UK WATCH - HOT DOCUMENT?
http://www.globalsecurity.org/wmd/library/news/iraq/2004/08/a_case_to_answer_impeach-blair_26aug04.pdf

>> HAMAS? HERE?

More Alleged Hamas Operatives Linked to DC-Area Think Tank
By Scott Wheeler
CNSNews.com Staff Writer
August 26, 2004
(CNSNews.com) - The Virginia man recently detained after his wife was seen videotaping Maryland's Chesapeake Bay Bridge has ties to a Springfield, Va., Muslim think tank that is an alleged front for the terrorist organization Hamas.
The think tank, the United Association for Studies and Research (UASR), is located just fourteen miles from the U.S. Capitol. Counter terrorism analyst Peter M. Leitner has described UASR as one of the "phony organizations that are really terrorist cells [and] part of the international terrorist network." UASR has been the subject of a CNSNews.com investigation since March.
Ismael Selim Elbarasse and his wife were spotted in their SUV by two Baltimore County, Md., police officers on Aug. 20. Elbarasse's wife was reportedly videotaping the 4.3 mile Chesapeake Bay Bridge, the main span that connects Maryland's Eastern Shore to the Baltimore, Washington D.C., metropolitan area.
"At the toll plaza, the Baltimore County officers reported what they had seen to Maryland Transportation Authority Police. Its officers stopped the SUV west of the bridge and confiscated the camera," the Baltimore Sun reported. The Elbarasses, accompanied by two children, had reportedly been seen trying to hide the camera, before it was taken by police. The camera showed that close-up images, "atypical for a tourist," had been videotaped, according to the Sun.
It's unclear whether the incident was a so-called "probing attack," efforts by potential terrorists to conduct surveillance and compile information about vulnerable American targets. Hundreds, if not thousands of probing attacks have taken place all over the United States since the Sept. 11, 2001 terrorist strikes on New York City and the Pentagon, according to counter terrorism experts.
Following the confiscation of his camera, Elbarasse was reportedly taken into custody as a material witness for a case involving the federal indictments of three men allegedly linked to Hamas.
The indictments were unsealed in Chicago on the same day Elbarasse was detained and list Elbarasse as a "high ranking Hamas leader" and an un-indicted co-conspirator in an operation that U.S. Attorney General John Ashcroft described as a U.S. based, "terrorist recruiting and financing cell" for Hamas.
CNSNews.com previously reported on the connections that two of the men indicted -- Mousa Abu Marzook and Mohammad Salah -- have to UASR. Internal documents obtained also link the third man indicted -- Abdelhaleem Hasan Abdelraziq Ashqar - and Elbarasse to UASR.
Ashqar worked at the UASR office in Springfield, Va., as a "research associate" in 1998, according to a source who did not want to be identified. A June 1999 document making direct reference to Ashqar at the UASR office in Springfield was also obtained by CNSNews.com .
Elbarasse, who served eight months in a New York prison in 1998 for refusing to testify to a grand jury investigating terrorism, was seen on a regular basis and photographed by CNSNews.com at UASR's Springfield, Va., office between April and early August when UASR moved files to an undisclosed location and appeared to be shutting down its identifiable operations. UASR records that included Elbarasse's contact information while he was in prison in New York State were also obtained by CNSNews.com .
Leitner, managing director for Criterion Strategies, a New York City based counter terrorism and emergency response company, said the videotaping incident involving Elbarasse is disturbing.
"When the U.S. invaded Iraq, both Hezbollah and Hamas avowed to bring terrorism to the United States, as a reprisal for the invasion of Iraq. Then we have (Jamal) Akal, (subject of a July 23 CNSNews.com report) the guy who was arrested in Israel, saying he was part of a new Hamas organization that was specially designed to target in North America," Leitner said.
"Now we have Elbarasse, engaged in operational activities in North America, the Chesapeake Bay Bridge, a very big strategic choke point, a spectacular target. And he is part of UASR, which shows the quickness and the ease with which a support cell, the fundraising, propaganda and recruitment cell of Hamas, can become an operational cell," Leitner added.
"There is no real demarcation between support cells and operational cells. When they get the call, they become operational," Leitner said.
Stanley Cohen, an attorney for Elbarasse, told CNSNews.com that the videotaping of the Chesapeake Bay Bridge was a benign activity and that Elbarasee's wife had also videotaped the Grand Canyon and Ft. Lauderdale Beach in the past..
"She is an inveterate video taper," Cohen said. If Elbarasse's wife "had blonde hair and blue eyes and her name was Rosie, it would have been no problem," Cohen added. However, "it became a crisis," he said, because Elbarasee's wife "had a hajib on and they are Palistinian or Muslim."
Cohen initially said Elbarasse's links to UASR amounted to "nothing," then added that his client stored "about thirty boxes of books" in his garage when UASR ran out of room during its "downsizing."
Cohen also said he could not rule out the possibility that Elbarasse had performed accounting services for UASR.
Tuesday, CNSNews.com sought comment directly from Elbarasse at his home in Annandale, Va. Elbarasse's wife said the family would have nothing to say and referred the news organization to Cohen.
According to a Justice Department press release regarding the federal grand jury indictments in Chicago, "Abu Marzook and Ashqar, together with Elbarasse and other unnamed co-conspirators, allegedly used various accounts at banks in such places as Cleveland, Milwaukee, New York, Louisiana, Mississippi and Virginia, to transfer amounts ranging from tens to hundreds of thousands of dollars at a time into the United States from various sources abroad, including Saudi Arabia and Switzerland and then between banks in the United States before transferring funds out of the country" to finance Hamas activities in Israel.
Marzook founded the UASR and later left the U.S. to become a leader of Hamas. He is currently believed to be in Syria and the Justice Department now considers him a fugitive.
The last known executive director of UASR is Ahmed Yousef, who has repeatedly refused to return telephone calls seeking comment for articles related to the CNSNews.com investigation.
The UASR office telephone number in Springfield, Va., was recently disconnected. Yousef, according to sources close to UASR, has been out of the country for several months and is believed to be in Algeria.
Muhammad Salah, another of the men indicted on Aug. 20 and a U.S. citizen, was arrested in Israel in 1993 for helping to organize terrorist attacks for Hamas. Salah reportedly told Israeli interrogators that the Hamas operation in the U.S. was based at UASR and that Ahmed Yousef was its leader.


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US Companies Providing Indirect Service to Terrorist Websites, Report Says
By Julie Stahl
CNSNews.com Jerusalem Bureau Chief
August 27, 2004
Jerusalem (CNSNews.com) - American Internet Service Providers are being used indirectly by the Palestinian Islamic Jihad and other terrorist groups to market their terrorist messages, Israel's Intelligence and Terrorism Information Center at the Center for Special Studies said in a report this week.
But following an inquiry by CNSNews.com into the allegations, two of the companies listed in the report said they were now in the process of correcting the situation.
"Palestinian and international terrorist organizations make massive use of the Internet to spread propaganda supporting terrorism and as a means of maintaining contact between organizations and headquarters, their infrastructures and their target populations," the report said.
As a case study, the report lists six separate websites belonging to the Palestinian Islamic Jihad, at least four them hosted by two different American Internet Service Providers.
The Palestinian Islamic Jihad appears on State Department's list of terrorist organizations as well as on the European Union's list of terror groups.
According to the report, the sites - all in Arabic - contain various messages; archival material about the group's activities (including terrorist operations); publication of books and articles sponsored by the Palestinian Islamic Jihad; "encouragement of terrorism against Israel and praise for the suicide bombers"; and some websites support armed insurrection to "liberate all of Palestine" (including Israel, the West Bank and Gaza Strip) and establish of an Islamic state there.
"Insofar as can be verified, the organization's Internet infrastructure is supported by Western companies located mainly in the United States," the report said.
Preference for U.S. and Western companies provides terror groups with "advanced technological support," the ability to "disappear" among the multitudes of Western companies on the World Wide Web -- and to a certain extent, allows protection under U.S. freedom of speech guarantees, the report adds.
Alerted by journalists inquiring about the report, Level 3 Communications, a Colorado-based ISP listed in the report, said it does not provide services to the Palestinian Islamic Jihad, but one of the companies to which it sells its services does.
"Level 3 does not sell services to the PIJ, contrary to the statements made in the recent report by the Intelligence and Terrorism Information Center," said Arthur Hodges, vice president of communications at Level 3 Communications, told CNSNews.com.
"Level 3 operates one of the largest Internet backbones in the world, and the company's network carries a substantial percentage of the world's Internet traffic every day," he added.
According to Hodges, the company sells services on a wholesale basis to a wide variety of communications service providers, including ISPs and web-hosting companies. Level 3 is not a retail ISP, nor does it provide web-hosting services, he said.
Hodges said Level 3's global security department conducted an investigation after the Intelligence and Terrorism Information Center issued its report. "The investigation determined that a U.S. company that buys services from Level 3 was an underlying provider of hosting services to some of the web sites identified in the report," he said.
"Level 3 alerted its customer; the customer conducted its own investigation into the matter and has indicated it will decommission the web sites," he said.
Deborah Barnett, director of communications at the Maryland-based Alabanza, another ISP mentioned in the report, said the sites in question involving her company are "under active review." The company has a strict policy against illegal and inappropriate materials posted on websites that it hosts, she said.
"We do have an acceptable-use policy and a highly advanced Information Technology division that checks as best we can for compliance of websites hosted by Alabanza," Barnett said in a written response to CNSNews.com.
"In addition to illegal activities, we also take action against a site if it promotes pornography, trademark [or] copyright infringements, or threatening material," she said.
Alabanza also has an "extensive network of resellers" in nearly every country worldwide, Barnett said. "While it's impossible to check content on every site that we host, we do have two people who work full-time on nothing but these compliance issues," she said.
"We take all complaint notifications seriously, and we review these sites manually. When appropriate, we contact authorities and work with them as required," she added.
According to Barnett, last year the company shut down a site called "whoseajew.com" after receiving a complaint about it.
"After reviewing the content, we felt that providing identities and locations of individuals practicing the Jewish faith was blatantly anti-Semitic and could potentially threaten their well-being," she said. "We shut the site down immediately. We have no tolerance for such activities."
Gray Area
Service agreements such as that between Alabanza and its customers enable companies to close down websites even if they are not technically illegal, said Brian Marcus, director of Internet monitoring for the Anti-Defamation League in New York.
Laws governing the posting of terrorism-related material on websites fall into a "gray area," he said.
"You can put up a site that's generally supportive of terrorism," he said, because it falls under the First Amendment, freedom of speech. A person could say, "I like Hamas" and even quote inciting words of a radical leader and still be within his rights, he added.
Where the law can begin to get involved is in cases such as that of a student in Idaho who was charged with creating websites that attempted to raise funds and was directly linked to terrorist organizations, Marcus said in a telephone interview.
Another "gray area" is that of issuing threats, which must be both "specific and credible" to come under investigation, he said.
Marcus pointed to the case of Babar Ahmad, who published two pro-Jihad (Islamic holy war) websites, one of them linked to Chechen terrorists. It gave explicit instructions on how to raise money and sought material support for terrorism. While Ahmad is in England, the computer with the material is physically in the U.S. and therefore the U.S. is trying to extradite Ahmad, he said.
But if companies are concerned - which most are - Marcus said, they can get around the issue of whether something is legal by enforcing the terms of their service agreements and taking websites off their servers for breaking company rules.
"[Most] companies don't have the time or the expertise to go into all the websites [they host]," said Marcus. But if a company is notified by a concerned party and discovers a client has broken the rules of service, the company will usually remove the web site immediately, he added.
Nevertheless, he said, terrorist groups are getting "much more sophisticated" in their use of the Internet, using it to "spread knowledge."
What groups have discovered, he said, is that if they send videos of executions or terror attacks to Arabic or other television networks, the material will be edited or censored; but if they post it on a web site it goes out to the public "uncensored [and] unfiltered," such as the recent grizzly beheadings of kidnap victims in Iraq.

