Background

From May 2003 through June 2004, the Coalition Provisional Authority  (CPA), led by the United States and the United Kingdom, was the  UN-recognized coalition authority responsible for the temporary  governance of Iraq and for overseeing, directing, and coordinating the  reconstruction effort. In May 2003, the CPA dissolved the military  organizations of the former regime and began the process of creating or  reestablishing new Iraqi security forces, including the police and a new  Iraqi army. Over time, multinational force commanders assumed  responsibility for recruiting and training some Iraqi defense and police forces in their areas of responsibility. In May 2004, the President issued a  National Security Presidential Directive, which stated that, after the  transition of power to the Iraqi government, the Department of State  (State), through its ambassador to Iraq, would be responsible for all U.S.  activities in Iraq except for security and military operations. U.S. activities  relating to security and military operations would be the responsibility of  the Department of Defense (DOD). The Presidential Directive also  established two temporary offices: (1) the Iraq Reconstruction and  Management Office to facilitate transition of reconstruction efforts to Iraq  and (2) the Project and Contracting Office (PCO) to provide acquisition and  project management support for some U.S.-funded reconstruction projects.  Other U.S. government agencies also play significant roles in the  reconstruction effort. USAID is responsible for projects to restore Iraq’s  infrastructure, support healthcare and education initiatives, expand  economic opportunities for Iraqis, and foster improved governance. The  U.S. Army Corps of Engineers provides engineering and technical services  to the PCO, USAID, and military forces in Iraq.
On June 28, 2004, the CPA transferred power to an interim sovereign Iraqi  government, the CPA was officially dissolved, and Iraq’s transitional period  began. Under Iraq’s transitional law, the transitional period covers the  interim government phase (from June 28, 2004, to January 30, 2005) and the  transitional government phase, which is currently scheduled to end by  December 31, 2005. Under UN Resolution 1546, the Multi-National Force -  Iraq (MNF-I) has the authority to take all necessary measures to contribute  to security and stability in Iraq during this process, working in partnership  with the Iraqi government to reach agreement on security and policy  issues. The Presidential Directive required the U.S. Central Command  (CENTCOM) to direct all U.S. government efforts to organize, equip, and  train Iraqi security forces. The Multi-National Security Transition  Command-Iraq, which operates under MNF-I, now leads coalition efforts to  train, equip, and organize Iraqi security forces.

	U.S. Appropriations Primarily Support Iraqi Reconstruction While Iraqi Funds Support Iraqi Government Operations

The United States is the primary contributor to rebuilding and stabilization  efforts in Iraq. U.S. appropriations have been used largely for activities that  include the repair of infrastructure, procurement of equipment, and  training of Iraqi security forces. International donors have provided a lesser  amount of funding for reconstruction and development activities; however,  most of the pledged amount is in the form of loans that largely have not  been accessed by the Iraqi government. Iraqi funding, under CPA or Iraqi  control, has generally supported operating expenses of the Iraqi  government. Finally, Iraqi needs may be greater than the funding currently  made available.

		U.S. Funding Supports Rebuilding and Stabilization Efforts in Iraq

U.S. appropriated funding has largely focused on infrastructure repair and  training of Iraqi security forces and this funding has been reallocated as  priorities changed. As of August 2005, approximately $30 billion in U.S.  appropriations had been made available for rebuilding and stabilization  needs in Iraq, about $21 billion had been obligated, and about $13 billion  had been disbursed. These funds were used for activities that included  infrastructure repair of the electricity, oil, and water and sanitation sectors;  infrastructure repair, training, and equipping of the security and law  enforcement sector; and CPA and U.S. administrative expenses.
Many current U.S. reconstruction efforts reflect initial plans that the CPA  developed before June 2004. As priorities changed, particularly since the  transition of power to the Iraqi interim government, the U.S. administration  reallocated about $5 billion of the $18.4 billion fiscal year 2004 emergency  supplemental among the various sectors (see fig. 1).
According to State department documents, these reallocations were made  to meet immediate needs: in October 2004, for projects in security and law  enforcement, economic and private sector development, and governance;  in January 2005, for quick-impact projects in key cities; in April 2005, for  job creation and essential services activities; and in July 2005, for security  force training and election support. As Figure 1 shows, security and justice  funds increased while resources for the water and electricity sectors  decreased.

