Iraq Reconstruction: Better Data Needed to Assess Iraq's Budget Execution
Published: 2008-01-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The President's New Way Forward in Iraq identified Iraq's inability to spend its resources to rebuild infrastructure and deliver essential services as a critical economic challenge to Iraq's self-reliance. Further, Iraq's ability to spend its $10.1 billion capital projects budget in 2007 was one of the 18 benchmarks used to assess U.S. progress in stabilizing and rebuilding Iraq. This report (1) examines data the U.S. embassy used to determine the extent to which the government of Iraq spent its 2007 capital projects budget, (2) identifies factors affecting the Iraqi government's ability to spend these funds, and (3) describes U.S. government efforts to assist the Iraqi government in spending its capital projects funds. For this effort, GAO reviewed Iraqi government budget data and information on provincial spending collected by the U.S. Provincial Reconstruction Teams. GAO also interviewed officials from the departments of the Treasury, Defense, State, and other agencies and organizations.
section_title: What GAO Found
paragraphs: U.S. and Iraq reports show widely disparate rates for Iraqi government spending on capital projects. Accordingly, GAO cannot determine the extent to which the Iraqi government is spending its 2007 capital projects budget. In its September 2007 Iraqi benchmark assessment, the administration reported that Iraq's central government ministries had spent 24 percent of their 2007 capital projects budget, as of July 15, 2007. However, this report is not consistent with Iraq's official expenditure reports, which show that the central ministries had spent only 4.4 percent of their investment budget as of August 2007. The discrepancies between the official and unofficial data highlight uncertainties about the sources and use of Iraq's expenditure data. The government of Iraq faces many challenges that limit its ability to spend its capital project budget. Violence and sectarian strife delay capital budget execution by increasing the time and cost needed to implement contracts. Recent refugee flows and the de-Ba'athification process have contributed to the exodus of skilled labor from Iraq. In addition, U.S. and foreign officials also noted that weaknesses in Iraqi procurement, budgeting, and accounting procedures impede completion of capital projects. For example, according to the State Department, Iraq's Contracting Committee requires about a dozen signatures to approve projects exceeding $10 million, which slows the process. U.S. agencies have undertaken a variety of programs to help Iraq execute its capital projects budget, although it is not clear what impact these efforts have had to date. U.S. agencies supported new efforts in 2007 targeting Iraq's ability to spend capital budget funds, including an office to provide procurement assistance to ministries and provinces and a new position in the U.S. Embassy to coordinate with senior Iraqi government officials on budget execution and oversee related U.S. assistance efforts. In addition, improving Iraqi government budget execution is part of a broader U.S. assistance effort to improve the capacity of the Iraqi government. For example, the U.S. Agency for International Development (USAID) has trained 500 ministry officials in procurement or budget execution. USAID also led an effort to implement an automated financial management information system for the Iraqi government, although this program was suspended in June 2007 following the kidnapping of five contractors involved in the project. In addition, U.S. advisors work directly with key Iraqi ministries to assist with budget execution and procurement, among other responsibilities.

section_title: Letter
paragraphs: The President’s February 2007 New Way Forward strategy for Iraq  identified Iraq’s inability to spend its resources to rebuild infrastructure  and deliver essential services as a critical economic challenge to Iraq’s  self-reliance. Further, the allocation and expenditure of Iraq’s $10.1 billion  capital projects budget in 2007 was 1 of the 18 benchmarks used to assess  U.S. progress in stabilizing and rebuilding Iraq. Iraqi government funds are  a necessary source of financing for Iraq’s rebuilding effort, particularly  because the United States has obligated most of the $40 billion it has  provided to Iraq for reconstruction since 2003. However, the government  of Iraq has had difficulty spending its resources on capital projects.
This report (1) examines data used by the U.S. embassy in Baghdad to  determine the extent to which the government of Iraq has spent its $10.1  billion capital projects budget for 2007, (2) identifies factors affecting the  Iraqi government’s ability to spend these funds, and (3) describes U.S.  government efforts to assist the Iraqi government in spending its capital  projects funds.
To address these objectives, we analyzed reports and interviewed officials  in Washington, D.C., and Baghdad from the departments of State (State),  Defense (DOD), and the Treasury (Treasury); the U.S. Agency for  International Development (USAID); the Economic Affairs Section of the  U.S. Embassy in Baghdad; and consultants under contract with the United  Kingdom’s Department of International Development. We reviewed Iraqi  Ministry of Finance capital projects budget and expenditure data for fiscal  years 2006 and 2007, which were provided by Treasury and the U.S.  Embassy in Baghdad. We also reviewed information on provincial  spending collected by the U.S. Provincial Reconstruction Teams (PRT)  and reported by the U.S. Embassy in Baghdad. We conducted this  performance audit from April 2007 through December 2007 in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives. A detailed description of our scope and methodology is  included in appendix I of this report. Due to broad congressional interest  in this issue, we performed our work under the authority of the  Comptroller General of the United States to conduct reviews on his own  initiative.
subsections: section_title: Background
paragraphs: The United States, along with its coalition partners and various  international organizations and donors, have made significant efforts to  rebuild Iraq’s infrastructure and the capacity of its personnel. The United  States alone has provided more than $40 billion since 2003, most of which  has been obligated. The February 2007 U.S. strategy, The New Way  Forward in Iraq, emphasizes a transition of responsibility for  reconstruction to the Iraqi government.
