Oil for Food

This article was originally published in CASI's July 2002 Newsletter (View full contents)

Phase X 150 Day Report

On 19 November 2001 the UN Secretary-General submitted S/2001/1089, his report on Phase X of the ‘oil for food’ programme. Though noting improvements in many areas, the report concentrates on detailing the problems hampering the implementation of the programme.

The adverse effects of holds is highlighted and as in previous reports the Secretary General comments that, "The absence of an agreement on the implementation of a cash component as envisaged in resolution 1284 (1999) continues to hamper severely the implementation of the programme."

The Government of Iraq (GoI) is criticised over "slow contracting for essential supplies", for not making "proper and timely adjustments in the sectoral funding allocation" and for refusal to grant visas to some UN personnel, but the report also concludes that "food commodities have been distributed in an equitable manner throughout the centre and south of the country". The problems with implementation seem to stem not from a refusal by the GoI to cooperate with oil for food, but from the logistical difficulties inherent in the attempt to run an entire economy using a centralised purchasing and distribution plan. UN personnel in the three northern governorates were also criticised for "slow contracting of essential supplies".

Overall, the report indicates that the oil for food programme is too large to be run efficiently, particularly since it is controlled by mutually hostile parties neither of which is accountable to the Iraqi people.

Benon Sevan’s Visit to Iraq

Benon Sevan, the Executive Director of the Office of the Iraq Programme, visited Iraq from 14 January to 10 February 2002. Briefing the Security Council on his return he stressed the benefits the programme had brought the Iraqi people:

[I]rrespective of all the complaints and/or criticisms leveled against it, the programme has indeed made, and continues to make, a considerable difference in the day-to-day life of the Iraqi people all over the country. […] Notwithstanding certain constraints and difficulties experienced in the effective implementation of the programme, considerable achievements have been made in several sectors such as agriculture, food, health and nutrition, electricity as well as housing, among others, which have arrested the decline in the living conditions of the average Iraqi citizen, and have, in fact, improved the nutritional status of the population, particularly in the three northern governorates.

However, he continued, "With all the oil resources of Iraq as well as the resilience of the Iraqi people, they definitely deserve a far better standard of living."

Mr Sevan also called on the Sanctions Committee to allow the GoI to include commercial protection clauses in contracts placed under oil for food, which, in contrast to the UN agencies running the programme in the three northern governorates, it is currently prohibited from doing. Suppliers are paid immediately upon goods’ arrival in Iraq, before they can even be tested, with the result that "there are numerous defective items sitting idle in warehouses, useless for any purpose." The prohibition on including performance bonds in contracts leads some suppliers not to ship goods when the prices are not in their favour, further disrupting the implementation of the ‘oil for food’ programme.

In his conclusion Mr Sevan commented on how a programme initially viewed as a "temporary measure" was now entering its sixth year and despite an enormous change in the level of funding and scope of the programme was still continuing "to operate pursuant to procedures and regulations established initially for the delivery of supplies mostly of food and medicine." He described the Sanctions Committee as being "bogged down almost to a standstill" and urged it to "bring about the necessary adjustments commensurate with the challenges to be met in ensuring the effective implementation of the programme."

Holds

The past year has witnessed a steep rise in the value of contracts placed on hold by members of the Sanctions Committee, from $3.71 billion on 14 May 2001 to $5.17 billion on 17 May 2002. This represents 17.9% of the total value of applications. Of particular concern is the significantly higher percentage of contracts on hold in key sectors such as water and sanitation (30.5% on 7 January 2002) and electricity (29.7% on 7 January 2002). $1.4 billion of the holds are on contracts for which the country placing the hold requested additional information and this information having been provided the holding party has failed to take further action. Benon Sevan told the Security Council on 26 February 2002:

I am afraid I will be stating the obvious and would be revealing no secrets when I say that many of the items such as computers placed on hold are readily available in the markets and shops of Baghdad, as well as elsewhere in Iraq. If Iraq wants to have any item, it can have it with no difficulty. In fact, the only reason why the trucks carrying supplies and equipment purchased under the humanitarian programme stop at the border gate where our independent inspection agents are stationed, is because if they do not stop for inspection, the suppliers will not get paid.

In other words, holds do not stop the Iraqi government smuggling in goods for its own uses, but they have impeded the use of the same goods for humanitarian purposes through the oil for food programme. Under the new procedures set out in Security Council resolution 1409 all contracts currently on hold will be reconsidered and their fates decided. It will be instructive to see how many of these contracts are now approved.

Phase XI statement

On 29 May 2002 Benon Sevan made a statement to the Security Council on Phase XI of the oil for food programme, accompanied by a "note". Significantly, and disturbingly, for the first time this wasn’t a formal Secretary-General’s report, suggesting that the Office of the Iraq Programme’s reporting standards may be slipping.

The note stated that as of 17 May 2002, $22 billion of humanitarian supplies and equipment had been delivered to Iraq under the ‘oil for food’ programme. This is compared to the $15.33 billion transferred to the Compensation Commission from Iraqi oil sales.