		Some International Funds Have Been Provided for Reconstruction, but Pledges are Mostly Loans

International donors have provided about $2.7 billion in multilateral and  bilateral grants, of the pledged $13.6 billion, for reconstruction activities;  however, most of the pledged amount is in the form of loans that largely  have not been accessed by the Iraqis. International reconstruction  assistance provided in the form of multilateral grants has been used largely  for activities such as electoral process support, education and health  projects, and capacity building of the ministries. As of August 2005, donors  have deposited about $1.2 billion into the two trust funds of the  International Reconstruction Fund Facility for Iraq (IRFFI). Of that  amount, about $800 million had been obligated and nearly $300 million  disbursed to individual projects. Donors have also provided bilateral  assistance for Iraq reconstruction activities; however, complete  information on this assistance is not readily available. As of August 2005,  State has identified $1.5 billion—of the $13.6 billion pledged—in funding  that donors have provided as bilateral grants for reconstruction projects  outside the IRFFI. About $10 billion, or 70 percent, of the $13.6 billion  pledged in support of Iraq reconstruction is in the form of loans, primarily  from the World Bank, the International Monetary Fund (IMF), and Japan.  According to a State Department official, Iraq is in discussions with the  government of Japan and the World Bank for initial projects of lending  programs that total about $6.5 billion. As of October 12, 2005, Iraq had  accessed a loan of $436 million from the IMF and an initial loan of $500  million from the World Bank, according to a State Department official.

		Iraqi Funds Support Iraq’s Government Operations

Iraqi funds—under the CPA or Iraqi control—primarily have supported the  Iraqi operating budget with some focus on relief and reconstruction projects.Of the Iraqi funds under CPA control from May 2003 to June 2004,  about $21 billion came from the Development Fund for Iraq (DFI) and  $2.65 billion from vested and seized assets from the previous Iraqi regime.  The CPA disbursed these Iraqi funds primarily to support the 2003 and 2004  Iraqi budgets for government operating expenses, such as salary payments  and ministry operations, the public food distribution system, and regional  government outlays. In addition, CPA used Iraqi funds to support efforts  such as the import of refined fuels and electricity restoration projects. On  June 28, 2004, stewardship of the DFI was turned over to the Iraqi interim  government. Proceeds from Iraqi crude oil exports continue to be  deposited into the DFI and represent more than 90 percent of the $23  billion in domestic revenue support for the Iraqi 2005 budget.
According to Iraq’s National Development Strategy, the 2005 Iraqi budget  planned for nearly $28 billion in expenditure. These expenditures exceed  estimated domestic revenues by $4.8 billion. However, higher than  anticipated domestic revenues may offset this deficit. Planned  expenditures of this budget include about 37 percent for direct subsidies;  about 21 percent for capital investment, especially in the oil and gas sector;  about 20 percent for employee wages and pensions; nearly 18 percent for  goods and services; and about 4 percent for war reparations. Direct  subsidies included the import of gasoline and other refined fuel products  (projected to cost $2.4 billion) and Iraqs’ public distribution system’s basic  food basket (projected to cost $4 billion). The Iraqi government continues  to develop plans to reform fuel price subsidies, partly due to an agreement  with the IMF to reduce subsidies by $1 billion per year, according to IMF  and agency documents. In addition to subsidy expenditures, Iraq has  planned for capital investment levels of 21 percent from 2005 to 2007. In  2005, the majority of these funds were planned for the oil and gas  sector—about $3 billion of about $5 billion in total for various ministries.

		Iraqi Needs Greater than Originally Anticipated

Initial assessments of Iraq’s needs through 2007 by the UN/World Bank and  the CPA estimated that the reconstruction of Iraq would require about $56  billion. However, Iraq may need more funding than currently available to  meet the needs and demands of the country. The state of some Iraqi  infrastructure was more severely degraded than U.S. officials originally  anticipated or initial assessments indicated. The condition of the  infrastructure was further exacerbated by post-2003 conflict looting and  sabotage. For example, some electrical facilities and transmission lines  were damaged, and equipment and materials needed to operate treatment  and sewerage facilities were destroyed by the looting that followed the  2003 conflict. In the oil sector, a June 2003 U.S. government assessment  found that over $900 million would be needed to replace looted equipment  at Iraqi oil facilities. In addition, initial assessments assumed  reconstruction would take place in a peace-time environment and did not  include additional security costs.
Further, these initial assessments assumed that Iraqi government revenues  and private sector financing would increasingly cover long-term  reconstruction requirements. However, private sector financing and  government revenues may not yet meet these needs. In the oil sector alone,  Iraq will likely need an estimated $30 billion over the next several years to  reach and sustain an oil production capacity of 5 million barrels per day,  according to industry experts and U.S. officials.