Iraq’s national government was established after a constitutional  referendum in October 2005, followed by election of the first Council of  Representatives (Parliament) in December 2005, and the selection of the  first Prime Minister, Nuri Kamal al-Maliki, in May 2006. By mid-2006, the  cabinet was approved; the government now has 34 ministries responsible  for providing security and essential services—including electricity, water,  and education—for the Iraqi people.
Iraq’s Ministry of Finance plays the key role in developing, analyzing, and  executing the budget, including distributing funds to individual spending  units, and preparing periodic financial reports. Iraq’s financial  management law directs the Ministry of Finance to consult with the  Ministry of Planning and Development Cooperation in establishing budget  funding priorities. Individual Iraqi spending units in the 34 central  government ministries, the 15 provinces, and the Kurdistan region provide  expenditure estimates to the Ministry of Finance. The Ministry of Finance,  in consultation with the Ministry of Planning, uses this information to  develop the budget and submits the draft budget to the Council of  Ministers for approval before submitting it to the National Assembly for  final approval. The Ministry of Planning is responsible for centralized  project management support, including review and analysis of capital  project plans and monitoring of contractor performance.
As we reported in September 2007, the government of Iraq spent only 22  percent of its $6.2 billion capital projects budget in 2006 for the central  government and Kurdistan (see fig. 1). The provinces received about $2  billion in 2006 funds for infrastructure and reconstruction projects, but  these funds were included in the budget as transfers, rather than as part of  the capital projects budget.
section_title: Extent of Iraqi Capital Project Spending in 2007 Cannot Be Determined Due to Conflicting Data
paragraphs: The government of Iraq’s fiscal year 2007 budget allocates $10.1 billion for  capital projects, including $6.4 billion for use by central government  ministries, $2.1 billion for use by the provinces, and $1.6 billion for use by  the semiautonomous Kurdistan region. However, we cannot determine  the extent to which Iraq has spent these funds due to conflicting  expenditure data. The U.S. government’s September 2007 benchmark  report, citing unofficial Ministry of Finance data, stated that Iraqi  ministries had spent 24 percent of their capital projects budgets, as of July  15, 2007. However, according to official Ministry of Finance expenditure  data, Iraqi ministries had spent only 4.4 percent of their budgets for  “nonfinancial assets,” or investment, as of August 31, 2007. Capital projects  represent almost 90 percent of the investment budget, which combines  capital projects and capital goods. In addition, the administration has  relied on unofficial PRT data to track the provinces’ spending on capital  projects and has reported the level of funds that the provinces have  committed to projects as an indicator of spending. However, provinces  had spent only 12 percent of their 2007 funds, as of October 2007,  according to PRT reporting.
subsections: section_title: U.S. and Iraqi Reports Show Differing Spending Rates
paragraphs: Citing unofficial Ministry of Finance data, the administration’s September  2007 Benchmark Assessment Report stated that the Iraqi ministries had  spent 24 percent of their capital projects budgets, as of July 15, 2007. The  report concluded from these data that the government of Iraq is becoming  more effective compared with 2006 in spending its capital projects budget.  However, the unofficial data on percent of budget spent are significantly  higher than official Iraqi expenditure data indicate. According to official  reporting by the Ministry of Finance, as of August 31, 2007, Iraqi ministries  spent only 4.4 percent of their 2007 investment budget (most of which is  for capital projects). Table 1 compares the two sets of data.
Although the 2007 Iraq budget has separate categories for capital goods  and capital projects, the Iraqi government’s official expenditure data do  not break out capital projects expenditures separately in 2007. To comply  with new International Monetary Fund (IMF) budget classification  requirements in 2007, the Iraqi government reports capital expenditures  together under the heading of “nonfinancial assets,” which we refer to as  investment in table 1. Capital projects represent almost 90 percent of the  investment budget, combining capital projects and capital goods.  Appendix II provides further analysis of 2007 Ministry of Finance  expenditure data and comparable 2006 data.
In reviewing our draft report, Treasury officials stated that our official  figure of 4.4 percent excluded capital project spending found in other  budget categories. However, Treasury could provide no documentation  that would allow us to verify whether, or the extent to which this occurs.  State Department made similar comments in reviewing our report.  However, State was unable to provide us with supporting documentation  and referred us to the Department of Treasury. Also, Treasury officials  noted that the higher figure of 24 percent capital project spending could  include commitments in addition to actual expenditures.
The Ministry of Oil represents the largest share (24 percent) of the Iraqi  government’s capital projects budget in 2007. According to the unofficial  data reported by the U.S. administration, as of July 15, 2007, the Ministry  of Oil spent $500 million on capital projects, which is 21 percent of the  ministry’s $2.4 billion capital projects budget. This reported level of  spending has already surpassed the ministry’s total for 2006; however, it is  not consistent with the much lower level of spending reflected in official  Ministry of Finance data through August (see table 1). According to the  Special Inspector General for Iraq Reconstruction (SIGIR), U.S. officials  stated that the ministry may not have spent all of these funds but instead  shifted them to subsidiaries such as the State Oil Marketing Organization,  which have responsibility for spending much of the oil ministry’s capital  projects budget.
section_title: U.S. Administration Relies on Unofficial PRT Data to Track Provincial Spending
paragraphs: The Iraqi government provided $2.1 billion, or over 20 percent of the 2007  capital projects budget, to the provinces (not including the  semiautonomous Kurdistan region), in amounts proportional to their  populations. These funds are in addition to approximately $2 billion in  2006 provincial funds, most of which had not been transferred to the  provinces until November and December of 2006. Because of the late  transfer, the provinces were permitted to carry over unspent 2006 funds.  Additionally, the semiautonomous Kurdistan region received a separate  2007 budget allocation of $1.6 billion, or 16 percent of the total 2007  capital projects budget.
