Rebuilding Iraq: Reconstruction Progress Hindered by Contracting, Security, and Capacity Challenges
Published: 2007-02-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense (DOD) has relied extensively on contractors to undertake major reconstruction projects and provide support to its deployed forces, but these efforts have not always achieved desired outcomes. Further, the Iraqi government must be able to reduce violence, sustain reconstruction progress, improve basic services, and make a positive difference in the daily lives of the Iraqi people. This statement discusses (1) factors affecting DOD's ability to promote successful acquisition outcomes on its contracts for reconstruction and for support to deployed forces in Iraq, (2) the deteriorating security situation and the capabilities of the Iraqi security forces, and (3) issues affecting the Iraqi government's ability to support and sustain future reconstruction progress. The testimony is based upon our work on Iraq reconstruction and stabilization efforts, DOD contracting activities, and DOD's use of support contractors spanning several years. This work was conducted in accordance with generally accepted government auditing standards.
section_title: What GAO Found
paragraphs: The challenges faced by DOD on its reconstruction and support contracts often reflect systemic and long-standing shortcomings in DOD's capacity to manage contractor efforts. Such shortcomings result from poorly defined or changing requirements, the use of poor business arrangements, the absence of senior leadership and guidance, and an insufficient number of trained contracting, acquisition and other personnel to manage, assess and oversee contractor performance. In turn, these shortcomings manifest themselves in higher costs to taxpayers, schedule delays, unmet objectives, and other undesirable outcomes. For example, because DOD authorized contractors to begin work before reaching agreement on the scope and price of that work, DOD paid millions of dollars in costs that were questioned by the Defense Contract Audit Agency. Similarly, DOD lacks visibility on the extent to which they rely on contractors to support their operations. When senior military leaders began to develop a base consolidation plan, officials were unable to determine how many contractors were deployed and therefore ran the risk of over- or under-building the capacity of the consolidated bases. U.S. reconstruction efforts also continue to be hampered by a security situation that continues to deteriorate. Although the number of trained and equipped Iraqi security forces increased to about 323,000 in December 2006 and more Iraqi Army units have taken the lead for counterinsurgency operations, attacks on coalition and Iraqi security forces and civilians have all increased. Aggregate numbers of trained and equipped Iraqi forces, however, do not provide information on the capabilities and needs of individual units. GAO has made repeated attempts to obtain unit-level Transition Readiness Assessments (TRAs) without success. This information is essential for the Congress to make fully informed decisions in connection with its authorization, appropriations, and oversight responsibilities. As the U.S. attempts to turn over its reconstruction efforts, the capacity of the Iraqi government to continue overall reconstruction progress is undermined by shortfalls in the capacity of the Iraqi ministries, widespread corruption and the inability to fund and execute projects for which funds were previously budgeted. Iraqi government institutions are undeveloped and confront significant challenges in staffing a competent, nonaligned civil service; using modern technology; and managing resources and personnel effectively. For example, according to U.S. officials 20 to 30 percent of the Ministry of Interior staff are "ghost employees" whose salaries are collected by other officials. Further, corruption in Iraq poses a major challenge to building an effective Iraqi government and could jeopardize future flows of needed international assistance. Unclear budgeting and procurement rules have affected Iraq's efforts to spend capital budgets effectively and efficiently, according to U.S. officials. At the Ministry of Oil, for example, less than 1 percent of the $3.5 billion budgeted in 2006 for key enhancements to the country's oil production, distribution, and export facilities, had been spent as of August 2006.

section_title: Letter
paragraphs: I am pleased to be here today to discuss (1) factors affecting the  Department of Defense’s (DOD) ability to promote successful acquisition  outcomes on its contracts for reconstruction and for support to deployed  forces in Iraq, (2) the deteriorating security situation and the capabilities  of the Iraqi security forces, and (3) issues affecting the Iraqi government’s  ability to support and sustain future reconstruction progress. Prudence  with taxpayer funds and growing long-range fiscal challenges demand that  DOD maximize its return on the billions of dollars it has invested in  reconstruction projects and support contracts. Further, strengthening  Iraq’s fragile government institutions, which have thus far failed to  adequately deter corruption, stimulate employment, or deliver essential  services is critical to establishing a peaceful, stable, and secure Iraq.
DOD has relied extensively on contractors to undertake major  reconstruction projects and provide support to its troops, but these efforts  have not always achieved desired outcomes or achieved such outcomes in  an economic and efficient manner. The challenges encountered in Iraq are  emblematic of a range of systemic and long-standing challenges faced by  DOD. In this regard, we identified DOD contract management to be high  risk because of its vulnerability to fraud, waste, abuse, and  mismanagement 15 years ago and have reported on DOD’s long-standing  problems with management and oversight of support contractors since  1997. In a report issued in July 2006, we concluded that with awards to  contractors large and growing, DOD will continue to be vulnerable to  contracting fraud, waste or misuse of taxpayer dollars, and abuse. While  DOD has acknowledged its vulnerabilities and taken some actions to  address them, many of the initiatives are still in their early stages and it is  too soon to tell what impact they may have.
The Iraqi situation is more complicated as the United States must rely on  the Iraqi government to play a larger role, which will require capacity not  yet present. As we previously reported, amid signs of progress, the  coalition faces numerous political, economic, and security challenges in  rebuilding Iraq. In addition, the continued violence increases the risk that  the United States will not be able to complete remaining reconstruction  projects as planned and threatens the Iraqi government’s ability to provide  essential services to the Iraqi people.
This testimony is based upon GAO’s extensive work on Iraq reconstruction  and stabilization efforts, DOD contracting activities, and DOD’s use of  support contractors spanning several years. This work was conducted in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The broader context of U.S. efforts for Iraqi reconstruction is tied to how  missions and projects are being conducted and managed. Over the past  decade, DOD has increasingly relied on contractors to provide a range of  mission-critical services. Overall, DOD’s obligations on service contracts  rose from $82.3 billion in fiscal year 1996 to $141.2 billion in fiscal year  2005. According to DOD officials, the amount obligated on service  contracts exceeded the amount the department spent on major weapon  systems.
