U.S. Rejects U.N. Oil Investment Proposal for Iraq

By Colin MacKinnon

At the end of March a U.N. panel recommended—and the U.S. promptly squelched—a plan to allow foreign companies to invest in the Iraqi oil and other non-military economic sectors.

The panel, which dealt with humanitarian issues, was one of three set up at the end of January to work out a new approach to Iraq now that UNSCOM has been thrown out. The other two panels dealt with disarmament and with issues remaining from Iraq’s invasion of Kuwait. All three are chaired by Ceslo Amorim, Brazil’s ambassador to the U.N.

The humanitarian panel, made up of four high-level U.N. officers, heard evidence from a wide variety of U.N. and other international agencies. The panel found the situation in the country appalling (no surprise) and suggested that the Security Council consider “authorizing private investment flows into the oil industry and other secondary export industries unrelated to the military complex.” Under the panel’s proposal, foreign exchange so earned would be under “strict international controls.”

Not acceptable, said Peter Burleigh, the U.S.’s deputy ambassador to the U.N. and acting chief of mission. “We’re prepared to agree to some changes now,” Burleigh told reporters on April 12, “but not these deep structural ones like foreign investment.” Burleigh didn’t say what the U.S. might have in mind.

Nevertheless, something—as observers have been saying for years now, to not much avail—has to be done.

Here are some of the reasons, as set out by the U.N. panel:

Thanks to the sanctions regime, Iraqi babies die at a rate of 129 per 1,000, one of the highest infant mortality rates in the world—109 is the average for “least developed countries.” Iraq’s current rate is double its pre-war rate.
Maternal mortality rates are twice what they were before the Gulf war.
A quarter of all children born in Iraq exhibit low birth weight.
Chronic malnutrition affects every fifth child under the age of five.
Only 41 percent of the population has regular access to clean water.
Almost all schools need major repairs.
Literacy has dropped from 75 percent eight years ago to 53 percent now.
Malaria, once under control, is back. Iraq had an epidemic of malaria in 1993 and the disease is once again “part of the endemic pattern” of illness in the country.

The Iraqi populace’s future remains grim.

Other evils fall into a hard-to-quantify category that the panel calls “the qualitative dimension.” Thus, juvenile delinquency, begging, and prostitution flourish. Mental illness affects ever-larger numbers of ordinary people (the number of mental health patients went from 197,000 in 1990 to over 500,000 in 1998). Scientific and medical expertise is becoming both dated and less available. Medical training is poor. Some doctors—those who can’t earn livings as physicians—have taken to driving taxis or doing similarly low-skilled work, further lowering the number of health care workers and the quality of care provided.

Oil Industry Deteriorates

The Iraqi oil industry has continued to deteriorate and is in what the panel calls a “precarious state.” As a result, Iraq has been producing far below the amount allowed by U.N. sanctions resolutions and earned only about $3 billion of the permitted $5.2 billion over the last six-month period.

In December a group of specialists from the Dutch firm Saybolt International visited Iraq and estimated that the country’s oil production capacity is declining at “an estimated rate of 4 to 8 percent annually.” Wells are watering out. Some 20 percent, says Saybolt, are damaged beyond repair because of water influx. Because of a lack of spare parts, Iraq is finding it more and more difficult to process crude before export. Though spares have been ordered, legally, under a dispensation from the U.N., most have yet to arrive.

Saybolt says that current Iraqi production capacity is around 2.5 million barrels a day (it was over 3 million before the Gulf war). With local consumption at 550,000 barrels a day and with legal exports to Jordan totaling 70,000 barrels a day (for barter deals), only about 1.9 million barrels a day are left to earn foreign exchange. This isn’t much. And, as Saybolt says, the figure is declining.

Currently only two-thirds of the money that comes in gets spent on humanitarian goods—53 percent of the total goes for food, medicine and humanitarian supplies in the center and south of the country and 13 percent for supplies in the Kurdish areas of the north not under Baghdad’s control. Another 30 percent goes to the U.N. Compensation Fund (for war reparations), 2.2 percent for the U.N.’s costs in administering the program (the U.N. has 1,700 staffers, both local and expatriate in Iraq plus 67 in New York), 0.8 percent goes toward the administrative costs of the U.N. Special Commission (UNSCOM, now more or less defunct) and 1 percent to an escrow account.

Not only is funding low, procurement is time-consuming and distribution can be erratic. To buy food and medicine the government of Iraq signs contracts with suppliers it chooses.

The Iraqi government doesn’t always choose to act with dispatch. The contracts are then processed by the U.N.’s Office of the Iraq Program, which takes its time, and are then submitted to a Security Council committee for its approval. Approval is not guaranteed: beady-eyed U.S. oversight, especially, will slow down or deny permits at the last stage.

How much Iraq buys, of course, depends on the levels of revenue coming in. Because oil prices have been low over the last year and a half and because the Iraqi oil industry has deteriorated, the cash flow hasn’t been enough. The Iraqi populace’s future, unless something changes, remains grim, even with oil prices firming. According to the report of the U.N. panel, the humanitarian program as presently designed can’t meet the needs of the population.

British-Dutch Proposal

Three days after the U.S.’s Burleigh rejected the panel’s investment proposal, the UK and Holland circulated a draft Security Council resolution that, on the face of it, takes into account much of the U.N. panel’s report.

The draft would put UNSCOM out of its misery and replace it with a larger body that would “monitor” Iraqi compliance with U.N. resolutions. The new body—the Commission on Investigation, Inspection and Monitoring—would take over UNSCOM’s personnel and archives.

Though the draft contains language expressing hope that the government of Iraq will allow U.N. inspectors back into the country, it assumes that Iraq will not and suggests, therefore, that the new body should deploy its monitors on Iraq’s borders. (How, where and to what effect are not gone into.)

This is not unlike a French proposal, backed by Russia and China, that would shift emphasis to monitoring but would also lift sanctions.

As to humanitarian concerns, the British-Dutch draft proposes a number of steps. It would lift the ceiling on Iraqi oil exports for food. It would divert funds from the U.N. Compensation Commission and use them to buy food and medicine. It would allow Iraqi authorities to use oil revenues to buy locally (to stimulate the local economy).

These are steps the U.N. can carry out with or without Iraqi cooperation.

The draft would also legalize the trade in oil by tanker truck over the Turkish border and try to bring the trade under U.N. control. The draft talks about streamlining sanctions committee approvals and would give the U.N. greater say over how food and medicine is distributed in Iraq. These steps would require Iraqi cooperation. The draft doesn’t say how the U.N. would arrange this.

All these humanitarian proposals were suggested by the U.N. panel.

If in Doubt, Form a Committee

Should foreign investment be allowed in the oil sector? Here the draft fudges. It merely asks U.N. Secretary-General Kofi Annan to set up a committee to study ways of increasing Iraqi oil production and facilitate imports of needed goods. But it’s hard to see how Iraq’s oil production can be increased without foreign investment. The Saybolt experts, like other industry observers, say that simply repairing current deterioration will take billions.

“One should not build up much hope on what the panels can do until there is a political breakthrough,” a U.N. diplomat told Middle East Economic Survey. “How the panels help is that they give Security Council members an opportunity to buy time and to have policy-oriented discussions on Iraq. They are searching for a consensus.”

Just so. Meanwhile the Iraqi populace, particularly its children, pay the price for sanctions aimed at Saddam.

Colin MacKinnon is contributing editor to the Washington-based Middle East Executive Reports.