To track capital projects budget execution by the provinces, the  administration uses unofficial commitment and expenditure information  collected by PRTs. The administration’s September 2007 benchmark  report cited PRT commitment data as an indicator of successful budget  execution by the provinces. The September report stated that provinces  committed almost half of their 2007 capital projects budgets. However, the  extent to which committed funds indicate actual spending is unknown.  Given the capacity and security challenges currently facing Iraq, many  committed contracts may not be executed and would not result in actual  expenditures, according to U.S. agency officials. According to PRT  reporting, the provinces committed 58 percent of their 2007 budget but  had spent only 12 percent as of October 21, 2007. (For additional analysis  of PRT data, see app. III.) U.S. officials noted that the provinces are still  spending the 2006 funds they were permitted to carry over, which  contributes to the low expenditure rate in 2007. Ultimately, actual  spending by the provinces should be reflected in official 2007 expenditure  data reported by the Ministry of Finance.
section_title: The Government of Iraq Faces Many Challenges in Attempting to Spend Its Capital Projects Budget
paragraphs: U.S. government, coalition, and international agencies have identified a  number of factors that challenge the Iraqi government’s efforts to fully  spend its budget for capital projects. First, Treasury officials noted that  violence and sectarian strife can delay capital budget execution by  increasing the time and cost needed to award and monitor contracts, and  by reducing the number of contractors willing to bid on projects. Second,  these officials stated that recent refugee outflows and the de- Ba’athification process have reduced the number of skilled workers  available and contributed to the exodus of Iraq’s professional class from  the country. Third, U.S. and foreign officials also noted that weaknesses in  Iraqi procurement, budgeting, and accounting procedures impede  completion of capital projects.
subsections: section_title: Violence and Sectarian Strife Hinder Budget Execution for Capital Projects
paragraphs: U.S., coalition, and international officials noted that violence and sectarian  strife remain major obstacles to developing Iraqi government capacity,  including its ability to execute budgets for capital projects. The high level  of violence has contributed to a decrease in the number of workers  available and can increase the amount of time needed to plan and  complete capital projects. The security situation also hinders U.S.  advisors’ ability to provide the ministries with assistance and monitor  capital project performance.
Violence and sectarian strife have reduced the pool of available talent to  budget and complete capital projects and, in many cases, have increased  the time needed to complete projects. International officials noted that  about half of Iraqi government employees are absent from work daily; at  some ministries, those who do show up only work between 2 to 3 hours  per day for security reasons. U.S. and UN officials stated that, while the  Ministry of Planning has a relatively skilled workforce, the security  situation seriously hinders its ability to operate. These officials noted that  20 director generals (department heads or other senior officials) in the  ministry have been kidnapped, murdered, or forced to leave the ministry in  the 6 months prior to February 2007.
Numerous U.S. and coalition officials also stated that security concerns  delay the ability of advisors to provide assistance, noting that it is often  too dangerous for staff to provide training or monitor contract  performance. The high level of violence hinders U.S. advisors’ access to  their counterparts in the ministries and directly affects the ability of  ministry employees to perform their work. State and USAID efforts are  affected by the U.S. embassy restrictions imposed on their movement.  Embassy security rules limits, and in some cases bars, U.S. civilian  advisors from visiting the ministries outside the Green Zone. For example,  a former Treasury attaché noted that his team could not visit the Ministry  of Finance outside the Green Zone and thus had limited contact with  ministry officials. Further, USAID suspended efforts to complete the  installation of the Iraqi Financial Management Information System (IFMIS)  in May 2007 after five British contractors were kidnapped from the  Ministry of Finance.
section_title: Lack of Trained Personnel Hinders Capital Project Budgeting and Execution
paragraphs: U.S., coalition, and international agency officials have observed the  relative shortage of trained budgetary, procurement, and other staff with  technical skills as a factor limiting the Iraqis’ ability to plan and execute  their capital spending. The security situation and the de-Ba’athification  process have adversely affected available government and contractor  staffing. Officials report a shortage of trained staff with budgetary  experience to prepare and execute budgets and a shortage of staff with  procurement expertise to solicit, award, and oversee capital projects.  According to State and other U.S. government reports and officials, there  has been decay for years in core functions of Iraqi’s government capacity,  including both financial and human resource management.
Officials also state that today’s unsafe environment has resulted in a large  percentage of Iraq’s more skilled citizens leaving the country. According to  a UN report, between March 2003 and June 2007, about 2.2 million Iraqis  left the country, and about 2 million were internally displaced. The UN  also has estimated that at least 40 percent of Iraq’s professional class has  left the country since 2003. One Iraqi official complained that those leaving  the country tend to be from the educated and professional classes. As a  result, fewer skilled Iraqi workers outside the government are available to  bid on, design, and complete proposed capital projects.