The growth in spending for services has coincided with decreases in  DOD’s workforce. DOD carried out this downsizing, however, without  ensuring that it had the specific skills and competencies needed to  accomplish DOD’s mission. For example, the amount, nature, and  complexity of contracting for services have increased, which has  challenged DOD’s ability to maintain a workforce with the requisite  knowledge of market conditions and industry trends, the ability to prepare  clear statements of work, the technical details about the services they  procure, and the capacity to manage and oversee contractors. Participants  in an October 2005 GAO forum on Managing the Supplier Base for the  21st Century commented that the current federal acquisition workforce  significantly lacks the new business skills needed to act as contract  managers.
Contractors have an important role to play in the discharge of the  government’s responsibilities, and in some cases the use of contractors  can result in improved economy, efficiency, and effectiveness. At the same  time, there may be occasions when contractors are used to provide certain  services because the government lacks another viable and timely option.  In such cases, the government may actually be paying more and incurring  higher risk than if such services were provided by federal employees. In  this environment of increased reliance on contractors, sound planning and  contract execution are critical for success. We have previously identified  the need to examine the appropriate role for contractors to be among the  challenges in meeting the nation’s defense and other needs in the 21st  century.
The proper role of contractors in providing services to the government is  currently the topic of some debate. In general, I believe there is a need to  focus greater attention on what type of functions and activities should be  contracted out and which ones should not, to review and reconsider the  current independence and conflict of interest rules relating to contractors,  and to identify the factors that prompt the government to use contractors  in circumstances where the proper choice might be the use of civil  servants or military personnel. Possible factors could include inadequate  force structure; outdated or inadequate hiring policies, classification and  compensation approaches; and inadequate numbers of full-time equivalent  slots.
Turning to Iraq, DOD has relied extensively on contractors to undertake  major reconstruction projects and provide support to its troops. For  example, DOD has responsibility for a significant portion of the more than  $30 billion in appropriated reconstruction funds and has awarded and  managed many of the large reconstruction contracts, such as the contracts  to rebuild Iraq’s oil, water, and electrical infrastructure, and to train and  equip Iraqi security forces. Further, U.S. military forces in Iraq have used  contractors to a far greater extent than in prior operations to provide  interpreters and intelligence analysts, as well as more traditional services  such as weapon systems maintenance and base operations support. The  Army alone estimates that almost 60,000 contractor employees currently  support ongoing military operations in Southwest Asia and has spent  about $15.4 billion on its single largest support contract—the Logistics  Civil Augmentation Program (LOGCAP)—between 2001 and 2004.
Reconstruction and support contracts are often cost-reimbursement-type  contracts, which allow the contractor to be reimbursed for reasonable,  allowable, and allocable costs to the extent prescribed in the contracts.  Further, these contracts often contain award fee provisions, which are  intended to incentivize more efficient and effective contractor  performance. If contracts are not effectively managed and given sufficient  oversight, the government’s risk is likely to increase. For example, we  have reported DOD needs to conduct periodic reviews of services  provided under cost-reimbursement contracts to ensure that services are  being provided and at an appropriate level and quality. Without such a  review, the government is at risk to pay for services it no longer needs.
section_title: DOD Needs to Improve Its Capacity to Manage Contractors
paragraphs: DOD’s reliance on contractors for key reconstruction efforts and support  to deployed forces requires that DOD create the conditions conducive for  success. Our work has shown that these conditions include a match  between requirements and resources, sound acquisition approaches,  leadership and guidance, visibility and knowledge of the number of  contractors and the services they provide, and the capacity to manage and  assess contractor performance. As we have previously reported, in many  cases these conditions were not present on DOD reconstruction and  support contracts, increasing the potential for fraud, waste, abuse, and  mismanagement.
Several of my colleagues in the accountability community and I have  developed a definition of waste. As we see it, waste involves the taxpayers  in the aggregate not receiving reasonable value for money in connection  with any government funded activities due to an inappropriate act or  omission by players with control over or access to government resources  (e.g., executive, judicial or legislative branch employees, contractors,  grantees or other recipients). Importantly, waste involves a transgression  that is less than fraud and abuse. Further, most waste does not involve a  violation of law, but rather relates primarily to mismanagement,  inappropriate actions, or inadequate oversight. Illustrative examples of  waste could include: unreasonable, unrealistic, inadequate or frequently changing proceeding with development or production of systems without  achieving an adequate maturity of related technologies in situations  where there is no compelling national security interest to do so;  the failure to use competitive bidding in appropriate circumstances;  an over-reliance on cost-plus contracting arrangements where  reasonable alternatives are available;  the payment of incentive and award fees in circumstances where the  contractor’s performance, in terms of costs, schedule and quality  outcomes, does not justify such fees;   the failure to engage in selected pre-contracting activities for  contingent events;
Congressional directions (e.g. earmarks) and agency spending actions  where the action would not otherwise be taken based on an objective  value and risk assessment and considering available resources.
subsections: section_title: Changing Requirements and Resources Complicate Efforts to Hold DOD and Contractors Accountable for Outcomes
paragraphs: A prerequisite to having good outcomes is a match between well-defined  requirements and available resources. Shifts in priorities and funding, even  those made for good reasons, invariably have a cascading effect on  individual contracts, making it more difficult to manage individual projects  to successful outcomes and complicate efforts to hold DOD and  contractors accountable for acquisition outcomes. I should note such  problems reflect some of the systemic and long-standing challenges  confronting DOD, whether on contracts for services or major weapon  systems. Contracts, especially service contracts, often do not have  definitive or realistic requirements at the outset needed to control costs  and facilitate accountability.
