Iraq

UN/World Bank Joint Iraq Needs Assessment

Format
Assessment
Source
Posted
Originally published

Attachments

TABLE OF CONTENTS
Acknowledgments

Abbreviations and Acronyms Executive Summary

1. INTRODUCTION

2. DEVELOPMENT FRAMEWORK

A. Context

B. Macroeconomic Framework

Background
Reconstruction Efforts and 2003 Policies
Macroeconomic Program for 2004 and Prospects
Assessment

C. Transition to a Modern Market Economy

Price Liberalization and Safety Net
Trade
The Investment Climate
State-Owned Enterprises
Financial Sector
Structure of Indirect Taxation

D. Iraqi Institutional and Administrative Framework

3. SECTOR PRIORITIES

A. Education, Health, and Employment Creation

Education
Health
Employment Creation

B. Infrastructure

Water and Sanitation
Transport
Telecommunications
Electricity
Housing and Land Management
Urban Management

C. Agriculture, Water Resources, and Food Security

D. Finance and Private Sector Development

Financial Sector
State-Owned Enterprises
Investment Climate and Trade

E. Mine Action

F. Government Institutions, Rule of Law, Civil Society, and Media

G. Cross-Cutting Themes - Human Rights, Gender, Environment

Human Rights
Gender
Environment

4. RECONSTRUCTION COSTS

Description of Approach

Annex 1: Macroeconomic Assumptions
Annex 2: Detailed Sector Tables
Annex 3: Present Legal Regime and Organizational Structure

Figures:

Figure 1: Bank Disbursement Profile for Selected Emergency Projects
Figure 2: Projected Iraq Disbursement Profile

Tables:

TABLE 1.1: CUMULATIVE IRAQ RECONSTRUCTION NEEDS
TABLE 1.2: CPA-ESTIMATED NEEDS
TABLE 2: MACROECONOMIC ASSUMPTIONS
TABLE 3: ESTIMATED RECONSTRUCTION/INVESTMENT, TA, AND INCREMENTAL O&M COSTS
TABLE 4.1: EDUCATION SECTOR
TABLE 4.2: HEALTH SECTOR
TABLE 4.3: EMPLOYMENT CREATION SECTOR
TABLE 4.4: WATER AND SANITATION SECTOR
TABLE 4.5: TRANSPORT SECTOR
TABLE 4.6: TELECOMMUNICATIONS SECTOR
TABLE 4.7: ELECTRICITY SECTOR
TABLE 4.8: HOUSING, LAND, AND URBAN MANAGEMENT SECTOR
TABLE 4.9: AGRICULTURE SECTOR
TABLE 4.10: STATE-OWNED ENTERPRISES, FINANCE, AND INVESTMENT CLIMATE SECTOR
TABLE 4.11: MINE ACTION SECTOR
TABLE 4.12: GOVERNMENT INSTITUTIONS, RULE OF LAW, CIVIL SOCIETY, AND MEDIA SECTOR

* * *

ACKNOWLEDGMENTS

The Need Assessment was carried out jointly by the UNDG1 and the World Bank Group, including the International Finance Corporation, under the overall coordination of the Special Representative of the Secretary General for Iraq, the late Mr. Sergio Vieira de Mello, in accordance with the provisions of paragraph 8 of Security Council Resolution 1483.

The International Monetary Fund contributed the macroeconomic section of the report. Experts from the European Commission, Australia, Japan, and countries of the European Union also contributed to the Assessment. The Coalition Provisional Authority (CPA), especially the CPA Budgetary Office, provided much needed information.

In particular, the UN and World Bank teams would like to thank senior officials of the Iraqi Ministries and Governing Council, who provided input and vital feedback to this Assessment

We are grateful to the acting SRSG and Humanitarian Co-coordinator for Iraq (HCI) who was responsible for the day-to-day coordination of the exercise within the country.

In addition to the many individual staff from the UN, World Bank Group, and others who contributed to the report (too numerous to name), we would like to thank the following UN agencies that cooperated with the UNDG in designating staff experts to participate in this joint endeavor: UNDP, WHO, FAO, UNMAS, UNICEF, UN HABITAT, UNIFEM, OHCHR, UNEP, WFP, UNFPA, DPKO, IFAD, ILO, IOM, ITU, OCHA, OIP, UNAIDS, UNCTAD, UNESCO, UNHCR, UNODC, UNIDO, UNOPS.

This Assessment was produced under difficult circumstances and severe time constraints. A number of people directly involved in the Assessment lost their lives or were wounded in the August 19, 2003, bombing of the UN compound in Baghdad. This Assessment is dedicated to the victims of that attack, and to all those who have lost their lives in the recent conflict.

