BRYAN WHITMAN (Deputy Assistant Secretary of Defense for Public Affairs): Good afternoon and good morning to those of you here in the Pentagon briefing room, and good evening to our briefers. Thank you for joining us today.

At the table, we have Ambassador Timothy Carney, who's the coordinator for Economic Transition in Iraq with the U.S. embassy in Baghdad. He's joined by Mr. Joseph Gregoire, who serves as the Baghdad Provincial Reconstruction Team leader; and also Mr. Jeremy -- Jeremiah Pam, who is the U.S. financial attache to Iraq. They're joining us today from the Coalition Press Information Center in Baghdad, and it's a privilege for us to hear from you about -- and to provide an update to us on economic and reconstruction activities in Iraq.

This is the first opportunity that we've had to talk to you gentlemen in this format, and typically what we do is allow you to take some time to give us an overview of what you're doing before we get into questions.

So let me turn it over to you, Ambassador, and let you get started.

AMB. CARNEY: Thanks very much. All three of us are delighted to be with the press corps. We're going to try to infuse some life into the dismal science and some passion into the effort at reconstruction that we're all here helping the Iraqis with.

My title is coordinator for Economic Transition in Iraq, and my job is essentially to assist the Iraqis to realize their considerable resources and the interests of giving services to their people and economic development and at the same time to try to bring all of the pots of U.S. money together.

Now, as we look at Baghdad and Iraq in general, and as you all would have heard from General Petraeus yesterday, clearly security is the most urgent problem. However, I submit that economic performance can make the government of Iraq, this government of Prime Minister Maliki, a valid interlocutor for the vital political solution that is the true future of this country.

What I hope to see emerge here are certain trends of governance. And I'm particularly focused on the execution of Iraq's capital budget; not the operating budget, the budget for salaries and pensions, but the capital budget that provides the money that can be used to give the people of Iraq -- and I mean all the people of Iraq, without any sectarian or ethnic bias -- the services that they definitely want.

At the same time, we have to see the passage of certain key laws. We've seen the framework law, the first of a sheaf of laws on hydrocarbons approved by the Council of Ministers at this point, but there are laws on de-Ba'athification, for example, and on provincial powers that can impact very, very importantly on the trends of governance that I've pointed to.

And finally, a trend that we'd like to see are the creation of jobs, at least in the short term. And as we all know, until there is real security, the Iraqi economy is not going to restart on a major, large scale. But in the interim, a significant number of jobs might be created.

There's an international dimension as well, especially when you look at budget execution. The U.S. Congress, the British parliament, indeed, Iraqis themselves are simply not willing to accept that unless the Iraqi government spends its capital budget -- and Jeremy Pam on my right is going to explain more about the details there -- if they don't spend their own money, why should the U.S. Congress appropriate U.S. money to be spent here in Iraq?

At bottom, when you look at the Provincial Reconstruction Teams, of which Joe Gregoire is a representative, we see these PRTs as a vital element in assisting the units of local governance to deliver services by spending their budget allocation.

So with that, let me turn to Treasury Attache Jeremy Pam for a presentation.

Thank you.

MR. PAM: Thank you, Ambassador Carney.

I think you've set out that the overall challenge very clearly, the -- just to flush out some of the numbers -- last year's -- Iraq's budget last year was $34 billion.

While all of the final data is not yet in, it looks like -- our current estimates are that they will end up having spent about 26 billion of that. Of the eight billion that they didn't execute -- well, of the 26 billion that they spent, that included much of their operating budget, as Ambassador Carney mentioned, including the salaries -- which itself is better than it was a couple of years ago, when there was difficulty even doing that.

But of the eight billion that wasn't spent, most of that -- perhaps five billion -- was from the capital budget, in a capital budget of a little over six billion. So most of the capital budget last year did not end up getting spent. Now that money that was not spent has been rebudgeted, put back into the 2007 budget, essentially fully financing a deficit, a surplus, of expenditures over revenue.

