Iraqi-U.S. Cost-Sharing: Iraq Has a Cumulative Budget Surplus, Offering the Potential for Further Cost-Sharing
Released: 2010-09-13T00:00:00

Letter

Background

In August 2008, GAO reported on the challenges that the Iraqi government faced in spending resources to finance key reconstruction and stabilization efforts, including those to develop Iraq’s security forces. We also reported that from January 2005 through April 2008, Iraq’s Ministries of Defense and Interior reported spending $2.9 billion of the $12.3 billion they were budgeted for investment expenditures in support of the Iraqi security forces. Iraq and other countries use the DOD-administered FMS program to purchase defense articles, services, and training from the U.S. government. In fiscal year 2009, more than 100 foreign governments spent $38.1 billion through the FMS program.

According to State and DOD officials, the United States and Iraq have not yet defined their longer-term security relationship. However, the United States and Iraq signed two bilateral agreements in November 2008 that set the stage for Iraq to assume a greater role in providing for its own security and for cooperation between the two countries. The U.S.-Iraq Security Agreement requires the withdrawal of U.S. forces in Iraq by December 31, 2011, and governs their presence in the interim. Within the security agreement, the Iraqi government requests the temporary assistance of U.S. forces to support its efforts to maintain security and stability in Iraq. According to DOD and State officials, the U.S. and Iraqi governments may amend the security agreement by mutual agreement. Such amendments could include an extension of the withdrawal timetable or an authorization of a residual U.S. force to continue training the Iraqi security forces after 2011.

Historically, Congress and U.S. agencies have sought to encourage host nation contributions for U.S. security support activities worldwide. (See app. IV for more information on cost-sharing with other countries for security support activities.) For example, Congress authorized the Secretary of Defense, in consultation with the Secretary of State, to accept contributions from host countries to share in the cost of DOD construction, supplies, and services in the country. Moreover, it is DOD policy to offset the administrative and operating expenses of security support activities to the maximum extent feasible through host country contributions. The Secretary of Defense also provided an annual report to Congress through 2004—under legislative provisions dating back to th Defense Authorization Act of 1981 and in more recent defense authorizations—that compared the defense costs borne by the United States, allies, and partner nations. In these reports, DOD officials stated that they would urge allied and partner nations to increase their cost- sharing contributions.

Iraq’s Estimated Actual and Available Cumulative Budget Surplus through the End of 2009

Iraq generated an estimated cumulative budget surplus of $52.1 billion through 2009, according to GAO’s analysis of data provided by the Iraqi government. Adjusting for $40.3 billion in advances that were outstanding as of September 2009 reduces the amount of available surplus to $11.8 billion. Iraq’s Board of Supreme Audit has highlighted weaknesses in Iraq’s accounting for a large and growing amount of advances. Under an arrangement with the IMF, Iraq is conducting a review of its outstanding advances to identify funds that may be available for government spending.

Iraq Generated an Estimated $52.1 Billion Cumulative Budget Surplus through 2009

A key indicator of a government’s fiscal condition is its annual budget surplus or deficit, measured primarily on a cash basis. According to Iraq’s Board of Supreme Audit, the tracking of revenues and expenditures using Iraq’s amended cash accounting is an important tool for fiscal planning and oversight of budget execution. GAO’s analysis of Iraqi data indicated that Iraq’s revenues exceeded expenditures through the end of 2009, resulting in an estimated cumulative budget surplus of $52.1 billion (see table 1). We calculated this estimate by adding (1) Iraq’s cumulative budget surpluses through the end of 2004, as reported by the Board of Supreme Audit; (2) Iraq’s reported annual surpluses from 2005 through 2008; and (3) an estimated $2.2 billion Iraqi budget surplus through December 2009. The cumulative budget surplus in table 1 differs from the sum of all annual surpluses due to the appreciation of the Iraqi dinar (see table 1 note). Table 1 shows that Iraq’s reported revenues and expenditures increased through 2008, particularly during the rapid increase in oil prices in 2008. (See app. II for more information on Iraq’s oil revenues.)

We estimated Iraq’s budget surpluses through the end of 2009 on the basis of revenue and expenditure data obtained from the Ministry of Finance. For 2005 through 2007, we based our analysis of Iraq’s revenues and expenditures on the Board of Supreme Audit’s reports on the annual financial statements of the Iraqi government, which the Ministry of Finance provided to us. For 2008, we based our analysis of revenues and expenditures on the final accounts for the Iraqi government, which the Ministry of Finance submitted to the Board of Supreme Audit for review and subsequently provided to us. For 2009, we based our analysis on monthly revenue and expenditure data obtained from the Ministry of Finance through Treasury. We based budget surpluses accumulated before 2005 on data included in the Board of Supreme Audit’s report on the government’s 2005 financial statements.

According to the Ministry of Finance, Outstanding Advances Reduce Iraq’s Available Surplus

During April 2010, a senior Ministry of Finance official stated that funds the ministry categorizes as “advances” are encumbered or have been paid out. This official stated that we should therefore deduct these funds from the cash surplus to more accurately represent funds available to the government for future uses. He stated that advances include funds set aside for FMS purchases and letters of credit as well as advance payments to contractors. Our analysis of data provided by the Ministry of Finance showed that the Iraqi government recorded about $40.3 billion in outstanding advances as of September 2009. Deducting these funds reduces Iraq’s available surplus to about $11.8 billion. Prior to February 2010, data provided to us by the Ministry of Finance through Treasury had not included any information on advances.

