Rebuilding Iraq: Stabilization, Reconstruction, and Financing Challenges
Published: 2006-02-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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. 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 the challenges (1) that the United States faces in its rebuilding and stabilization efforts and (2) that the Iraqi government faces in financing future requirements. This statement is based on four reports GAO has issued to the Congress since July 2005 and recent trips to Iraq. Since July 2005, we have issued reports on (1) the status of funding and reconstruction efforts in Iraq, focusing on the progress achieved and 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).
section_title: What GAO Found
paragraphs: The United States faces three key challenges in rebuilding and stabilizing 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 progressively draw down U.S. forces. The security situation in Iraq has deteriorated since June 2003, with significant increases in attacks against Iraqi and coalition forces. In addition, the security situation has affected the cost and schedule of rebuilding efforts. The State Department has reported that security costs represent 16 to 22 percent of the overall costs of major infrastructure projects. 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 impact of U.S. projects. Third, the U.S. reconstruction program has encountered difficulties with Iraq's inability to sustain new and rehabilitated infrastructure projects and to address basic maintenance needs in the water, sanitation, and electricity sectors. U.S. agencies are working to develop better performance data and plans for sustaining rehabilitated infrastructure. 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. Iraq will likely need more than the $56 billion that the World Bank, United Nations, and CPA estimated it would require for reconstruction and stabilization efforts from 2004 to 2007. More severely degraded infrastructure, post-2003 conflict looting and sabotage, and additional security costs have added to the country's basic reconstruction needs. However, it is unclear how Iraq will finance these additional requirements. While the United States has borne the primary financial responsibility for rebuilding and stabilizing Iraq, its commitments are largely obligated and future commitments are not finalized. Further, U.S. appropriations were never intended to meet all Iraqi needs. In addition, international donors have mostly committed loans that the government of Iraq is just beginning to tap. Iraq's ability to financially contribute to its own rebuilding and stabilization efforts will depend on the new government's efforts to increase revenues obtained from crude oil exports, reduce energy and food subsidies, control government operating expenses, provide for a growing security force, and repay $84 billion in external debt and war reparations.

section_title: Letter
paragraphs: I am pleased to be here today to discuss U.S. efforts to rebuild and  stabilize 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. The United States’  reconstruction assistance 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.
My testimony today is based on the four reports that we have issued to the  Congress since July 2005 and 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 we have achieved and the challenges we  face 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). We continue to review U.S. efforts to train and equip  Iraqi security forces, develop the oil and electricity sectors, reduce  corruption, and enhance the capacity of Iraqi ministries.
Based on these four reports and recent audit work conducted in Iraq, I will  discuss the challenges (1) that the United States faces in its rebuilding and  stabilization efforts and (2) that the Iraqi government faces in financing  future requirements.
This statement includes unclassified information only and is based on  recent GAO reports. We conducted our reviews for these reports between  September 2004 and October 2005 in accordance with generally accepted  government auditing standards. In addition, we recently conducted audit  work in Iraq in November 2005 and January 2006.
subsections: section_title: Background
paragraphs: 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. 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 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 Multi-National Force-Iraq (MNF-I), now leads coalition efforts to  train, equip, and organize Iraqi security forces.
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 Gulf Region Division.
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  Representatives on December 15, 2005. As of February 3, 2006, the  Independent Electoral Commission of Iraq had not certified the election  results for representatives.