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Europe's Iran Fantasy
Europeans are from Venus, Mullahs are from Mars.
by Leon de Winter
09/06/2004, Volume 009, Issue 48
Amsterdam
ON OCTOBER 22, 2003, the Guardian, a leading British newspaper, carried no fewer than three articles about the remarkable events in Tehran the day before. The foreign ministers of the three leading European Union countries--Britain's Jack Straw, France's Dominique de Villepin, and Germany's Joschka Fischer--had flown to Iran to try to persuade its Shiite leaders to conclude an agreement about Iran's nuclear program.
The first was a news story, under the headline, "E.U. ministers strike Iran deal." The lead began, "Three European foreign ministers claimed a diplomatic coup yesterday, securing an agreement from Iran over its nuclear program which could defuse a brewing crisis with the U.S." Central to the agreement was a commitment "to suspend [Iran's] uranium-enrichment and reprocessing activities"--in other words, to halt production of materials for nuclear weapons.
The second article was by Guardian commentator Ian Black, who wrote: "The agreement marks a significant victory for the European Union's policy of 'conditional engagement' and the use of carrots and sticks, in contrast to threats from the United States against the Islamic republic, part of President George Bush's 'axis of evil.' . . . 'We often find ourselves on the defensive, being told we are appeasers for engaging with regimes like this,' an E.U. diplomat said last night. 'This agreement gives the lie to that argument. Clearly the Iranians did not do this because they feared E.U. military action. They did it because they want a relationship with us and want to keep channels open.'"
The Guardian's third piece about this triumph of European diplomacy opened as follows: "Iran's agreement to allow unlimited U.N. inspections of its nuclear facilities and to suspend its uranium enrichment program marks a tremendous success for European diplomacy. . . . Mr. Straw played down the significance of the achievement. He should not be so modest. . . . Iran will doubtless remain an axis-of-evil rogue state in George Bush's florid lexicon. But Washington must not try to undermine this accord. To date, [Washington's] polarizing, aggressive pressure tactics have mostly made a difficult problem worse. Europe demonstrated yesterday that there is a different, more effective way. And it is not the American way."
These articles were typical of those then appearing in the European press about the success of European soft power. Few commentators could resist the opportunity to malign Bush, even though many realized that Iran had no intention of adhering to the agreement. The warnings and reports by the International Atomic Energy Association, then and since, make it clear: Everything that happened on that fall day in Tehran was fiction and deception. Yet Europe's leading politicians chose to deceive and debase themselves rather than recognize Iran's play-acting for what it was. For them, the illusion of soft power was infinitely preferable to the suggestion that they should be prepared to prevent Iran from becoming a nuclear power at all costs. The Iranians knew perfectly well that the Europeans would not back up their demands with force--the only language tyrants building nuclear arsenals understand. The mullahs are quite familiar with Europe: The life-loving Europeans of the third millennium would never have sent their children into the minefields of Iraq.
All but a handful of Europe's politicians, obsessed by the specter of electoral defeat, refuse to take a stand if doing so could force them to sacrifice lives. Post-historical and post-religious Europe, born in the shadow of the Holocaust, does not see sacrifice as legitimate. Of course, considering that Europe has nurtured some of the world's cruelest ideologies, the dread of scenarios that might require sacrifice is hardly surprising. The problem is that much of the world, especially the Arab Islamic parts of it, is simply not interested in the moral and ethical implications of Europe's bloody past.
Since Auschwitz--the benchmark of ideological and political developments in Europe--the miracle of European prosperity and freedom has not led to the conviction that this prosperity and freedom must be defended, if necessary by force; on the contrary, the miracle has given birth to an attitude of cultural relativism and pacifism. It is as if modern Europe had divested itself of its idealistic and historical context, as if many Europeans saw the miracle of a prosperous and free Europe as an ahistorical, natural, and permanent state of affairs--as if Auschwitz had been wiped from their memory.
But anyone who is ignorant of, or ignores, the fact that tens of millions of Europeans died in the twentieth century in the struggle between good and evil--and it seems most Europeans have simply forgotten this--will fail to appreciate that the continued existence of Europe's system of liberal moral and ethical values is the result of conscious choices by courageous Europeans (and many others).
It may be something worse than amnesia: Today's Europeans may see the history of the twentieth century as scarred only by an abstract process known by the ancient Germanic word "war," a concept that for them represents some monstrous destructive force beyond good and evil that blindly spews out victims, like a flood or a hurricane. Most Europeans no longer regard Auschwitz as the disastrous result of evil ideas and the evil decisions of human beings. Instead, they see it as the consequence of something more like a natural disaster.
Perfectly expressing this concept of war were the huge demonstrations in Europe against the war in Iraq. In these rituals, the term "war" was taken out of its historical, political, and cultural context, and no justification for fighting was deemed acceptable. The high priest of this antihistorical creed is Michael Moore, who, 59 years after the end of the Second World War, in a discussion with TV talk show host Bill O'Reilly, would not state categorically that only a devastating war could have saved Europe from something far worse, namely Nazism. By these lights, war is bad whatever the historical or political circumstances.
Another manifestation of the same kind of thinking is the antihistorical view of the suffering caused by the Allied bombing of Nazi Germany: Germans increasingly see themselves as victims of "the war," as if the conflict were not a consequence of the German people's national obsessions with race and purity. A recent German novel about the Allied bombing enjoyed a succ?s de scandale because it purposely left out any reference to historical context. Everyone is a victim in war, was the message, and the difference between good and evil disappears when the dogs of war are unleashed. "Ordinary Germans" were victims too.
The European landscape is littered from north to south and east to west with monuments to battles and massacres. Many of them commemorate distant conflicts that now are hard to understand, but some mark the struggle against the most recent European evils: the right-wing totalitarian fascism of Nazi Germany and the left-wing totalitarian fascism of the Soviet Union. Although carved in stone, their lessons have not been learned. For most Europeans, the monuments no longer speak to Western civilization of the essential choice between good and evil. Instead, the memorials to the millions who died, from American soldiers to murdered civilians, stand for a faraway world that today's European, safe in his postmodern cultural relativism, thinks he has long since left behind: a world as distant as the Ice Age, plagued by an abstract phenomenon called "war."
It was only logical, therefore, that the implosion of Yugoslavia in the 1990s, which threatened to generate yet more massacres and monuments, left Europe paralyzed. Europe had to bring an end to the mass killings of Europeans by other Europeans in the Balkans, but it lacked the ability to take the necessary action. For that, Europe needed the detested United States.
Of course the horrors of war are beyond comparison, and it is a mark of civilization to deploy military force only with extreme caution. But most Europeans no longer realize that to avoid taking a path that may in the end lead to violent conflict--to avoid opposing totalitarian ideologies--can result in even greater suffering and more casualties. Today's Europeans seem unable to accept the idea that bowing to tyranny is sometimes worse than going to war to resist it. Indeed, to judge from the way European appeasers have handled the threat of a potential Iranian nuclear bomb, it seems that Europe would rather accept its own demise than sacrifice its sons to the dogs of war, which make no distinction between good and evil.
Last month the Brookings Institution hosted a conference of former American and European politicians and bureaucrats on the danger of the Shiite bomb. Newsweek quoted Madeleine Albright as commenting: "Europeans say they understand the threat but then act as if the real problem is not Iran but the United States."
It is remarkable that current developments in Iran do not dominate our headlines. The media are obsessed by Abu Ghraib, by those "liars" Sharon and Bush, by Halliburton and the neocons. And their obsession extends to conspiracy theories, although they fail to realize that something must be wrong when a radical pacifist like Michael Moore can receive the best film award at Cannes from Quentin Tarantino, a man who has done more than anyone to glamorize violence. In the meantime, a terrifying danger looms on the horizon, set to transform the geopolitical map of the Middle East within two years and so the map of the entire world: the Iranian nuclear bomb.
The mullahs are quite frank about why they want nuclear weapons. On December 14, 2001, the de facto dictator of Iran, Ali Akbar Hashemi Rafsanjani, spelled out his dream in a sermon at Tehran University. "If one day the world of Islam comes to possess the [nuclear] weapons currently in Israel's possession," Rafsanjani said, "on that day this method of global arrogance would come to a dead end." This, he said, is because the use of a nuclear bomb on Israel would entirely demolish the Jewish state, whereas it would only damage the Islamic world. Iran's leaders have made dozens of similar statements.
Last week Israel's senior commentator Zeev Schiff wrote in the Israeli newspaper Haaretz: "There is an impression that Iran has no fears of any United Nations Security Council action. If its audacity succeeds, Iran will gain another period of unhindered nuclear development. Even though the Iranians have been caught out in the lies they have been weaving for 18 years, it is possible the ayatollahs' regime in Tehran believes that time is on their side."
What happened in Tehran on October 21, 2003, was not proof of the viability of soft power, but the opposite--proof of its impotence. The Guardian and the rest of the European media were fooling themselves and us, blinded by their hatred of Bush's hard power. "Washington sought to persuade Western allies to take a tougher line on Iran," Haaretz wrote last week, concluding dryly, "But Britain, Germany, and France say they prefer to try and persuade Tehran to cooperate with the International Atomic Energy Agency." They never learn.
Leon de Winter is a Dutch novelist and columnist for Elsevier magazine, Holland's premier political weekly. He is also a contributor to German publications like Die Zeit, Der Spiegel, and Die Welt, as well as an adjunct fellow at the Hudson Institute.
? Copyright 2004, News Corporation, Weekly Standard, All Rights Reserved.

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Latest Iranian missile has upgraded warhead
By Ze'ev Schiff, Haaretz Correspondent
The warhead of the Iranian Shihab 3 missile has been considerably upgraded, according to photographs published in Iranian newspapers of test launches three weeks ago. It is believed that the improvements will permit slower entry into the atmosphere so the warhead, which may be chemical in nature, will be more durable and its contents will be better protected. It is also believed that the missile's range has been extended.
The operational and technological conclusions from the changes in the missile indicate that the Iranians are not resting on their laurels in developing their surface-to-surface missiles, and have shown a daring approach to their technological planning. It is very likely that the Iranians are being assisted by foreign experts from the former Soviet Union hired by Iran under personal contracts, or by experts from North Korea.
It is also likely that the Iranian effort is not limited to the Shihab 3, which has a range of about 1,300 kilometers, but also to the Shihab 4, planned with a range of 2,000 kilometers or more. At present the Shihab 3 can already come within range of Turkey, which is a member of NATO, as well as most Saudi cities and oil fields. On the last test of the Shihab 3 on August 11, the missile did not pass the maximum trajectory that had been determined for it.
The Iranians gave the experimental launch extensive media coverage, stressing that the test was a response to an Israeli experimental launch of the Arrow missile, which intercepted a Scud missile in the U.S. at the end of July.
It subsequently turned out that the reported success of the Shihab's launch was intended to camouflage a failure in the missile's flight early in the launch.
However the photographs published by the Iranians show several new details. In addition to the new warhead, the missile was fired from an operational vehicle and not from an ordinary surface launcher. In all the other Shihab 3 tests, the warhead was cone-shaped, but this time it has a new, flatter shape and appears to have various short wings.
Experts from various countries are expected to analyze the technological and operational aspects of the new form of the Shehab 3. It is especially interesting to several European countries, which understand that the day is not far when Iranian missiles will be within range of a considerable portion of Europe.
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Iran plays down US mud-slinging ahead of IAEA board meeting
IRNA - Islamic Republic News Agency
Tehran, Aug 29, IRNA -- Iran Sunday put a brave face ahead of an IAEA board of governors` meeting in Vienna, saying it was confident the country`s nuclear dossier would not make a case for examination at the UN Security Council. Tehran is bracing for the International Atomic Energy Agency (IAEA)` report, due to be released at a September 13 meeting of the agency`s board of governors. "We don`t think the (International Atomic Energy) Agency`s report will be such that it gives a pretext for referral of Iran`s file to the Security Council," Foreign Ministry spokesman Hamid Reza Asefi told a weekly news briefing. The official said most outstanding questions about Iran`s nuclear program had been resolved, but the Americans were sure to come ahead with new `peripheral issues`. "Experience has shown that America raises up one peripheral issue each time ahead of the meeting, like the previous meeting where they raised up the `Shiyan` issue," he said, referring to US allegations that Iran had razed an alleged nuclear site in Lavisan near Tehran to remove evidence. Asefi said Iran has allowed IAEA inspectors to visit the site and take samples. The report, being written by IAEA Director General Mohammad ElBaradei, will review the agency`s progress in clearing up questions about Iran`s nuclear activities. Earlier this month, diplomats familiar with Iran`s nuclear dossier, were reported in Vienna as saying that new findings on Iran by the UN atomic agency appeared to strengthen Tehran`s claim it has no enriched uranium domestically. They said reported findings could hurt renewed US hopes that its allegations could translate into support for referral of Iran to the UN Security Council. Most suspicions focus on the sources of traces of enriched uranium and the extent and nature of work on the advanced P-2 centrifuge, used to enrich uranium. According to diplomats in Vienna, the IAEA`s new findings bolster Tehran`s assertion that all traces of enriched particles found in Iran were inadvertently imported on contaminated equipment it bought on the black market. Asefi said, "With the clarification of the issues such as P-2 and uranium enrichment as well as contamination of components and other marginal issues, all ambiguities have been answered." "If the Americans do not bring forth a new marginal issue, there is no reason for Iran`s nuclear file not to be put on a normal course," the Foreign Ministry spokesman added. "If what has come to pass between us and the agency is carefully reviewed, it will become evident that our cooperation with the agency has made a good progress. In the same breath, the agency`s report must show progress," he said. In what has been described as a confidence-building measure, Tehran has voluntarily suspended uranium enrichment and manufacture of centrifuge components. Moreover, the Islamic Republic has signed an additional protocol to the nuclear Non-Proliferation Treaty (NPT), allowing snap inspections of its nuclear activities. Asefi turned the tables on French President Jacques Chirac who has reiterated the need for confidence-building on Iran`s side. "We assure Chirac and others that we want confidence-building, but in this process, our right of access to peaceful nuclear technology must be respected," he said.
Iran says its nuclear program is in accordance with the country`s bid to produce 7,000 megawatts of electricity in the next 20 years, when the country`s oil and gas reserves become overstretched. The country has cooperated closely with the European `big three` -- Germany, France and Britain -- to answer outstanding questions about the country`s nuclear program. Asefi said, "America has always made illogical demands, but we are not worried and we will not give up our legitimate right of having access to peaceful nuclear technology." 2323/1412
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Boom - or bomb?
By Zvi Bar'el
HAARETZ
Iran's actions depend on the number of vacationers on the island of Kish no less than on its relations with Washington and the battles in Najaf.
Iranian Defense Minister Ali Shamkhani preferred to be interviewed for the Al-Arabiya television network this week in Persian. It is possible that had he spoken in the other language in which he is fluent, Arabic, there would have been no need for translation and there would have been no call for "clarifications" concerning how his remarks were taken out of context. According to the translation, Shamkhani said, more or less, that his country would not sit by idly and do nothing in light of the possibility that the United States might attack it. The meaning of this is that Iran will preempt an attack by American forces.
"This is not what the defense minister said," clarified the Iranian Defense Ministry spokesman, Hamid Reza Assafi. "His remarks were not understood properly."
Shamkhani, according to the spokesman, said that Iran would defend its national interests. Translation problems are a convenient way out for statesmen and military people who are caught saying things that they meant to say, but that should not be said. The interesting aspect of Shamkhani's remarks may be, in fact, the effort to correct the impression they made, because since when has Iran retreated from a threat that it has made? Especially toward the United States?"
But this is not the first time this month that Iran has made an effort to put on a pleasant face. When Iraqi Defense Minister Hazem Sha'alan declared two weeks ago that Iran is Iraq's biggest enemy, and that Iran was infiltrating foreign agents and terrorists into Iraq, the Iraqi charge d'affaires in Iran was summoned for clarifications and was asked to show evidence for the minister's claims. Two days later, the director general of the Iraqi Foreign Ministry, Hamed Biati, stated that, "Iran is a neighboring country and helped the Iraqi opposition for years prior to the toppling of Saddam Hussein." The defense minister's remarks "do not represent the government," said the director general of the Foreign Ministry.
The balance of power within the Iraqi government, and the way appointments are distributed accordingly, allow the director general of the Foreign Ministry to contradict the defense minister's statement, but this is not the point. Iraq does not want to get into a conflict with Iran, and the latter wants to look like a good neighbor - a neighbor that claims to want to meet with the prime minister of Iraq, Iyad Allawi, in order to straighten things out. Yet, according to Allawi, he has not yet been sent an official invitation.
This is an Iran that is taking care to portray itself as having helped the U.S. in the war against the Taliban and is, at the same time, refusing to hand over Al-Qaida activists for questioning in their countries of origin or to the U.S. But there is one area in which Iran is not concealing information: It has long-range Shihab 3 missiles, which were successfully tested recently, it has nuclear installations and it is continuing to enrich uranium - but all "for peaceful purposes."
Two threats
In an interview that Shamkhani gave to The Los Angeles Times in 1998, the minister stated that Iran has a "natural right" to develop sophisticated weapons systems, because Iran is a threatened country. He said that there are two major threats facing his country: the foreign presence, and especially the American presence, in the waters of the Persian Gulf, and the extremist-nationalist movements in the Caucasian republics. The U.S. can eliminate at least one of these threats, he said, and take its army out of the Gulf.
He added that the Iranians had never started a war against anyone and they would not do so in the future, but they could not forget the lesson learned from the war with Iraq that exacted from them thousands of terrible casualties. These two threats, said Shamkhani at the time, meant that the Iranian army would have to deploy along a number of fronts: one on the Gulf, a second along the border with Afghanistan and a third in the north of the country.
Israel, in that interview, was mentioned only as a secondary threat, and Shamkhani asked why there were complaints about Iraq when Israel was equipping itself then with F-15 aircraft with a range of 4,000 kilometers, and why Israel can develop nuclear weapons while Iran is not allowed to do so.
For more than a year now Iran has found itself next to a new threatening neighbor. The U.S. presence in Iraq is a change in the strategic status quo that Iraq had known since the end of the Iran-Iraq war in 1988. There are too many American forces, too many threats to Iran coming from the Pentagon and Israel, and too few real allies. Iran, it is often said in the Gulf states, is a country without enemies and without friends, in a league by itself. In Iran, however, this formula is not accepted.
"Iran perceives itself as a country that is surrounded by enemies, but without friends," says an expert at a Turkish research institute who specializes in Iranian affairs. "There is no country in the world that has a close relationship with Iran on the model of the relationship between the U.S. and Israel, or the relationship among the NATO countries, or of even the loose relationship among the countries of the Arab League. It is true that nowadays every Arab state can declare that it does not have Arab backing, but there is a sense of commitment. When I speak to Iranian politicians, and even reformists, they say that if Iran does not look after itself, no one will."
How tightly can Iran stretch the rope, and what exactly is that rope? Iran is posing two challenges to the U.S.: its involvement in Iraq, and the infrastructure it has that could develop nuclear weapons in the near future. From conversations with American diplomats, the impression emerges that Iran's involvement in Iraq is worrying the U.S. more than the potential for the development of nuclear weapons. An American diplomat who is serving in a neighboring country says that "Iran is liable to turn Iraq into a theocracy. It is an element that is stirring ferment, [Iraqi Shiite leader] Muqtada al-Sadr is drawing strength from it, and the border with Iran is porous and there are no efforts being made on its part to seal it against the entry of terrorists of any sort."
America's fears
The political fear in Washington is that it is not enough that the war in Iraq looks endless and that it is impossible to show any real achievement before the presidential elections on November 2, but also that it is Iran that is raking in the profits in the meantime. The Muqtada al-Sadr affair is perceived as an Iranian challenge and not just as a local challenge - but more than that, the oil prices that have soared to record highs this month are good for Iran's budget. The past fiscal year, which ended in March 2004, indicated a growth rate of 6.7 percent and this year it will apparently be even higher because of the oil prices.
But this is not the only impressive figure. For four years now Iran has been experiencing economic growth. Its balance of trade is in a surplus, its debts are paid, its foreign currency reserves come to approximately $35 billion and, according to foreign reporters who have visited Iran recently, there is an atmosphere of flourishing business in the country. The Turkish Turkcel telecommunications company won an approximately $2-billion tender to set up a cellular telephone infrastructure that will compete with the government company; another Turkish company has won and completed the tender to build Tehran airport; the Peugeot company has signed an agreement to assemble cars in Iran that will also be exported from there to Eastern Europe; a consortium of German companies, Deutsche Chemie, is slated to set up a huge tourism project on the Iranian island of Kish and compete with Dubai's huge share of the tourism market; and the Internet network is spreading to more and more homes and businesses. It is doubtful that the Iranian regime will want to subject this economic prosperity to an American threat.
The interesting thing, in fact, is that when the parliament is again in conservative hands (since the elections in February of this year), spiritual leader Ayatollah Ali Khamenei can show economic achievements, development and growth, and thus garner political power in advance of the presidential elections that will be held next summer. It will be difficult for President Mohammed Khatami and the liberals to depict these achievements as their own next year. Thus, if no dramatic change occurs in Iran, there is a fear that the presidency - after the Parliament and the local authorities - will return to conservative hands. The war with Iraq, which was supposed to changed the balance of power within Iran as well and get rid of another part of the so-called axis of evil, could well turn out to have strengthened the conservative regime there even more.
But this is also a problem for the conservative elements in Iran. They have to sustain their success, and when their country is threatened by the U.S., even the most enthusiastic investors have difficulty going there. One means to relieve the international pressure that Iran has employed successfully is to hold a tug-of-war with the International Atomic Energy Agency. Last October, when Iran declared its intention of adopting the Additional Protocol to the Nuclear Non-Proliferation Treaty, the signing of a huge approximately $2-billion deal with Japan was in the offing; without this willingness on Iran's part, Japan would not have signed the deal.
This game of Iran's, among other things, has led to the conclusion on the part of members of the American Council on Foreign Relations, which is headed by Zbigniew Brzezinski, to issue a report this month in which there are recommendations to conduct constructive negotiations with Iran with the participation of European states, and to use more carrots than sticks. This is based on the assumption that the U.S. cannot and does not want to conduct another military campaign in the Middle East, and on the more solid supposition that has led the authors of the report believe that it is possible to reach agreements with Iran, primarily because of the regime's economic aspirations. This report has already been subjected to a great deal of criticism from neo-conservative elements in the Pentagon. It is thus possible to wager, then, without taking too much risk, that U.S. President George W. Bush will not change his policy during the next two months.

