Decentralisation Bonanza in the Iraqi Budget

by Reidar Visser

27 January 2010

“Pork barrel” may perhaps come across as supremely insensitive in the Iraqi context and yet this very American expression may be the best way of explaining the political compromise that facilitated the passage of the 2010 budget in the Iraqi parliament yesterday.

The key to understanding at least some of the underlying dynamic here is hidden in article 43 of the new budget law, which specifies special rates of added income for a number of Iraqi governorates according to their economic structure. The historical roots of this article goes back all the way to December 2007, when the Basra branch of the Fadila party exploited local regionalist sentiment to make an unprecedented demand for a one-dollar fee per locally-produced barrel of oil to be set aside for the governorate in a special fund. Basra holds maybe 60 to 70% of Iraq’s oil (currently producing more than 1,000,000 bpd) and yet has one of the lowest standards of living in the country. Accordingly, many Basrawis think they are specially entitled to the disproportionate share of oil revenue that is constitutionally mandated for under-developed regions, and have earlier flirted with the idea of territorial autonomy for improving their lot. The idea of using federalism to solve the problem received a blow in a failed referendum initiative in January 2009, but the demand for a share of the oil lingered – to the point where their logic was accepted by the Maliki government, which eventually indicated its preparedness to give Basra 50 cent per barrel of oil. When news about this broke last May, it was immediately followed by demands from Kirkuk, Iraq’s second biggest producer (maybe 600,000 bpd) for a similar half-dollar per barrel fee. Fast forward to article 43 of the budget passed yesterday where this kind of logic has been pushed to its logical maximum: Henceforth, one dollar will be paid to the relevant governorates for 1) each barrel of produced oil; 2) each barrel refined oil (the biggest refineries are in Bayji in Salahaddin province and Dura near Baghdad) 3) each 150 cubic metres of produced natural gas. Also, 20 dollars will be paid for each foreign visitor to the “holy sites” in the governorates! In practice, the latter will mean Karbala, Najaf, Samarra and Kazimayn in Baghdad. It seems like an inverse version of the taxation strategies of absolutist rulers in seventeenth-century Europe, when attempts were made to put a levy on every conceivable household item from shoes to wigs for the purpose of increasing state revenue.

The underlying politics that enabled this development can be explained as follows. Back in the 2009 local elections Maliki made a big win in Basra because of the security improvements. Given his centralist instincts, the concession to the Basra demand for a special share of the oil by Maliki last May was quite remarkable; nonetheless it can be explained as a necessary step towards securing continued Daawa influence in Iraq’s second city. Only weeks ago, Basra’s governor, a Maliki ally, declared that the eyes of the Basrawis were “fixed on the half-dollar promise”, and other Basra politicians had earlier made claims for as much as a 3% share of the oil revenue so this was clearly creating pressure on Maliki.

But Maliki needed political allies to get the budget passed with the special fee for Basra. Last summer, partly with the help of Iran and the Islamic Supreme Council of Iraq (ISCI) which attacked him for flirting with secularists such as Salih al-Mutlak (who is now being banned), and partly assisted by the United States who told him to back off from criticism of the leading Kurdish parties, Maliki managed to thoroughly estrange what would have been his most natural political partners from the ideological point of view – the centralist secular-nationalists including Iraqiyya, Hiwar and the Hadba front in Mosul. That severely restrained his choice of partners, especially as long as he continued to indicate a preference for a separate electoral ticket without any coordination with the other Shiite Islamist parties. In fact, by the autumn of last year, there were few alternatives left except the Kurds, whom Maliki had previously alienated quite severely (to the point where Peter Galbraith described Maliki as one of the most dangerous centralists on the Iraqi political scene). Nonetheless, the Kurds and the Daawa party were able to find common ground on a number of issues, in particular on the compromise over Kirkuk in the election law and the subsequent debate over the Hashemi veto and the parliamentary seat distribution key.

For the past weeks, the Kurds have in fact been the main driving force in getting the budget passed alongside Maliki. What price did they exact for this? It is still a little hard to analyse the detail of this because the most important parts of the budget law – the annexes to the law itself – have yet to be published. But some main points, as well as the language of a number of revisions to the previous version of the budget published on 20 January, make it possible to see at least the general contours of the underlying political compromise. The first Kurdish demand was simply to retain the 17% share of the country’s general budget after the deduction of federal spending. This demand has been disputed with reference to demographic statistics by political opponents of the Kurds who claim the figure is too high, but it was accepted by Daawa early on. Similarly, the demand for a per-barrel fee for Kirkuk to match the arrangement previously approved for Basra was also acceded to (and indeed doubled to one dollar in the final version of the budget and made universal for any oil-producing governorate). Another Kurdish demand was that the Kurdish regional militia or peshmerga be paid separately (instead of over the Kurdistan budget), though apparently without giving up Kurdish command and control; this aroused controversy and pending the publication of the budget annexes it is impossible to see whether a solution was indeed found, though it seems more unlikely. (PS This latter issue is in fact "solved", Iraq-style, in article 16/9: The prime ministers of the federal government and the KRG will agree on a solution that is "in accordance with the constitution". Which means there is no solution and the ball has been kicked down the road again; clearly not the sort of thing one would expect in a normal budget...)