U.S. reconstruction goals were based on assumptions about the money  and time needed, as well as a permissive security environment, all of  which have proven unfounded. U.S. funding was not meant to rebuild  Iraq’s entire infrastructure, but rather to lay the groundwork for a longer- term reconstruction effort that anticipated significant assistance from  international donors. To provide that foundation, the Coalition Provisional  Authority (CPA) allocated $18.4 billion in fiscal year 2004 reconstruction  funds among various projects in each reconstruction sector, such as oil,  electricity, and water and sanitation. The CPA used a multitiered  contracting approach to manage and execute the projects. In this case, the  CPA, through various military organizations, awarded 1 lead contractor, 6  sector contractors, and 12 design-build contracts in early 2004 (see fig. 1).
After the CPA dissolved, the Department of State initiated an examination  of the priorities and programs with the objectives of reprioritizing funding  for projects that would not begin until mid- to late-2005 and using those  funds to target key high-impact projects. By July 2005, the State  Department had conducted a series of funding reallocations to address  new priorities, including increased support for security and law  enforcement efforts and oil infrastructure enhancements. One of the  consequences of these reallocations was to reduce funding for the water  and sanitation sector by about 44 percent, from $4.6 billion to $2.6 billion.  One reallocation of $1.9 billion in September 2004 led DOD’s Project and  Contracting Office to cancel some projects, most of which had been  planned to start in mid-2005.
Additionally, higher than anticipated costs associated with using the large  design-build contracts contributed to DOD’s decision to directly contract  with Iraqi firms. For example, in the electricity sector, high cost estimates  by one design-build contractor resulted in the termination of five task  orders and the resolicitation of that work. After the task orders were  canceled, the design-builder was slow to reduce overhead costs in  accordance with the reduced workload, according to agency officials and  documents. DOD is now directly contracting with Iraqi firms to reduce the  costs of reconstruction efforts not requiring advanced technical and  management expertise, such as erecting electrical distribution projects.  Similarly, in the transportation sector, the design-build contractor  demobilized and left Iraq shortly after award of the contract in March 2004  because DOD and the contractor agreed that the overall program costs  were too high. Subsequently, DOD has made greater use of Iraqi  contractors who were experienced in building roads and bridges.
Further, the lack of a permissive environment resulted in higher than  anticipated security costs, which in turn, resulted in diverting planned  reconstruction resources and led to canceling or reducing the scope of  certain reconstruction projects. As we reported in July 2005, U.S. civilian  agencies and the reconstruction contractors we evaluated generally  obtained security services from private security providers. We noted that  the use of private security providers reflected, in part, the fact that  providing security was not part of the U.S. military’s stated mission. We  also found, however, that despite significant role played by private  security providers, U.S. agencies generally did not have complete data on  the costs associated with their use. In June 2006, we reported that the  agencies had agreed to include requirements for reconstruction  contractors to report all costs for private security supplies and services  that the contractor or any subcontractor may have to acquire necessary  for successful contractor performance.
section_title: DOD’s Business Arrangements Contributed to Increased Risks on Individual Contracts
paragraphs: Agency procurement personnel generally had limited advance warning  prior to awarding the initial reconstruction contracts and were uncertain  as to the full scope of reconstruction activities that were required. The  need to award contracts and begin reconstruction efforts quickly  contributed to DOD using business arrangements that potentially  increased DOD’s risks. Such arrangements included allowing contractors  to begin work before agreeing on what needed to be done and at what  price and, during the initial stages of reconstruction, awarding contracts  that were not awarded under full and open competition.
To produce desired outcomes within available funding and required time  frames, DOD and its contractors need to clearly understand reconstruction  objectives and how they translate into the contract’s terms and conditions:  the goods or services needed, the level of performance or quality desired,  the schedule, and the cost. When requirements were not clear, DOD often  entered into contract arrangements that posed additional risks, in  particular by authorizing contractors to begin work before key terms and  conditions, including the work to be performed and its projected costs,  were fully defined. For example,  In 2004, we issued two reports that identified a considerable amount of  work that was being undertaken in Iraq as undefinitized contract  actions. For example, we reported that as of March 2004, about  $1.8 billion had been obligated on reconstruction contract actions  without DOD and the contractors reaching agreement on the final  scope and price of the work. Similarly, we found that as of June 2004,  the Army and the contractor had definitized only 13 of the 54 task  orders on the LOGCAP contract that required definitization. The lack of  definitization contributed to the Army’s inability to conduct award fee  boards to assess the contractor’s performance.
In September 2005, we reported that difficulties in defining the cost,  schedule, and work to be performed associated with projects in the  water sector contributed to project delays and reduced scopes of  work. We reported that DOD had obligated about $873 million on  24 task orders to rebuild Iraq’s water and sanitation infrastructure,  including municipal water supplies, sewage collection systems, dams,  and a major irrigation project. We found, however, that agreement  between the government and the contractors on the final cost,  schedule, and scope of 18 of the 24 task orders we reviewed had been  delayed. These delays occurred, in part, because Iraqi authorities, U.S.  agencies, and contractors could not agree on scopes of work and  construction details. For example, at one wastewater project, local  officials wanted a certain type of sewer design that increased that  project’s cost.
In September 2006, we issued a report on how DOD addressed issues  raised by the Defense Contract Audit Agency in audits of Iraq-related  contract costs. In particular, we found that DOD contracting officials  were less likely to remove the costs questioned by auditors if the  contractor had already incurred these costs before the contract action  was definitized. In one case, the Defense Contract Audit Agency  questioned $84 million in an audit of a task order proposal for an oil  mission. In this case, the contractor did not submit a proposal until a  year after the work was authorized, and DOD and the contractor did  not negotiate the final terms of the task order until more than a year  after the contractor had completed the work. In the final negotiation  documentation, the DOD contracting official stated that the payment of  incurred costs is required for cost-type contracts, absent unusual  circumstances. In contrast, in the few audit reports we reviewed where  the government negotiated prior to starting work, we found that the  portion of questioned costs removed from the proposal was  substantial.
