Global Policy Forum

The Economics of Reconstruction in Iraq

By Ed Harriman

US General Accountability Office
http://www.gao.gov

US Special Inspector General for Iraqi Reconstruction
http://www.sigir.mil

International Advisory and Monitoring Board
http://www.iamb.info

There is a ‘reconstruction gap' in Iraq. According to the US Special Inspector General for Iraqi Reconstruction (SIGIR), ‘in the coming year, the amount of money needed by the Iraqi government to carry out the daily operations of its existing health, water, oil and electrical infrastructure, as well as to complete and sustain planned reconstruction projects, will outstrip the available revenue.' The US General Accountability Office (GAO) told Congress that the Iraqis still need ‘additional training and preparation to operate and maintain the power plants, water and sewage treatment facilities, and healthcare centres . . . to ensure that the billions of dollars . . . already invested in Iraq's infrastructure are not wasted'.

The sums are simple. Reconstruction will cost considerably more than originally imagined. The American administration has committed most of its funds. The Iraqis have neither the money nor the expertise to run the projects that have been completed. There's little transparency or accountability. To judge from the audits published so far, at least $12 billion spent by the Americans and by the Iraqi interim and transitional governments has not been properly accounted for. Almost three years after the fall of Saddam, the GAO reports, ‘it is unclear how US efforts are helping the Iraqi people obtain clean water, reliable electricity or competent healthcare.' The Bush administration has decided to provide no more reconstruction funds.

The auditors who have discovered Iraq's deepening financial crisis have been ignored. They asked the US ambassador and the US military commander in Iraq for their views. Neither replied. The US State Department was to submit estimates of how much it will cost to complete all American-funded projects in Iraq to the White House Office of Management and Budget. The Office won't discuss the matter. Earlier this month, Brigadier-General William McCoy told reporters: ‘The US never intended to completely rebuild Iraq . . . This was just supposed to be a jump-start.'

According to American officials behind the sandbags and razor wire of the US embassy in Baghdad, life for ordinary Iraqis is on the up and up, thanks to their efforts. They claim that 143 water and sanitation projects had been completed by July 2005, but the GAO is not convinced, pointing out that the officials ‘could not document the location, scope and cost of these projects', and that ‘reporting only the number of projects . . . provides little information on . . . the amount and quality of water reaching Iraqi households.' US officials also say that 145 American-financed health clinics had been completed by the end of August. ‘However, the data available do not indicate the adequacy of equipment levels, staffing levels or quality of care,' according to the GAO. A US official told the GAO that ‘without full power supply . . . these clinics will be able to provide only the most basic services and limited or no maternal and/or paediatric services.'

It is now a year and a half since the Coalition Provisional Authority (CPA), the US body which administered Iraq, handed over the running of the country to the Iraqi interim government, and the management of US projects to the new US embassy in Baghdad. Millions of Iraqis now have mobile phones, but they don't have clean water, the streets are awash with sewage, the electricity often fails and most hospitals are in a terrible state.

The Iraqi public has not been getting value for money, while myriad contractors, bureaucrats and politicians – American and Iraqi – have been getting stonkingly rich, a situation that the CPA fostered.* When the auditors first commented on the CPA's lack of accountability, its boss, Paul Bremer, bullishly replied that their report ‘does not meet the standards Americans have come to expect of the inspector general'. In his just published memoirs, Bremer dwells on infighting within George Bush's cabinet and his claim that he tried and failed to get the number of US troops in Iraq increased. Bremer also says that he ‘realised there would be corruption at many levels of Iraqi society in the months and years to come. But I also hoped that the independent anti-corruption institutions we had created would eventually prevail.'†

The auditors' investigations into financial abuse under Bremer's CPA in Iraq's South-Central region found hard evidence of mendacity and theft. Two men have been arrested in the US. Philip Bloom is charged with conspiracy, fraud, money laundering and other offences. He is said to have rigged bids and bribed CPA officials who awarded his companies contracts worth $3.5 million. Bloom appears to be a small-time wheeler-dealer. More interesting is Robert Stein, his alleged co-conspirator, who was the CPA's Comptroller and Funding Officer for the South-Central region. Stein has been convicted of fraud and sued for embezzlement in previous business dealings with the US military in the States. He is a private contractor. It's odd that he, rather than a federal employee, was put in charge of a reconstruction kitty of some $82 million in cash. Stein kept the value of the contracts he awarded and the payments he authorised just below the threshold above which more senior approval was required, or submitted them on forms intended for smaller sums. Because he was spending Iraqi money, he was not subject to the tight federal standards that would have applied had he been spending American taxpayers' dollars.