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Iran Ready to Provide Nuke 'Guarantees'
Sat Aug 28, 6:34 PM ET
By ALI AKBAR DAREINI, Associated Press Writer
TEHRAN, Iran - Iran said Saturday it would continue its nuclear program but provide "guarantees" not to build atomic weapons, and warned Washington it cannot stabilize neighboring Iraq (news - web sites) and Afghanistan (news - web sites) without Tehran's help.
In a wide-ranging news conference, Iranian President Mohammad Khatami (news - web sites) said the wall of mistrust separating Tehran and Washington had become thicker during the Bush administration, adding he hoped American casualties in Iraq would affect U.S. public opinion before the November election.
Washington claims the Iranian nuclear program is aimed at building atomic weapons, but Tehran says is directed at generating electricity.
"We are ready to do everything necessary to give guarantees that we won't seek nuclear weapons," Khatami said.
"As Muslims, we can't use nuclear weapons," he told reporters in Tehran. "One who can't use nuclear weapons won't produce them."
He did not elaborate on the nature of the guarantees, but Iran has already agreed to international inspections of its nuclear facilities and military sites. Khatami reiterated his country would not give up its nuclear program.
Khatami's statement marks the first time Tehran has so publicly said it would provide guarantees to ease international concerns about its nuclear program.
On the U.S.-led conflicts in neighboring Iraq and Afghanistan, Khatami said Washington needs Iranian help to succeed in both countries. The United States and some Iraqi officials accuse Iran, which follows the Shia branch of Islam like most Iraqis, of meddling in Iraqi affairs.
"The U.S. knows itself that it can't succeed in Iraq and Afghanistan without an Iranian presence," he said. "Without imposing itself, Iran is considered an effective force in Iraq. You can't ignore the Islamic Republic of Iran."
Khatami, however, said Tehran will not to settle its "many differences with America" in Iraq, but strongly criticized Bush for his Iraq policies, saying he hoped U.S. casualties in Iraq would affect the outcome of the upcoming election.
But he praised Iraq's most senior Shiite cleric, Grand Ayatollah Ali al-Sistani, as a supporter of democracy in Iraq, unlike the Americans "who are suppressing the people."
He warned Washington against making the same mistake it did in Iraq by attacking Iran, but said an American invasion was doubtful because the United States was so bogged down in Iraq.
President Bush (news - web sites) labeled Iran as part of a global axis of evil along with North Korea (news - web sites) and Iraq under Saddam Hussein (news - web sites).
"There is enough American public opinion pressure on Washington because of the young soldiers being killed in Iraq" to ensure Washington does not threaten Iran, he said.
Khatami warned Israel it would be committing "suicide" if it attacked Iran, following recent threats that the Jewish state might take military action to prevent Iran from making a nuclear bomb.
On the nuclear issue, Khatami said Iran is entitled to obtain capabilities to go through the full nuclear fuel cycle, from extracting uranium ore to enriching it for use as reactor fuel.
"We don't want anything beyond this. It's our legitimate right and no country can prevent us from achieving it," he said.
Earlier this month, Iran confirmed it had resumed building nuclear centrifuges, which can be used to enrich uranium to weapons grade, and declared it should have the right to advanced nuclear technology.
Washington has been lobbying U.N. nuclear watchdog, the International Atomic Energy Agency, to refer Iran's nuclear dossier to the Security Council, which could impose sanctions.
Khatami said Washington has no evidence to demand U.N. sanctions and urged the IAEA not to bow to U.S. pressure when it discusses Iran's nuclear program next month, saying the Iranian case should be closed.
Khatami, ending his second and final four-year presidential term in 2005, acknowledged he had failed to fully implement his social and political reform program because of opposition from unelected, powerful hard-line institutions controlled by Islamic clerics.
Still, he said he had changed Iran's political landscape, adding "I came to work within the ruling system, not to change the system or bring tension."
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IRAN
Nuclear Weapons
Updated: November 25, 2003
What steps are being taken to curb Iran's nuclear program?
Iranian officials have admitted to the United Nations International Atomic Energy Agency (IAEA) that they have been secretly developing a broad range of nuclear capabilities for the past 18 years. The IAEA board decided not to sanction Iran for these disclosures. Instead, on November 26 it adopted a resolution that condemned Iran's past violations of IAEA rules and welcomed Iran's new pledges of cooperation. In recent weeks, Iran has agreed to snap weapons inspections and a temporary halt to its uranium enrichment program.
What is the Bush administration's reaction to this deal?
Secretary of State Colin Powell said November 26 he was "very happy" with the IAEA resolution. But U.S. officials had been pushing for stronger action against Iran. Specifically, they wanted Iran to be declared in breach of the 1968 Nuclear Non-Proliferation Treaty (NPT) and for the matter to be referred to the U.N. Security Council, which could then impose sanctions. U.S. officials failed to convince a majority of countries on the 35-member IAEA board that this step was required. According to The New York Times, only Canada, Australia, and Japan agreed to support the U.S. position.
Why did most countries push for a compromise?
One reason was that the IAEA did not consider Iran's many violations of specific nonproliferation rules proof that Iran had a nuclear weapons program. This conclusion led to outrage on the part of the U.S. representative to the IAEA, Kenneth Brill, who said the Iranian government had "systematically and deliberately deceived the IAEA and the international community about these issues for year after year after year" to further its "pursuit of nuclear weapons." Many international nuclear experts have agreed that the types of experiments Iran was conducting--such as uranium enrichment by laser--strongly suggest the existence of a nuclear weapons program.
Another reason was that officials from France, Germany, and Britain were eager to encourage so-called pragmatic leaders in Iran who are pressing for greater engagement with the international community, rather than continued isolation. Hardliners in Iran have argued that their country--which the State Department classifies as the leading state sponsor of terrorism--should drop out of the NPT and speed up development of a nuclear bomb. This path, similar to the one pursued by North Korea, would have escalated the crisis, proponents of engagement say.
What does the new IAEA resolution say about Iran's nuclear program?
It "strongly deplores Iran's past failures" to disclose its nuclear program and calls on Iran "to undertake and complete the taking of all necessary corrective measures on an urgent basis," according to press reports. The IAEA's latest analysis of Iran's nuclear program found "that Iran has failed in a number of instances over an extended period of time to meet its obligations" with respect to the reporting, processing, and use of nuclear materials. However, it found "no evidence" that Iran was pursuing nuclear weapons--a phrase IAEA head Mohammed ElBaradei later explained meant "no proof" in a legal sense.
What would happen if Iran violates more IAEA rules?
The agency would then be able to use "all options at its disposal" to punish Iran, according to the IAEA resolution. U.S. diplomats say this language is a veiled reference to U.N. Security Council action.
Does Iran have a program to build nuclear weapons?
Many international officials and weapons experts believe it does. The Bush administration is concerned that a nuclear-armed Iran, one of the three nations in the group President Bush labeled the "axis of evil," would further destabilize the Persian Gulf region and possibly give terrorists access to weapons of mass destruction.
Why does Washington suspect Iran is seeking nuclear weapons?
Iran's secret nuclear program included all the steps needed to make fissile material for a nuclear bomb. U.S. officials argue that Iran would not have denied the existence of a peaceful nuclear energy program. Iran also has the world's sixth largest oil reserves, raising suspicions about why it would spend billions of dollars to develop nuclear power plants. Iranian officials, however, say their program is committed to nuclear power and other peaceful uses.
Will the new agreement prevent Iran from getting a nuclear weapon?
It's unclear. Some experts and international officials argue that the new, more rigorous IAEA inspection protocol, coupled with Iran's desire to engage with the international community, will dissuade it from seeking nuclear weapons. Others point out that powerful elements within the Iranian government, including the leadership of the Revolutionary Guards, remain intent on acquiring the capability to develop atomic weapons, raising concerns that Iran might continue to conceal parts of its nuclear program. Nuclear experts also warn that, under the terms of the NPT, Iran can legally develop a peaceful nuclear power program, then drop out and rapidly convert it to an illegal weapons program. According to the NPT, Iran may build any nuclear facility, including uranium enrichment plants to create nuclear fuel, as long as the facility is devoted to peaceful uses and subject to IAEA safeguards and inspections.
When could Iran have a nuclear weapon?
The Bush administration has been operating on the assumption that Iran could have a nuclear bomb by 2006 if no steps are taken to slow the program, says Kenneth Katzman, a specialist in Middle East affairs for the Congressional Research Service. On June 11, Secretary of Defense Donald H. Rumsfeld said, "The assessment is that they [the Iranians] do have a very active program and are likely to have nuclear weapons in a relatively short period of time." Previous administration forecasts--made before Iran's stepped-up uranium enrichment activities were discovered in February 2003--indicated Iran could go nuclear by the end of the decade.
What is Iran's main civilian nuclear facility?
When it's completed, it will be an $800 million Russian-built nuclear power plant at Bushehr, along the Persian Gulf in southwestern Iran. Bushehr is scheduled to open in 2005, and Russian officials say they will continue to build the reactor despite fears that Iran could divert expertise and spent fuel into a nuclear weapons program. Bushehr will be subject to IAEA inspections, and to further safeguard the plant, Russian officials have said they will require all spent fuel rods from Bushehr to be returned to Russia. The rods contain plutonium, which can be reprocessed to fuel a nuclear bomb.
What are some of the warning signs that Iran is seeking nuclear weapons?
Among them:
Iranian officials have admitted that Iran has been secretly developing, for 18 years, a uranium centrifuge enrichment program, and, for 12 years, a laser enrichment program, in violation of Iran's nuclear safeguards agreement with the IAEA.
Iran has secretly produced small amounts of low-enriched uranium and plutonium, in violation of the IAEA agreement.
Iran revealed in February that it was constructing a secret gas centrifuge uranium-enrichment plant at Natanz. Subsequent IAEA inspections found traces of weapons-grade uranium there.
Traces of enriched uranium were also found at a centrifuge workshop near Tehran called the Kalaye Electric Company.
Iran also revealed in February that a secret heavy water production facility was under construction in Arak, just north of Natanz. Heavy water can be used to produce plutonium, another fuel for nuclear explosions.
Iran failed to reveal to the IAEA that it imported 1.8 metric tons of natural uranium from China in 1991 and stored it at an undisclosed laboratory at the Tehran Nuclear Research Center.
Iranian officials want to mine and enrich their own uranium, which many experts say is costly and unnecessary for the civilian nuclear program that Iran is pursuing. On October 21, Iran agreed to suspend, but not dismantle, this aspect of its program.
Why did Iran announce the existence of the secret plants in February?
It's not clear. Some experts say that Iran has decided the best way to keep its nuclear program afloat and allay international suspicion is to comply fully with IAEA rules. Others say Iran got caught with a secret program and was trying to minimize the damage. An Iranian opposition group, the Mujahedeen-e-Khalq (which is classified by the U.S. State Department as a terrorist group), announced in August 2002 that it had intelligence about the two facilities, taking many international governments by surprise.
Will this issue be resolved diplomatically?
It appears so, if Iran follows through with its pledges to cooperate with the IAEA and opens all of its nuclear facilities to international inspectors. If Iran continues to violate its agreements, however, sanctions or other punishments could follow. According to the Bush administration, a unilateral military strike against Iran's nuclear facilities is not currently under consideration.
-- by Sharon Otterman, staff writer, cfr.org