Our analysis of Ministry of Finance data indicated that outstanding advances have grown considerably over time (see fig. 1).

According to the Board of Supreme Audit report on Iraq’s 2005 financial accounts, Iraq had about $6.4 billion in outstanding advances through the end of 2004. By September 2009, the amount of outstanding advances had grown to more than $40.0 billion, according to Iraqi government data. The largest increase in the amount of outstanding advances occurred between the end of 2007 and September 2009. Outstanding advances more than doubled over this period from $16.7 billion to $40.3 billion.

Questions Remain about the Accounting for and Composition of Advances

The Board of Supreme Audit has noted weaknesses in Iraq’s accounting for advances. In a March 2009 report on Iraq’s 2005 financial accounts, the board stated that a failure to settle advances at the end of the fiscal year had resulted in inaccurate expenditure data and created difficulty in settling these increasingly large advances over time. The report also stated that the Iraqi government had failed to comply with legal requirements and regulations in executing advances. In a September 2009 report on Iraq’s 2006 financial accounts, the board again expressed concern about the increase in the government’s use of advances. This 2009 report explained that the increase in advances could indicate weaknesses in the government’s follow-up procedures used to close out advances as expenditures, which could lead to inaccuracies in individual ministries’ expenditure reports. It also noted that advances could provide cover for ministries or other entities to exceed their budget allocations or to hide the misappropriation of government funds.

The composition of advances is unclear. A senior Ministry of Finance official stated that advances include funds set aside for FMS purchases and letters of credit as well as advance payments to contractors. In addition, the Board of Supreme Audit identifies 26 categories of advances. However, 40 percent of total outstanding advances through 2008 was categorized as “other temporary advances,” which are not fully defined (see app. III). Furthermore, the board does not include a category of advances that clearly identifies funds transferred for FMS purchases. We did not collect data on which ministries or other entities had received the advances, whether advances were intended for operating or investment activities, and the amount of advances that are recorded as expenditures annually. The senior Ministry of Finance official said that this type of information is housed at more than 250 government spending units in Iraq.

Moreover, as part of a $3.6 billion IMF arrangement approved in February 2010, Iraq agreed to reform various aspects of its public finance management system, including strengthening its accounting for advances. For example, Iraq agreed to strengthen reporting and cash management by requiring spending units to submit reports on all spending, including advances, no later than 2 months after the end of each month, and to reconcile these amounts with the cash balances at the beginning and end of the reporting period. Iraq also agreed to follow procedures for approving the release of cash to spending units as a way of reducing idle balances in spending units’ accounts to the minimum required for the continuity of government operations. Furthermore, Iraq agreed to prepare a report on its outstanding advances, identify advances that are recoverable, set a schedule for their recovery, and eventually write off advances that are deemed irrecoverable. Under the terms of the IMF arrangement, Iraq has committed to completing this report by September 30, 2010.

Iraq’s Budgets Have Been Unreliable Indicators of Iraq’s Year-end Fiscal Balances

GAO’s analysis of Iraqi financial data indicated that Iraqi budgets are unreliable indicators of the country’s fiscal balance at the end of each year. As depicted in figure 2, from 2005 through 2009 Iraq began each year with budgets that projected government spending would exceed government revenue by $3.5 billion (2005) to $15.9 billion (2009). If the government had spent funds in accordance with its budgets, and its revenue projections had proved accurate, the government would have generated more than $35 billion in cumulative deficits through the end of 2009. However, our analysis of Iraqi data showed that actual expenditures for the past 5 years have consistently fallen short of budget projections, while actual revenues, in general, have met or exceeded projections. On a cash accounting basis, Iraq generated budget surpluses in each year from 2005 through 2009, rather than the deficits projected by its budget. Finally, after adjusting for advances, Iraq generated budget surpluses from 2005 through 2007. In 2008 and 2009, Iraq produced adjusted deficits after deducting advances, but these deficits were less than one-half of the amounts that it projected in its budget.

In commenting on a draft of this report, DOD acknowledged that Iraq’s budgets serve as imperfect predictors of the country’s year-end fiscal balance. DOD noted that experience from 2008 and 2009 showed that actual deficits were about one-half of what was projected by the budget. Accordingly, DOD concluded that although Iraq budgeted for a $20 billion to $25 billion deficit in 2010, it is more likely that Iraq will generate a $8 billion to $10 billion deficit.

Iraq’s Financial Deposit Balances

Iraqi government data and an independent audit report show that, through the end of 2009, Iraq had accumulated between $15.3 billion and $32.2 billion in financial deposit balances held at the Central Bank of Iraq, the Development Fund for Iraq in New York, and state-owned banks in Iraq. This range does not include approximately $10 billion in JP Morgan Chase and Citibank accounts to cover Iraq’s letters of credit and about $3.2 billion in a Federal Reserve Bank of New York account for Iraq’s FMS purchases. The range reflects a discrepancy between the amount of government-sector deposits reported by the Central Bank of Iraq to the IMF and the amount that the Ministry of Finance asserts is available for government spending. In November 2009, the Ministry of Finance reclassified $16.9 billion held in state-owned banks as unavailable for government spending, stating that these funds belong to state-owned enterprises and government trusts, such as those that were established for orphans and pensioners. Therefore, according to the Ministry of Finance, only $15.3 billion of the $32.2 billion is unencumbered and available for spending. The IMF is seeking additional clarity on the amount of financial deposits that may be available for government spending.