The need to award contracts and begin reconstruction efforts quickly—a  contributing factor to DOD’s use of undefinitized contract actions—also  contributed to DOD using other than full and open competition during the  initial stages of reconstruction. While full and open competition can be a  tool to mitigate acquisition risks, DOD procurement officials had only a  relatively short time—often only weeks—to award the first major  reconstruction contracts. As a result, these contracts were generally  awarded using other than full and open competition. We recently reported  that our ability to obtain complete information on DOD reconstruction  contract actions was limited because not all DOD components  consistently tracked or fully reported this information. Nevertheless, for  the data we were able to obtain, consisting of $7 billion, or 82 percent, of  DOD’s total contract obligations between October 1, 2003, through March  31, 2006, DOD competed the vast majority of DOD’s contract obligations.
section_title: DOD Lacked the Capacity to Properly Manage and Assess Contractor Performance
paragraphs: An unstable contracting environment—when wants, needs, and contract  requirements are in flux—also requires greater attention to oversight,  which relies on a capable government workforce. Managing and assessing  postaward performance entails various activities to ensure that the  delivery of services meets the terms of the contract and requires adequate  surveillance resources, proper incentives, and a capable workforce for  overseeing contracting activities. If surveillance is not conducted, not  sufficient, or not well documented, DOD is at risk of being unable to  identify and correct poor contractor performance in a timely manner and  potentially paying too much for the services it receives.
We and others have reported on the impact of the lack of adequate  numbers of properly trained acquisition personnel and high turnover rates  on reconstruction efforts. For example,    Our June 2004 report found that early contract administration  challenges were caused, in part, by the lack of a sufficient number of  personnel.
Our September 2005 report on water and sanitation efforts found that  frequent staff turnover affected both the definitization process and the  overall pace and cost of reconstruction efforts.
The Special Inspector General for Iraq Reconstruction found that one  of the CPA’s critical shortcomings in personnel was the inadequate link  between position requirements and necessary skills.
In 2004, an interagency assessment team found that the number of  contracting personnel was insufficient to handle the increased  workload expected with the influx of fiscal year 2004 funding. In part,  the CPA’s decision to award seven contracts in early 2004 to help better  coordinate and manage the fiscal year 2004 reconstruction efforts  recognized this shortfall. As a result, however, DOD is relying on these  contractors to help manage and oversee the design-build contractors.
DOD’s lack of capacity contributed to challenges in using interagency  contracting vehicles in Iraq. In certain instances, rather than develop and  award its own contracts, DOD used contracts already awarded by other  agencies. While this practice may improve efficiency and timeliness, these  contracts need to be effectively managed, and their use requires a higher  than usual degree of business acumen and flexibility on part of the  workforce.
During the initial stages of reconstruction, we and the DOD Inspector  General found instances in which DOD improperly used interagency  contracts. For example, the Inspector General found that a DOD  component circumvented contracting rules when awarding contracts on  behalf of the CPA when using the General Services Administration’s  federal supply schedule. The Inspector General cited DOD’s failure to plan  for the acquisition support the CPA needed to perform its mission as  contributing to this condition. Similarly, in April 2005 we reported that a  lack of effective management controls—in particular insufficient  management oversight and a lack of adequate training—led to breakdowns  in the issuance and administration of task orders for interrogation and  other services by the Department of the Interior on behalf of DOD. These  breakdowns included:  issuing 10 out of 11 task orders that were beyond the scope of  underlying contracts, in violation of competition rules;    not complying with additional DOD competition requirements when  issuing task orders for services on existing contracts;    not properly justifying the decision to use interagency contracting;    not complying with ordering procedures meant to ensure best value for  the government; and    not adequately monitoring contractor performance.
Because officials at Interior and the Army responsible for the orders did  not fully carry out their roles and responsibilities, the contractor was  allowed to play a role in the procurement process normally performed by  the government. Further, the Army officials responsible for overseeing the  contractor, for the most part, lacked knowledge of contracting issues and  were not aware of their basic duties and responsibilities. In part, problems  such as these contributed to our decision to designate management of  interagency contracting a high-risk area in January 2005.
To improve its capacity to plan and award contracts and manage  contractor performance, DOD has merged the Project and Contracting  Office with the U.S. Army Corps of Engineers’ Gulf Region Division.  Additionally, DOD established the Joint Contracting Command–Iraq to  consolidate and prioritize contracting activities and resolve contracting  issues, among other things. As noted previously, DOD has also attempted  to directly contract with Iraqi firms, rather than rely on the large U.S.  design-build contracts that it had awarded in early 2004. Although DOD  expects this approach will reduce costs, it will also likely increase the  administrative and oversight burden on DOD’s workforce.
section_title: DOD Needs Clear and Comprehensive Guidance and Leadership to Manage and Oversee Support Contractors
paragraphs: Since the mid-1990s, our reports have highlighted the need for clear and  comprehensive guidance for managing and overseeing the use of  contractors who support deployed forces. As we reported in December  2006, DOD has not yet fully addressed this long-standing problem.
Such problems are not new. In assessing LOGCAP implementation during  the Bosnian peacekeeping mission in 1997, we identified weaknesses in  the available doctrine on how to manage contractor resources, including  how to integrate contractors with military units and what type of  management and oversight structure to establish. We identified similar  weaknesses when we began reviewing DOD’s use of contractors in Iraq.  For example, in 2003 we reported that guidance and other oversight  mechanisms varied widely at the DOD, combatant command, and service  levels, making it difficult to manage contractors effectively. Similarly, in  our 2005 report on private security contractors in Iraq, we noted that DOD  had not issued any guidance to units deploying to Iraq on how to work  with or coordinate efforts with private security contractors. Further, we  noted that the military may not have a clear understanding of the role of  contractors, including private security providers, in Iraq and of the  implications of having private security providers on the battle space.
Our prior work has shown that it is important for organizations to provide  clear and complete guidance to those involved in program  implementation. In our view, establishing baseline policies for managing  and overseeing contractors would help ensure the efficient use of  contractors in places such as Iraq. DOD took a noteworthy step to address  some of these issues when it issued new guidance in 2005 on the use of  contractors who support deployed forces. However, as our December 2006  report made clear, DOD’s guidance does not address a number of  problems we have repeatedly raised—such as the need to provide  adequate contract oversight personnel, to collect and share lessons  learned on the use of contractors supporting deployed forces, and to  provide DOD commanders and contract oversight personnel with training  on the use of contractors overseas prior to their deployment.
