http://www.nytimes.com/2004/06/21/politics/21DIPL.html

June 21, 2004

U.S. Is Quietly Spending $2.5 Billion From Iraqi Oil Revenues to Pay for Iraqi Projects

By STEVEN R. WEISMAN

WASHINGTON, June 20 -- Struggling with bureaucratic problems in spending the money appropriated by Congress to rebuild Iraq, American authorities are moving quietly and quickly to spend $2.5 billion from a different source, Iraqi oil revenue, for projects employing tens of thousands of Iraqis, especially in the country's hot spots, Bush administration officials say.

The spending program, which was started unannounced, has been undertaken in consultation with Iraqi ministers, despite misgivings that the oil revenue belonged to Iraq and that it should be set aside for use when Iraq's sovereignty is restored, scheduled for June 30.

Because of deteriorating security and complex delays in contracts that have slowed the spending of the $18 billion in Congressionally appropriated money, occupation authorities say they decided recently that they had to spend the Iraqi money to build schools, factories and oil fields, and to turn Iraqis away from violence.

"The security needs were just overwhelming," said an occupation official. "Would we rather have been able to save the money and have a nice kitty? Sure. There's always a tension between putting money to work right away and having it available for a tough year next year. This is the way we resolved it."

Bush administration officials say they believe that the spending program has helped stabilize Iraq, although most note that negotiated arrangements allowing insurgent groups to operate peacefully in Falluja, Karbala, Najaf and other troubled areas also have aided in reaching that goal.

Iraq's overall domestic budget of roughly $20 billion for 2004, financed mostly by oil revenue, was approved last year by the Program Review Board, a unit of the Coalition Provisional Authority -- the American-led occupation authority in Iraq.

But this spring, Bush administration officials said, it became clear that rising global oil prices were presenting Iraq with a windfall, and a decision had to be made about whether to save that extra money or disburse it in a one-time expenditure that might not be available in the 2005 budget.

American occupation officials said the $2.5 billion had helped pay for security needs like police cars and uniforms, as well as repairs of schools, power grids, oil fields, state-owned factories and other sources of employment. Additional funds have been used for vocational training for young Iraqis "to get some of these kids off the streets, doing something productive for the future," an occupation official said.

Some of the money has gone to American military teams operating since the beginning of the occupation 14 months ago. The teams have become famous in Iraq for the way they have spread across the country, commissioning repairs and paying for them from satchels bulging with $100 bills shipped by plane from a Federal Reserve vault in East Rutherford, N.J. Much of that money came from Iraqi assets frozen in the United States during the Persian Gulf war in 1991.

At least $1 billion has been distributed in this fashion -- by some estimates more than $2 billion.

"The military commanders love that program, because it buys them friends," said an administration official, referring to the cash distribution. "You want to hire everybody on the street, put money in their pockets and make them like you. We have always spent Iraqi money on that."

The $2.5 billion to be spent from Iraqi oil funds has several components, the biggest of which is $1 billion to be spent on 15 to 21 military or security projects around the country. The rest of the money is to be used for vocational training, infrastructure repair, principally in the oil and electricity sectors, and increased supplies of food. A small amount has been set aside for future compensation of victims of Saddam Hussein's government and displacement since the occupation began.

A principal goal is to employ Iraqis and compensate for the shortfall in financing that was supposed to have come from American sources.

One reason for distributing cash for quick gains, some administration officials say, is that controls on the $18 billion appropriated by Congress last fall to rebuild Iraq may make it harder to operate in that fashion, so policy makers have decided to use what they have before the formal end of the occupation, now scheduled for June 30.

Early last fall, L. Paul Bremer III, the American administrator in Baghdad, said he hoped that most of the $18 billion would be spent by the time sovereignty was transferred.

In November, however, the transfer of sovereignty was accelerated. Meanwhile, what was intended as a spending program to showcase the benefits of the American occupation has been slow in functioning because of security problems and cumbersome contracting regulations.

Of the $18 billion appropriated by Congress, the American occupation has made spending "commitments" of $7.7 billion, with the hope of reaching $10 billion by the time Iraq officially regains self-rule on June 30. But these figures simply represent money that is reserved or to be reserved for certain purposes. Only $3.2 billion in contracts for actual construction projects have been awarded, although the number could rise before June 30.

A senior administration official said that, contrary to early hopes, it would probably take five years to use up the $18 billion.

"The expectations for spending were unrealistic," said the official said. "You can't just pull 2,300 projects off the shelf and build them without vetting. It takes time to figure out if you're going to build a power plant, where it should be and who should build it."

Another problem has been a lag in donor countries coming forward with the money they had pledged last September at a donors' conference in Madrid. Of $13 billion pledged then, less than $2 billion has been received.

"Donor countries can see that the money that is already there is not being spent, because they can't spend it," said a development official involved in that fund-raising effort. "That removes the pressure on the donors to come through with the money they pledged."

More than a year ago, after the fall of Mr. Hussein, some conservatives in the Bush administration envisioned Iraq as a model for free enterprise, replacing the big money-losing state-owned industries in everything from petrochemicals to pharmaceuticals.

Instead, the accelerated government-driven employment and construction projects are cementing Iraq's reliance on the state as its central economic engine, just as it had been under Mr. Hussein.

"Lots of people wanted to change this, and change that, and transform the economy of Iraq," said an administration official. "But then we quickly realized that we had to put Humpty Dumpty back together first, and then give it over to the Iraqis and let them figure out the best way to change their country."

Accordingly, when sovereignty is transferred next week, Iraq will be what this official called "a centralized socialist state" on which virtually all citizens are dependent for basic needs, putting a particular burden on the fragile interim government selected less than three weeks ago.

Of Iraq's eight million employed workers, for example, an estimated 700,000 work for the government directly, 400,000 work for state-owned enterprises, many of them operating in the red, and 200,000 work for various armed forces or security branches, a number expected to grow.

But those numbers measure the equivalent of full-time employees, and some administration officials say that a more realistic number is two million Iraqis, one out of every four with a job, who are dependent on the state for employment.

In addition to the tens of thousands of jobs to be created by the new oil-financed program, American officials say 1.5 million jobs will be generated by the Congressionally appropriated funds that are only now starting to be spent.

Beyond these state programs, most Iraqis are given free or partially subsidized food, costing $4 billion this year. Electricity supplied at subsidized rates costs $1.7 billion, and the cost of distributing low-cost kerosene and other fuel to Iraqis is estimated at $3 billion to $5 billion.

But occupation officials say the spending of money now to generate employment will revive state industries, so that in the future they can be privatized and serve as the country's economic base.

"All the programs we have started have the full support of the Iraqi ministries of planning and finance," said an occupation official.

"There are two ways of looking at this," the official said. "First is the absolute need to find jobs for millions of young people who need training. But second is to increase the capacity of companies and of the oil infrastructure to become healthy and employ more Iraqis in the future."