Ministry of Finance Reclassified $16.9 Billion of $32.2 Billion in Deposits as Encumbered and Not Available to the Iraqi Government

Data from the Central Bank of Iraq and the International Advisory and Monitoring Board show that Iraq began 2010 with $32.2 billion in financial deposits held at state-owned banks in Iraq, the Central Bank of Iraq, and the U.S. Federal Reserve Bank’s Development Fund for Iraq account (see table 2). We obtained data on Iraq’s deposit balances in state-owned banks from the Central Bank of Iraq during an April 2010 trip to Baghdad, Iraq. These data separate central ministry accounts from state-owned enterprises’ accounts. However, the Central Bank of Iraq consolidates these categories in its reporting to the IMF. In turn, the IMF publishes the consolidated accounts in its International Financial Statistics.

In April 2010, Iraq’s Minister of Finance and a senior Ministry of Finance official stated that not all of the $21.4 billion in financial deposits in state- owned banks was available to the Iraqi government for future expenditures for two reasons. First, according to Ministry of Finance data, only $4.5 billion of the $12.2 billion in central ministries’ accounts at state- owned banks is available to the government (see table 2). Ministry of Finance officials said that the remaining deposits—about $7.6 billion—are set aside as government trust funds for the Iraqi people, such as worker pensions and court funds to support orphaned infants. Second, the senior Ministry official explained that none of the funds in state-owned enterprises’ accounts—which the Iraqi government refers to as self-funded or self-financing entities—belongs to the government, primarily because these enterprises receive few funds, if any, from Iraq’s public Treasury. The Ministry of Finance officials agreed with the Central Bank of Iraq data on the amount of financial deposits in the Central Bank of Iraq and the Federal Reserve Bank’s Development Fund for Iraq. Accordingly, the Ministry of Finance data show that the Iraqi government had about $15.3 billion in financial deposits available for future expenditures through the end of 2009.

We sought a more in-depth explanation regarding why the Ministry of Finance excluded $16.9 billion in government-sector deposits as available for governmental spending. According to a Ministry of Finance document, in November 2009, representatives of the Ministry of Finance and Iraq’s two largest state-owned banks—Rafidain and Rasheed—reviewed the government’s deposits at the two banks. To do so, the Ministry of Finance formed a committee that consisted of three officials from its accounting department, one of whom served as the head of the committee; an official from the ministry’s inspector general department; and one official from each of the two banks. During the review process, the Ministry of Finance’s accounting department developed a list of cash balances in accounts that were available to the government for future spending. It then asked the two banks to prepare similar lists for reconciliation purposes. When the committee met in late November 2009, according to the meeting minutes, the balances of the Ministry of Finance and the two banks did not reconcile. The banks’ lists included accounts for state-owned enterprises and others that, according to the committee minutes, were not financed by Iraq’s public Treasury; the Ministry of Finance list did not include those accounts. After the committee agreed to eliminate those accounts from Rafidain’s and Rasheed’s lists of available funds, the Ministry of Finance’s and banks’ balances reconciled. This review process effectively reclassified $16.9 billion in Iraq’s deposit balances as unavailable for government spending.

We could not corroborate the Ministry of Finance’s information on the availability of financial deposits or the Central Bank of Iraq’s data on financial deposits in state-owned banks. According to U.S. officials, the government’s accounts in the two largest state-owned banks have not been audited by an independent organization since November 2009, when the Ministry of Finance and the two banks reclassified the deposits. Thus, we did not have an independent audit to corroborate the status of the reported financial deposits in the two banks. We note that an earlier independent audit report on Iraq’s largest state-owned bank—Rafidain bank—found significant deficiencies in the bank’s internal controls. Due to the significance of these problems, the auditors could not validate the existence or value of many of the bank’s account balances, nor could they express an opinion on the bank’s financial statements. Moreover, Ernst and Young independent audits of the Central Bank of Iraq could not confirm or reconcile over $11 billion in the account balances of the Ministry of Finance and other governmental entities as of the end of 2008 and about $800 million as of the end of 2009.

Furthermore, we requested other information that might help to clarify the status of funds set aside for trust funds, but a senior Ministry of Finance official did not provide us with any additional information. In addition, we could not corroborate the committee minutes’ statement that state-owned enterprises do not receive funds from Iraq’s public treasury, and, therefore, the funds in their accounts are not available to the Iraqi government.

The IMF is seeking greater clarity on the amount of Iraq’s financial deposits that is unencumbered and available for government spending. Under the terms of Iraq’s February 2010 arrangement with the IMF, the Ministry of Finance is required to complete a review of all central government accounts in the banking system, reconcile them with Iraqi Treasury records, and return any idle balances received from the budget to the central Iraqi Treasury. This review was due to be completed by March 31, 2010. However, according to the IMF, the review was still under way as of August 2010.

Iraq’s Financial Deposits Decreased from $41.1 Billion in 2008 to $32.2 Billion in 2009

Overall, Iraq’s financial deposits increased by $11.7 billion from 2007 to 2008 and then decreased by $8.9 billion from 2008 to 2009, with most of the fluctuation occurring in deposits in banks in Iraq (see table 3).

According to Central Bank of Iraq officials and data, Iraq’s financial deposits at the Central Bank declined by $10.3 billion during 2009 due to the Ministry of Finance transferring funds from the Central Bank to Iraq’s two largest state-owned banks, Rafidain and Rasheed. The Central Bank of Iraq’s data show no corresponding increase in government deposits at state-owned banks. According to these data, government deposits at state- owned banks increased by $1.7 billion from 2008 to 2009, a difference of $8.6 billion.