So the good news is that Iraq has a second chance to spend that money. But in order to take advantage of that second chance, they have to do a better job of spending it in responsible, financially accountable ways. And I think the very promising news of the recent weeks and indeed days is that they're showing a very strong indication of the readiness and the commitment and organization to do a better job spending that money and beginning capital projects.

Just on Wednesday of this week -- well, they passed their 2007 budget. The council of representatives passed it a few weeks ago, and they have issued the instructions necessary for provinces and ministries to begin spending it. And just this past Wednesday there was a government-wide conference, here in Baghdad, in which the deputy prime minister for economics, the finance minister and planning minister called in the entire government -- 10 or more ministers, including most of the key ministries, and a similar number of governors, and others representing all of the provinces -- to discuss the subject of budget execution and how they could do better in 2007.

There was an excellent discussion, and a great deal of useful information that was passed out. And we have every indication that the Iraqis who attended that are going to go back and begin acting on it.

AMB. CARNEY: Let me move now, if I may, to Joe Gregoire, who runs the largest PRT in Iraq. That's the one for Baghdad City. Joe, please.

MR. GREGOIRE: Thank you, Ambassador Carney.

Good morning, ladies and gentlemen. I trust you will indulge me if I come across as a cheerleader for the Provincial Reconstruction Teams. To me, the PRTs are the quintessential, the ultimate in Secretary Rice's initiatives with regard to transformational diplomacy.

The PRTs were stood up initially in November 2005, and they were stood up essentially to build government capacity at the local government level. PRTs have been using projects and training to promote transparency, accountability, and more effective local government, as well as to promote reconciliation, build civil society and further economic recovery.

Through the PRTs, we have given the Iraqis, whom we engage on a daily basis, lead in this process. They've been determining projects that we've been funding with U.S. funds. They've been implementing these along with some of our implementing partners.

Their needs -- and when I say "their needs," I mean the needs of the Iraqis whom we engage, not the coalition's -- drives the process and the objectives.

The PRT allows for rapid mobilization of resources to tackle long-term problems, long-term development issues. We do this in large part because the PRTs are truly the quintessential civil-military teams.

Here in Baghdad, for example, we have approximately 90 people who compose this Provincial Reconstruction Team, more than third of whom are men and women in uniform. The other third are probably representatives of U.S. government agencies, and the remaining third are Iraqis, who are indeed are working day in and day out with us and with our Iraqi hosts.

The PRT is designed to kick-start developmental processes.

I say kick-start because so many of these processes -- and I'm thinking of development in particular -- may take years to play out. Short-term gains build for long-term development and strengthen democratic gains.

In Iraq, the PRT is supporting decentralization of government services. I think that's very important because the constitution of '05 provides for a devolution of powers to the provincial government. And so our mandate is to see to it that we strengthen the provincial governments to indeed carry out their tasks. We essentially have been doing it by focusing on five thematic areas: the rule of law, infrastructure for the provision of essential services, economic development, governance, and public diplomacy.

Ultimately, PRT is a short-term solution to a long-term problem. This is something that my colleagues at the Department of State and our colleagues in the Department of Defense recognized from the very start. The PRTs will go out of business. And when they do go out of business, most likely it will be because they've been successful. And they will be replaced completely through and with normal assistance programs. Eventually, the PRT which I'm leading, as will the other PRTs elsewhere in provinces, will fall under the USAID mandate. And when they do, that will be a sign that indeed we have achieved the mission we were sent out on.

Thank you. Mr. Ambassador?

AMB. CARNEY: We'd be delighted to take questions at this point.

MR. WHITMAN: Well, I'm sure we have a few here, Ambassador, so let's go ahead and get started. Go ahead.

Q Yes. This is Vince Crawley. I'm with the USINFO, State Department News Service. And I'm trying to get a sense on the PRTs. Could you just give us a flavor what your day-to-day work is when you're out engaging with the public?

AMB. CARNEY: Joe, would you let these folks know what the day- to-day work of a PRT is all about?

