United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on National Security, 

Emerging Threats, and International Relations; 

Committee on Government Reform, House of 

Representatives 

REBUILDING IRAQ 

Governance, Security, 

Reconstruction, and 

Financing Challenges 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 10:00 a.m. 

Tuesday, April 25, 2006

 

GAO-06-697T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 25, 2006

REBUILDING IRAQ

Governance, Security, Reconstruction, 

Highlights of GAO-06-697T, a testimony and Financing Challenges 

before the Subcommittee on National 

Security, Emerging Threats, and 

International Relations; Committee on 

Government Reform, House of 

Representatives 

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 transition to its first 

permanent government. 

In November 2005, the President 

issued the National Strategy for 

Victory in Iraq. According to the

strategy, victory will be achieved 

when Iraq is peaceful, united, 

stable, secure, well integrated into 

the international community, and a 

full partner in the global war on

terror. 

In this testimony, GAO discusses 

the key challenges that the United

States, international community, 

and Iraq face in rebuilding and 

stabilizing Iraq. 

This statement is based on four 

reports GAO has issued to the 

Congress since July 2005 and 

recent trips to Iraq. Since July 

2005, GAO issued reports on (1) the 

status of funding and

reconstruction efforts in Iraq, the 

progress achieved, and challenges 

faced in rebuilding Iraq’s 

infrastructure; (2) U.S. efforts in 

the water and sanitation sector; 

and (3) U.S. assistance for the 

January 2005 Iraqi elections, and 

(4) U.S. efforts to stabilize the

security situation in Iraq (a 

classified report).

The war in Iraq will not be won by the military alone. Iraq’s future requires

strong Iraqi leadership, sustained U.S. commitment, and a reengaged 

international community. 

The United States, Iraq, and its partners have made some progress in 

stabilizing and rebuilding Iraq. Iraqis have voted in increasing numbers, with 

over 12 million casting votes in the December 2005 election. Over the past 

year, the number of security forces that the coalition has trained and 

equipped has increased from about 142,000 to about 242,000. Finally, the 

United States has completed or has underway about 500 water, oil, and 

electricity reconstruction projects. 

However, this progress is tempered by the overwhelming challenges the 

coalition faces. First, sectarian divisions delayed the formation of a 

permanent government and created a political vacuum. Recent events 

provide some hope that a new government will be formed in the near future. 

Once formed, the new government will confront the enormous tasks of 

strengthening government institutions, disbanding the militias, resolving 

disputes over internal boundaries and oil revenues, addressing corruption, 

and delivering results to the Iraqi people. Of particular importance is 

providing the Iraqis with the training and technical assistance needed to run 

their national and provincial governments. A transparent and accountable 

government can reduce corruption and deliver results to the Iraqi people. 

Second, the security environment continues to be a concern as insurgents 

demonstrate the ability to recruit, supply, and attack coalition and Iraqi 

security forces. From 2004 to 2005, attacks against the coalition, Iraqis, and 

infrastructure increased 23 percent. Since the bombing of a Samarra mosque

in February 2006, Iraqis have become increasingly concerned that civil war 

may break out. The poor security situation in much of Iraq has impeded the 

development of an inclusive Iraqi government and effective Iraqi security

forces. 

Third, higher than expected security costs, funding reallocations, and 

inadequate maintenance have impeded U.S. reconstruction efforts. As of 

March 2006, oil and electricity production were below pre-war levels and 

reconstruction goals for oil, electricity, and water had not been met. Iraq 

produced 2.6 million barrels of oil per day before the war; in 2005, 

production averaged 2.1 million barrels per day. Production levels alone do 

not measure the impact of reconstruction efforts. While U.S. efforts have 

helped Iraq produce more clean water, 60 percent is lost due to leakage and 

contamination. Continued focus on developing outcome measures is critical 

to ensure that reconstruction efforts are making a difference in the lives of 

the Iraqi people. 

www.gao.gov/cgi-bin/getrpt?GAO-06-697T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Joseph A. 

Christoff at (202) 512-8979 or 

christoffj@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss U.S. efforts to stabilize and 

rebuild Iraq. The United States, along with its 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

transition to its first permanent government. 

Between fiscal years 2001 and 2005, the U.S. direct financial commitment 

to securing and stabilizing Iraq grew to $278 billion. Approximately 

$248 billion has been provided to support U.S. military operations and 

forces, which currently number about 130,000 troops, and about $30 

billion to develop capable Iraqi security forces, restore essential services, 

and rebuild Iraqi institutions. In February 2006, the administration 

requested an additional $123 billion to support U.S. stabilization and 

reconstruction operations in Iraq and Afghanistan in fiscal years 2006 and

2007.

1

 These amounts do not include future direct costs nor do they 

include the significant, additional recapitalization and other longer-term 

costs that will be incurred due to the Iraq conflict. 

In November 2005, the President issued the National Strategy for Victory 

in Iraq. According to the strategy, victory will be achieved when Iraq is 

peaceful, united, stable, secure, well integrated into the international 

community, and a full partner in the global war on terrorism. The new 

strategy also aimed to provide a more comprehensive and coordinated 

focus on U.S. stabilization and reconstruction efforts in Iraq. Success in 

Iraq requires progress on the three tracks of the President’s National 

Strategy for Victory in Iraq. The strategy states that progress along one of

these tracks—political, security, or economic—reinforces progress along 

the other tracks. 

 1

A separate breakout for Iraq was not provided. For fiscal year 2006, the administration 

requested $72.4 billion in supplemental funds, including $38 billion for defense and 

intelligence operations in Iraq and Afghanistan, plus $3.7 billion to develop Iraqi security 

forces and $3.3 billion for State to continue its operations in Iraq. For fiscal year 2007, the

defense budget request includes $50 billion that the Office of Management and Budget

terms “bridge funding” to continue the global war on terror in Iraq and Afghanistan. State’s 

2007 budget submission requests an additional $836 million for reconstruction and embassy 

operations in Iraq. 

Page 1 GAO-06-697T
My testimony today is based on the four reports that we have issued to the 

Congress since July 2005 and on our recent trips to Iraq. Since July 2005, 

we have reported on (1) the status of funding and reconstruction efforts in 

Iraq, focusing on the progress achieved and the challenges faced in 

rebuilding Iraq’s infrastructure; (2) U.S. reconstruction efforts in the water 

and sanitation sector; (3) U.S. assistance for the January 2005 Iraqi 

elections; and (4) U.S. efforts to stabilize the security situation in Iraq (a 

classified report). 

Based on these four reports and recent audit work conducted in Iraq, 

including my most recent visit to the country earlier this year, I will 

discuss the key challenges that the United States, the international 

community, and the Iraqi government face in stabilizing and rebuilding 

Iraq. We conducted our reviews for these reports under my authority as 

Comptroller General in accordance with generally accepted government 

auditing standards. In addition, we recently completed audit work in Iraq 

in November 2005, January 2006, and March-April 2006. 

The war in Iraq will not be won by the military alone but only through an 

integrated U.S., Iraqi, and international effort to meet the political, 

security, economic, and other needs of the Iraqi people. 