	Security, Measurement, and Sustainability Challenges in Rebuilding and Stabilizing Iraq

The United States faces three key challenges in stabilizing and rebuilding  Iraq. First, the unstable security environment and the continuing strength  of the insurgency have made it difficult for the United States to transfer  security responsibilities to Iraqi forces and engage in rebuilding efforts.  Second, inadequate performance data and measures make it difficult to  determine the overall progress and impact of U.S. reconstruction efforts.  Third, the U.S. reconstruction program has encountered difficulties with  Iraq’s inability to sustain new and rehabilitated infrastructure projects and  to address maintenance needs in the water, sanitation, and electricity  sectors.

		Strength of the Insurgency Has Made It Difficult to Transfer Security Responsibilities to Iraqi Forces and Engage in Rebuilding Efforts

Over the past 2 years, significant increases in attacks against the coalition  and coalition partners have made it difficult to transfer security  responsibilities to Iraqi forces and engage in rebuilding efforts in Iraq. The  insurgency in Iraq intensified in early 2005 and has remained strong since  then. Poor security conditions have delayed the transfer of security  responsibilities to Iraqi forces and the drawdown of U.S. forces in Iraq. The  unstable security environment has also affected the cost and schedule of  rebuilding efforts and has led, in part, to project delays and increased costs  for security services.

			Insurgency Intensified through Early 2005 and Remains Strong

The insurgency intensified through early 2005 and has remained strong  since then. As we reported in March 2005, the insurgency in  Iraq—particularly the Sunni insurgency—grew in complexity, intensity, and  lethality from June 2003 through early 2005. Enemy-initiated attacks  against the coalition, its Iraqi partners, and infrastructure had increased in  number over time, with the highest peaks occurring in August and  November 2004 and in January 2005. The November 2004 and January 2005  attacks primarily occurred in Sunni-majority areas, whereas the August  2004 attacks took place countrywide. MNF-I is the primary target of the  attacks, but the number of attacks against Iraqi civilians and security forces  increased significantly during January 2005, prior to Iraq’s national election  for a transitional government that was held January 30, 2005. According to  the Director of the Defense Intelligence Agency (DIA), attacks on Iraq’s  Election Day reached about 300, double the previous 1-day high of about  150 attacks on a day during Ramadan in 2004.
Although the number of attacks decreased immediately after the January  elections, the strength of the insurgency in Iraq has remained strong and  generally unchanged since early 2005, according to senior U.S. military  officers. As shown in figure 2, although enemy-initiated attacks had  decreased in February and March 2005, they generally increased through  the end of August 2005.
According to a senior U.S. military officer, attack levels ebb and flow as the  various insurgent groups—which are an intrinsic part of Iraq’s  population—rearm and attack again. As DOD reported in July 2005,  insurgents share a goal of expelling the Coalition from Iraq and  destabilizing the Iraqi government to pursue their individual and, at times,  conflicting goals. Iraqi Sunnis make up the largest proportion of the  insurgency and present the most significant threat to stability in Iraq.  Radical Shia groups, violent extremists, criminals, and, to a lesser degree,  foreign fighters, make up the rest. Senior U.S. military officers believe that  the insurgents remain adaptive and capable of choosing the time and place  of their attacks. These officers have also predicted spikes in violence  around Iraq’s upcoming constitutional referendum scheduled for October  15, 2005, and the national elections scheduled for December 15, 2005.

		Poor Security Conditions Have Delayed Transfer of Security Responsibilities to Iraqi Forces and Draw Down of U.S. Forces