Further, a 2006 Department of Defense (DOD) report stated that Iraq’s  government also confronts significant challenges in staffing a nonpartisan  civil service and addressing militia infiltration of key ministries. The report  noted that government ministries and budgets are sources of power for  political parties, which staff ministry positions with party cronies as a  reward for political loyalty. Some Iraqi ministries under the authority of  political parties hostile to U.S. goals use their positions to pursue partisan  agendas that conflict with the goal of building a government that  represents all ethnic groups. For example, until late April 2007, the  Ministries of Agriculture, Health, Civil Society, Transportation,  Governorate Affairs, and Tourism provided limited access to U.S. officials,  as they were led by ministers loyal to Muqtada al-Sadr, who has been  hostile to U.S. goals.
section_title: Procurement, Budgetary, and Accounting Weaknesses Impair Capital Budget Execution
paragraphs: Weak procurement, budgetary, and accounting systems are of particular  concern in Iraq because these systems must balance efficient execution of  capital projects while protecting against reported widespread corruption.  A 2006 survey of perceptions of corruption by Transparency International  ranked Iraq’s government as one of the most corrupt in the world. A  World Bank report notes that corruption undermines the Iraqi  governments’ ability to make effective use of current reconstruction  assistance. According to a State Department document, widespread  corruption undermines efforts to develop the government’s capacity by  robbing it of needed resources, some of which are used to fund  insurgency; by eroding popular faith in democratic institutions, perceived  as run by corrupt political elites; and by spurring capital flight and  reducing economic growth.
U.S. and international officials have cited many weaknesses in Iraqi  procurement procedures and practices. The World Bank found that Iraq’s  procurement procedures and practices are not in line with generally  accepted public procurement practices, such as effective bid protest  mechanisms and transparency on final contract awards. Iraqi procurement  laws and regulations are composed of a mixture of Saddam Hussein-era  rules, CPA Order 87 requirements, and recent Iraqi government budgetary  practices. The complexity of Iraq’s contracting regulations combined with  the inexperience of many new Iraqi officials has led to a pervasive lack of  understanding of these laws and regulations, according to State officials.  The Iraqi government has sponsored conferences on budget execution in  2007 to clarify budgeting and procurement rules and procedures and  issued regulations for implementing Order 87. However, laws and  regulations are still complex and are frequently confusing to implement in  practice, according to a Treasury official.
U.S., coalition, and international officials have identified difficulties in  complying with Iraqi procurement laws and regulations as a major  impediment to spending Iraqi capital project budgets. For example,  according to an Iraq Reconstruction Management Office (IRMO) official,  the Iraqi procurement process often requires a minimum of three bids  through a competitive bidding process. However, when less than three  technically qualified bids are received, all bids are thrown out and the  project cycles through a new round of bidding. The result has been fewer  bids submitted in subsequent rounds. In addition, Iraqi procurement  regulations require about a dozen signatures to approve oil and electricity  contracts exceeding $10 million, which also slows the process, according  to U.S. officials. Procurements over this amount must be approved by the  High Contracting Commission, chaired by the Deputy Prime Minister,  which causes further delays. U.S. advisors to the Ministry of Oil noted that  the $10 million threshold is far too low, given the size of infrastructure  projects in the energy sector. In June 2007, the Council of Ministers raised  the dollar thresholds for contracts requiring High Contracting Commission  approval from $10 million to $20 million for the Ministries of Defense,  Electricity, Oil, and Trade, and raised the level from $5 million to $10  million for other ministries. However, the embassy noted that the  increased thresholds may not improve budget execution without an  increase in the number of trained personnel or technical assistance from  the Ministry of Planning.
Other features in the Iraqi budgetary and accounting systems adversely  affect the tracking of capital projects spending. For example, government  spending on reconstruction projects is not coordinated with spending for  donor-financed projects, according to the World Bank. As a result,  significant donor-financed expenditures are not included in the budget. In  addition, according to U.S. officials, the budget is appropriated and  tracked at too high a level of aggregation to allow meaningful tracking of  decisions because multiple projects can be combined on a single line.  Reconciliation of budget accounts is often impossible as budget execution  reports are submitted late or with incomplete information. In addition, as  discussed earlier, in response to IMF requirements, the government of Iraq  began implementing a new budget classification and chart of accounts in  2007 that does not provide a separate breakout of capital projects  spending. Appendix II provides further analysis of 2007 Ministry of  Finance expenditure data and comparable 2006 data.