Summary 

The United States, our partners, and Iraq have made some progress in 

stabilizing and rebuilding Iraq. Iraqis have voted in increasing numbers, 

with over 12 million casting votes in the December 2005 election. The 

number of security forces that the coalition has trained and equipped has 

increased from about 142,000 in March 2005 to about 242,000 in March 

2006. Finally, the United States has completed or has underway about 500 

water, oil, and electricity reconstruction projects. 

However, this progress is tempered by the overwhelming challenges faced 

in forming a permanent government, quelling the insurgency and sectarian 

violence, providing basic services, and financing future reconstruction 

efforts. 

• Four months after the December 2005 election, Iraq is still forming a 

permanent government. Sectarian divisions have delayed the formation of 

a permanent government and created a political vacuum. Recent events 

provide some hope that a new government will be formed in the near 

future. Once formed, the new government will confront the enormous 

tasks of strengthening government institutions, disbanding the militias, 

resolving disputes over internal boundaries and oil revenues, and 

Page 2 GAO-06-697T
addressing corruption. Appointments to the key ministries of Interior, 

Defense, and Oil will be critical to unifying Iraq and minimizing sectarian 

violence. As the new government develops, the Iraqis will need assistance 

and training to strengthen their national and provincial governments. A 

transparent and accountable government will reduce corruption and 

deliver results to the Iraqi people. 

• From 2004 to 2005, attacks against the coalition, Iraqis, and infrastructure 

increased 23 percent. Despite coalition efforts, insurgents continue to 

demonstrate the ability to recruit, supply, and attack coalition and Iraqi 

security forces. In addition, sectarian tensions and violence increased 

following the February 2006 bombing of a Shi’a shrine in Samarra. Since 

then, Iraqis have become increasingly concerned that civil war may break 

out. Many Iraqis in Baghdad and the central and northern Sunni areas have 

lost confidence in the Iraqi army and police to improve the security 

situation. In some Sunni areas, support for the insurgents has increased, 

and Iraqi Shi’as have expressed greater confidence in their militias. The 

poor security situation in Iraq has impeded the development of an 

inclusive Iraqi government and hindered the development of effective Iraqi

security forces. 

• U.S. reconstruction efforts have focused on restoring Iraq’s basic services, 

including refurbishing oil facilities, increasing electrical generating 

capacity, and rebuilding water treatment plants. As of March 2006, oil and 

electricity production were below pre-war levels and reconstruction goals 

for oil, electricity, and water had not been met. Iraq produced 2.6 million 

barrels of oil per day before the war; in 2005, production averaged 

2.1 million barrels per day. Higher than expected security costs, funding 

reallocations, and inadequate maintenance have slowed the pace of 

reconstruction efforts and limited the impact of the services provided. For 

example, in the water sector, $1.9 billion was reallocated to the security 

and justice sectors, which delayed or terminated many large water 

projects. In addition, production levels alone do not measure the impact of 

reconstruction efforts. While U.S. efforts have helped Iraq produce more 

clean water, 60 percent is lost due to leakage and contamination. 

Continued focus on developing outcome measures is critical to ensure that 

U.S. efforts are making a difference in the lives of the Iraqi people. 

• Iraq will likely need more than the $56 billion originally estimated for 

reconstruction and stabilization efforts, but it is unclear how Iraq will 

finance its reconstruction needs. U.S. commitments are largely obligated,

and future commitments focus on sustaining existing infrastructure, 

strengthening ministerial capacity, and training and equipping Iraqi 

security forces. International donors are reluctant to commit additional 

Page 3 GAO-06-697T
funds until security improves and Iraq accounts for the donors’ previous 

contributions. Iraq can only contribute to its future reconstruction needs if

it increases oil revenues, reduces energy and food subsidies, controls 

government operating expenses, and minimizes corruption. 

From May 2003 through June 2004, the 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. The U.S.-led 

Multi-National Force-Iraq (MNF-I) conducts counterinsurgency operations 

and leads coalition efforts to train, equip, and organize Iraqi security 

forces. 

The Department of State (State) is responsible for all U.S. activities in Iraq 

except security and military operations. State’s Iraq Reconstruction and 

Management Office (IRMO) is responsible for planning and prioritizing 

reconstruction requirements, monitoring spending, and coordinating with 

the military commander. Other U.S. government agencies also play 

significant roles in the reconstruction effort. The U.S. Agency for 

International Development (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 USAID, State, and military forces in Iraq. In December 2005, the 

responsibilities of the Project Contracting Office (PCO), a temporary 

organization responsible for program, project, asset, and financial 

management of construction and nonconstruction activities, were merged 

with those of the U.S. Army Corps of Engineers. 

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 

included the completion of a draft constitution in October 2005 and two 

subsequent elections—a referendum on the constitution and an election 

for a permanent government. The Iraqi people approved the constitution 

on October 15, 2005, and voted for representatives to the Iraq Council of 

Background 

Page 4 GAO-06-697T
Representatives on December 15, 2005. The Independent Electoral 

Commission of Iraq certified the election results on February 10, 2006. 

The Iraqi government, in partnership with the United States and others, 

has made some progress in rebuilding and stabilizing Iraq. Since June 

2004, Iraqis have approved a new constitution and increasingly 

participated in the process of forming the first permanent government 

under this constitution. The United States has helped train and equip a 

growing number of Iraqi security forces, and these forces have taken on 

increasing responsibility for the nation’s security. Iraq’s economy is 

growing and the United States has completed a number of projects to help 

Iraq add to, maintain, or refurbish its electrical, water supply, and oil 

production capacity. Although making progress in many areas, Iraq has 

also had setbacks. 

The U.S. goal is to work with the Iraqi government to form a permanent 

national unity government that is inclusive. According to the UN Secretary 

General, Iraq has met all key benchmarks for transitioning to a permanent

government under Security Council Resolution 1546.2

 In January 2005, 

Iraqis elected a transitional National Assembly. Despite intimidation and 

threats of violence, almost 8.5 million Iraqis (59 percent of those 

registered) cast ballots and elected the assembly. In October 2005, the 

transitional government endorsed a draft constitution that, according to 

the U.S. ambassador for Iraq, protects human rights, religious freedom, 

women’s equality and Iraqi unity. Iraqis approved the constitution, with 

nearly 10 million voters casting ballots (63 percent of those registered). 

Then, in December 2005, over 12 million Iraqis (78 percent of those 

registered) voted to elect the first Council of Representatives. According 

to the National Security Council’s Director for Iraq, the increasing 

participation of all Iraqis in the political process, especially Sunnis, 

demonstrates significant political progress. However, the majority of Iraqis 

voted along sectarian lines. 

Iraq Has Made Some 

Progress in Political, 

Security, and 

Economic Areas 

Iraqis Have Increasingly 

Participated in the Political 

Process 

 2

U.N. Security Council Resolution 1546 endorsed a timetable for Iraq’s transition to a 

democratic government which included drafting a permanent constitution for Iraq leading 

to a constitutionally elected government by December 31, 2005. 

Page 5 GAO-06-697T
U.S. goals are to defeat the terrorists and neutralize the insurgency, 

develop capable Iraqi security forces, and help the government advance 

the rule of law, deliver services, and nurture civil society. Over the last 

several months, the Secretaries of State and Defense, as well as MNF-I, 

reported progress in developing Iraqi security forces, saying that these 

forces continue to grow in number, take on more responsibilities, and 

increase their lead in counterinsurgency operations. The numbers of 

operational army personnel and trained and equipped police have 

increased from about 142,000 in March 2005 to about 242,000 in March 

2006. However, as we have previously reported, the number of trained and

equipped forces does not provide reliable information on their status. DOD 

reports the capabilities of Iraqi units using transition readiness 

assessments. This information is provided to the Congress in quarterly 

classified reports. 

