by UNSCR 1483. The United States has deployed financial investigation

teams to Iraq and other foreign jurisdictions to identify and recover additional Iraqi

assets.

Efforts have also been made to secure assets inside of Iraq. Since the end of the

conflict, approximately $900 million in currency has been found in various locations,

in addition to $350 million of currency and gold discovered in vaults at the Central

Bank of Iraq. All of the vested assets in the United States, as well as the assets

30

found in Iraq, will be used to assist the Iraqi people and support the reconstruction

of Iraq.

Proceeds from the sale of Iraqi oil will be another critical source of funds. The

Security Council resolution introduced by the U.S., Spain and the UK and approved

unanimously last month provides immunity from attachment for Iraq’s oil and proceeds from its sale through 2007. Oil revenues will be deposited in the Development

Fund for Iraq, an account of the Central Bank of Iraq. The Coalition Provisional

Authority now is working on the development of regulations to ensure transparency

and accountability in the use and administration of oil proceeds and other revenues

that will be deposited in the Development Fund for Iraq.

An important part of this effort will be the establishment of the International Advisory and Monitoring Board, which will be responsible for approving the auditors

of the Development Fund for Iraq and reviewing their findings. Representatives

from four international organizations—the IMF, the World Bank, the United Nations, and the Arab Fund for Social and Economic Development—will participate on

this board. On May 24, Ambassador Bremer sent letters to the four organizations

to initiate the process of constituting the board; I will chair a meeting later this

month to finalize the terms of reference.

Role of the International Financial Institutions

Donor contributions will also play an important role in the reconstruction of Iraq.

Active participation by the international financial institutions is important to mobilizing this international support.

I am pleased to report that the international financial institutions are intensifying

their support for the process of reconstruction and recovery in Iraq. IMF and World

Bank officials are traveling with the delegation of Sergio Vieira de Mello, the U.N.

special representative for Iraq, on his trip to Iraq this week. In addition, IMF Managing Director Horst Kohler announced last week that he was prepared to send out

a team to Baghdad for a fact-finding mission as early as this weekend. This team

will work with the Coalition Provisional Authority and Iraqi officials to identify priority needs related to budget planning and execution, central bank functions, payments systems and banking sector reform, as well as the social safety net.

Later this month, the United Nations Development Program and the World Bank

will cohost a donor meeting in New York to launch a coordinated, international effort to support Iraq’s reconstruction needs and lay the groundwork for a donor conference in late summer after the World Bank has completed its needs assessment

of Iraq.

Reforming the Banking Sector

Strengthening and modernizing the banking sector is central to achieving overall

economic progress in Iraq. We are still in the early stages of assessing the banking

system. We know, however, that Iraqi banks were oriented much more toward the

fulfillment of Ba’athist political objectives than toward financial intermediation and

other economic services that one normally associates with banks. Essentially, Iraqi

banks were vehicles for storing and moving cash around the country, and in some

cases outside the country.

Our overarching objective in this area is to help Iraq restore its banking sector

and ensure that it begins to function in a commercially viable way. We want Iraq’s banking sector to be a vehicle for sound economic growth, to meet the needs of the

Iraqi people, and to reflect regional as well as international best practices. For example, we endorse the objective of Iraqis having access to financial products and

services that are based on Islamic principles.

Creating a sound supervisory and regulatory regime is a critical step to establishing a sound financial system. We are working with the Iraqis to help them bring

this about. To this end, we will be working with governments in the region that

have strong systems and have offered technical assistance for the banking sector.

Iraq’s Foreign Debt

An issue that has garnered much attention and will clearly have to be addressed

is Iraq’s capacity to address the potentially enormous burden of its existing financial obligations. Estimates of Iraqi external debt range from $60 billion to $130 billion.

Whatever the precise level, Iraq’s external obligations are significant and must be

addressed in a comprehensive manner.

In the near-term, we have taken two important steps put to address this situation. First and foremost, we have worked with our G–8 partners to provide Iraq

with some breathing room. We achieved agreement that given Iraq’s precarious financial situation, creditors should not expect Iraq to make any payments on its debt

for at least the next eighteen months. Secondly, we have put a lot of people to work

on what could be described as data forensics. On the creditor side of the ledger, we

31

proposed at the last meeting of the Paris Club, and creditor governments agreed,

to report the amount of debt they are currently owed. We have also approached the

IMF for its assistance in determining the amount of debt owed to non-Paris Club

governments. To address the other side of the ledger, we have placed Treasury advisors in Baghdad to go through Iraqi government debt records.

In the medium-term, once we have a better estimate of the true level of Iraq’s

debt, we can move forward to develop a comprehensive strategy to deal with Iraq’s

official debt. To supplement these efforts, we are providing a Treasury advisor to

work with Iraqi officials to develop a notional strategy for external debt treatment.

Conclusion

Achieving our economic objectives in Iraq is central to achieving our ultimate goal

of a stable, unified, and prosperous Iraq—one which provides opportunities for all

Iraqis to forge a better future for themselves and their children. The challenges are

formidable. We have a tough job ahead. Our achievements to date can be attributed

to careful planning, vigilance to potential problems, and early action by dedicated

and talented professionals to prepare for them. We will bring the same spirit to our

work in the coming months.

The CHAIRMAN. Thank you very much, Secretary Taylor.

Mr. Natsios.

STATEMENT OF ANDREW S. NATSIOS, ADMINISTRATOR, U.S.

AGENCY FOR INTERNATIONAL DEVELOPMENT

Mr. NATSIOS. Thank you very much, Mr. Chairman, for the opportunity for us to testify before the committee. I have longer testimony that I will submit for the record.

AID sent its team of AID mission staff and disaster response

team members, almost a hundred people, to the region the week

the conflict began, and into southern Iraq almost as soon as combat

operations moved north. We did not experience a major humanitarian crisis, we avoided it. Part of that was, Saddam was so

shocked by the combat operations that he couldn’t carry out any of

the plans that we understood he was considering, like blowing up

the dams, which he had done during the Iraq-Iran War, the atrocities he committed against the Kurds, and we felt might happen

again against the Shiites in the south and the Kurds in the north.

That did not happen.

We did not have mass population movements and so we avoided

major catastrophe on the humanitarian side. We did have pockets

of need and so the disaster assistance response team focused on

those pockets to respond quickly.

What is it that the mission in AID is directed to do? First is to

conduct assessments of need, infrastructure building, working with

our partners in the NGO community, the UN agencies, and private

businesses. Secondly, design programs. We have planners to plan

out the requirements of each contract in terms of time line and

budgeting. We have our sector specialists, agricultural scientists,

economists, health experts, education experts. We have people who

oversee the contract management and each subcontract granted in

cooperative agreement. We have contract officers who negotiate

these contracts.

Donor coordinators. The donor coordination AID does is not at

the macro level that Defense and State does. We work with my

counterparts in other ministries around the world; in fact not just

here but in other emergencies, other projects that we work together

jointly with Canadian CIDA, which is the AID of Canada, DFID in

Britain, and CSA in Sweden, for example. And what we do is deVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 89517 SFRELA2 PsN: SFRELA2
32

cide exactly which donor government will do which sector in which

province and which institution. And we work very carefully with

these matrixes we develop over a period of time through other

emergencies to directionalize this process. And finally, we do program evaluation to make sure the program is getting on track, or

we can get it back on track.

The reconstruction itself actually began for AID on the 28th of

April when the President declared major combat over, because our

contractors, particularly that are doing the reconstruction primarily, had provisions in their contracts for insurance purposes

that said until the combat was officially over, on a large scale they

could not go into the country. So we have been working at this for

about five weeks, not in terms of the disaster response which began

earlier, but in terms of actual reconstruction.

We took control of the port facilities from the British Marines on

May 23rd, and with our contractors are now responsible for managing the port. We began the preparatory work to upgrade the port

to international standards, and we have been working closely with

our friends in the World Food Program for the preparation of massive movements of food into the country. They have moved already

440,000 tons of food into the country and began the first national

distribution of food on June 2nd.

I just came back 2 days ago from Cyprus, where I met with the

UN officers there. They have, by the way, their best team I have

ever seen in any emergency. They’ve collected them, put them in

Cyprus and Iraq and Kuwait, and I am very pleased with the quality of people who are running this. Romero DeSilva is arguably the

best logistician in the international system, and he is in charge of

the entire UN effort on humanitarian food assistance side.

A million more tons of food will arrive by September and the entire system will be up and running.

The airport administration will be taken over as well for the

international airports only. AID is not responsible for the local airports. We are now doing the preparatory work to upgrade them to

international standards, and a civil aviation conference is scheduled for June 14th with other U.S. government agencies for the restoration of commercial air traffic to international standards.

We began, on May 7th, a 24-hour, 7-day a week dredging operation for the port of Umm Qasr. It is now down 9 meters and we

can bring in vessels that carry up to 15,000 tons of cargo. In the

next few months we hope to remove the four wrecked ships that

are at the bottom that we had not known were there until we conducted our assessment. We expect that within three months the

port will be up to a standard it hasn’t been in 20 years.

We have completed the engineering work for reconstruction of

the boilers at electrical generating plants, the repair of the 400

KVA and 135 KVA high voltage initial transmission repairs, the

urban water system in the southern part of Iraq, and 3 bridges

which are critical to traffic around the country.

Most of this work has nothing to do with the war. This has to

do with the lack of investment over a 20-year period towards this

infrastructure in a country, by the way, that had western standard

infrastructure as late as the mid 1980s. Because of the Iran-Iraq

war and the success of destructive things that Saddam did to his

33

country, there was no investment and maintenance of these. For

example, Basra right now has better electrical service than it had

in 14 years. They have not had, in most of the city, 24-hour electrical service. They do now have that.

The only remaining problem we’re facing in electrical requirements is in Baghdad and we have made a great deal of progress

just in the last week to bring it up to pre-war standards, at least.

In water and sanitation, we purchased, for the first time, enough

chlorine for all of the treatment plants in the country for 100 days,

purchased through UNICEF. The water and sanitation system experts are now coordinating with Bechtel and with UNICEF and the

NGO community about local rehabilitation and then longer term

reconstruction of those systems.

We bought 22 million doses of vaccines and are beginning a massive immunization program. We have established a surveillance

system to monitor potential cholera outbreaks—which have not

happened yet, but we are watching it—and set up a tracking system for international medical donations.

We have begun our back to school campaign to encourage students to return to school not only for education purposes, but to get

them off the streets. One of the first public safety things we do in

any reconstruction effort after a war is to get kids off the streets

by opening the schools up as fast as possible. We have already provided enough school materials for 120,000 students in Baghdad

during the month of May. We have inventoried 700 schools with

the Ministry of Education in Basra, and finalized the purchase of

8,000 school kits for teachers and students for 700 schools in Basra

for the opening of school, and we have begun giving grants for the

reconstruction of Basra schools which have been neglected for more

than 15 years.

We have awarded a contract to UNESCO that does high school

textbooks for the printing and distribution of 5 million math and

science textbooks. We have begun the process with UN agencies to

evaluate the textbooks generally, many of which are full of ethnic,

racial and religious vitrea against groups, not just the United

States I might add—he had a lot of people he hated—and those

textbooks need to be revised. UNICEF does textbooks grades 1

through 6, UNESCO 7 through 12, and we want the international

system involved in this, so it’s not an American only effort we’re

funding.

Senator BIDEN. Mr. Natsios, I apologize, I didn’t hear the beginning of your statement. Has that process begun?

Mr. NATSIOS. Yes, it has begun, and the textbooks in fact are

being written now specifically for math and sciences, that’s the first

category.

Senator BIDEN. Thank you.

Mr. NATSIOS. We have also begun a call for grants that’s been

published on our web site for American universities to begin a university and college partnership program between American universities and colleges and Iraqi institutions, which is being greeted

very enthusiastically in the university community in the United

States in the areas of health, education, agriculture, and engineering among others.

34

We have also begun a process of evaluating proposals from the

NGO community for community assistance and rehabilitation at

the local level.

And most importantly, I had a fascinating briefing by our local

government contractor from the Research Triangle in North Carolina that was awarded a bid. They have begun to set up neighborhood councils and we’ve been giving them small grants to begin

projects. One fascinating story in one city in the north, we had a

meeting of the Shiite, Suni and Christian leaders in the community

and they told us they had never sat down, ever, in a cooperative

way and talked about what they could do in a common way to improve their society. This was the first time they’ve ever had a meeting like that.

Senator BIDEN. Where was that?

Mr. NATSIOS. This was in the north, I think it was in Mosul, I

don’t know. I can get the name of it. But they said this is the only

constructive meeting we have had without suspicion and malice

and acrimony in the meetings.

There’s some moving stories. We opened the first Internet cafe in

Umm Qasr. We showed the local Hamas leaders and the new village council what the Internet was. They said they’d heard rumors

of this thing but they had never seen it. And several old men sort

of broke down, I didn’t quite know why, you know, Internet cafes

for us are quite common. And they said, we heard stories that this

thing called the Internet existed, we never understood it until now.

We showed them they could look up any Muslim or Arab speaking

newspaper in the world, instantly get it, or English speaking or

French or whatever, on the Internet, look it up and read it every

day. They had never seen this before, they couldn’t imagine that

they could freely read newspapers from other countries anytime

they wanted to. It was a very moving event apparently, from what

our staff is telling us.

We have begun the marshland initiative assessment process. We

haven’t got a plan in place yet to do this, but there is an assessment team working with the NGO community, international organizations and the White House on how we will look at the restoration of the marshes, to which enormous ecological damage was

done. 90 percent of them have been destroyed. There is one great

marsh that’s still left, about 200,000 people in it. This is the remnant of the classic Marsh Arabs that Wilfred Thesiger wrote about

in a wonderful book in the 1950s about living among those Marsh

Arabs, and is something I have always remembered in the work

I’ve done around the world.

And finally in the area of agriculture and rural economy, a competitive procurement will be published very shortly for assistance

in improving agricultural production, world finance, reducing water

logging and soil salinity, and other areas in the agriculture sector.

So, we have begun the process, it’s accelerating quite rapidly at

this point, contractors, NGO staff, international staff, and our own

agencies. We have been working, by the way, on this report of this

conflict with the UN, I have never seen, actually, such intense collaboration with UN agencies among themselves or with the international donor agencies as I have in Iraq, and I have been involved

in more than 10 reconstruction efforts in the last 14 years. There

35

are more than 5 major UN agencies that have large funding from

us to do their work.

And one thing we do have, and I would just conclude with this,

we have never had a unified assessment system, an international

system for reconstruction. Usually we all have different mechanisms to assess the situation. In January we began training the

civil affairs units, part of the U.S. Army, and I’m a retired civil affairs officer myself, I served in the first Gulf War, and they are

very critical and we work very closely with them. We use this template, the UN agencies use this assessment template, the NGOs

are trained in it, other donor governments were, and all UN agencies are now using it. So we now have one template for the first

time in any reconstruction effort, for assessing each sector in each

region of the country, so there’s a common language that we can

all get to quickly without having to retranslate everything back

into a language we all understand. That’s been a great benefit from

the start, and so, those conclude my remarks.

[The prepared statement of Mr. Natsios follows:]

PREPARED STATEMENT OF ANDREW S. NATSIOS

Chairman Lugar, Senator Biden, members of the committee, I am honored to be

here today to speak about the U.S. Agency for International Development’s programs in Iraq.

As you know, USAID is providing both emergency and reconstruction assistance

for Iraq. We are approaching these tasks, unprecedented in size and scope, with six

broad objectives in mind. They are to:

• show the Iraqi people an improvement in their standard of living and public

services;

• stabilize the population—reduce ethnic and religious tensions, repatriate refugees, resettle internally displaced people, and resolve property claim disputes

created under Saddam;

• develop a market economy—produce new jobs and encourage investment and

agricultural and economic growth; create the institutions of economic governance which will form the foundation of the new Iraqi economy and the fiscal

structure of the national government;

• support the de-Ba’athification of Iraqi society—eliminate the palpable sense of

fear that was a feature Saddam’s rule; and create a genuine civil society that

can control the abuses of the state, stabilize social order, and help reconstruction take place;

• create accountability and control systems to prevent oil revenues from being diverted by future Iraqi governments and ensure future revenues are used for

public good; and

• ensure a peaceful transition to a pluralistic democracy representative of the ethnic and religious make-up of the society.

I will discuss what we are doing and what we plan to do in Iraq in the context

of these six objectives.

Show the Iraqi People Improvements in Their Living Standards and Public Services

The brutality of Saddam Hussein’s regime is well-known, but his rule was also

characterized by the willful neglect of many areas, among them basic infrastructure,

education, health, governance, and the economy. The highly centralized nature of

the regime severely limited opportunities for local or individual initiatives. The level

and quality of services people received was substantially lower than the gross indicators of Iraqi economic development would suggest.

Prior to the 1990s, for example, Iraq had one of the best education systems in

the Arab world, achieving universal primary enrollment and significantly reducing

women’s illiteracy. Those achievements have eroded significantly since then, however. Primary school enrollment at the time hostilities began was approximately

76.3 percent and secondary school enrollment was down to 33 percent, with nearly

twice as many girls absent from the classroom as boys.

36

In health care, too, the downward trend is clearly evident. Today, almost of a

third of the children in the south and central regions of the country suffer from malnutrition. Low breast feeding rates, high rates of anemia among women, low birth

weight, diarrhea and acute respiratory infections all contribute to Iraq’s high child

mortality rate—131 deaths per 1,000 live births. This rate has more than doubled

since the 1980s.

Emergency Humanitarian Relief

Thanks to early, prudent, and thorough contingency planning, the pre-positioning

of emergency supplies, and careful coordination with U.S. and international humanitarian organizations, the humanitarian crisis in Iraq that many had predicted was

avoided. Many elements of the U.S. Government were involved in this unprecedented effort—but there are three units of USAID in particular that I would like

to focus on today: the Office of Foreign Disaster Assistance (OFDA), Food for Peace

(FFP), and the Office of Transition Initiatives (OTT).