In return for allegedly granting Bloom's companies contracts, including to build a police academy at Babylon and ‘to rehabilitate' the Karbala library, Stein and his wife are accused of receiving $683,284.93 from Bloom. Some $267,000 was transferred into their personal bank accounts. Other payments went directly to creditors in Stein's hometown of Fayetteville, North Carolina: $36,348 to jewellers, $140,000 to a local real estate firm, more than $100,000 to local car dealerships. Credit card bills, local and federal taxes, a $10,000 Treasury bill and $200 owing on a court settlement were paid. Stein's position at CPA regional headquarters appears to have offered him the opportunity to tidy up his domestic finances. To Bloom he must have seemed an excellent business partner, often authorising cash payment for the total value of contracts the same day they were signed.

At the police academy, however, money was spent on overpriced equipment that was not needed, and often not delivered, SIGIR's auditors report. One generator was missing, another was broken. A small fleet of all-terrain vehicles never arrived. Of $7.3 million spent, some $2 million has not been accounted for. The library at Karbala is described in the audit as ‘the focal point for academic and professional learning in the area', and ‘the area's richest source of Arabic translations of the most important Western works of history, literature, philosophy, politics and science'. Some $2.1 million was awarded on contracts to refurbish it, buy books and train library staff. The auditors found that the library manager, who has been there for twenty years, had never been told of the contracts, or that more than 30,000 books should have been delivered – they weren't – or that there was a grant to train his staff. They also found plastic chairs where metal ones had been paid for, only a handful of computer terminals instead of the dozens ordered, and no internet access, although it had been paid for. The library and police training school should be showcase projects, but what the auditors discovered makes nonsense of the CPA's self-regarding mission to save and rebuild Iraq. There is a question of administrative oversight to be answered here.

Buried in one of the appendices of an earlier SIGIR audit (of April 2005) is a report that the division level agent for South-Central Iraq was fired by Bremer's Baghdad office on 30 May 2004. That agent was Robert Stein. Yet he was allowed to carry on. ‘The division level agent made or authorised disbursements in the amount of $1,496,562 after his authority to make cash disbursement was revoked,' the appendix says. He also approved funding of $499,000 for a ‘project modification' and an electronic fund transfer of $300,423 on 28 June, the day the CPA closed.

The auditors hope that arresting these two Americans will show Iraqis that American wrongdoing will be punished. But Stein and Bloom are small beer, as are the two military officials who have since been arrested in connection with the ‘bribes, kickbacks and gratuities, amounting to at least $200,000 per month' paid by Bloom in spring 2004 ‘to CPA-SC (South-Central) officials . . . in order to obtain contracts', according to Stein's arrest warrant.

The CPA in al-Hillah managed a Rapid Regional Response Program, which was intended to ‘create local jobs, support local industries and stimulate the economy'. A recent audit discovered that there are no accounts for $20.5 million of $20.8 million spent on 74 projects. Ostensibly the money was intended to fund local projects which would ‘assist in strengthening the governor's ability to promote the Diwaniyah people's welfare', ‘aid the Iraqi Democratic Gathering Regional Centre to assist in activities against the Mahdi Army and Moqtada Sadr' or ‘clean up the Barnoon village and install civic pride'. But the auditors ‘could not determine how grant recipients actually used the cash that South-Central region distributed'. They could ‘not determine what benefit, if any, the Iraqi people received'.