In April 2006, MNF-I also reported that 52 Iraqi army battalions, 14 Iraqi 

Army brigades, and 2 Iraqi Army divisions had taken the lead for 

counterinsurgency operations, with coalition support in areas of Iraq 

shown in figure 1 below. The Administration reports that these areas of 

operation cover about 18 percent of Iraq’s territory, including about 65 

percent of Baghdad. 3

 According to the Director for National Intelligence, 

Iraqi security forces are taking on more-demanding missions, making 

incremental progress toward operational independence, and becoming 

more capable of providing security. 

Iraqi Forces Are 

Increasingly Responsible 

for the Nation’s Security 

 3

Six National Police battalions also conduct counterinsurgency operations in Baghdad. 

Page 6 GAO-06-697T
Figure 1: Areas of Iraq Where the Iraqi Army Leads Counterinsurgency Operations

with Coalition Support, as of March 30, 2006 

Source: MNF-I Iraq Operational Update Briefing, April 13, 2006. 

Page 7 GAO-06-697T
However, according to a DOD report, Iraqi army units remain largely 

dependent on coalition support for key logistics and other combat 

enablers such as transportation and communications. Several problems 

have hampered the Ministry of Defense’s ability to sustain Iraqi forces 

independently, including weaknesses in payroll, material readiness, 

contracting, and construction. Furthermore, although a concept of 

logistical support exists, the Iraqi army will continue to rely on a U.S. 

supply chain because Iraq does not have a defense industrial base. 

The U.S. economic goal in Iraq is to help the Iraqi government establish 

the foundations for a sound economy with the capacity to deliver essential 

services. The economy continues to grow; the International Monetary 

Fund estimated that Iraq’s GDP in 2005 grew by 2.6 percent and estimates 

that it will grow by 10.4 percent in 2006. While the Iraqi economy 

continues to be overwhelmingly dependent on oil exports, which are 

projected to accounted for approximately 90 percent of government 

revenue in 2006, other sectors have begun to pick up activity, including the 

trade and services sector. According to State and DOD reporting, the 

United States has completed or has underway about 500 water, oil, and 

electricity reconstruction projects. These projects have added or restored 

more than 2,700 megawatts of electricity generation capacity and 

improved other essential services. U.S. efforts have helped to restart Iraq’s 

oil production and export capacity, including the restoration of the Qarmat 

Ali water reinjection and treatment plant, and several gas and/or oil 

separation plants near Kirkuk and Basrah. However, crude oil production 

and export and electricity production levels remain below pre-war levels,

according to State. 

The United States and Iraq must address four key challenges if they are to

successfully stabilize and rebuild Iraq. First, Iraq needs to form a 

permanent government. Second, Iraq and the United States must 

neutralize the insurgency and address sectarian violence. Third, the Iraqi 

government and the United States must restore and maintain basic 

services. Fourth, Iraq must secure funding to continue reconstruction 

efforts begun by the United States. 

Iraq’s Economy Is Growing 

and Projects Seek to 

Improve Essential Services 

The Iraqi Government 

and the United States 

Face Key Challenges 

to Stabilizing and 

Rebuilding Iraq 

Page 8 GAO-06-697T
Forming a permanent government in Iraq is critical to defeating the 

insurgency and securing the peace. However, sectarian divisions delayed

the formation of a permanent government and created a political vacuum.

Recent events provide some hope that a new government will be formed in 

the near future. Once formed, the new government will face four 

immediate challenges: building effective national and provincial 

governments, stemming corruption, disbanding militias, and resolving 

disputes on boundaries and ownership of future oil fields. 

Sectarian divisions delayed formation of Iraq’s permanent government 

creating a political vacuum that increases the risk that terrorists and 

former regime elements will succeed in stopping Iraqi progress toward 

democracy. According to the Defense Intelligence Agency (DIA) Director, 

the December 2005 elections appeared to have heightened tension and 

polarized sectarian divides. In February, the Kurdish parties’ nomination 

of Jalal Talabani to be president of Iraq was not challenged. However, 

Shi’a, Kurdish and Sunni parties could not agree on a prime minister. In 

this regard, the Secretary of State emphasized that the prime minister had 

to be a leader who could be a unifying force bringing stability to the 

nation. 

In February 2006, the holy Shi’a shrine in Samarra was bombed, 

intensifying sectarian conflicts. The bombing provoked violence and 

reprisal attacks in Baghdad, Basra, and other urban centers and almost 

daily reports of sectarian intimidation and murder, according to the UN. 

During March and April, the Iraqi parties continued efforts to identify a 

prime minister and a cabinet. On April 22, Iraq’s legislative body selected 

their speaker and the Presidency Council. Also, a candidate for prime 

minister was nominated with support of the Sunnis, Kurds, and Shia 

coalition. 

According to the President of the United States, Iraq’s leaders have 30 days 

to finalize the Iraqi cabinet. Among the ministries of key concern are 

Interior, Defense, and Oil, according to State officials. The Ministry of 

Interior was seriously compromised by sectarian influences of militias, 

corruption, and a culture of impunity, according to State’s 2006 human 

rights report. Defense is responsible for the Iraqi military services, with 

over a 100,000 forces and plays the primary role in stabilizing the country. 

The Ministry of Oil generates about 90 percent of the Iraq government’s 

revenue and is the focus of considerable concern regarding oil smuggling 

and corruption. 

Sectarian Divisions and 

Immediate Challenges Will 

Confront Iraq’s Permanent 

Government 

Sectarian Divisions Delay 

Government Formation 

Page 9 GAO-06-697T
The new government will face four immediate challenges once formed. 

Developing effective national and provincial governments. 

Strengthening national and provincial institutions is a key step in 

improving governance and supporting efforts to build Iraqi self-reliance 

and defeat the insurgency. However, according to U.S. assessments, Iraqi 

ministries have limited capacity to provide government services to the 

Iraqi people. These assessments identified limitations in managers’ skills 

and training; weak technical expertise; outdated work processes and 

procedures; and an inability to identify and articulate strategic priorities. 

In January 2006, State reported a new initiative to address Iraqi ministerial 

capacity development at 10 national ministries. According to State, 

Embassy Baghdad plans to undertake plans to provide key ministries with

training in civil service policies, requirements-based budget processes, 

information technology standards, and logistics management systems. 

In addition to a weak national government, Iraqi provinces also have 

limited capacity to provide governmental services. A March 2006 joint U.S. 

embassy and MNF-I assessment of stability in each of Iraq’s 18 provinces 

showed varying levels of stability across Iraq’s 18 provinces (see fig. 2). 