Once certified, the representatives are to form a permanent government.  According to U.S. officials and Iraqi constitutional experts, the new Iraqi  government is likely to confront the same issues it confronted prior to the  referendum—the power of the central government, control of Iraq’s  natural resources, and the application of Islamic law. According to U.S.  officials, once the Iraqi legislature commences work, it will form a  committee that has 4 months to recommend amendments to the  constitution. To take effect, these proposed amendments must be  approved by the Iraqi legislature and then Iraqi citizens must vote on them  in a referendum within 2 months.
section_title: Security, Measurement, and Sustainability Challenges in Rebuilding and Stabilizing Iraq
paragraphs: 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 to 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. U.S. agencies are working to develop better performance data and  plans for sustaining rehabilitated infrastructure.
subsections: section_title: Strength of the Insurgency Has Made It Difficult to Transfer Security Responsibilities to Iraqi Forces and Engage in Rebuilding Efforts
paragraphs: Over the past 2½ years, significant increases in attacks against the  coalition and coalition partners have made it difficult to transfer security  responsibilities to Iraqi forces and to engage in rebuilding efforts in Iraq.  The insurgency in Iraq intensified through October 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. Recently, the administration has  taken actions to integrate military and civilian rebuilding and stabilization  efforts.
subsections: section_title: Insurgency Has Intensified and Delayed the Transfer of Security Responsibilities
paragraphs: The insurgency intensified through October 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. According to a February 2006  testimony by the Director of National Intelligence, insurgents are using  increasingly lethal improvised explosive devices and continue to adapt to  coalition countermeasures.
As shown in figure 1, 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.
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. 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, 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 Shia groups, some of whom are supported  by Iran, violent extremists, criminals, and, to a lesser degree, foreign  fighters. According to the Director of National Intelligence, Iran provides  guidance and training to select Iraqi Shia political groups and weapons and  training to Shia militant groups to enable anticoalition attacks. Iran also  has contributed to the increasing lethality of anticoalition attacks by  enabling Shia militants to build improvised explosive devices with  explosively formed projectiles, similar to those developed by Iran and  Lebanese Hizballah.
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. The Secretary of Defense and MNF-I recently 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 in some parts of Iraq. For  example, in December 2005 and January 2006, MNF-I reported that Iraqi  army battalions and brigades had assumed control of battle space in parts  of Ninewa, Qadisiyah, Babil, and Wasit provinces. 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. In the  meantime, coalition forces continue to support and assist the majority of  Iraqi security forces as they develop the capability to operate  independently.
However, recent reports have recognized limitations in the effectiveness of  Iraqi security forces. For example, DOD’s October 2005 report notes 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. 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 and to address the militias and  armed groups that are outside the formal security sector and government  control. Moreover, according to the Director of National Intelligence’s  February 2006 report, Iraqi security forces are experiencing difficulty in  managing ethnic and sectarian divisions among their units and personnel.  GAO’s classified report on Iraq’s security situation 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.
section_title: Security Situation and Management Issues Have Affected Rebuilding Efforts
paragraphs: 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 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. For  example, in March 2005, USAID cancelled two task orders related to  power generation that totaled nearly $15 million to help pay for the  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 January 2006, State reported that direct and indirect security  costs represent 16 to 22 percent of the overall cost of major infrastructure  reconstruction projects.
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, the Project Contracting Office reported in  February 2006, the number of attacks on convoys and casualties had  increased from 20 convoys attacked and 11 casualties in October 2005 to  33 convoys attacked and 34 casualties in January 2006. In another  example, work at a wastewater plant in central Iraq was halted for  approximately 2 months in early 2005 because insurgent threats drove  away subcontractors 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 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 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 project  sites.
Our ongoing work on Iraq’s energy sectors and the management of design- build contracts will provide additional information on the issues that have  affected the pace and costs of reconstruction.
section_title: Recent Actions to Integrate Military and Civilian Rebuilding and Stabilization Efforts
paragraphs: The Administration has taken steps to develop a more comprehensive,  integrated approach to combating the insurgency and stabilizing Iraq. The  National Strategy for Victory in Iraq lays out an integrated political,  military, and economic strategy that goes beyond offensive military  operations and the development of Iraqi security forces in combating the  insurgency. Specifically, it calls for cooperation with and support for local  governmental institutions, the prompt dispersal of aid for quick and visible  reconstruction, and central government authorities who pay attention to  local needs.