It appears that CPA officials handed stacks of $100 bills to local dignitaries and others whose support they wanted and whose intelligence they needed, to dispose of as they saw fit. The ‘reconstruction' projects seem to have been part of a ‘hearts and minds' campaign and it may never have been intended that the funds be properly accounted for. A woman from al-Hillah told me that $100,000 designated for a local women's centre with which she was involved was handed over to a local dignitary who, she alleges, used it to finance his election campaign. The money came from the Development Fund for Iraq: it was, in other words, Iraqi money handed over to the Americans under UN Security Council Resolution 1483 to be spent ‘in a transparent manner to meet the humanitarian needs of the Iraqi people'.

The problem for the American occupation is that the Iraqis can see what's been going on: broken and missing equipment, shoddy workmanship, contracts mysteriously awarded to politicians' and civil servants' brothers-in-law, missing millions. It's unlikely that the full extent of corruption under the CPA will ever be known. KPMG auditors, working on behalf of the IAMB, report simply that ‘the former CPA did not maintain complete accounting records in respect of contractual commitments.' They also found that the US embassy can't account for all the contractual commitments made with $2.8 billion of Iraqi funds which were handed over to it during the first half of 2005.

The behaviour of Iraq's interim and transitional governments is equally disturbing. The SIGIR auditors write that while they ‘documented mismanagement and lack of accountability and potential fraud in the handling of (CPA) funds', Iraqi auditors ‘have similarly pointed to mismanagement, lack of accountability and potential fraud in handling operating funds of the (Iraqi) ministries'. A year ago the SIGIR auditors reported that $8.8 billion, virtually all the money spent by the Iraqi interim government, was not properly accounted for.

A year and about $30 billion later, KPMG has found that the Iraqi Ministry of Finance is, by and large, following standard accounting procedures. Audit departments have been established in most Iraqi ministries, but in many they seem to be largely ignored. The most recent KPMG report, covering the first six months of 2005, cites numerous instances in which contracts worth hundreds of millions of dollars have been awarded without tender, paperwork is non-existent, and there is no evidence that goods and services have been delivered.

A culture of cronyism and kickbacks thrives within the Ministries of Construction and Housing, Oil, Trade and Electricity – the ones the Iraqis allowed KPMG to inspect. The government barred the auditors from the Ministries of Defence and the Interior. The Electricity Ministry wouldn't let them see some of its accounts. At the Oil Ministry the auditors ‘were specifically denied access to the relevant accounting records' for fuel oil exports. They discovered that the state oil marketing organisation has kept back more than $168 million, rather than depositing it with the government to be accounted for. Almost three years after the invasion, Iraq's oil exports are still not being monitored, so there is no way of confirming how much is exported and sold. This is unlikely to change soon.

On 16 May last year, the Iraqi Supreme Board of Audit submitted a confidential report to the prime minister detailing corruption in weapons deals, worth almost $1.3 billion, which were contracted by the Ministry of Defence during the last eight months of Iyad Allawi's government. Allawi's ‘interim government', which was in power from June 2004 until April 2005, was largely picked and approved by the Americans. On 10 October 2005, 23 arrest warrants were issued, including ones for Allawi's defence minister, General Hazem Shaalan, several Iraqi officials in his ministry, and Allawi's ministers of labour, transport, electricity and housing (the minister for transport previously worked for Boeing; the minister for electricity came from a big US engineering firm). By then Shaalan was comfortably settled in his London home, several of the others had decamped to join the growing colony of Saddam's Baathist cronies living in high style in Jordan, and the money had disappeared.

Shaalan has protested his innocence. ‘The Iraqi people are the smartest in the region and know exactly the game that is going on,' he said. Yet he has some explaining to do, not least with respect to two contracts with Pakistanis, which he personally signed, for more than $500 million. No details were given as to the numbers, types or models of equipment ostensibly purchased. ‘It was not possible to determine whether the items were supplied,' the confidential report says. There is also the matter of his verbal instruction to an official to give more than $1 million in cash to a businessman to buy cars for his ministry. The Supreme Board of Audit found that the records of the vehicles bought don't match those of the companies from which they were supposedly purchased, and that $100,000 of the cash is unaccounted for.