U.S. agencies, the World Bank, and independent auditors have reported a  number of serious internal control weaknesses in Iraqi government  accounting procedures. U.S. officials reported that the government of Iraq  uses a manual reporting system to audit expenditures, which does not  provide for real-time reports. According to a Treasury official, the Iraqi  government reports capital expenditures by ministry but not by specific  project, which limits its ability to track capital projects expenditures. The  World Bank reported that reconciliation of government of Iraq accounts is  impossible because the government lacks consolidated information on the  exact number of government bank accounts it has and the balances in  them. The World Bank also noted that provincial governments do not  provide an accounting of funds they receive. In addition, the independent  public accounting firm for the Development Fund for Iraq reported  numerous internal control weaknesses in Iraqi ministries for 2006,  including that Iraqi ministries do not have policies and procedures  manuals that detail comprehensive financial and internal controls. It also  reported that the ministries do not have unified procurement policies and  procedures, do not have proper project management and monitoring  systems, and lack written project management policies and procedures  manuals. Finally, the firm noted that the ministries’ internal audit  departments do not cover the operations of state-owned companies and  entities that are related to the ministries and that there are no proper  monitoring procedures over the operations of the related companies.
section_title: Several U.S. Assistance Efforts Are Under Way to Improve Iraqi Budget Execution
paragraphs: In early 2007, U.S. agencies increased the focus of their assistance efforts  on improving the Iraqi government’s ability to effectively execute its  budget for capital projects, although it is not clear what impact this  increased focus has had, given the inconsistent expenditure data  presented earlier in this report. Several new U.S. initiatives were  established targeting Iraqi budget execution, including coordination  between the U.S. embassy and an Iraqi task force on budget execution,  and the provision of subject-matter experts to help the government track  expenditures and to provide technical assistance with procurement.  According to U.S. officials, these targeted efforts also reflect an increased  interest of senior Iraqi officials in improving capital budget spending. In  addition, improving Iraqi government budget execution is part of a broader  U.S. assistance effort aimed at improving the capacity of the Iraqi  government through automation of the financial management system,  training, and advisors embedded with ministries.
We recently reported on U.S. efforts to build the capacity of Iraqi  ministries led by State, DOD, and USAID. The findings and  recommendations from that report also apply to assistance efforts  targeting Iraqi Budget Execution, which are a part of U.S. capacity- building efforts. Our report found that U.S. capacity building efforts in Iraq  faced several challenges that posed risks to their success. The report also  found that U.S. agencies implementing capacity development projects  have not developed performance measures for all of their efforts,  particularly outcome-related performance measures that would allow  them to determine whether U.S. efforts at the civilian ministries have  achieved both U.S.- and Iraqi-desired goals and objectives. The report  recommended that State, in consultation with the Iraqi government,  complete an overall capacity-building strategy that includes plans to  address risks and performance measures based on outcome metrics.
In early 2007, U.S. agencies began providing technical assistance and  coordination specifically targeted to addressing Iraq’s capital budget  expenditure bottlenecks. This assistance includes the following:    Coordinator for Economic Transition in Iraq. State established this  position in the U.S. Embassy in February 2007 to work with senior Iraqi  government officials and to coordinate with U.S. agencies that provide  assistance related to improving Iraq’s budget execution. The coordinator  participated in regular meetings of an Iraqi government budget execution  task force, which includes the Deputy Prime Minister and the Ministers of  Finance and Planning, to address impediments to spending the  government’s capital projects budget. The coordinator also worked with  the U.S. Treasury attaché to help the Iraqi government hold conferences  on budget execution to educate government officials about Iraqi budget  and procurement processes. According to a State official, the  responsibilities of this position were transferred to Ambassador Charles  Reis in June 2007, when he assumed responsibility for coordinating all  economic and assistance operations in the Embassy.
Budget Execution Monitoring Unit. The Iraq Reconstruction Management  Office supported the creation of this unit in the Deputy Prime Minister’s  office with four to six subject-matter experts to help assess budget  execution by collecting and aggregating spending data for key ministries  and provinces. The unit was established in spring 2007. State officials  noted that the Budget Execution Monitoring Unit tracks aggregate  spending by ministry. Although some ministries have demonstrated some  capability to track what projects are undertaken with capital projects  spending, the U.S. Embassy does not have a mechanism to track the  results of capital projects spending across all ministries and provinces,  according to State officials. Embassy officials and the Treasury Attaché  are analyzing how to help Iraqi ministries and provinces develop project  tracking tools.
Procurement Assistance Program. State and DOD provided funding for 10  to 12 international subject-matter experts to support this program within  the Ministry of Planning and Development Cooperation to help ministries  and provinces with procurement and capital budget execution, including  policy interpretation, training, acquisition consulting, and technical  assistance. The program was established in May 2007 and consists of two  Procurement Assistance Centers in Baghdad and one in Erbil. The  program is currently setting up 18 Provincial Procurement Assistance  Teams that will provide direct assistance to provincial officials.
In addition to these recently established efforts, which are specifically  designed to help the Iraqi government execute its capital projects budget,  several broader, ongoing capacity-building assistance efforts are under  way. These efforts include assistance related to budget execution,  although that is not their primary focus. These efforts include the  following:  Iraqi Financial Management Information System (IFMIS). USAID and  IRMO awarded contracts beginning in 2003 to BearingPoint to install a  Web-based financial management information system for the government  of Iraq to support a fully automated and integrated budget planning and  expenditure reporting and tracking system at the central and provincial  levels. The IMF has highlighted the importance of implementing IFMIS in  its reviews of Iraq’s progress toward meeting the terms of the IMF Standby  Agreement. However, according to USAID officials, the project  experienced significant delays, due in part to a lack of full support by Iraqi  government officials. USAID suspended assistance to the Ministry of  Finance to implement IFMIS in June 2007, following the kidnapping of five  BearingPoint employees. A USAID official stated that the Iraqi government  continues to rely on its legacy manual accounting system, which  contributes to delays in the government’s reporting of expenditure data. In  lieu of IFMIS, Treasury and USAID are now assisting provincial  governments with the use of inexpensive spreadsheet software to improve  their financial management capability, according to Treasury officials.
