Inside Iraqi politics - Part 4. A look at legislative progress: Reconciliation via wealth distribution


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The first three installments of The Long War Journal's series on Iraqi politics discussed the structure and progress of the executive branch and the composition of the legislative branch. This installment begins examination of progress on key legislation.

Some of the most important measures of progress are the Iraqi government's efforts to propose and pass legislation allocating wealth. This includes the 2008 budget, which is immediately essential to executive functions and represents a de facto distribution of revenue among Iraq's provinces and sects, and the hydrocarbons laws, which will have long-term ramifications for the apportionment and development of the country's oil resources.

The 2008 Budget

Passed on Feb. 13, the budget was a pivotal piece of legislation, as it outlines the disbursal of revenue for all purposes in 2008, and the Iraqi parliament had missed its constitutionally mandated deadline to approve it in 2007.

Even in the absence of a current budget, money flowed at the start of this year. The projected revenue in the $30.2 billion budget for 2007 had been met a month early and exceeded by surprisingly high oil revenue; last year's revenue was allocated but contracts remain unexecuted, so projects are ongoing; and several supplemental budgets approved in 2007 had injected funds into the provinces. But approving this year's budget of $48 billion remained a priority, given that it more directly addresses the country's pressing economic, reconstruction, and security needs.

"It reflects some of the lessons learned [last] year," said Brigadier General Terry Wolff, the Special Assistant to the President and Senior Director for Iraq and Afghanistan Policy Implementation on the National Security Council. The 2008 budget has an "increased security budget, increased provincial budgets,   and it will also reflect the fact that the Iraqis are doing what both the IMF [International Monetary Fund] and the World Bank have asked them to do in terms of debt relief and controlling inflation."

The budget is also considered a measure of reconciliation, because it candidly reflects the government's willingness to distribute resources equitably among regions and sects. This is especially relevant in the absence of an official agreement about the division of Iraq's oil profits, which constitute about 95 percent of the country's revenue. Some American officials point to the budget as a sign of Iraqi compromise and desire to remain unified as a country.

As an example, Iraq's parliament, the Council of Representatives (COR), opened a special legislative session at the end of December to resolve the disputes delaying passage of the 2008 budget. Lawmakers interrupted their winter break to debate funding of the Kurdish Regional Force - Kurdistan's semiautonomous security forces - and the proportion of nonfederal funds allocated to Kurdistan. Non-Kurdish lawmakers had cited Iraqi Planning Ministry data showing that Kurdistan contains 13 percent of the country's population and argued that the province should be funded accordingly. The Kurdish representatives wanted to maintain the 17 percent allocated to the province in previous budgets.

The impasse was resolved with parliament's passage of the budget on Feb. 13, along with the Provincial Powers Act and the General Amnesty Law. Representatives agreed to integrate up to two divisions of the Kurdish Regional Force into the Iraqi Army, and individual political deals brokered between the Kurdish bloc and major Shia parties maintained the past proportion of funding for Kurdistan. According to a secular Iraqi politician not affiliated with the parties, the Sadrist Movement and other Shia politicians agreed to support the 17 percent allocation in return for Kurdish support of the Provincial Powers Act.

This type of political deal is an example of how the budget reflects ethno-sectarian compromise through revenue apportionment, as well as how the legislative process can enable accommodation.

"The budget represents all of the sectarian communities and they all believe it's a good, investment-heavy document," said Phil Reeker, Counselor for Public Affairs at the American Embassy in Baghdad. "I think that's the thing to point to, because ultimately that's the function of government; taking revenues and spending it on the people."

The Hydrocarbons law

The Iraqi hydrocarbons law, or oil law, is really a package of four pending laws vital for governing the oil industry and the overwhelming majority of Iraq's revenue. These laws will significantly influence the degree of the country's long-term wealth and help outline management responsibilities and profit sharing. Specifically, the four laws outline:

1. Managing investment in Iraq's oil resources, specifically the industry's upstream development;
2. Revenue sharing among private companies, provinces, and the federal government;
3. Restructuring the Ministry of Oil; and
4. Reconstitution of the Iraq National Oil Company (INOC).

How Iraq's oil industry integrates with foreign investment is a pivotal aspect of the ongoing debate over the legislation. The industry was nationalized in 1972 - a status currently shared by neighbors such as Saudi Arabia and Iran - but analysts believe that foreign investment based in profit sharing will significantly increase oil revenue. Iraqi politicians, oil companies, and various independent advisers are attempting to strike a balance between Iraqi control and foreign investment that will maximize the industry's potential, while allaying nationalist fears over the politically sensitive topic of who controls and profits from the oil. Successful legislation is considered a prerequisite to attracting foreign investors.

"It's not the security situation that keeps the oil companies away,   it's the lack of a comprehensive national oil law," said Reeker. "You have to have this national law that establishes the legal framework [for] foreign investors.   They're not going to come until they know the rules of the road are defined and can be reasonably expected to remain in place."