The first challenge facing any relief effort, especially one of the size and complexity of Iraq, is gathering accurate information so that urgent needs can be identified and specific interventions designed that make the most sense for a specific location. To this effect, USAID assembled the largest Disaster Assistance Response

Team (DART)—outside of a few search and rescue missions—in history. The DART

included more than 60 people—doctors, public health professionals, water and sanitation experts, food distribution and agricultural specialists, logisticians, security officers and specialists in refugees, internally displaced persons (IDPs) and abuse prevention. Most members of the DART have had years of experience dealing with complex humanitarian emergencies and international relief situations, and their assessments of the conditions on the ground are vital to our humanitarian and reconstruction efforts.

In the months prior to the war, OFDA began preparing for a possible humanitarian emergency by stockpiling emergency relief supplies, including water tanks,

hygiene kits, health kits, plastic sheeting and blankets. OFDA also provided funding

to the World Food Program (WFP), UNICEF, and NGOs to set up logistics operations, offices and relief stockpiles. Because of this, our NGO partners were in a position to respond quickly to urgent humanitarian needs and are now making repairs

to water and sanitation facilities in Ar Rutbah, Basra, and Erbil. OFDA grants are

also supporting urgent health care assistance: CARE is working in Baghdad; Save

the Children in Mosul; the International Medical Corps in Basra, al Nasariyah, and

Wasit; and World Vision in Ar Rutbah. OFDA has also purchased medical kits, each

containing enough supplies for 10,000 people for three months. In late May, the

DART provided 33 of these kits to our NGOs partners for distribution in several

cities in Iraq.

Timely USAID grants from the Office of Food for Peace helped prepare WFP to

undertake the largest mobilization operation they have ever carried out. The first

country-wide distribution of food in Iraq is already under way. Much of it comes

from a $200 million FFP grant to WFP which made it possible to purchase food in

Jordan, Syria, and Turkey for immediate consumption. In just the month of May,

for example, more than 360,000 metric tons (MTs) have arrived in Iraq from neighboring countries. All of this is in addition to the 245,000 MTs of U.S.-produced food

that is already in the region or en route.

As a result of these careful preparations—and the fact that the Iraqis received

increased rations prior to the fighting—there has been no food crisis in Iraq. We

anticipate continuing U.S. food shipments through October and perhaps longer, if

needed. The long-term solution, however, is the creation of a functioning market

system. In the meantime, our food specialists on the DART have been working with

DoD, WFP and the Ministry of Trade on issues like finding the 9,000 trucks needed

to haul the 480,000 MTs of food that we expect to arrive in Iraq every month, assuring security along the corridors from Kuwait, Jordan, Syria, Turkey, and Iran, and

preparing enough silos, warehouses and equipment to support these vital supplies.

The Office of Transition Initiatives (OTT) specializes in small, ‘‘quick impact’’ programs. OTT’s flexibility and quick turn-around times have proved invaluable in

many situations. OTT grants are currently helping the Town Council in Umm Qasr,

Iraq’s principal deep water port, get up and running and funding sports activities

for young people there. One of the lessons we have learned from our work in other

failed and failing societies is the need to keep young people, especially young men,

off the streets, in school and in healthy activities such as sports. Unless they are

occupied, young men are often a source of disruption, for they can be easily lured

into looting or organized crime and violence.

OTT has also provided grants to keep the electric generators at the Mosul Dam

running, so that the 1.7 million people who depend on it have electricity. Other OTT

37

projects currently underway include efforts to repair a school in Umm Qasr; shore

up the Mosul Dam; put 16,000 people to work cleaning up garbage and debris in

al Thawra; and supplying water testing equipment, refurbishing the fire station,

and supplying new furniture and instructional materials to primary school in

Kirkuk.

In addition, OTT has begun work on repairing ministries and public buildings and

supplying them with computers, copiers, communications equipment, supplies and

furniture, so that they can resume their normal functions. One of the advantages

of this approach is that it allows us to work directly with Iraqi citizens and civil

servants on practical every-day matters. Already we have started programs with the

Iraqi Ministries of Justice, Irrigation and Finance, as well as the Central Bank, and

we are looking at the possibility of doing more. Indeed, we have received proposals

for 30 ministries and commissions for just such services.

Other OTT projects envision repairing the Courthouse in al Hillah; building concrete platforms for three radio and television broadcast towers; assessing the needs

of fire department throughout the country; and designing more public works projects

such as in al Thawra (ex-Saddam City).

Infrastructure Restoration

Since the President declared an end to major combat operations in Iraq on May

1, 2003, USAID’s reconstruction efforts have focused on critical areas that will each

contribute to substantial improvements in the lives of the Iraqi people. They are

ports, airports, electricity, water, sanitation, health, education, and local governance.

Through a contract with Stevedoring Services of America (SSA), we have been upgrading facilities—silos, warehouses, and cranes—at Umm Qasr, Iraq’s principal

deep water port. Administration of the port was handed over to SSA by the British

on May 23. This is the first reconstruction project in Iraq to be transferred from

military to civilian authority. In the days ahead, SSA will phase in over 3,500 local

workers as managers, heavy equipment operators, maintenance and other workers

and is working closely with the newly elected director general of the Iraqi Ports Authority on staff training and port revitalization issues.

At the same time, Bechtel is rebuilding port administration buildings and analyzing the adjoining rail system for repair. Meanwhile Bechtel’s subcontractor, Great

Lakes, has been dredging Umm Qasr since May 7 on a 24-hour, seven days a week

basis. This is dangerous and difficult work: some 200 pieces of unexploded ordnance

have been removed from the harbor and ten sunken vessels discovered in the harbor. As a result of the dredging, the channel is now nine meters deep, and two

ships, carrying 15,000 metric tons (MTs) of rice and wheat respectively, were unloaded last week at Umm Qasr. Our goal is for the work to have progressed enough

so that the port can handle ships carrying 50,000 MTs of food by the end of this

summer.

Through our contract with SkylinkUSA, preparatory work to upgrade Basra and

Baghdad International Airport to international standards has been done, and we

are aiming to have the latter opened by June 15.

Restoring electric power is an urgent priority, a task made considerably more difficult by acts of deliberate vandalism. On May 26, for example, two 400 KY towers

were torch cut and hauled down, bringing the number of towers that have been

damaged since the end of hostilities to 8. In other cases, substations essential to the

restoration of power service have been totally destroyed by looters looking for copper

wire and other scrap to sell on the black market.

In parts of the north and south of the country, however, there is a surplus of electricity. For the first time in more than a decade, Basra has electricity 24 hours a

day, a marked improvement in the life of the country’s second largest city. At the

same time, electrical shortages continue in the center of the country. We are working hard to rectify these problems. Bechtel has completed its assessments and we

have approved task orders that will enable them to repair the 400 KVA and 135

KVA high voltage transmission lines.

We are also funding new boilers for electrical generation plants. A further problem is that much of the country’s power generation depends on natural gas, diesel

and bunker oil, which Saddam’s regime failed to produce in sufficient quantities.

With the lifting of U.N. Security Council sanctions and the gradual restoration of

the country’s oil field capabilities, this problem should ease.

Another way Saddam punished the people of southern Iraq was by withholding

chemicals to treat and purify drinking water. This contributed greatly to the unnecessarily high death and illness rates, particularly among children and other vulnerable groups. USAID has begun addressing this by providing funds to UNICEF to

purchase enough chlorine for 100 days of water treatment for the southern

38

governates of Al Muthanna, Al Basra, Dhi Qar, and Maysan. The International Rescue Committee, acting on another USAID grant, will work to improve the rural

water systems in 59 areas in An Najaf Governate.

Other infrastructure work includes the restoration of bridges at Ar Rutbah, Al

Ramadi, Mosul, and one just southeast of Baghdad.

Health, Education, and Agriculture

Initial evaluations of the health sector show that services have been disrupted

and equipment, medicine, and supplies have been looted from some hospitals and

warehouses. While there have been no major outbreaks of communicable diseases,

the potential for such outbreaks remains a source of concern. USAID’s goal in this

sector is to meet urgent health needs as well as normalizing health services rapidly.

To this effect, we have worked through UNICEF to supply 22.3 million doses of vaccines to prevent measles, pediatric tuberculosis, hepatitis B, diphtheria, whooping

cough, tetanus and polio. This is enough to treat 4.2 million children under the age

of 5 as well as 700,000 pregnant women.

We have also established a surveillance system with WHO, UNICEF, and ABT

Associates to monitor cholera, worked with the Iraqi Director of Public Health on

a diarrhea survey, established a database for tracking and coordinating international medical donations, and helped prepare public service announcements about

sanitation and breast feeding. In addition, we have made grants to CARE, Save the

Children, the International Medical Corps, and World Vision for emergency health

projects in Baghdad, Mosul, Basra, al Nasariyah, Maysan, Wasit, and Ar Rutbah,

respectively. Our grant to ABT will enable them to address other medical needs,

such as pharmaceuticals and equipment and coordinating donations of medical supplies. ABT will also work with the Iraqi Ministry of Health to improve their administration of medical services throughout the country.

In the education sector, we have launched a ‘‘back to school’’ campaign with

UNICEF and delivered 1,500 school kits that helped 120,000 students in Baghdad

return to their classrooms in May. Through a contract with Creative Associates, we

have inventoried all 700 schools in Basra with the Ministry of Education, begun

making grants to refurbish a number of schools there, and finalized plans to distribute 8,000 school and student kits for Basra schools when the new school year

starts in September. The next step is to do the same in Dhi Qar Governate. We are

also funding UNESCO to print and distribute 5 million math and science texts on

time for the beginning of the school year, and we are in the process of soliciting proposals to link U.S. colleges and universities with Iraqi institutions of higher learning on various health, education, agro-industry, engineering, and other projects. A

USAID technical advisor is also working with the Ministry of Education on ways

to deliver sufficient equipment, material, supplies for the new school year.

We are also about to launch a competitive procurement for assistance to Iraq’s

agriculture sector. This program will address issues such as increasing agricultural

productivity, rural finance, and reducing water-logging and soil salinity.

Stabilize the Population: Refugees, IDPs and Abuse Prevention

The emergency humanitarian assistance and early reconstruction work cited

above are only one part of USAID’s overall strategy for Iraq. Stabilizing the ethnic

and religious tensions within the country, resettling TDPs, and ultimately helping

resolve some of the complex property disputes created during Saddam’s 24 years of

corrupt and abusive rule are important goals.

Our first step began with the DART, which, for the first time ever, included specialized abuse prevention officers. Our Agency has years of experience in post-conflict situations. A priority for the DART was to identify key contacts with the U.S.

armed forces, civil affairs units, the International Committees of the Red Cross,

NGOs, the media, and local leaders and brief them on the kinds of lawlessness and

human rights abuse that occur in the immediate aftermath of a conflict so that suitable responses could be fashioned. As part of this effort, each of our abuse prevention officers distributed USAID’s Field Guide to Preventing, Mitigating and Responding to Human Rights Abuse, which was designed for just such situations.

Another important goal of our abuse prevention officers was to identify mass

grave sites. Iraq tragically has plenty of these sites: clerics have told us there are

146 of them in and around Najaf and another 29 in Karbala. The presence of mass

graves is an important reminder of the nature of Saddam Hussein’s regime. Other

mass grave sites have been found near Musayeb, Kirkuk, Basra, Al Hillah, and elsewhere. Should any of Saddam’s immediate circle be tried for major human rights

abuse or crimes against humanity, the sites will be prima facie evidence.

These abuse prevention officers are also monitoring the situation of IDPs in northern cities like Kirkuk, Dohuk, Zamar, and Domiz, where upwards of 100,000 KurdVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 89517 SFRELA2 PsN: SFRELA2
39

ish families were driven from their homes as part of Saddam’s Arabization campaign. Many of these Kurdish families are now returning to their homes—or trying

to—and this makes for a potentially destabilizing situation. Our role, for the moment, is to try and sort out the dynamics of these conflicting property claims, so

that ultimately, they can be resolved by legal means, somewhat like they were in

Eastern Europe after the fall of the Berlin Wall.

Elsewhere our abuse prevention officers are working with several NGOs to identify and train local groups in human rights monitoring and grave site protection.

Another early USAID grant supports the International Organization on Migration

(IOM), which is providing relief supplies for up to 500,000 IDPs in central and

southern Iraq and coordinating the distribution of supplies for another two million

Iraqis in the same region. As you know, after the first Gulf War, Saddam deliberately targeted the Marsh Arabs, or Madan people, for destruction. Tens of thousands were killed, land and water mines were sown throughout the region, and

some 200,000 people were driven from their homes. The systematic draining of these

marshes reduced them to a tiny fraction of their former size, destroyed a way of life

that had survived for millennia, and caused an environmental catastrophe of unprecedented size and cope. This month, we hope to send a team of hydrologists, environmental specialists and economists to the region to study what might be done

to begin restoring some part of this region and how to include the Marsh Arabs in

the process.

Develop a Market Economy and Create Institutions of Economic Governance

Under Saddam, the Iraqi economy was highly centralized and exceedingly corrupt.

All the country’s heavy industries, and much of its light industries are government

owned. So, too, is the oil industry, which is the main source of the country’s revenue. With the lifting of U.N. sanctions and the gradual improvements in the oil

sector, some revitalization of legitimate economic activity should follow naturally,

along with a reduction of black market activity which has in the past fueled criminal syndicates. Yet much more must be done to make a solid break with past practices and put the country on a solid economic and commercial footing.

One of the keys to doing this will be to harness the power of the private sector

and give the economy the jump-start it needs to create jobs and raise incomes for

millions of Iraqi citizens. We are about to seek bids for a contract that would begin

this process. We also expect to provide technical assistance under the policy guidance of the Treasury and State Departments to Iraq’s Central Bank, Ministry of Finance, and the private banking sector. Within a year, we hope that the Ministry

of Finance will be able to handle government payrolls, Iraqis will begin tackling

some of the tough economic choices that lie ahead, a legal framework will be established that encourages the private sector, and access to private commercial banks

will be widespread.

An early focus on economic governance is essential if the new Iraqi government

is to be successful. Many laws and institutions need to be changed or created from

scratch: a framework for fiscal and monetary policies must be put in place and legal

and regulatory reforms shaped. Customs and tax policies must be devised so that

the government has revenue from more than just the oil sector and the proper incentives are given for the private sector. Property rights and the repatriation of

profits must be assured, clear tariff structures created and free trade encouraged.

USAID, working with other USG agencies and appropriate international organizations and partners, will support Iraqi efforts in all of these sectors to transform

Iraq’s economy and establish a model for the region and beyond.

De-Ba’athification of Iraqi Society

Ambassador Bremer’s recent decision to remove 30,000 members of the Ba’ath

Party from all positions of responsibility in post-Saddam Iraq was a wise and necessary step. Clearly, the top echelons of the Party can hardly be counted on to take

the country in the proper direction. Indeed, until such time as they are jailed or

thoroughly reformed, these people can be expected to obstruct progress in whatever

way they can. Many of them have long experience with smuggling, black

marketeering, and armed repression. One of the great dangers is that they will

turn, as others have done in Serbia and Russia, to criminal syndicates or armed

paramilitary organizations whose ties to extremist elements could make them very

dangerous to both Coalition Forces and ordinary Iraqis. Some will turn to crime—

extortion, murder, and robbery. Others will foment tensions among contending ethnic and religious groups or hire themselves out as mercenaries and enforcers.

While it is obviously not USAID’s job to provide security or police protection, we

do have experience in many post-conflict situations with rehabilitation and reintegration programs following demobilization and disarmament. And, as I menVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 89517 SFRELA2 PsN: SFRELA2
40

tioned above, we do have human rights monitors in the country already, and they

are preparing to expand our capabilities substantially in this domain.

De-ba’athification also hinges on the success of our larger goals in Iraq: the establishment of a stable society, with free market economy and an honest, competent

democratic government that represents the entire spectrum of Iraqi citizens.

Creation of Accountability and Control Systems in the Oil Sector

Iraq has the second largest proven oil reserves in the world. Oil is the country’s

primary foreign exchange earner and the major source of government revenues. It

can be a source of great wealth and hope for the Iraqi people, but it can also be

a source of great temptation to the unscrupulous. The way oil revenues are used,

therefore, will become an extremely important political and economic question in the

country as soon as a new government is established. How the industry is managed

will likely set the pattern for the way the country is governed economically and politically. Simply put, ensuring the transparency and accountability of every facet of

the oil industry is crucial to the country’s transformation.

The natural resources of the country belong to the Iraqi people. This puts a huge

premium on questions of economic governance. Yet unless the new government is

honest, technically sound, and strongly democratic it will be very difficult, if not impossible, to break with the corrupt practices of the past. We must, therefore, make

it crystal clear that a new day has dawned and that there will robust systems of

accountability and transparency in place from the beginning.

Ensure a Peaceful Transformation to a Pluralistic Democracy

The three most important tasks the U.S. must accomplish if we are to be successful in Iraq are security, democracy, and a free market economy.

No one with an understanding of Iraq’s history should expect that the country can

be immediately transformed into a fully functioning democracy. As we have seen all

over the world, the process of democratization is often slower than we would like.

And yet, the slope of history points in one direction only—toward more democracy

and more democratic governance in every part of the world. Even in the Middle

East, there are unmistakable signs of progress, but so too are there formidable obstacles.

Iraq, of course, presents a special case. The brutality with which the Ba’ath Party

ruled has left a legacy of suspicion and fear. Individual initiative has been discouraged if not crushed outright. The centralized, autocratic nature of the regime afforded little opportunity for anyone to develop the local governance skills that are

so essential to the daily functioning of a working democracy. There has been no freedom of speech, no freedom of thought, no freedom to organize interest groups of any

kind, no freedom to develop political views or skills or parties. All of this has left

a legacy that can and will be overcome with time. Our job is to accelerate the pace

at which this happens.

Our first step has been to work with Coalition forces to identify key local leaders

with whom we can work and connect them to opportunities for relief and reconstruction assistance. This has been an important part of our DART’s responsibilities, as

well as those of our NGO and private sector partners.