National Capacity Development Program. This USAID program is to  improve public administration skills at the ministerial level and has  provided training in a range of issues, including project management,  budgeting, fiscal management, leadership, and information technology. As  of October 2007, the program had trained more than 2,000 ministry  officials from 30 different Iraqi institutions since November 2006 when the  training program was first established, according to USAID officials. The  program has trained 500 Iraqi government officials specifically in  procurement, and 51 of the 500 completed the “Train the Trainers” course  to enable them to train additional ministry officials in procurement. USAID  officials also noted that the program includes imbedded teams at the  Ministry of Planning and Development Cooperation that are helping  ministries set up proper procurement units with procurement tracking  systems.
Local Governance Program. This program, operated under a USAID  contract, supports Iraq’s efforts to improve the management and  administration of local, municipal, and provisional governments.  According to USAID officials, this program includes several activities to  assist with provincial budget execution. These efforts include the  development of reference materials refreshed annually to reflect new  guidance by the Minister of Finance and Minister of Planning and  Development Cooperation; national and regional conferences that bring  together provincial council members, governors, and members of their  staffs to discuss provincial budget execution; and local staff in many  provincial government centers assisting with provincial budget execution,  as well as public finance advisors in some of the PRTs and at its Baghdad  headquarters.
Advisors to civilian and security ministries. These advisors assist in the  development of the ministries’ budget planning and contracting skills. As  of mid-2007, State and USAID were providing 169 advisors and subject- matter experts to civilian ministries to implement capacity development  projects and provide policy advice and technical assistance at key  ministries and government entities. In addition, DOD and Multinational  Security Transition Command-Iraq (MNSTC-I) provided 215 embedded  U.S. and coalition military and civilian advisors to the Ministries of Interior  and Defense; and a U.S. Treasury attaché advises the Ministry of Finance.  Treasury reports that it has completed four multiday budget execution  workshops in 2007 that have trained over 120 central ministry and  provincial government staff members, and it plans additional training for  January 2008.
The administration’s September 2007 Benchmark Assessment Report  concluded that the government of Iraq has steadily improved its ability to  execute capital projects spending, as a result of U.S. assistance efforts.  However, it is not clear what impact these efforts have had to date due to  limitations with available data, outlined earlier in this report, and because  much of this assistance specifically designed to improve budget execution  was established too recently for U.S. agencies to fully evaluate them.
section_title: Conclusion
paragraphs: To support continued economic growth and improve the delivery of  services, the government of Iraq needs to make significant investment in  its infrastructure. Such investments come from the government’s efficient  execution of its capital budget. The administration’s September 2007  Benchmark Assessment Report concluded that the government of Iraq had  steadily improved its ability to execute capital projects spending as a  result of U.S. technical assistance. However, the additional information  provided by Treasury and State in commenting on a draft of this report did  not reassure GAO that accurate and reliable data on Iraq’s budget exists.  State and Treasury continue to cite unofficial expenditure data to support  assertions that the government of Iraq is becoming more effective in  spending its capital project budget, even though the data differ  significantly from the official expenditure figures generated under a new  IMF-compliant chart of accounts. The discrepancies between the  unofficial and official data highlight the ambiguities about the extent to  which the government of Iraq is spending its resources on capital projects.  Thus, we do not believe these data should be used to draw firm  conclusions about whether the Iraqi government is making progress in  executing its capital projects budget. The lack of consistent and timely  expenditure data limits transparency over Iraq’s execution of its  multibillion dollar 2007 capital budget and makes it difficult to assess the  impact of U.S. assistance.
section_title: Recommendation
paragraphs: To help ensure more accurate reporting of the government of Iraq’s  spending of its capital projects budget, we recommend that the Secretary  of Treasury work with the government of Iraq and relevant U.S. agencies  to enhance the Treasury department’s ability to report accurate and  reliable expenditure data from the ministries and provinces. This reporting  should be based on the IMF-compliant standards rather than unofficial  data sources that are of questionable accuracy and reliability.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Departments of Defense, State, the  Treasury, and USAID. Treasury and State provided written comments,  which are reprinted in appendixes IV and V. Treasury, State, and USAID  also provided technical comments and suggested wording changes that we  incorporated as appropriate. DOD did not comment on the report.
Treasury and State raised several concerns in commenting on our draft  report. First, Treasury stated that our analysis of Iraq’s budget execution  was based on incomplete and unofficial reporting, in particular, the  unofficial July 15, 2007 data used to comply with a congressional reporting  requirement (the September 2007 Iraq Benchmark Assessment Report).  The administration highlighted this unofficial data in the September 2007  benchmark report to Congress to assert that Iraq’s central government and  provinces were becoming more effective at spending their capital budgets.  We do not believe these data should be used to draw firm conclusions  about the Iraqi government’s progress in spending its capital budget. We  agree that the unofficial data the administration used in the report to  Congress do not portray a full and accurate picture of the situation.  Accordingly, we compared these data with official Iraqi Ministry of  Finance data to assess the extent to which the Iraqis had spent their  capital projects budget. Since the spending gap between the  administration’s unofficial data and the Ministry of Finance’s official data  is strikingly large, we recommend that the Department of Treasury work  with the Ministry of Finance to reconcile these differences.