In commenting on a draft of this report, DOD stated that the adjusted deficit in 2009 may explain at least $8 billion of the drawdown in deposits from 2008 to 2009. However, we do not find a consistent relationship between Iraq’s adjusted fiscal balance and fluctuations in Iraq’s financial deposits, as could have been the case for 2009. For example, our analysis of Ministry of Finance data showed that in 2008 Iraq generated a $1.8 billion adjusted deficit, after deducting advances. However, over the same period, Iraq’s financial deposits increased by $11.7 billion, from $29.4 billion to $41.1 billion.

These problems are further amplified in independent audits of the Central Bank of Iraq conducted by Ernst and Young. The auditors could not confirm or reconcile over $11 billion in the account balances of the Ministry of Finance and other governmental entities as of the end of 2008 and about $800 million as of the end of 2009. Because the Central Bank of Iraq did not receive statements for these accounts, the auditors could not ensure the completeness, valuation, and accuracy of the balances. As we have previously noted, an Ernst and Young audit report of the 2006 financial statements of Iraq’s largest state-owned bank—Rafidain—found significant deficiencies in the bank’s internal controls. Due to the significance of these problems, the auditors could not validate the existence or value of many of the bank’s account balances, nor could they express an opinion on the bank’s financial statements.

Iraq Has Increased Its Spending on Security but Did Not Use All of Its Available Funds

Iraqi government data show that the Iraqi security ministries have increased their spending from 2005 through 2009 and set aside about $5.5 billion to purchase equipment, training, and services under the FMS program. The Iraqi government has also funded the Iraq-Commander’s Emergency Response Program (I-CERP) and assumed responsibility for contracts to pay the salaries of the Sons of Iraq. However, we estimate that, during this same period, the Ministries of Defense and Interior did not spend or set aside for FMS and other purchases between $2.5 billion and $5.2 billion of their budgeted funds that could have been used to address security needs. Moreover, the Iraqi government did not provide any additional funding for I-CERP, as originally expected. The administration is seeking $2 billion in additional U.S. funding in its fiscal year 2011 budget request to provide training and equipment to the Iraqi security forces.

Iraq’s Security Ministries Have Increased Spending Since 2005

Data from the Ministries of Finance, Defense, and Interior show that Iraq has increased its security spending under the Ministries of Defense and Interior from $2.0 billion in 2005 to $8.6 billion in 2009 (see table 4). Spending by these ministries reflects the actual value of equipment that has been delivered, buildings constructed, training provided, or salaries paid. The Ministry of Defense, which is responsible for training and equipping Iraq’s army, navy, and air force, increased its spending an average of about 28 percent each year from 2005 through 2009. The Ministry of Interior, which performs similar activities in support of Iraq’s federal police, local police, and border enforcement, increased its spending by 45 percent annually, on average.

Iraqi government data also indicate that the Ministries of Defense and Interior have increased their spending as a percentage of budgeted funds from 2005 through 2009 (see table 5). Although the percentages of their budgets that the two ministries were able to spend has fluctuated from year to year, both spent more than 90 percent of the funds made available to them in 2009. By comparison, the Ministry of Defense spent about 64 percent of its budgeted funds from 2005 through 2009, on average; the Ministry of Interior spent about 85 percent of its budgeted funds over the same period.

Iraq’s Security Ministries Have Used the FMS Program to Purchase Equipment, Training, and Services

From January 2006 through December 2009, Iraq set aside about $5.5 billion to purchase equipment, training, and services through the FMS program (see table 6). The FMS program provides an established procurement mechanism through which the Ministries of Defense and Interior can spend available Iraqi funds to address security needs. Moreover, according to the Defense Security Cooperation Agency (DSCA); the United States Forces-Iraq (USF-I); and the Iraqi Ministers of Finance, Defense, and Interior, the program provides a way for the security ministries to spend their money without risking the loss of funds to the corruption and mismanagement that hamper Iraqi government contracting. Under FMS, the Ministries of Defense and Interior must identify their equipment or training needs, transfer funds to an account at the Federal Reserve Bank of New York, and sign a purchase agreement. DOD then oversees contracting with suppliers, billing, and delivery of Iraq’s purchases.

From January 2006 through December 31, 2009, Iraq signed purchase agreements with the United States to buy an estimated $5.1 billion in equipment, training, and services through the FMS program. This includes purchase agreements with the Ministry of Defense valued at about $4.3 billion and purchase agreements with the Ministry of Interior valued at about $840 million. Through these FMS agreements, Iraq has purchased tanks, helicopters, naval patrol boats, training aircraft, and other equipment to improve the capabilities of its army, navy, and air force. To operate and maintain this equipment, Iraq also has used FMS to purchase training, support equipment, spare parts, and maintenance and repair packages. In addition, Iraq has purchased technical services for the planning, designing, and constructing of security infrastructure, such as buildings to house its General Directorate of Counterterrorism and a pier and seawall for a naval base at Umm Qasr.