What seems clearer, however, is that some money has been set aside for the interesting separate heading of “oil exports via Turkey”. Already on 20 January, it was reported that the revised budget included 416 billion dinars for “expenses” for oil production and 84 billion dinars for payment for exporting oil to Turkey. Again, the exact sums cannot be confirmed in the absence of the annexes, but the principle of the federal government paying something special for export via Turkey is confirmed in article 16/7 of the budget law itself, where such expenses are expressly deducted from the federal government before the share of Kurdistan is calculated. At this point, much of this is still conjecture, but given the overall tendency of tentative rapprochement between Daawa and the Kurds, it is not entirely inconceivable that these funds are intended to enable the Kurds to at least cover the operating costs of the foreign oil companies (DNO and Genel) that briefly began exporting from Kurdistan last year (but received no payment since Baghdad does not recognise their contracts, thereby forcing the KRG to make any payments from its own purse). This is of course not the big breakthrough in terms of recognition of contracts that these companies had been hoping for – that after all does not relate to the budgetary process and will likely be handled by the next Iraqi oil minister. It is also unclear whether the state oil exporting company, SOMO, is prepared to carry out resumption of export in practice. But the inclusion of this item in the budget does seem like a significant concession by Maliki, who is likely to come under criticism from strongly nationalist politicians if he has given the Kurds at least some of what they wanted in terms of increased possibilities for maintaining a working relationship with foreign companies that are still considered controversial by many Iraqis (chiefly because of the big profits envisaged in their deals with the Kurdistan authorities, and also the way in which the contracts came about, by circumventing Baghdad). [CORRECTION: The same expression about Turkey exports can also be found in the 2009 budget, suggesting that no radical change is implied by this heading in itself. The alternative explanation offered relates to Turkish pipeline surcharges .]

The more orthodox centralist thinking of Maliki’s oil minister, Hussein al-Shahristani, can probably be seen elsewhere in article 17 of the budget, which threatens to penalise regions and governorate that halt exports (which the Kurds did last summer; the Kurdish politician Khalid Shwani objected to this clause as “politicised” in early January), and in the statements by Abd al-Hadi al-Hassani of the Tanzim al-Iraq branch of the Daawa (also a prominent figure on the oil and gas committee), who recently expressed his desire to convert the DNO and Genel contracts to what he described as “straightforward technical service contracts”. Still, no major disagreement has been noted between Daawa and the Kurds after 20 January other than a Kurdish rejection of a proposal to have spending on the port of Basra defined as “national” instead of “provincial” expenditure (the latter being in line with the Kurdish general policy of weakening Baghdad as much as possible); it seems unlikely, therefore, that they would have signed off on the budget package had they not received more or less what they had asked for on 20 January. All in all, apart from the political aspect, it seems clear that while the recent flurry of technical service contracts with major foreign oil companies to boost production for the southern oilfields are helping Shahristani to maintain his political independence vis-à-vis the Kurds (i.e. continuing to demand the right to review and possibly revise the foreign contracts), they are not yet helping him towards the economic independence he had wanted for the financial year of 2010: The nationwide production forecast has reportedly been set at a very modest 2,15 million barrels per day at an average price of 62 USD.

But the Kurds and Daawa were not enough to get the budget passed. More consistent resistance to Maliki was seen in the shape of the Iraqi National Alliance headed by ISCI and the Sadrists, who have been unhappy about Maliki’s refusal to join them in an all-Shiite political alliance ahead of the parliamentary elections. Last autumn this escalated to the point where ISCI joined forces with their erstwhile enemies in the secular Iraqiyya, to introduce the idea of a “law on electoral conduct”. While most of the draft of this law is unremarkable, a provision under article 25 would transform the Maliki government to a caretaker government with no independent spending power for the period leading up to the 7 March elections, thereby preventing him from using state funds to support his electoral bid. In late December, this was further developed with the idea of coupling the passage of the budget to the “electoral behaviour” law: Maliki would not get his budget without agreeing to cede some spending authority in the dying days of his ministry.

