George:

 

I found your email address in my address book, which means you have been the recipient of my comments in the past. A fate worse than death, unless you have insomnia.

 

I'll try to keep this relatively short.

 

Isaiah Cox' proposal is fascinating.  It will, however, be some time before Iraq truly experiences the rule of law, so effectively establishing the property rights of the Iraqi citizens in the Iraqi oil companies under Iraqi law will be difficult.  Perhaps the 5 to 15 enterprises he suggests should be organized under foreign law thus providing the Iraqis with the protection of foreign courts.

 

Suppose, for example, that they were organized as Manager-Managed Delaware Limited Liability Companies with two classes of Membership Interests.  A small portion of the equity, say 10%, would have voting rights, capital contribution requirements (to give the enterprise initial working capital), and could be owned by foreigners.  The balance of the equity would be non-voting, but would have no capital contribution requirements and would be issued per capita to each Iraqi citizen. 

 

As is common in limited liability companies in the U.S., transfer of the membership interests would be severely restricted.  The LLC would elect "pass-through" treatment under the U.S. tax laws, which would essentially compel distribution of free cash flow.

 

I've used the U.S. LLC structure purely for example.  A similar enterprise structure from another Western country that recognizes property rights would work as well.

 

As for Mr. Cox' comment about OPEC, be careful what you wish for.  Without a cartel to control price, the value of the oil might be limited for some time.  [This is why arguments that the U.S. fought the war "for oil" never made any sense.  While U.S. oil companies would benefit from a slighly lower price - $18 to $25 per bbl - the price that could result from unrestrained Iraqi output - $5 to $12 per bbl - is insufficient for companies to recover their cost of capital for capital investments they have already made.  Such low prices will be an economic disaster for the companies, their shareholders and our economy.]

 

Drew Kanaly's proposal is more ambitious for two reasons.  First, utilities have on-going operation and maintenance costs that are not insignificant. Second, they have the same "stranded" cost issues (although perhaps not the same magnitude of such stranded costs) as in Western countries.  So, simply putting them in trust is problematic because a trust does not provide a mechanism to generate the working capital to meet the operation and maintenance expenses or the revenue to fund the stranded costs (at least that portion of the revenue that the rate-payers cannot or will not bear). 

 

Again, I suggest privatizing them with structures that give the investors control in exchange for a small portion of the free cash flow, with the bulk of the free cash flow distributed to the Iraqi citizens holding non-transferable securities.

 

Carol Maxam makes the most important point.  Iraq cannot rely on petroleum as the basis of its economy on a long-term basis.  If I thought the dividends were going to be high enough to act as a disincentive to diversification, I would fully agree with her.  But, I believe that dividends on oil earnings alone will not satisfy the Iraqi people.  Meanwhile, they need access to capital to start new businesses that is not simply governmental largesse subject to governmental control.  The dividends on oil earning will provide this.

 

I am very concerned that how we "win the peace" is going to be much more important - and much more expensive - than winning the war.  I wrote about this at some length to Professor David Mason of Butler University as part of a larger analysis of his thesis suggesting parallels between the Iraq War and WWI.  In the interest of brevity, a copy of my correspondence to Professor Mason is attached.

 

Sorry this is so long.