The note also included examples of infrastructural rebuilding financed by ‘oil for food’. Installation of parts for water treatment "have led to increases in water availability at household levels" and "a general improvement in the quality of potable water", whilst the release from hold of items needed for power plants will hopefully reduce Iraq’s power supply deficit by 45% in two to three years’ time. The note also observed that "The increased availability of imported and locally manufactured drugs has resulted in a general improvement in the delivery of health care in the centre/south of Iraq", but more worrying was the observation that "sanitary facilities in the majority of schools fail to meet the most basic hygiene standards and expose children to serious health hazards".

The tone of the statement was upbeat and it concluded that "the Government of Iraq is indeed in a position to address the nutritional and health concerns of the Iraqi people, particularly the nutritional status of children". On a less positive note Mr Sevan yet again called for an agreement to be reached on the implementation of a ‘cash component’ and outlined the financial difficulties facing the ‘oil for food’ programme.

Funding Crisis

Falling Iraqi oil sales during the past six months have plunged the humanitarian programme in Iraq into a financial crisis which may soon have grave consequences for its ability to meet the needs of the Iraqi people.

Since September 2001, Iraq and the Sanctions Committee have been locked in a dispute over how the price of Iraqi oil should be set. Iraq had been charging below market price for oil bought under the ‘oil for food’ programme, but then demanding a surcharge of 25-30 cents a barrel from traders. This money was paid directly into Iraqi-controlled accounts, giving the government a source of revenue forbidden by sanctions. In an attempt to end this practice the Committee has sought to ensure the price of Iraqi oil is sufficiently high that traders cannot afford to make additional payments to the Government of Iraq. They have taken to setting the price ‘retroactively’ based on average market prices during the previous month.

In an attempt to protect its revenue source the Iraqi government has at times refused to sell oil under this pricing system, causing losses to the humanitarian programme. These have been compounded by the reluctance of traders to buy Iraqi oil when faced with reduced profit margins, uncertainties over prices, and the possibility of a US led attack on Iraq. The result by 1 March, according to a Reuters report, was that $40 million in kickbacks to the Iraqi government may have been stopped, at a cost of some $750 million to the humanitarian programme [‘Iraq oil program faces disarray as tensions mount’, Reuters, 1 March 2002]. UN oil experts reported that in the current situation any measures taken by the Committee to reduce profit margins would result in lower exports and that "the more effective the measures taken by the Committee are, the more export levels will then be reduced" [Paper by the UN oil overseers, 14 March 2002]. Iraq also suspended all sales for four weeks in April in protest at the escalating violence between Israel and the Palestinians.

The combined effect of these difficulties was to cut sales under ‘oil for food’ from an average of 1.95 million barrels per day during Phase X of the programme which ended on 30 November 2001 to 1.28 million during Phase XI which ended on 29 May [Weekly oil export tables, Office of the Iraq Programme (OIP)]. Benon Sevan, Executive Director of the OIP, estimated that $2.4 billion of revenue was lost during Phase XI, and as at 22 May, "the shortfall in available funds for the purchase of humanitarian supplies was approximately $1.84 billion." He further commented that

Unless the question of the pricing mechanism for setting the price of Iraqi crude oil is resolved urgently, all other efforts and decisions taken to expedite the approval of humanitarian supplies for Iraq may unfortunately remain academic. Irrespective of improvements in procedures, including those recently adopted by the Council in resolution 1409 (2002), without the necessary funds available in the escrow account it will be impossible to implement the humanitarian programme effectively. [Statement to the Security Council, 29 May 2002]

In June, Iraq probably cut the surcharge it charges oil customers to 15 cents a barrel in a move believed to be "designed to boost its dwindling oil exports" [Financial Times, 7 June 2002]. A French proposal to set prices every two weeks and adopt stricter standards for traders reportedly failed to produce agreement, while a British proposal to create a ‘green list’ of selected oil companies to receive advance notice of prices is currently under discussion [‘Britain Proposes New Iraq Oil Pricing’, AP, 11 July 2002]. Iraq is also now reported to have cut back the surcharge to 10 cents a barrel and in some cases withdrawn it altogether [‘Iraq cuts its illicit oil surcharge-trade’, Reuters, 16 July 2002]. Whilst it is encouraging to see progress at last being made, it is incumbent upon all sides to reach an agreement in the near future before further revenue is lost.

New Humanitarian Coordinator

On 31 May it was announced that Ramiro Armando de Oliveira Lopes da Silva of Portugal, Director of the Transport and Logistics Division at the World Food Programme, would succeed Tun Myat as UN Humanitarian Coordinator in Iraq. This will make Tun Myat the only one of the last three UN Humanitarian Coordinators in Iraq to reach the end of his term without resigning in protest at the effects of sanctions. He has previously stated that "If by my resigning today sanctions would be lifted tomorrow I would be very happy do so" [statement to Voices in the Wilderness delegates, 18 May 2002].

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