The continuing strength of the insurgency has made it difficult for the  multinational force to develop effective and loyal Iraqi security forces,  transfer security responsibilities to them, and progressively draw down  U.S. forces in Iraq. In February 2004, the multinational force attempted to  quickly shift responsibilities to Iraqi security forces but did not succeed in  this effort. Police and military units performed poorly during an escalation  of insurgent attacks in April 2004, with many Iraqi security forces around  the country collapsing or assisting the insurgency during the uprising.  About that time, the Deputy Secretary of Defense said that the  multinational force was engaged in combat in Iraq, rather than in  peacekeeping as had been expected. The United States decided to maintain  a force level of about 138,000 troops until at least the end of 2005, rather  than drawing down to 105,000 troops by May 2004 as DOD had announced  in November 2003. The United States has maintained roughly the same  force level of 138,000 troops in Iraq since April 2004, as it has sought to  neutralize the insurgency and develop Iraqi security forces.
In late September and early October 2005, the Secretary of Defense and  senior U.S. military officers reported on their strategy to draw down and  eventually withdraw U.S. forces as Iraq meets certain conditions. These  conditions would consider the level of insurgent activity, readiness and  capability of Iraqi security forces and government institutions, and the  ability of the coalition forces to reinforce the Iraq security forces if  necessary. The ability to meet these conditions will be affected by progress  in political, economic, and other areas. According to the commanding  general of the multinational force, as conditions are met, multinational  forces will progressively draw down in phases around the country. By the  time the multinational force’s end state is achieved, U.S. forces will be  withdrawn or drawn down to levels associated with a normal bilateral  security relationship. The defined end state is an Iraq at peace with its  neighbors, with a representative government that respects the human  rights of all Iraqis, and with a security force that can maintain domestic  order and deny Iraq as a safe haven for terrorists.
DOD and the multinational force face a number of challenges in  transferring security responsibilities to the Iraqi government and security  forces. As we reported in March 2005, the multinational force faced four  key challenges in increasing the capability of Iraqi forces: (1) training,  equipping, and sustaining a changing force structure; (2) developing a  system for measuring the readiness and capability of Iraq forces; (3)  building loyalty and leadership throughout the Iraqi chain of command; and  (4) developing a police force that upholds the rule of law in a hostile  environment. Further, in a July 2005 report to Congress, DOD noted  continuing problems with absenteeism in the Iraqi Army, Police Service,  and Border Police; among those units conducting operations; and units  relocating elsewhere in Iraq. The report also noted that there was  insufficient information on the extent to which insurgents have infiltrated  Iraqi security forces. However, in an October 2005 report to Congress,  DOD noted insurgent infiltration is a more significant problem in Ministry  of Interior forces than in Ministry of Defence forces. Moreover, in early  October 2005, senior U.S. military officers noted challenges in developing  effective security ministries, as well as logistics capabilities of Iraqi forces.
Since March 2005, the multinational force has taken some steps to begin  addressing these challenges. For example, the multinational force has  embedded transition teams at the battalion, brigade, and division levels of  Ministry of Defense forces, as well as in the Ministry of Interior’s Special  Police Commando battalions, the Civil Intervention Force, and the  Emergency Response Unit. Multinational force transition teams conduct  new transition readiness assessments that identify the progress and  shortcomings of Iraqi forces. According to DOD’s report, these assessments  take into account a variety of criteria that are similar but not identical to  those the U.S. Army uses to evaluate its units’ operational readiness,  including personnel, command and control, training, sustainment/logistics,  equipment, and leadership. The assessments place Iraqi units into one of  the following four categories:   Level 1 units are fully capable of planning, executing, and sustaining  independent counterinsurgency operations.
Level 2 units are capable of planning, executing, and sustaining  counterinsurgency operations with coalition support.
Level 3 units are partially capable of conducting counterinsurgency  operations in conjunction with coalition units.
Level 4 units are forming or otherwise incapable of conducting  counterinsurgency operations.
The multinational force is also preparing similar readiness assessments on  the Iraqi police through partnerships at the provincial levels. These  assessments look at factors that are tailored to the tasks of a police force,  including patrol/traffic operations, detainee operations, and case  management.
According to DOD’s October 2005 report and DOD officials, Iraqi combat  forces have made progress in developing the skills necessary to assume  control of counterinsurgency operations. However, they also recognize that  Iraqi forces will not be able to operate independently for some time  because they need logistical capabilities, ministry capacity, and command  and control and intelligence structures. According to DOD’s October 2005  report, Iraq has 116 police and army combat battalions actively conducting  counter insurgency operations. This number corresponds to the number of  battalions in levels 1, 2, and 3 described above. Of these battalions, 1  battalion was assessed as level 1, that is, fully capable of planning,  executing, and sustaining independent counterinsurgency operations.  Thirty-seven were level 2, or capable of planning, executing, and sustaining  counterinsurgency operations with coalition support; and 78 were level  3—partially capable of conducting counterinsurgency operations in  conjunction with coalition units. The assessment of Iraqi units’ capabilities  also considers the threat level they face. According to a senior U.S. military  officer, Iraqi forces have more quickly progressed from level 3 to level 2 in  areas that have experienced fewer insurgent attacks, such as southern Iraq.
GAO’s forthcoming classified report on Iraq’s security situation will provide  further information and analysis on the challenges to developing Iraqi  security forces and the conditions for the phased draw down of U.S. and  other coalition forces.

