represehtative government is established in Iraq. This raises questions of how
we manage that (shared) control with the US. How will we influence decisions
on spending? What reporting lines will there be? etc Importantly, these
structures need to be decided quickly: the DFI will have significant resources
immediately and spending decisions could start being made in the next couple
2. Ensuring that the DFI outlined by the resolution meets UK objectives and
commitments in practice - in terms of transparency, accountability and
oversight in the management of Iraq's resources. The UNSCR is very high-
level and does not outline much of the detail necessary to operationalise this
structure. Hence there is a role for the UK in developing modalities that meet
our objectives. In addition, where there is resolution language committing the
Coalition to use the resources of the DFI 'in a transparent manner' and to
ensure that oil sales are 'made consistent with international best practice',
, how
do we ensure that structures are out in place to meet these commitments?
This paper sets out some thoughts on these two issues. The attached annex (A)
outlines some draft UK terms of reference for the DFI and for the Advisory Board and
some principles that could form the basis of our engagement with the US on these
issues.
The UNSCR and the Development Fund for Iraq
Para 12 of UNSCR 1483 'notes the establishment of a Development Fund for Iraq
(DFI)'. This and the two subsequent paragraphs set out some aspects of this structure
such that:
• The DFI will be held in the Central Bank of Iraq'
• It will be audited by 'independent public accountants'
An International Advisory and Monitoring Board will be created, which the
independent public accountants will be approved by and to whom they will
report. The Advisory Board members shall include duly qualified
representatives of the Secretary General, the Managing Director of the IMF,
' This may not be practically possible immediately and the US is also considering other options such as
holding the funds in the Bank for International Settlements (BIS).
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petroleum products and natural gas?
3. Frozen assets: all 'funds or other financial assets or economic
resources' of the previous government of Iraq, Iraqi state bodies or
members of the Saddam regime currently held and/or frozen
outside Iraq
• The DFI shall enjoy the privileges and immunities equivalent to those enjoyed
by the United Nations
This framework is shown diagrammatically in the attached annex (B).
Timing
The US have already created the DFI and opened an account in its name at the Federal
Reserve Bank of New York. The $1bn from the UN Escrow accounts has been
transferred to this account. Frozen assets and the first oil revenues could also be
deposited quickly -- so the DFI could begin disbursements immediately. The US plan
to transfer this account to the Central bank of Iraq as soon as possible.
The US has also written to the Managing Directors of the UN, World Bank and IMF
immediately, requesting that they designate a representative to serve on the Advisory
Board. The World Bank held a discussion of their role on the Advisory Board at
during a Bank Board meeting on 28 May. The US Treasury plans to hold a meeting
for these representatives in Washington DC in the next few weeks.
Implications and Modalities of the DFI
The UNSCR 1483 raises two sets of issues for the UK.
UK Roles and Responsibilities as a Coalition Member
UN SCR 1483 makes clear that the UK Government (as a member of the Coalition)
will be jointly responsible for disbursing revenues from the DFI. The Resolution also
notes that other States that are not occupying powers may work under the Authority --
2 5% goes to the UN Compensation Fund
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• What mechanisms will there be for resolving disagreements among coalition
partners over spending or letting of contracts?
• Which department in the UK will have oversight responsibility for these
resources? (HMT? DFID? FCO?)
Since the resources in the Fund do not originate from UK taxpayers, the standard
legal and reporting requirements, for example to Parliament, do not apply. However,
there may still be a political and moral rationale for ensuring that Parliament is
informed through some mechanism(s) as to the decisions being taken by the Authority
and hence, implicitly, the UK Government.
However, UNSCR 1483 does 'encourage' the Authority to 'inform the Council at
regular intervals of their efforts under this resolution'. In addition, it mandates the UN
Security Council to 'review the implementation of this resolution within twelve
months of its adoption and to consider further steps that might be necessary'. Further,
the UN Secretary General is requested to report to the Security Council at regular
intervals on the 'work of the International Monitoring and Advisory Board'. Hence,
the UN Security Council will provide some form of oversight function and there is an
opportunity to press for regular information flows to the Council by the Authority and
the Advisory Board
In addition, the creation of the DFl and UNSCR 1483 more generally raises once
again the important legitimacy issue concerning economic policymaking under the
Authority. The Attorney General has been asked to provide an opinion on the legal
basis provided by UNSCR 1483 for the Coalition to take, in particular, economic
decisions that go beyond those allowed under Occupation Law. There is a clear
linkage between economic policymaking and the DFI since most economic policy
decisions will have a spending element. If this opinion is that Occupation Law
continues to constrain such economic decisions, there could be important practical
implications over which spending decisions we deem to have a legal basis.