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Tehran's pragmatists are ready to talk
By Ray Takeyh
International Herald Tribune, August 24, 2004
WASHINGTON As Iran's nuclear challenge becomes the subject of international deliberations, the Islamic Republic is confounding another U.S. administration. It is tempting simply to regard the Iranian regime as unfit for rehabilitation and to isolate it until it is replaced. But one of the many paradoxes of modern Iran is that the recent demise of the reform movement has facilitated the ascendance of pragmatic conservatives willing to have a far-reaching dialogue with the United States. At a time when the challenge of Iran seems most acute, the prospect of Tehran accommodating Washington has never been greater.
It is customary in the West to view Iran's conservatives as a mass of undifferentiated reactionaries, united in purpose and driven by a regressive ideology. Yet even among those who proclaim their fidelity to the Islamic revolution, there are many who appreciate that mere slogans cannot solve Iran's economic and security quandaries.
The pragmatic conservative clerics grouped around the powerful former president, Ayatollah Akbar Hashemi Rafsanjani, believe the regime must address the economic demands of its hard-pressed constituents, which would require not only structural reforms but also a rational foreign policy that ends Iran's isolation from the global marketplace.
To accomplish this, Iran must not only engage its immediate neighbors, but also reach a modus vivendi with the United States. The pragmatists, unlike the reformers, have the clout to deliver on their pledges because of their commanding position in the national security apparatus and their close ties to the supreme leader, Ayatollah Ali Khamenei.
Historically, the conservatives have been vociferous in condemning America as the "Great Satan." But the changed geopolitical map of the Middle East and the massive projection of U.S. power on Iran's periphery have led a critical segment of Iran's right to reconsider the value of a rational relationship with America.
The powerful secretary to the Supreme National Security Council, Hasan Rowhani, a leading pragmatist, acknowledged this point recently: "By intervening in Afghanistan and Iraq, the Americans have become our neighbors. We have to be realistic. One day, ties will have to be established."
A similar lean toward pragmatism is evident in this group's approach to the nuclear issue. While the reactionary clerics want Iran to pull out of the Nuclear Nonproliferation Treaty and manufacture nuclear weapons, the pragmatists recognize that such a strategy would wreck Iran's tenuous rapprochement with the Gulf states and even drive them further into the U.S. embrace. Moreover, such a policy would trigger multilateral sanctions, further isolating Iran from its valuable European commercial partners.
Instead of such brazen defiance, the pragmatists are following North Korea's example, seeking to employ the nuclear card to extract security and economic concessions from the international community.
A spokesman for Iran's Foreign Ministry, Hamid Reza Asefi, dangled the prospect of such a deal recently when he said, "We are ready for discussion and negotiations, but we need to know what benefits the Islamic Republic would get from them." Should Washington be willing to relax its economic sanctions and respect Iran's legitimate security interests in the Gulf, it may successfully defuse another proliferation crisis in the Middle East.
Among the fears that have greatly preoccupied Washington is that Iran is seeking to export its revolution to Iraq. Many Iranian hard-liners initially viewed Iraq, with its Shiite majority, as an ideal location for propagation of their radical message. But even on this issue the pragmatists have managed to curb the theocracy's impetuous designs. The notion of exporting the revolution was dismissed by one of Iran's leading pragmatic conservatives, Muhammad Larijani - a close adviser to Khamenei - when he said, "Iran's experience is not possible to be duplicated in Iraq."
Despite Tehran's vociferous objections to American intervention in Iraq, it does hold out the possibility of cooperating with America in achieving shared objectives. Iran has no desire to see a weak Iraq become a failed state as Afghanistan. In April 2004, Rafsanjani went so far as to say, "We helped the Americans in Afghanistan and we are ready to do the same with Iraq."
Iran's emerging pragmatists are well aware that the current state of U.S.-Iranian relations inhibits Iran's economic development, as investors are loath to send capital to a country that might become a potential war zone. Instead of a grandiose bargain with the United States, the pragmatists propose a series of tactical compromises aimed at obtaining nonaggression and nonintervention guarantees from Washington.
Incremental improvement in U.S.-Iranian relations and the gradual integration of Iran into the global economy hold out the best possibility of changing Iran's behavior on issues of concern such as terrorism and opposition to the Arab-Israeli peace process. An Iran that has a stake in regional stability and better relations with the United States is likely to avoid provocative policies.
If Washington wants a meaningful dialogue with Iran, it will find receptive interlocutors.
Ray Takeyh is a senior fellow at the Council on Foreign Relations.
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Managing Information
By Shane Harris
sharris@govexec.com
The Senate Intelligence Committee's 521-page critique of pre-Iraq War intelligence is more than a shot across the bow of U.S. intelligence agencies. It's a slap in the face, a kick in the pants and as pointed a reprimand as the august body could muster without degenerating to fisticuffs.
The review concludes that the government's intelligence agencies, in particular the Central Intelligence Agency - their conduit to the president - assumed a lot about Iraq's efforts to build and use weapons of mass destruction, including chemical, biological and nuclear devices. Many of their assumptions were wrong, which is problematic since President Bush used them in issuing his call to upend Saddam Hussein to save the world from his WMD.
The botched analysis was manifest in an October 2002 National Intelligence Estimate, which supposedly represented the consensus of all 14 intelligence agencies. But Senate investigators found reports, some never included in the NIE, that contradict its conclusion that Iraq possessed WMD and could make more. This missed call has been labeled "an intelligence failure."
But the fundamental problems with the NIE didn't stem from the quality of the intelligence, an examination of the Senate report shows, although some of it was deficient. Rather, the government's inability to assess Iraq's weapons programs represents a failure of management, primarily at the CIA.
Trouble at the Top
Consider the intelligence production cycle. Information arrives at agencies - from human sources, from satellite photos, from the morning paper - and analysts study it. Then they write documents - such as briefings or NIEs - that are consumed by decision-makers. It's essentially a secretive publishing enterprise - information comes in at the lower levels and is read at the highest.
As information rises up the chain in any hierarchical organization, such as the CIA, the FBI or even the Coca-Cola Co., pieces of it fall away, like jettisoned stages of a rocket, until a capsule of distilled information remains, easy to consume, brief and, most important, decisive. It's the preferred method of creating executive-level summaries - "Just tell me what I need to know" - and it occurred with textbook regularity when the intelligence agencies sat down to write the Iraq NIE.
The problem is, the National Intelligence Estimate didn't tell decision-makers everything they needed to know. The Senate report exhaustively documents the exclusion or stifling of alternative analyses of Iraq WMD.
Dissenters from Air Force intelligence, for instance, were sidelined when they challenged the CIA view that Saddam Hussein would use his unmanned drone aircraft to drop toxic biological specimens on U.S. cities. The Air Force said the drone fleet was too small for that. The Air Force may be the leading authority on aircraft, but CIA analysts, with access to exclusive sources, considered themselves the experts on bioweapons.
Something similar happened with the CIA's examination of aluminum tubes, which analysts thought Iraq would use to enrich uranium for nuclear weapons. The agency didn't invite nuclear experts from the Energy Department to look them. A CIA analyst told Senate committee investigators, "We were trying to prove some things. . . . It wasn't a joint effort."
Considering the decisive role the drone and aluminum tube data played in characterizing Iraq's intentions as bellicose, CIA managers should have played devil's advocate and required their analysts to hear dissenting views, the Senate investigators concluded. But the managers didn't do that, investigators found. As a result, an NIE that could have been a fragrant stew was reduced to a thin consomm??.
The report's authors singled out the top manager, former Director of Central Intelligence George Tenet, painting him as an absent leader. Tenet told the committee that he doesn't expect to hear dissenting analyses "until the issue gets joined" during an NIE writing. The committee members indicated that if someone had looked at the issue before it was joined, the 373 members of Congress who voted to let the president invade Iraq might have changed their minds.
"The whole Iraq misadventure calls into question the very concept of an NIE," says Steven Aftergood, an intelligence expert with the Federation of American Scientists, who has spent years studying how the CIA works. "In retrospect, we would have been better off if each agency . . . produced its own estimate. The profound differences of opinion . . . would then have had a better chance to be aired and evaluated."
Or managers could have interceded. But, says one former CIA executive, that wouldn't happen under Tenet. "George doesn't do paper," the official says. "He doesn't do analysis. That responsibility fell back to [Deputy Director John] McLaughlin [now the interim CIA chief] and the staff."
But there, too, things broke down. CIA managers in the Directorate of Operations, the spy side of the house, withheld information from analysts. "Significant reportable intelligence was se-questered in CIA Directorate of Operations cables, distribution of intelligence reports was excessively restricted, and CIA analysts were often provided with 'sensitive' information that was not made available to analysts who worked the same issues at other . . . agencies," the Senate report says. "These restrictions, in several cases, kept information from analysts that was essential to their ability to make fully informed judgments." Some "sensitive" information concerned the reliability of two main sources on alleged mobile weapons labs and information pertaining to Iraq's aerial drone program, the one that raised dissents from Air Force analysts.
Cowardly Bureaucracy
Considering that the Iraq assessment went so wrong, can the intelligence process be fixed? Any reforms must be targeted at the CIA's inherent managerial weaknesses, experts say.
On the analysis side, the former intelligence executive says the agency's secretive and hierarchical nature has created "a lot of little hollers" in which senior analysts mentor junior ones who sometimes parrot their teachers' convictions. That cannot continue, he argues.
The CIA produces some radical, relatively heretical thinkers. But one analyst, who headed the agency's group targeting Osama bin Laden and wrote two books on radical Islam, says those bosses aren't serving their decision-maker customers because they don't encourage contrarian thinking.
Instead, the senior service is "just willing to go which way the wind blows," says the analyst, a senior service member himself, who uses the nom de plume Anonymous. Their resolve is most tested when they meet the people on the pointy end of the intelligence fork. In that risk-averse air, he contends, managers become much more selective in what they tell decision-makers, including the president. No one wants to stake his reputation on a bad analysis.
But that's just what happened with Iraq. And it begs the question of whether CIA managers pushed for analysis that jibed with the White House's public declarations that Iraq was a weapons-wielding worldwide threat. The Senate report says White House officials exerted no undue influence over the writing of the NIE. It blames the CIA's laser focus on trying to prove, rather than disprove, the presence of WMD partly on the agency's lack of awareness of how far Hussein had gone with his nuclear program before the first Gulf War and a desire not to get snookered again.
For now, the question of why the intelligence process was so one-sided remains. Whatever the reason CIA managers withheld information from analysts, the fact is, they did it. If they hadn't, the NIE might have read differently.
Undoubtedly, calls for reform will include an admonition to challenge intelligence assumptions, perhaps by creating a formal mechanism, such as an intelligence watchdog unit. But intelligence managers would do well to take on that responsibility. Otherwise, like cigarette packs, NIEs might have to carry a warning label: "Caution: Conclusions in this document may not reflect reality."

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>> DISSENTING REPUBLICANS?


Republicans for Kerry
Bush's defeat would be good for the GOP.
BY NIALL FERGUSON
Saturday, August 28, 2004 12:01 a.m. EDT
It is doubtless not the most tactful question to ask on the eve of the Republican convention, but might it not be better for American conservatism if George W. Bush failed to win a second term?
Yes, I know, the official GOP line is that nothing could possibly be as bad for the U.S. as a Kerry presidency. According to the Bush campaign, John Kerry's record of vacillation and inconsistency in the Senate would make him a disastrously indecisive POTUS--an IMPOTUS, as it were. By contrast, they insist, Mr. Bush is decisiveness incarnate. And when this president makes a decision, he sticks to it with Texan tenacity (no matter how wrong it turns out to be).
It is a mistake, however, to conceive of each presidential contest as an entirely discrete event, a simple, categorical choice between two individuals, with consequences stretching no further than four years.
To be sure, there are many tendencies in American political life that will not be fundamentally affected by the outcome of November's election. For example, contrary to what Mr. Kerry claimed in his convention speech, there are profound structural causes for the widening rift between the U.S. and its erstwhile allies on the European Continent that no new president could possibly counteract. And regardless of whether Mr. Bush or Mr. Kerry is in the White House next year, the U.S. will still be stuck with the dirty work of policing post-Saddam Iraq with minimal European assistance other than from Britain--which, by the same token, will remain America's most reliable military ally regardless of whether Mr. Bush or Mr. Kerry is in the White House.
Nor would the election of Mr. Kerry have the slightest impact on the ambition of al Qaeda to inflict harm on the U.S. Even if Americans elected Michael Moore as president, Osama bin Laden would remain implacable. In geopolitical terms, at least, what happens on Nov. 2 will change very little indeed. Yetin other respects--and particularly in terms of party politics--the election's consequences could be far-reaching. It is not too much to claim that the result could shape American political life for a decade or more.
Fourteen years ago, in another English-speaking country, an unpopular and in many respects incompetent conservative leader secured re-election by the narrowest of margins and against the run of opinion polls. His name was John Major, and his subsequent period in office, marred as it was by a staggering range of economic, diplomatic and political errors of judgment, doomed the British Conservative Party to (so far) seven years in the political wilderness. I say "so far" because the damage done to the Tories' reputation by the Major government of 1992-97 was such that there is still no sign whatsoever of its ever returning to power.
Many Conservatives today would now agree that it would have been far better for their party if Mr. Major had lost the election of 1992. For one thing, the government deserved to lose. The decision to take the United Kingdom into the European Exchange Rate Mechanism had plunged the British economy into a severe recession, characterized by a painful housing market bust. For another, the Labour candidate for the premiership, Neil Kinnock, had all the hallmarks of a one-term prime minister. It was Mr. Kinnock's weakness as a candidate that enabled Mr. Major to scrape home with a tiny majority of 21 out of 651 seats in the Commons. Had Mr. Kinnock won, the exchange rate crisis of September 1992 would have engulfed an inexperienced Labour government, and the Conservatives, having replaced Mr. Major with a more credible leader, could have looked forward to an early return to office.
Instead, the next five years were a kind of Tory dance of death, in which the party not only tore itself apart over Europe, but also helped to tear Bosnia apart by refusing all assistance to those resisting Serbian aggression. Meanwhile, a spate of petty sexual and financial scandals discredited one minister after another, making a mockery of Mr. Major's call for a return to traditional family values ("Back to Basics"). All of this provided the perfect seedbed for the advent of New Labour and the election by a landslide of Tony Blair in May 1997. Well, Mr. Blair is still in Downing Street and, having weathered the worst of the political storm over Iraq, seems likely to remain there for some years to come.Could something similar be about to happen in the U.S.? In my view, the Bush administration, too, does not deserve to be re-elected. Its id?e fixe about regime change in Iraq was not a logical response to the crisis of 9/11. Its fiscal policy has been an orgy of irresponsibility. Given the hesitations of independent voters in the swing states, polls currently point to a narrow Bush defeat. Yet Mr. Kerry, like Mr. Kinnock, is the kind who can blow an election in a single sound bite. It's still all too easy to imagine George W. Bush, like John Major, scraping home by the narrowest of margins (not least, of course, because Mr. Bush did just that four years ago).
But then what? The lesson of British history is that a second Bush term could be more damaging to the Republicans and more beneficial to the Democrats than a Bush defeat. If he secures re-election, President Bush can be relied upon to press on with a foreign policy based on pre-emptive military force, to ignore the impending fiscal crisis (on the Cheney principle that "deficits don't matter") and to pursue socially conservative objectives like the constitutional ban on gay marriage. Anyone who thinks this combination will serve to maintain Republican unity is dreaming; it will do the opposite. Meanwhile, the Dems will have another four years to figure out what the Labour Party finally figured out: It's the candidate, stupid. And when the 2008 Republican candidate goes head-to-head with the American Tony Blair, he will get wiped out.
The obvious retort is that American politics is not British politics. No? Go back half a century, to 1956, and recall the events that led up to the re-election of another Republican incumbent. Sure, Eisenhower didn't have much in common personally with George W. Bush, except perhaps the relaxed work rate. But Ike was no slouch when it came to regime change. In 1953 a CIA-sponsored coup in Iran installed as dictator Shah Mohammed Reza Pahlavi. In 1954 Ike enunciated the "domino theory," following the defeat of France in Vietnam and invaded Guatemala to install another pro-American dictator. In 1955 he shelled the Chinese isles of Quemoy and Matsu.
Yet Eisenhower's refusal to back the Anglo-French-Israeli invasion of Egypt following Nasser's nationalization of the Suez Canal, and his acquiescence in the Soviet invasion of Hungary, should have alerted American voters to the lack of coherence in his strategy. Predictably, Ike's re-election was followed by a string of foreign-policy reverses--not least the overthrow of the Hashemite monarchy in Iraq, Castro's takeover of Cuba and the shooting down of Gary Powers's U-2 spy plane over the Soviet Union. These were the setbacks that lent credibility to JFK's hawkish campaign in 1960: And Kennedy's victory handed the rest of the decade to the Democrats.
Like Adlai Stevenson before him, Mr. Kerry has an aura of unelectability that may yet prove fatal to his hopes. But a Stevenson win in 1956 would have transformed the subsequent course of American political history. Conservatives may ask themselves with good reason whether defeat then might ultimately have averted the much bigger defeats they suffered in the '60s. In just the same way, moderate Republicans today may justly wonder if a second Bush term is really in their best interests. Might four years of Mr. Kerry not be preferable to eight years or more of really effective Democratic leadership? Mr. Ferguson, professor of history at Harvard and a senior fellow of the Hoover Institution at Stanford, is author of "Colossus: The Price of America's Empire" (Penguin, 2004).
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No Dollar Left Behind
The GOP gets failing grades.
By Timothy P. Carney
JAVITS CENTER, NEW YORK -- As recently as 1996, the Republican-party platform called for the abolition of the Department of Education as an unconstitutional, heavy-handed, and ineffective entity. Eight years later, things have changed.
Conservatives in New York this week knew there was trouble once they read the first sentence of the platform on "No Child Left Behind." It read: "Public education is the foundation of civil society." (In comparison to "family," which earned the description of being the "cornerstone.")
The second sign of trouble was learning that the subcommittee handling education was chaired by Rep. Phil English (R., Penn.), a key ally of Arlen Specter this past spring, and had the endorsement of the National Education Association.
The two days of platform debate confirmed the suspicion that the GOP has become the party of Big Education.
On Wednesday, conservative Texas delegate Kelly Shackelford moved to strike the "foundation" sentence, asking "were we not a civil society for the first hundred years of our country?" English and most of the delegates resisted, insisting the GOP declare its undying support of government schools.
So Shackelford offered a compromise: just remove the word "public." Education as a foundation of civil society was an idea most people can accept. Invoking an idea of tolerance fit for George Orwell, some delegate objected that without specifying public education over private and religious education, that sentence would be discriminatory. Shackelford lost again.
After all was done with the subcommittee, the first sentence appeared as, "Public Education is a foundation of free and civil society [emphasis added]." Shackelford and others tried in full committee to add other kinds of education to that sentence, but they were defeated again, at the urging of English.
The next section was even more displeasing to conservatives. Titled "Historic Levels of Funding," it bragged about outspending Bill Clinton, Jimmy Carter, and Richard Nixon on education. The paragraph could have been mistaken for an angry screed from a disillusioned fiscal conservative:
"President Bush and Congressional Republicans have provided the largest increase in federal education funding in history and the highest percentage gain since President Johnson." Efforts to strike this paragraph ("we're using liberal Democrats in our platform and saying we're worse than them," objected one delegate) were met with angry scolds by the Bush campaign's proxies, but conservatives got a bone thrown to them when the full committee struck the words "President Johnson" and replaced them with "the 1960s."
One other scuffle on education reflects the entire platform process's central-planning problem. Shackelford introduced an amendment to reinsert language from the 2000 platform saying education is essentially a local undertaking. He was defeated by other delegates who explained that Republicans no longer believe in local control after No Child Left Behind.
When he couldn't convince other delegates with appeals to conservative principles, Shackelford turned to the true guiding star for the platform: the Bush campaign's policy team.
With the stamp of approval from the campaign, Shackelford was able to pass his amendment through full committee -- with the campaign's proxies explaining that although No Child Left Behind looked like a huge federal power grab, it really was all about local control.
Delegates also failed to insert language objecting to in-state college tuition for illegal aliens. No one even tried to deny illegals access to public schools.
Conservatives hoping for real education reform had started losing hope in the GOP before the 2000 election. This platform convinced conservatives that on education, it may be about time to jump the GOP ship.
-- Timothy P. Carney is a reporter for the Evans-Novak Political Report.
http://www.nationalreview.com/comment/carney200408271245.asp