According to U.S. and Iraqi officials, the security ministries have used FMS transfers as a means of setting aside funds that remained unspent at the end of the fiscal year. For example, in April 2010, officials at the Ministry of Defense said that they had received Ministry of Finance approval to transfer $143 million of their unspent 2009 funds into the FMS account. Similarly, officials from the Ministry of Interior said that they planned to transfer $300 million to $350 million of their unspent 2009 funds into the FMS account, and they noted that, if approved, this would be the 4th consecutive year in which they executed a transfer after the end of the calendar year.

The United States is also using U.S. funds to supplement Iraq’s FMS purchases. Under seven arrangements, the United States contributed about $550 million and Iraq contributed more than $880 million to provide Iraq with more than $1.4 billion in equipment and services (see table 7). For example, in June 2009, Iraq’s Ministry of Defense signed and funded a $110 million agreement with the United States to purchase eight T-6A training aircraft for the Iraqi air force. In July 2009, the United States supplemented this purchase by signing an agreement to provide almost $100 million in funding for seven additional training aircraft, spare parts, training, and maintenance. According to officials from USF-I and U.S. Central Command, these arrangements provide an incentive for Iraq to purchase U.S. equipment, rather than equipment from foreign vendors, thereby enhancing military interoperability and reinforcing the strategic partnership between the two countries. Moreover, FMS purchases include training, sustainment, spare parts, and logistics support to help increase the likelihood that equipment will remain functional over time.

Iraq Has Funded I-CERP and Assumed Responsibility for the Sons of Iraq and Other Security Contracts

In addition to spending by the Ministries of Defense and Interior, the Iraqi government also has funded I-CERP and assumed responsibility for paying the salaries of the Sons of Iraq and other security-related support contracts previously paid by the United States. In April 2008, Iraq provided $270 million to fund I-CERP, an Iraqi-funded variation of the Commander’s Emergency Response Program (CERP). CERP is a U.S.- funded and-managed program that enables local commanders to respond to urgent humanitarian relief and reconstruction requirements by carrying out programs that will immediately assist the local population. Although neither I-CERP nor CERP directly supports the Iraqi military or police, these programs contribute to a sustainable security situation and help provincial governments win the support of the local population, according to USF-I. Through I-CERP, Iraq provides funding for projects, which USF-I subsequently carries out using the same procurement, disbursement, and accountability mechanisms that it uses to implement CERP projects. As of September 1, 2009, USF-I had obligated about $229 million of Iraqi funding for I-CERP projects, ranging from road and school improvements to small business grants.

Iraq has also assumed responsibility for some security contracts formerly paid by USF-I, most notably, the contracts to pay the salaries of the Sons of Iraq. In June 2007, USF-I incrementally began hiring Sons of Iraq as security contractors to assist the Coalition and Iraqi forces in maintaining security in their local communities. Iraq started to take responsibility for some of the Sons of Iraq contracts in October 2008 and, according to an official from USF-I responsible for monitoring these contracts, assumed full control of almost 90,000 contracts in May 2009. From February 2009 through December 2009, Iraq paid more than $255 million for the salaries of the Sons of Iraq. Before turning the Sons of Iraq contracts over to Iraq, USF-I spent approximately $413 million of CERP funding to pay their salaries.

Additionally, Iraq has begun to pay for security-related support contracts previously paid by the United States, and USF-I plans to transfer additional contracts as the United States reduces its presence in Iraq. According to USF-I, the command transferred almost $132 million in security-related contracts to Iraq between September 2008 and October 2009, including a contract to manage the Bayji National Ammunition Depot and a contract to provide maintenance for armored personnel carriers. From November 2009 through April 2010, USF-I planned to transfer another seven contracts valued at about $10 million. These include a contract to provide training for air traffic controllers in the Iraqi air force and a contract to provide maintenance for flight simulators.

Iraq’s Security Ministries Have Not Fully Used Available Resources, and Funding for I-CERP Has Fallen Short of Expectations

Our analysis of data from the Iraqi Ministries of Finance, Defense, and Interior; DSCA; and the Trade Bank of Iraq indicated that—despite increases in spending by the security ministries since 2005—the Ministries of Defense and Interior did not spend or set aside between $2.5 billion and $5.2 billion that could have been applied to Iraq’s security needs (see table 8). U.S. officials have cited several reasons that the security ministries have been unable to fully use their budgeted funds, including overly centralized decision making and weak procurement capacity. As displayed in table 8, Iraqi government data show that the Ministries of Defense and Interior spent $28.3 billion of the $38.4 billion they were budgeted from 2005 through 2009, resulting in about $10 billion of unspent funds. These ministries also set aside about $7.5 billion for advances, including FMS purchases and letters of credit. This includes approximately $5.5 billion transferred to an account at the Federal Reserve Bank of New York for FMS purchases and about $1.8 billion in letters of credit for purchases through foreign contracts. It also includes more than $100 million in advances on domestic contracts made by the Ministry of Defense through the end of 2009. With the exception of this Ministry of Defense data on advances for domestic contracts, our analysis does not reflect any additional funding that the security ministries may have set aside to pay advances. We requested this information from the Ministries of Defense and Interior through the USF-I advisors to these ministries, but the ministries did not provide us with any additional data.