Iraq’s Government Faces Four 

Major Challenges to Unifying 

the Nation 

Page 10 GAO-06-697T
Figure 2: Iraq Provincial Stability Based on Governance, Security, and Economic Conditions, as of March 2006 

Legend:

Stable

Moderate

Serious

Critical

Anbar

Ninawa

Najaf

Salah ad

Din

Muthanna

Basrah

Diyala

Tamim

Karbala

Wasit

Maysan

Dhi Qar

Qadisiyah

Babil

Baghdad

Sulaymaniyah

Erbil

Dahuk

KRG

• Serious. Denotes a province that has:

– a government that is not fully formed or

that is not capable of serving the needs of

its populace;

– economic development is stagnant with

high unemployment; and 

– a security situation marked by routine AIF

activity, assassinations and extremism.

• Moderate. Denotes a province that has:

– a government that functions, but has

areas of concern in areas such as the 

ability to deliver services, the influence

of sectarian elements, etc.;

– an economy that is developing slowly,

but in which unemployment is still a 

serious concern; and

– the security situation is under control,

but where conditions exist that could 

quickly lead to instability.

• Stable. Denotes a province that has:

– a fully functioning government;

– strong economic development that

supports job creation; and

– a semi-permissive security

environment where local security

forces maintain the rule of law.

• Critical. Denotes a province that has:

– a government that is not functioning or

not formed, or that is only be

represented by a single strong leader;

– an economy that does not have the 

infrastructure or government

leadership to develop and is a

significant contributor to instability; and

– a security situation marked by high

levels of AIF activity, assassinations

and extremism.

Source: U.S. Embassy/MNF-I National Coordination Team, Provincial Stability Assessment

Page 11 GAO-06-697T
As figure 2 illustrates, the three provinces in Kurdistan have fully 

functioning governments, strong economies, and relative security. Eight 

provinces have functioning governments with problems in delivering 

services and dealing with security. The remaining seven provinces are in 

serious or critical condition, with Anbar province rated as critical. 

To help build government capacity at the provincial level, the U.S. 

embassy in Baghdad and MNF-I are developing provincial reconstruction 

teams (PRTs). These teams are designed to provide a link between 

provincial and national level efforts to improve governance. These teams 

are charged with helping provincial governments improve security, rule of

law, and political and economic development. State officials said that U.S.-

led PRTs in Hillah, Mosul, and Kirkuk have been fully operational since 

December. Another PRT in Baghdad has been initiated but is not yet fully 

operational. The anticipated four other U.S.-led, four coalition-led, and six 

Iraqi-led PRTs have not been initiated. Each PRT requires more than 100 

staff and considerable financial and security support. However, program 

documents indicate problems in providing funding and security. 

Stemming corruption. U.S. and international officials reported increased 

concerns about corruption. In our discussions with IMF, World Bank, 

Japan, and the European Union, representatives reported that “donor 

fatigue” might limit their ability to provide future assistance to Iraq, 

especially if the current security environment did not improve and the 

Iraqi Ministries did not improve their procurement and financial 

management practices. Corruption in the oil sector was cited as a special

problem. According to State officials and reporting, about 10 percent of 

refined fuels are diverted to the black market, and about 30 percent of 

imported fuels are smuggled out of Iraq and sold for a profit.

According to World Bank and UN specialized agency officials, public 

tendering is still an “alien concept” within Iraq Ministries. These officials 

reported several recent attempts by Ministry officials to subvert the public

procurement process. For example, World Bank financing for two projects 

worth $40 million each was cancelled after Iraqi ministry officials awarded 

contracts to firms that were not included in the competitive bidding 

process. 

U.S. officials also reported instances of corruption related to the 

protection of essential infrastructure. According to IRMO officials, the 

Ministry of Electricity contracts with tribal chiefs, paying them about $60-

$100 per kilometer to protect transmission lines running through their 

areas. However, IRMO officials reported that the protection system is 

Page 12 GAO-06-697T
flawed and encourages corruption. According to U.S. and UN 

Development Program officials, some tribes that are paid to protect 

transmission lines are also selling materials from downed lines and 

extracting tariffs for access to repair the lines. IRMO officials stated that 

they want the Ministry of Electricity to change the system so that tribes 

are only paid when the lines remain operational for a reasonable period of 

time. 

Disbanding militias. Disbanding the militias or integrating them into 

Iraq’s armed forces is a critical challenge facing a new Iraqi government. 

Iraq’s 2004 transitional law outlawed all militias not under the command 

structure of the Iraqi transitional government, except where provided by

federal law. Iraq’s constitution similarly states that formation of military 

militias outside the framework of the armed forces is prohibited. Despite 

these prohibitions, militias continue to operate throughout Iraq. The 

largest militias include the Kurdish Peshmerga organization in Kurdistan, 

the Shiite Badr organization in southern Iraq, and the Shiite Jayash alMahdi (Mahdi Army) in central and southern Iraq. In March 2006, the UN

reported that militias challenge Iraq’s rule of law and that the 

consolidation of local militia power in southern Iraq is resulting in 

systematic acts of violence against the Sunni community.4

 Such 

developments, including recent efforts to form a Sunni Arab militia could 

undermine efforts to promote national accord. According to the Secretary 

of State, controlling the militias is one of the new government’s top 

priorities. 

Resolving disputes on boundaries and ownership of future oil 

fields. Resolving disputes over territorial boundaries, especially in Kirkuk, 

poses another challenge. The Kurds believe that this oil-rich region is part

of the Kurdish regional government’s territory. According to the 2003 State 

Department Human Rights report, the previous regime had systematically

forced the removal of ethnic minorities under its admitted policy of 

“Arabizing” arable land. Specifically, the regime “Arabized” certain Kurdish 

areas, such as the urban centers of Kirkuk and Mosul, through the forced 

movement of local residents from their homes and villages and their 

replacement by Arabs from outside the area. According to the U.N., 

resolution of the dispute over Kirkuk is an issue that needs to be 

addressed. 

 4

U.N. Security Council, Report of the Secretary General pursuant to paragraph 30 of

resolution 1546 (2004), S/2006/137, Mar. 3, 2006. 

Page 13 GAO-06-697T
In addition, a new Iraqi government will need to agree on how to share the 

proceeds from crude oil exports from both current and future Iraqi oil 

fields. The constitution states that oil and gas are owned by the people of 

Iraq in all regions and governorates. It also states that the federal 

government, with the producing governorates and regional governments, 

shall undertake the management of oil and gas extracted from the present 

fields, provided that it distributes its revenues fairly and in proportion to 

the population.5

 However, the specific details of revenue sharing have yet 

to be worked out, and the status of revenues from future fields is unclear. 

A Strong Insurgency and 

Increased Sectarian 

Violence Threaten 

Progress in Political and 

Security Areas 

Over the past 3 years, significant increases in attacks against the coalition 

and coalition partners, as well as recent increases in sectarian violence, 

have made it difficult for the United States to achieve its political and

security goals in Iraq. The insurgency in Iraq intensified from June 2003 

through October 2005 and has remained strong and resilient. Sectarian 

tensions and violence recently increased following the bombing of a holy 

Shi’a shrine in Samarra in February 2006. Poor security conditions 

threaten to undermine the development of an effective Iraqi government

and the transfer of security responsibilities to the Iraqi government. 