In April, we awarded a contract to Research Triangle Institute (RTI) to work with

local communities in secure areas and respond to their priorities, and help build up

local governments so that they can respond to their constituents and deliver basic

services like potable water, schooling, and health care. Already RTI and its subcontractors have about 20 people in the country, working closely with the Coalition

Provisional Authority, and that number is expected to reach 50 by the end of this

month. RTI’s technical experts are setting up neighborhood advisory councils in

Baghdad and working with appropriate local administrators to improve the delivery

of essential services.

Last week we awarded cooperative agreements to five U.S. NGOs—Mercy Corps;

International Relief and Development, Inc.; Agricultural Cooperative Development

International and Volunteers in Overseas Cooperative Assistance; Cooperative

Housing Foundation International; and Save the Children Federation, Inc.—as part

of our Iraq Community Action Program. This, too, is specifically designed to promote

grass-roots citizen involvement in the affairs of some 250 communities through Iraq.

One of the hallmarks of a free society is an open, pluralistic media, and we are

working to create one in the new Iraq. Already, we have given funds to Radio Sawa

to support their reporting of humanitarian and reconstruction efforts and to

Internews to help support a symposium that brought Iraqi, Arab and Western

media experts together to develop a set of recommendations on fostering a free, pluralistic media in Iraq.

41

Conclusion

One of the strengths of USAID is our ability to enlist the American private sector

in projects of great importance to the country. Neither we nor any other government

agency has the expertise on hand that we have been able to bring on board through

our relationships with the private sector in just the past two months. This was a

major reason we were able to position enough supplies and technical expertise in

the region to deal with a potential humanitarian crisis and start our reconstruction

efforts quickly and aggressively.

But if we are nearing the end of the emergency phase of our work, we are a long

way from completing the reconstruction, for our goal is nothing less than the transformation of Iraq into a functioning, stable state that poses no threat to its own citizens or its neighbors and serves the interests of the Iraqi people. Rebuilding the

physical infrastructure of the country is but one part of this. Helping the Iraqis

build the institutions of an honest, democratic state that represents the broad spectrum of Iraqi society at the local, regional, and nation level and a functioning, transparent economy based on the power of the private sector will be at least as important. We have no illusions that this will be quick or easy. The President and Secretary of State have made it clear that the United States is in this for as long as

necessary.

Thank you.

The CHAIRMAN. Thank you very much. Let me just indicate that

we will now have a question period in which we will have 7 minutes on the first round so all can be heard. We may then need to

proceed through additional questions.

I would just say at the outset that this was an apropos comment

made by my colleague Senator Biden as you were proceeding, and

I agree with him. He said these gentlemen really mean business;

we’re getting somewhere. As a matter of fact, the testimony is impressive. I would commend to all of our colleagues the four papers

you have presented plus the additional information you have furnished, because it does have a structural soundness to it, a tactical

and strategic emphasis that I believe is very important for all of

us to understand and to build upon. Sometimes people feel they are

almost being harassed by our insistence. I think that we feel excited that you are proceeding in so many ways and with such success.

Let me just say that each one of you has played a role as part

of the administration, and I once again mention Senator Biden’s

earlier quote about how he found it impressive that the President

of the United States was meeting one on one with the leaders of

the Arab world, expressing as a matter of fact that we are going

to have success with the road map. Now skeptics of that process

abound everywhere. They ask, are we really staying the course and

is there longevity to this? My own judgment, at least from my

knowledge of President Bush, is that there is. People will be surprised, as they will be, I think, with Iraq.

We are now talking about a successful Iraq down the trail.

You’re saying we are going to take the time and spend the money

and do the planning so that, as a matter of fact, in the war against

terrorism, there will not be a nation out here harboring young men

who fly airplanes into our World Trade Center or into our Pentagon, a nation that has seen a festering mass of difficulty for the

last 20 years. As you have explained, the government not only tortured its own people and ran down its economy, but from time to

time attacked others and used weapons of mass destruction against

others. This is a matter of record. Now it’s gone, what is coming

in its place is what you’re trying to describe.

42

Let me just say that there are two technical challenges that I am

curious about in my time frame. The first has to do with the debt.

You pointed out, Secretary Taylor, that you have had success in

getting forbearance with regard to demands for payment for servicing that debt through 2004. That’s important, because the dimensions of the debt are difficult to define, quite apart from what is

to happen with it.

It is all well and good for people to argue that the Iraqis ought

to govern themselves, Iraq for Iraqis. Yet the fact is, whoever is in

Iraq now is faced with dimensions that are very substantial. So,

without there being someone to more or less wipe the slate clean,

whatever fledgling government that comes along could be crushed

by international pressure, by demands for payment of this debt,

whatever it may be.

You may not be able to go further than you have in trying to define the dimensions of it, or precisely what kind of conversations

we’re having. Yet I hope that we’re having conversations with European countries, with Russia, with other countries, that indicate

that they are going to need to settle this situation for very little.

In other words, we are not going to have a case in which America

tries to put together a country to finance the debts of other countries that really need to take a differing view.

My second question is an internal one that any of you may want

to answer. Congress did appropriate the supplemental of about

$2.475 billion. There was a first report to Chairman Young, but it

doesn’t have much in it. It’s not really clear to me, in other words,

what Ambassador Bremer has asked for and what he has been

granted, and how far $2.475 billion takes us. That part of our internal housekeeping seems to remain either vague or nonexistent.

If any of you could comment on the first matter that I raised, or

the $2.475 billion and who’s asking for it, who’s getting it, and

where that will take us, I would appreciate it.

Mr. TAYLOR. Mr. Chairman, I’ll take the first one, or at least get

it started. You are correct to emphasize this very important problem. I think the success we have had so far, of having an agreement that we can’t expect service payments at least through the

end of ’04, has been significant, because it was a concern as we

make plans for the budget for this year and next year that we can

effectively zero out that alone.

I think in answer to your question about discussions with Europeans, many of these discussions have taken place in the context

of the G–7 or G–8 apparatus that we have, and particularly the

meeting of the G–8 finance ministers including Russia that occurred in France a few weeks ago delved into these issues. There

was quite a bit of interest in resolving them, first as you say, to

get an estimate of the size of the debt. There is a lot of uncertainty.

The estimates we got originally, we see have to be revised. There’s

quite a range, $60 billion to $130 billion, it is a huge amount, and

the range of uncertainty is huge.

What we are doing first is having the so-called Paris Club survey

all its members to find out what their estimates of the debt are.

Second, we have had the IMF survey the non-Paris Club countries

which also have a lot of debt, particularly some of the Eastern EuVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 89517 SFRELA2 PsN: SFRELA2
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ropean countries and countries in the Middle East. Those two

things together will provide us with estimates.

We also have people on the ground in Iraq going through records

to estimate, trying to get a better sense of what the debt is.

As soon as that is together, we are going to sit down and try to

find a way to have what is necessary, and that is substantial reduction in the value of the debt, and we will work on that cooperatively. So far it seems to me that things are going better than I

could have expected and it does show cooperation, but there are

going to be differences of opinion amongst the various debtors.

Dr. ZAKHEIM. Let me start with the answer to your second question, Senator, and I think Mr. Natsios may want to talk about this

as well. In terms of the appropriated funds and how we look at

those as opposed to the other funds, clearly there is a sense that

if we are not paying monies directly to the Iraqi people, for example, funds to set up the original Office of Reconstruction and Humanitarian Assistance, ORHA, which has now been folded into the

CPA, we have already spent or committed $250 million of appropriated funds to setting up, or covering rather, the operational expenses. We spent or committed $175 million of appropriated funds

for natural resources risk remediation, that’s to remove unexploded

ordnance and emergency repairs and so on. So these are the things

that we spend money on or contract essentially to help ourselves

administer or to do some things that we are really doing.

When you then look at payments to Iraqis, for example, it makes

a lot of sense not to tax the American taxpayer in effect by using

appropriated funds to pay Iraqis when you have Iraqi funds to do

so. So that is a general rule of thumb, and as I mentioned earlier,

we have spent $195 million, of which we spent about, as I said, $30

million or so, a little less than that, on ministry start-ups. The rest

were spent really through salaries, and we requested $258 million,

again, overwhelmingly for salaries for Iraqis.

The CHAIRMAN. That’s very helpful. The business plans for Iraq

still are not clear to me, and maybe not to you. You’re still forming

them, but at least you’ve put some pieces in, made some estimates

regarding the oil revenues, made some decisions as to whether to

pump more oil or not, and started to determine how much investment is required for that and other sources of revenue. At some

point these funds that are now impounded and have been found are

going to be exhausted if they are not recurring, so in an ongoing

procedure that goes on for months and years, the cash flow situation here is important. We are trying to figure out for us at least,

two people who are going to be voting on appropriations as they go

down the trail, what we might anticipate for the American people.

Therefore this is still, in my mind’s eye, something that I would

like to see fleshed out a little bit more.

Likewise, the debt situation, as you say, maybe $70 billion, maybe $130 billion, maybe more than that. Some have made estimates; everybody is trying to divine what we think is owed there.

All I’m saying is that to leave the Iraqi people facing all of that

as the rest of us leave and say do your best, would be ridiculous.

Having undertaken the responsibility of nation building in Iraq,

we’re going to have to build the debt structure to end it in one form

or another, or there will be no viability after these cash flows that

44

I’m talking about finally come along. We know what they are, and

we either supplement them, or we get the French, the Germans,

the Russians, somebody else to also contribute to the cash flow,

which is a pretty good idea. One reason I would sort of like to see

what kind of flow there is going to be is that we then could become

rather poignant in asking them to do those things.

You know, as I visit Russia to talk about arms control, I could

also talk about debt, and about their obligations. Senator Biden

and others have visits and we do some of this work from time to

time. Sometimes it’s impressive to people that we’re worried about

it and we might be voting on it. This is why these are not abstract

questions which the administration answers in dribs and drabs

until we find out what we’re talking about. This is a team effort

now, in which we understand we’re in there for a long while, and

we try to get some construct.

Having said that, you have filled in a lot of blanks today. I

thought it was very, very impressive, and I appreciate that very

much. Even as I raise these additional questions, I do so in good

faith; because as you know, we all need to be thinking about them.

This is not an antagonistic situation or a competition; it’s looking

for the best thing that we can put together at this stage.

Senator Biden.

Senator BIDEN. Thank you very much, Mr. Chairman. I want to

echo your view and express the cliche, we’re all in this one together. The American people are not going to stick with us on this

unless we are able to come up with a coherent and uniform view.

I would begin my questioning by saying I think we suffered from

an overwhelming expectations game. On the ground in Iraq, I’m

sure, Mr Natsios, as you have found, the average Iraqi looking at

the awesome military power we had, does not understand why we

can’t reconstruct Iraq as rapidly as we can deconstruct it. I mean

that sincerely. I see when I am traveling, and I always kid about

this, but it’s true. I find that we are the totality of their problems

and the totality of their solutions, from their perspective. And so

the Iraqis are sitting there saying if the United States really wanted to do this, the water and the lights would be on, it would be

like the Lord on the seventh day, you know what I mean, and so

that’s a difficulty.

The other expectation game is, with all due respect, Secretary

Taylor, and I do think you have made good progress, the idea that

we accomplished no one seeking any payment on debt to 2004. This

is no accomplishment at all in the sense that nobody expected anything. They know there’s nothing to get, there’s no way to get it

out now, and I think the expectation game is going to get very very

very tough in terms of the debtor community when in fact things

start to roll a little bit more. That means we are going to have a

real hard time making it clear that this has to be worked out. So

I think your real work is cut out for you, and I know you know

that, but I think the expectation game is real in terms of the debtor

community, particularly the smaller and the poorer countries, or

large countries like Russia with real needs, and I think they’re

going to find it very much difficult to work it out. We look forward

to working with you to help in that effort.

45

Let me ask one question, Mr. Natsios. You mentioned the success

in Basra, and I’m not being a wise guy when I ask this. Did we

get the electricity on or was that the Brits? I mean, was it you

guys, was it AID who did this, or the Brits?

Mr. NATSIOS. I would like to give you any success story attributable to us; however, it’s almost never just one institution. It was

the British Marines with their engineers, with UNICEF, UNICEF

did some of the work, with AID, and DFID, which is the British

aid agency, all worked together on this.

Senator BIDEN. So you worked together on this. What I’m trying

to get at, again, is expectations. Was the bulk of that led by AID?

Mr. NATSIOS. No. It was led by the engineers. What we led with

was funding, but that started before Bechtel arrived on the ground

and before the contract was activated. They started that very early

on and Bechtel has taken over much of that responsibility.

Senator BIDEN. Now, let me ask Defense, you have given us a

pretty detailed estimate of the resources that we can bring to bear

right now to help build Iraq and as I listened I added it up, and

it’s about $15 billion now roughly, based on your statement, including congressional appropriations, Iraq assets, UN and international

donations, and projected oil revenues. Add them all up in the near

term, next 12 months roughly, and you’re talking about $15 billion.

What I still don’t have a sense of from all this testimony here is

what are the costs going to be over that same period of time,

matching those revenues? Do we have an estimate of the cost?

I’m just going to lay it out and any one of you can jump in, if

you could speak to this. We’re going to have, and I don’t want to

get into a debate about how long, but at least for the remainder

of this calendar year, and my guess is the next fiscal year, we are

going to have somewhere over 100,000 American troops in the region and we’re going to have probably close to 150,000 troops. I

would like to know what the annual cost of maintaining just those

troops is, which as I understand it is not being paid for out of any

Iraqi assets frozen, any Iraqi assets in the future, any Iraqi assets

at all. And although there will be contributions, God willing and

the creek don’t rise, from NATO forces and others to supplement

those forces, there will be no in-kind contribution that I’m aware

of to pay for the maintenance of those U.S. forces. So what is the

cost of that, of our current deployment?

[The following information was submitted by Dr. Zakheim on August 8, 2003 in response to Senator Biden’s question:]

Dr. ZAKHEIM. Based on current mobilization levels and projected demobilization

schedules, the total estimated cost of maintaining the current mobilization and military operations now in Iraq is approximately $3.9 billion per month. However, projecting annual costs out into the future cannot be done with any certainty at this

point—and it may be misleading to suggest that any such estimate is valid. The

drawdown of troops in support of Operation Iraqi Freedom is currently underway

and will continue through next year. The U.S. Central Command’s stability operation plan for Iraq is still evolving to meet the dynamic situation within the country. The number of troops and the pace of demobilization are still to be determined.

Therefore the annual cost of supporting the troops cannot be estimated with any degree of certainty.

And second, what are the additional cost estimates that we have

in the near term, meaning the next 3, 6, 12 months, for all the

things that you’ve talked about, and how do they match to reveVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 89517 SFRELA2 PsN: SFRELA2
46

nues that are pledged, we have appropriated, or represent assets

of the Iraqis?

[The following information was submitted by Dr. Zakheim on August 8, 2003 in response to Senator Biden’s question:]

Dr. ZAKHEIM. The costs for the current post-combat transition-stability period is

approximately $3.9 billion per month. However, this level of spending can change

significantly if the level of operations (OPTEMPO) or the number of Reserves deployed were to change. A limited drawdown of troops in support of Operation Iraqi

Freedom is currently underway. The environment within the country remains dynamic, however, and the U.S. Central Command stability operations plan continues

to evolve. The number of troops and pace of demobilization over the next few

months has not yet been determined.

Projecting costs for the next few months is difficult due both to the dynamic environment within Iraq today and to the continuing identification of reconstruction

needs. We are continually assessing both the needs and our ability to garner the

appropriate resources. To date the international community has offered to contribute over $2 billion in cash and in-kind assistance for Iraq reconstruction and humanitarian assistance. This amount is expected to rise significantly in the next several months in response to further UN appeals for assistance, an informal international consultation meeting on the heals of the UN Flash Appeal, and a formal

international donors conference planned for September 2003.

In addition, the United Nations Security Council Resolution (1483) calls for certain monies to be placed in the Development Fund for Iraq (DFI) which will be disbursed at the direction of the CPA. The DFI now has an initial deposit of $1 billion

derived from the UN’s ‘‘Oil for Food’’ escrow account. It is expected to also accept

proceeds from the sale of petroleum, petroleum products and natural gas and returned Iraqi assets provided from UN member states.

Approximately $1.7 billion in formerly blocked and confiscated Iraqi state assets

in the U.S. have been vested in the Treasury Department for apportionment to Federal agencies for requirements that benefit the Iraqi people. In addition, about $800

million in Iraqi state assets have been brought under U.S. control in Iraq. The

seized assets, which include primarily U.S. dollars are being verified for authenticity.

Finally, in the Emergency Wartime Supplemental Appropriations Act, 2003, Congress appropriated $2.475 billion for the President’s Iraq Relief and Reconstruction

Fund which is the primary source of U.S. government funding for Iraqi recovery activities. Congress also made $489 million to the Department of Defense within the

Iraqi Freedom Fund to be used if needed to repair damage to Iraqi oil facilities and

to preserve a petroleum distribution capability.

Dr. ZAKHEIM. Let me start with the military costs. The Congress

gave us a supplemental of approximately $62 billion, most of which

was for maintaining operations, and those were assumed to the end

of this fiscal year. We have already allocated and essentially paid

back something slightly over $30 billion to the services for operations that they had essentially forward financed.

We are still going through our mid-year review of expenses, and

what costs we project out to the end of the fiscal year, and we believe that the supplemental will be adequate.

Senator BIDEN. The end of the fiscal year being this October?

Dr. ZAKHEIM. Yes, sir, September 30th. It will be adequate to

cover within reason whatever number of troops remain. The reason

for that is that we had built in some estimates for moving troops

back and there is a cost to that, and the pay for the troops, of

course, is a constant wherever they are. So the real issue is, how

much more are you paying to keep the troops out there, as against

how much are you paying to bring them back, and it looks at

present to be in balance.

We will be able to get you better numbers for the record a little

later on when we finish this review, but it looks like the suppleVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 89517 SFRELA2 PsN: SFRELA2
47

mental will be covering the cost of troops through the end of the

fiscal year. Beyond that, I am not in a position to predict right now.

