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General Problem
Nearly five years after invading Iraq, the situation there remains chaotic. Although the violence has decreased in recent months, we still have soldiers dying and being seriously wounded each week. We spend about 2 billion dollars every seven days on the effort. The activities in Iraq damage our reputation and divert our energies and resources from other national and international problems. There is a distinct possibility that our venture in Iraq will cost yet more American lives and money without achieving a positive outcome.
Although there appears to have been significant improvement in the security situation in Iraq in recent months, there is also a clear benefit to speeding our progress and helping to insure long-term success.
How can we help guarantee against a bad outcome in Iraq?
Specific Problem
Distribution of oil revenues is a major political choke point for the Iraq Government. The Bush Administration, Congress and the Iraq Study Group universally recognize this problem. It is, however, not surprising that people in power are unwilling give up control of money. It is also not surprising that the Shia, having been downtrodden for so long, would not want to share oil revenues with the Sunni.
How can we help the Iraqis break the political logjam of oil revenue distribution?
Alternative Solutions
1. Develop an acceptable method of sharing the oil revenue among the several Iraqi groups. Little progress is being made.
2. Central government distributes oil revenue directly to Iraq citizens in a program similar to Alaska. Requires time to build necessary government infrastructure. Is passive. Makes citizens beholden to the government.
3. Create public companies (perhaps one in North, two in South), all owned by Iraqi citizens as exclusive shareholders, with non-transferable shares in each company allocated equally to each Iraqi citizen. Having more than one company will provide competition to enhance accountability of management to shareholders, and contribute to transparency and improved corporate governance. We refer to these companies collectively as “Iraq, Inc.”.
Possible Downsides to the successful implementation of Iraq, Inc.
1. Gender issues caused by Iraqi women gaining relative financial power.
2. Increased instability in other countries in the region as their citizens agitate for
similar programs.
3. Government has a more difficult time collecting revenue, but see below under
positive effects.
Possible Downsides of the failure to successfully implement Iraq, Inc.
1. The financial costs of a failed implementation
2. Delaying the implementation of another solution
3. Unmet expectations
Financial Cost of Implementation
As Dr. Wolf points out, “the incorporation and privatization of Iraqi oil would lodge the corporations' accountability in their shareholders, i.e. Iraq's citizens. Corporate management would be thereby induced to be more efficient and expeditious in boosting production, maintenance, and investment in Iraq's huge pool of proven reserves.” He considers that the establishing of an Iraqi company or companies is practical and could be accomplished in short order, “For a relatively small---say, $20-30 million contract---a consortium of Goldman, Nomura, and UBS---could set up in collaboration with Iraqi oil and finance ministries in 7-8 months.”
Positive Effects
1. Ends the political impasse about how to divide oil revenue among Iraq’s competing groups.
2. Gives Iraqi citizens a vested interest in stopping the sabotage of pipelines.
3. Gives Iraqi citizens more power over how their government spends money.
4. Provides some financial security for Iraqi citizens.
5. Empowers Iraqi women.
6. Ends suspicion that the United States is attempting to exploit Iraqi oil.
7. The shareholders would acquire a sense of pride of ownership
8. The power of government and its leaders would be diminished.
9. Consumer banking would grow
10. Immigration would increase, emigration would decrease.
11. Iraq would become a more fertile environment for entrepreneurial development
12. In the long term, it would help protect Iraq from falling into a trap of other resource rich countries such as Nigeria, Venezuela, Libya and the Gulf States where the government owns the revenue producing assets of the country. Leaders of these countries have power because revenue comes first to the government and can be spent without having to ask citizens to pay taxes. Leaders can easily dispense money to perpetuate the leader’s power. The citizens are beholden to their government rather than the government being beholden to its citizens.
13. Government revenues from taxing net income of privatized companies and/or dividend income received by shareholders, thereby making the Iraqi government directly responsible to the Iraqi people for its financial support.
14. Cascading effects on development of supporting institutions of a modern, pluralistic, democratic state, e.g. property rights, rule of law, commercial banking.
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Negative Effects
1. Concern by the Saudi and other oil rich governments that they would lose power if this approach spread to their countries.
2. Traditionalists would object to women getting so much financial power.
3. It is likely that a majority of directors on the board would be Shia.
4. It is likely that Shia managers and vendors would receive preferential treatment.
5. Shareholders would pressure the directors to maximize dividends at the expense of long-term growth.
6. The directors elected by the shareholders may lack competency.
Required Action by the United States
1. Organize Iraqi advocates and champions for the program.
2. Engage Iraqi and US, and EU consultants to develop further the concept in order to emerge with a practical, accelerated implementation plan.