The insurgency intensified through October 2005 and has remained strong 

and resilient since then. The insurgency—particularly the Sunni 

insurgency—grew in complexity, intensity, and lethality from June 2003

through early 2005.6

 According to a late February 2006 testimony by the

Director of National Intelligence, insurgents are using increasingly lethal

improvised explosive devices and continue to adapt to coalition 

countermeasures.7

Insurgency Has Intensified and 

Sectarian Tensions Increased 

 5

The constitution also states that the federal government shall specify an allotment of the 

oil revenue “for a specified period for the damaged regions which were unjustly deprived of

them by the former regime, and the regions that were damaged afterwards in a way that 

ensures balanced development in different areas of the country, and this shall be regulated 

by a law.” 

6

For more information on security trends and the makeup of the insurgency, see GAO,

Rebuilding Iraq: Preliminary Observations on Challenges in Transferring Security

Responsibilities to Iraqi Military and Police, GAO-05-431T (Washington, D.C.: Mar. 14, 

2005). 

7

U.S. Senate, Senate Armed Services Committee, Current and Projected National Security 

Threats to the United States (Washington, D.C.: Feb. 2, 2006). 

Page 14 GAO-06-697T
As shown in figure 3, enemy-initiated attacks against the coalition, its Iraqi 

partners, and infrastructure increased in number over time. The highest 

peak occurred during October 2005, around the time of Ramadan and the 

October referendum on Iraq’s constitution. This followed earlier peaks in 

August and November 2004 and January 2005. According to a senior U.S.

military officer, attack levels ebb and flow as the various insurgent 

groups—almost all of which are an intrinsic part of Iraq’s population—

rearm and attack again. Overall, attacks increased by 23 percent from 2004 

to 2005. 

Figure 3: Enemy-Initiated Attacks against the Coalition and Its Partners, by Category, June 2003 through February 2006 

a

According to DIA officials, June 2003 data are incomplete. 

b

The data did not break out attacks against Iraqi government officials from attacks against Iraqi 

civilians in January and February 2006. 

According to a March 2006 UN report, an increasingly complex armed 

opposition continues to be capable of maintaining a consistently high level 

of violent activity across Iraq. Baghdad, Mosul, and the western province 

of Al Anbar have been experiencing the worst violence. Although the 

southern and northern governorates are less affected, some areas, 

Page 15 GAO-06-697T
particularly Basra and Kirkuk, have recently witnessed increased tension 

and a growing number of violent incidents. A recent U.S. embassy-MNF-I 

assessment showed that, of Iraq’s 18 provinces, 1 province—Al Anbar—

had a security situation marked by a high level of insurgent activity, 

assassinations, and extremism; 6 provinces, including Baghdad and Basra, 

had routine insurgent activity, assassinations, or extremism; 8 provinces 

had the security situation under control but conditions existed that could 

quickly lead to instability; and 3 provinces in the north had a semipermissive security environment where local security forces maintained 

the rule of law. 

As the administration has reported, insurgents share the goal of expelling 

the coalition from Iraq and destabilizing the Iraqi government to pursue 

their individual and, at times, conflicting goals.8

 Iraqi Sunnis make up the 

largest portion of the insurgency and present the most significant threat to

stability in Iraq. In February 2006, the Director of National Intelligence 

reported that the Iraqi Sunnis’ disaffection is likely to remain high in 2006,

even if a broad, inclusive national government emerges. These insurgents 

continue to demonstrate the ability to recruit, supply, and attack coalition 

and Iraqi security forces. Their leaders continue to exploit Islamic themes, 

nationalism, and personal grievances to fuel opposition to the government 

and recruit more fighters. 

According to the Director of National Intelligence, the most extreme Sunni 

jihadists, such as al-Qaeda in Iraq, will remain unreconciled and continue 

to attack Iraqi and coalition forces. The remainder of the insurgency 

consists of radical Shi’a groups—some of which are supported by Iran—

violent extremists, criminals, and, to a lesser degree, foreign fighters. 

According to the Director, Iran provides guidance and training to select 

Iraqi Shi’a political groups and weapons and training to Shi’a militant 

groups to enable anticoalition attacks. Iran also has contributed to the 

increasing lethality of anticoalition attacks by enabling Shi’a militants to 

build improvised explosive devices with explosively formed projectiles, 

similar to those developed by the Lebanese Hizballah. 

According to the March 2006 UN report, the deteriorating security 

situation is further evidenced by the increased levels of sectarian strife 

and the sectarian nature of the violence, particularly in ethnically mixed 

 8

Department of Defense, Report to Congress, Measuring Stability and Security in Iraq, July 

20, 2005. National Security Council, National Strategy for Victory in Iraq, November 2005. 

Page 16 GAO-06-697T
areas of Iraq. The UN expressed concern about the role of militias and 

irregular armed elements in the almost daily reports of intercommunal 

intimidation and murder. These include regular reports of bodies of Sunni 

and Shi’a men with signs of torture and summary execution in Baghdad 

and its surrounding areas. Violence against Kurds and Arabs has also been

reported in Kirkuk, while the abduction and intimidation of ordinary Iraqis 

is a growing problem. According to the report, repeated bombings against 

civilians, mosques, and more recently against churches are creating fear, 

animosity, and feelings of revenge within Iraq’s sectarian communities. 

According to UN and U.S. reports, the continuing insurgency and recent 

increase in sectarian violence have impeded the development of an 

effective, inclusive Iraqi government. In March 2006, the UN reported that

persistent attacks and terrorist actions by armed groups against the Iraqi 

government in large parts of the country challenged the stability of the 

country and the government’s ability to protect its citizens. According to a 

March 2006 State Department survey, Iraqis have become increasingly 

concerned that civil war may break out. Iraqis in Baghdad and the central

and northern Sunni areas have lost confidence in the ability of Iraqi army 

and police to improve the security situation. At the same time, support for 

the armed resistance increased in some Sunni areas, and Iraqis in Shi’a 

areas expressed confidence in two large Shi’a militias, the Badr 

Organization and the Mahdi Army. In early April 2006, the State 

Department reported that the recent terrorist activity and rise in sectarian

violence impeded efforts to further the understanding and trust between 

political groups necessary to establish a government of national unity. The 

report noted the importance of Iraq developing ministries that sectarian 

interests do not control.

Poor Security Conditions 

Hinder Development of 

Political and Security 

Institutions 

Recent U.S. reports have recognized that the security situation has the 

potential to hinder progress in developing effective Iraqi security forces, 

thereby delaying the transfer of security responsibilities to the Iraqi 

government and the drawdown of U.S. forces. For example, in February 

2006, the Director of National Intelligence testified that Iraqi security 

forces are experiencing difficulty in managing ethnic and sectarian 

divisions among their units and personnel, while the director of the 

Defense Intelligence Agency reported that many elements of the Iraqi 

security forces are loyal to sectarian and party interests. In the November 

2005 National Strategy for Victory in Iraq, the administration cited a

number of challenges to developing effective Iraqi security forces, 

including the need to guard against infiltration by elements whose first 

loyalties are to institutions other than the Iraqi government. Moreover, in 

March and April 2006, a senior U.S. military officer stated that to help quell

Page 17 GAO-06-697T
sectarian tensions and violence, MNF-I increased the number of coalition 

and Iraqi troops in Baghdad. These troops increased patrols in areas that 

had been transferred to the Iraqi security forces. 