EXECUTIVE SUMMARY

Background and Process

i. This Joint Iraq Needs Assessment was prepared by staff from the United Nations (UN) and the World Bank Group; International Monetary Fund (IMF) staff prepared a macroeconomic assessment. The Needs Assessment covers fourteen priority sectors and three cross-cutting themes, as agreed among the international community at the Technical Reconstruction Meeting held in New York on June 24, 2003.2 In addition to Iraqi expertise, the work benefited from significant inputs by the Coalition Provisional Authority (CPA), several non-governmental organizations (NGOs), and a number of experts from the European Commission, Australia, Japan, and countries of the European Union.

ii. The Assessment is based on the best possible data available at the time. However, overall security and travel constraints, the tragic events and subsequent repercussions of the bombing of the UN Headquarters in Baghdad, the lack of primary sources and significant time constraints all made systematic data collection extremely difficult. It also interrupted ongoing and planned consultations with Iraqi officials and civil society stakeholders that were considered critical for ensuring Iraqi ownership of the Assessment's findings. To adjust partially for this, Bank and UN staff held intensive discussions on the draft Assessment, and in particular the investment and policy priorities contained therein, with Iraqi representatives in Dubai during the week of September 21, 2003. In addition, IMF staff discussed issues related to macroeconomic policies for 2004, and in particular the draft 2004 budget. Discussions were also held separately on some of the sector assessments in Amman, Jordan. Finally, a meeting to present the findings in the draft Assessment was held with the Core Group (European Union, United Arab Emirates, United States, and Japan) on October 2, 2003, in Madrid.

iii. The purpose of this Needs Assessment is to inform the Donor Reconstruction Conference scheduled for October 23-24, 2003, of the current status and priority reconstruction and rehabilitation needs in each sector, focusing on the most urgent requirements for 2004 and indicative reconstruction needs for the period 2005-2007. In addition, this report strives to put the sector assessments in their proper context, highlighting the need for a sustainable approach to reconstruction and development, and outlining a number of policy reform options. Overall investment needs along with a discussion of absorptive capacity are provided in the final chapter.

iv. This report is not intended as a final statement on the status and priority development needs in Iraq today. The individual sector needs assessments, which contain more detailed analysis, are important to supplement the synthesized report. Further assessments will be required over the coming months to fill remaining gaps and improve overall data quality. Finally, there are significant priority sector needs that fall outside the scope of this Assessment. Most central among these are the security and oil sectors, which are being addressed separately by the Coalition Provisional Authority (CPA).3

Context and Development Framework

v. The economy of Iraq has suffered twenty years of neglect and degradation of the country's infrastructure, environment, and social services. Since the mid-1980s, the ruling regime has neglected public infrastructure and investment, and conflicts have resulted in further damage to buildings, pipelines, communication equipment, and transportation links. The health and education systems, once widely regarded as among the best in the Middle East, have seriously declined as a result of both a severe lack of resources and years of politicalization. Brutal and misguided policy choices (such as the draining of the southern marshes area) have left a legacy of serious environmental degradation that threatens human health and livelihoods with a potential to undermine economic progress. In addition, the country's economy has been degraded by the effects of a highly centralized and corrupt authoritarian government, sanctions, and by a command economy where prices played little role in resource allocation, and where the state (and in particular the ruling regime) dominated industry, agriculture, finance, and trade. In short, the country's rich potential for economic prosperity, including water, human capital, and the world's second largest oil reserves, were squandered by the past regime, which directed public resources and efforts at the military and its own preservation and enrichment.

vi. After attaining middle income status in the 1970s, a majority of Iraqi people are now dependent on the food ration system. 4 Income per capita, which rose to over US$3,600 in the early 1980s following sharp rises in the real price of oil, is estimated to have fallen to the range of approximately US$770-1,020 by 2001, continuing to decline thereafter. The country's divergence from the Millennium Development Goals (MDG) further indicates the degree to which the quality of life for the Iraqi people has deteriorated.

vii. Against this background, development priorities for Iraq include: (i) strengthening institutions of sovereign, transparent, and good government; (ii) restoring critical infrastructure and core human services destroyed and degraded by years of misrule and conflict; and (iii) supporting an economic and social transition that provides both growth and social protection.

