November 12, 2002
III. Revenue
34. At present, 72 per cent of the total revenues received from Iraqi oil exported under the programme are allocated for the purchase of humanitarian supplies and equipment as well as services. As at 31 October 2002, after the deduction of funds for purposes authorized by the Security Council, 59 per cent of the total revenue of $59.13 billion, or $31.12 billion, had been made available to the Government of Iraq for the purchase of humanitarian supplies and equipment for the 15 governorates in the centre and south, where the Government is responsible for implementing the programme. About $7.2 billion, or 13 per cent, has been made available for programme implementation in the three northern governorates of Dahuk, Erbil and Sulaymaniyah. The amount also includes about $2.2 billion for the reimbursement of the cost of food and medicine for the three northern governorates purchased by the Government under bulk procurement arrangements, as well as a $771 million share for the purchase of oil spare parts and equipment, as authorized by the Council.
A. Revenue shortfall
35. Although the implementation of the revised procedures has brought about much-needed improvements leading to the more expeditious approval of applications, the benefits of implementing those procedures have been adversely affected by a substantial shortfall in the funding of the programme. The effective implementation of the programme during the past year has continued to be hindered by a number of difficulties, foremost among them a growing shortfall resulting from a substantial reduction in Iraqi oil exported under the programme. The level of oil exports has dropped from an average of over 2 million barrels a day in 2000 to under 1 million barrels in recent months.
36. The Government of Iraq has budgeted over $5 billion for the humanitarian programme for the current phase XII. In order to make that amount available to the programme, after the necessary deductions are made pursuant to relevant resolutions of the Security Council, Iraq would have to export about $7 billion worth of oil during the present phase, ending 25 November 2002. Unless there is a substantial increase in the level of oil exports, it is now estimated that revenue will total about $5 billion during the current phase. After the deductions are made in accordance with the relevant resolutions of the Council, only about $3.49 billion will be made available for the implementation of the programme, thus further compounding the dire funding shortfall. By the most conservative assessment, some $4 billion has been lost due to the low level of exports during phase XII.
37. The funding situation with regard to the programme in the centre and the south is further compounded by the failure of the Government of Iraq to adjust the budgetary allocations contained in the distribution plans to more realistically align with the oil revenues that are available during each phase. The Office of the Iraq Programme has repeatedly recommended that the Government of Iraq keep under constant review the funding levels and revise downward the allocations contained in the distribution plans, ensuring as well the availability to various sectors of the necessary funds. Regrettably, instead of revising the allocations contained in distribution plans downward, the Government has continued to revise them upward, even during the present phase, mostly in favour of sectors that are already fully funded.
38. The situation is further exacerbated by the cumulative revenue shortfall from earlier phases, which has left about $2.98 billion worth of contracts for various humanitarian supplies approved by the United Nations for which no funds are available.
39. Several factors have contributed to the drop in the volume of Iraqi oil exports under the programme, including: Iraq's periodic unilateral suspension of its oil exports, such as their suspension for 30 days during the previous phase, which resulted in over $1.2 billion in lost revenue; the continued absence of an agreement between the Government of Iraq and the Security Council Committee established by resolution 661 (1990) concerning the situation between Iraq and Kuwait on the manner in which the price of Iraqi crude oil is set (the Committee has been pricing Iraqi oil retroactively amidst market reports of Iraq's demands for surcharge payments from its buyers); and concerns by traders over the reliability of uninterrupted Iraqi oil supplies and/or possible disruptions as a consequence of current political developments.
40. I should like to recommend that the Government of Iraq be forthcoming in order to resolve the continuing disagreement over the pricing of Iraqi oil so as to resolve the difficulties encountered in improving the critical funding situation. I should also like to appeal to the Security Council and its Committee to be forthcoming and to take the necessary and appropriate action in response to any positive measures that Iraq may take in that regard.
B. Impact of the revenue shortfall
41. I have on several occasions expressed my concern to the Security Council over the substantial shortfall in revenue, which has been adversely affecting programme implementation. As at 31 October 2002 there were applications valued at over $2.98 billion that could not be funded, even though they had been approved. All sectors are affected by this state of affairs. The following table provides information on the number of approved contracts, as at 31 October, for which no funds are yet available:
Sector Number Value (US dollars) Percentage Agriculture 328 538 794 505 18.05 Telcommunications and transport 98 240 934 654 8.07 Education 119 234 935 723 7.87 Electricity 171 559 875 722 18.76 Food handling 334 507 093 533 16.99 Health 234 308 588 343 10.34 Housing 178 308 080 058 10.32 Water and sanitation 90 286 483 353 9.6 Total 1 552 2 984 785 892 100 42. While the specific impact on sectors of the approved but unfunded applications varies, unless the present situation is redressed it is likely that many of the programme achievements to date will be compromised, leading to a worsening of the humanitarian situation. It will certainly not be possible to sustain or capitalize on the gains made to date unless the present level of funding is improved substantially.
43. Under the circumstances, it is recommended that the Government of Iraq take urgent steps to regularize its recent efforts to prioritize the funding of the approved applications for contracts covering all sectors and that it keep the Office of the Iraq Programme informed thereon in order to avoid unnecessary delays in the utilization of the limited funds available. It is also recommended that the Government of Iraq take the steps necessary to ensure that the minimal funds required to fund applications for priority sectors are retained even when there are inordinate delays in the submission of applications for contracts concerning such sectors as health, water and sanitation, as well as for essential items required to maintain projects already implemented. It is also essential for the Government to prioritize the funding of applications within each sector.
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