Global Policy Forum

By Steven R. Weisman

Under pressure from potential donors, the Bush administration will allow a new agency to determine how to spend billions of dollars in reconstruction assistance for Iraq, administration and international aid officials say. The new agency, to be independent of the American occupation, will be run by the World Bank and the United Nations. They are to announce the change at a donor conference in Madrid later this week.

The change effectively establishes some of the international control over Iraq that the United States opposed in the drafting of the United Nations Security Council resolution that passed on Thursday. That resolution referred to two previously established agencies devised to ensure that all aid would be monitored and audited.

But diplomats say other countries were unwilling to make donations because they saw the United States as an occupying power controlling Iraq's reconstruction and self-rule. The change, supported by L. Paul Bremer III, the chief occupation administrator in Baghdad, is meant to assure them as his team labors to reconstruct Iraq. [The nation's instability continued over the weekend, with two more American soldiers killed in an ambush in Kirkuk.]

Secretary of State Colin L. Powell, arriving here on Friday for a conference of Asian leaders, said that after the vote on Thursday, he was "more encouraged and optimistic than I was a week or so ago" about the prospects of raising donations for Iraq at a conference in Madrid next Thursday and Friday.

European countries are concerned that the Coalition Provisional Authority "is the decision-making authority in Iraq," a World Bank official said. "For political reasons, they don't want their funds to be perceived as being commingled with funds controlled by the C.P.A. They want their own say over how the money is spent." American reconstruction aid, like the proposed $20 billion that President Bush is struggling to get through Congress, would go to the previously set up entity, the Development Fund for Iraq, which is run by the occupation administrators and the Iraqis. Other resources are to come from Iraqi oil revenues. This fund has given big contracts to American companies like Halliburton and Bechtel.

But the new agency could open up that process and award contracts through bidding practices open to global companies. Donors could also give directly to Iraq, specifying that their own companies do the work.

Leading up to Madrid, Japan has committed itself to $5 billion over several years, including $1.5 billion in 2004 and possibly a few more billion dollars in subsequent years. The European Union has committed $230 million and Canada about $200 million for 2004. The World Bank is contemplating loans of $500 million in each of the next two years. Rich Arab countries are also being wooed.

In June, when plans for Madrid got started, World Bank and United Nations officials said donors began pressing for an agency outside the control of the occupation. At first, the Defense Department, which runs the occupation, resisted handing over financial control of Iraq's rebuilding. Instead, the Pentagon set up the Development Fund for Iraq, which is recognized by a United Nations Security Council resolution in May.

The fund was to work in tandem with another agency, the United Nations' International Advisory and Monitoring Board, which was given auditing functions and no say in spending. That setup, reiterated in the United Nations resolution of Thursday, has proved inadequate to assuage donors. The administration changed its mind in recent weeks, in part because of the support of Mr. Bremer. "We had to act because the international community was stonewalling us on aid," said an administration official. According to the official, Mr. Bremer said, " `I need the money so bad we have to move off our principled opposition to the international community being in charge.' "

A senior State Department official said the United States would still be consulted in the spending of aid money, for example to avoid duplication of spending. "The donors all want to have a little bit of distance from us," the official said. "That's fine. But you can't really do much of anything without some coordination with us." World Bank and United Nations officials said the new reconstruction agency would work closely with the Iraqi ministries set up by the Iraqi Governing Council, the 25-member body picked by the American occupation.

As it is now envisioned, the agency would oversee two new funds, one managed by the World Bank and the other by various United Nations development agencies. Those funds would oversee spending from international funds in 14 sectors that the World Bank and the United Nations assessed earlier this month as needing $36 billion in assistance over several years. Those sectors included electricity, sewage, water and health programs, from hospitals to smaller community health centers.

The United Nations has in the past set up trust funds for aiding war-ravaged countries that have not yet set up governments. Aid officials said the new fund would be the first that had so many controls to keep it separate from the military forces running the country. "This is unique for postconflict situations," a United Nations official said. "It's been very complicated to set up a firewall separating the money given to us and the money spent by the C.P.A."

Separate from the $36 billion "needs assessment" for Iraq determined by international agencies, the United States has conducted its own assessment of areas where the American occupation would oversee spending, for example in reconstituting the oil industry and training police and security forces. The American assessment was for spending $19 billion, bringing the total overall needs to $55 billion. The Bush administration is asking Congress for about $20 billion to contribute to this $55 billion package, and the rest would presumably come from oil revenues, international aid or future American aid packages.

A remaining problem, administration officials and many others said, is that the World Bank and other donors may be reluctant to make loans to Iraq before decisions are made on the $120 billion in outstanding debt it owes to other countries, not to mention the tens of billions of dollars in reparations it owes from its past wars. In addition, aid could be held up because of the volatile conditions in parts of Iraq. "Quite simply, we cannot do what we would want to do next year if security does not improve," a United Nations official said.

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