Senator BIDEN. Well, I have not heard anybody even postulate

that we are likely to bring home the bulk of American forces in the

next 12 months, not the fiscal year. We’re now doing the appropriations process, we are in that cycle, and we are going to appropriate

money for the Defense Department, which is already well underway. Can you give us the estimate as to the cost for the next fiscal

year, because you have to be doing that now? What is the cost for

the next fiscal year of maintaining the projected military presence,

whatever that is? I know you don’t know for certain, but that’s part

of the budget process now and there probably will be a supplemental come January of next year again if past is prologue, and

that’s not a criticism, it’s an observation. So, can you give us a

sense what we’re going to need for the next fiscal year just to maintain troops which comes out of direct Congressional appropriations?

Dr. ZAKHEIM. Regarding the statement you just made about a

supplemental in January, I cannot talk to the future. The reason

is that last year the supplemental came quite a few months into

the fiscal year. Right now, to estimate the timing of a supplemental

we have to do two things. First, we cannot forward finance again

until we get our estimates right, and then we have to get our estimates right and get them up to Congress. So at this stage, I would

not be doing any justice to anyone by giving you a concrete estimate on that.

Senator BIDEN. With all due respect, and I know my time is up,

if you guys don’t have an idea in June of 2003 what the cost of

maintaining forces is going to be in Iraq for fiscal year 2004, then

it’s not the Defense Department that I remember. You guys have

to have an estimate now. If you’re going to wait until next January

to present us with a proposal, that is, I would argue, irresponsible,

irresponsible. You’ve got to give us your best estimate now; and so

I assume that’s in train, and if it’s not in train then it’s derelict.

Dr. ZAKHEIM. I don’t think we are derelict, Senator. I think I indicated that it was in train. All I simply said was that in putting

this estimate together, and particularly as you yourself indicated,

with regard to troop levels and bringing troops back and so on, that

does take a little time. It is not a question of whether we wait until

January, it is simply a matter of assessing where you are and projecting out where it is apt to be. You cannot predict perfectly. We

have done pretty well with the supplemental, but we cannot predict

perfectly and we want to have our estimates right.

Senator BIDEN. What is the current cost of maintaining deployment per month now, just now?

Dr. ZAKHEIM. Probably in the region, if you include the cost of

reserves, in excess of $3 billion per month, but I can get you that

figure accurately.

[The following information was submitted by Dr. Zakheim on August 8, 2003 in response to Senator Biden’s question:]

Dr. ZAKHEIM. Based on current mobilization levels and projected demobilization

schedules for Operation Iraqi Freedom (OIF), the total estimated cost for the remainder of the fiscal needed to maintain the current force level is approximately

$3.9 billion per month. This estimate includes the following costs:

The Department anticipates that on average approximately 124,501 reserve component members will be mobilized on active duty for OIF during FY 2003 at an estiVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 89517 SFRELA2 PsN: SFRELA2
48

mated incremental cost of $0.8 billion per month. This cost estimate includes all pay

and allowances as well as personnel support costs (e.g., medical, temporary duty

costs) associated with mobilized Reserve and Guard members.

In addition, approximately $500 million per month is estimated for the incremental cost for imminent danger pay, family separation allowance, foreign duty pay,

subsistence, defense health care costs and other military personnel support costs for

personnel directly supporting OIF.

Also, the Department estimates that ongoing operations during the transition and stability period will cost approximately $2.6 billion per month. Included in this category are various necessary consumable items, such as subsistence, fuel, spare

parts, and transportation costs and other ground, air and naval operational costs.

Senator BIDEN. Thank you. I will come back.

The CHAIRMAN. Thank you very much, Senator Biden. Senator

Hagel.

Senator HAGEL. Mr. Chairman, thank you, and gentlemen, thank

you for appearing this morning.

To follow on with Senator Biden’s questions on costs of maintaining our forces in Iraq, Dr. Zakheim, would you clarify where we are

with force structure now for example, which countries have troops

in Iraq, are providing additional security, what the numbers are?

For example, I think when Secretary Wolfowitz was up here a couple weeks ago, he noted that the British had 20,000 troops in Iraq.

My understanding now is we have 10,000 in Iraq. Are they demobilizing, who’s there, what do we anticipate in addition to allied

troops? Are you factoring those in, at what numbers. To replace our

troops? Would you clarify that picture for us?

Dr. ZAKHEIM. Well, Senator, most of that I will really have to do

for the record, but let me say this. The number of the troops that

are out there and that would be coming out there obviously would

be less than those that were fighting the war, and that explains to

some extent the turnover in British forces. I will get you for the

record the exact numbers as to where the British are right now. In

terms of other contributions, again, this has to be worked through

Ambassador Bremer and the Coalition Provisional Authority (CPA),

but we have quite a few offers, some of them are well-known. For

example, the Spanish have offered forces, the Italians have offered

forces, as well as many smaller countries.

Senator HAGEL. Pardon me for interrupting, but could you tell us

who is on the ground there, which countries have forces there?

Dr. ZAKHEIM. The British have forces on the ground, the Polish

have had forces on the ground.

Senator HAGEL. They had?

Dr. ZAKHEIM. I believe there are still some there but I would

have to check on that. There are some smaller units and I will get

you that for the record, Senator.

Senator HAGEL. To go back to the British forces, are my numbers

correct that there are 10,000 troops, British troops there now,

versus 20,000?

Dr. ZAKHEIM. I’d have to check into that.

Senator HAGEL. You’re not sure?

Dr. ZAKHEIM. I’m not sure.

Senator HAGEL. That’s a little puzzling, don’t you think, if you’re

coming up here to testify about the issue of reconstruction and security, anticipating questions that Senator Biden asked, that the

Chairman has asked, and others will ask, and you have no idea

how many British troops are there?

49

Dr. ZAKHEIM. You are talking about a transition; so if I’m going

to give you something, I want to be sure that it’s accurate to the

day.

Senator HAGEL. How about a ballpark? Can we get you on the

record to take a wild guess?

Dr. ZAKHEIM. I don’t like—— Senator HAGEL. Are 20,000 still out there?

Dr. ZAKHEIM. No, 20,000 are not still out there.

Senator HAGEL. What is your position at DOD?

Dr. ZAKHEIM. I am the comptroller, Senator.

Senator HAGEL. That means controlling. As I listened to your testimony, everything has to go back through you; is that right?

Dr. ZAKHEIM. Well, certainly with respect to resources, that’s correct, Senator.

Senator HAGEL. Well, troops are classified as what?

Dr. ZAKHEIM. But they are British troops.

Senator HAGEL. And that’s not factored in as to what may be a

factor as to troops we’ll need, more or less, because our allies have

troops or will have troops, that hasn’t factored into your equation?

Dr. ZAKHEIM. Force planning, sir, is normally done by the Joint

Staff, and requests of other nations for forces are done in conjunction with our policy people. The last time I checked, sir, the British

government does not run those kinds of things through me, and it

would be presumptuous, quite frankly, to do anything other than

try to get you the facts on the ground as opposed to talk about

their decisions. That is not my theme, sir.

Senator HAGEL. All right. Let’s try another witness and maybe

we will get some answers.

Mr. Larson, the June 24th meeting that you described, tell us

about what’s going to happen there and what you anticipate, what

are the objectives? Is this to get allies to commit to resources?

Mr. LARSON. This is not a pledging conference as such.

Senator HAGEL. International donors?

Mr. LARSON. Yes. It’s beginning the process of preparing for a

pledging conference that I would hope to have in September. What

we found is that a good way to get this sort of mobilization of resources underway is to have a meeting at officials level, basically

the level of those of us at this table, and to task out work. One of

the things that we want to do and it’s already underway is make

sure that there is an international assessment of needs, and the

United Nations Development Program and the World Bank are

going to work on that together. We will take stock at the conference of where that work stands.

We believe it is going to be possible to have some representatives

of the Coalition Provisional Authority from Baghdad attend this

meeting to give a firsthand account of what they’re thinking at that

stage, of what the nature of the needs are, what the budget will

be, a lot of the questions that senators are asking today, recurrent

needs for salaries, investment needs for these various sectors that

need to be rehabilitated.

Then we will set in motion planning for a ministerial level, cabinet level donors meeting, as I say, in September. We are frankly

pleased that the United Nations has been willing to step forward

and work on this with us. We were pleased that at the G–8 meetVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 89517 SFRELA2 PsN: SFRELA2
50

ing just ending yesterday, there was a positive reference to this

conference, and an understanding that the international community is going to need to pull together.

Senator HAGEL. So you’re looking at September as the meeting

to get people to pledge and commit; is that right?

Mr. LARSON. I think that’s fundamentally right. There will be a

blend, Senator, between the humanitarian needs where there has

already been a fairly strong international response, and reconstruction. We expect this June 24 conference to come immediately after

a meeting that is planned to focus on reconstruction needs. I think

that—excuse me, on humanitarian needs. I think we will get

pledges on humanitarian needs at both conferences and then we

will have to have that roll over to a September meeting.

You know, donors will want to see what the needs are, and that

will come out of the assessment that is being worked on as we

speak.

Senator HAGEL. Let me ask you this question. I know that decisions are made at levels higher than yours, although your level is

pretty high, under secretary. It strikes me that waiting until September—I mean, we are just now into June. I don’t know what the

mystery is here as to the help that we need in order to bring stability and some security to that country and anticipating what

those needs are, and then why it takes so long for assessments.

Mr. LARSON. Let me respond quickly. This is a rolling process.

Even as the military operations were underway, we were meeting

and having consultations with allies. We were going out and making requests for things like help in policing, as well as humanitarian support. So we are not just sitting around and waiting until

the fall. On those things where it’s possible to move forward, we

are moving forward, and we’re getting responses, as Under Secretary Zakheim and I and others have indicated.

But we think to carry this to the next level, we’re going to, in

order to get the sort of commitments that we would like to get out

of European countries, for example, we are going to have to go

through a process that will give them some benchmarks, and part

of those benchmarks will be the needs assessments that have been

done internationally by the World Bank and UNDP, and those can

be meshed with the needs assessment that the Coalition Provisional Authority.

Senator HAGEL. Just a quick point, since my time is up. By September, the world is going to change considerably in Iraq, and all

the crack planning that has been done obviously is missing some

of that, and we’ll come back around to this in the next round. But

as I fade off in the sunset in my first round of questioning, Dr.

Zakheim, could you provide this committee with a number of American troops in Iraq?

Dr. ZAKHEIM. I believe the actual number right now is a classified one.

Senator HAGEL. You’re kidding? We have newspaper reporters at

the tables here, and they may want to tell you, because we read

about it almost daily in every major newspaper. Deputy Secretary

of Defense Wolfowitz gave us a number when he was here. So

that’s your answer?

51

Dr. ZAKHEIM. That’s my understanding. I will get you the number.

Senator HAGEL. Maybe some of the reporters want to give you

the numbers, but we will see the next round of questions. Thank

you, Mr. Chairman.

The CHAIRMAN. Senator Sarbanes.

Senator SARBANES. I pass for now.

The CHAIRMAN. Senator Feingold.

Senator FEINGOLD. Senator Sarbanes, you are very courteous,

thank you.

Why don’t we start with Mr. Zakheim. The administration has

rightly emphasized the idea that Iraqi resources will be used for

the Iraqi people. This is a very important idea, but I’m sure you

agree that just articulating it is not enough. So my question has

to do with the transparency of this. How are the Iraqi people supposed to know how found funds and seized assets and oil revenues

are used? You did mention that there are careful accounting procedures, but what is the proactive effort that is being made to ensure

that this information is actually available to the Iraqis? Since the

United States is now engaged in nation building in Iraq, doesn’t it

make sense to do everything we can to establish a culture of transparency and accountability right away?

Dr. ZAKHEIM. I completely agree with you, Senator, and I think

as you are well aware, the presidential envoy, Ambassador Bremer

consults with Iraqis, there are Iraqis working back at the ministries and therefore, anything that is going to be public for us will

be public for them. There is no particular reason to hide from them

what is being done with their funds, it’s quite public.

What I have told you this morning regarding the expenditure for

salaries, for example, is that we are giving them the numbers, we

are providing them. It is no more, no less than that. There is every

reason to provide the same level of accountability to the Iraqi people, since they are going to want to know what happened to their

money, as it would be to the United States Congress and the American people who want to know how we are treating that money as

custodians.

Senator FEINGOLD. What are you actually doing proactively to

get that information out?

Dr. ZAKHEIM. As I understand it, the Coalition Provisional Authority is in constant contact with leading Iraqis. There are efforts

to stand up the ministries. We put monies into that so that there

are Iraqi civil servants working who would have access to information. We are also funding two daily newspapers, which will provide

announcements and information for Iraqis. As you know of

course—— Senator FEINGOLD. Is that kind of information currently in those

newspapers?

Dr. ZAKHEIM [continuing]. I doubt it probably is as yet, but it

could be. It is probably most useful for Iraqis in the civil service

sector. Again, we are rehiring people, paying them, and once they

are on board, they will have that information.

Mr. LARSON. Senator, your question also touched on the oil aspect of this. Just to say briefly, the Security Council resolution sets

out a relatively clear process for having transparency with respect

52

to the use of oil proceeds that are deposited into the development

fund for Iraq. It includes an international advisory monitoring

board that would have representatives of the UN Secretary General, the managing director of the IMF, director general of the Arab

Fund for Economic and Social Development, as well as the World

Bank president. So with respect in particular to the development

fund, which will be the repository of oil proceeds, there is a process

that will ensure accountability and transparency in the use of those

revenues.

Senator FEINGOLD. Let me ask anybody on this panel more about

just the expected cost of overall stabilization and relief and reconstruction. Obviously the percentage at this point that the United

States is enormously greater than the other possible contributors.

I would like to know how much the United States has spent to

date. Do we expect the relative percentage of what we’re spending

versus other donors to change? What can we expect the percentages to be once that happens. Mr. Zakheim?

Dr. ZAKHEIM. As I indicated in my testimony, we are clearly providing the largest percentage. That will change, because once more

donations come in and particularly given the conference that will

take place, as Secretary Larson said in September, we expect that

the size of our percentage will change, although we may remain the

largest donor. That is the case in Afghanistan and again, there our

initial percentage was much larger. With the influx of other contributions, that percentage diminished. I expect a similar pattern

with respect to Iraq.

Senator FEINGOLD. What do you anticipate the pattern will be,

what’s the goal? Where are we at now and what is your plan and

our plan, given your role as comptroller, for what percentage we

will be paying and others will be paying? I would like to get some

number estimates of what the goal is.

Dr. ZAKHEIM. The first thing to do, as Secretary Larson noted,

is get the needs assessments done. Quite frankly, the international

financial institutions were reluctant to send teams out to Iraq until

there was a Security Council resolution passed. These needs assessments take some time. Once we have them and we know the

size roughly of what we are trying to achieve, we would then go

out and solicit support from countries that are wealthier and countries that are not. Small countries have contributed already. Organizations like the European Union are likely to significantly increase their contributions over the long term once those needs assessments are done.

Until that point, I think it is very difficult to make an estimate

of just what our percentages are likely to be.

Senator FEINGOLD. But I’m asking you what our goal is. My constituents want to know how much we’re going to pay. They want

to know as much as possible what the total will be and what can

be expected as a percentage by other countries. I understand that

that can be affected to some extent by what the needs are, but you

must have an objective in mind with regard to how much the

United States of America is going to pay here and how much other

countries are going to pay. I want to know what that objective is.

Dr. ZAKHEIM. Our objective is clearly to solicit as much as we can

overseas. Just to give you another example why it is so tough to

53

predict, we cannot give you the revenues from oil which are not

simply going to be available for reconstruction. Sixty percent are

still going to be used for food. As that situation improves in Iraq,

oil revenues will be available, that will lower the overall numbers.

It’s tough to predict that, we have to do some serious analysis by

lots of people. So to say, ‘‘Well, here’s a cap on our numbers or

here’s a cap on our percentage,’’ when we clearly don’t know the

size of—— Senator FEINGOLD. I wanted to know, though, not a cap. What’s

your goal? What would you like to see happen? Would you like to

see the rest of the world do 90 percent of this or 10 percent of this?

What’s a realistic goal that I can tell my constituents, we’re going

to try to get other people to help us with?

Dr. ZAKHEIM [continuing].——I think the realistic goal is to get

them to contribute as much as they possibly can.

Senator FEINGOLD. That is a complete non-answer. You must

have some goal. You must have some documents or papers that say

you know, our goal here is to try to push the donors and everybody

else to contribute X percentage. You don’t have such a goal?

Dr. ZAKHEIM. I just do not think it’s easily answered that way,

Senator.

Senator FEINGOLD. Thank you, Mr. Chairman.

PREPARED STATEMENT OF SENATOR RUSSELL FEINGOLD

I thank the Chairman and Senator Biden for holding this important hearing, the

second in a series scheduled since the regime of Saddam Hussein fell and the U.S.

became responsible for Iraq. These hearings help to establish where we stand today

and to clarify the sometimes-ad hoc policies and procedures in place, so that we can

meet our responsibilities to the American people and exercise oversight without constantly groping in the dark for the most basic information. So first and foremost,

these hearings are giving all of us the tools we need to do our jobs.

Equally important is the role that these hearings can play in helping to inform

the American people about the magnitude of the task ahead. The men and women

of the United States military performed brilliantly throughout the military engagement in Iraq, but that was only one piece of the puzzle. The U.S. mission in Iraq

is not yet accomplished. Our work has only just begun. We still have not secured

the weapons of mass destruction and the means to make them that were at the

heart of this Congress’s reasoning for taking military action. A repressive order has

been replaced with simple disorder. The American people deserve to know what will

be asked of them in terms of the costs of reconstruction and the amount of time

during which our military sons and daughters, husbands and wives, and mothers

and fathers will be on the ground.

The hearings also help to raise some critically important issues. Over the weekend the New York Times Magazine ran a very disturbing article about conditions

in Afghanistan, the last country where the U.S. forcibly removed the government

in power, rhetorically committing to stay the long and difficult course of stabilization and reconstruction in the aftermath of the conflict. I supported our action in

Afghanistan wholeheartedly. The Taliban government colluded with the Al Qaeda

network, and the President was right to use force against these enemies. but as the

article put it, reconstruction in Afghanistan to date has been ‘‘a sputtering, disappointing enterprise, short of results, short of strategy, short, most would say, of

money.’’ This is about more than failing the people of Afghanistan. It is even about

more than damaging our international credibility. It is about our security. We know

what disorder and international indifference bred in Afghanistan in the recent past.

