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Iraq: U.S. Weighs Plan To Mortgage Iraqi Oil For Rebuilding Costs


by Michael M. PhillipsWall Street Journal
June 19th, 2003

WASHINGTON - The Bush administration is considering a controversial plan to pay for Iraq's reconstruction by mortgaging its future oil revenue.

The proposal, which could involve issuing securities or trade credits backed by projected oil revenue, has the enthusiastic endorsement of the two major U.S. companies with reconstruction contracts in Iraq, Halliburton Co. and Bechtel Group Inc.

"Without a financing mechanism to maximize the use of future Iraqi oil revenues for current reconstruction needs, it will be impossible to construct the stable and secure Iraq that both the Iraqi people and the world community seek," the Export-Import Bank of the U.S. warned in a paper circulating inside the administration. Ex-Im Bank Chairman Philip Merrill has emerged as the Bush administration's principal advocate for oil-revenue securitization.

The internal administration debate over how to raise billions of dollars in reconstruction money comes amid growing unrest in Iraq that appears partly rooted in public impatience with the pace of postwar recovery. At the same time, there is a growing sense in Washington and at the United Nations that current oil revenue, combined with the $7 billion now at the U.S.-led Coalition Provisional Authority's disposal, won't be enough to rebuild the shattered country.

The very essence of the securitization proposal, however, has generated resistance among administration and U.N. officials dubious of the authority's legal and moral right to assume debts on behalf of the Iraqi people. "This is an idea that's being kicked around," said a senior official of the provisional authority in Baghdad, the Iraqi capital. "But this isn't a transaction that's going to occur tomorrow."

Nonetheless, lobbyists from the Coalition for Employment Through Exports, an American business group representing major exporters, have been knocking on doors throughout the Bush administration to argue that securitization of trade credits through the Ex-Im Bank and other nations' export agencies could generate as much as $4 billion a year in financing for Iraq. The business group includes among its members Halliburton, whose Kellogg, Brown & Root subsidiary has a $180 million contract to refurbish Iraq's oil
industry, and Bechtel, which has a $680 million contract to rebuild other Iraqi infrastructure.

Edmund B. Rice, president of the trade group, said securitization of future revenue is essential because oil production will ramp up much more slowly than the administration has forecast, limiting the funds available to coalition authorities. U.S. officials have said that revenue will reach $5 billion in the second half of this year and $14 billion to $15 billion in 2004. Mr. Rice said looting and poor maintenance at oil facilities make those projections unlikely.

Furthermore, business executives and some U.S. officials fear it might take years for an elected Iraqi government to be in a position to borrow internationally. "In order to rebuild this country, we need to make the oil revenue work for the Iraqis," the Ex-Im Bank's Mr. Merrill said. "Where's the money going to come from otherwise?"

One other alternative would be for rich nations to pony up huge contributions for Iraq at a pledging conference tentatively scheduled for September. The U.N. Development Program will host a preliminary meeting of potential donors in New York next week, but both U.S. and U.N. officials doubt enough will be collected in the coming months to meet Iraq's huge financial needs.

"Very soon, it's going to become apparent that there isn't enough money available to sustain the reconstruction effort," Mr. Rice said. He forecasts a financing "crunch" as early as this autumn.

The securitization proposal, however, could be politically explosive among the Iraqi public, sensitive to the perception that Americans are pillaging their national bounty. And the plan faces skepticism elsewhere in the administration.

In a written response to the Ex-Im Bank, the State Department questioned whether the Provisional Authority, under the U.N. resolution putting it in charge of Iraq's finances, has the right to assume debts on Iraq's behalf. State Department officials suggested a new Iraqi government might not honor the obligations once it came to power. Lenders might then turn to the U.S. to make them whole, the State Department warned.

In addition, it could be tricky for Iraq to assume new debts at the same time it is trying to restructure old ones incurred by Saddam Hussein's deposed regime. U.S. officials estimate Iraq has $60 billion to $130 billion of outstanding foreign debt, much of it owed to Russia, Germany and France, and believe it will be necessary for creditors to give Iraq a break on repayment. U.S. officials worry that old creditors could well fight the creation of a new class of lenders who are guaranteed they will get their money back.




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