Macroeconomic Framework and Transition to a Market-Based Economy

viii. Oil is the most salient feature of the Iraqi economy with proven reserves estimated at 112 billion barrels, ranking it second behind Saudi Arabia. As of the end of August 2003, output is estimated at 1.3 million barrels per day (bpd). The resumption of real gross domestic product growth in 2004 will depend critically on the restoration of adequate security, the normal functioning of basic utilities, and the expansion of oil production and private investment.

ix. Iraq's draft 2004 budget assumes realistic oil revenue of US$12 billion, but very little non-oil revenue, reflecting the view that introducing low tax rates would help stimulate economic growth. However, in the light of Iraq's sizeable reconstruction needs, and given the downside risk on the oil export price and the impact it would have on government revenues, a broader-based tax revenue effort should be adopted. The budget assumes that operating expenditures of US$12.1 billion and investment expenditures of some US$1.4 billion will be financed by total revenues and grants of around US$12.9 billion and Iraqi assets held abroad of US$0.6 billion. 5 In addition there are existing contracts under the Oil-for-Food (OFF) Program of about US$7.8 billion. 6 Additional reconstruction needs in 2004 will require donor financing.

x. With respect to budgetary transfers, piecemeal reforms should be avoided. The reform strategy for state-owned enterprises (SOEs) should take into account the complexities of the existing environment, including the overall price structure, infrastructure, the trade regime, and the difficulty for the economy to absorb the current high levels of unemployment. While oil subsidies have a distortionary effect, options for phasing them out in stages are needed to avoid undue social disruptions. Similarly, the eventual transition from the in-kind social safety net under the food ration system to cash transfers would require certain critical pre-conditions, including transfers to households to provide compensation for the income effects of higher prices, adequate financial infrastructure, and the continuation of the public importation and distribution of basic foods, until such time as private markets develop and can take over. Such a gradual approach would enable the population to cope with the transition, ensure stability, and protect the vulnerable.

xi. The success of the upcoming banknote exchange program is critical because it affects the functioning of the payments system, the execution of the budget, and more generally, the reactivation of the economy. Monetary policy management in the coming months will likely prove challenging, and should have as a primary objective to maintain broad price stability. The Central Bank of Iraq also needs to take steps to improve its banking supervision capacity. In a context of considerable uncertainty and limited availability of foreign exchange reserves, a flexible exchange rate regime should be adopted.

xii. The role of the private sector will be crucial for achieving high growth and creating employment in the medium term. In addition, the involvement of the private sector in the economy as a whole will be essential since public resources are unlikely to be adequate to provide the needed volume of investment. Government policy should encourage diversification in terms of both public revenues and within the private sector, concurrent with actions to develop a dynamic competitive sector surrounding the country's natural endowment of oil. Public expenditure execution and control systems will need to be considerably strengthened.

xiii. Institutional, Administrative, and Policy Framework. The government's ability to absorb and implement new mandates and resources, particularly as it gains sovereignty and decision-making authority, will be one of the most significant challenges to reconstruction. Iraq possesses a strong core capital of institutional potential with well educated and determined civil servants in key positions. However, checks and balances and improved financial systems are needed throughout to reestablish basic principles of good governance, transparency, and accountability.

Sector Priorities

xiv. The report highlights the immediate (2004) and medium-term priorities in each of the fourteen sectors. It also provides approximate investment costs for 2004 and 2005-2007. Recurrent costs, including funding for food security, are covered in the 2004 draft Iraqi budget and, therefore, are not included in this Assessment. Although the needs in each sector are unique, there are general themes that run across many of the sectors.

xv. Education, Health, and Employment Creation. The sector assessments stress the deterioration in core human services from relatively high levels at the start of the 1980s to some of the worst in the region today. This decline is attributed to a combination of: (i) lack of resources, as public funds were siphoned off for military expenditures and other priorities of the ruling regime; and (ii) the politicalization of the systems which influenced everything from resource expenditures and policy choices to personnel. Priorities across both health and education are aimed at initially restoring indicators to the levels attained in the early 1980s and then to beginning the process of reform. In education, this entails initial concentration on rehabilitating schools damaged by neglect, conflict, and underinvestment, relieving the serious congestion in the system, and bringing out-of-school children, including girls, back into the classroom, and, thereafter, on improving quality and modernizing the system in terms of teacher upgrading, and updating the curriculum and instruction methods. In health, the challenge for Iraqi policy makers, health workers, and the donor community is to restore basic services in the short term and to initiate long-term transformation of the current system into a decentralized and susta inable model based on primary care, prevention, partnership, and evidence-based policy.

xvi. In terms of employment creation, the goal is to address the currently unsustainably high levels of unemployment and underemployment with short-term job creation, while the enabling environment for the private sector improves in order to create sustainable job creation in the medium term.