These issues are for us to settle within the Authority (ie with the US) and not a wider
group of countries. However, UNSCR 1483 does provide a role for other countries if
they wish to work under the Authority so there is scope for engaging other countries if
we wish to. In addition, there are principles such as transparency that we will need to
press the US Administration very hard on if we are to retain credibility with the wider
international community. It is important to note that these decisions need to be made
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to meet UK objectives.
The main questions raised by the model are
1. Line Management: Who technically establishes the DFI? In practical terms,
what is the line of reporting for the accountants and the Advisory Board? (The
UN Resolution simply notes the establishment of the Fund so it is not
explicitly the UN. Similarly the Coalition controls spending but what is the
role of the Advisory and Monitoring Board?).
2. Transparency - ex ante and ex post: The resolution provides some
mechanisms for ex post transparency through the auditing role but even here
there are questions, such as: how often will the accountants audit the IDF?
Will they publish their reports? In addition, best practice would demand some
form of ex ante transparency in economic policymaking through the
publication of forecasts, budgets etc. This raises questions such as: How will
the resolution requirement to 'use funds in a transparent manner' be
operationalised? Will the Coalition publish a budget? If so, how often? Who
will review it? What additional checks, if any, are needed to guard against
corruption?
3. Prioritisation: How will competing spending demands be managed? How will
political (ethnic etc) interests be managed? Decisions would traditionally be
based on a needs assessment undertaken by the IFIs but how will this work in
the interim? Can an IFI needs assessment still play a role?
4. Regional/Federal Structures. Prioritisation of spending decisions will need to
be consistent with any political moves to a federal structure. How will this be
achieved? Will regions have some control over their own budgets? Their own
revenue sources? How will the Kurdish regions existing institutional structure
be managed?
5. Relationship to other sources of finance: How will donor finance (eg in a
Donor Trust Fund) be managed in the context of the DFI? What is the linkage
to domestic sales of oil? Will they be subsidised? What happens to any
domestic revenue?
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too slowly, duplicating work by NGOS and donors etc), if there is corruption and/or
political influence over contracts funded by the DFI (eg money is seen to be
distributed unevenly across Iraq or among different ethnic groups), or the funds are
spent on projects that go well beyond the legal mandate provided by the UN
Resolution.
In the DOD/ORHA view, the main role for monitoring falls to the auditor who would
ensure that the domestic and international sales of petroleum and derivates are 'in line
with prevailing international market practice' and the revenues are deposited in the
DFI. He/she would also ensure that funds disbursed from the account are recorded
accurately and disbursed for the purposes set out in the UN resolution. However,
these purposes are very broad (eg 'humanitarian needs of the Iraqi people' or 'other
purposes benefiting the Iraqi people') so it is not clear how effective such monitoring
will be.
The DOD/ORHA view also seems to envisage keeping the DFI completely separate
from donor financing. However, this poses questions of coordination and potential
problems of duplication and transparency.
We are not fully sighted on US thinking in terms of how spending decisions and
reporting lines will operate within the Coalition.
Wider Questions
At present, the UNSCR is not specifically time-limited. However, it does state that the
oil revenues will be deposited in the DFI 'until such time as an internationally
recognised representative government of Iraq is properly constituted'. This is likely ot
be some way off but it does mean that we would not expect the Coalition to continue
controlling Iraqi revenues indefinitely. It is therefore possible to view the IDF as the
very beginning of an Iraqi government budget or Treasury Department - with the
Coalition in control on a temporary basis and, once the political situation allows,
control being handed over to an Iraqi administration. This raises some slightly broader
but very relevant questions relating to the efficient use of Iragi resources.
1. Surveillance and monitoring. The IFIs (especially the IMF) have a huge
amount of experience and expertise in providing surveillance of economies,
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similar contributions (possibly declining) over year two (and possibly three.)
3. Links to wider Iraqi public finances. Will other sources of Iraqi revenue be
folded into the same Fund as and when they begin to come on stream? (eg
tariff revenues, tax receipts?). Will there be a unified Treasury Account?
4. Role, if any, for the UK region and or federal strucutres? While there is not a
formal UK sector, the UK military is providing security in the Southern region
around Basra and the UK secondees to ORHA are concentrated in the
administration of this region. If budgets are allocated on a regional basis
(which may be practical for some projects and/or sectors), this raises a
question of the financial management of the UK-dominated region.
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