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The Republican Convention
The party begins in New York City, paid for by special interests
By Meredith O'Brien
WASHINGTON, August 20, 2004 -- President Bush will accept his party's nomination in New York City at the Republican National Convention, an event that will cost an estimated $166 million. In addition to the tens of thousands of patriotically themed balloons, Republicans asked for and received millions of dollars worth of phone lines, computers, hightech gadgets, automobiles and parties, many of them paid for by special interests that had, in the past, contributed soft money to the Republican National Committee.
The largesse comes at a time when political conventions are attracting fewer and fewer viewers. Ratings for July's four-day Democratic convention on the three major networks, as well as on cable news stations Fox News, MSNBC and CNN "hit an all-time low," Entertainment Weekly reported.
Despite spending an estimated $95 million to throw the Democratic National Convention in Boston - the final tab won't likely be known for months - the event did little to change the dynamics of what still appears to be a close presidential election, especially among the crucial undecided voters. In the first national polls taken just after John Kerry accepted the Democratic nomination for president in his hometown, there was precious little, if any, bounce detected. Surveys conducted by various media organizations showed everything from what Newsweek called a "baby bounce" in his lead over Bush (up four points, the smallest post-convention bounce in the history of the magazine's poll), to what the Gallup organization saw as an actual five-point loss among likely voters, despite day after day of glowing adjectives being lavished on Kerry's image in front of a crowd of 15,000 journalists in the FleetCenter in Boston.
Republican 2004 National Convention
The Republican Convention
Counting the Costs
Spending Spree
Wining and Dining the GOP
Grand Old Parties
Many pundits have argued that the election results won't really be affected by the nominating conventions at all, but instead will hinge on the debates this fall between Kerry and Bush. Though presidential nominating conventions may no longer move poll numbers up, the price tag for the events shoots ever upward. According to a study by the Washington, D.C.-based Campaign Finance Institute , which tracks the escalating costs of presidential campaigns, spending for these four-day convention productions has grown, even if the impact of the conventions on the final election results is diminishing. "In a sense, the [convention] committees are building the stage props for a television production, with the costs going up even as hours of major network television coverage and average audience ratings have skidded," CFI analysts wrote in a July 2004 study.
As Senator Joe Biden, D-Del., made his way home from Boston, he remarked to The Boston Globe, "Maybe I've been to too many of these things, but two days would do it." Similar sentiments were uttered four years ago after the Democratic convention in Los Angeles wrapped up. "We ought to consider the possibility of shortening it," then-House Democratic Leader Richard Gephardt told The Wall Street Journal.
But cutting down--or even eliminating--the number of days of the national conventions would put a damper on the special interest parties slated for the weeks of the Democratic and Republican conventions. Lobbyists, businesses and interest groups hoping to make a pitch or build relationships with policy makers planned hundreds of private parties held during the Democratic convention in Boston and slated for the Republican convention in New York City. Though the Bipartisan Campaign Reform Act of 2002--better known as McCain-Feingold--banned unlimited cash donations to parties (known as soft money), special interests still can write large checks to a party's convention host committees, or throw elaborate bashes for the party leaders themselves. Or both.
"Companies like to be part of the democratic process of our country," Darrell Henry, the American Gas Association's government relations director told The Los Angeles Times. "It gives us exposure, and we get to be involved in the biggest political event of the season." The group is spending hundreds of thousands of dollars on parties at the Democratic and Republican conventions this year.
The senators and congressmen who are feted at convention week events like AGA's parties are often specifically invited for their areas of expertise and their committee assignments. In New York City, the AGA has teamed up with other energy interests, like the Edison Electric Institute and the National Mining Association, to throw a "Texas Honky-Tonk Salute" for Rep. Joe Barton (R-Texas), the chairman of the House Committee on Energy and Commerce. The same groups are throwing "The Wildcatters Ball" at Rockefeller Plaza for Sen. James M. Inhofe (R-Okla.), chairman of the Senate Committee on Environment and Public Works, according to media reports.
The Boston Herald estimated that some $20 million was spent in Boston alone on these private receptions. At least 50 parties costing $100,000 or more have been slated for both conventions, according to Broadcasting & Cable.
On top of the lavish parties, private groups are getting around the campaign finance regulations by pouring unlimited amounts of money into the committees hosting the conventions, technically designated as charitable, civic booster organizations by the Federal Election Commission. These groups don't have to reveal the names or contribution amounts of their donors.
Still, an examination, based on newspaper reports, press releases, Web sites and other sources, of the donors to the New York City 2004 host committee and to Republican campaigns as well as to the Boston 2004 host committee and to Democratic campaigns yields interesting results. Twenty-six companies gave either cash or in-kind contributions to the host committees for both conventions, according to a Center for Public Integrity analysis. Most of those companies also contributed soft money to both parties in the 1999-2000 election cycle, as well as to the federal campaigns of both President Bush and Senator Kerry, as well