GAO’s October 2005 classified report and recent classified briefing to your

staff provided further information and analysis on the challenges to 

developing Iraqi security forces and the conditions for the phased 

drawdown of U.S. and other coalition forces.9

 In response to a 

Congressional mandate based on our report, the administration reported 

to Congress additional details on the current U.S. mission and the 

conditions necessary to transfer security responsibility to the Iraqi 

government, including criteria used to evaluate progress.10 

Reconstruction Goals Not 

Yet Reached Because of 

Security, Management, and 

Sustainment Challenges 

U.S. reconstruction efforts have focused on restoring basic services in 

Iraq, such as repairing oil facilities, increasing electricity generating 

capacity, and restoring water treatment plans. However, key 

reconstruction goals in the oil, electricity, and water sector have yet to be 

achieved due to security, management, and sustainment challenges in U.S.-

funded projects. 

U.S. electricity, oil, and water projects have focused on restoring essential 

services, such as refurbishing and repairing oil facilities, increasing 

electrical generating capacity, and restoring water treatment plants but 

key reconstruction goals have not been achieved (see table 1).

Key Reconstruction Goals Have 

Not Been Achieved 

 9

GAO, DOD Reports Should Link Economic, Governance, and Security Indicators to 

Conditions for Stabilizing Iraq, GAO-06-152C (Washington, D.C.: Oct. 2005). 

10Department of State, Report to Congress submitted pursuant to U.S. Policy in Iraq Act, 

Section 1227 of the National Defense Authorization Act for Fiscal Year 2006 (P.L. 109-

163) (Washington, D.C., April 2006). 

Page 18 GAO-06-697T
Table 1: Reconstruction Goals Not Met for Oil Electricity and Water Sectors 

Sector Metric Pre-War (2003)

Current 

(March 2006) 

Planned U.S. 

end state 

Oil Crude Oil

Production 

Capacity 

2.6 MBPD 2.0 MBPD 3.0 MBPD 

Electricity Peak Generation

Capacity 

4300 MW 4,092MW 

(5387 MW peak in 

7/14/05) 

6,000 MW

Water New or Restored 

Treatment 

Capacity 

Unknown 1.1 M m3/day 2.5 M m3/day 

MBPD = millions of barrels per day

MW = megawatts

M m3/day = million cubic meters per day

Source: U.S. Embassy Baghdad, “Reconstruction Progress in Iraq,” March 29, 2006 

As of March 2006, oil, electricity, and water sectors were below the 

planned U.S. end state. Before the war, oil production in Iraq averaged 

2.6 million barrels per day (mbpd). In March 2006, State reported that oil 

production was about 2 mbpd, significantly below the desired goal of 

3 mbpd. A combination of insurgent attacks on crude oil and product 

pipelines, dilapidated infrastructure, and poor operations and maintenance 

have hindered domestic refining and have required Iraq to import 

significant portions of liquefied petroleum gas, gasoline, kerosene, and 

diesel. 

In March 2006, electric generation capacity was about 4,100 megawatts. 

This level was below the post-war peak of about 5,400 megawatts and the 

planned U.S goal of 6,000 megawatts. Insurgent attacks have weakened the 

grid and the lack of fuel and spare parts has contributed to disruptions in 

service. In the water sector, the U.S. goal of providing 2.5 million cubic 

meters of water per day has not been achieved. As of March 2006, only 1.1

million cubic meters of water per day was produced. 

Specifically, production levels for oil and electricity have consistently 

fallen below their respective pre-war levels. As shown in Figure 4, since 

2004, oil production levels have consistently averaged below pre-war 

levels of about 2.6 mbpd. In addition, although the capacity for export is 

theoretically as high as 2.5 million bpd, export levels averaged about 

1.4 million bpd in 2005. 

Page 19 GAO-06-697T
Figure 4: Iraqi Oil Production, Export, and Revenues, June 2003 through March 2006 

Note: March data as of March 24, 2006 

In the electricity sector, production has largely fallen short of the original

target goal of producing 120,000 megawatt-hours of electricity per day. In 

May 2005, agency reports show this target goal was reduced to 110,000

megawatt-hours. As shown in figure 5, this target goal was last reached 

briefly in the summer of 2005 and has not been met since. In March 2006,

about 89,000 megawatt-hours was produced. Agency reports have 

attributed the downward spikes in production to several causes, including 

planned and unplanned maintenance, fuel shortages due to insurgent 

attacks on oil pipeline that supply fuel to power plants, and limited supply 

of fuels. 

Page 20 GAO-06-697T
Figure 5: Estimated Daily Electricity Produced in Iraq, January 1, 2004-March 23, 2006

 Source: Department of State estimates. 

 Note: GAO has not assessed the reliability of the data provided by State.

Page 21 GAO-06-697T
Further, supply has not improved much over last year when judged by 

hours of power. According to agency reporting, the national average of 

available electricity was 12.3 hours per day in the last week of February, 

2006, and 11.7 hours per day last week of March. The average for Baghdad

was 8.1 hours per day in February 2006, and 5.7 hours per day in March 

2006. According to agency reporting, Iraqis have become greater 

consumers and this had dramatically altered demand and diluted the effect 

of increased generation capacity on actual results. 

The security situation in Iraq has also 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 and delays 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. In 

January 2006, State reported that direct and indirect security costs 

represent 16 to 22 percent of the overall cost of major infrastructure 

reconstruction projects.11 In addition, the security environment in Iraq 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, in 

February 2006 the Project Contracting Office reported that in October 

2005 the number of attacks on convoys and casualties had increased from

20 convoys attacked and 11 casualties compared with 33 convoys attacked 

and 34 casualties in January 2006. 

Security Conditions Have 

Hindered Reconstruction 

Efforts 

While poor security conditions have slowed reconstruction and increased 

costs, a variety of management challenges also have 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 led to the reduced

scope in 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 

Project Management 

Challenges Also Affect U.S. 

Reconstruction Program 

 11Department of State, Report to Congress, Section 2207 Report on Iraq Relief and

Reconstruction, January 2006.

Page 22 GAO-06-697T
inflationary environment that makes it difficult to submit accurate pricing; 

unanticipated project site conditions; and uncertain ownership of project

sites. Further, between Jan 2004 and April 2006, the Administration 

reallocated $3.5 billion from the water and electricity sectors to security, 

justice, democracy and other programs which contributed to the 

cancellation and delays of water and electricity projects. 

The U.S. reconstruction program has encountered difficulties with Iraq’s 

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 Iraq’s problems in maintaining or properly 

operating them. State reported in January 2006 that several efforts were 

under way to improve Iraq’s ability to sustain the infrastructure rebuilt by 

the United States. 

Iraq’s Capacity to Operate and 

Maintain U.S.-Funded Projects 

Presents Sustainability 

Problems 

• In the water and sanitation sector, U.S. agencies have identified limitations 

in Iraq’s 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. 

In March 2005, State reallocated funding from an electrical generation 

project and provided $25 million to USAID to support the operations, 

maintenance, and logistics for USAID’s reconstructed water and sanitation 

projects for up to 1 year. According to a senior IRMO official, the U.S. 

government has allocated an additional $110 million to the Project 

Contracting Office to sustain water and sanitation facilities and equipment 

that were procured, constructed, or rehabilitated using IRRF monies. The 

program, expected to begin soon after the USAID effort ends in April 2006, 

will consist of two major components—operations and maintenance 

support and assistance and capacity development. The objectives of the 

program are to effectively operate U.S. government-funded facilities in the 

near term and to help the Iraqi government sustain these efforts over the 

long-term. 