			Security Situation Has Affected Rebuilding Efforts

The security situation in Iraq has affected the cost and schedule of  reconstruction efforts. Security conditions have, in part, led to project  delays and increased costs for security services. Although it is difficult to  quantify the costs in time and money resulting from poor security  conditions, both agency and contractor officials acknowledged that  security costs have diverted a considerable amount of reconstruction  resources and have led to canceling or reducing the scope of some  reconstruction projects. For example, in March 2005, the USAID cancelled  two electrical power generation-related task orders totaling nearly $15  million to help pay for increased security costs incurred at another power  generation project in southern Baghdad. In another example, work was  suspended at a sewer repair project in central Iraq for 4 months in 2004 due  to security concerns. In a September 2005 testimony, the Special Inspector  General for Iraq Reconstruction and a USAID official also observed that the  cost of security had taken money away from reconstruction and slowed  down reconstruction efforts.
However, the actual cost that security has added to reconstruction projects  is uncertain. We reported in July 2005, that, for 8 of 15 reconstruction  contracts we reviewed, the cost to obtain private security providers and  security-related equipment accounted for more than 15 percent of contract  costs, as of December 31, 2004. Our analysis and discussions with agency  and contractor officials identified several factors that influenced security  costs, including (1) the nature and location of the work, (2) the type of  security required and the security approach taken, and (3) the degree to  which the military provided the contractor security services. For example,  projects that took place in fixed locations were generally less expensive to  secure than a project, such as electrical transmission lines, which extended  over a large geographic location. In addition, some contractors made more  extensive use of local Iraqi labor and employed less costly Iraqi security  guards, while others were able to make use of security provided by the U.S.  military or coalition forces.
Our analysis did not include increased transportation or administrative  expenses caused by security-related work stoppages or delays, or the cost  associated with repairing the damage caused by the insurgency on work  previously completed. We also excluded the cost associated with the  training and equipping of Iraqi security forces and the costs borne by DOD  in maintaining, equipping, and supporting U.S. troops in Iraq.
In July 2005, to improve agencies’ ability to assess the impact of and  manage security costs in future reconstruction efforts, we recommended  that the Secretary of State, the Secretary of Defense, and the Administrator,  USAID, establish a means to track and account for security costs to  develop more accurate budget estimates. State did not indicate whether it  agreed with our recommendation, Defense agreed, and USAID did not  comment on the recommendation.
In addition, the security environment in Iraq also has led to severe  restrictions on the movement of civilian staff around the country and  reductions of a U.S. presence at reconstruction sites, according to U.S.  agency officials and contractors. For example, work at a wastewater plant  in central Iraq was halted for approximately 2 months in early 2005 because  insurgent threats drove subcontractors away and made the work too  hazardous to perform. In the assistance provided to support the electoral  process, U.S. funded grantees and contractors also faced security  restrictions that hampered their movements and limited the scope of their  work. For example, IFES was not able to send its advisors to most of the  governorate-level elections administration offices, which hampered  training and operations at those facilities leading up to Iraq’s Election Day  on January 30, 2005.
While poor security conditions have slowed reconstruction and increased  costs, a variety of management challenges have also adversely affected the  implementation of the U.S. reconstruction program. In September 2005, we  reported that management challenges such as low initial cost estimates and  delays in funding and awarding task orders have also led to the reduced  scope of the water and sanitation program and delays in starting projects.  In addition, U.S. agency and contractor officials have cited difficulties in  initially defining project scope, schedule, and cost, as well as concerns with  project execution, as further impeding progress and increasing program  costs. These difficulties include lack of agreement among U.S. agencies,  contractors, and Iraqi authorities; high staff turnover; an inflationary  environment that makes it difficult to submit accurate pricing;  unanticipated project site conditions; and uncertain ownership of projects  sites.