as to Kerry's Political Action Committee. (See chart below).
Contributors to Boston and NYC host committees Democratic soft money 1999-2000 Money to Kerry federal campaigns and PACs since 1991 Republican soft money 1999-2000 Money to Bush federal campaigns since 1999
Allied Domecq $51,600.00 $725,017.00 $7,500.00
Amgen Inc. $150,000.00 $11,500.00 $1,780,200.00 $31,840.00
AstraZeneca $6,425.00 $105,000.00 $8,200.00
AT&T $7,142,507.00 $19,550.00 $12,176,649.00 $54,215.00
Bank of America $41,952.00 $233,550.00
Bristol-Myers Squibb Company $7,402.00 $57,050.00
CB Richard Ellis $18,300.00 $62,770.00
Citigroup $202,310.00 $328,695.00
Clear Channel Outdoor $985,000.00 $14,500.00 $2,154,950.00 $93,615.00
Credit Suisse First Boston $106,154.00 $430,550.00
DaimlerChrysler Corporation $14,000.00 $3,450.00 $212,725.00 $37,025.00
Delta Air Lines, Inc. $1,275,000.00 $30,350.00 $818,996.00 $76,611.00
EMC Corporation $12,975.00 $1,820,000.00 $172,515.00
Ernst & Young $2,238,000.00 $74,975.00 $2,769,525.00 $443,809.00
Fannie Mae $38,000.00 $37,465.00
General Motors Corp. $12,500.00 $11,500.00 $331,300.00 $138,295.00
IBM Corporation $78,980.00 $67,693.00
KPMG LLP $26,550.00 $1,312,850.00 $171,027.00
Marriott International, Inc. $260,000.00 $6,250.00 $1,099,500.00 $23,875.00
Microsoft Corporation $3,901,876.00 $115,913.00 $8,822,623.00 $230,740.00
New Balance Athletic Shoe, Inc.
Pfizer Inc. $1,040,000.00 $26,150.00 $14,030,244.00 $118,304.00
Serono, Inc.
The Coca-Cola Company $400.00 $4,500.00
Verizon Communications $3,000,500.00 $87,158.00 $5,280,832.00 $134,980.00
Waste Management, Inc. $525,000.00 $5,750.00 $1,935,535.00 $143,519.00
(Source: Center for Public Integrity analysis based on FEC data)
'In kindness' of interests
When not directly writing checks to the campaigns, some companies are showing their appreciation to the parties indirectly, by giving in-kind donations to the host committees.
General Motors, for example, supplied 300 vehicles to Democratic convention organizers in Boston. Neither convention organizers nor city officials would say what happened to those vehicles after the convention. The same number of vehicles was donated to the GOP convention in New York. Officials on that end were also mum about what will happen to those shiny new vehicles after the balloons drop from the Madison Square Garden ceiling. Kimberly Hippler, a spokeswoman for GM, told the Center that donating the vehicles is "good for the political process by helping solve sheer transportation issues at the convention, and it's good for GM to be doing this." She said it is "hard to estimate the cost" of the vehicles and that after the convention, the vehicles are "all dispersed into different applications, dealers, auctions, [I] can't say where they're all going to."
Panasonic made donations of various video and audio products to Republicans--as they did with the Democrats--giving conventioneers more than 100 Panasonic Viera high definition plasma monitors, according to the Republican convention and Panasonic Web sites. The retail price for those units ranged from $3,700 for the 37-inch Panasonic Vieras to $8,000 for the 50-inch models. Panasonic officials did not return Center phone calls regarding what will happen to its televisions after the convention has concluded.
Officials from the Republican Party, the host committee and the New York City mayor's office refused to field questions about what will happen to the in-kind contributions, like the cars, plasma TVs and Blackberries, donated for convention use once the Republicans leave town.
After months of reviewing thousands of pages of FEC and other public documents, the Center for Public Integrity has completed an analysis of the making of a Republican national convention. From examining the Request for Proposals issued by the Republican National Committee--which details a long list of items any city and civic committee willing to serve as host would have to provide party officials--and perks expected for GOP convention delegates, to actual convention spending for the 2000 Republican convention in Philadelphia and spending thus far for the 2004 convention in New York, the Center sought to provide an overview of the costs and expectations surrounding a national convention.
A summary of the findings:
What Republicans want: Like their Democratic counterparts, GOP officials mandate many goods and services from cities and their civic organizations seeking to host their national, quadrennial conventions. For its 2004 convention, Republicans asked for housing for a year for designated GOP convention staff, new computer equipment, Blackberry wireless devices, 300 air-conditioned buses, sedan car services for GOP officials, gasoline and drivers for all vehicles donated to the host committee and more than $1 million in office supplies, to name a few of the line items.
The site selection process: The method of selecting a city to host a presidential convention is becoming increasingly lavish. Cities hoping to land the 2004 Republican convention and its 50,000-person entourage went to great lengths to show the scouting party of about 20 Republicans that they know how to throw a party. In 2002, the cities vying for the convention treated the Republicans to fine food, lodging and elephant-shaped ice sculptures. The real cost of these three-day, multi-city tours goes largely unreported, as many cities and their visitors bureaus are reluctant to divulge this information. But according to documents filed by the Philadelphia 2000 host committee with the FEC, the group spent more than $1 million on its site selection process to lure the Republicans to its city for the 2000 convention. New York officials declined to say how much its host committee and other city organizers spent on its winning bid.
The impact of hosting the convention: There's disagreement about whether presidential conventions provide an economic boon to host cities immediately, pay off later after four days of a positive national spotlight on the community, or actually cost the city money. But in the case of this year's Republican convention, some analysts say it likely won't be as much of a boon as public officials claim. The Boston-based Beacon Hill Institute reported that although New York City Mayor Michael Bloomberg has said his city will yield a $250 million boost from hosting the Republican convention, once the security measures required by the Secret Service are taken into account, the city will only benefit to the tune of $163 million. [See "Counting the Costs"]
Where does the convention-related money go? An analysis of the 2000 Philadelphia convention spending by the RNC's Committee on Arrangements(COA) for the convention found that the largest chunk of party money--$8.2 million--was spent on payroll and consulting costs, followed by $2.7 million for travel and lodging and almost $1.1 million for media. As for the spending for the 2000 Philadelphia host committee--the private fundraising and convention organizing group that served, in the words of the Campaign Finance Institute, as an automatic teller machine for the Republicans--the top dollars went to consultants, $20.7 million, while costs related to events and facility renovations topped $17.9 million, followed by travel, lodging and transportation at $7.4 million.
A look at the 2004 spending by the COA between January 2003 and June 30, 2004, found that $4.67 million was spent on payroll and consulting, $585,000 was spent on travel expenses and $283,000 was spent on media expenses. New York 2004, the host committee for convention, isn't required to divulge its spending until 60 days after the convention. [See "Spending Spree"]
What Republicans want
Post-9/11 security measures aside--the federal government gave the two conventions a total of $100 million to cover security costs, in addition to the nearly $30 million it gave them to spend as they pleased--convention costs continue to increase, mostly due to the demands the parties place on their host cities for goods and services.
Through a Freedom of Information Act request filed with the city of New York, the Center for Public Integrity obtained a copy of the winning bid submitted to the RNC by the city of New York, and the contract signed between the RNC, the city, and the city's host committee, New York City 2004 (NYC 2004). The documents detail the party's expectations and what New York City and its host committee are obliged to provide for the Republican shindig.
Here's a partial list of the items, along with the price tags listed in the documents, when provided:
56 delegate events ($2.2 million).
Media, volunteer, hotel staff parties ($2.4 million).
Hospitality lounges for media, diplomats, Republican Party officials ($1 million).
Welcoming and information booths ($250,000).
Special events ($1.55 million).
Delegate packets ($800,000).
Decorations ($1 million).
Podium ($2.5 million).
D?cor and fabric coverings for Madison Square Garden ($808,000).
Office supplies for COA staffers ($1.2 million).
Shuttle for COA staff ($150,000).
A year of housing for COA staff ($2.3 million).
Telecommunications system ($5 million).
Laptop and desktop computers ($1.22 million).
24-hour police security for all COA facilities and convention hotels, as well as for dignitaries.
300 air-conditioned shuttle buses for convention participants. Sedan car service for "officers and staff of the COA and other officials as designated by the COA when such persons are in New York City conducting convention-related business," according to the contract. Drivers, vehicle maintenance costs and gasoline for vehicles given to the host committee or the COA. Subway and rail passes good for 60 days prior to the convention and throughout the duration of the event.
Unlike the contract signed between the city of Boston, its host committee Boston 2004 and the Democratic party--which specified that computer and web equipment would be returned to the city's schools, but gave no word on what would happen to the remainder of the items donated to the Democrats or the host committee--the contract between New York City and the RNC did, at least, make one issue a bit clearer, "No items, resources, services, or funds provided by the Host Committee or any Host City Party shall be used other than for Convention purposes." The contract further states, "The Host Committee agrees to use its best efforts to promptly return to the City such goods and equipment after the Convention Period, in good and operable condition, reasonable wear and tear expected."
But Republican officials wouldn't reply to Center inquiries about what would ultimately happen to those goods donated by private interests and not paid for by the city.
Site selection: Show me the free food
Some of the things Republicans can't give back are the free meals and trips they got when site selection committee members and other party officials were wined and dined by officials who wanted the GOP to hold its 2004 convention in their city.
Like the Democrats, Republicans hold a nearly year-long audition for would-be convention hosts, expecting potential host cities to show them the best of what they have to offer. Philadelphia's host committee spent well over $1 million in its attempts to woo the GOP to host its 2000 Republican convention in its city, according to FEC documents. And in March 2002, the RNC distributed a 30-page Request for Proposals to two dozen American cities to start the audition process anew, inviting them to submit bids if they were interested in hosting its 2004 convention.
Among the first to woo the Republicans were Bostonians, who held a clambake for members of the RNC in Beantown, nearly three years before the convention, before the party had even issued its RFP. Mayor Thomas M. Menino, a Democrat, and then-Gov. Jane Swift, a Republican, hosted the event in July 2001. More than 300 Republicans dined on lobster at the John F. Kennedy Library overlooking Boston Harbor, after first enjoying an amphibious excursion about the city on its famous "Duck Tours," according to a newsletter produced by Boston 2004, the committee that eventually hosted the Democrats in 2004.
Five cities eventually submitted written bids to GOP headquarters in Washington in 2002:
Boston, Miami, New York City--all three of which also sought the Democratic convention--New Orleans and Tampa-St. Petersburg. The New York, Tampa and Miami bids were the only ones delivered in person by officials from those locales, although Boston sent its three-pound bid in red computer bags with the logo, "We'll Do More in 2004," according to The Boston Herald. In July, the GOP announced it would make three site visits to New York City, New Orleans and Tampa-St. Petersburg.
For 10 days in August 2002, nearly two dozen Republican leaders took to the road to be feted in grand style.
According to The Bradenton Herald, Tampa-St. Petersburg organizers said they spent approximately $100,000 for the bid. Estimates for how much New York and New Orleans spent on their bids--including the costs of the site selection tour for 20 Republicans--haven't been publicly released. [See "Wining and Dining the GOP"]
An appeal to history
Yet New York had an advantage that its Southern competitors couldn't match, summed up in a date that hangs over the election--and the site selection process as well: September 11. With Mayor Bloomberg and former Mayor Rudy Giuliani on hand, New York Gov. George Pataki told fellow Republicans that New York City would be the best place to hold the 2004 convention for President Bush because it was symbolic of one of Bush's finest moments, when he went to Ground Zero to speak with the rescue workers days after airliners crashed into the World Trade Center, sending the towers crashing to the ground. "This will be an opportunity for the people of New York to say to the President, 'Thank you,'" Pataki said, according to The New York Daily News. The city's bid proposal featured newspaper images of Bush standing at Ground Zero on top of the pile holding the infamous bullhorn he used to speak with the rescue workers.
The focal point of a Republican convention in New York City, slated to run well into September, very close to the 9/11 attack's three year anniversary, would be the convention hall, Madison Square Garden, less than 4.5 miles from Ground Zero.
Imagery aside, New Yorkers still had to convince the Republicans that they should play host to their convention in a city where people of their political persuasion are outnumbered by a 5-1 margin. Among the site selection tour festivities USA Today reported that Republicans enjoyed:
A stay at The Plaza Hotel. (Its Web site boasts, "The crown jewel of Manhattan's fabled Fifth Avenue, The Plaza reigns over New York with a grace and glamour . . . a stay at The Plaza entails the ultimate in gracious luxury.")
A horse-drawn carriage ride across the city to Mayor Bloomberg's home on the Upper East Side.
A luncheon at the New York Stock Exchange, one of the most important centers of American commerce.
A Broadway performance of Thoroughly Modern Millie. Breakfast at the locale made famous by author Truman Capote and Hollywood icon Audrey Hepburn, Tiffany's on Fifth Avenue.
If Republicans were not sufficiently impressed by their Big Apple tour, Mayor Bloomberg--who threw $7 million of his own cash into New York's bid--capped six months of intense lobbying with one more trip to the nation's capital in November 2002. Bloomberg pressed not just the GOP, but Democrats as well, arguing that his city should be the host of both conventions. According to press accounts, Bloomberg had dinner with DNC chairman Terry McAuliffe and later a separate meeting with President Bush's political advisor Karl Rove to argue that his city had the fundraising promise and the high profile necessary to make for a successful convention, according to Newsday.
The polls will tell whether Bloomberg's pitch pays off for Republicans.
Meredith O'Brien was a co-author of The Buying of the President (Avon, 1996), and last wrote for the Center on the Democratic Convention.
Agust?n Armendariz contributed to this report.

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Halliburton Contracts Balloon
Despite being under an investigative cloud, company gets $4.3 billion in 2003
By Andr? Verl?y and Daniel Politi
WASHINGTON, August 18, 2004 -- The oil services company Halliburton, largely through its subsidiary Kellogg, Brown & Root, has received more revenue from government contracts in the last year than from 1998 through 2002. In 2003, when the company had record revenue of $16.3 billion, Halliburton received contracts from the Department of Defense worth $4.3 billion, while in the previous five years it obtained less than $2.5 billion from the military, according to an analysis by the Center for Public Integrity. Although figures are not yet available for 2004, government revenue is bound to increase as a result of the contracts the company has won for work in postwar Afghanistan and Iraq, which so far potentially totals $11.4 billion. Some of that work was actually awarded earlier; many of the company's contracts extend for multiple years. In 1998, Halliburton's total revenue was $14.5 billion; that year, the company got contracts from the Pentagon worth $284 million. Two years later, revenue had dropped to just under $12 billion while work under DoD contracts more than doubled. In 2002, DoD awarded Halliburton tasks worth $485 million while the company's revenue was $12.6 billion. Of the more than 150 American companies that together have received U.S. government contracts potentially worth more than $51 billion for postwar work in Afghanistan and Iraq, Halliburton is by far the largest recipient of contracts awarded in the two countries. As part of its continuing Windfalls of War project, the Center for Public Integrity has been compiling information on contracts awarded by the U.S. government for support in Operation Enduring Freedom and Operation Iraqi Freedom. The Center has compiled its list of contractors and contract awards through information obtained from 95 requests and appeals filed under the Freedom of Information Act or through official government and company sources.
A company under investigation
Halliburton, where Vice President Richard Cheney served as CEO from 1995 to 2000, has come under increased scrutiny because of allegations of overcharging on food service and fuel distribution contracts, poor management and close ties to the administration. This year, two audit reports by the Defense Contract Audit Agency found several deficiencies in KBR's billing system. As a result, the agency is withholding $186 million in payments for food service until KBR provides additional data showing that the meals billed actually were provided, according to congressional testimony by William H. Reed, the director of DCAA. The Pentagon's Inspector General also launched a criminal investigation in February 2004 into whether KBR overcharged the government while it was importing fuel from Kuwait to Iraq. Patrice Mingo, a spokeswoman for Halliburton, told the Center that the company has not received an official notification of an investigation by DOD's IG office. A Pentagon spokeswoman said the investigation is on-going. In a February press release the company said it welcomed a review of all its government contracts and denied overcharging. On Aug. 3, 2004, the Securities and Exchange Commission fined Halliburton $7.5 million for failure to disclose a change in its accounting practice. This change in accounting for cost overruns, while not out of the norm, means that public filings by the company were misleading in 1998 and 1999, according to the SEC. For example, in the second quarter of 1998 Halliburton used the new accounting practices without disclosing them and reported a pre-tax income of $228.7 million. If the old accounting practices had been used the pre-tax income would have been $183.3 million.
Robert C. Muchmore Jr., Halliburton's former controller, also agreed to a $50,000 fine by the SEC while a suit was filed against Gary V. Morris, the company's former chief financial officer. Vice President Cheney, Halliburton's chief executive officer during the period when these statements were released, provided testimony to the SEC but was not investigated. Halliburton and Muchmore neither admit nor deny the SEC's findings. In a shareholder class-action lawsuit in Dallas, four anonymous former accountants for Halliburton alleged earlier this month that the company had systematically committed accounting fraud to make projects appear more profitable.
On August 17, Halliburton said that the Army Materiel Command would start to withhold 15 percent of payments on future invoices under the LOGCAP III contract. A day later the Army reversed its decision, for reasons unknown. In the past, extensions to Halliburton had been given because, an Army spokeswoman said, neither the government nor the company had the necessary staff to review the increased number of bills. The Army did not return phone calls, but told the Washington Post that suggestions that Halliburton receives special treatment are wrong.
Anatomy of $11.4 billion
In Iraq, Halliburton subsidiary Kellogg Brown & Root has been awarded five contracts worth at least $10.8 billion, including more than $5.6 billion under the U.S. Army's Logistics Civil Augmentation Program contract, an omnibus contract that allows the Army to call on KBR for support in all of its field operations. When the Army needs a service performed, it issues a "task order," which lays out specific work requirements under the contract. From 1992 to 1997, KBR held the first LOGCAP contract awarded by the Army, but when it was time to renew the contract, the company lost in the competitive bidding process to DynCorp after the General Accounting Office reported in February 1997 that KBR had overrun its estimated costs in the Balkans by 32 percent (some of which was attributed to an increase in the Army's demands). KBR beat out DynCorp and defense giant Raytheon for the third LOGCAP contract in December 2001, this one to run 10 years.
Under the LOGCAP contract, in November 2002 the Army Corps of Engineers tasked KBR to develop a contingency plan for extinguishing oil well fires in Iraq. Not surprisingly, on March 24, 2003, the Army Corps announced publicly that KBR had been awarded a contract to restore oil-infrastructure in Iraq, potentially worth $7 billion. The contract KBR received--contract DACA63-03-D-0005--would eventually include 10 distinct task orders. KBR did not come close to reaching the contract ceiling, billing just over $2.5 billion. No additional task orders are being added to the contract, according to the Army Corps. [For more information on contract DACA63-03-D-0005, see Inside a War-Time Contract.] The contract was awarded without submission for public bids or congressional notification. In their response to congressional inquiries, Army officials said they determined that extinguishing oil fires fell under the range of services provided under LOGCAP, meaning that KBR could deploy quickly and without additional security clearances. They also said that the contract's classified status prevented open bidding. The contract was later declassified after the Center for Public Integrity filed a lawsuit under the Freedom of Information Act. In June 2003, the Army Corps announced that it would replace KBR's oil-infrastructure contract with two publicly bid contracts and in January 2004, the Army Corps awarded a contract that has a maximum value of $1.2 billion to KBR. The company is to continue its work to repair Iraq's oil infrastructure in southern Iraq. The contract for the northern region, with a maximum value of $800 million, went to Parsons.
In January 2004, the Army Corps awarded a contract with a potential value of $1.5 billion to KBR. The contract is for a full range of engineering services in the U.S. Central Command's area of operations, which includes Iraq and Afghanistan. The contract has a $500 million ceiling for the first year and four one-year options, each with an annual ceiling of $250 million.
Kellogg Brown & Root received a contract in August 2002 worth $110.7 million from the State Department to design and build office buildings and diplomatic staff apartments for the U.S. Embassy in Kabul, Afghanistan, as well as renovate existing offices. Additionally, as of June 2004, KBR had received 11 task orders under the LOGCAP contract for work in Afghanistan totaling $489 million.
Senior fellow Larry Makinson and database editor Aron Pilhofer contributed to this report.
http://www.publicintegrity.org/wow/printer-friendly.aspx?aid=366
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Still Groping in the Dark?
by Peter Van Doren, Jerry Taylor
Mr. Van Doren is editor of the Cato Institute's "Regulation" magazine. Mr. Taylor is Cato's director of natural resource studies.
It's been nearly a year since a quarter of the nation went pitch dark in one of the most widespread power blackouts in U.S. history. Lobbyists representing various factions in the industry have labored to use the event as ammunition for their respective policy agendas. But it turns out that the blackout revealed less about the merits of deregulation -- or various alternative institutional arrangements -- than it did about the difficulty involved in ensuring that a system as complex as the electricity grid stays up and running in the face of foreseeable contingencies.
The final report of the U.S.-Canada Power System Outage Task Force tells a complicated but prosaic tale about dozens of small things that went wrong with few obvious policy lessons. It found little evidence for the case that lack of transmission investment or deregulation -- two of the more popular explanations for the blackout -- had anything to do with the event. Instead, it found that poor tree maintenance along transmission lines in the First Energy (Ohio) service area, combined with inoperative computer software and various human errors, were the key events that triggered the blackout.
In short, three 345-kilovolt transmission lines went down when heat caused them to sag and come into contact with trees. That created an imbalance between supply and demand along the lines feeding the Cleveland area, which led, in turn, to higher current flow and accompanying lower voltage on a large portion of the remaining Eastern interconnection as the power raced along other routes to get to Cleveland.
When devices known as "relays" detected the unusual power flows around the Cleveland area, they automatically triggered circuit breakers that removed a number of lines from service (a preventative measure to ensure that billions of dollars of capital stock are not fried by unusual power flows). In the words of the report, the "cascade became a race between the power surges and the relays." The lines that tripped first were generally the longer lines that split the grid into those sections that blacked out and those that recovered without furthering the cascade. The upshot is that "protective relay settings on transmission lines operated as they were designed and set to behave on August 14."
Would less sensitive or more integrated relays have prevented the blackout? Apparently not. "The investigation team has used simulation to examine whether special protection schemes, designed to detect an impending cascade and separate the grid at specific interfaces, could have been . . . set up to stop a power surge and prevent it from sweeping through an interconnection and causing the breadth of line and generator trips . . . that occurred that day. The team has concluded that such schemes would have been ineffective on August 14."
How about mandatory, not voluntary, federal guidelines for industry reliability practices? To be sure, the lack of contingency planning and the lack of "situational awareness" by First Energy did violate the voluntary reliability guidelines which the company promised to uphold. Errors in that arena, however, were matters of secondary importance.
On the issue of vegetation management along the paths of transmission lines -- the proximate trigger for the entire event -- the voluntary guidelines established at the time by the North American Electric Reliability Council (NERC) were silent. Accordingly, if compliance with NERC guidelines were mandatory last year rather than voluntary -- the main reform advocated by politicians and industry analysts -- it would have made no difference.
In fact, First Energy went beyond the voluntary NERC guidelines by flying over its rights of way twice a year as was common industry practice. But in what surely counts as the understatement of the year, the Task Force report notes that flyovers do not appear in retrospect to be able to determine the distance between trees and transmission lines. Better practices are clearly in order, but First Energy was scarcely alone in believing that current practices were sufficient.
The report also discounted an intriguing explanation for the blackout that involves "reactive power," which is required for the operation of motors and other devices that use magnetic fields. The theory is that an insufficient amount of reactive power from generators led to the voltage collapse and the cascading blackout. In this view, the shortage of reactive power was a consequence of utility restructuring that ignored the need to ensure that merchant generators were given proper incentives to produce such power for the grid. In effect, this theory argues that the introduction of imperfectly designed markets was responsible for conditions that make blackouts more likely.
The task force found that reactive power levels were indeed low in the Cleveland/Akron area but were in fact sufficient to preserve stable (although lower than normal) voltage until the three 345-kilovolt lines tripped from tree contact.
In short, the current debate is blurring the distinction between problems attendant to the restructured electricity system and problems that contributed to the blackout on Aug. 14, 2003. It's certainly true that the transmission investment has not kept pace with the increase in system "throughput," although the optimality of the old ratio of investment to throughput is assumed rather than established. It's also true that utility restructuring has increased the number of players whose behavior has to be managed to prevent local system instabilities from spilling over into other service territories. And the evidence does suggest that under current voluntary industry guidelines some utilities are abusing the shared grid by deviating systematically from their supply and demand schedules. Likewise, analysts are right to worry that the restructured electricity system is dangerously cavalier about the need to ensure that sufficient reactive power is available to the system. Those four observations, however, have nothing to do with what actually happened to turn the lights off last year.
There are no quick or simple fixes for what went wrong last year. In fact, it's almost certain that a system as interdependent as the modern electricity system will forever remain vulnerable to such mishaps. While we believe that a serious discussion about the problems associated with the restructured electricity system is long overdo, stapling that discussion to the events of Aug. 14, 2003 confuses rather than enlightens the debate.
Reprinted from The Wall Street Journal ? Dow Jones & Company, Inc. All rights reserved.