• The U.S. government purchased 41 natural gas turbines to support Iraq’s 

efforts to generate more electricity, but Iraqi power plants are using fuel 

oil for all these engines due to limited access to natural gas. The use of oilbased fuels, without adequate equipment modification and fuel treatment, 

decreases the power output of the gas turbines by up to 50 percent, 

requires three times more maintenance, and could result in equipment 

failure and damage that significantly reduce the life of the equipment, 

Page 23 GAO-06-697T
according to U.S. and Iraqi power plant officials. IRMO estimates that the 

yearly cost of operating these turbines with oil-based fuels instead of 

natural gas totals $1.25 billion.12 If Iraq were able to capture the gas it 

currently flares and use it in these turbines, IRMO estimates that the 

annual operating cost would be about $81.8 million. However, this latter 

cost does not include initial capital expenditures for the infrastructure 

needed to collect and process the natural gas and transport it to the power 

plants. In addition, the IRMO analysis assumes that the cost of natural gas

is zero since this gas is currently flared in Iraq’s oil fields. These cost 

comparisons will be analyzed in more detail as part of our ongoing review 

of Iraq’s energy 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. 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. In 

January 2006, State reported that it has developed a strategy with the 

Ministry of Electricity to focus on rehabilitation and sustainment of 

electricity assets. 

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 and building 

ministry capacity. In January 2006, State reported that it has several efforts 

under way focused on improving Iraq’s ability to operate and maintain 

facilities over time. As part of our ongoing review of Iraq’s energy sector, 

we will be assessing the extent to which the administration is providing 

funds to sustain the infrastructure facilities constructed or rehabilitated by 

the United States. 

While State has set broad goals for providing essential services, and the 

U.S. program has undertaken many rebuilding activities in Iraq, limited 

performance data and outcome measures make it difficult to determine 

and report on the progress and impact of U.S. reconstruction. In January 

Limited Performance Data and 

Measures and Inadequate 

Reporting Present Difficulties 

in Determining Progress and 

Impact of Rebuilding Effort 

 12Total annual operating costs by type of oil used: (1) $228 million for crude oil in 4 

turbines; (2) $206 million for residual oil in 20 turbines; and (3) $819 million for diesel oil in 

17 turbines. IRMO based these calculations on International Standards Organization rated 

capacity in megawatts for each engine. 

Page 24 GAO-06-697T
2006, State reported that it is currently finalizing a set of metrics to better 

track the impact of reconstruction efforts. 

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. 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. For example, the 

United States reports that, as of March 2006, Iraq has the capacity to 

produce 1.1 million cubic meters of water per day. However, this level 

overestimates the amount of potable water reaching Iraqi households 

because U.S. officials estimate that 60 percent of water treatment output is 

lost due to leakage, contamination, and illegal connections. In addition, 

potable water and sewage lines in Iraq are sometimes adjacent to each

other, allowing leaking sewage to enter the water mains when there is 

insufficient pressure in the lines. In the absence of metering and quality 

measures, it is unclear how U.S. efforts are improving Iraqi access to water 

and sanitation services.

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. 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 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. However, these data do not 

show whether (1) the power generated is uninterrupted for the period 

specified (e.g., 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 

Page 25 GAO-06-697T
and access of electricity is difficult to obtain without adequate security or 

accurate metering. 

As the new Iraqi government forms, it must plan to secure the financial 

resources it will need to continue the reconstruction and stabilization 

efforts begun by the United States and international community. Initial 

assessments in 2003 identified $56 billion in reconstruction needs across a 

variety of sectors in Iraq. However, Iraq’s needs are greater than originally

anticipated due to severely degraded infrastructure, post-conflict looting 

and sabotage, and additional security costs. The United States has borne 

the primary financial responsibility for rebuilding and stabilizing Iraq; 

however, its commitments are largely obligated and remaining 

commitments and future contributions will focus on sustaining rebuilt 

infrastructure, building government institutions, and training and 

equipping Iraqi security forces. Further, U.S. appropriations were never 

intended to meet all Iraqi needs. 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 Iraq has 

just begun to access. Iraq’s ability to contribute financially to its additional 

rebuilding and stabilization needs is dependent upon the new

government’s efforts to increase revenues obtained from crude oil exports, 

and reduce expenditures. 

Initial assessments of Iraq’s needs through 2007 by the U.N., World Bank, 

and the CPA estimated that the reconstruction of Iraq would require about 

$56 billion.13 However, Iraq is likely to need more funding than currently 

available to meet the 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. In addition, insurgents continue to target electrical transmission 

lines and towers as well as oil pipelines that provide needed fuel for 

electrical generation. 

Iraq Faces Challenges in 

Financing Future Needs 

Iraqi Needs Are Greater Than 

Originally Anticipated. 

 13The October 2003 joint UN/World Bank assessment identified $36 billion, from 2004 

through 2007, in immediate and medium-term needs in 14 priority sectors, including 

education, health, electricity, transportation, agriculture, and cross-cutting areas such as 

human rights and the environment. For example, the assessment estimated that Iraq would 

need about $12 billion for rehabilitation and reconstruction, new investment, technical 

assistance, and security in the electricity sector. In addition, the assessment noted that the 

CPA estimated an additional $20 billion would be needed from 2004 through 2007 to rebuild 

other critical sectors such as security and oil. 

Page 26 GAO-06-697T
Further, these initial assessments assumed that Iraqi government revenues 

and private sector financing would increasingly cover long-term 

reconstruction requirements. This was based on the assumption that the 

rate of growth in oil production and total Iraqi revenues would increase 

over the next several years. However, private sector financing and 

government revenues may not yet meet these needs. According to a 

January 2006 International Monetary Fund (IMF) report, private sector 

investment will account for 8 percent of total projected investment for 

2006, down from 12 percent in 2005.14 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. For the electricity sector, Iraq 

projects that it will need $20 billion through 2010 to boost electrical 

capacity, according to the Department of Energy’s Energy Information 

Administration. 

The United States is the primary contributor to rebuilding and stabilization 

efforts in Iraq. Since 2003, the United States has made available about 

$30 billion for activities that have largely focused on infrastructure repair 

and training of Iraqi security forces. As of January 2006, of the $30 billion 

appropriated, about $23 billion had been obligated and about $16 billion 

had been disbursed for activities that included infrastructure repair, 

training, and equipping of the security and law enforcement sector; 

infrastructure repair of the electricity, oil, and water and sanitation 

sectors; and CPA and U.S. administrative expenses. 

International donors have provided a lesser amount of funding for 

reconstruction and development activities. According to State, donors 

have provided about $2.7 billion in multilateral and bilateral grants—of the 

pledged $13.6 billion—as of December 2005. About $1.3 billion has been 

deposited by donors into the two trust funds of the International 

Reconstruction Fund Facility for Iraq (IRFFI),15 of which about 

$900 million had been obligated and about $400 million disbursed to 

individual projects, as of December 2005. Donors also have provided 

Future Contributions for Iraq 

Reconstruction May Be 

Limited. 

 14International Monetary Fund, Iraq: Request for Stand-by-Arrangement (Washington,

D.C.: January 2006). 