The minister didn't sign every contract himself. His deputy secretary general, Ziyad al-Qataan, handled much of the paperwork for several contracts in which full payment, in cash, was made up front to Iraqi and other Arab businessmen acting as middle men for Polish, American and other military equipment firms. Hundreds of millions of dollars were transferred from the Iraqi government's holdings into bank accounts in Lebanon, Jordan and elsewhere. Some $201 million in cash was taken out of the country through Baghdad airport, in violation of currency control regulations. Many of the contracts had an 18-month delivery time, hopelessly long for equipment urgently needed by the new Iraqi armed forces to whom the Americans say they are going to hand over so that US troops can be withdrawn.

Much of the equipment – helicopters, uniforms, armoured cars, bullet-proof vests, ammunition, winter coats – has never turned up, or has turned out to be grossly substandard and overpriced. For example, the ministry paid an Emirates firm $113,000 apiece for 230 land cruisers that usually cost $35,000 each. The ministry paid more than $300,000 over the top for 2500 bullet-proof vests. There is also the matter of a $9-million contract for 300,000 ‘defective hand grenades'.

The rot doesn't stop with Allawi's defence minister and his top civil servants. Last year the commander of Iraqi ground forces had his ‘rest house' furnished with sofas, bedroom furniture and gold-plated chandeliers, all paid for, according to the confidential Supreme Board of Audit report, at inflated prices out of the Iraqi public purse. The ministry stumped up $27,500 to get the occupant of another house to move out so the ministry's inspector general could move in. The report also reveals that several Iraqi unit commanders routinely claimed and then seem to have kept for themselves the inflated salaries of hundreds of troops, many of them ghost soldiers. In one National Guard regiment almost $120,000 was stolen in one month.

Corruption also has the result that everything has to be paid for twice. New funds have to be found to complete or repair projects on which much has already been squandered. The Iraqi government and the US administration face a deepening funding crisis that nothing short of billions of dollars and a halt to the insurgency can forestall. But US policy has made such a crisis inevitable. The idea was that once the Americans had projects ‘up and running', the Iraqis would take over, pay for and run them. Most of the big contracts for major infrastructural reconstruction – sewage, clean water and electricity – have gone to a few large American engineering firms which have charged top-dollar prices for goods and services bought largely in the United States. Consequently, much of the money for reconstruction from American funds has never left the US, and much of the Iraqis' own money from the Development Fund has also been paid to American firms.

Then there's the increased cost of rebuilding Iraq as a result of the continuing war. The US embassy has cut its budget for reconstructing the water and sanitation system by more than $2 billion, largely to pay for security and to repair what the insurgents and US marines destroy. Security costs can add 25 per cent to budgets. There are twice as many private mercenaries as British troops in Iraq. To pay them, development projects across Iraq are being scrapped and scaled back.

This is only part of the story. The occupation authorities have generally stipulated that new machinery should be installed (most of it imported, largely from Coalition firms), when they could instead have given relatively small sums directly to Iraqi managers so that they could repair the machinery they already had or buy spare parts. As it is, ‘the Iraqis' capacity to operate . . . the power plant infrastructure and equipment provided by the United States remains a challenge at both the plant and ministry levels,' the GAO reports.

‘Iraqi power plant officials from 13 locations throughout Iraq,' the GAO goes on, ‘stated that their training did not adequately prepare them to operate and maintain the new US-provided gas turbine engines.' As Iraq has little natural gas, ‘some Iraqi power plants are using low-grade oil to fuel their natural gas combustion engines. The use of oil-based fuels, without adequate equipment modification and fuel treatment, decreases the power output of the turbines by up to 50 per cent, requires three times more maintenance, and could result in equipment failure and damage,' the GAO points out. It's hardly surprising that there are daily power cuts.

The last guy to get a piece of the action has often been the Iraqi sub-sub-sub-contractor who has been encouraged to cut corners in part because his slice of the contract price is too meagre properly to carry out the job. Across Iraq, much of what hasn't been stolen has been skimped on. Schools, clinics, sewage projects, all described as completed by the US embassy, will soon need major repairs as well as regular maintenance work carried out by trained staff overseen by Iraqi civil servants. The Iraqi government will have to pick up the tab.