Toward that end, U.S. agencies are developing tools for integrating  political, economic, and security activities in the field. For example,  USAID is developing the Focused Stabilization Strategic City Initiative that  will fund social and economic stabilization activities in communities  within 10 strategic cities. The program is intended to jump-start the  development of effective local government service delivery by directing  local energies from insurgency activities toward productive economic and  social opportunities. The U.S. embassy in Baghdad and MNF-I are also  developing provincial assistance teams as a component of an integrated  counterinsurgency strategy. These teams would consist of coalition  military and civilian personnel who would assist Iraq’s provincial  governments with (1) developing a transparent and sustained capability to  govern; (2) promoting increased security, rule of law, and political and  economic development; and (3) providing the provincial administration  necessary to meet the basic needs of the population. It is unclear whether  these two efforts will become fully operational, as program documents  have noted problems in providing funding and security for them.
section_title: Limited Performance Data and Measures and Inadequate Reporting Present Difficulties in Determining Progress and Impact of Rebuilding Effort
paragraphs: 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 building Iraqi health clinics. However, limited performance  data and measures make it difficult to determine and report on the  progress and impact of U.S. reconstruction. Although information is  difficult to obtain in an unstable security environment, State reported that  it is currently finalizing a set of metrics to 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. Information on  access to water and its quality is difficult to obtain without adequate  security or water-metering facilities.
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  and access of electricity is difficult to obtain without adequate security or  accurate metering capabilities.
Opinion surveys and additional outcome measures have the potential to  gauge the impact of the U.S. reconstruction efforts on the lives of Iraqi  people and their satisfaction with these sectors. A USAID survey in 2005  found that the Iraqi people were generally unhappy with the quality of  their water supply, waste disposal, and electricity services but approved of  the primary health care services they received. 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 in January 2006 that it is currently  finalizing a set of standard methodologies and metrics for water and other  sectors that could be used to track the impact of U.S. reconstruction  efforts.
section_title: Iraq’s Capacity to Operate and Maintain U.S.-Funded Projects Presents Sustainability Problems
paragraphs: 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.
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. The U.S. embassy in Baghdad 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 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. 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 currently working with the Iraqi  government to assess the additional resources needed to operate and  maintain water and sanitation facilities that have been constructed or  repaired by the United States.
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. 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.
Although agencies have incorporated some training programs and the  development of operations and maintenance capacity into individual  projects, 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 May 2005, an interagency working group including  State, USAID, PCO, and the Army Corps of Engineers was formed to  identify ways to address 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 suboptimized conditions following handover to the Iraqis. To  mitigate the potential for project failures, the working group  recommended increasing the period of operational support for  constructed facilities from 90 days to up to 1 year. 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.
section_title: Iraq Faces Challenges in Financing Future Needs
paragraphs: 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 are not finalized. 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. Finally, 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, reduce energy and food subsidies, control  government operating expenses, provide for a growing security force, and  repay external debt and war reparations.
subsections: section_title: Iraqi Needs May be Greater Than Originally Anticipated
paragraphs: 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. The 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.
Iraq may 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. 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 addition,  insurgents continue to target electrical transmission lines and towers as  well as oil pipelines that provide needed fuel for electrical generation. In  the oil sector, a June 2003 U.S. government assessment found that more  than $900 million would be needed to replace looted equipment at Iraqi oil  facilities. These 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. 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. 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.
section_title: Future Contributions for Iraq Reconstruction May Be Limited
paragraphs: 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 priorities changed, the United States  reallocated about $5 billion of the $18.4 billion fiscal year 2004 emergency  supplemental among the various sectors, over time increasing security and  justice funds while decreasing resources for the water and electricity  sectors. 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. These appropriations were not intended to meet  all of Iraq’s needs.
The United States has obligated nearly 80 percent of its available funds.  Although remaining commitments and future contributions have not been  finalized, they are likely to target activities for building ministerial  capacity, sustaining existing infrastructure investments, and training and  equipping the Iraqi security forces, based on agency reporting. For  example, in January 2006, State reported a new initiative to address Iraqi  ministerial capacity development at 12 national ministries. According to  State, Embassy Baghdad plans to undertake a comprehensive approach to  provide training in modern techniques of civil service policies,  requirements-based budget processes, information technology standards,  and logistics management systems to Iraqi officials in key ministries.