MR. GREGOIRE: Well, on any given day, Mr. Ambassador, ladies and gentlemen, we will have perhaps four or five engagements, most of them outside -- what we call beyond the wire; that is to say, engagements beyond the limits of the International Zone. We typically will hold discussions with members of the Provincial Council. That is the premier or the dominant legislative institution within the province. We will hold meetings on governance. By governance, I mean on policies, practices and procedures that aim to build capacity within local government units or institutions.

We will more often than not conduct three or four visits to police stations, detention centers and the prisons in any given week, so that our colleagues can assess the conditions within these institutions all with the view to building up capacity to ensure proper rule of law. We have virtually daily engagements with the officials at the Baghdad City Hall, more commonly known here as the Amanat, largely to coordinate the activities, numerous U.S. government agencies involved in the implementation of projects which aim to provide and meet the basic needs of the population, the inhabitants of the city.

I think that's a typical day, not to speak of the many other meetings that we would generally attend at the embassy level.

MR. WHITMAN: Thank you.

Tony.

Q Mr. Carney, this is Tony Capaccio with Bloomberg News. There's a general impression in Washington that many of the billions dollars that have been spent on Iraq reconstruction has been wasted, for want of a better word. You're aware of SIGIR reports from Stuart Bowen. You're aware of the Parson's audit on the police academy.

Can you give, from your perspective, the whole issue of waste? How -- is there a way to quantify, from your perspective, how much actually has been wasted of this 20-odd billion dollars spent to date? Again, there's a lot of suspicion about this in Washington.

AMB. CARNEY: I think the answer to that question resides in the reality of transparency. As you know, when Congress appropriated those billions of dollars for reconstruction in Iraq, they mandated the creation of the special inspector general for Iraqi Reconstruction and that's Mr. Stuart Bowen, who you named.

And the effort that Mr. Bowen and his associates, the auditors, his team of investigators here in the field, living and working with us in the U.S. Embassy, has been put forth in a series of quarterly reports. And you're referring to one when you talk, for example, about the police academy, where the large contract was clearly inadequately done.

Now, I have the advantage of coming to this office and this job in the wake of the president's announcement of new policies in January of this year. And I can argue, I think successfully, that my focus is on now and on what's going to happen in this period of surge, not only military surge but also economic surge over the next four to six months. And I would submit that your particular question would be better addressed to the head of IRMO, the Iraqi Reconstruction Management Office.

Q Well, Bowen has also issued audits identifying what he calls a sustainment gap -- a clumsy term, obviously, but the whole notion of needing dollars beyond building to sustain projects that have been built and turned over to Iraqis to operate over the next several years. Do you have a concern that more money will be needed to bridge this so-called sustainment gap or problem that Bowen has identified?

AMB. CARNEY: I think an answer to your question there is, no question that when you put together a large brick-and-mortar project, let's call it a major bridge, for example, that you have to have an ongoing maintenance program to repair the bridge where needed. If it's damaged by floodwaters, for example, that you bring teams out; it will need to be resurfaced from time to time.

The point to make there is that Iraq is basically a rich country; that in fact there's been a successful effort to mightily reduce the debt that Iraq had incurred during the Saddam Hussein era. I would argue that as Iraq returns to its former levels of 3 million-plus barrels a day of oil exported, that you're going to find as much money as the country needs for the major portion of this effort at maintenance and sustainment as you've defined it.

Q Ambassador, Gordon Lubold from the Christian Science Monitor. At the beginning, in your opening statement, you seemed to emphasize the idea of providing reconstruction money and projects to all Iraqis. Can you characterize the way in which you spend money to prove to some populations that they're going to get a piece of the pie as well?

AMB. CARNEY: Yes, thanks. And let's not put too fine a point on it here. Let's say we're talking about Shi'a and Sunni and Kurds, and in particular Sunnis, who have been suffering, on the one hand, and at the same time engaging with al Qaeda to provoke Shi'a, with the result being something new since I was here almost four years ago, which is to say the large scale of sectarian violence.