In addition to identifying the lack of clear and comprehensive guidance for  managing contract personnel, we have issued several reports highlighting  the need for DOD components to comply with departmental guidance on  the use of contractors. For example, in our June 2003 report we noted that  DOD components were not complying with a long-standing requirement to  identify essential services provided by contractors and develop backup  plans to ensure the continuation of those services during contingency  operations should contractors become unavailable to provide those  services. We believe that risk is inherent when relying on contractors to  support deployed forces, and without a clear understanding of the  potential consequences of not having the essential service available, the  risks associated with the mission increase.
In other reports, we highlighted our concerns over DOD’s planning for the  use of contractor support in Iraq—including the need to comply with  guidance to identify operational requirements early in the planning  process. When contractors are involved in planning efforts early, and given  adequate time to plan and prepare to accomplish their assigned missions,  the quality of the contractor’s services improves and contract costs may be  lowered. DOD’s October 2005 guidance on the use of contractor support to  deployed forces went a long way to consolidate existing policy and  provide guidance on a wide range of contractor issues. However, as of  December 2006, we found little evidence that DOD components were  implementing that guidance, in part because no individual within DOD was  responsible for reviewing DOD and service efforts to ensure the guidance  was being consistently implemented.
We have made a number of recommendations for DOD to take steps to  establish clear leadership and accountability for contractor support issues.  For example, in our 2005 report on LOGCAP we recommended DOD  designate a LOGCAP coordinator with the authority to participate in  deliberations and advocate for the most effective and efficient use of the  LOGCAP contract. Similarly, in our comprehensive review of contractors  on the battlefield in 2006, we recommended DOD appoint a focal point  within the Office of the Under Secretary of Defense for Acquisition,  Technology, and Logistics—at a sufficiently senior level and with the  appropriate resources—dedicated to leading DOD’s efforts to improve its  contract management and oversight. DOD agreed with these  recommendations. In October 2006, DOD established the office of the  Assistant Deputy Under Secretary of Defense for Program Support to  serve as the office of primary responsibility for contractor support issues,  but the office’s specific roles and responsibilities have not yet been clearly  defined.
section_title: Military Commanders and Senior DOD Leaders Need to Have Visibility over the Contractors Who Support Them
paragraphs: DOD continues to lack the capability to provide senior leaders and military  commanders with complete information on support provided by  contractors to deployed forces. Without such visibility, senior leaders and  military commanders cannot develop a complete picture of the extent to  which they rely on contractors to support their operations. We first  reported the need for better visibility in 2002 during a review of the costs  associated with U.S. operations in the Balkans. At that time, we reported  that DOD was unaware of (1) the number of contractors operating in the  Balkans, (2) the tasks those contractors were contracted to do, and (3) the  government’s obligations to those contractors under the contracts. We  noted a similar situation in 2003 in our report on DOD’s use of contractors  to support deployed forces in Southwest Asia and Kosovo. At that time,  we reported that although most contract oversight personnel had visibility  over the individual contracts for which they were directly responsible,  visibility of all contractor support at a specific location was practically  nonexistent at the combatant commands, component commands, and  deployed locations we visited. As a result, commanders at deployed  locations had limited visibility and understanding of all contractor activity  supporting their operations and frequently had no easy way to get answers  to questions about contractor support. This lack of visibility inhibited the  ability of commanders to resolve issues associated with contractor  support such as force protection issues and the provision of support to the  contractor personnel.
Moreover, in our December 2006 review of DOD’s use of contractors in  Iraq, we found that DOD’s continuing problems with limited visibility over  contractors in Iraq unnecessarily increased contracting costs to the  government and introduced unnecessary risk. Without visibility over  where contractors are deployed and what government support they are  entitled to, costs to the government may increase; for example, at a  contractor accountability task force meeting we attended, an Army  Materiel Command official noted that an Army official estimated that  about $43 million is lost each year on free meals provided to contractor  employees at deployed locations who also receive a per diem food  allowance. Also, when senior military leaders began to develop a base  consolidation plan, officials were unable to determine how many  contractors were deployed and therefore ran the risk of over- or  under-building the capacity of the consolidated bases. DOD’s October 2005  guidance on contractor support to deployed forces included a requirement  that the department develop or designate a joint database to maintain by- name accountability of contractors deploying with the force and a  summary of the services or capabilities they provide. The Army has taken  the lead in this effort, and recently DOD designated a database intended to  provide improved visibility over contractors deployed to support the  military in Iraq, Afghanistan, and elsewhere.
section_title: DOD Lacks a Sufficient Number of Trained Contractor Management and Oversight Personnel
paragraphs: As I previously noted, having the capacity to manage and assess contractor  performance is a critical factor in promoting successful outcomes, yet as  we reported in December 2006, DOD does not have sufficient numbers of  trained contractor management and oversight personnel at deployed  locations. Such personnel include not only the contracting officers who  award contracts, but also those personnel who define the requirements,  receive or benefit from the services obtained, and monitor contractor  performance. The lack of an adequate number of trained personnel limits  DOD’s ability to obtain a reasonable assurance that contractors are  meeting contract requirements efficiently and effectively.
Several contract oversight personnel stated that DOD does not have  adequate personnel at deployed locations to effectively oversee and  manage contractors. For example, an Army official acknowledged that the  Army is struggling to find the capacity and expertise to provide the  contracting support needed in Iraq. In addition, officials responsible for  contracting with Multinational Forces-Iraq stated that they did not have  enough contract oversight personnel and quality assurance representatives  to allow the organization to reduce the Army’s use of the LOGCAP  contract by awarding more sustainment contracts for base operations  support in Iraq. Similarly, a LOGCAP program official noted that if  adequate staffing had been in place, the Army could have realized  substantial savings on the LOGCAP contract through more effective  reviews of new requirements. Finally, the contracting officer’s  representative for an intelligence support contract in Iraq stated that he  was unable to visit all of the locations that he was responsible for  overseeing.