Key points of contention in the privatization vs. nationalization issue include the length of any contracts, the preferential treatment of the INOC over private investors in awarding contracts and responsibilities, and production sharing agreements that determine the split of profits between private companies and the government. Initial drafts of the investment portion of the legislation assigned the majority of profits to private oil companies until they recoup exploration and drilling costs, after which the companies earn 20 percent. Critics believe this degree of revenue sharing gives away too much of Iraq's oil wealth, while proponents of the plan argue that it is a fair distribution given the assumed risk of the foreign companies, as well as their unique ability to drastically increase the country's oil production. But significant, long-term production sharing agreements are abnormal for the region, as many countries utilize private companies on a more limited, contractual basis to augment nationalized industries. The extent of any revenue sharing between Iraq and private investors remains in debate, but some experts assert initial drafts provide for government control.

"[T]he aim of this law from beginning was to promote foreign investment in Iraq's oil sector," said Revenue Watch Middle East Director Yahia Said, at an event held in May 2007 by the US Institute of Peace, an independent organization funded by the US Congress. "Yet while the law opens the door for foreign companies, there are careful, deliberate mechanisms in place to maintain control in the hands of national government."

Drafts of the laws have required that any contracts with private companies contain language that stipulates Iraqi government control, give the INOC authority over more than 90 percent of Iraq's known oil reserves, and mandate a degree of transparency in oil contracting that is unusual for the Middle East.

Iraq's oil fields in 1992. Click map to view.

The other major debating point in hydrocarbons legislation is the degree of federal vs. provincial control over management of the industry. Two facts spur inevitable differences among naturally self-interested ethno-sectarian parties: the overwhelming proportion of the country's revenue comes from oil and the major oil fields are unevenly located across Iraq's provinces. The current draft of the law leans toward centralization by regarding the industry as a national patrimony overseen by the Council of Ministers, with specific policy set by the Ministry of Oil.

In very general terms, Kurdish politicians want more decentralization and aggressive production sharing agreements with Western companies, Shia leadership is open to decentralization but is more circumspect about Western investment, and Sunni leaders emphasize centralization while also closely vetting the conditions for any arrangements with foreign companies. The Kurds have long lobbied for control of northern oil resources and passed their own regional oil law in August 2007. But a federal government spokesman declared the law "illegal" and warned that foreign investors making deals with Kurdistan will be subject to lawsuits and denial of contracts after any federal oil laws are passed. Several foreign companies signed development contracts with the Kurds despite the warnings.

The first federal law governing investment has been approved by Iraq's executive branch and submitted to the Council of Representatives for debate and review, though the legislature has made little progress on resolving key issues. Drafts of the other three laws have not been finished by the executive to be forwarded to the legislature. Analysts assert that all four laws must be reviewed as a package before the parliament can pass any of them. It is likely that debate over such comprehensive oil legislation will take some time, given the political sensitivity, complexity, and huge, long-term ramifications of the issue. Overall, the laws are slowly moving through committees but are delayed by a cautious approach and a lack of agreement on key questions, with many divisions along regional party lines.

As for when the legislation is likely to pass, one official would not venture to guess. "I couldn't put a date on its passage; it's a tough one," said Reeker.

Short-term resolution of a long-term issue

While sectarianism and regional disagreements affect legislative progress in Iraq, lawmakers and bureaucrats have managed to achieve consensus on revenue distribution essential to the function of government with the passage of the 2008 budget. US officials believe that the distribution currently taking place - in the form of equitably apportioned yearly budgets and past supplemental budgets assigned to provinces - is a reasonable indicator of willingness to compromise and remain unified as a country, as well as address Iraq's pressing economic, reconstruction, and security needs.

But a host of unresolved items delays legislation on the long-term disposition of Iraq's oil industry and wealth. Progress on hydrocarbons law calls for striking a balance between federal and provincial authority and between privatization and nationalization. In addition, Iraqi politicians are cautious about the design and compromise of any legislation, as they view any agreement as a de facto definition and distribution of political power that will outlast shorter-term US interests. Given the import of the legislation and the difficulty of competing interests, the uneven geographic distribution of oil fields, politically sensitive matters of nationalism, and a decayed oil infrastructure requiring private Western investment, Iraqi technocrats and lawmakers have some way to go before reaching agreement on the package of hydrocarbons laws. Effective compromise on this issue will be vital to building on Iraq's impressive revenue momentum and stabilizing the country through long-term equitable wealth distribution among provinces and sects.


Bill Roggio contributed to this report.

The next and final installment of The Long War Journal's series on Iraqi politics will discuss the status of more pieces of legislation considered important for stability and reconciliation, including the Unified Retirement Law, de-Baathification reform, the General Amnesty Law, the referendum on Kirkuk, the Provincial Powers Act and the Provincial Elections Law.

