The Bush administration is considering a provocative idea to pledge some of Iraq’s future oil and gas revenue to secure long-term reconstruction loans before a new Iraqi government is in place to sign off on the proposal.
The plan, endorsed by the Export-Import Bank of the United States and some of America’s biggest companies, would help avert a looming cash crunch that has the potential to stall the postwar rebuilding effort. One U.S. official rated the proposal’s prospects at 50-50.
But the plan is drawing fire from some administration officials, lawmakers, policy analysts and prominent Iraqis who say it would mortgage the Persian Gulf nation’s most treasured resource, prevent future leaders from deciding how to spend their oil money and put U.S. taxpayers at risk.
“Iraqis believe their oil should not be touched by foreigners, that it should remain in the hands of the Iraqi government and that no one has a right to do anything before an elected government is in place,” said Fadhil Chalabi, executive director of the Center for Global Energy Studies in London and a former Iraqi Oil Ministry official.
“As an economist, I believe in what they are proposing. You couldn’t come up with a better formula,” Chalabi said. “But Iraqi politics and the way they look at these things are not encouraging. It could create problems later on. Better to wait until a government is formed.”
That may be too late, in the view of the plan’s supporters. The Export-Import Bank and an industry coalition that includes Halliburton Co., Bechtel Group Inc. and other major companies that are interested in winning contracts in Iraq are warning that unless steps are taken soon to secure new funds, the reconstruction well could run dry.
“Common sense says get Iraq running. How do you get the country running? By using its own oil revenue 100% for the benefit of the Iraqi people,” said Export-Import Bank Chairman Philip Merrill. “If you want to wait three or four years, be my guest. But that means the country is going to be running on the dole of the United States.”
Many experts agree that Iraq is headed for a possible cash flow crisis as reconstruction costs escalate, initial funds are depleted and the resumption of oil exports is delayed due to damage caused by looting and sabotage.
But they part company over whether the U.S.-led occupation administration in Baghdad has the legal or moral authority to pledge future oil revenue as loan collateral before the issue can be debated by elected Iraqis.
“Unless a reconstituted Iraqi government or the U.N. Security Council authorizes the plan, it appears to violate international law,” said Rep. Henry A. Waxman (D-Los Angeles). “We do not have the right, without additional authority, to impose financial obligations on the future government of Iraq.”
Waxman, the ranking Democrat on the House Government Reform Committee, has asked the Export-Import Bank, the Pentagon and the U.S. Army Corps of Engineers to disclose more information about the proposal and the role played by Halliburton and other companies in crafting it.
Opponents of the plan warn that if a future Iraqi government chose to stop making payments on the obligations, U.S. taxpayers could wind up holding the bag.
“We’re going to be on the hook, just like U.S. banks were on the hook to Mexico in the early 1980s and U.S. lenders were on the hook to South America in 1990,” said independent energy economist Philip K. Verleger Jr.
Although the proposal is under consideration in Washington and Baghdad, the State Department has expressed concern about the preemption of Iraqi decision-making authority and the possibility that a future government might choose to default on the debt.
The Treasury Department has voiced similar reservations, warning that the creation of a new class of debt could complicate U.S. efforts to persuade other countries to write off or restructure Iraq’s massive prewar debt burden.
Still, a Treasury official who requested anonymity said the plan has merit and might well win approval. “It’s a 50-50 proposition right now,” the official said.
Experts estimate that rebuilding Iraq could cost anywhere from $20 billion to $100 billion over several years. Oil exports are expected to net about $3.5 billion this year and $14 billion in 2004. But some of that money will be needed for other purposes, and coalition officials continue to scale back their export targets as pipeline explosions and power outages constrain production.
The administration has been financing reconstruction from a $7-billion pool of congressional appropriations, international contributions and seized Iraqi assets. But concern is growing that the rising costs could consume all of the money set aside so far and that initial oil sales will not make up the difference.
“Existing revenues for reconstruction are not adequate to sustain the effort much beyond the end of this year,” said Edmund Rice, president of a business group called the Coalition for Employment Through Exports. “The crunch could come in late autumn or after the first of the year. But roughly six months is when they’re going to hit the wall on resources.”
The oil loan proposal is designed to bridge the funding gap. Under the plan, a portion of Iraq’s future oil and gas revenue would be pledged as collateral to repay loans or bonds issued to finance infrastructure improvements. An Iraq Reconstruction Finance Authority would be established to review projects and arrange the financing.
The industry coalition has proposed using the financing mechanism to raise $3 billion to $4 billion a year for reconstruction work on a project-by-project basis. The Ex-Im Bank envisions raising $25 billion to $30 billion to boost Iraq’s oil production to as much as 5 million barrels a day from its current level of less than 1 million barrels.
Depending on how much money was raised, the plan could wind up claiming anywhere from a small fraction to the lion’s share of Iraq’s oil revenue over a decade or longer.
The Iraqi reconstruction authority would use the borrowed money to pay contractors for large-scale improvements such as renovating oil wells or building power plants. The loans would be guaranteed by a consortium of export credit agencies, including the Ex-Im Bank and its foreign counterparts. The financing would be reserved for new projects and would be subject to competitive bidding open to companies from all countries.
“Bechtel and Halliburton would have to rebid on a level playing field with everybody else,” said Rice, whose coalition represents 28 companies and two trade groups. Members include such California-based giants as ChevronTexaco Corp., Fluor Corp., Hewlett-Packard Co., Northrop Grumman Corp. and Oracle Corp.
Ex-Im Bank officials believe the U.S.-led occupation already has adequate legal authority to launch the oil loan program. In May, the U.N. Security Council authorized allied officials to disburse Iraqi oil revenue for humanitarian purposes, economic reconstruction, disarmament and “other purposes benefiting the Iraqi people.” It did not address the use of future revenue.
Bank officials say there is a precedent for such a plan in the region. In 1948, a similar money-raising authority was established in behalf of the new state of Israel before an elected government was in place to endorse taking on the financial obligation.
Supporters of the oil loan idea insist that Iraqis should be included in the decision-making process from the start. But until some form of elected government is in place, the only Iraqi officials in a position to participate are those appointed by allied authorities to staff the various government ministries.
“We’re better off to have the Iraqis involved,” said Merrill of the Ex-Im Bank. “Should they have control from Day 1? Probably not. Will they have control at the end of the decade? For certain. Where on the curve do they get control? I don’t know.
“But they’re likely to get there a lot quicker if they’ve got the money than if they don’t.”