3. Aid with the development of sophisticated capital markets within Iraq.
4. Lobby members of the Iraqi government and influential members of Iraqi society.
5. Sponsor a major public relations program.
6. Put serious positive and negative pressure on and provide incentives for the Shia leaders who would be naturally inclined to oppose the program. Section1314 of the FY2007 U.S. Supplemental Appropriations Act mandated that any Iraq oil revenue sharing program ensure the equitable “distribution of hydrocarbon resources of the people of Iraq without regard to the sect or ethnicity of recipients”. It can be argued, however, that the Iraqi government, left to its own devices, will never implement such a law. The leaders of the various groups all want more than their fair share. The Shiite leaders have little incentive to support meaningful revenue sharing.
Differences From the “Alaska Model”
In Alaska, the state government sold private oil companies the right to explore and produce oil. The companies pay the state government royalties. The state government pays each its citizen who lives in Alaska an equal share of these royalties.
The “Iraq, Incorporated” model makes the citizens the sole shareholders of an oil company that owns and manages the oil reserves and oil production facilities. There is no government in the middle. Iraq, Incorporated is not a passive recipient of royalties from a real oil company, it is the oil company. The shareholders are truly empowered, are in control and share the profit.
As Dr. Wolf points out, “the incorporation and privatization of Iraqi oil would lodge the corporations' accountability in their shareholders, i.e. Iraq's citizens. Corporate management would be thereby induced to be more efficient and expeditious in boosting production, maintenance, and investment in Iraq's huge pool of proven reserves.”
The Iraq Study Group considered the Alaska model for distributing oil revenue in its final report (pages 22-23 enclosed), but rejected the concept for the reasons given in Lee Hamilton’s letter (enclosed). However, what we are trying to get the Iraq Government to do now seems much more difficult. It should be noted that the Iraq Incorporated concept is significantly different from Alaska plan. Iraq Incorporated is outside the government and does not require the establishment of a competent government bureaucracy. Iraq could/should have been set up before the government was formed. It now will require a change to the Constitution. Issuing of shares, voting for directors and distributing dividend checks could be accomplished in a similar fashion to the current Iraq voter registration and voting. The government can collect corporation taxes and withhold personal income tax from the dividend checks.
Collateral Benefits
It is a way to bridge political divides in the United States caused by the war in Iraq. It is a powerful agent of change that has potential appeal to a wide spectrum of political thought: Women’s Rights; Free Marketers; Libertarians; Parents of Soldiers; Conservatives; Liberals; Those fighting terrorists; Anti-War Activists; Isolationists; and most of all: the Iraqi people.
Counter Arguments
1. The surge is working. (Hill letter) Rebuttal: It is not certain that the surge alone will be sufficient to provide long-term stability
2. The Iraq government is already unofficially distributing oil revenues among the various groups. (Hill letter) Rebuttal: It still remains a political choke point.
3. This a problem for the Iraq government to solve. The US should not get involved. (Rumsfeld letter) Rebuttal: The US still has considerable power and responsibility. Having invaded Iraq, we are already deeply involved.
4. Iraq government needs the money. (Hamilton letter) Rebuttal: Tax the corporation and shareholders.
5. Too long to put required infrastructure in place. (Iraq Study Group and US Embassy in Iraq) Rebuttal: Iraq, Inc is not the Alaska Model and would be set up outside the government.
6. Requires amendment to the Constitution. Rebuttal: The Constitution can be amended. Section 1314 of the FY2007 Supplemental Appropriations Act mandated that any Iraq oil revenue sharing program ensure the equitable “distribution of hydrocarbon resources of the people of Iraq without regard to the sect or ethnicity of recipients”. It can be argued, however, that the Iraqi government, left to its own devices, will never implement such a law. The leaders of the various groups all want more than their fair share. The Shiite leaders have little incentive to support meaningful revenue sharing.
Summary
1. There is universal consensus that the Iraq, Inc. concept has merit. The arguments against the program are that it would be difficult to implement and that would be inappropriate for the US to exert pressure on the Iraq Government.
2. It can be argued that the US has sufficient power and influence to cause Iraq, Inc. to be instituted. We have done more in other situations.
3. There is little downside risk, especially compared to the cost, risk and lost opportunities and loss of prestige we are now incurring.
Author: Christian S. Miller, father of U.S. soldier in Iraq
Acknowledgements
I wish to express my sincere thanks to all the leaders and scholars who took time from their busy schedules to give me their thoughtful views on the situation. The views expressed in this paper are those of the author. The concepts and ideas are not necessarily original and stem from several sources, especially Dr. Charles Wolf of the RAND Corporation and Hoover Institute.
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