		Limited Performance Data and Measures and Inadequate Reporting Present Difficulties in Determining Progress and Impact of Rebuilding Effort

State has set broad goals for providing essential services, and the U.S.  program has undertaken many rebuilding activities in Iraq. The U.S.  program has made some progress in accomplishing rebuilding activities,  such as rehabilitating some oil facilities to restart Iraq’s oil production,  increasing electrical generation capacity, restoring some water treatment  plants, and reestablishing Iraqi health services. However, limited  performance data and measures make it difficult to determine and report  on the progress and impact of U.S. reconstruction. For example, in the  water and sanitation, health, and electricity sectors, limited performance  data and reporting measures are output focused and make it difficult to  accurately measure program results and assess the effectiveness of U.S.  reconstruction efforts. Although information is difficult to obtain in an  unstable security environment, opinion surveys and additional outcome  measures have the potential to help determine progress and gauge the  impact of the U.S. reconstruction efforts on the lives of the Iraqi people.
In the water and sanitation sector, the Department of State has primarily  reported on the numbers of projects completed and the expected  capacity of reconstructed treatment plants. However, we found that the  data are incomplete and do not provide information on the scope and  cost of individual projects nor do they indicate how much clean water is  reaching intended users as a result of these projects. For example,  although State reported that 143 projects were complete as of early July  2005, it could not document the location, scope, and cost of these  projects. Moreover, reporting only the number of projects completed or  under way provides little information on how U.S. efforts are improving  the amount and quality of water reaching Iraqi households or their  access to sanitation services. Information on access to water and its  quality is difficult to obtain without adequate security or water metering  facilities. However, opinion surveys assessing Iraqis’ access and  satisfaction with water sanitation services have found dissatisfaction  with these services. The most recent USAID quality of life survey, in  February 2005, found that just over half of respondents rated their water  supply as poor to fair and over 80 percent rated their sewerage and  wastewater disposal as poor to fair. These surveys demonstrate the  potential for gathering data to help gauge the impact of U.S.  reconstruction efforts.
Limitations in health sector measurements also make it difficult to  relate the progress of U.S. activities to its overall effort to improve the  quality and access of health care in Iraq. Department of State  measurements of progress in the health sector primarily track the  number of completed facilities, an indicator of increased access to  health care. For example, State reported that the construction of 145 out  of 300 health clinics had been completed, as of August 31, 2005.  However, the data available do not indicate the adequacy of equipment  levels, staffing levels, or quality of care provided to the Iraqi population.  Monitoring the staffing, training, and equipment levels at health facilities  may help gauge the effectiveness of the U.S. reconstruction program  and its impact on the Iraqi people. In addition, opinion surveys assessing  Iraqis’ access and satisfaction with health services also have the  potential for gathering data to help gauge the impact of U.S.  reconstruction efforts. For example, the most recent USAID quality of  life survey, in February 2005, found that the majority of Iraqis approved  of the primary healthcare services they received; although fewer than  half of the respondents approved of the level of health care at Ta’mim,  Al Basrah, and Maysan governorates.
In the electricity sector, U.S. agencies have primarily reported on  generation measures such as levels of added or restored generation  capacity and daily power generation of electricity; numbers of projects  completed; and average daily hours of power. For example, as of May  2005, U.S.-funded projects reportedly had added or restored about 1,900  megawatts of generation capacity to Iraq’s power grid. However, these  data do not show whether (1) the power generated is uninterrupted for  the period specified (eg., average number of hours per day), (2) there  are regional or geographic differences in the quantity of power  generated, and (3) how much power is reaching intended users.  Information on the distribution and access of electricity is difficult to  obtain without adequate security or accurate metering capabilities.  However, opinion surveys assessing Iraqis’ access and satisfaction with  electricity services have found dissatisfaction with these services. The  February 2005 USAID survey found that 74 percent of the respondents  rated the overall quality of electricity supply as poor or very poor. The  surveys also found that the delivery of electricity directly influenced the  perceived legitimacy of local government for many respondents. These  surveys demonstrate the potential for gathering data to help gauge the  impact of U.S. reconstruction efforts.
In September 2005, we recommended that the Secretary of State address  this issue of measuring progress and impact in the water and sanitation  sector. State agreed with our recommendation and stated that it is taking  steps to address the problem.

		Iraq’s Capacity to Operate and Maintain U.S.-Funded Projects Presents Sustainability Problems