According to the 2003 UN/World Bank Joint Iraqi Needs Assessment, ‘Iraq produced enough water before the 1991 Gulf War to supply more than 95 per cent of urban Iraqis and 75 per cent of rural Iraqis. By 2003, these production levels had fallen to about 60 per cent and 50 per cent respectively,' though much of this was not potable because of contamination. By this time, the sewage system in Baghdad had failed too, and back-ups of raw sewage were flooding the streets, less than 10 per cent of the urban population outside Baghdad had sewage systems, and not one treatment plant was operational in the whole of Iraq. The UN/World Bank assessment found that at least $4 billion was needed to restore the water and sewage systems to pre-1991 levels, with another $2.8 billion to build new plants and lay new pipes. The Americans budgeted $4.6 billion of US money to do the job.

But the job hasn't been done. First, as the GAO reports, the estimates were way too low, by as much as 50 per cent. An embassy official told the GAO that the American ‘construction programme was underfunded from the start'. Since September 2004, as I mentioned, the Americans have cut their sanitation and water budget by almost half. The State Department reported that as of April 2005, 64 projects were complete and 185 were in progress. But the GAO adds that ‘State was unable to provide a list of those completed projects, which would enable us to evaluate the significance of the project numbers in terms of scope of work, cost or size.'

The State Department was similarly unable to say how many Iraqi homes are now receiving clean water and are hooked up to the sewage system. A recent US quality of life survey in Iraq ‘found that just over half of respondents rated their water supply as poor to fair and over 80 per cent rated their sewerage and wastewater disposal as poor to fair.' The GAO believes that even these dismal figures are underestimates. The embassy has awarded 54 ‘task orders' worth $1.2 billion for water treatment plants, dams, irrigation projects and city water supplies to three British and American engineering firms. As of June 2005, only one of the firms, Bechtel, had completed any projects, and most of the 18 it had completed were months late. The GAO discovered that ‘approximately $52 million of the $200 million in completed large-scale water and sanitation projects were either not operating or were operating at lower capacity . . . One repaired wastewater plant was partially shut down due to the looting of key electrical equipment . . . Two projects lacked a reliable power supply, one lacked sufficient staff.' Another lacked both, while the ‘repaired water plants in one southern governorate lacked adequate electricity and necessary water treatment chemicals'.

Under contracts paid out of US funds, the contractor has to keep completed projects up and running for 90 days. After that, maintenance and running costs are to be paid by the Iraqi government. More than a year ago, Bechtel warned the embassy that Iraqis might not be able to run the facilities they had repaired and installed, especially those with new Western equipment. ‘Bechtel estimated that water and wastewater plants had only about one-third of the staff needed,' the GAO said. Because of power cuts, the plants needed back-up generators, but these ‘needed diesel fuel to power them and that was not always available'. The company's contract did not allow for funding for spare parts. ‘Without these spares or the funds to buy them, Iraqi staff would likely have to cannibalise parts . . . borrowing parts from one machine to repair others.' Bechtel also reported that ‘Iraqi staff did not undertake repairs until a situation became critical.'

Last spring the embassy agreed to set up a modest fund to train Iraqis. The embassy described this as ‘moving from the previous model of building projects and turning them over to Iraqi management towards a "build-train-turnover system".' The GAO commented that ‘US assistance efforts do not address the long-term ability of the Iraqi government to support, staff and equip these facilities.'

According to the latest SIGIR report, as of September some $425 million had been set aside by the embassy ‘to develop sustainment programmes for infrastructure facilities and to promote capacity-building initiatives within Iraqi ministries'. SIGIR was, however, ‘unable to determine how these efforts were supporting sustainment goals. For example, many activities are associated with basic operations, maintenance and management of the delivered facilities.' The GAO is more forthright: ‘a number of critical infrastructure facilities constructed or rehabilitated under US funding have failed, will fail, or will operate in sub-optimised conditions following handover to the Iraqis.' Essentially, the occupation authorities have been awarding contracts that are heavy at the front end, where the American contractors take their profits, and light on budgeting for crucial local, labour-intensive maintenance and support.