And yet our resolve to do the hard work of reconstruction has been called into question repeatedly over the past year.

Now we face a new challenge in Iraq, and we are asking the donor community,

the Iraqi people, and the rest of the world to believe that reality will match our

rhetoric, and to believe that we will stay committee to reconstruction in Iraq. There

is ample reason to be skeptical. Hearings like this one help all of us to assess

whether or not we are on the right course.

54

The CHAIRMAN. Thank you, Senator Feingold.

Senator Chafee.

Senator CHAFEE. Thank you, Mr. Chairman. I would like to

thank the distinguished panelists also. As we try and look at the

situation there in Iraq and judge what we have in front of us, I

didn’t hear too much on the most important area, in drinking

water, and we’re getting some reports from the media on the

ground that it’s not very good, that most of the citizens are getting

their water from sewage choked waterways, there’s been an epidemic of cholera. What exactly is the situation? I think Mr. Larson

said that 75 percent of Baghdad has drinking water, but didn’t

refer to the rest of the country. Mr. Natsios addressed some obscure cities in the south that had 100 days worth of drinking water

available. What actually is the situation with that most basic of

needs, especially if much of our food needs to be mixed with good

water. I guess, Mr. Natsios, you raised your hand. Give us an assessment of where we are and that will help us know where we’re

going and how bad it is.

Mr. NATSIOS. Our first priority is the drinking water and the reason for that is that about 400,000 children have died needlessly in

the last five years, mostly from dirty water. It is unconscionable

that a country of this wealth has child death rates of the size that

Iraq has had. And Saddam successfully blamed the international

sanctions regime, which is nonsense. This deliberately planned effort by the central government to kill off the children of his opponents, the Shiites and the Kurds.

Senator CHAFEE. But where are we, never mind who’s to blame?

Mr. NATSIOS. No, let me just go through this because we’re dealing with a very different position in different areas of the country.

The central part of the country, the water system is in reasonably

good shape. The areas in the north where the Kurds are were independent of the central government, they are in recently good shape;

there are pockets here and there. Our focus is on the 60 percent

of the population who are Shiite in the southern 60 percent of the

country.

We just completed an assessment using Bechtel engineers of the

water pumping stations, and there are a total of 673 water pumping stations and 253 treatment plants. The treatment plants have

had no chlorine for years. We have enough chlorine now that we

just purchased through UNICEF for 100 days so that all of those

areas in the south will have chlorine very shortly. It’s been ordered, it’s on its way. That will at least clean up temporarily the

condition of the water system in the south so we can drive down

these death rates. The death rates in India, for example, which has

the largest numbers of poor people in the world, 101 per 1,000 die

before they are 5. The rate of death is Iraq is 131. The death rate

in Jordan among children is 50. Iraq is considerably richer than

Jordan, so we’re hoping to get the death rate down in the next six

months to a year, fairly quickly, and the water system will be the

principal means by which we do that.

In order to do this more systemically over the longer term, in addition to fixing the water system we have to also fix the sewer system. The sewer system doesn’t treat sewage in the south, it simply

flows into the Tigris and the Euphrates Rivers untreated and that’s

55

where the water comes from, for the most part. There are also

wells, but they’re not in good shape either.

So we are now in the process of taking the assessment we’ve

done to determine the facilities that need rehabilitation or reconstruction first, and then the ones that are in reasonably good

shape, we will do those last. And Bechtel will begin that process

in terms of actually doing the reconstruction very shortly. Congress

just released to us $234 million last week, and a good portion of

that money will go into the Bechtel contract and they can begin

construction in this area.

We have improved the situation in Basra fairly dramatically over

what it was before the war or during the war, but it still is nowhere near where it should be.

Senator CHAFEE. Thank you very much. You’ve painted a picture

of an extremely impoverished country with no access to good drinking water pretty much, so I think that let’s us know the magnitude

of the task in front of us, what we have as we try to bring some

stability and order to this country, starting with that.

Moving, if I have the time, to the next precious liquid, the oil,

and Mr. Larson, you said that their capacity at peak was 3.5 million barrels per day. Do we have some kind of goal, I’ve heard that

Iraq has the second largest reserves in the world, known reserves

in the world, as to what we want for price per barrel? If we’re able

to generate close to 3.5 and perhaps more in the near future, would

that glut the market? And I suppose there are competing dynamics

here. We’d like to have a lower price of gas here and help our economy, but we also want a higher price per barrel to help the Iraqis.

Do we have an idea of what we want for a price per barrel on the

world market, and can we affect that in the years to come with controlling the second largest known reserves in the world?

Mr. LARSON. I think in the short run our focus is very much on

getting the existing capacity up as quickly as possible. Mr.

Ghadhban, who is serving as the CPO, indicated last month that

production had reached 800,000 barrels a day and he expressed

hope that it could get up to 1.5 million barrels a day by the middle

of this month. If so, that would be very good progress. He also said

he’d like to see it approaching 2 million barrels a day by the end

of the year and then be sustained at that level or somewhat above

that level in 2004.

We are in the first instance working very hard. The Iraqis and

the Army Corps of Engineers are working very very hard to make

sure that those sorts of goals can be met.

I think that the decisions about whether to increase production

well beyond the levels that had previously been possible in Iraq is

something that a new representative Iraqi government is going to

have to decide. For the purposes of my calculations, I used the figure of $20 a barrel. It’s a very rough guess. It represents the fact

that Iraq produces a sour crude that sells at a discount of 3 to $4

dollars per barrel under other types of crude oil. I don’t think that

we should have a goal with respect to the price of oil. I don’t think

that we can or should try to aspire to be controlling it. There are

lots of other factors, shifts in demand in many parts of the world,

production from Russia, from Kazakhstan, from Venezuela, from

West Africa, that all have a bearing on that.

56

Senator Hagel has been conducting a series of hearings about the

international energy market and the effect of this on global energy

security. One of the points that we had tried to make in those hearings is that you can’t focus on just one major supply region to understand how the oil market works, you have to understand that

there are several big areas that interact together.

Senator CHAFEE. Thank you.

The CHAIRMAN. Thank you very much, Senator Chafee. Senator

Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chairman.

I would like to ask about a product I recently saw. I was at a

conference over the recess and I learned that Proctor & Gamble

has a packet that you put in a 10-liter can of water and it cleans

it up. It seems to me that it was sort of a very significant breakthrough in terms of providing clean water. I understand that you

all are dealing with them about that; is that correct, and what does

it offer in terms of addressing the water problems?

Mr. NATSIOS. I had to demonstrate the technology to them and

I actually drank the water.

Senator SARBANES. You don’t look any worse for wear.

Mr. NATSIOS. No, I’m still here. I was a little disturbed as to

what the water was. They didn’t tell me what it was when I

cleaned it up, they told me after I drank it what I had just drunk.

And as I said, I’m still here, although a little upset about what I

had just taken in. It’s an extraordinary technology and its very useful for us in emergency situations. We may purchase some of it,

we’re looking at that now. I think UNICEF is looking at purchasing some of this technology. However, in terms of cost, over the

longer term, we tend to look at systemic solutions to water problems, which is to say we want the water system itself to be functional or we want the treatment plant, and we want the processing

to take place in the treatment plant and the clean water to run

through the system. That’s the cheapest way so far. This is more

expensive than that, but in the case where it would take too long

to do that, in the interim, this is an appropriate technology where

the treatment takes place at point of use, so we are intrigued by

it and I can tell you, it does work.

Senator SARBANES. Now, when is the donor conference?

Mr. LARSON. June 24th, Senator.

Senator SARBANES. Who is the point person for foe donor conference?

Dr. ZAKHEIM. It is a joint effort; the three of us in particular are

working on it.

Senator SARBANES. I want to follow up on what Senator Feingold

was asking. Are we going to the donor conference with no framework or guidelines of what it is we want to get in terms of the allocation or a percentage of contributions?

Mr. LARSON. I was looking for an opportunity, Senator Sarbanes,

for an opportunity to clarify a little bit about that, our thinking on

how we get the best possible contribution from other countries.

Senator SARBANES. What I understand Mr. Zakheim’s answer to

be is well, we will get what we can get.

Dr. ZAKHEIM. It is not exactly that. Let me clarify that please,

sir. Basically, the point is that there are a variety of sources, inVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 89517 SFRELA2 PsN: SFRELA2
57

cluding, Iraqi sources. If we lay out percentages, we do run the risk

of scaring some people off. The June conference, in any event, is

a technical one; in effect it is a planning conference for September

where there will be a full-blown donors conference. Even then, if

we say, ‘‘Well, we’re doing X percent and we expect you to do Y,’’

some people will say, ‘‘we just might not do what you ask of us.’’

We found regarding Afghanistan, and I was involved there with

many of my colleagues here, that in raising the funds for Afghanistan, we got several billion dollars of support. I found that it was

much more effective not to come up with fixed percentages and instead push people to do more, rather than say, ‘‘Here’s a percentage,’’ because the first thing they will say is, ‘‘Who are you to determine the percentage.’’

Mr. LARSON. If I could just amplify slightly, Senator Sarbanes,

we found as we started approaching other countries on this that

some certainly in the coalition, but also some outside the coalition

were very very willing to be involved in this sort of work. Japan,

for example, is very very interested in being involved. But we also

want it understood that we have a political process to get some of

the other major contributors into this game. Part of that process

was getting the United Nations Security Council resolution, because that was really a signal that we could move forward.

A second part of the process is getting an assessment of what the

needs really are and making sure that the focus is on helping the

Iraqi people.

A third part of the process is helping, is trying to get some distinction between the sorts of things that governments have to do,

humanitarian support, basic types of reconstruction, from what will

probably be done by the private sectors. We have talked in this

hearing about needs in the area of telecom and possible big oil investments. I assume that those are the things that the private sector is going to have to step in and do.

I believe that politically the way to get countries on board is to

make them part of the preparatory process, to bring them in on the

24th, make sure they feel that they are a part of identifying what

the needs are, and then I think based on the experience that we

have had in Afghanistan, that we, you know, have a real shot at

getting some significant support from them, but if we came out

with a percentage goal now, I think it would be counterproductive

to what clearly all of the senators here and all of us at the table

are trying to accomplish.

Senator SARBANES. What is the percentage that we’re putting

into Afghanistan?

Mr. LARSON. I would like to get that for you for the record. It’s

the plurality but it’s not over half. We have gotten very significant

contributions from the European Union for our work in Afghanistan.

[The following information was submitted by Dr. Zakheim on August 8, 2003 in response to Senator Sarbanes’ question to Mr.

Larson:]

Dr. ZAKHEIM. At the Brussels conference in March, the United States Government

committed $600 million out of a total international commitment of $1.8 billion, i.e.,

30 percent. I note, however, that the USG’s total commitment for fiscal year 2003

was subsequently revised and will be on the order of $900 million (versus the $600

58

million pledged in Brussels). If other countries do not make additional pledges, our

overall share will rise.

Senator SARBANES. Now, I would like to ask Mr. Zakheim. Secretary Rumsfeld said in a hearing before the Senate Appropriations

Committee, and I’m quoting here: ‘‘Let me be clear. When it comes

to the reconstruction, before we turn to the American taxpayer, we

will turn first to the resources of the Iraqi government and the

international community.’’

I’m interested, first of all, in ascertaining what are the resources

of the Iraqi government to which he is referring. They are presumably seized Iraqi assets and oil revenues, I would like to know the

magnitude of those. And secondly, he talks about the international

community; what is he referring to?

Dr. ZAKHEIM. I think that’s right in terms of the Iraqi resources,

it is the seized and the vested assets.

Senator SARBANES. And how much is that ?

Dr. ZAKHEIM. As I said, the amount seized is roughly $800 million, it is actually $798 million right now. That is excluding gold

that has been seized, and that is being assayed with the help of

the Treasury Department and the U.S. mint, and we will know

what the value of that is.

In addition, as you heard earlier, the vested assets, that is, the

monies that were essentially frozen in this country, total about $1.7

billion.

So right there you have approximately $2.5 billion, which is

about the equivalent of what the Congress gave us in appropriated

funds. That gives you a rough sense of the proportions.

Senator SARBANES. And the oil revenues?

Dr. ZAKHEIM. That is over and above that, Senator.

Senator SARBANES. How much do you have to spend to get the

oil on line? I’ve heard a figure as high as $20 billion.

Mr. LARSON. That’s very exaggerated, Senator Sarbanes. The

CEO of the oil ministry that’s working on this is suggesting that

it will take in the hundreds of millions of dollars to achieve the

goals he set out for this year, that is, to get production up in the

range of 1.5 million barrels per day sometime this month, and to

2 million barrels a day by the end of the year.

Where you begin to get these very large numbers is when you

begin to talk about actually increasing the baseline productive capacity, going beyond where Iraq has ever been in the past. And

that’s where I believe that one is really talking about how much

foreign investment can Iraq attract in order to increase its baseline

capacity.

Now there’s a middle ground between 2 and some significantly

larger number, and that is, what would it take to get them back

to 3.5 million barrels a day. My testimony quotes Cambridge Energy Associates with a figure of $3 billion. It is a figure, I don’t

mean to endorse it, but it’s sort of a reasonable estimate of what

it could take to get to 3.5 million barrels a day.

Senator SARBANES. My time is up, but I want to pursue just for

a moment, Mr. Chairman.

59

There is a story in the Washington Post today entitled, ‘‘Iraq Is

Ill Equipped To Exploit Huge Oil Reserves.’’ The story develops, in

part, on the basis of a report by the Council on Foreign Relations,

spelling out some figures. And this story is sort of miles apart from

what we’re being told from the witness table. Now, you know,

maybe this is all wrong, but somehow we have to get to the point

where we have a set of facts that people are more or less agreed

upon in terms of being able to evaluate the situation.

Mr. LARSON. Senator, I’ll make two quick comments on today’s

story. First of all, with respect to the cost that it will take to get

production up to the levels I indicated, 1.5 million barrels per day

this summer, 2 million barrels per day by the end of the year, I

put my faith in the people who are the ground actually assessing

the physical state of the infrastructure. No one knew before they

were able to get on the ground and take a look at these things exactly what had to be done and exactly what it would cost. Now the

numbers that I have quoted to you today may turn out not to be

right, but I think they are closer by a considerable degree than any

estimates that were done at a desktop in New York.

The other piece of this article that I think was confusing is that

many of the comments were sourced to the French oil company

Total, and they were talking about what needs to be done to get

$5 billion or more new investment to develop new capacity. And

those are important issues, but they are issues in my judgment

that are not today’s issues, they are issues that will only really become serious issues at the time we have a representative Iraqi government that is in a position to decide whether they want to increase oil productive capacity beyond what it has ever been in the

past.

The CHAIRMAN. Thank you, Senator Sarbanes.

Senator BIDEN. Can I ask for a point of clarification? Daniel

Yergin, from Cambridge that you referred to, he told us in the

meeting that you and I attended that it would take $5 billion, not

$3 billion, to get to 3.5 million barrels per day. Your statement

says $3 billion. We called to check. He said $5 billion, not $3 billion.

Mr. LARSON. If we misquoted the Cambridge study, we’ll certainly clarify it, but I think Daniel Yergin would agree that any of

these estimates are very approximate, there’s a range, but if his

point estimate is 5, we then we should change our testimony.

Senator BIDEN. Yes, but it’s a 67 percent increase, or difference,

so that’s why I raised it.

[A follow-up to Secretary Larson’s response follows:]

UNITED STATES DEPARTMENT OF STATE,

Under Secretary of State for Economic, Business, and Agricultural Affairs,

Washington, DC 20520–7512,

June 11, 2003.

Hon. RICHARD LUGAR, Chairman,

Committee on Foreign Relations,

U.S. Senate.

DEAR SENATOR LUGAR:

Thank you for allowing me to testify before the Foreign Relations Committee on

economic restructuring in Iraq on June 4. As always, it was a pleasure to appear

before the committee and to speak with you and your colleagues. I look forward to

60

continuing our dialogue on Iraq reconstruction as we move forward to support Iraqi

efforts to undo the terrible legacy of Saddam’s misrule.

Senator Biden asked a question about the numbers I had used in my testimony

concerning the costs associated with raising Iraqi oil production to a rate of 3.5 million barrels per day. I cited a figure of $3 billion for the Cambridge Energy Research

Associates (CERA) annual conference in mid-February, but Senator Biden recalled

that CERA has more recently used a higher figure of $5 billion to reach that level

of production. In response to his question, we have confirmed with CERA that they

have in fact increased their estimate of the likely costs associated with raising Iraqi

oil production to 3.5 million barrels per day. The new estimate is at the high end

of their late-February estimate: $5 billion, raised from the lower level I cited in my

testimony earlier this week.

The fact that CERA’s numbers have been updated reflects how difficult it is to

project potential costs associated with raising oil production. Given the uncertainties, it is possible that CERA and other analysts will revise the numbers further.

It is important to note, though, that even at $5 billion, the resources required to

restore Iraqi production to its highest historical levels do not approach the tens of

billions of dollars being discussed in the media.

I also want to make sure you were aware that the State Oil Marketing Organization has announced a tender for the crude oil now in storage in Ceyhan, Turkey,

and in southern Iraq, with bids due June 10. The first liftings should take place

about a week after that. Restoring oil exports under Iraqi management sends a

clear signal of progress to Iraqis and the international community and provides

much needed financial resources for the Iraqi people.

Please contact me or my staff if we can be of further assistance.

Sincerely,

ALAN LARSON

The CHAIRMAN. Senator Alexander.

Senator ALEXANDER. Thank you, Mr. Chairman. I have listened

to the four of you and I thank you for your testimony. My opinion

is that your progress is impressive and specific, and it answers a

lot of questions. I have three questions I hope to get in.