Second, Treasury stated that our report incorrectly concluded that capital  spending is only contained in the Iraqi budget item for “nonfinancial  assets” (which we refer to as “investment”). State made a similar  comment. Treasury and State asserted that capital spending is spread  through many chapters in the new chart of accounts and that the amount  is higher than the 4.4 percent cited in our report. However, State and  Treasury did not provide us with evidence to demonstrate which Iraqi  accounts included additional capital expenditures.
Third, Treasury questioned our comparison of 2006 and 2007 Iraqi  spending as displayed in appendix II. Treasury stated that it is misleading  to compare 2006 and 2007 spending levels because of changes in Iraqi  spending accounts between the 2 years. We added this note of caution to  appendix II. However, we also made adjustments to account for the  differences in the budget classification systems, thereby enabling valid  comparisons between 2006 and 2007 data. Table 4 outlines the key  differences in the 2006 and 2007 classification systems. After updating the  draft report with data through August 2007, budget execution ratios in  2007 are still lower in most cases than corresponding ratios in 2006. We  believe this analysis provides additional perspective on the comparisons  between 2006 and 2007 expenditures made in the administration’s  September 2007 Benchmark Assessment Report to Congress.
State also raised several concerns in commenting on a draft of this report.  First, State commented that the draft report fails to accurately portray the  “tangible progress” that the central government and provincial  governments have made in budget execution. State commented that this  progress represents a tangible example of Iraq’s leaders working together  successfully. However, we do not believe these data are sufficiently  reliable to conclude that U.S. assistance efforts have already achieved  success helping the Iraqi government execute its capital budget.
Second, State attributed the discrepancy between the official and  unofficial data cited in our report to “a time lag in data collection” and  asserted that the July 15 data are representative of the government of  Iraq’s performance as of the publication of the administration’s September  2007 Benchmark Assessment Report. After providing our draft report to  State for comment, we received updated data from Treasury that clearly  refutes State’s comment. These updated data show that the central  ministries spent 4.4 percent of their investment budget through August  2007, raising questions about the unofficial data reported to Congress in  the administration’s September 2007 benchmark report.
Finally, State commented that the amount of money committed and  dispersed in the provinces during 2007 is “especially impressive.”  However, as we noted in our report, commitments do not represent  expenditures. The absence of provincial spending data in official Ministry  of Finance reporting makes it difficult to determine the extent to which  the Iraqi government was spending its 2007 capital projects funds. As  Treasury noted in their comments, the official Ministry of Finance  reporting does not show provincial spending and is working to determine  the discrepancy.
We are sending copies of this report to interested congressional  committees. We will also make copies available to others on request. In  addition, this report is available on GAO’s Web site at http://www.gao.gov.  If you or your staffs have any questions concerning this report, please  contact me at (202) 512-8979 or christoffj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. Key contributors to this report are listed in  appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: In this report, we review the Iraq government’s progress in expending its  fiscal year 2007 capital projects budgets. Specifically, we (1) examine the  data the U.S. embassy uses to determine the extent to which the Iraqi  government has spent its 2007 capital projects budget, (2) identify factors  affecting the Iraqi government’s ability to spend these funds, and (3)  describe U.S. government efforts to assist the Iraqi government in  spending its capital projects funds. We undertook this review under the  Comptroller General’s authority to conduct reviews on his own initiative,  and in recognition of broad congressional interest in Iraq and the critical  importance of Iraqi capital expenditures in rebuilding its infrastructure.
To examine the data the U.S. Embassy in Baghdad uses to measure Iraqi  government spending, we obtained expenditure data from the U.S.  Department of the Treasury and the U.S. Embassy in Baghdad and  interviewed knowledgeable U.S. agency officials. We reviewed three  different sets of data on Iraqi government expenditures: official monthly  expenditure reports from the Ministry of Finance through August 2007;  unofficial Ministry of Finance data on expenditures by central ministries,  as of July 15, 2007; and U.S. Provincial Reconstruction Team (PRT) data  on expenditures by Iraq’s provincial governments, as of October 21, 2007.  The official Ministry of Finance expenditure reports reflected a much  lower rate of spending on capital projects than the unofficial Ministry of  Finance and unofficial PRT data showed. We did not independently verify  the precision of the data on Iraq’s budget execution. However, the  disparity between the different sets of data calls into question their  reliability and whether they can be used to draw firm conclusions about  the extent to which the Iraqi government has increased its spending on  capital projects in 2007, compared with 2006. We are presenting the PRT  data in appendix III for informational purposes, even though our field  work raised questions about their reliability. To obtain a better  understanding of Iraqi capital budget and spending data and Iraqi practices  in developing expenditure data, we interviewed U.S. officials with the  Departments of Defense (DOD), State (State), and the Treasury  (Treasury); and the U.S. Agency for International Development (USAID) in  Washington, D.C., and Baghdad. We also interviewed advisors to the  Ministry of Finance, working under a contract with the United Kingdom’s  Department for International Development. We also reviewed U.S.  embassy reports on Iraqi budget execution, Iraqi government instructions  for executing the budget, Iraq’s Financial Management Law, the Special  Inspector General for Iraq Reconstruction (SIGIR)’s July 2007 Quarterly  and Semiannual Report to the Congress, and the administration’s July and  September 2007 Benchmark Assessment Reports.