15The IRFFI was established in response to the June 24, 2003, UN technical meeting and the

2003 Madrid conference’s calls for a mechanism to channel and coordinate donor 

resources for Iraq reconstruction and development activities. The IRFFI is composed of 

two trust funds, one run by the UN Development Group and the other by the World Bank

Group. 

Page 27 GAO-06-697T
bilateral assistance for Iraq reconstruction activities; however, complete 

information on this assistance is not readily available. Most of the pledged 

amount is in the form of loans that the Iraqis have recently begun to 

access. 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 IMF, and Japan. 

Iraq’s fiscal ability to contribute to its own rebuilding is constrained by the 

amount of revenues obtained from crude oil exports, continuing subsidies 

for food and energy, growing costs for government salaries and pensions, 

increased demands for an expanding security force, and war reparations 

and external debt. 

Crude oil exports are projected to account for nearly 90 percent of the 

Iraqi government revenues in 2006, according to the IMF. Largely 

supporting Iraq’s government operations and subsidies, crude oil export 

revenues are dependent upon export levels and market price. The Iraqi 

2006 budget has projected that Iraq’s crude oil export revenues will grow 

at an annual growth rate of 17 percent per year (based on an average 

production level of 2 million bpd in 2005 to 3.6 million bpd in 2010), 

estimating an average market price of about $46 per barrel. Oil exports are 

projected to increase from 1.4 million bpd in 2005 to 1.7 million bpd in 

2006, according to the IMF. Iraq’s current crude oil export capacity is 

theoretically as high as 2.5 million bpd, according to the Energy 

Information Administration at the Department of Energy. However, Iraq’s

crude oil export levels have averaged 1.4 million bpd as of December 2005, 

in part due to attacks on the energy infrastructure and pipelines. In 

February 2006, crude oil export levels averaged about 1.5 million bpd. 

While Iraq produces crude oil, its ability to produce refined fuel products, 

such as diesel and gasoline, is limited. According to State, the Iraqi Oil 

Ministry imported roughly $500 million of fuel each month in 2005. As a 

result, Iraq must import fuel to meet domestic demand. According to State,

the imported fuel is sold at a subsidized price, further constraining Iraqi

budgetary resources. 

Current government subsidies constrain opportunities for growth and 

investment and have kept prices for food, oil, and electricity low. Low 

prices have encouraged over-consumption and have fueled smuggling to 

neighboring countries. Food and energy subsidies account for about 

8 percent of Iraq’s projected gross domestic product (GDP) for 2006. 

Iraq Must Address Budget 

Constraints to Contribute to 

Future Rebuilding and 

Stabilization Efforts. 

Page 28 GAO-06-697T
As part of its Stand-By Arrangement with the IMF, Iraq plans to reduce the 

government subsidy of petroleum products, which would free up oil 

revenues to fund additional needs and reduce smuggling. According to the 

IMF, by the end of 2006, the Iraqi government plans to complete a series of 

adjustments to bring fuel prices closer to those of other Gulf countries. 

However, it is unclear whether the Iraqi government will have the political

commitment to continue to raise fuel prices. The scheduled March 

increase in the price of diesel and gasoline was delayed until June 2006. 

Iraqis currently pay about $.26 per gallon for regular gasoline compared to 

about $.91 per gallon in neighboring countries. 

Generous wage and pension benefits have added to budgetary pressures. 

Partly due to increases in these benefits, the Iraqi government’s operating 

expenditures are projected to increase by over 24 percent from 2005 to 

2006, according to the IMF. As a result, wages and pensions constitute 

about 21 percent of projected GDP for 2006. The IMF noted that it is 

important for the government to keep non-defense wages and pensions 

under firm control to contain the growth of civil service wages. Under the 

IMF agreement, the Iraqi government must complete a census of all public

service employees by June 2006. The census will help address the issue of 

ghost employees in Iraqi ministries—employees on the payroll but not 

working, according to a U.S. Treasury official. 

Iraq plans to spend more resources on its own defense. Iraq’s securityrelated spending is currently projected to be about $5.3 billion in 2006, 

growing from 7 to about 13 percent of projected GDP. The amount reflects 

rising costs of security and the transfer of security responsibilities from 

the United States to Iraq.

The Iraqi government also owes over $84 billion to victims of its invasion 

of Kuwait and international creditors. As of December 2005, Iraq owed 

about $33 billion in unpaid awards resulting from its invasion and 

occupation of Kuwait. As directed by the UN, Iraq currently deposits 

5 percent of its oil proceeds into a UN compensation fund. Final payment

of these awards could extend through 2020 depending on the growth of 

Iraq’s oil proceeds. In addition, the IMF estimated that Iraq’s external debt

was about $51 billion at the end of 2005. 

Page 29 GAO-06-697T
Iraq is at a precarious stage in its emerging democracy and 2006 will be a 

critically important year in its development. Continuing insurgent violence

and growing sectarian divisions make it increasingly difficult to achieve 

the ultimate U.S. goal of a united and stable Iraq that is well integrated into

the international community and a full partner in the global war on 

terrorism. The United States, Iraq, and our international partners face 

daunting challenges in achieving this goal and making a difference in lives

of the Iraqi people. These include forming a national unity government, 

quelling the insurgency and sectarian violence, providing basic services, 

and financing future reconstruction efforts. 

In moving forward to achieve U.S. goals, it is important that the United 

States continue training and equipping Iraqi security forces and, more 

importantly, ensuring that these forces have the logistical capabilities to 

support and sustain themselves. The United States along with the 

international community should also help Iraqis develop the budgeting and 

administrative tools they need to run their national and provincial 

governments. Additionally, transparency and accountability mechanisms 

are essential given the legacy of corruption inherited from the previous 

regime. Efforts should also be taken to ensure that Iraqis are capable of 

maintaining power plants, water treatment facilities, and other U.S.-funded 

infrastructure. 

Although the United States has played a key role in addressing these 

challenges, it is important for the Iraqis to assume greater leadership and 

for the international community to increase its efforts. In assuming 

leadership, the Iraqis need to form a permanent government and address 

unresolved constitutional and budgetary issues. Of particular importance 

is disbanding the militias, reducing subsidies, and controlling a bloated 

bureaucracy. Even as they address these difficult challenges, Iraq must 

reengage the international community to fund the enormous 

reconstruction tasks that remain. This will not be easy since donors are 

demanding accountability for funding they have provided over the past 

3 years. 

Collectively, Iraq’s future requires strong Iraqi leadership, sustained U.S. 

commitment, and a reengaged international community. All these will be 

essential in order for real success to be achieved.

Mr. Chairman and Members of the Subcommittee, this concludes my 

prepared statement. I will be happy to answer any questions you may have. 

Conclusion 

Page 30 GAO-06-697T
For questions regarding this testimony, please call Joseph Christoff at 

(202) 512-8979. Other key contributors to this statement were Monica 

Brym, Lynn Cothern, Dave Groves, Patrick Hickey, Steve Lord, Micah 

McMillan, Judy McCloskey, Tet Miyabara, Kate Monahan, Mary Moutsos, 

and Audrey Solis. Jeanette Espinola, Ian Ferguson, Valerie Nowak, Jeff 

Phillips, Nanette Ryen, and Alper Tunca provided technical assistance.

Page 31 GAO-06-697T

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