Mr. Larson, you just came back from France. The pictures looked

good. The president seemed to have a one-day good visit there, but

if I am not mistaken, France agreed to help with the reconstruction

of Iraq, and what might we expect from France, and what could

France do at this conference at June, for example? What might we

expect from France as we look ahead, specifically regarding the

Iraqi debt?

Mr. LARSON. I think that the G–8 meeting was a very important

milestone in the process of reconstruction, because the leaders were

able to discuss privately the challenge of reconstruction in Iraq.

And in his concluding statement, President Chirac’s concluding

statement, he referenced the importance of this conference and the

importance of working together on reconstruction for Iraq.

We believe that France is very important in two respects on

donor issues. One, they are an important donor and contributor in

their own right. And secondly, as a large member of the European

Union, they will have a very very strong voice in determining the

extent and way in which the European Union gets involved in reconstruction.

Finally, on the debt aspect of your question, the French do preside over the Paris Club, the institution that Under Secretary Taylor mentioned. Treasury and State represent the United States in

the Paris Club, and as Under Secretary Taylor mentioned, we are

pressing the issue in the Paris Club right now. At this stage it’s

61

basically a data collection issue, but I think that everyone agrees

not only with the point that if we cannot expect Iraq to be servicing

debt, at least until the end of 2004, and I they at least privately

would agree with Under Secretary Taylor’s statement, that when

the time comes, it’s going to be necessary to get substantial debt

relief to Iraq.

Senator ALEXANDER. Mr. Zakheim, let me take the discussion a

different sort of direction. The administration now says we’re there

for a long haul. The committee seems reassured by that. I agree

with that. However, not everybody is excited about that and one

group are spouses of many of the men and women who are serving

in our military. Last Friday, Senator Chambliss and I each held

hearings in our respective states, and Senator Dodd and Senator

Nelson will do so in the next week, and then we will have a joint

hearing later this month on issues affecting military parents raising children. And what we have is more missions, longer deployments, fewer soldiers, a few more women in the service, more

spouses working, and a lot of pressure on our volunteer army.

And if family readiness isn’t in good shape, it affects readiness

of our military. One witness before our subcommittee on children

and families last week pointed out her great pride in her husband’s

work, but that they had a 17-month old daughter and he’s been in

Afghanistan or Iraq for 15 of the 17 months, and most of the time

he was home, he was training with helicopters. He’s a volunteer

and he also volunteered for the marriage, but there is a lot of pressure there.

And I wonder as we think about the future in this long haul that

we’re all there for, we need to also be thinking, and I hope you’re

planning as a part of all this, how we—the size of our force structure and the length of our deployments, and how that affects military readiness by not putting too much stress on families.

Dr. ZAKHEIM. Senator, we certainly do that, and the best evidence of that is that re-enlistments are still very very high. We

have probably historic retention rates. We are doing a number of

things in terms of the pay and benefits that we are providing our

forces. Thanks to the Congress, we are able to provide them with

really healthy benefits and pay, not necessarily yet fully competitive with the equivalent in the civilian world, but certainly a lot

closer than they were some years back.

Second, we are looking very carefully—and the Secretary of Defense has talked about this—at how we can realign—particularly

reserve and active missions—or rather, the functions of the reserves and the actives. It turns out that there are some things that

are almost uniformly reserve activities (civil affairs is a good example), because there was some sense in the past that this is what

reserves ought to do. It is quite clear that this should not only be

a reserve activity.

Of course of all our forces are voluntary, but in a sense with

respect to the reserves, some of them were more voluntary than

others, if you will. So we are looking very carefully at the missions

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and the taskings we are giving to our reserves. Some of those

might migrate over to the active force to provide a little more relief

in that regard, so reserves are not deployed for excessively long periods. We are also looking at personnel tempo, which affects the active forces as well. The course we are taking is very much under

advisement.

Senator ALEXANDER. My last question has to do with contracting

authority. I want to make sure I have this right. We’ve got the resolution, the United Nations says the UK and the United States

have the authority. There is an organization which you call the

CPA, Bremer’s in charge. He reports to the President; is that right?

Dr. ZAKHEIM. That is correct.

Senator ALEXANDER. He reports directly to the President?

Dr. ZAKHEIM. He does report to the Secretary of Defense.

Senator ALEXANDER. He reports to the Secretary of Defense, so

he’s not the President’s representative?

Dr. ZAKHEIM. No, he is the President’s envoy, but he reports to

the Secretary of Defense.

Senator ALEXANDER. Oh. How does that work?

Mr. LARSON. This is very similar to the situation of an ambassador in another country. You know, the ambassador reports to the

President through the Secretary of State, and I think this is similar.

Senator ALEXANDER. I will leave that to the President.

Let me get on down to the next level. The next level is, you had

designated the Army to handle the contracts.

Dr. ZAKHEIM. Yes, Senator.

Senator ALEXANDER. So if someone wants to be a contractor for

drinking water, for a variety of—for all contracts going into Iraq,

they call the Army? Is that how you find out what to do?

Dr. ZAKHEIM. Well, what they do, the Army administers the contract.

Senator ALEXANDER. Who does the contractor call?

Dr. ZAKHEIM. The contractors will go to the CPA. That is their

address.

Senator ALEXANDER. Where is the CPA?

Dr. ZAKHEIM. That is Mr. Bremer’s organization.

Senator ALEXANDER. So you call Baghdad ?

Dr. ZAKHEIM. No. There are officials here as well. Contractors

also work for AID, for example, and then AID puts proposals to

Ambassador Bremer, so Ambassador Bremer and his staff in Baghdad are the ultimate authority deciding what is done, and then the

various agencies.

Senator ALEXANDER. I don’t want to overstay my time, Mr.

Chairman, but I’m trying. I thought you simplified this and I’m

now a little more confused. So what does the Army do about contracting?

Dr. ZAKHEIM. The Army is essentially managing the contracts; its

role is simply to make sure that the contracts are drawn up properly and are audited properly. It is basically responsible for contract management. It will issue those defense contracts that it is

executive agent for. The Army will not, for example, issue contracts

that are issued by AID.

63

Senator ALEXANDER. So the Army only does Army contracts. I

thought the Army was working for Mr. Bremer and the CPA.

Dr. ZAKHEIM. Yes, but the Army is the executive agent for the

Defense Department and for the CPA.

Senator ALEXANDER. Isn’t the CPA in charge of everything?

Dr. ZAKHEIM. Yes, it is.

Senator ALEXANDER. Well then, why wouldn’t they be in charge

of AID contracts?

Dr. ZAKHEIM. I will let the director of AID answer that one.

Mr. NATSIOS. The contracts that we let, we let 9 contracts, are

AID contracts. They report to us, we spend the money, we are responsible, we are audited by the GAO, the Inspector General. All

the money we spend is money that you the Congress appropriated.

We do not have any of these other sources of money. All our money

is appropriated money. The contracts are by AID, they are AID

contracts, I am responsible ultimately as the CEO of AID.

We have a fixed set of things we are supposed to do that was

agreed to by an inter-agency process beginning last October, and

we are carrying these functions out. There has been one or two

more things that were added along the way that we weren’t planning to do, but the inter-agency process said we want you to do

this, please do it, and whatever we are asked to do, we do.

Senator ALEXANDER. Thank you, Mr. Chairman.

Senator SARBANES. Mr. Chairman, could I ask one follow-up to

that? Who makes the decision on whether these contracts are going

to be non-bid contracts?

Mr. NATSIOS. For AID?

Senator SARBANES. Well, no, for anybody.

Mr. NATSIOS. Our contracts, we have one contract that’s just for

hiring some technical personnel people that we issued last October,

I think we hired 20 people, and was not bid. All our other contracts

are approved through what is called under the FARS, Federal Procurement Act, limited competition. This was done in January when

there was debate before the Security Council as to whether or not

other countries would endorse this, and so we were told by the

inter-agency they wanted this done quietly within the confines of

federal law. And we did it exactly according to the federal act and

the FARS act.

A limited competition means you go to nine companies or eight

companies. In the case, for example, of the engineering construction contract that Bechtel ultimately won, there were seven companies, the largest engineering and construction companies in the

United States as prime contractors that were asked to bid. They

bid. There were two final bidders. We asked for last best offer. We

chose Bechtel because they had the lowest price with the highest

technical review, and they were awarded the contract. But those

were bid. They were bid using this limited competition which we

also used, by the way, in Afghanistan and was also used in Bosnia.

It’s a much faster process. Our process normally takes six

months from the time you bid the thing publicly to the time you

64

award the contract. We did not have six months, we were told we

have two months. I said then we must use a truncated process,

which there is a provision for in the FARS, which is what we used.

Senator SARBANES. Did the military do the same thing or are you

doing non-bids?

Dr. ZAKHEIM. The way it is going to work is that—and this is

also in answer to Senator Alexander, so I can be clear on this.

When there is a requirement by the CPA in Baghdad, the Army

will be issuing the solicitations, contractors will respond, and then

the Army, once the decision is made, will simply issue the award.

Will the contracts necessarily be sole source? No, not necessarily at

all. Again, it is a function, as Mr. Natsios said, of the urgency and

the need.

Senator SARBANES. You have been doing primarily sole sourcing

up to now; is that correct?

Dr. ZAKHEIM. There has been, as you just heard, an urgency

there. We are caught really——.

Senator SARBANES. No, no, I understand Administrator Natsios’ procedure and that seems to be in conformity with existing law and

seems to retain a competitive bidding dimension, although circumscribed from what might ordinarily be the case in order to address the urgency of the situation, but it’s not my understanding

that that’s what the Defense Department has been doing.

Dr. ZAKHEIM [continuing].——I’m sorry, sir, what do you think

we have been doing? You’ve lost me here.

Senator SARBANES. Have you been following the procedure that

Administrator Natsios was just outlining?

Dr. ZAKHEIM. What we have done, we have issued contracts,

some of them sole source. Again, because some of the things that

were needed, for instance supporting the ORHA people in Baghdad,

were exceedingly urgent.

Senator SARBANES. Thank you, Mr. Chairman. I will pursue it.

The CHAIRMAN. Thank you very much, Senator Sarbanes.

Let me start the second round just by making an observation;

you’re welcome to comment. I have heard a discussion of the technical conference on June 24th with a potential pledging conference

in September. This is an overall point of policy of our government;

and it is important that we try to emphasize to other nations that

we are all involved in the war against international terrorism, all

of us. The Iraqi situation, as the President has stated on other occasions, is one chapter of that, but it is only one chapter. Afghanistan is another chapter. It is an ongoing story, and we do not know

how many chapters we are going to have.

One part of it, which precedes the Mideast, is the problem of the

leftovers from the Cold War with the Soviet Union. There are huge

stores of weapons and materials of mass destruction that are potentially obtainable by terrorists. They could obtain them from

other sources, but Russia and the United States have more than

95 percent of the stores. Already we have drawn the attention of

the G–8 to that issue, both at last year’s conference and in preparation for the G–8 conference this year, attempting to pin down what

was an overall pledge at the time, that the United States was

doing roughly a billion dollars worth of work in this area in threat

reduction and other programs, and the G–8 would do a billion.

65

Throughout the past year, some of us, as we have visited with

the British and the French and others, have been asking how much

are you going to do? They began thinking about it, and began to

put some figures on this. We’ve had a hearing or two here. I believe

Mr. Larson was in one. Ideally you would have a chart with 10

years of projects. Countries would be invited to take on projects in

terms of their own self interests and geography. For example, tactical nuclear weapons or Russian submarines that are not strategic

but, nevertheless, would foul up the waterways of the northern

seas in a big way and so forth, would be an important objective.

In any event, together we are moving toward cleaning up the materials and weapons of mass destruction, the fissile materials that

might be a part of this intersection of fissile materials and terrorists, would be the final bottom-line existential event.

Now Afghanistan is an important part, and Dr. Zakheim has said

there have been pledges made. We have heard testimony that some

of the pledges have not been kept as yet, or at least there has been

some reticence in being forthcoming with the monies that we might

have anticipated. Maybe they felt we were too reticent, that our

plans were not comprehensive enough for Afghanistan. Ours are

becoming broader. The involvement of NATO certainly is a breakthrough for that organization as well as our overall diplomacy with

European countries.

I sketch all this because I think it’s relevant to whatever you’re

going to talk about on the 24th of this month and subsequently.

This is not simply a cafeteria course on whether you want to sample Iraq and get a little bit here and there. It is really a question

of our overall diplomacy in getting an idea out there that the intersection of terrorism with weapons of mass destruction, is a potential existential event for all the participants, not just the United

States. This was not just an idea in which we became aggressors

and decided to become universal enforcers and so forth.

We have suffered here. Other countries have too, but maybe not

in the same dramatic way. They might sometime unless we all

work together and round up the rest of the terrorists. There are a

good number of things that we are doing. I hope that is the context

for the conference you are preparing for and for whomever will represent the United States at this conference. It seems to me that

that’s the kind of context we’re going to have again and again as

we approach these issues.

Otherwise, whether it’s debt servicing or who contributes this or

that, or what have you, it becomes an ad hoc matter of the moment; and that really won’t be good enough. We will be back again

in this conversation in which people ask Senators representing

Americans, how much are we doing, how much are others doing,

and how much are we asking others to do?

Now if the thought is, do as much as you can, make your best

effort. That isn’t good enough. Ultimately this entire situation is

going to falter through mistrust of others, whether they are allies

or whether they just happen to be other countries in the world that

might be affected by terrorism. So I just ask any of you, do you

generally agree that this is a reasonable context and if so, is that

the way you’re approaching it?

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Secretary Larson.

Mr. LARSON. Thank you, Senator. I think it is, and in answering,

I would like to commend you for all the leadership that you have

shown on the issue of the Global Partnership and cooperative efforts to reduce the threat posed from these materials left over from

the Cold War.

This provides, I think, an excellent example of what we are trying to do. As you indicated, last year at the Canada G–8 summit,

we were able to push through after a great deal of diplomacy and

effort, a plan that really was sometimes called 10 plus 10 over 10.

In other words, to get a commitment for $20 billion over 10 years,

of which the United States might provide half. At this most recent

G–8 summit yesterday and a few days before, there was a reaffirmation of the commitment of the G–8 to that plan. We were able

to bring in some additional partners, Norway, Sweden, Poland. So

we are growing this out from the G–8 so it isn’t just a G–8 initiative.

I think it is a good model or template, but to be able to get that

sense of commitment to other countries to a share of a global effort,

we first of all had to get them to accept that it was a global effort,

and I think the Security Council resolution and the G–8 statement

of a few days ago will be very helpful in that regard. We had to

give them a sense of what the magnitude is. We had to give them

a sense of the $20 billion as being a rough estimate of what really

ought to be done over the next 10 years. And then we had to get

into the hard work of convincing countries that they needed to do

their share of that.

We do have a similar idea here. It’s just that if we had started

with our partners with the $10 billion, we need you to contribute

$10 billion without having laid that foundation beforehand, we

wouldn’t have had the success that we did on the Global Partnership. And so, here in the case of Iraq, I think we need to follow

much of the game plan that we followed on the Global Partnership.

The CHAIRMAN. I appreciate that response. It implies of course

that we are able to furnish to them a construct that you’re trying

to provide for us today of the budgets, the cash flow, the other aspects that indicate why we are doing what we’re doing and why we

are anticipating that they would want to do their part.

Senator Biden.

Senator BIDEN. Thank you very much, Mr. Chairman.

Gentlemen, there was an Office of Reconstruction and Humanitarian Assistance organizational chart, that is obviously no longer

relevant. Is there a chart we can submit in the record as to who

reports to whom and so on? Is that available?

Dr. ZAKHEIM. Certainly, Senator, and it is actually a combination

of charts so that there is more clarity, and we will certainly submit

it for the record.

[The following chart was submitted by Dr. Zakheim on August 8,

2003.]

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Senator BIDEN. I appreciate that. Secondly, one of you and I can’t

recall who, I think it was you, sir, indicated that a national budget

is being prepared for Iraq. Who’s preparing that budget?

Mr. LARSON. I will take the first crack at this and maybe Under

Secretary Taylor may be able to amplify, but as Under Secretary

Taylor indicated, Peter McPherson is working with Ambassador

Bremer as the key person in Baghdad.

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Senator BIDEN. Does he work for Bremer?

Mr. LARSON. Yes.

Senator BIDEN. Okay.

Mr. LARSON. And a main part of his job is really to prepare, in

consultation with the Iraqis and with the other parts of the Coalition Provisional Authority, a notional budget. Because it’s through

that budget that one can identify what the immediate and investment needs are.

Senator BIDEN. I’m not trying to cut you off, but you said a notional budget?

Mr. LARSON. Well, what I mean is that you are going to have to

accept, we all are going to have to accept that in the first instance,

this will be a rough and ready budget, because——

Senator BIDEN. But it will have numbers?

Mr. LARSON [continuing]. It will have numbers, but it’s the sort

of budget that if you scratch it too deep, any of us would be able

to raise questions about it, and he understands that.

Senator BIDEN. Got you.

Mr. LARSON. That has to be a starting point for coming to the

international community or anyone who wants to be a part of this

to see what the priorities are.

Senator BIDEN. When is that budget due? What’s the time frame?

Mr. TAYLOR. Let me add a few things about it. There is not a set

deadline for this, but the meeting in New York is an important

event to have as much information for that. What you have been

hearing from us in this hearing are pieces, some different sources

of funds from the assets, from the oil, and the budget that’s being

put together by our team in Baghdad working for Ambassador

Bremer is the government’s budget, and the government’s budget

is the salary payment, the payment to teachers, et cetera. But

broader than that will be the whole budget for reconstruction,

which is going to include whatever it has to do for roads, hospitals,

et cetera.

And both of those are being done. There is actually a lot of work

on it going on right here in Washington.

Senator BIDEN. How many Iraqi ministries are there? You know,

when we sit down and do our budget, I think we can make that

comparison, we have certain functions, we have 13 appropriations

bills. I mean, how many ministries were there and how many ministries are we attempting to maintain? Not the personnel, but is

there a ministry for education, a ministry for transportation? How

many ministries are there?