The inability of contract oversight personnel to visit all the locations they  are responsible for can create problems for units that face difficulties  resolving contractor performance issues at those locations. For example,  officials from a brigade support battalion stated that they had several  concerns with the performance of a contractor that provided maintenance  for the brigade’s mine-clearing equipment. These concerns included delays  in obtaining spare parts and a disagreement over the contractor’s  obligation to provide support in more austere locations in Iraq. According  to the officials, their efforts to resolve these problems in a timely manner  were hindered because the contracting officer’s representative was  located in Baghdad while the unit was stationed in western Iraq. In other  instances, some contract oversight personnel may not even reside within  the theater of operations. For example, we found the Defense Contract  Management Agency’s (DCMA) legal personnel responsible for LOGCAP in  Iraq were stationed in Germany, while other LOGCAP contract oversight  personnel were stationed in the United States. According to a senior  DCMA official in Iraq, relying on support from contract oversight  personnel outside the theater of operations makes resolving contractor  performance issues more difficult for military commanders in Iraq, who  are operating under the demands and higher operational tempo of a  contingency operation in a deployed location.
Our work has also shown the need for better predeployment training for  military commanders and contract oversight personnel on the use of  contractor support since the mid-1990s. Training is essential for military  commanders because of their responsibility for identifying and validating  requirements to be addressed by the contractor. In addition, commanders  are responsible for evaluating the contractor’s performance and ensuring  the contract is performed in an economic and efficient manner. Similarly,  training is essential for DOD contract oversight personnel who monitor the  contractor’s performance for the contracting officer.
As we reported in 2003, military commanders and contract management  and oversight personnel we met in the Balkans and throughout Southwest  Asia frequently cited the need for better preparatory training.  Additionally, in our 2004 review, we reported that many individuals using  support contracts such as LOGCAP were unaware that they had any  contract management or oversight roles. Army customers stated that they  knew nothing about LOGCAP before their deployment and that they had  received no predeployment training regarding their roles and  responsibilities in ensuring that the contract was used economically and  efficiently. In 2005, we reported that military units did not receive specific  predeployment training or guidance about working with private security  providers. In our December 2006 report, we noted also that many officials  responsible for contract management and oversight in Iraq told us they  received little or no training on the use of contractors prior to their  deployment, which led to confusion over their roles and responsibilities.  For example, in several instances, military commanders attempted to  direct or ran the risk of directing a contractor to perform work outside the  scope of the contract, even though commanders are not authorized to do  so. Such cases can result in increased costs to the government.
Over the years, we have made several recommendations to DOD intended  to strengthen this training. Some of our recommendations were aimed at  improving the training of military personnel on the use of contractor  support at deployed locations, while others focused on training regarding  specific contracts, such as LOGCAP, or the role of private security  providers. Our recommendations have sought to ensure that military  personnel deploying overseas have a clear understanding of the role of  contractors and the support the military provides to them. DOD has agreed  with most of our recommendations. However, we continue to find little  evidence that DOD has improved training for military personnel on the use  of contractors prior to their deployment.
section_title: A Deteriorating Security Situation Continues to Hamper Reconstruction Efforts
paragraphs: The security situation continues to deteriorate, impeding the management  and execution of reconstruction efforts. To improve this condition, the  United States is, among other things, (1) training and equipping Iraqi  security forces that will be capable of leading counterinsurgency  operations, and (2) transferring security responsibilities to Iraqi forces and  the Iraqi government as capabilities improve. Although progress has been  made in transferring more responsibilities to the Iraqi security forces, the  capabilities of individual units are uncertain.
Since the fall of 2003, the U.S.-led multinational force in Iraq has  developed and refined a series of plans to transfer security responsibilities  to the Iraqi government and security forces, with the intent of creating  conditions that would allow a gradual drawdown of the 140,000 U.S.  military personnel in Iraq. This security transition was to occur first in  conjunction with the neutralization of Iraq’s insurgency and second with  the development of Iraqi forces and government institutions capable of  securing their country.
DOD and the State Department have reported progress in implementing  the current security transition plan. For example, the State Department  has reported that the number of trained and equipped Iraqi army and  police forces has increased from about 174,000 in July 2005 to about  323,000 in December 2006. DOD and the State Department also have  reported progress in transferring security responsibilities to Iraqi army  units and provincial governments. For example, the number of Iraqi army  battalions in the lead for counterinsurgency operations has increased from  21 in March 2005 to 89 in October 2006. In addition, 7 Iraqi army division  headquarters and 30 brigade headquarters had assumed the lead by  December 2006. Moreover, by mid-December 2006, three provincial  governments—Muthanna, Dhi Qar, and Najaf—had taken over security  responsibilities for their provinces.
The reported progress in transferring security responsibilities to Iraq,  however, has not led to improved security conditions. Since June 2003,  overall security conditions in Iraq have deteriorated and grown more  complex, as evidenced by the increased numbers of attacks and more  recent Sunni-Shi’a sectarian strife after the February 2006 bombing of the  Golden Mosque in Samarra (see figure 2). Enemy-initiated attacks against  the coalition and its Iraqi partners have continued to increase during 2006.  For example, the average total attacks per day increased from about  70 per day in January 2006 to about 180 per day in October 2006. In  December 2006, the attacks averaged about 160 per day. These attacks  have increased around major religious and political events, such as  Ramadan and elections. Coalition forces are still the primary target of  attacks, but the number of attacks on Iraqi security forces and civilians  also has increased since 2003. In October 2006, the State Department  reported that the recent increase in violence has hindered efforts to  engage with Iraqi partners and shows the difficulty in making political and  economic progress in the absence of adequate security conditions.
