THE IRAQI HERITAGE TRUST MEMO I. Establishing the Iraqi ...

- ~- ---- --------------July 16, 2003Amb Bremer's Revisions IncludedIII.Operational Decisions and Steps#I: Establish an "Iraqi Heritage Trust"/ The legal basis for the Trust should be written directly into the Iraqi constitution. Foreignoil revenues will be deposited into the Trust, which will in turn finance the Iraqi budget,Domestic oil sales would be retained by the Oil Ministry but reported to the Trust. TheTrust will serve a purpose similar to that of the DFI once an Iraqi government isestablished and the DFI is dismantled- helping to ensure that oil revenues are wellmanagedand to maintain mechanisms that ensure accountability, govemability, andperformance over Iraq's oil resources. A web site for the Trust should be established.There should also be quarterly reporting of financial statements, including oil revenues/ for the quarter. A distinguished international advisory board should be appointed.#2: Establish an initial level of capitalizationThe level of funding to be "set aside" for the Fund at the outset (i.e., for fiscal year 2004)_/Should be determined by an exact dollar value - $50-$100 million may be suitable for this/ purpose. Pension payments should be paid immediately from the Savings Fund. Adecision will be needed by Ambassador Bremer, in consultation with the Governing/Council, about the desired amount of funding. Even if only a small amount of initialfunding is provided, it is important that some "seed money" be available in order toestablish the Trust's institutional structure. --~Foreign OilRevenues --~$100DividendFund$1StabilizationFund$1.50Example:Amount allocated to threefunds within the Trust is$5, leaving the Iraqi budgetwith $95 to spend.Budget$95#3: Establish a formula for defining subsequent levels of financingAfter the first fiscal year has passed, financing for the Trust can be adjusted by a formulathat varies according to changes in foreign sales revenue - higher revenues wouldprovide more funding for the Trust. A sliding scale of revenues to Trust contributions and4

July 16, 2003Amb Bremer's Revisions IncludedEach of the funds should be managed professionally (and internationally), though inconsultation with Iraqi government officials. International management is advisable tomaximize long-term financial performance of the various funds and to hinder the Iraqigovernment from using the funds as "captive source" of government financing. Fundmanagement should be assigned on the basis of a competitive selection process. Each ofthe funds must be subject to regular and frequent external audits.#7: Establish clear expenditure guidelines/There must be clear guidelines that define permissible spending. Expenditures from theStabilization Fund, for instance, should be spent only on items that can be quicklydiscontinued, will not create long~term spending obligations, and will provide themaximum amount of near-term economic stimulus. Funds maintained within theStabilization Fund should also be capped.IV.ConclusionGiven Iraq's extraordinary dependence on oil, careful management of its future oilrevenues is critically important to build broad popular support, prevent erratic "stop-go"macroeconomic policies that characterize many oil-dependent economies, maximizefinancial returns, and strike a balance between Iraq's near-term, medium-term, andlonger-term economic priorities. The above structure is recommended.6

July 16, 2003Amb Bremer's Revisions IncludedBasra/Klrkuk Crude 011 Prices$35~==~~==~~==~---------------------------------------------,rf lW!a. .tSir:11JJllean 17.76 18.05edian 17.04 16.97$30 ax ·· - - ·31Ae·· · · ··32.28- - ···in 6.66 7.45t Dev 5.29 5.39orr 0.988$25 ·--------··$20$15$10$5BrentiBasra/Klrkuk Crude 011 Prices~or---------------------------------------------------------~------,$35$25$20$15$10$5 . -8