Furthermore, the American embassy doesn't know or isn't saying how much money is left for these contracts. It told the GAO that its water and sanitation objectives are ‘classified'. KPMG auditors, concerned only with Iraqi funds managed by the US embassy, discovered that, for a sample of outstanding contracts worth $606 million, the embassy database overestimated outstanding costs by some $518 million (85 per cent) compared to the costs they found when they looked at the contract files. The auditors say they were informed that the embassy's accounting and contracting databases for DFI funds would not be reconciled before the handover to the Iraqis at the end of last month. What's more, they ‘found that US agencies have not developed a comprehensive strategy and implemented procedures for the handover of DFI contract administration to the Government of Iraq'. It appears that the embassy may be holding back several hundred million dollars of Iraqi funds that should now be with the Iraqi government.

Then there is the embassy's other pot of money, the US funds allocated by Congress, some $1.2 billion of which is still uncommitted. ‘But using uncommitted funds to pay additional sustainment costs would require cancelling planned projects,' SIGIR auditors point out. So SIGIR tried to get the embassy to do a cost-to-complete exercise to get some idea of what needs to be done. The embassy didn't have the information available. The US military said it doesn't have to provide cost-to-complete data.

The auditors estimate that the Iraqis will need between $750 million and $950 million annually to operate and maintain US funded projects. The Iraqi budget for this year is estimated already to be underfunded by $4.8 billion. ‘According to senior US advisers to the Iraqi ministries, funding for existing infrastructure support is a fraction of what is necessary,' SIGIR says. These advisers stated that this year's budget ‘contains little or no funding for operations and maintenance activities for existing infrastructure'. In the Ministries of Defence and the Interior, ‘the combined gap between requirements and anticipated funding has been estimated at $7 billion for the calendar year 2006,' SIGIR reports. The Supreme Board of Audit found that the Iraqi MoD has ‘no independent department for warehousing', and nowhere to store material ordered from overseas. The auditors noticed that equipment was stored ‘in courtyards, parks and hallways'. Of Iraq's 116 police and armed forces battalions, only one is considered by the US military as ready to be trusted to conduct counter-insurgency operations on its own. If the American-led occupation authorities and their Iraqi allies cannot perform better in these strategically important ministries, there seems little hope for the success of basic social programmes.

The 2003 UN/World Bank assessment found that some $56 billion was needed to get Iraqi society on its feet again. The Iraqis themselves will not be able to afford it; Congress has already voted some $20 billion for Iraqi reconstruction and President Bush cannot ask for more. So much for what was to be the Marshall Plan in the Middle East.

US agencies have been looking for various ways to get the Iraqis to pay for what is largely an American failure. Iraq's oil revenues could be $10 billion higher next year if international oil prices continue to rise. But the government is committed to spending this on increasing production, which now hovers around pre-invasion levels. The GAO estimates that it will cost an estimated $30 billion over several years to double oil output and repair sabotage damage.

The Iraqis could borrow. Of some $13 billion pledged by international donors, $10 billion is in the form of loans – mostly from Japan, the IMF and World Bank – on which the Iraqis have prudently drawn less than $500 million. The American auditors point out that the Iraqi government could ‘save' several billion by stopping subsidies on basic foodstuffs ($4 billion), fuel ($2.4 billion), water and electricity. This, SIGIR says, ‘could ease some of the financial stress the new Iraqi government is facing and open up funding streams for infrastructure sustainment'. It could also transform an insurgency into open rebellion.

Footnotes

* See Ed Harriman's previous piece in the LRB, 7 July 2005.

† My Year in Iraq: The Struggle to Build a Future of Hope by Paul Bremer and Malcolm McConnell (Simon and Schuster, 432 pp., £18.99, February, 0 7432 7389 3).

Ed Harriman is a journalist and television documentary film-maker.