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Politics Dog the Oil Reserve
By David G. Victor, Joshua C. House
Los Angeles Times, August 22, 2004
With oil prices heading toward $50 a barrel, what would happen if the markets really blew?
Ever since the late 1970s, Washington's answer to such an event has relied on oil stockpiled mainly by the federal government, to be released if market instability warranted it. Today, the U.S. Strategic Petroleum Reserve contains 666 million barrels -- nearly 65 days of imports -- worth nearly $30 billion at current prices. Our industrialized allies have similar stocks, India has started one and China, whose oil imports are rising rapidly, is expected to create a reserve soon. Through the International Energy Agency in Paris, the major oil importers have agreed, in principle, to coordinate their stockpiles.
Unfortunately, reserves in the United States and most democracies are nearly feckless as a policy instrument. The legislation that created the U.S. reserve gave the power to buy and sell stocks to a federal agency, now the Department of Energy, that, in effect, passes the decision on to the president. White House control automatically converts every key decision into a highly political act.
In July 2000, President Clinton's order to transfer some strategic reserves to fill a newly created Northeast Home Heating Oil Reserve had obvious political implications for Al Gore's presidential bid. In 1996, Congress required the sale of more than $220 million of stockpiled oil to help pay down the budget deficit, another political move, though one that, in hindsight, looked wise when oil prices tanked two years later.
The uncertainty of reliable production in Russia and Iraq, coupled with the general threat of new terrorist attacks, makes for many worrisome scenarios. But a cloud of political suspicion would hang over any management decision. If President Bush released stockpiled oil to stabilize prices in an election year, no matter how justified his action, he surely would be accused of political pandering. And if he rightly refused to release oil because speculative trading doesn't meet the standard of "severe energy supply interruption," as called for in the 1975 legislation setting up the Strategic Petroleum Reserve, would he face charges that he was rewarding his oil buddies with record profits?
One way to take the politics out of governing the Strategic Petroleum Reserve would be to mechanize decision-making, such as by setting a price trigger for sales and fills. President Reagan's Council of Economic Advisors, among others, considered this option and wisely demurred. In the 1980s, the international spot market for oil was not fully developed; prices were mainly driven by opaque long-term contracts, not market dynamics. Price triggers act similarly to price controls, increasing the risk of creating true scarcities in oil supply. Such automatic triggers would have smoothed small gyrations in the oil market but failed when most needed to dampen large price swings.
There's a better way: independent management of the strategic reserve. In contrast to an automatic mechanism, an independent authority would be able to detect subtle economic and political shifts that determine our true vulnerability to oil shocks. More important, such an authority would depoliticize Strategic Petroleum Reserve decision-making, which would enable us to use the stockpile for its originally intended purpose of providing a credible bulwark against the most severe chaos in oil markets.
The president could create an independent board to manage the reserve within existing legislation, but that would not completely remove a political taint. New legislation would better accomplish the job. Congress and the president should look to the Federal Reserve as a model. The Strategic Petroleum Reserve needs its own resources, with politicians supplying broad guidelines for action and periodic review rather than direct control. Such a change would not only affect the United States but would also require remaking the International Energy Agency into something closer to a central bankers' forum.
New management for America's oil reserve would spark new thinking about the optimal size and operation of strategic stocks. Until now, most public debate has focused on the reserve's size. The International Energy Agency suggests that its member countries keep a petroleum stockpile roughly equivalent to 90 days of domestic consumption. In truth, the optimal size of strategic reserves is not a single quantity but depends on political and economic conditions. A competent independent authority would make it possible to carry a smaller stockpile -- at lower cost. Because today's oil prices are formed in highly liquid markets, the standard of "severe supply interruption" is largely meaningless. The better standard is our willingness to absorb price shocks. For that there is no simple answer, yet independent economic authorities can make the wisest choices.
More than 30 years after our first oil shock, the Strategic Petroleum Reserve still wears polyester and bell-bottoms. A dose of market reform and political independence can bring its fashion up to date and create a truly useful tool for protecting the U.S. economy.
David G. Victor, adjunct senior fellow at the Council on Foreign Relations, and Joshua C. House are in the Program on Energy & Sustainable Development at Stanford University.


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August 24, 2004

Media Contact: (202) 789-5200
Pension underfunding leaves taxpayers vulnerable to major bailout
Without changes to funding, premium rules, crisis on par with S&Ls a real possibility
WASHINGTON--Underfunding of private-sector pension plans is rampant--currently more than $350 billion--and has led the Pension Benefit Guaranty Corporation (PBGC) to go from a $9.7 billion surplus in 2000 to an $11.2 billion deficit in 2003. This situation increases the likelihood that more pension funds will go under and leaves the PBGC poised for a taxpayer bailout similar to the 1980s savings and loan crisis, according to a new Cato Institute study.
"As long as sponsors of underfunded pension plans are not held responsible for the exposure they impose on the PBGC, ultimately either the premium level must increase, in which case some of the cost will be shifted to well-funded pensions in the short run, or, if exposures create claims that reach catastrophic levels, taxpayers will be called upon to provide a bailout through the PBGC," writes Richard A. Ippolito in "How to Reduce the Cost of Federal Pension Insurance."
Despite the dire warning, Ippolito, a former chief economist at the PBGC, suggests that to avert an impending crisis, pension plan underfunding can be controlled by transforming the PBGC into a private insurance program that sets premiums according to the amount of risk plan sponsors add to the program.
He adds that without changes to funding and premium rules, the PBGC's deficit is likely to increase to $18 billion over the next ten years, and may swell to $50 billion or more.
"Eliminate the loopholes that permit sponsors of underfunded plans to evade the variable rate premium and require sponsors to calculate market value underfunding," Ippolito recommends. "That change would dramatically increase revenues to the PBGC, reducing the need for a bailout and greatly reducing the level of underfunding."
Further, defined-benefit pension plans would pose no risks to the PBGC (or to a private pension insurance program) if they were fully funded and with assets that matched their liabilities.
"Once taxpayers were removed as ultimate guarantors of the insurance, the plans themselves (and most notably the better funded plans) would have an incentive to align premiums with exposure, and plan sponsors would have to face up to the problems that their own underfunding creates," Ippolito writes.