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), of which about $900  million had been obligated and about $400 million disbursed to individual  projects, as of December 2005. Donors also have provided 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. In September 2004, the IMF provided a  $436 million emergency post-conflict assistance loan to facilitate Iraqi debt  relief, and in December 2005, Iraq secured a $685 million Stand-By  Arrangement (SBA) with the IMF. On November 29, 2005, the World Bank  approved a $100 million loan within a $500 million program for  concessional international development assistance.
section_title: Iraq Must Address Budget Constraints to Contribute to Future Rebuilding and Stabilization Efforts
paragraphs: 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 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 January 2006, crude oil export  levels fell to an average of about 1.1 million bpd.
Further, 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. According to State, the Iraqi Oil Ministry estimates that the current  average import cost of fuels is roughly $500 million each month.
Current government subsidies constrain opportunities for growth and  investment and have kept prices for food, oil, and electricity low. Before  the war, at least 60 percent of Iraqis depended on monthly rations—known  as the public distribution system (PDS)—provided by the UN Oil for Food  program to meet household needs. The PDS continues to provide food  subsidies to Iraqis. In addition, Iraqis pay below-market prices for refined  fuels and, in the absence of effective meters, for electricity and water. Low  prices have encouraged over-consumption and have fueled smuggling to  neighboring countries. Food and energy subsidies account for about 18  percent of Iraq’s projected gross domestic product (GDP) for 2006.
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.
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. As a first  step, the Iraqi government plans to complete a census of all public service  employees by June 2006.
Iraq plans to spend more resources on its own defense. Iraq’s security- related 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.
section_title: Conclusion
paragraphs: For the past 2½ years, the United States has provided $30 billion with the  intent of developing capable Iraqi security forces, rebuilding a looted and  worn infrastructure, and supporting democratic elections. However, the  United States has confronted a 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 able to operate independently, thereby  enabling the United States to reduce its military presence.
Similarly, it is unclear how U.S. efforts are helping Iraq obtain clean water,  reliable electricity, or competent health care. Measuring the outcomes of  U.S. efforts is important to ensure that the U.S. dollars spent are making a  difference in the daily lives of the Iraqi people. In addition, 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. In response to our reports, State has begun to develop  metrics for measuring progress and plans for sustaining the U.S.-built  infrastructure. The administration’s next budget will reveal its level of  commitment to these challenges.
But the challenges are not exclusively those of the United States. The  Iraqis face the challenge of forming a government that has the support of  all ethnic and religious groups. They also face the challenge of addressing  those constitutional issues left unresolved from the October referendum— power of the central government, control of Iraq’s natural resources, and  the application of Islamic law. The new government also faces the equally  difficult challenges of reducing subsidies, controlling public salaries and  pensions, and sustaining the growing number of security forces. This will  not be easy, but it is necessary for the Iraqi government to begin to  contribute to its own rebuilding and stabilization efforts and to encourage  investment by the international community and private sector.
We continue to review U.S. efforts to train and equip Iraqi security forces,  develop the oil and electricity sectors, reduce corruption, and enhance the  capacity of Iraqi ministries. Specifically, we will examine 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; assess issues related to the development of Iraq’s energy  sector, including the sectors’ needs as well as challenges such as  corruption; and examine capacity-building efforts in the Iraqi ministries.
Mr. Chairman, this concludes my prepared statement. I will be happy to  answer any questions you or the other Committee members may have.
section_title: Contact and Staff Acknowledgments:
paragraphs: 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, Bruce Kutnick, Steve Lord, Sarah Lynch,  Judy McCloskey, Micah McMillan, Tet Miyabara, Jose Pena III, Audrey  Solis, and Alper Tunca.
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