Further, because of the level of violence in Iraq, the United States has not  been able to draw down the number of U.S. forces in Iraq as early as  planned. For example, after the increase in violence and collapse of Iraqi  security forces during the spring of 2004, DOD decided to maintain a force  level of about 138,000 troops until at least the end of 2005, rather than  reducing the number of troops to 105,000 by May 2004, as had been  announced the prior fall. Subsequently, DOD reversed a decision to  significantly reduce the U.S. force level during the spring of 2006 because  Iraqi and coalition forces could not contain the rapidly escalating violence  that occurred the following summer. Moreover, rather than moving out of  urban areas, U.S. forces have continued to conduct combat operations in  Baghdad and other cities in Iraq, often in conjunction with Iraqi security  forces. As you know, DOD is in the process of providing additional forces  to help stem violence in Iraq.
Understanding the true capabilities of the Iraqi security forces is essential  for the Congress to make fully informed decisions in connection with its  authorization, appropriations, and oversight responsibilities. DOD and  State provide Congress with weekly and quarterly reports on the progress  made in developing capable Iraqi security forces and transferring security  responsibilities to the Iraqi army and the Iraqi government. This  information is provided in two key areas: (1) the number of trained and  equipped forces, and (2) the number of Iraqi army units and provincial  governments that have assumed responsibility for security of specific  geographic areas.
The aggregate nature of these reports, however, does not provide  comprehensive information on the capabilities and needs of individual  units. This information is found in unit-level Transition Readiness  Assessment (TRA) reports. The TRA is a joint assessment, prepared  monthly by the unit’s coalition commander and Iraqi commander.  According to Multinational Force-Iraq guidance, the purpose of the TRA  system is to provide commanders with a method to consistently evaluate  units; it also helps to identify factors hindering unit progress, determine  resource shortfalls, and make resource allocation decisions. These reports  provide the coalition commander’s professional judgment on an Iraqi  unit’s capabilities and are based on ratings in personnel, command and  control, equipment, sustainment and logistics, training, and leadership.  These reports also serve as the basis for the Multinational Force-Iraq’s  determination of when a unit is capable of leading counterinsurgency  operations and can assume security responsibilities for a specific area.
DOD provided GAO with classified, aggregate information on overall  readiness levels for the Iraqi security forces—including an executive-level  brief—and information on units in the lead, but has not provided unit-level  reports on Iraqi forces’ capabilities. GAO has made multiple requests for  access to the unit-level TRA reports since January 2006. Nevertheless, as  of last week, DOD still had not provided GAO unit-level TRA data, thereby  limiting oversight over the progress achieved toward a critical objective.
section_title: The Iraqi Government Currently Lacks the Capacity to Sustain and Continue Reconstruction and Security Efforts
paragraphs: While the United States has spent billions of dollars rebuilding the  infrastructure and developing Iraqi security forces, U.S. and World Bank  assessments have found that the Iraqi government’s ability to sustain and  maintain reconstruction efforts is hindered by several factors, including  the lack of capacity in Iraq’s key ministries and widespread corruption,  and the inability of the Iraqi government to spend its 2006 capital budget  for key infrastructure projects.
subsections: section_title: Despite Some Progress, Concerns about Ministries’ Capacity and Widespread Corruption Hinder Reconstruction Efforts
paragraphs: The United States has invested about $14 billion to restore essential  services by repairing oil facilities, increasing electricity generating  capacity, and restoring water treatment plants. For example, the U.S.  Army Corps of Engineers reported that it had completed 293 of   523 planned electrical projects, including the installation of 35 natural   gas turbines in Iraqi power generation plants. Additionally, reconstruction  efforts have rebuilt or renovated schools, hospitals, border forts, post  offices, and railway stations. Despite these efforts, a considerable amount  of planned reconstruction work is not yet completed. DOD estimated that  as of October 8, 2006, about 29 percent of the planned work remained to  be completed, including some work that will not be completed until mid-  to late 2008.
The Iraqi government has had difficulty operating and sustaining the aging  oil infrastructure and maintaining the new and rehabilitated power  generation facilities. For example,  Iraq’s oil production and exports have consistently fallen below their  respective program goals. In 2006, oil production averaged 2.1 million  barrels per day, compared with the U.S. goal of 3.0 million barrels per  day. The Ministry of Oil has had difficulty operating and maintaining  the refineries. According to U.S. officials, Iraq lacks qualified staff and  expertise at the field, plant, and ministry levels, as well as an effective  inventory control system for spare parts. According to the State  Department, the Ministry of Oil will have difficulty maintaining future  production levels unless it initiates an ambitious rehabilitation  program. In addition, oil smuggling and theft of refined oil products  have cost Iraq substantial resources.
In 2006, electrical output reached 4,317 megawatts of peak generation  per day, falling short of the U.S. goal of 6,000 megawatts. Prewar  electrical output averaged 4,200 megawatts per day. Production also  was outpaced by increasing demand, which has averaged about  8,210 megawatts per day. The Iraqi government has had difficulty  sustaining the existing facilities. Problems include the lack of training,  inadequate spare parts, and an ineffective asset management and parts  inventory system. Moreover, plants are sometimes operated beyond  their recommended limits, resulting in longer downtimes for  maintenance. In addition, major transmission lines have been  repeatedly sabotaged, and repair workers have been intimidated by  anti-Iraqi forces.
In part, these shortfalls can be traced to the lack of capacity within Iraq’s  central government ministries. Iraqi government institutions are  undeveloped and confront significant challenges in staffing a competent,  non-aligned civil service; using modern technology and managing  resources effectively; and effectively fighting corruption. According to U.S.  and World Bank assessments, ministry personnel are frequently selected  on the basis of political affiliation rather than competence or skills, and  some ministries are under the authority of political parties hostile to the  U.S. government. The Iraqi ministries also lack adequate technology and  have difficulty managing their resources and personnel. For example, the  World Bank reports that the Iraqi government pays salaries to nonexistent,  or ghost, employees that are collected by other officials. According to U.S.  officials, 20 to 30 percent of the Ministry of Interior staff are ghost  employees.