UPDATE: A reference to the Islamic Supreme Council of Iraq (ISCI) was used in error and removed from reference to the compromise on the 2008 budget.



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READER COMMENTS: "Inside Iraqi politics - Part 4. A look at legislative progress: Reconciliation via wealth distribution"

Posted by David M at February 25, 2008 10:39 AM ET:

The Thunder Run has linked to this post in the blog post From the Front: 02/25/2008 News and Personal dispatches from the front lines.

Posted by Bill from INDC at February 25, 2008 5:31 PM ET:

Brian H -

The info (the 1992 map and the linked 2005 Revenue Watch piece) on the distribution of oil fields is relevant because it generally reflects current resources generating 95% of Iraq's revenue, 90% of which will be allocated to INOC. The only graphic I could find that showed undeveloped resources in Anbar looked like it had been sketched on the back of a cocktail napkin. All other sources informing the oil section are no older than 2007, and some quite recent.

Nowhere in the piece do I assert that the Sunni are "oil poor" in terms of undeveloped fields, though I perhaps could have noted untapped resources; but whether they can even capitalize on them hinges on the issues mentioned above, particularly the degree of privatization of the industry. Without private help and some degree of centralized, national revenue sharing in the interim, those reserves will remain untouched and the Sunni areas will wither ... but not before war and instability resume.

The Iraqis are not close to any such agreement, though working on it.

Unrelated to the specific topic: as is a recurring theme with your comments, your form is aggressive. This was true when you criticized my quite generally accepted use of the term bureaucracy and specified "administration" in a previous piece, and it is true here as you condemn analysis (some aspects purposefully vague) because the graphic is sourced to 1992.

Moderate your approach and both your conclusions and basic likability will improve. As is, your conclusion is (somewhat) "irrelevant and pointless" because: without basic agreement on revenue sharing of currently developed resources and the extent of privatization in upstream development, the Sunnis will never see that oil.

Posted by ajacksonian at February 26, 2008 11:45 AM ET:

The equality of the hydrocarbon laws is essential as the viability of fields in western Iraq will need equal treatment to those elsewhere. Getting that futures agreement together now helps that to happen.

Japan and India are highly interested in western Iraqi oil, the first as they have been holding back all development agreements from Iran for years, and refuse to work with the regime there... Japan suffers greatly from increased oil costs as their own resources in this area are miniscule. India has seen some deals with Iran (notably the natural gas pipeline) turn sour as Iran is *importing* natural gas from Turkmentistan and other ex-Soviet Republics in that southern tier of 'stans.

I expect the provincial/governate elections will shake things up tremendously and that the current ruling structure at the National level will alter to reflect that when their elections come the year after. These omnibus National parties have not had the necessary grass roots 'farm teams' stood up, while the technocratic oriented Iraq Awakening has done just that.

Speaking from my limited geological experience, getting new oil fields prospected, surveyed, tested, and actually getting oil to flow is a 3-5 year deal at minimum, and 7-10 years for decent production is realistic. Expansion and rejuvenation of older fields is less costly, but you see a diminishing return on investment, too. Iraq's decayed infrstructure needs new refineries (and I know I have read about contracts let on that somewhere), to replace the ancient Soviet era ones. That and the work being done during transition will get Iraq a shifting oil and gas infrastructure that may, arguably, be the most modern on the planet. To run it requires modern western contracts, skills, and surrounding society... the other huge plus is that Iraqis are not looking to subsist on petro-income, but are standing up their older factory system. I do wish that the US had a infrastructure technology transfer program to ship old US facilities outcompeted here, to Iraq where they could be put to good use. The idea is to have Iraq get a robust industrial structure with oil as an added boom, instead of an oil dependant economy with industry as a minor sector adjacent to it. That takes 20 years to do, but getting the groundwork done right today is critical to get there.

Thank you for the hard work done here!

Sent a check last year and need to get some idea of funding for this year done.... no one else is doing this sort of work.

Posted by Bill from INDC at February 26, 2008 2:20 PM ET:

"Of course, private development is a REAL touchy issue with Iraqis, it seems to me. They have a history of government ownership and control which seems to make them balk and get huffy at the very idea of corporate profit-taking on "their" oil. The idea of value-added effort and infrastructure seems tough for them to get their minds around. "

Hence the reason much of the Sunni leadership still takes a position of closely scrutinizing and even resisting PSAs that allow private companies to recoup drilling and infrastructure costs, despite how such arrangements would hasten the development of the untapped reserves under their feet.

The discoveries may have softened some of their stances on privatization and centralization, but they did not fundamentally reverse them, that I am aware.

Posted by FbL at March 1, 2008 5:41 PM ET:

Bill, thanks so much for this great article. I'm preparing to interview a bigwig in Iraqi economics, and this is going to be a great help in my education. Thanks!