But if you look at the government's requirement to be the government of all Iraqis, you need look no further than Anbar province, which is heavily Shi'a, as I believe you know. Anbar, like the other provinces, has a budget allocation. It's going to be somewhere in the vicinity over $200 million, I would suggest.

I know that the government sent a large chunk of monies for Anbar -- I beg your pardon. I said Anbar was Shi'a. I meant it is heavily Sunni. I misspoke.

I know the government has answered some of those needs in Anbar province, because it sent most of the capital budget to Anbar, to Sunni Anbar province, in the form of cash, because there are functioning banks. And the province apparently didn't have a bank account. So it sent nearly the dinar equivalent of more than $20 million to be secured at one of the coalition military bases in the province. That seems to me to be a sign, an evidence of the kind of good-faith effort towards ensuring the Sunni areas of Iraq are in a position to make contracts and deliver the services that the people need, at least a good indication of that.

Q Are you saying there that you're sending a disproportionate amount, perhaps more, to a Sunni area to prove to the Sunnis that they're getting a piece of it as well?

AMB. CARNEY: I'm not saying that at all. I'm saying that Anbar is getting its fair share. As I understand it, the roughly $2.5 billion of the capital budget that goes to provinces does so on the basis of population.

But Jeremy, you might be able to comment on that.

MR. PAM: That's right. There has been a -- both in 2006 and in the current year of 2007, the current budget of 2007, the provincial allocations were based on population, and for the most part, there haven't been disagreements about the broad distributions. And so in 2007, for instance, Anbar province has been budgeted more than $100 million for capital projects, and in 2006, it received a similar amount.

AMB. CARNEY: Thanks. Thanks, Jeremy.

MR. WHITMAN: Luis.

Q Luis Martinez of ABC News. Ambassador Carney, do you find yourself operating under some kind of timeline as to when you want to see some form of success on the economic front? You call this the economic surge. We heard from the military commanders that they didn't expect any good readouts on how their operations are succeeding until late summer. What is your estimate of when you'll see some progress?

AMB. CARNEY: Well, I'd be a fool to lay out some sort of timeline that becomes cast in stone. I think, frankly, within a relatively short time -- I'm talking about a few months -- you're going to see the emergence of the trends that I've remarked on; trends on budget execution, the passage of the laws that are so key to the functioning of the society.

I'm less certain on the jobs, but, frankly, that may be ignorance on my part. I just haven't gotten myself smartened up on that aspect of the issue yet.

MR. WHITMAN: Jim.

Q Sir, Mr. Ambassador, this is Jim Garamone from American Forces Press Service. You know, a lot of people for the last couple of months have been talking about how important the hydrocarbon law is. What's the prognostication for that right now?

And the second question -- maybe to Jeremy -- financial institutions have been wrecked since, you know, essentially we got in there, and everyone has -- military officials and State Department officials -- have talked about the need to resurrect the financial institutions. How is that going? Is there progress?

AMB. CARNEY: Well, let me start with -- it isn't one law for hydrocarbons; I believe it's four. And the first one, indeed the very important one, the one that gives oil as a patrimony of all Iraqis, is the one that's been approved by the Council of Ministers and is teed up to go to the parliament, which here is called the Council of Representatives. Now, there are three other laws that relate to revenue sharing and the establishment of an Iraqi national oil company and yet another one -- the title of which escapes me -- that are going to have to be drafted, going to have to work through the Cabinet and then go as a package, as I understand it, to the Council of Ministers. I would guess that's going to take a few months as well.

But you know, I've, for example, served in Indonesia, which is a major exporter of oil and gas, and these oil questions in diverse and plural societies are absolutely vital and require the most careful sets of negotiations. And I believe I can point to the framework law as evidence that that process is something that Iraqis are capable of meeting.

Now, Jeremy, if you'd address the institutional lack here in Iraq.

MR. PAM: Sure.