The U.S. reconstruction program has encountered difficulties with the  Iraqis’ ability to sustain the new and rehabilitated infrastructure and  address maintenance needs. In the water, sanitation, and electricity  sectors, in particular, some projects have been completed but have  sustained damage or become inoperable due to the Iraqis’ problems  maintaining or properly operating them.
In the water and sanitation sector, U.S. agencies have identified limitations  in the Iraqis’ capacity to maintain and operate reconstructed facilities,  including problems with staffing, unreliable power to run treatment plants,  insufficient spare parts, and poor operations and maintenance procedures.  As of June 2005, approximately $52 million of the $200 million in completed  large-scale water and sanitation projects either were not operating or were  operating at lower capacity due to looting of key equipment and shortages  of reliable power, trained Iraqi staff, and required chemicals and supplies.  For example, one repaired wastewater plant was partially shut down due to  the looting of key electrical equipment and repaired water plants in one  southern governorate lacked adequate electricity and necessary water  treatment chemicals. In addition, two projects lacked a reliable power  supply, one lacked sufficient staff to operate properly, and one lacked both  adequate staff and power supplies. In response, U.S. agencies have taken  initial steps to improve Iraqi capacity to operate and maintain water and  sanitation facilities. For example, in August 2005, USAID awarded a  contract to provide additional maintenance and training support for 6  completed water and sanitation facilities.
The U.S. embassy in Iraq stated that it was moving from the previous model  of building and turning over projects to Iraqi management toward a  “build-train-turnover” system to protect the U.S. investment. However,  these efforts are just beginning, and the U.S. assistance does not address  the long-term ability of the Iraqi government to support, staff, and equip  these facilities. It is unclear whether the Iraqis will be able to maintain and  operate completed projects and the more than $1 billion in additional  large-scale water and sanitation projects expected to be completed through  2008. Without assurance that the Iraqis have adequate resources to  maintain and operate completed projects, the U.S. water and sanitation  reconstruction program risks expending funds on projects with limited  long-term impact. In September 2005, we recommended that the Secretary  of State address the issue of sustainability in the water and sanitation  sector. State agreed with our recommendation and stated that it is taking  steps to address the problem.
In the electricity sector, the Iraqis’ capacity to operate and maintain the  power plant infrastructure and equipment provided by the United States  remains a challenge at both the plant and ministry levels. As a result, the  infrastructure and equipment remain at risk of damage following their  transfer to the Iraqis. In our interviews with Iraqi power plant officials from  13 locations throughout Iraq, the officials stated that their training did not  adequately prepare them to operate and maintain the new U.S.-provided  gas turbine engines. Due to limited access to 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  percent, requires three times more maintenance, and could result in  equipment failure and damage that significantly reduces the life of the  equipment, according to U.S. and Iraqi power plant officials.
U.S. officials have acknowledged that more needs to be done to train plant  operators and ensure that advisory services are provided after the turnover  date. To address this issue, USAID implemented a project, in February  2005, to train selected electricity plant officials (plant managers,  supervisors, and equipment operators) in plant operations and  maintenance. According to DOD, PCO also has awarded one contract and  is developing another to address operations and maintenance concerns.
Although agencies had incorporated some training programs and the  development of operations and maintenance capacity into individual  projects, recent problems with the turnover of completed projects, such as  those in the water and sanitation and electricity sectors, have led to a  greater interagency focus on improving project sustainability. In May 2005,  an interagency working group including State, USAID, PCO, and the Corps  of Engineers, was formed to identify ways of addressing Iraq’s capacity  development needs.
The working group reported that a number of critical infrastructure  facilities constructed or rehabilitated under U.S. funding have failed, will  fail, or will operate in sub-optimized conditions following handover to the  Iraqis. They found that a number of USAID and PCO projects encountered  significant problems in facility management and operations and  maintenance when turned over to the Iraqis or shortly thereafter. To  mitigate the potential for project failures, the working group recommended  increasing the period of operational support for constructed facilities from  a 90-day period to a period of up to one year. According to a State  department official, as of September 22, 2005, the recommendations are  currently under active consideration and discussion by the Embassy  Baghdad and Washington.