Dr. ZAKHEIM. I know that there were a total, I believe, of 24 ministries before the war. Some of those ministries are not going to be

stood up as quickly as others. The Ministry of Defense obviously is

a later one, agriculture is probably an earlier one. My understanding, and we will get you an answer for the record on that, is

we are talking initially about a half dozen more technical ministries that will be ramped up earlier to deal with some of the more

immediate, or what you might say less national security types of

problems like defense or intelligence.

[The following information was submitted by Dr. Zakheim on August 8, 2003 in response to Senator Biden’s question:]

69

Dr. ZAKHEIM. Prior to the war, there were 23 ministries. As part of the restructuring of the Iraqi government, it is anticipated that four of these ministries will

be dissolved due to their past history of abuses or misuse. These include the Ministries of Intelligence, Information, Higher Education and Scientific Research, and

the Military Industrialization Commission.

Senator BIDEN. Are there ministries that you would consider

functioning? Not that we should or shouldn’t, I’m just trying to get

a sense of what’s on the ground. What ministries are up and running now, if any, and which ones are the priorities to get up and

running? Agriculture, you said is one. Can you tell us which ones?

Mr. TAYLOR. I can tell you the Central Bank is up and running

and that’s important. These economic ministries we want to move

very quickly on.

Dr. ZAKHEIM. Regarding the Agriculture Ministry, they are

bringing back the civil servants. Obviously the more senior the civil

servants, the greater the problem; because these people got to the

top as part of their connection to the old regime. Then there is a

problem with just getting the buildings up to speed because some

of them were destroyed.

Senator BIDEN. I’m just trying to get a sense of the time line.

January 1st is the date that every witness has basically said from

the Defense Department on, that is really the time, though there

was a lot of preliminary planning before that, the administration

began to really focus on the reconstruction of Iraq after Saddam is

gone. And one of the things that we had heard in this committee

and in our private conversations at the White House as well as

State and other places, was that there was a game plan that existing ministries were going to be able to be preserved, if you will, because there were very well educated civil servants who were competent, who were within those various ministries. And once you got

rid of the bad apples at the top, so to speak, they would be able

to get functioning relatively quickly. Or at least that was the expectation in November and December of last year—that we had assigned counterpart persons from departments in the United States.

So there were Department of Education people from the United

States named and assigned to help get up and running the Department of Education, if there is such a department stand-alone in

Iraq, and there were going to be some from the Department of Agriculture, et cetera. So we were going to take American personnel

who were going to be the de facto ministers functioning, getting

these agencies up and running.

I would like, since my time is up, for the record, to know what

ministries there are that you believe that are, that exist in Iraq,

what American counterpart personnel by name have been assigned

to those ministries, what their functions are, and what the needs

that remain are as you’re assessing them now, so that we get, or

at least I get a sense of how this is going to be stood up, how we’re

going to deal with this.

I know my time is up, but I would also ask Mr. Natsios, for the

record, you had identified on February 19th, in a vision statement,

benchmarks and a range of sectors in Iraq for reconstruction. If you

could update those for us, it would be very very helpful. And I realize this does not cover the problem we would all agree is maybe

the most important thing that’s going to hold it all together, what

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the transition government is going to be and who is in charge of

doing that and how that will be stood up, et cetera.

But one of the big pieces is the reconstruction of the justice system. Who would be the person, if we wanted to get the most knowledgeable person in the administration to talk about the state of the

existing Iraqi justice system, what plans we have, preliminary or

otherwise for reforming or getting that system functioning, who is

the person we should talk to? Who do I pick up the phone and call?

I’m not being facetious now. I’m trying to get a sense of who is in

charge of the justice system, the justice department for Iraq.

Mr. NATSIOS. Can I answer your earlier question, Senator?

Senator BIDEN. Yes, you can. Does anybody have a name for who

that person is? Okay, so we don’t have it. Mr. Natsios.

Mr. NATSIOS. There is someone, I just don’t know his name.

Senator BIDEN. Oh, okay.

Mr. NATSIOS. We were asked to make functional, and when I say

functional, many of these ministries were looted and so there was

nothing there. We were given a list of the five essential ministries,

five or six, one of them was the Central Bank, which is not a ministry.

Senator BIDEN. Can you tell me what they are?

Mr. NATSIOS. Justice, finance, trade. Now, I will explain why

trade is important. Irrigation and agriculture, and the Central

Bank. There is, I think one more, I just can’t recall from my memory what the other one is.

What we were asked to in AID, and we have done, is put together what we call—and we did this is Bosnia, Kosovo, Afghanistan—ministries in a box. We buy the computers that are put in

the network through the whole system, we put up the electric

lights. Many of the ministries in Kabul had the roofs blown off, so

we repaired the buildings. We bought fax machines, we made the

phone system functional, all of the office equipment that you need

to communicate. The materials you need, the desks and that sort

of thing. We repaired the buildings so people could function in

them. And so, that’s one thing we did.

The second thing we did is through our contracts put in place,

if it was necessary, the training of people in certain disciplines.

Now, there is a controversy in the education ministry. We went in

and said we really are not enthused about the way in which subjects are taught in schools, highly authoritarian, very propagandistic, a problem with textbooks, the way the teachers were

trained. So we went in and said we want to retrain your teacher

force, which is one of our benchmarks.

The initial response was we don’t need any retraining, we like

this the way it is. We said well, we don’t like it, and we’re going

to work with you. We had a long debate and once the senior people

were removed, the people at the school level said we want the

training, help us. So we’re now at the point where we’re designing

a curriculum to retrain the teachers, and the mid-level people who

were not really drawn into the Ba’athist party.

So that’s the capacity building part of our job. We don’t appoint

the people who run the ministries, that is another division of CPA

that Ambassador Bremer appoints, and they report to him, but we

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do the capacity building and the making of the functions so the

place can run.

The trade ministry is important for this reason. You may ask,

why are we doing the Ministry of Trade? They run the food distribution system, and without them we can’t set up the 44,000 distribution sites for people to get the food that people depend on. So,

the most important ministry is trade, because people have to eat.

Mr. TAYLOR. If I could just add a couple sentences to Senator

Biden’s questions. In the case of the Finance Ministry, our people

are working with the civil servants in that ministry and have been

from the day they arrived. And they’ve had to work on how the

payment system is working, and they are actually functioning quite

actively.

Same with the Central Bank. They are engaged with the people

who have been employed for 30 or 40 years in the Central Bank,

very qualified, dedicated people. They are thinking about the currency and what monetary policy should look like. So that’s all going

pretty much along the lines of what we indicated we were thinking

about last January, at least with respect to these economic issues.

Senator BIDEN. That’s all I want to know, how each and every

one of the ministries is working, relative to the way you just described the Central Bank.

Mr. NATSIOS. Could I just add one thing? Senator, we will have

to you the updated benchmarks. We adjust them every two weeks

and we do have a chart with all these benchmarks on it and dates,

and the last time it was updated was two weeks ago, it’s time for

another update, and we will send that to you.

Senator BIDEN. I appreciate that, thank you.

The CHAIRMAN. I want to recognize the three senators who are

here for the second round. My hope is that the hearing will conclude in roughly 21 minutes or so. We will obviously have leeway,

as there are important questions and answers. That’s the purpose

of this hearing.

Senator Hagel.

Senator HAGEL. Mr. Chairman, thank you. Dr. Zakheim, for the

record, let me—I have a couple of excerpts, one from a May 20th

press conference with Secretary Rumsfeld and the Chairman of the

Joint Chiefs of Staff, General Myers, and this is General Myers

speaking: ‘‘We continue in that broad range of security and stability operations and to support the increasingly effective humanitarian operations in Iraq, as the Secretary said. We currently have

some 150,000 U.S. troops in Iraq. Approximately one-third of those

forces are in and around the greater Baghdad area.’’ Two days later, Doctor, at this hearing as a matter of fact, with

the Deputy Secretary of Defense and the Vice Chairman of the

Joint Chiefs of Staff, General Pace, our colleague Senator Sarbanes

asked this question, and I quote from the transcript. He asked this

question to General Pace:

Senator SARBANES. How many U.S. troops are in Iraq now?

General PACE. 145,000, sir.

Senator SARBANES. Ah-ha. And are we expecting to increase that number?

General PACE. The number is being increased as we speak, by about 18,000 with

the arrival of the 1st Armored Division and then beyond that, there are no current

projected deployments.

Senator SARBANES. So, we’re going to go up to over 160,000?

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General PACE. Potentially, sir, although some of the troops that are there now,

the ones who did all the fighting earlier, as General Franks sees the opportunity

and the security environment allows, he will bring home who got there first.

I wanted to make sure that’s on the record so there is no question about what’s classified and what’s not classified.

Dr. ZAKHEIM. Senator, you are absolutely right. I saw those numbers on a classified document and that is why I told you what I

told you. I asked my staff whether in fact the actual numbers were

unclassified, and I have an answer for you. As of yesterday, sir,

U.S. forces in Iraq, just over 146,600. You also asked me about the

British forces. As of yesterday, sir, British forces in Iraq, 13,000.

I was not trying to obfuscate at all. What I saw was a classified

chart. The numbers are not in this case.

Senator HAGEL. Thank you very much.

Secretary Taylor, Secretary Larson mentioned, as you did generally, the Paris Club, negotiations or responsibilities that we are

going to have to work our way through, for all the reasons you both

understand. Are there currently plans now underway to organize

a Paris Club meeting to deal with the debt that Iraq now holds?

Mr. TAYLOR. The Paris Club representatives met and discussed

the first task, which was to collect the data on that as best we can

for the Paris Club members, and that has already taken place and

it’s underway. Since there is debt held by countries not in the Paris

Club, we have asked the IMF to do the same kind of activity, to

go to the countries and ask what kind of debt do you have. And

then third, since we want to get information from the perspective

of Baghdad, our people on the ground are working with the records

to see what their records are of the debt that they owe.

So that is what’s underway now, and as soon as we get some

clarification, better estimates of the size of the debt, then the actual discussions of how much of value will be reduced and who participates and that actually, the dates for that have not been set at

this time.

Senator HAGEL. But that planning is underway to set the date

and to take it to the next step to try to resolve?

Mr. TAYLOR. There certainly is a plan to take the next step as

soon as we get the information.

Senator HAGEL. Okay, thank you.

Secretary Larson, did you have something to add to that?

Mr. LARSON. No, sir.

Senator HAGEL. A question on the issue of oil. Does anyone at

the table know what our position, the U.S. government position

would be on advising the interim authority or government or whatever comes at some point in Iraq, what their position should be regarding membership in OPEC? Get out of OPEC, stay in OPEC,

have you thought it through?

Mr. LARSON. I think that we are very aware of the fact that oil

and nationalism are very closely intertwined in Iraq and that we

will want to make sure that any decision on their future participation in OPEC is a decision that the new representative government

takes. I’m sure that our team on the ground will be able to help

them think through some of their options.

If I could just add quickly in response to Senator Biden’s question earlier, that we do have a very functioning administration in

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the oil ministry as well, because as I mentioned, Mr. Ghadhban

and including many well qualified Iraqis. They are doing a strategic review of the options for the oil sector and the contribution

it can make to the economy.

We will have to evaluate, Senator Hagel, that question, but I

think it’s one where we need to be careful not to be seen as steering them, because it does need to be seen as a decision they make

in the interest of Iraq.

Senator HAGEL. This certainly could have a bearing on previous

questions about oil pricing and how much they increase production,

and all that are going to have an impact on revenues coming from

oil in Iraq, which you all know. Anyone want to add anything to

what Secretary Larson said?

My last question goes back to the Iraqi military situation, high

unemployment, problems that we have because of that unemployment, obviously spilling over into social issues. Who can explain to

this committee the plans we have in place to deal with that issue,

the Iraqi military unemployed, out on the street, eventually will

cause a lot of trouble, and some trouble is being caused now. But

what are our plans to deal with it?

Dr. ZAKHEIM. As you know, Ambassador Bremer has made it

very clear that because as you say, some of them are being troublesome, he is not going to bring back the wrong people or address

them in the way they perhaps would like to be addressed. Clearly,

it just adds to the unemployment problem and it goes back to the

overall economic recovery of the country. At some point, of course,

there will have to be a reconstituted Iraqi military and some of the

former military may well be requalified. It really depends on what

they did before. The more senior people, are less likely to be requalified, the less senior ones are more likely to be. But at this

stage of the game, I think it is a little premature for me at least

to speak about how that military might be restructured when we

still have our operations that we conduct.

I would reemphasize what Ambassador Bremer has said; the fact

that they are unemployed and the fact that some of them are noisy

about it should not in any way deter us from getting the wrong

people out of uniform and doing it as soon as possible.

Senator HAGEL. Well, in the interest of time, I will not pursue

that, but yes, Mr. Natsios?

Mr. NATSIOS. We have found in the aftermaths of conflicts and

civil wars that if you don’t get young men working, and I don’t

mean senior officers, I mean young men, we have trouble on the

streets. So we developed a set of mechanisms through our Office of

Transition Issues, OTI, to do mass employment programs. In a

country like East Timor, we recruited a third of the work force

through these programs. They don’t pay a lot of money, $2 a day,

but for many of these countries, that is a living wage.

We started these programs three weeks ago, and the first one

was Sadda City, which is the poorest slum area in what used to

be called Saddam Hussein City, but it’s a Shiite city and they

hated him so much, the first thing they did was to change the

name. It was full of, and this is not garbage from the conflict that

wasn’t picked up, it has been like that for years and years—old

trash, garbage, trash; it was just very depressing. So we decided

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to make that our first mass employment program. We employed

16,000 people, I think it was $2 a day, to begin a mass cleanup of

the area. It was a huge morale boost for the city, which had been

completely neglected for a very long period of time. I think 180

trucks left with the garbage and the trash and the refuse from

years on the first day alone, and there has been this very big community uplift that has taken place there. I think we are in four

other neighborhoods now of the city, and we will be extending

these mechanisms throughout the country in order to get particularly younger men off the streets.

Senator HAGEL. And this includes former military?

Mr. NATSIOS. It does, but it’s not the officers. We don’t employ

those people, and they tend not to want to do a lot of physical

labor; I just wanted to say that.

Senator HAGEL. Thank you very much.

Dr. ZAKHEIM. Senator, just to add and amplify, because of your

question, we in fact have in the solicitation phase, which means we

are very early on, we are soliciting contracts for retraining and reshaping the Iraqi military. Now again, it is early, we are just soliciting the contracts. By the way, in response to an earlier question,

while we did have sole source contracts before, the new contracts

are all being competed because the kind of FAR regulations that

justify sole source as a compelling activity, are not as applicable

now. So we are soliciting contracts, we are going to compete on

those contracts, and that will include developing, retraining and

supplying the army. Obviously it is too soon to determine who will

actually be brought in, but there is a process in train that goes

hand in hand with what AID is doing.

Senator HAGEL. Thank you.

The CHAIRMAN. Thank you, Senator Hagel. Senator Sarbanes.

Senator SARBANES. Thank you, Mr. Chairman, I just have a couple follow-up questions.

I’m glad we clarified this level of the military. I was very much

taken aback when I arrived at the hearing to hear Senator Hagel

asking you about that and being told that the figure was classified.

I take it that means that you were not aware either of Secretary

Rumsfeld’s statement or those of Deputy Secretary Wolfowitz before this subcommittee; is that correct?

Dr. ZAKHEIM. At the risk of saying it is not correct, it is not correct. As I mentioned when I answered the original question, the

numbers change. I had seen a number on a classified chart. I did

not feel that I could reveal that. I checked that, and the numbers

I provided, 146,000 for us and 13,000 for the British, 146,006 actually, are as of yesterday, so that is the most up-to-date number. I

wish again to emphasize I was not trying to obfuscate or fail to

give a straight answers to straight questions.

Senator SARBANES. How can we avoid drawing that conclusion

when we have both the Secretary of Defense and the Deputy Secretary of Defense publicly giving us figures and then have you

come in and say that the figure is classified?

Dr. ZAKHEIM. Again, because the number I saw, and the numbers

do change daily, was on a classified chart. I gave you the number

as of yesterday.

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Senator SARBANES. On your bidding process at AID, for what duration do you give those contracts?

Mr. NATSIOS. The contracts we did were 12 to 18 months, not all

of them. There were some shorter ones. I think the personnel one

was for 3 months or something like that, but the longest one was

18 months. I can get back to you, Senator, with precise dates for

each one.

Senator SARBANES. I wanted to lay the basis for my question to

Mr. Zakheim. It’s my understanding that some of the contracts the

Defense Department gave on a sole source basis—none of your contracts were sole source, were they, in the AID?

Mr. NATSIOS. The personnel contract, that small one. Other than

that, no, they were not.

Senator SARBANES. My understanding is that the sole source contracts that were given by the Defense Department have a multiyear duration to them; is that correct?

Dr. ZAKHEIM. As I understand it, they are 90-day contracts with

90-day options.

Senator SARBANES. The previous ones you gave were 90-day contracts with 90-day options?

Dr. ZAKHEIM. That is what I am being told, 90 days and then 90-

day options, so we are talking about a total of 6 months if the option is picked up.

[The following information was submitted by Dr. Zakheim on August 8, 2003 in response to Senator Sarbanes’ question:]

Dr. ZAKHEIM. Virtually all post-war Iraq contracts awarded by DoD were short

duration (e.g. 90 days) sole-source contracts with 90–180 day option periods. DoD’s present objective is to transition all post-war Iraq contracting, wherever possible, to

full and open competition. Federal Acquisition Regulation 6.302–2, Unusual and

Compelling Urgency, was cited as the rationale for the initial sole-source awards.

Even in such cases, senior executive approvals are required to fully document any

sole source awards, and that all ‘‘agencies shall request offers from as many potential sources as is practicable under the circumstances.’’

Senator SARBANES. Well, I’m looking at a New York Times story

of April 11th. The Pentagon contract given without competition to

a Halliburton subsidiary, that’s Kellogg Brown & Root, to fight oil well fires, is worth as much as $7 billion over 2 years.

Dr. ZAKHEIM. That is if all the task orders are picked up. We

have actually spent a few tens of millions of dollars and what they

do in any event is called in the terminology wildcat, and that is for

contingencies anywhere, it is not just for Iraq.