xvii. Infrastructure. Years of conflict, deferred maintenance, weakened technical and management capacity, and neglect have resulted in serious degradation of Iraq's infrastructure. Most Iraqis today have limited or no access to essential basic services or must rely on costly alternatives for electricity and water services. Billing systems and associated revenues that maintained operations have collapsed and need to be reinstated as a critical priority. Serious environmental and health risks associated with contaminated water supplies, inappropriate handling of solid waste, and disposal of sewage threaten to further burden the already severely stressed health system. Moreover, the lack of basic infrastructure services, particularly electricity, has added to the general lack of security in various parts of the country.

xviii. Infrastructure rehabilitation will play a key role not only in improving service quality and coverage across a range of subsectors but also in enhancing Iraq's competitiveness and security as it seeks to attract investment and promote development of the private sector. Some of the proposed investments in the sector assessments are also critical to facilitate the import and distribution of strategic commodities and construction inputs necessary for the overall reconstruction effort.

xix. In addition to the immediate needs, policy, and institutional issues related to infrastructure service delivery will have to be addressed early on to rationalize and realign regulatory oversight and delivery mechanisms across the sectors. In order not to compromise longer-term, least-cost solutions for infrastructure service delivery in future years, technical assistance is needed for policy and institutional reform options in the short term. It is also critical that Iraqi policy-makers and other stakeholders increasingly take greater ownership in determining the future course of the sectors for which they are responsible.

xx. Throughout most of the infrastructure subsectors, the initial goal is to restore services to levels that existed prior to March 2003. However, some subsectors, particularly transport, degraded seriously through the sanctions period in the 1990s, so they use an earlier benchmark.

xxi. Agriculture, Water Resources, and Food Security. This sector has declined since the 1980s; today over half of the country's total food requirement is imported and a large portion of the population is dependent on food rations. Moreover, Iraq is heavily dependent on external water resources that are generally not subject to cross-border agreements, and now faces decreased water inflows and increased salinity, which negatively affect agriculture, drinking water, a nd the ecological balance in marshland areas.

xxii. Given the right support and policy environment, Iraq's agriculture sector could contribute significantly to economic growth and job creation. Water use efficiency and quality could also improve, benefiting agriculture and health. With well-paced economic liberalization and open markets, the strategic goals for agriculture in Iraq should be efficient and stable growth, increased food security, and high rates of rural employment. Given the high dependence rates on the food rations and public food distribution system, great care must be taken to ensure that family access to food is protected.

xxiii. Finance and Private Sector Development. In the medium term, the private sector will be a crucial means to achieve high growth and create employment. The challenge for policy makers will be to support sustainable job creation and employment outside of the oil sector through policies that create an enabling environment for the private sector. Also critical is revival of a banking system that is able to operate on commercial lines and the application of hard budget constraints to public enterprises within an environment that fosters domestic and foreign investment.

xxiv. Mine Action. The objectives of mine action in Iraq are to reduce casualty rates and risk to local populations; free land and infrastructure assets for productive use; and build national capacities to plan, coordinate, and manage the mine action sector nationwide. In the immediate term, it is critical to develop an operational capacity to remove unexploded ordinance from the recent conflict, and to reorient mine action assets to provide a response in highly affected communities. A full Landmine Impact Survey will need to be conducted at a later date to obtain comprehensive national data.

xxv. Government Institutions, Rule of Law, Civil Society, and Media. Iraq's public institutions both at the central and local government levels, have been seriously affected by years of neglect, autocratic rule, and sanctions. Once a permanent Iraqi government is in place, policy changes resulting from the new constitution and other Iraqi-led initiatives will determine new functional and staffing requirements for government institutions. In addition, one of the first priorities of an elected government will be to review existing laws with the aim of institutionalizing human rights, introducing a system of transparency and accountability, and generally meeting the requirements of a free and democratic society.

xxvi. Human Rights, Gender, Environment. Thematic assessments, as well as analyses of the fourteen sector reports, were conducted to identify critical action points in these three cross-cutting areas. These are discussed in the Assessment's Human Rights, Gender, and Environment section as well as within the relevant sector assessments.

Reconstruction Costs

xxvii. The Assessment estimates the overall stock of medium-term reconstruction needs throughout the country to be on the order of US$36 billion; US$9 billion of which needs to be addressed in 2004. 7 These figures largely cover physical reconstruction, technical assistance, and training needs, plus additional operational and maintenance costs associated with new investments across the fourteen sectors. In addition, there are critical sectors outside this UN/World Bank Assessment, including security and oil, that have been estimated by the CPA to cost an additional US$20 billion over the coming years.8 Recurrent costs are not included in the Assessment because they are provided for in the draft 2004 Iraqi budget.