We report a range for outstanding advances and unused funds to reflect uncertainty regarding what portion of the advances for FMS purchases and letters of credit has been recorded as an expenditure by the Ministry of Finance and is therefore already reflected in total expenditures. Our low estimate for outstanding advances ($4.9 billion) assumes that about $2.6 billion of the $7.5 billion set aside for FMS purchases, letters of credit, or Ministry of Defense advances on domestic contracts is already reflected in total expenditures. Our high estimate for outstanding advances ($7.5 billion) assumes that none of the $7.5 billion set aside for FMS purchases, letters of credit, or other advances has resulted in an expenditure. To determine the portion of funds set aside for FMS purchases that may have resulted in the delivery of equipment or services, and that therefore may have already been recorded as an expenditure by the Ministries of Defense and Interior, we reviewed a report from the Defense Finance and Accounting Service showing the value of FMS deliveries to the security ministries, as of December 31, 2009. Similarly, to determine the value of letters of credit that may have resulted in expenditures, we reviewed data from the Trade Bank of Iraq on letters of credit that were closed as of December 31, 2009. Finally, to determine the portion of other advances that may have been expended, we reviewed data on advances for domestic contracts provided by the Ministry of Defense. We determined that the data used in this analysis were sufficiently reliable and made the assumptions described in this section to generate estimates of unused funds.

We also found that the Iraqi government had not provided additional funding for I-CERP, as originally intended. The Memorandum of Understanding between the United States and Iraq, establishing I-CERP, stated that funding for I-CERP would eventually seek to match U.S. funding for the CERP program—more than $1 billion in 2008. However, as of September 1, 2009, USF-I had obligated $229 million of the $270 million in funding provided by Iraq for I-CERP, and Iraq had not provided any additional resources to support the program. By comparison, from fiscal years 2004 through September 2009, USF-I obligated more than $3.6 billion for CERP projects in Iraq and had forecast $300 million in additional CERP needs for Iraq in fiscal year 2010. According to an official from USF-I who is familiar with the negotiations over additional funding for I-CERP, Iraq did not provide additional funding for I-CERP due to limited capital budgets and competing spending priorities.

The Administration Is Requesting $2 Billion in Additional Funds for the Iraqi Military and Police Forces

In February 2010, the administration submitted a budget request for $3 billion in additional U.S. funding to provide training, equipment, and other services to the Iraqi military and police forces. This includes a $1 billion request for fiscal year 2010 supplemental funding, which has already been approved by Congress, and a $2 billion request as part of the administration’s fiscal year 2011 budget proposal, which is currently under consideration. According to USF-I, the Iraqi security forces will need additional equipment, training, and sustainment to bolster their capabilities as the United States begins to reduce its troop presence. USF-I plans to meet these needs by transferring U.S. defense articles valued at $600 million to the Iraqi government and using $3 billion in additional U.S. government funds to purchase equipment, training, and services for the Iraqi security forces. Under the administration’s proposal, about $2.4 billion would be used to support Iraqi forces under the Ministry of Defense, and almost $600 million would help to train and equip Ministry of Interior forces. USF-I asserts that these equipment transfers and additional funding will bolster Iraq’s internal security and stability with police training, provide the Ministry of Defense with a foundational capability for external provide the Ministries of Defense and Interior with an institutional and logistic sustainment capability.

Specifically, USF-I has stated that the $600 million in U.S. equipment transfers would allow it to modernize one mechanized division and fully equip three infantry divisions of the Iraqi army; provide additional air surveillance capabilities; improve protection for naval infrastructure, such as ports and oil platforms; and provide training and other support for existing equipment. Additional funding would cover the costs of refurbishing and shipping some of the equipment to be transferred to the Iraqi security forces. It would also provide funding for the sustainment of equipment previously purchased by Iraq, including tanks and rotary wing aircraft; pilot training; long-range air defense radars; ammunition; and contracts for advisors to the Ministries of Defense and Interior, among other things.

In commenting on a draft of this report, State asserted that U.S. government security assistance is necessary to help the Iraqi security forces meet the minimum essential capability requirements associated with the responsible drawdown of U.S. forces. Furthermore, in the budget justification documentation accompanying its fiscal year 2011 budget request, DOD stated that the United States faces the choice of making additional investments to fill essential gaps in the capabilities of the Iraqi security forces or accept the risk that they will fall short of being able to fully secure Iraq from internal and external threats by the time U.S. forces depart in accordance with the Security Agreement. However, USF-I acknowledges that some equipment necessary for providing Iraq with a set of minimum essential capabilities would not arrive in Iraq before December 31, 2011, the final withdrawal date for U.S. forces. According to USF-I, all purchases made using U.S. funding will be conducted through the FMS process. Depending on the equipment or services being provided, it could take from 6 months to 36 months after an FMS agreement has been implemented for the items to be delivered. Consequently, some equipment and services purchased using fiscal year 2011 funding may not arrive in Iraq until 2013, well after the withdrawal of U.S. forces—with some items, such as tank ammunition, potentially taking even longer to arrive.

Conclusions

Congress has instructed the U.S. government to take actions to ensure that Iraqi funds are used to pay for the costs of training, equipping, and sustaining the Iraqi military and police. DOD has encouraged greater Iraqi spending of its own funds, particularly through the FMS program, and Iraq has consistently increased spending on its own security over the past 5 years. However, billions of dollars that Iraq has budgeted for security have gone unused. As U.S. troops withdraw, the Iraqi government must take a larger role in providing security throughout the country. Congress recently provided the administration with $1 billion in new funding to support Iraq’s military and police through its passage of a fiscal year 2010 supplemental appropriation. The administration is currently requesting an additional $2 billion in fiscal year 2011 funding for similar uses. However, our analysis of Iraqi government data showed cumulative budget surpluses of $52.1 billion through December 2009, of which at least $11.8 billion is available for future spending. These surpluses have enabled Iraq to accumulate at least $15.3 billion in financial deposit balances. Moreover, IMF-required reviews of Iraq’s outstanding advances and its balances in government bank accounts will clarify the total resources available for future spending. In light of these resources, Iraq has the potential to further contribute toward its security needs, even as it addresses other competing priorities.