Senator SARBANES. Well, was it a two-year contract or a 90-day

contract?

Dr. ZAKHEIM. The contracts specifically for work in Iraq that

were let specifically for Iraq are 90-day contracts with 90-day options.

Senator SARBANES. What about this contract?

Dr. ZAKHEIM. That is a contract that is not purely for Iraq, it is

worldwide. It is based on a series of contingencies that might take

place and then we pick up task orders. We let lots of multi-year

contracts. This is by no means the only multi-year contract.

Senator SARBANES. Do you let a lot of multi-year contracts on a

sole source basis?

Dr. ZAKHEIM. No, sir. What I am saying is we generally let a lot

of multi-year contracts.

76

Senator SARBANES. No, no, no. It’s not responsive to the point

we’re pursuing to say to me that you let a lot of multiyear contracts

if those contracts were being let on a competitive basis. That’s not

what I’m pursuing. Do you let a lot of sole source contracts on a

multi-year basis?

Dr. ZAKHEIM. We let some sole source contracts on a multi-year

basis. This is not the first of its kind, no, sir.

Senator SARBANES. Why don’t you submit something to the committee that develops that?

Dr. ZAKHEIM. Certainly. I am told that even this one was competitive within the contract as well, but I will get you something

that clarifies it.

[The following information was submitted by Dr. Zakheim on August 8, 2003 in response to Senator Sarbanes’ question:]

Dr. ZAKHEIM. Halliburton-Kellogg, Brown & Root (KBR), was awarded the competitive Logistical Civil Augmentation Contract (LOGCAP III) in December 2001.

LOGCAP III is the third competitive multi-year award for U.S. Army logistical support. DynCorp Corporation was awarded the previous multi-year contract award

from 1997–2001.

LOGCAP III, as presently written, is a ten-year Task Order Contract, with a oneyear base period, and nine one-year options. There were five bidders on the 2001

contract awarded by the U.S. Army Support Command, Rock Island, Illinois. Funding on this contract is by task order.

In late May, the U.S. Army issued a LOGCAP III Statement of Work (this will

result in a new contract task order) to provide logistics support for up to 110 thousand personnel in Iraq (for a three-to-five-year span). Internal Government budgets

are approximately $1.0 billion for this new work.

A separate task order was executed in November 2002 under the above competitive LOGCAP III contract. This task order required KBR to develop an Oil Restoration Contingency Plan. This plan included extinguishing oil well fires; capping oil

well blowouts; and assuring continuation of the operations of the Iraq oil infrastructure.

The Oil Restoration Contingency Plan resulted in a new contract solicitation. KBR

was the sole-source, contract awardee for this new work. This sole-source award was

for one year with three one-year options, and was based on the U.S. Army’s determination that KBR was the only contractor that could commence and deliver this

complex Contingency Plan on extremely short notice. Total contract value (cost plus

award fee) is presently $172 million.

Senator SARBANES. Thank you.

The CHAIRMAN. Thank you very much, Senator Sarbanes. Senator Chafee.

Senator CHAFEE. Thank you, Mr. Chairman.

Mr. Larson, you really dialed in on the oil, and I congratulate

you. You really know your facts and figures on this and where we

are going. And as I look at it, and the cost and where we’re going,

am I right that if we generate, or if Iraq generates the 2 million

barrels per day that you hope for by the end of the year and you

get the $20 a barrel, that’s only $40 million a day, and $14 billion

a year, is that about right, minus what it costs to produce it?

Mr. LARSON. Right. The rough estimate that I put in my written

testimony was 14 to $15 billion a year of gross revenues based on

a lot of assumptions, including the ones you just gave.

Senator CHAFEE. That’s a long way, if we keep 160,000 troops,

that will cost about, according to the CBO, about $40 billion a

year?

Mr. LARSON. Yeah. And we believe that the funds from oil, the

oil proceeds need to be put into this development fund for Iraqi use

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for the Iraqi people. They are not contributed to the cost of keeping

our troops on the ground.

Senator CHAFEE. So we are saddled with an enormous cost here,

no denying that, just to keep 150,000, and it’s actually going up,

according to the testimony, up to 160,000 U.S. troops, and that the

CBO estimates, I think $200,000, $225,000 per peacekeeper per

year, and we’re up to $40 billion per year, without addressing any

of the reconstruction. That’s just peacekeeping, let alone getting

the citizens away from the sewage filth, drinking water, and establishing schools, and other indications of order. As we look at it, how

are we going to afford this?

Mr. LARSON. As some of the senators have said, which is the

focus of these meetings, is that we identify the reconstruction costs

and that we get a strong international support for that. It is to

work together as well to get other countries to contribute to the

cost of maintaining security over time. Dr. Zakheim has touched on

many efforts that we have made to get on the ground support from

other countries in this regard, and Poland is a notable example.

Senator CHAFEE. You don’t dispute the math, though, about $40

billion per year for peacekeepers?

Dr. ZAKHEIM. The CBO’s estimates presuppose a certain level for

a certain duration and there is just no way we can predict that. I

think there were predictions before the war started that we needed

more than 300,000 troops and that clearly was not the case. The

predictions regarding how long and how many troops will have to

stay are all over the place as well. I used to work at the CBO, and

they make some pretty good estimates; but those estimates do not

always bear out. I think it is fair to say that while the cost will

be substantial, I do not know what it is actually going to be, and

I do not think anybody can honestly tell you that it is going to be

$40 billion.

Senator CHAFEE. I don’t know if any of you have an answer to

this, but looking back, how we treated the United Nations and the

Security Council probably was a mistake, and with these enormous

costs, why should they help with this burden? They were opposed

to it.

Mr. LARSON. I think one of the missions that we also have moved

forward on is to build international support for the task that lies

ahead. I think the United Nations Security Council resolution of a

couple of weeks ago, which was unanimous, with only Syria not

voting, was a very strong signal that the Security Council has said

whatever differences there may have been in the past over Iraq,

there is an assignment that the international community has that

it can’t shirk from, and that’s helping the Iraqi people reclaim their

country.

I think the announcement out of the G–8 summit was another

sign that the major countries of the world have recognized this responsibility.

We have in the most recent Security Council resolution a framework for reconstruction that brings in the United Nations, it brings

in the World Bank, and calls for other countries to play their part,

and so we’re going to use that as a foundation for moving forward.

Senator CHAFEE. There is a long way to go from expressions of

support and contributing valuable resources. One of the testiVerDate 11-MAY-2000 09:15 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 89517 SFRELA2 PsN: SFRELA2
78

monies, Denmark, the Netherlands, are committing $100,000 here,

a few million there, and I think probably what we can expect and

assume is that we are going to be saddled with the cost unless any

of you can dispute that, because looking back, certainly the Security Council and the United Nations wanted us to pursue the inspections and let the inspections process work before we embarked

on this endeavor.

Mr. LARSON. I think Senator Lugar pointed us in the right direction by comparing this to what is now called the Global Partnership, which is designed to reduce the risk from chemical or nuclear

materials left over from the Cold War from falling into the wrong

hands. And there, the first step was to get everyone to agree that

this is a problem, to get them to agree that it’s a global problem,

not just for the United States, and then to begin to set up a framework for working together to accomplish it. Because of the provisions in the international community that existed earlier this year

about what should be done in Iraq, it has taken some hard work

to get to where we are. We would agree with you, Senator Chafee,

that having gotten the acquiescence or support of countries for the

most recent Security Council resolution is not a guarantee of financial support, but it’s an important milestone towards that, and it’s

our responsibility to use these needs assessments that are being

developed, to have the Iraqi people through their representatives

begin to make the case for the help that they need, not to recover

from the war but to recover from 25 years of being oppressed by

Saddam Hussein. That there will be a growing appreciation that

this is something that countries have a moral responsibility to be

involved in, but it will not be easy, I’m not trying to suggest that

it will.

Senator CHAFEE. Just a follow-up on that. In the first Gulf War,

by presenting our case accurately and with enough patience that

we did get the Security Council, they did participate in the cost.

I don’t think that will be the case here because of the way it unfolded.

I just have one last question or note. Somebody mentioned the

book about the Marsh Arabs. What was the book?

Mr. NATSIOS. It’s called the Marsh Arabs, by Wilfred Thesiger,

the last of the great British explorers, about his time from 1950 to

1957 with the Marsh Arabs.

Senator CHAFEE. And you recommend?

Mr. NATSIOS. I strongly recommend it.

Senator CHAFEE. Thank you, gentlemen.

Mr. NATSIOS. If I could just add, we have an update every day

on our web site. It’s called Iraq Humanitarian and Reconstruction

Assistance Fact Sheet, and it has on it a chart of every country in

the world that has contributed, how much, what it’s valued at, and

the current level is $1,185,000,000. That changes each day or as

people make further pledges.

The CHAIRMAN. That’s an important announcement, because people may want to follow on the web site with running totals. These

hearings are evolutionary; they move on from our testimony today

to the actual facts.

Let me just indicate in conclusion, I think Senator Chafee presents a point of view that many Americans may have. There is

79

some pessimism out there. When we go out of this committee now,

or to some other debate with questions about Medicare reform, prescription drugs for the elderly of America, and problems of shoring

up Social Security and how to make ‘‘leave no child behind’’ work,

these are very important issues for the American people. Although

we are focused today on international relations and security in this

committee, and these are paramount considerations for us, there

are lots of others.

I am somewhat more optimistic. I take my cue again, playing off

Secretary Larson’s thoughts, that when the United States and Russia, say 12 years ago, took a look at the fact that the Russians had

produced 40,000 metric tons of chemical weapons we could have

taken the position, and some Americans did, that they made their

bed, let them sleep in it, it’s not a great problem, and all these

things, it’s their tough luck. It was a horrible stock, and the Russians had no money with which to destroy it, or likewise, biological

things which are much more murky. Nuclear is quite obvious. Of

course it’s a pretty small world, and we came to the conclusion that

it could be our bad luck too.

As a matter of fact, other countries may not have stepped up to

the plate until the G–8 meeting that we have been talking about

today in the same manner, but I think they do understand that.

We had an agreement 12 years ago, and there is a recognition that

there are disasters out there. Now Iraq is potentially that sort of

situation and we’re going to have to be successful. There really is

no compromise in the event that we are not successful with the

weapons of mass destruction, in getting them either secured or destroyed, nor is there any halfway option with regard to Iraq or Afghanistan.

Other nations may not come to this conclusion instantly. I appreciate the problems that you have as our negotiators, actually sitting at the table with them. Yet all of us really have to be on the

same page in indicating that these are potentially existential

events for them as well as for us, and that it’s out there and it has

to be solved, and that we are leaning upon them. Now they may

not like that. It’s not a popularity contest in terms of leadership

of this sort, but it seems to me that more and more are coming to

that conclusion, whether they like it or not, and they are beginning

to see many of the same things through the same prism that we

do.

It is tough going, and I think this committee appreciates that. I

personally appreciate your testimony today, your response to our

questions and your appearance. I hope that you understand the importance that we place in the oversight function and requesting

these hearings from time to time so that we can all catch up, at

least through our dialogue with the American people and with people around the world who may have some greater confidence in our

system, complex as it is in coming to the right conclusions. I appreciate your testimony.

With that, the hearing is adjourned.

[Whereupon, the hearing adjourned at 12:40 p.m.]

80

RESPONSES TO ADDITIONAL QUESTIONS SUBMITTED FOR THE RECORD

Question submitted to Under Secretaries Larson (State), Zakheim (Defense), Taylor

(Treasury), and Administrator Natsios (USAID) by Chairman Lugar

Question. We have just received the first OMB report dated June 2, 2003 on U.S.

strategy and activities related to post-conflict reconstruction In Iraq, as required

under Section 1506 of the FY 2003 Emergency Wartime Supplemental Appropriations Act, 2003. One of the questions raised by this report is how much has each

cite agency requested to obligate out of the $2.475 billion in FY 2003 funding, and

how much has OMB actually apportioned and provided to implement the Iraq stabilization.

Can you be specific: to date, what are the amounts requested by each agency;

what are the amounts already apportioned by OMB by agency; and how much has

actually been transferred into each agency’s account for obligation for Iraq stabilization and reconstruction efforts?

Response Submitted by Dov Zakheim, Under Secretary of Defense

To date, agencies have formally requested that $616.1 million be made available

from the appropriated Iraq Relief and Reconstruction Fund (IRRF) to implement

Iraq relief and reconstruction activities. Three agencies have requested funding from

this account: USAID ($549.1 million), Department of Defense ($66 million), and Department of State ($.956 million). OMB has apportioned and transferred $527.1 million to USAID. Of that amount, $212 million was provided as reimbursements to

USAID for activities in Iraq undertaken with non-IRRF resources. The remaining

$315.1 million was provided for reconstruction and transition activities. In addition

to these appropriated resources, OMB has appropriated $563.9 million in vested

Iraqi assets to the Department of Defense primarily for salary and pension payments.

Response Submitted by John B. Taylor, Under Secretary of the Treasury

Treasury technical assistance began work in Iraq with two blocks of funding: A

total of $225,000 remained unused from the FY 2000 Treasury International Affairs

Technical Assistance (TIATA) Program; and $2 million that had not yet been committed to the FY 2003 TIATA Program. This gave the Office of Technical Assistance

(OTA) a total of $2.25 million in resources for use in Iraq. Congress was given informal notification of OTA’s intent to use these funds in this manner with the understanding that the funds would be repaid from whatever resources OTA received for

its work in Iraq. Use of these funds began February 19, 2003 when funds were obligated to advisor contracts. As of July 14, 2003 essentially all of these funds have

been obligated, although spending continues against these obligations.

OTA forwarded the budget request for its activities in Iraq at a joint meeting with

USAID at OMB on Wednesday, May 16, 2003. The request totaled $6 million, broken down into the following categories: Ministry of Finance, $2 million; Central

Bank of Iraq and the commercial banks, $1.8 million; Office of the Financial Coordinator, $1.4 million. In addition, OTA requested $.8 million to provide grant funding

to the Financial Services Volunteer Corps (FSVC) to work on inter-bank clearing,

the Baghdad Stock Exchange, and Iraq’s insurance industry.

According to the agreed protocols for use of funds out of the Emergency Wartime

Supplemental Appropriations Act of 2003 (P.L. 108–11), all budget proposals must

originate from the Coalition Provisional Authority (CPA) in Baghdad. Therefore,

OTA immediately forwarded its $6 million budget request to the Program Review

Board (PRB) of the CPA. OTA received notice that its request was approved by the

PRB on June 3, 2003. The approved usage of the funds was subsequently approved

by the CPA Administrator, Paul Bremer, and forwarded to OMB in Washington.

Since then, OTA has drafted a Congressional Notification (CN) and agreed the

wording with OMB. This will be forwarded to Congress, today, July 14, 2003. Once

the CN has lapsed, OTA expects prompt apportionment by OMB. When the funds

are received, OTA will reimburse both the FY 00 and the FY 03 TIATA funds to

the full extent that they have been utilized. The balance ($3.75 million) will be

spent in ongoing assistance projects.

In summary, OTA has requested $6 million from the $2.475 billion Emergency

Wartime Supplemental. While none of this funding has yet been apportioned, we expect it to be done promptly after the lapse of the CN. OTA expects the transfer soon

after the apportionment is made.

81

Response Submitted by Under Secretary of State Alan Larson

As of June 4, 2003, the Coalition Provisional Authority (CPA) has requested $550.1 million and OMB has apportioned $527.1 million of the $2.475 billion appropriated to the Iraq Relief and Reconstruction Fund (IRRF) to the U.S. Agency for

International Development (USAID).

Breakdown of Funds Obligated for Iraq Stabilization and Reconstruction Efforts,

As of June 4, 2003

(millions U.S. dollars)

CPA/USAID Dept. of State Total

Request .......................................................... $549.1 $0.956 $550.1

Apportioned and Transferred ................ 527.1 — 527.1

Not Yet Apportioned .............................. 22 0.956 23

CPA = Coalition Provisional Authority; USAID = United States Agency for International Development.

Questions for the Record Submitted by Senator Bill Nelson to USAID Administrator

Andrew Natsios

RESTORATION OF IRAQ MARSHLANDS

Question. An important aspect of reconstruction will be the restoration of the

Marshlands that were devastated by Saddam’s destructive and inhumane policies.

To restore the Marshlands we must have a comprehensive plan to change water resources management in the Tigris-Euphrates region. I understand the University of

Miami’s Iraq-Aware Project is a constructive proposal. The Project proposes to work

closely with AID and other interested parties to develop a comprehensive framework

for a long-term program to address the competing problems that are confronting the

Marshlands drawing on extensive Everglades restoration experience. I further understand University officials have met with AID to discuss the Iraq-Aware Project.

Are you aware of this project?

Answer. USAID has been researching marshland restoration and management

since March 2003 and have met with several interested parties, including the University of Miami, to discuss a strategic approach and action plan. To prepare for the

long-term program, USAID fielded a four-person technical team in June to conduct

a rapid assessment of the marshlands. Team members included a social scientist,

wetlands ecologist, agricultural specialist and a geotechnical engineer. They were

joined on the field visits by national and district officers from the Ministry of Water

Resources and scientist from the Marine Science Center at the University of Basra,

the Iraq Foundation, and the AMAR International Charitable Trust Foundation

which provides primary health care to marsh dwellers in Iran and Iraq.

At the time of the USAID meeting with the University of Miami, USAID encouraged the University to submit a proposal under the University Partnership program

(Higher Education and Development (HEAD)) that could include marshland restoration and management.

Question. What is the plan for, and when will USAID hear competitive proposals

for the Marshland Initiative, as described in CN #130, dated May 16, 2003?

Answer. The program is still in the design stage with the rapid assessment and

strategic approach and action plan contracted under an existing task order. If this

initiative is approved and goes forward, proposals will be solicited.

Question. Describe the process by which you are awarding contracts in Iraq for

this and other projects.

Answer. USAID awards contracts in accordance with the Federal Acquisition Regulation (FAR), the rules that apply generally to all federal agencies. The Agency is

responsible for the purchase of over $2.5 billion of goods and services each year in

the support of U.S. foreign policy goals in over 100 countries.

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