Watching their money

Simon Jeffery explains how donors to Iraqi reconstruction came to have the choice of three funds to give to

The Guardian
October 24, 2003
By Simon Jeffery

The international donors gathered in Madrid today had the choice of giving their Iraq rebuilding money to three funds - one run by the UN, one by the World Bank and one by the US.

The choice offered individual countries the chance to specify how they would like to see their money spent.

Cash in the first two funds goes to the UN's quick-impact projects or the long-term development envisaged by the World Bank. Money put into the third goes to the coalition provisional authority, Iraq's US-led administration.

However, such choice was never Washington's plan. The story of how it came about is one of early single-mindedness compromised by events that did not turn out in quite the way the postwar planners had anticipated.

The CPA's fund was set up by the UN security council in May, in its resolution that recognised the US-led coalition as Iraq's occupying powers.

It handed over $1bn to the Development Fund for Iraq (DFI) from the coffers of the UN's oil for food programme (which managed Iraq's legal oil trade in the final Saddam years), and authorised it to collect 95% of future oil revenues.

Resolution 1483 spelt out its areas of spending: humanitarian needs, economic reconstruction, and the costs of Iraqi civilian administration.

But soon afterwards, the DFI hit problems. Part of the deal in putting it under US control was the security council's request for an International Advisory and Monitoring Board (IAMB) representing the UN secretary-general, the World Bank, the International Monetary Fund and the Arab Fund for Social and Economic Development to audit the DFI's spending.

But the CPA's civilian leader, Paul Bremer, was intransigent over the scope of the watchdog's remit, and would not accept the auditing powers that the IAMB trustees wanted. The result was that negotiations on setting it up did not conclude until this week.

The IAMB was never offered an advance approval to the spending of Iraqi oil money, but now has the right to audit oil sales, the Iraqi central bank (where the money is deposited), and the DFI spending arm.

It will also be able to order special audits, and will have access to all records and documents falling within its scope.

Anthony Richter, a Middle East analyst at George Soros's Open Society Institute, which has set up an initiative called Iraq Revenue Watch, says it was this five-month delay, while negotiations took place, that led potential donors to look elsewhere.

"One of the important effects of not creating the IAMB up to now was the establishment of the [UN and World Bank] multidonor trust funds.

"Without the audit mechanism, the DFI looked less transparent, so the international community went to the extraordinary length of creating a separate fund," he explains.

"I tracked the various drafts of the IAMB regulations from the moment it was launched for discussion.

"If you look at what the Americans put up as an initial document, and where they ended up months later, you'll see that they conceded quite a bit. The only thing that is regrettable is that it took as long as it did."

In the meantime, the DFI built up a bad reputation. By July, the German ambassador to the UN, Gunter Pleuger, was calling for a multilateral reconstruction fund to encourage donations from countries uneasy with contributing to a coalition fund.

Alongside the DFI's lack of transparency, as Mr Bremer haggled over the scope of its watchdog's powers, some countries simply refused to give money to the occupying powers.

The DFI was later the subject of a Christian Aid report alleging that it had failed to account for $4bn. Without auditing, the amount in the DFI's accounts has remained uncertain. It has its initial $1bn from the oil for food programme, possibly $2bn in oil revenues, and $1.7bn that the US has given it in seized Iraqi assets.

The charity this week said that it had only accounted for $1bn of spending, and demanded to know what had happened to the rest. The CPA responded that it was fulfilling its obligations under security council resolution 1483 now that agreement had been reached on forming the long-delayed IAMB.

"The CPA is learning as it goes, and this was one point on its learning curve," says Mr Richter.

"Agreeing to an IAMB early would have been in their best interests, and in deferring it as long as they did - for whatever reason - they have maybe not been able to capitalise on the goodwill and confidence that its early establishment would have engendered.

"A number of diplomats posted to the UN felt in the dark throughout the summer and fall as to where the money was going and where it was being spent. It perpetuated a feeling of lack of confidence."

The new trust funds will spend money which, at one point, the US could have expected to be the responsibility of the DFI.

Through hard-nosed unilateralism, the US has engendered the kind of multilateralism widely believed to be very out of favour among the more hawkish members of the Bush administration.

The CPA will still have impressive resources - an estimated $10-20bn annually in oil revenues - but, as with many aspects of the occupation, it has not gone entirely to the US plan.

If one of the missions of the occupation is to bring about an open and democratic society, it is in the best interests of the US to set a high standard for the way in which it is administrating the oil revenues.

Guardian Unlimited © Guardian Newspapers Limited 2003

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