Whereas the idea of a law on electoral behaviour and a caretaker government remained popular in secularist circles, ISCI gradually began adopting a bargaining position that could enable the budget to pass after all. Around a month ago, some deputies began focusing more on extra money to the governorates and the agricultural sector, and on 31 December Jalal al-Din al-Saghir of ISCI announced a move to get more of the investment money directly to the governorates (i.e. by circumventing the relevant ministries in Baghdad), also expressing a general desire for reducing the number of ministries in Baghdad. Around the same time, the idea of replicating Basra’s oil surcharge began spreading to the ISCI heartland around Najaf where there is only negligible oil production. Instead, ISCI’s Layla al-Khafaji on 30 December introduced the idea of financial remuneration for the “touristic governorates” (the principal of which are Najaf and Karbala, on account of the holy sites there). The rationale of this arrangement is perhaps not as readily understandable as the oil surcharge (which in addition to making up for under-development also serves as compensation for environmental problems in an industry setting that is not particularly labour-intensive; conversely tourism generates significant income locally), but it does reflect a certain regionalist instinct in the Najaf governorate that is comparable to what is found in Basra. ISCI completed its list of demands with some nice populist touches such as cuts in the salaries and budgets of top state officials (most prominently the “three presidents”, i.e. the prime minister, the president proper and the speaker of the assembly). Still, their pressure persisted right until last week and it seems likely this may have contributed significantly to further increases in governorate allocations (and the per-visitor fee for the holy cities grew 40-fold from 50 cents to 20 dollars), although the precise figures have yet to be published. Conversely, and reflecting the chronology of the compromise behind the budget, the Kurds have largely refrained from supporting the law on electoral behaviour (and certainly the idea of coupling it with the budget), even though it had initially been introduced last autumn by the collective presidency (which includes the Kurdish president, Jalal Talabani). This apparently reflects the tentative rapprochement between Maliki and the Kurds which began last December.

It is interesting that the Sunni Islamist Tawafuq, often seen as enemies of Maliki after his resistance to their rise to the parliamentary speakership under Ayad al-Samarraie last April, has actually acted quite loyally alongside Maliki (and the Kurds) in this. For example, on 4 January, Salim al-Jibburi rejected the idea of linking the passage of the budget to the law on electoral behaviour, thereby reiterating the Daawa stance. At the same time, they, too, have gone further than ever before in expressing decentralisation ideas, with Samarraie on 5 January publicly backing the idea of sidelining a number of Baghdad ministries and sending the money directly to the governorates. Alaa al-Sadun presided over the financial committee and on 20 January announced the decision to decentralise the budgets of several ministries to the governorates instead; this was followed by two laws issued by parliament on the day before the budget passed on the “breaking of ties” between the ministry of public works and its departments on the one hand and the relevant governorate institutions on the other.

One disputed item of the budget can highlight where we stand today. In the hours following the passage of the budget yesterday, a bitter dispute erupted between Daawa and the ISCI – to the point where Khalid al-Atiyya, the deputy speaker of parliament and a Maliki ally, reportedly asked the presidential council to veto the recently-passed bill! The disagreement relates to the appointment and confirmation of some 115,000 civil servants, which in article 21 is postponed to the next parliament. In practice, this is a smaller version of the electoral behaviour bill, since Maliki had wanted to have those Iraqis confirmed as a way of strengthening his own role as patron for them. He is now being prevented from this, and the level of intra-Shiite bitterness on the issue is certainly interesting.

What we have then, all in all, is a budget where Maliki has been forced to give up much of his centralist credentials after the half-dollar initially promised for Basra oil simply snowballed out of control. The failure of federalism south of Kurdistan has shown that most Iraqis don’t fancy formal decentralisation, but at the same time it seems clear that they certainly do not object to the purely economic variant that is reflected in this governorate-level spending spree. Throughout the process, few politicians have highlighted ideas such as budgetary prudence, centralised planning and the greater danger of corruption at the local level. In sum, it appears Iraqis are being treated to the good old formula of bread and circus these days, with the swelling budget coming on the heels of the arbitrary de-Baathification process (this has also coincided with several executions, and state television keeps spending much time broadcasting court proceedings against officials of the former regime). It is remarkable how much has changed since the local elections just a year ago, and how successful the parties with an ethno-sectarian agenda such as the Kurds and ISCI have been in regaining the initiative after Maliki failed to ally with the nationalists and instead went out on a limb with his attacks against Syria and ex-Baathists after the Baghdad bombings last autumn. This has created an unexpected return to alliance patterns more similar to 2005 than to early 2009; to a great extent this is now mostly about pork barrel and a contest among the Shiite-led parties about being tough on de-Baathification. It is noteworthy, however, that in terms of concrete alliance formation, it is ISCI and the Kurds that appear to have been in the closest talks as far as the future is concerned.