	Conclusion

For the past two and half years, the United States has served as the chief  protector and builder in Iraq. The long-term goal is to achieve a peaceful  Iraq that has a representative government respectful of human rights and  the means to maintain domestic order and quell terrorism. To achieve this  goal, the United States has provided $30 billion to develop capable Iraqi  security forces, rebuild a looted and worn infrastructure, and support  democratic elections.
However, the United States has confronted a capable and lethal insurgency  that has taken many lives and made rebuilding Iraq a costly and challenging  endeavor. It is unclear when Iraqi security forces will be capable of  operating independently, thereby enabling the United States to reduce its  military presence.
Similarly, it is unclear how U.S. efforts are helping the Iraqi people obtain  clean water, reliable electricity, or competent health care. Measuring the  outcomes of U.S. efforts is needed to determine how they are having a  positive impact on the daily lives of the Iraqi people.
Finally, the United States must ensure that the billions of dollars it has  already invested in Iraq’s infrastructure are not wasted. The Iraqis need  additional training and preparation to operate and maintain the power  plants, water and sewage treatment facilities, and health care centers the  United States has rebuilt or restored. This would help ensure that the  rebuilding efforts improve Iraq’s economy and social conditions and  establish a secure, peaceful, and democratic Iraq.
We will continue to examine the challenges the United States faces in  rebuilding and stabilizing Iraq. Specifically, we will examine the efforts to  stabilize Iraq and develop its security forces, including the challenge of  ensuring that Iraq can independently fund, sustain, and support its new  security forces; examine the management of the U.S. rebuilding effort,  including program execution; and assess the progress made in developing  Iraq’s energy sectors, including the sectors’ needs, existing resources and  contributions, achievements, and future challenges.
Mr. Chairman, this concludes my prepared statement. I will be happy to  answer any questions you or the other Subcommittee members may have.

Contact and Staff Acknowledgements

For further information, please contact Joseph A. Christoff on (202) 512- 8979. Individuals who made key contributions to this testimony were  Monica Brym, Lynn Cothern, Tim DiNapoli, Muriel Forster, Charles D.  Groves, B. Patrick Hickey, Sarah Lynch, Judy McCloskey, Kendall Schaefer,  Michael Simon, and Audrey Solis.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.

Summary:
Why GAO Did This Study

The United States, along with coalition partners and various international organizations, has undertaken a challenging and costly effort to stabilize and rebuild Iraq following multiple wars and decades of neglect by the former regime. This enormous effort is taking place in an unstable security environment, concurrent with Iraqi efforts to complete a constitutional framework for establishing a permanent government. The United States' goal is to help the Iraqi government develop a democratic, stable, and prosperous country, at peace with itself and its neighbors, a partner in the war against terrorism, enjoying the benefits of a free society and a market economy. In this testimony, GAO discusses (1) the funding used to rebuild and stabilize Iraq and (2) the challenges that the United States faces in its rebuilding and stabilization efforts. This statement is based on several reports GAO has issued to the Congress over the past three months. In July, we issued two reports on (1) the status of funding and reconstruction efforts in Iraq and (2) the use of private security providers in Iraq. We issued two additional reports in September on (1) U.S. reconstruction efforts in the water and sanitation sector and (2) U.S. assistance for the January 2005 Iraqi elections. Finally, we expect to issue shortly a report on U.S. efforts to stabilize the security situation in Iraq (a classified report). This statement includes unclassified information only.

What GAO Found

The United States is the primary contributor to efforts to stabilize and rebuild Iraq. Since 2003, the United States has made available about $30 billion for activities that include the construction and repair of infrastructure, procurement of equipment, and training and equipping of Iraqi security forces. International donors have pledged $13.6 billion in reconstruction funds (from 2004 through 2007), of which about $2.7 billion was provided in multilateral and bilateral grants through August 2005. However, most of the pledged amount''about $10 billion--is in the form of loans on which the Iraqi government largely has not yet drawn. Iraqi funds have primarily supported the country's operating budget, with some focus on capital improvement projects. For 2005, Iraq planned for about $28 billion in expenditures--largely supported by oil proceeds--to fund salaries, pensions, ministry operations, and subsidies. It is likely that Iraq may need more funds than currently available due to the severely degraded infrastructure, post conflict looting and sabotage, and additional security costs. The United States faces three key challenges in stabilizing and rebuilding Iraq. First, the security environment and the continuing strength of the insurgency have made it difficult for the United States to transfer security responsibilities to Iraqi forces and to engage in rebuilding efforts. The security situation in Iraq has deteriorated since June 2003, with significant increases in attacks against the coalition and the coalition's partners. Second, inadequate performance data and measures make it difficult to determine the overall progress and impact of U.S. reconstruction efforts. The United States has set broad goals for providing essential services in Iraq, but limited performance measures present challenges in determining the overall progress and impact of U.S. projects. Third, the U.S. reconstruction program has encountered difficulties with Iraq's ability to maintain new and rehabilitated infrastructure projects and to address maintenance needs in the water, sanitation, and electricity sectors. For example, as of June 2005, U.S.-funded water and sanitation projects representing about $52 million of approximately $200 million spent on completed projects were inoperable or were operating at lower than normal capacity. The United States has made a significant investment in the rebuilding and stabilization of Iraq. To preserve that investment, the United States must address these critical challenges.