It's certainly true that the financial institutions in Iraq are not what they need to be for a sustainable economic recovery.

Some of that is nothing new. It's the legacy of the function -- the way in which banks were used during the Saddam period.

Banks here were not full service banks in the Western sense of the word, of the concept, and didn't serve the function of intermediating between capital flows. Instead, they were primarily payment systems. They primarily served as payment -- as systems for payment of government salaries. And they continue -- in most places of the country they continue to serve that function. The situation in Anbar province that Ambassador Carney mentioned is the exception rather than the rule, where even that basic function has run into difficulty.

Nonetheless, it's true that the financial system has to be rejuvenated and begin performing a broader range of financial services. And the Iraqis have been working on that. The central bank, the Ministry of Finance and others have been recently discussing plans towards that end.

I don't think that the details of this have been announced yet, but I'm confident that there is progress, that progress has been made even in recent weeks and we'll continue to see more movement towards it in the near future.

Q Thank you.

MR. WHITMAN: We probably only have time for one more. (Off mike.)

Q This is Al Pessin from Voice of America. Can you tell us how it's going in the effort to expand the -- create and expand the provincial PRTs? Is the military delivering the folks that it said it would?

Do they have the right specialties? And how goes the effort to get more folks from State and other U.S. government agencies to volunteer to go out there in a few months and replace the military folks, as well as the effort to recruit contractors for the same purpose? So how's all that going?

AMB. CARNEY: I think I can reply in a word: that I do not have the full details on that. But I have a general knowledge that this process is going forward; that the military who are being sought for the intermediate period while State tries to go out and recruit, including among other U.S. government agencies, are more or less identified; that the extra 10 PRTs are in the process of being stood up. But frankly, you should address that question to somebody who's got a much more current knowledge.

Joe, are you perhaps more up to date than I am on this?

MR. GREGOIRE: Well, I do have some intimation, specifically that the Department of State has recruited all team leaders for the new PRTs that will be embedded within the brigade combat teams. I know the department is actively recruiting other core personnel. And I believe, although I cannot state as a certainty, that the military is also canvassing its civil affairs components to see whether or not there are people, whether it be in the Reserves or who might be redeployed, who do have an interest in serving on PRTs.

I think the process is working as fast as we might expect it to be at this point.

AMB. CARNEY: Thank you.

MR. WHITMAN: Carl, is it a quick one? Then we'll sneak it in here.

Q Yeah, it is pretty quick. Ambassador, I'm Carl Osgood. I write for Executive Intelligence Review. The U.N. agencies have estimated that somewhere around 3 million Iraqis have been displaced because of the violence, including a fair number of those outside of the -- refugees outside of the country. I'm wondering what impact that displacement of the population has on your efforts.

AMB. CARNEY: You make a good point.

There are a large number of Iraqi families that have been not only displaced but many, many others who have actually fled, including large number of professional people who would be enormously valuable in economic efforts here in Iraq.

There's a focus. I believe the secretary of State herself has raised this issue in testimony on the Hill -- was it perhaps not last week? And it's a well-placed focus.

I have just come to this press conference from a meeting at the prime minister's residence, where there was a focus, with the authorities who are competent in the city of Baghdad, and the Iraqi security authorities as well, talking about the conditions under which people might be brought back into their homes -- the security that's necessary, as well as the issue of dealing with squatters who have taken over homes. It's a thorny, complex problem. It's one that seems to be understood as, indeed, a difficult matter to deal with, but one that's quite urgent.

MR. WHITMAN: Well, gentlemen, if you would allow me to bring this to a close and to thank you one more time for joining us this evening, it's not often that we get an opportunity to talk to experts that are working the reconstruction aspects of the activities that are going on in Iraq. And so it has been very helpful for us, and we appreciate your time. And perhaps we can do this again in a couple of months. Then you can give us a further update.

AMB. CARNEY: We look forward to it, and you're very welcome.

MR. WHITMAN: Thank you.