xxviii. While the figures in the Assessment reflect the best estimates of the likely needs for the immediate and medium term, the actual disbursement of funds is much harder to predict since it is linked to the security situation, the current capacity in Iraqi institutions to plan and implement projects, and the state of infrastructure and energy services to support importation and distribution of physical assets. Experience by the Bank in other post-conflict countries shows that constraints to reconstruction are often due not to a lack of funds, but rather to difficulties in developing and implementing time-bound investment programs according to established international procedures. Given the massive size and scope of the reconstruction needs in Iraq, it can be expected that initial disbursement rates will be lower in the first year, as local Iraqi capacity is built, but would increase rapidly over time as experience is gained. 9

xxix. In addition, the Assessment notes that the US$36 billion (in addition to the US$20 billion that was assessed separately by the CPA) is not the same as the financing gap; that is, not all of the identified needs may require external donor assistance. It is expected that, over time, investments will be increasingly covered by Iraqi government revenues or private sector financing, thereby diminishing the need for donor support. This is based on the assumption that, in a stable environment, oil productivity and output will increase with the investment that will take place, general economic recovery will result in increasing direct and indirect tax revenues, and an improved investment climate will result in significant financing from both domestic and international private investors.

xxx. Finally, the Assessment notes that it is currently not possible to predict offsetting expenditures on principal and interest payments on Iraq's very sizeable external debt. Such payments could also affect the financing gap in the medium term.

xxxi. Despite these potential limitations on absorptive capacity that may impact the timing and pace of disbursements, the need for a strong and concerted donor effort is in no way diminished. The challenge will be to mobilize commitments as much as possible now in order to allow projects to be planned and initiated immediately. The Donor Conference planned for October 2003 in Madrid is intended to launch this effort.

1. INTRODUCTION

1.1 While the reconstruction and development challenges facing Iraq are monumental, the Iraqi people also have a historic opportunity to rebuild the ir country into a nation that is once again prosperous, honors its pluralistic society, and is free from repression and fear. A partnership between the Iraqis and the international community has been formed to assist the country to attain these goals.

1.2 Following the adoption of United Nations (UN) Security Council Resolution 1483, member states from around the world, UN organizations, the World Bank Group, the International Monetary Fund (IMF), the Arab Fund for Social and Economic Development, the Coalition Provisional Authority (CPA), and Iraqi officials gathered in New York on June 24, 2003, for a first informal Technical Reconstruction Meeting on Iraq. During this meeting, the international community expressed its readiness to embark on a coordinated effort of sustained development support. In this context, the international community decided to undertake a series of assessments to determine Iraq's immediate (2004) and medium-term (2005-2007) reconstruction and rehabilitation needs for presentation at a Reconstruction Conference in October 2003 in Madrid.

1.3 This UN/World Bank Joint Iraq Needs Assessment contains the results of these sector assessments carried out in Iraq over the summer of 2003 by the UN, World Bank Group, and IMF, as well as a number of experts from, the European Commission, Australia, Japan, and countries of the European Union. The assessments cover fourteen priority sectors and three cross-cutting sectors, as agreed with the Iraqi participants at the June 24, 2003, Technical Reconstruction Meeting. The criteria for selecting sectors were mainly based on areas of likely need and the desire to align the Needs Assessment with the anticipated structure and responsibilities of future Iraqi ministries.

1.4 The purpose of this Needs Assessment is to inform the Reconstruction Conference of the current status and priority reconstruction and rehabilitation needs in each sector, focusing on the most urgent needs and budgetary requirements for 2004 and indicative reconstruction needs for the period 2005-2007. In addition, this Needs Assessment strives to put the sector assessments in their proper context, including an overview of the prevailing environment, highlighting the need for a sustainable approach to reconstruction and development, and outlining a number of policy reform options. Overall investment needs along with a discussion of absorptive capacity is provided in Chapter 4.

1.5 The information contained in this Needs Assessment is based on the best possible data available at the time, including data contained in the UN/World Bank "Watching Briefs," the Oil-for-Food (OFF) Program, and other independent assessments. However, the tragic events and subsequent repercussions of the bombing of the UN Headquarters in Baghdad, which resulted in the deaths and injuries of several people working on this Assessment as well as their colleagues, overall security and travel constraints, the lack of primary sources, and significant time constraints all made systematic data collection extremely difficult. It also cut short ongoing and planned consultations with Iraqi officials and civil society stakeholders in Iraq. Instead, detailed consultations on a draft of the Needs Assessment were held in Dubai in late September 2003 with representatives of the Governing Council, ministers from a number of line ministries, the Governor of the Central Bank of Iraq, and the CPA. A few sector teams were able to arrange additional consultations with stakeholders during this same period in Amman, Jordan. This Needs Assessment inc