Further, corruption in Iraq is reportedly widespread and poses a major  challenge to building an effective Iraqi government and could jeopardize  future flows of needed international assistance. For example, a World  Bank report notes that corruption undermines the government’s ability to  make effective use of current reconstruction assistance. A 2006 survey by  Transparency International ranked Iraq’s government as the second most  corrupt government in the world. Moreover, between January 2005 and  August 2006, 56 officials in Iraq’s ministries were either convicted of  corruption charges or subject to arrest warrants.
According to U.S. government and World Bank reports, the reasons for  corruption in the Iraqi ministries are several, including the following:  the absence of an effective Iraqi banking system leaves the government  dependent on cash transactions;  the majority of key Iraqi ministries have inadequately transparent,  obsolete, or ambiguous procurement systems; and    key accountability institutions, such as the inspectors general who  were installed in each Iraqi ministry in 2004, lack the resources and  independence to operate effectively and consistently.
Corruption is also pervasive in the oil sector, a critical source of revenue  for the Iraqi government. In 2006, the World Bank and the Ministry of Oil’s  Inspector General estimated that millions of dollars of government  revenue is lost each year to oil smuggling or diversion of refined products.  According to State Department officials and reports, about 10 percent to  30 percent of refined fuels is diverted to the black market or is smuggled  out of Iraq and sold for a profit. According to U.S. embassy documents, the  insurgency has been partly funded by corrupt activities within Iraq and  from skimming profits from black marketers. In addition, Iraq lacks fully  functioning meters to measure oil production and exports, precluding  control over the distribution and sale of crude and refined products.
section_title: Iraq Has Spent Little of Its Annual Capital Budget to Help Support Reconstruction Efforts
paragraphs: Sound government budgeting practices can help determine the priorities  of the new government, provide transparency on government operations,  and help decision makers weigh competing demands for limited resources.  However, unclear budgeting and procurement rules have affected Iraq’s  efforts to spend capital budgets effectively and efficiently, according to  U.S. officials. The inability to spend the funds raises serious questions for  the government, which has to demonstrate to skeptical citizens that it can  improve basic services and make a difference in their daily lives. The U.S.  government has launched a series of initiatives in conjunction with other  donors to address this issue and improve the Iraqi government’s budget  execution.
When the Iraqi government assumed control over its finances in 2004, it  became responsible for determining how more than $25 billion annually in  government revenues would be collected and spent to rebuild the country  and operate the government. Unclear budgeting and procurement rules  have affected Iraq’s efforts to spend capital budgets effectively and  efficiently, according to U.S. officials. As of August 2006, the government  of Iraq had spent, on average, 14 percent of its 2006 capital projects budget  (Iraq’s fiscal year begins on January 1 of each year). Some of the lowest  rate of spending occurs at the Ministry of Oil, which relies on damaged  and outdated infrastructure to produce the oil that provides nearly all of  the country’s revenues (see table 1).
Since most of the $34.5 billion in reconstruction funds provided between  fiscal years 2003 and 2006 have been obligated, unexpended Iraqi funds  represent an important source of additional financing. The capital goods  budgets of the Interior and Defense ministries were intended for the  purchase of weapons, ammunition, and vehicles, among other items.  However, as of August 2006, Interior and Defense had spent only about   11 percent and 1 percent, respectively, of these budgeted funds.
Further, according to U.S. and foreign officials, the ability of the Iraqi  government to fund improvements in its oil and electricity sectors remain  uncertain. For example, the Ministry of Oil has had difficulty operating and  maintaining its aging infrastructure, including some refineries originally  constructed in the 1950s, 1960s, and 1970s. While the Ministry of Oil’s  $3.5 billion 2006 capital project’s budget targeted key enhancements to the  country’s oil production, distribution, and export facilities, as of August  2006, the ministry had spent less than 1 percent of these budgeted funds.
Similarly, Iraq’s electricity sector suffers from deteriorated, outdated, and  inefficient infrastructure resulting from two decades of underinvestment  in operations and maintenance, replacement, and expansion. This  weakened infrastructure has led to unplanned outages. Despite the  Ministry of Electricity’s recent development of a 10-year master plan,  Iraq’s ability to fund improvements in its electricity sector remains  uncertain. This uncertainty is due to low electricity tariffs, uncertain donor  commitments, and according to a World Bank assessment, an inadequate  legal and regulatory framework.
section_title: Concluding Observations
paragraphs: As I have discussed today, there are a number of conditions that exist in  Iraq that have led to, or will lead to, increased risk of fraud, waste, and  abuse of U.S. funds. DOD’s extensive reliance on contractors to undertake  reconstruction projects and provide support to deployed forces requires  DOD to address long-standing challenges in an aggressive, effective  manner. This reliance raises a broader question as to whether DOD has  become too dependent on contractors to provide essential services  without clearly identifying roles and responsibilities, and employing  appropriate oversight and accountability mechanisms.
Continuing reconstruction progress will require overall improvement in  the security situation in Iraq. To do so, Iraqi security forces and provincial  governments must be in a position to take responsibility for the security of  their nation. At this time, their capacity to do so is questionable.  Furthermore, the U.S. and the international community will need to  support the Iraqi government’s efforts to enhance its capacity to govern  effectively and efficiently if it is to make a positive difference in the daily  lives of the Iraqi people.
Mr. Chairman, this concludes my statement. I would be pleased to answer  any questions that you or other members may have at this time.
section_title: GAO Contacts and Acknowledgments
paragraphs: For questions regarding this testimony, please call Katherine V. Schinasi at  (202) 512-4841. Other contributors to this statement were Ridge Bowman,  Daniel Chen, Joseph Christoff, Carole Coffey, Lynn Cothern, Timothy  DiNapoli, Whitney Havens, John Hutton, John Krump, Steve Lord, Steve  Marchesani, Tet Miyabara, Judy McCloskey, Mary Moutsos, Ken Patton,  Jim Reynolds, and William Solis.
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