Matter for Congressional Consideration

To ensure that Iraq continues to spend its own resources on security costs, Congress should consider Iraq’s available financial resources when reviewing (1) a fiscal year 2011 budget request and (2) potential future funding requests to support the Iraqi security forces.

Recommendation for Executive Action

We recommend that the Departments of State and the Treasury work with the Iraqi government to further identify Iraqi resources available for future spending. This should include assisting Iraq in completing two reviews required under Iraq’s arrangement with the IMF. First, State and Treasury should assist Iraq in completing a review of its outstanding advances to determine whether some of these advances may be recoverable and available for future spending. Second, State and Treasury should help Iraq complete a review of its central government accounts so that it can return any idle balances to the central Iraqi Treasury.

Agency Comments and Our Evaluation

We provided a draft of this report to the Departments of Defense, State, and the Treasury and the U.S. Agency for International Development (USAID). We also provided a draft of this report to the International Monetary Fund through Treasury. We received written comments from State, Treasury, and DOD, which we have reprinted in appendixes V, VI, and VII, respectively. USAID did not provide comments. State, Treasury, and DOD also have provided technical comments, which we incorporated throughout the report as appropriate. In addition, the IMF provided technical comments, which we incorporated in the report as appropriate.

State and Treasury concurred with our recommendation. State agreed to work closely with its Iraqi counterparts to identify available financial resources, complete reviews of outstanding advances and central government accounts, and secure Iraqi cost-sharing across a variety of sectors. Treasury agreed, in principle that, while Iraq’s fiscal accounts are not well ordered, Iraq potentially will have financial resources to engage in greater cost-sharing in the future. Furthermore, Treasury asserted that it continues to work with the Ministry of Finance and other Iraqi agencies to obtain more accurate estimates of available fiscal balances and enhance public financial management. However, State, Treasury, and DOD stated that they believe that the Iraqi government’s available funds are closer to the low end of GAO’s range. Given the substantial shortcomings associated with Iraq’s accounting for advances and financial deposits, we report a range for Iraq’s available surplus and financial deposits. We believe that it would be premature to suggest that Iraq’s available resources fall at the low end of this range until Iraq has completed reviews of outstanding advances and central government accounts, as it agreed to in its arrangement with the IMF. These reviews will clarify the total resources available for government spending.

State, Treasury, and DOD also stated that Iraq needs to maintain a fiscal reserve, given its dependence on oil revenues and the volatility of oil prices. In its comments, DOD stated that the Iraqi government believes it needs to keep about $10 billion to $12 billion, or about 2 to 3 months of spending, in government accounts as a reserve. Under its arrangement with the IMF, Iraq agreed to maintain $2.6 billion in the Development Fund for Iraq to pay for 2 to 3 months of employee wages. Iraq was capable of maintaining this amount with at least $15.3 billion in financial deposits that it had at the end of 2009. Furthermore, through June 2010, Iraq generated almost $2 billion more in revenue than it had predicted in its budget. If this trend continues, Iraq may have about $4 billion in additional oil export revenues by the end of the year.

DOD agreed that there is room for improvement in the Iraqi government’s financial accounting and reporting, and noted that the growing amount of outstanding advances presents a challenge to Iraq’s public financial management. However, DOD also commented that it believes the overall message of our draft report—that the Iraqi government currently has significant cash reserves that would allow it to pay more of its security costs now and in 2011—is inaccurate. We disagree. As our report states, Iraq ended 2009 with at least $15.3 billion in financial deposits. When completed, IMF-required reviews of Iraq’s outstanding advances and central government accounts will clarify total resources available to the government for spending in 2010 and beyond. The review of deposits in central government accounts was due to be completed by March 31, 2010, but, according to the IMF, it was still under way as of August 2010. The review of Iraq’s outstanding advances is to be completed by September 30, 2010. We cannot yet project Iraq’s fiscal position through the end of 2010 or 2011. However, as we note in this report and as DOD acknowledged in its comments to our draft, past data indicate that Iraq’s deficit in 2010 will be far less than is projected in its 2010 budget.

We are sending copies of this report to the appropriate congressional committees, the Secretary of State, the Secretary of the Treasury, the Secretary of Defense, the Administrator of the U.S. Agency for International Development, and other interested parties. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staffs have any questions about 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. GAO staff who made major contributions to this report are listed in appendix VIII.

Joseph A. Christoff Director, International Affairs and Trade The Honorable Carl Levin Chairman The Honorable John McCain Ranking Member Committee on Armed Services United States Senate The Honorable Kent Conrad Chairman The Honorable Judd Gregg Ranking Member Committee on the Budget United States Senate The Honorable John F. Kerry Chairman The Honorable Richard G. Lugar Ranking Member Committee on Foreign Relations United States Senate The Honorable Joseph I. Lieberman Chairman The Honorable Susan M. Collins Ranking Member Committee on Homeland Security and Government Affairs United States Senate The Honorable Daniel K. Inouye Chairman The Honorable Thad Cochran Ranking Member Subcommittee on Defense Committee on Appropriations United States Senate The Honorable Patrick J. Leahy Chairman The Honorable Judd Gregg Ranking Member Subcommittee on State, Forei and Related Programs Committee on Appropriations United States Senate The Honorable Ike Skelton Chairman The Honorable Howard P. M Ranking Member Committee on Armed Serv House of Representati ves The Honorable John M. Spratt Chairman The Honorable Paul Ryan Ranking Member Committee on the Budget ves House of Representati , Jr.