To examine the factors affecting the Iraqi government’s ability to spend its  capital projects budget, we reviewed and analyzed reports and interviewed  officials from DOD, State, Treasury, and USAID. We also interviewed  advisors to the Ministry of Finance, working under a contract with the  United Kingdom’s Department for International Development. We  interviewed these officials in Iraq over the telephone and visited Iraq in  July 2007. We also reviewed Iraq’s Financial Management Law and  relevant reports from the World Bank, the International Monetary Fund  (IMF), Ernst and Young, and SIGIR. In addition, we reviewed previous  GAO reports. We reviewed information provided in these interviews and  reports to identify the different factors affecting Iraq’s ability to spend its  capital projects budget.
To examine U.S. government efforts to assist the Iraqi government in  executing its capital projects budget, we interviewed officials from DOD,  State, Treasury, and USAID. We reviewed several U.S. government  documents, including State’s April 2007 quarterly section 1227 report to  Congress on the military, diplomatic, political, and economic measures  undertaken to complete the mission in Iraq;  DOD’s quarterly reports to  Congress, Measuring Security and Stability and Iraq, from November 2006  to September 2007; the USAID contract awarded in July 2006 to  Management Systems International, Inc., Building Recovery and Reform  through Democratic Governance National Capacity Development  Program; a status report on USAID’s implementation of the Iraqi Financial  Management Information System under the Economic Governance Project  II, and reports from USAID’s Iraq Local Governance Program.
We conducted this performance audit from April 2007 through December  2007 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comparison of Budget Execution during the First 8 Months of 2006 and 2007
paragraphs: Budget execution is a relative measure comparing actual expenditures to  the budget. Using the budget execution metric, the government spent 36  percent of its budget during the first 8 months of 2007, compared to 43  percent during the same period in 2006. Tables 2 and 3 provide a  breakdown of budget execution for the first 8 months of 2006 and 2007,  respectively. While we were not able to determine the reliability of these  official Iraqi expenditure data, we are presenting this analysis because it  raises additional questions about the data presented by the administration  in its September 2007 assessment of Iraqi benchmarks. Whereas the  unofficial Iraqi expenditure data cited by the administration suggest that  the Iraqi government has improved its ability to spend capital projects  funds in 2007, this analysis of official Iraqi expenditure reports suggests  the opposite.
To compare the 2006 and 2007 budgets, we combined various expenditure  categories into four groups. As explained in the report, beginning in 2007,  the Iraqi government adopted a new chart of accounts as recommended by  the IMF, which complicates efforts to compare 2006 with 2007. Column 1  in table 4 shows the nine categories of expenditures reported in 2006 and  their combination into the four groups presented in the table; column 2  shows the eight categories used in the 2007 chart of accounts.
The percentage of the budget expended as of August 31 is the ratio used to  measure budget execution for 2006 and 2007 in tables 1 and 2,  respectively. Only in the category of goods and services did budget  execution appear to increase, from 22 percent in 2006 to 27 percent in  2007. In general, the Iraqi ministries have compensated their employees.  However, even in that category, budget execution decreased from 65  percent in 2006 to 53 percent in 2007.
As mentioned previously, the expenditures for capital projects are no  longer reported as a separate category in official Ministry of Finance  accounts. The 2007 budget provides separate categories for capital goods  and capital projects. However, the reported expenditures in the category  nonfinancial assets, which we refer to as investment, combine capital  goods and capital projects. The capital projects budget of $10.1 billion  represents 88 percent of the combined investment category of $11.4  billion. The budget execution ratio of this investment category was 5  percent for the first 8 months of 2007, compared with 13 percent for the  first 8 months of 2006.
The expenditure performance of the Iraqi government from January  through August 2007 may even be worse than the dollar expenditure  figures suggest. The Ministry of Finance reports the government’s budget  and expenditures in its own currency Iraq dinars (ID). The U.S. Treasury  converts them to dollars using a budget exchange rate of ID 1,500 per  dollar in 2006 and ID 1,260 per dollar in 2007. The dollar value of  expenditures from January through August 2007 is 19 percent higher due  to the exchange rate conversion. Expenditures from January through  August 2007 were ID 18,600 billion or about 15 percent lower than the ID  21,900 billion spent over the same period in 2006.
section_title: Appendix III: Provincial Reconstruction Team Data on Provinces’ Spending of 2006 and 2007 Capital Projects Funds
paragraphs: Table 5 and table 6 provides additional details on provincial capital  projects budgets, by allocations, committed funds, and spent funds, for  2006 and 2007, as of October 21, 2007. These funding levels are based on  data collected and reported by U.S.-led PRTs. Because the government of  Iraq only reports provincial spending in the aggregate, the embassy relies  on PRT data to track provincial capital projects spending. We are  presenting the PRT data for informational purposes, even though our field  work raised questions about their reliability.
section_title: Appendix IV: Comments from the Department of the Treasury
section_title: Appendix V: Comments from the Department of State
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition, Steve Lord, Acting Director; Lynn Cothern; Howard Cott;  Martin De Alteriis; Timothy Fairbanks; Victoria H. Lin; Bruce Kutnick; Mary  Moutsos, and Sidney Schwartz made key contributions to this report.