White House to sign Iraq reconstruction bill into law

Nov. 10, 2003
At presstime last week, US President George W. Bush was expected to sign an $87.5 billion Iraq and Afghanistan spending bill that earmarks $18.6 billion in grants for Iraq reconstruction.

At presstime last week, US President George W. Bush was expected to sign an $87.5 billion Iraq and Afghanistan spending bill that earmarks $18.6 billion in grants for Iraq reconstruction.

Of that reconstruction total, $1.89 billion will go to oil-related projects, mostly for infrastructure, although $690 million is for a domestic petroleum product stockpile. The White House had wanted a total of $2.1 billion, with $900 million set aside for fuel but congressional spenders trimmed back that amount by $210 million.

Blueprint largely intact

Other than the $210 million shortfall on fuel, the White House's blueprint for repairing war-related damage to Iraq's oil sector remained largely intact (OGJ, Oct. 13, 2003, p. 37). The measure will allow for $575 million to be spent repairing refineries and pipeline delivery systems; four new topping plants will be built for another $125 million.

The budget also provides $68 million to buy 250 LPG tanker trucks and 200 fuel tankers that can be used if domestic product distribution lines are sabotaged or looted.

The administration also is expanding security: about $60 million will be spent on key infrastructure areas and $8 million to protect personnel. Another $5 million will pay for oil industry consultants.

An earlier version of the Senate bill called for the $1.89 billion reconstruction measure to be a loan instead of a grant. But the White House threatened to veto the bill and lawmakers eventually relented.

Lawmakers did successfully add to the legislation provisions designed to make the bidding process for reconstruction contracts more equitable and transparent.

The bill for example makes it harder, although not impossible, for the White House to approve noncompetitive contracts like the one now in place for Halliburton Co. Another provision creates an inspector general for the Coalition Provisional Authority (the US entity running the reconstruction effort).

And while Congress lost the battle to make the aid package a loan instead of a grant, legislators made clear they want the administration to do a better job of managing Iraqi oil revenues.

The measure calls on the Bush administration to increase resources contributed by foreign countries and international organizations for Iraq's reconstruction. It also instructs the White House to provide monthly statistics on Iraqi oil production and revenues as well as the use of such revenues.

Style and substance

But both amendments are now largely symbolic given that the White House recently took steps to address congressional concerns in those areas.

On funding, US officials said that $18 billion committed at the recent Madrid donor conference along with Congress' supplemental budget request and future Iraqi oil revenues would mean the White House was on track to have a reconstruction budget of $55 billion over 4 years.

Figuring into the sum are the pledges of $5 billion from the World Bank and $4.25 billion from the International Monetary Fund, Under Sec. of the Treasury John Taylor said Oct. 27.

"For the remainder of 2003 and for 2004, the oil revenue generated will go to the operating budget of Iraq to pay Iraqi salaries, pay for the Oil-for-Food program—all the things that are in the operating budget of the government. In 2005, 2006, and 2007, etc., the expectation of the World Bank and other forecasters is that the revenues will begin to exceed the operating costs of the budget and can therefore be used for reconstruction, thereby achieving the $55 billion target," Taylor said.

And to address transparency issues, the US recently agreed on the framework on an international oversight board that will monitor how the US is spending Iraq oil revenue. The board will include representatives from the World Bank, IMF, the United Nations, and the Arab Fund for Social and Economic Development.

Future oversight

Despite recent White House efforts to shine a brighter light on reconstruction spending, criticisms are expected to continue, especially from Congress.

In a Nov. 3 presentation made before the US Senate Democratic Policy Committee, Steven Schooner, director of the Government Procurement Law Program at George Washington Law School, said the way the US has handled restoration contracts is "troubling."

Schooner said that instead of expanding to $2 billion two new oil restoration contracts, the US Army Corps of Engineers (US ACE) should have considered awarding four contracts worth $500 million each with an eye toward involving foreign firms.

Another speaker, Timothy Mills, a partner at the law firm of Patton Boggs LLP, said the US should be taking stronger steps to encourage independent contract financing for Iraqi subcontractors.

Mills noted that in this postwar period, many qualified medium and smaller Iraqi companies still can't get contract financing from any financial institution, Western or Arab. He said their only alternative is to obtain high-interest loans from one of 12 well-connected families in the country, and the high cost of that money is inevitably passed on to Halliburton or other US contractors in Iraq.

As an example, Mills said that under a $1 million contract performed over a period of 3-6 months, the borrowing business would have to increase the bid to provide the lending family entity with a return equal to one half of the maximum profit that can be obtained on the project. That might translate into a net of 10% to the lending family for putting well less than $1 million at risk for a few months.

"Private sector capital is being unnecessarily concentrated in Iraq in the hands of the well-capitalized, family-owned entities. If history is a guide, the power that comes with such capital concentration likely will be used to further the market position and interests of a privileged few, to the detriment of the many Iraqi entrepreneurs who are willing, but presently are unable, to restart and expand existing businesses as well as start new businesses," Mills said.

He suggested that that problem can be solved by creating a lending fund of about $500 million from Iraqi seized assets that would be available for lending by registered Iraqi financial institutions dedicated to providing contract financing in accordance with approved lending and risk-mitigation practices.

"I understand that a fund of this size would provide sufficient 'revolver' contract financing at a level that would accommodate all Iraqi companies that are qualified to bid for subcontracts under the forthcoming US Agency for International Development's $1.5 billion Phase II Infrastructure contract (the follow-on to the Bechtel Corp. infrastructure contract) and the current and forthcoming follow-on [US ACE] Operation Restore Iraqi Oil (Operation RIO) contracts."

Mills said, ideally the fund would be available to all financial institutions providing contract financing that meet the conditions for regulation—much as Federal Reserve funds are made available for loan at the Federal Reserve rate to banks in the US.

Mills added that Iraqi private banks might need to acquire, or be provided with, the practical expertise to set up and conduct contract financing lending operations.