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PENSION REFORM IN CHINA: A QUESTION OF
PROPERTY RIGHTS
James A. Dorn
China's aging population will sharply increase the number of retirees who have to be supported by each worker in the next several decades. That demographic problem combined with the inability of state-owned enterprises (SOEs) to cover even the pensions of current retirees makes reform of the pay-as-you-go (PAYG) system a top priority. The State Council has issued a number of decrees calling for moving to a multi-pillar system, incorporating both a defined benefit PAYG plan and a defined contribution plan with fully funded individual accounts, but little progress has been made (Wang et al. 2004). Today China has a highly fragmented social security "system" confined primarily to workers in urban SOEs and some collectives. The high payroll tax rates and precarious nature of the system have led to noncompliance and evasion, and workers in the nonstate sector have little incentive to join (Zhao and Xu 2002). To solve China's pension crisis, one must also address the lossridden SOEs and the weak condition of the four large state-owned banks. Pension reform cannot be successful without a broad-based change in China's ownership structure. The lack of well-defined property rights to pensions, enterprise assets, and bank capital means that China's financial sector needs radical reform.
This article focuses on China's pension crisis from the perspective of property rights theory. The issue of pension reform is essentially a question of property rights: Should pension funds be fully funded and individually owned or should the state socialize assets by taking wealth from the younger working generation and redistributing it to Cato Journal, Vol. 23, No. 3 (Winter 2004). Copyright ? Cato Institute. All rights reserved.
James A. Dorn is Vice President for Academic Affairs at the Cato Institute and Professor of Economics at Towson University in Maryland. An earlier version of this study was presented at a conference on "China's Pension System: Crisis and Challenge," sponsored by the Cato Institute and Peking University's China Center for Economic Research. The author thanks Jacobo Rodr??guez for his helpful comments in revising this article for publication.
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the older retired generation? In the privatized system, individuals will have an incentive to act responsibly and to save and invest for the future. In the PAYG system, there is no saving and investment. Individuals look to the state for their future welfare, retirement becomes politicized, and property plundered. I shall argue that the best way for China to put its pension system on a sound footing is by large-scale privatization. Implicit pension debt must be made explicit and the current hybrid system must be fully privatized along with SOEs and state-owned banks. Trying to "revitalize" SOEs and "recapitalize" state banks will not do the job as long as majority ownership remains in the hands of government officials. Investment decisions will be politicized and capital will not go to its highest valued uses. Corruption will continue and wealth will be squandered as special interests vie for political favors. Although the pace of economic reform will depend to a large extent on political reform, a sound understanding of the importance of private property rights for the future of capital markets in China is an essential first step toward reform.
China's Pension Crisis
Table 1 summarizes the key data illustrating the problems confronting China's PAYG pension system. The old-age dependency ratio (i.e., the number of people who are age 65 or older relative to those age 15 to 64) will increase from 11 percent in 2005 to 25 percent in 2030 and 39 percent by midcentury. Meanwhile, the system dependency ratio (that is, the number of pensioners supported by each worker paying into the system) will increase from 35 percent in 2005 to 53 percent in 2030 and 69 percent by 2050 (Figure 1). In other words, less than 3 workers will be supporting each retiree in 2005, less than 2 by 2030, and less than 1.5 by midcentury.
The more immediate problem is that there is a negative cash flow in the pension system that will increase significantly over the next several decades (Figure 2). In 2005 the deficit is expected to be nearly RMB 50 billion (in constant 2000 yuan) or nearly $6 billion ($1 = RMB 8.28). By 2030 the deficit will reach RMB 630 billion ($76 billion), and by 2050 nearly RMB 1.5 trillion ($181 billion). Without reform the accumulated reserves in the current pension system will be - RMB 123 billion in 2005 (in constant 2000 yuan), increasing to - RMB 8.6 trillion in 2030 and - RMB 41 trillion in 2050. To balance the system, payroll tax rates would have to rise dramatically from 27 percent in 2005 to 45 percent in 2030 and nearly 60 percent in 2050
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TABLE
1
CHINA'S PENSION CRISIS Year 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Dependency Ratios (%)
Old-age dependency ratio (65+/15-64) 10.6 11.4 12.4 14.5 18.2 21.0 25.3 31.5 36.6 38.1 39.2
System dependency ratio 35.4 35.1 36.2 38.6 43.0 48.7 53.0 56.0 59.9 65.1 69.2
Financial
Conditions
(RMB 10 billion, in 2000 yuan) Revenue 17.2 25.8 36.3 43.5 50.3 56.9 63.9 71.3 78.5 84.3 90.1
Expenditure 21.2 30.6 42.9 58.7 78.3 102.5 126.9 149.4 174.0 203.1 235.3
Annual balance −4.0 −4.8 −6.6 −15.1 −28.0 −45.6 −63.0 −78.1 −95.5 −118.8 −145.2
Accumulated res. 9.7 −12.3 −45.9 −111.7 −245.9 −484.2 −860.1 −1,384.0 −2,070.2 −2,966.1 −4,126.3
Bal. Contrib. Rate (%) 28.0 27.0 27.0 30.7 35.5 41.1 45.3 47.8 50.5 54.9 59.5 NOTE: RMB 8.28
=
$1. SOURCE: Wang et al. (2004: Table 5).
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FIGURE 1
A RISING DEPENDENCY RATIO IN CHINA'S PENSION SYSTEM (RETIREES PER WORKER, %) SOURCE: Wang et al. (2004: Table 5). FIGURE 2 PROJECTED DEFICITS IN CHINA'S PENSION SYSTEM (RMB 10 BILLION, IN 2000 YUAN) SOURCE: Wang et al. (2004: Table 5).
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(Wang et al. 2004: Table 5). Such increases would cripple economic growth.
Another useful measure of the system's financial condition is the implicit pension debt (IPD)--that is, the present value of all future benefits promised to current retirees and to those still in the work force who have paid into the system, assuming the PAYG system is immediately terminated (World Bank 1997: 33).1 Wang et al. (2004: Table 6) estimate that China's IPD is about RMB 4.4 trillion (in constant 2000 yuan) or 48 percent of gross domestic product (GDP). They assume that the old system ended in 2000, public institutions and government workers are excluded, and the discount rate is 4.5 percent. They also assume that the old pension regime was a pure PAYG system because most of the individual accounts set up as part of the multi-pillar system announced in 1997 were not funded. Indeed, they are notional and contain no real assets. Finally, the authors assume that the payroll tax rate is 24 percent and that the replacementrate is 60 percent. When public institutions and government workers are included, the IPD increases to nearly 64 percent of GDP. The above data paint a very bleak picture of the present system. As Wang et al. (2004: 120) conclude, "Our baseline calibration confirms that the current PAYG system is not financially sustainable and that its high annual deficit threatens China's fiscal stability." Even if benefits were reduced and the retirement age increased, the system would still not be viable because payroll taxes would have to be increased dramatically. Fundamental, not piecemeal, reform is necessary.
Empowering Workers
Before leaving office, Premier Zhu Rongji argued that pension reform is "the lifeline of our workers . . . and we absolutely can't allow any payment delays or embezzlement of the funds" (Hutzler andLeggett 2001: A10). For that reason he recommended that retirement funds be professionally managed and workers be given a wider range of investment options. Moving from a PAYG system to a fully funded system in which workers have property rights in their retirement accounts is clearly consistent with the socialist ideal of empowering workers (Pin^~ era 1998).
Zhao and Xu (2002) calculate what it would cost to end the old system and move to a fully funded system that would achieve the 1If the PAYG system were terminated immediately and individuals were all on the new fully funded system, no payroll contributions would go to the old system; all contributions would be invested in the private retirement accounts. Hence, with no contributions to the old system from payroll, all promised benefits under the old system would be unfunded liabilities.
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same replacement rate as the current PAYG regime.2 They estimate that the annual cost of paying off the IPD over a 50-year period would be 1 percent of GDP or 5.6 percent of payroll, assuming the economy grows by 4 percent per year. Thus, if the old system were terminated, the cost of funding benefits promised to current and future retirees would only be 5.6 percent of payroll compared with the 24 percent tax rate needed to fund current retirees under the PAYG system. In addition, if one assumes that (1) the real rate of return on investment under the fully funded system is 6 percent (a reasonable assumption given the high rates of growth in the nonstate sector), (2) wages grow by 4 percent per year, and (3) workers contribute to their individual accounts for 40 years, retire at age 60, and live to age 75, then the new system could achieve a 60 percent replacement rate with an annual contribution equal to 10.2 percent of payroll--compared with the current rate of 24 percent. China could therefore pay off its pension debt and fund a private system with a total contribution rate of only 15.8 percent of payroll (Zhao and Xu 2002: 406-12).
It is important to recognize that the above calculation for the fully funded system holds if and only if workers' contributions to their individual accounts remain invested and if workers can earn competitive rates of return. Consequently, to be successful, pension reform must be accompanied by capital freedom--workers must be free to choose among an array of investment options, including investing in the private sector and in foreign markets. Moreover, private pension fund management is essential if the retirement accounts are to be free of political interference. With those conditions satisfied, workers should be able to earn at least 6 percent on their investments, according to Zhao and Xu (2002: 407).
If all the above assumptions hold, then workers in the nonstate sector who have no incentive to enter the PAYG system (or the multitier system with notional accounts) will find the new system attractive. Their broad participation would make the lower contribution rates possible (Zhao and Xu 2002: 411). Moreover, if SOEs and state-owned banks were privatized, the proceeds could be used to fund the transition and give workers new investment opportunities. 2The present system can be characterized as a multi-pillar pension system, similar to that proposed by the World Bank (1997), with a public PAYG pillar funded by a 13 percent payroll tax levied on enterprises; a fully funded pillar with individual accounts financed by a combined worker-employer payroll tax of 11 percent; and a voluntary pillar similar to an Individual Retirement Account. However, since the mandatory individual accounts are notional, Zhao and Xu (2002: 399-400), like Wang et al. (2004), treat the current system as a PAYG system financed by a payroll tax of 24 percent and having a replacement rate of 60percent.
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The sale of state assets would also allow authorities to lower the payroll tax needed to finance the new system and fund the IPD.3 If a broad-based tax were substituted for the payroll tax, rates could be even lower with further gains in efficiency. Finally, the transition period of 50 years could be reduced if workers were given recognition bonds representing their promised benefits under the old system and payable at retirement (Zhao and Xu 2002: 408-9).4 The longer China waits to move toward a fully funded system, the more costly that transition will be (World Bank 1997: 33). In 2001, the State Council sanctioned the Liaoning experiment intended to increase the use of "social pooling" and to create a firewall between the PAYG pillar and individual accounts. A National Social Security Fund was also established. But little progress has been made. Assets allocated to the individual accounts have been used to pay current retirees, and the plan to fund the NSSF through the sale of SOE shares never materialized.5
Workers will not become empowered until they have full rights to their pension funds. Privatizing the pension system would create new wealth that stays with the workers and could be left to family members or others. Workers would no longer be tied to their firms or be wards of the state upon retirement. The private sector would grow as SOE holdings were reduced and new savings and investment poured into the productive sector of the economy. To achieve those results, China will have to honor its commitment to the World Trade Organization to allow foreign banks to compete fully with state-owned banks by 2007, liberalize interest rates, open capital markets, respect private property rights, and depoliticize banking and commerce. In December 2003, the Standing Committee of the National People's Congress approved a constitutional amendment to give greater 3If the sale of state assets reduced the IPD to 40 percent of GDP, a tax rate of 0.8 percent of GDP would be sufficient to pay off the IPD over a 50-year period (Zhao and Xu 2002: 410).
4The transition time could be reduced to 40 years by giving all workers in the old system recognition bonds--with the last bonds coming due exactly 40 years after the PAYG system was ended--compared with a 50-year transition period when the IPD is financed by taxes. If the IPD were financed with long-term government bonds (debt), the transition period would increase. Zhao and Xu (2002: 405, 409) believe that debt financing is not politically feasible because of the decentralized nature of China's fiscal system. Li and Li (2003), however, favor debt financing.
5In June 2001, a plan was introduced whereby 10 percent of the proceeds from the sale of SOEs' nontradable shares and from IPOs (initial public offerings) would be earmarked for the NSSF, but that plan was discontinued (Kynge and McGregor 2001: 14; Zhao and Xu 2002: 412).
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security to private property. The NPC formally adopted that amendment in March 2004, making a "citizen's lawful private property. . . inviolable." Premier Wen Jiabao has pledged to "unswervingly encourage, support and guide the development of the nonpublic sector." He told the Washington Post in November 2003 that protecting private property will "give greater scope to the creativity and enterprising spirit of the Chinese population and will in the end help us achieve the goal of common prosperity" (Goodman 2003: A1). The great Chinese sage Lao Tzu reached a similar conclusion long ago when he said that when the ruler takes "no action," "the people of themselves become prosperous" (Chan 1963: 167). The principle of nonintervention or wu wei does not mean that government should do nothing but rather that it should take "no action that is contrary to Nature" (Chan 1963: 136). Wu wei, therefore, is "the embodiment of suppleness, simplicity, and freedom" (Smith 1991: 208). Although Lao Tzu had no vision of a liberal constitutional order of freedom based on private property, his vision of a spontaneous social order isconsistent with classical liberalism (Dorn 1998, 2003).
Private Property, Freedom, and Prosperity
Establishing a fully funded pension system in China giving workers private property rights to their pension funds would increase economic freedom and prosperity, just as it did in Chile (Pin^~ era 1998). As Jacobo Rodr??guez (1999: 2) writes, "Chile has created a retirement system that, by giving workers clearly defined property rights in their pension contributions, offers proper work and investment incentives; acts as an engine of, not an impediment to, economic growth; and enhances personal freedom and dignity."
Peking University economist Yaohui Zhao (2001: 1) argues:
The best alternative in solving the financial crisis is to give individuals incentives to participate. The best way to give incentives to individuals is to put all pension contributions (from both employer and employee) into individual accounts and make sure that theinvestment earns competitive returns. This gives individuals the property rights to these accounts.
Once workers' rights to their pensions are privatized and secure, they will have greater freedom and a brighter future than under the present politicized pension system. Moreover, under a private, fully funded system, demographic issues become irrelevant. The performance
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of the pension funds depends solely on the strength of the economy and the investment portfolio, not on the aging of the population. Retirees are no longer supported by workers; there is no intergenerational redistribution of income. A new culture emerges in which the overriding aim of economic policy must be to safeguard property rights and "do no harm"--that is, a policy devoted to enhancing economic freedom and prosperity. Depoliticizing pensions means that workers will no longer have to depend on government for their retirement income. Individuals, asprivate owners of their pensions, will be responsible for their future. A culture of freedom will replace the old parasitic culture of dependency; a new constituency will be created in support of limited government and economic freedom. Jos? Pin^~ era, the architect of the Chilean privatization program, is correct when he says, "The world would be a better place if every worker were also an owner of capital" (Pin^~ era 2001: 1).
Opponents of privatization often argue that it increases risk and that a government PAYG system reduces risk. But it is important to recognize that a PAYG system is not risk free. Demographic changes and political pressures to increase benefits run the risk of creating large deficits in the system. Privatization eliminates those risks but introduces market-risk factors. However, if individuals have access to competitive domestic and international capital markets, they can diversify their portfolios and limit their risk exposure. Some people will select higher risk exposure to try to obtain higher returns, but if they know that there will be no government bailout if they fail to achieve the high returns, they are more likely to be conservative than reckless. After all, they are risking their own, not taxpayer, money.
To overcome the fear of markets, people need to appreciate theirsignificance. The market is a network of trust relationships cemented by private property rights and freedom of contract. To the extent those institutions are weakened, the market price system will be distorted and resources will be allocated more by political than by market forces. The value of property rights depends on the scope and enforcement of those rights, especially on the ease of selling property rights and on the rewards one expects to capture from exercising those rights. Any attenuation of private property rights reduces trust and liquidity as reflected in lower market prices. As Ricardo Guajardo, CEO of Bancomer-BBVA, noted at a recent Cato Institute conference in Mexico City (October 24, 2001), investors are "looking for trust and certainty," which means "property rights should be bulletproof."
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By failing to establish the institutional infrastructure necessary for creating a vibrant private capital market, China is denying itself the chance to create new liquidity and wealth. It is a mistake to think that imposing capital controls and limiting investment opportunities is in China's long-run interest. A key lesson of the Asian financial crisis, according to Federal Reserve Board Chairman Alan Greenspan (1999: 10), is that
where a domestic financial system is not sufficiently robust, the consequences for a real economy of participating in this new, complex global system can be most unwelcome. Improving deficiencies in domestic banking systems in emerging markets will help to limit the toll of the next financial disturbance on their real economies. But if, as I presume, diversity within the financial sector provides insurance against a financial problem turning into economy-wide distress, then steps to foster the development of capital markets in those economies should also have an especial urgency. And thedifficult groundwork for building the necessary financial infrastructure--improved accounting standards, bankruptcy procedures, legal frameworks [to protect property rights] and disclosure--will pay dividends of their own.
Assets have little value if people do not have clear title and are not free to put them to their highest valued uses--that is, if there are no private property rights protected by law. As Hernando de Soto, author of The Mystery of Capital, notes, "Capital is that value, that additional value, that comes from things that are duly titled"; "capital is also law" (Fettig 2001: 23, 26). Countries are poor when their leaders prevent privatization and fail to abide by the rule of law. Hong Kong is rich not because it has abundant natural resources but because it has market-supporting institutions.
In a study of 150 countries, Lee Hoskins and Ana Eiras (2002) find that countries with stronger private property rights have created more wealth (as measured by real GDP per capita) than countries in which private property rights are attenuated and corruption is high (Figure 3). Likewise, James Gwartney and Robert Lawson (2002: 20) find a strong correlation between economic freedom (as measured by the economic freedom of the world index) and human welfare (as measured by per capita income, economic growth, and life expectancy). They also find that individuals with low incomes fare much better in countries with higher levels of economic freedom. Making private property rights bulletproof does matter. If China wants to revitalize its firms and banks--and solve the pension crisis--it must change ownership, not simply inject more funds into dying institutions.
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The Inseparability of Pension Reform and
Ownership Reform
Creating fully funded pensions should go hand-in-hand with privatizing state-owned enterprises and banks. China's socialist sector is bankrupt and should be allowed to wither away so that the dynamic private sector can grow to its full potential. If China wants real capital markets, then private property rights and freedom of contract must be safeguarded by the rule of law. Firms must be allowed to offer shares and those shares must be fully transferable.6 Likewise, banks must be put on a sound commercial basis so that they will have the flexibility to adjust quickly to market forces without prior political approval.
6Of course, firms must also adopt generally accepted accounting practices and meet certain financial standards in order to list their shares.
FIGURE 3
STRONGER PROPERTY RIGHTS CREATE GREATER WEALTH
SOURCE: Hoskins and Eiras (2002: 40).
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Trying to make socialist firms and banks act like private joint-stock companies without changing effective ownership is futile. Indeed, capital markets without widespread private ownership and fully transferable shares are an illusion (Nutter 1968). To be credible, asset (stock) prices must accurately reflect the capitalized values of companies-- that is, the discounted value of expected future profits. Product and factor prices must be freely determined to give an accurate profit picture, and interest rates must reflect consumers' time preferences and the productivity of capital to correctly calculate present values.
By failing to create real capital markets, China is failing to take advantage of the gains to be had from specializing in ownership and risk taking.7 The socialization of risk reduces incentives to innovate and to create wealth. The value of Chinese firms is below what it could be if capital were free to flow to its highest valued uses and if workers were free to own their pensions and to move their funds to where risk-adjusted returns were maximized. It is time for China to put its vast pool of private savings to better use than to bail out state enterprises and prop up state banks that continue to make loans to bankrupt firms.
China's Challenge
China has been willing to experiment with different ownership forms since 1978 but is still wedded to state ownership. Amending the PRC Constitution to make private property inviolable is an important step toward creating a culture of enterprise. With further liberalization, assuming China honors its commitments under the WTO, there will be an opportunity to spontaneously develop the institutions necessary for real capital markets. Foreign investors can play an important role in that development.
After a decade of reform, China's paramount leader Deng Xiaoping said, "The reform of the political structure and the reform of the economic structure are interdependent and should be coordinated. Without political reform, economic reform cannot succeed" (Deng 1987: 147-48). The challenge for China's new leaders will be to accommodate economic reform by relaxing the Communist Party's monopoly on power and to respect the natural rights of all individuals to life, liberty, and property. The first step is to recognize the importance 7For a discussion of the benefits from specialization in ownership and risk taking, see Alchian (1977: chap. 5).
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of property rights for China's future prosperity. Shanghai will never match New York or London or Hong Kong without allowing capital freedom.
China's leaders could learn much from the wisdom of Lao Tzu. Nonintervention worked well for Hong Kong, and it can work for China. Indeed, economic liberalization has more than quadrupled real per capita income in China since 1978. Further liberalization will yield additional gains in the battle to alleviate poverty. In particular, China needs to
* Remove restrictions on private ownership and protect property rights;
* Establish a fully funded pension system that empowers workers;
* Liberalize the financial sector and privatize SOEs and state banks;
* Allow full convertibility of the renminbi.
Once property rights are more secure and China's capital markets are liberalized, domestic and foreign investors will have more options and the private sector will have greater opportunities to grow. Moreover,if Greenspan is right, China's financial markets should be better able to weather a crisis.
Privatizing China's pension system would be a giant step in the right direction. A larger privatization program, however, must accompany that step if China is to realize its full potential.
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