Appendix I: Objectives, Scope, and Methodology

In this report, we provide inform Iraq’s budg balances, and (3) the extent to which on security costs. governments’ contributions to the co countries, which could This report builds on GAO’s e August 2008 report on Ir our March 2009 report in w of 2008.

Iraq’s Estimated Actual and Available Cumulative Budget Surplus or Deficit

To complete our analysis of the Iraqi government’s estimated actual and available cumulative budget surplus, we analyzed financial data and other information that we obtained from the Iraqi Ministry of Finance, including reports by Iraq’s Board of Supr 2005, 2006, and 2007. During a trip to Baghdad in April 2010, we interviewed the Minister of Finance and a senior Ministry of Finance official to clarify data that we received on Iraq’s revenues, expenditures, and advances. We also interviewed the President of the Trade Bank of Iraq and obtained data on letters of credit issued and closed by the Iraqi government. We a Agency (DSCA) on funds set aside by the Iraqi government for U.S. Foreign Military Sales (FMS) purchases. For this analysis, we also reviewed U.S. agency and Inter and interviewed officials from the Departments of State (State), Defense (DOD), and the Treasury (Treasury); the World Bank; and the IMF. eme Audit on Iraq’s financial accounts for nalyzed data from the U.S. Defense Security Cooperation national Monetary Fund (IMF) documents To determine Iraq’s revenues and expenditures for 2005 through 2007, we obtained translated copies of reports on Iraq’s audited accounts for each of these years. These reports were prepared by Iraq’s Board of Supreme Audit and provided to GAO by the Iraqi Ministry of Finance. The reports include final revenue and expenditure data for each year, including adjustments made by the Ministry of Finance during its end-of-year reconciliation process. To determine Iraq’s revenues and expenditures for 2008, we obtained translations of the final Ministry of Finance account s that it submitted to the Board of Supreme Audit for review. The data ontotal revenues and expenditures contained in Iraq’s final accounts for 2008 also include adjustments made by the Ministry of Finance during its end- of-year reconciliation process. To determine Iraq’s revenues for 2009, we obtained data on Iraq’s monthly revenues and expenditures through Decembe r 2009 from the Ministry of Finance through Treasury. It is unclear whether these data include adjustments made by the Ministry of inance during its end-of-year reconciliation process. We found that the F revenue and expenditure data from the 2005 through 2007 Board of Supreme Audit reports were sufficiently reliable to determine Iraq’s cash- based budget surplus. To corroborate Iraqi oil revenue, we compared the oil revenues data for 2008 and 2009 provided by the Ministry of Finance with Central Bank of Iraq export oil revenue receipts.

To determine Iraq’s annual budget surpluses from 2005 through 2009 and cumulative surplus through the end of 2009, we used revenues and expenditures data denominated in Iraqi dinars. For each year, we subtracted total expenditures from total revenues to determine the annual cash surplus. To determine the annual cash surpluses in dollars, we u the annual Iraqi dinar-dollar budget exchange rates to convert each dinar-denominated annual surplus into dollars. To compute the dinar- denominated cumulative cash surplus through the end of 2009, we added rd of the cash surplus accumulated before 2005, as reported by Iraq’s Boa Supreme Audit, to the annual surpluses we calculated for each of the years from 2005 through 2008 and the estimated surplus we calculated for 2009. To calculate Iraq’s dollar-denominated cumulative cash surplus through the end of 2009, we converted the dinar-denominated cumulative cash surplus into dollars using the 2009 dinar-dollar budget exchange rate. Thi dollar-denominated cumulative cash surplus differs from the sum of annual dollar-denominated cash surpluses due to the appreciation of the Iraqi dinar.

Ministry of Finance to the Board of Supreme Audit and (2) Ministry o Finance data through September 2009. We interviewed officials from Iraqi Ministry of Finance and Trade Bank of Iraq to try and clarify the composition and disposition of these advances. Finally, to better understand concerns about the way in which the Ministry of Finance accounts for advances, we reviewed reports issued by Iraq’s Board of Supreme Audit and an IMF report on its arrangement with Iraq.

Iraq’s Financial Deposit Balances

To assess the amount of the Iraqi government’s financial deposit bala we interviewed and obtained documentation from the Iraqi Minister of Finance, a senior Ministry of Finance official, the Governor of the Centra ain Bank of Iraq, and staff from the two largest state-owned banks, Rafid and Rasheed. The Iraqi government’s financial deposits are held in Iraq’s state-owned banks Federal Reserve Bank in New York’s Development Fund for Iraq. We also reviewed independent audit reports for the Central Ban largest state-owned bank, Rafidain. as well as in the Central Bank of Iraq and the U.S.

According to Central Bank of Iraq data, a small amount of government-sector deposits are also held in private commercial banks. These deposit balances total about $100 million (approximately 0.4 percent of government-sector deposits in commercial banks). held in central government deposits in domestic banks is available for operating and investment purposes. The Ministry of Finance based its claim on a reclassification of accounts done in late November 2009 by representatives from the ministry’s accounting and inspector general departments and the two largest state-owned banks. We were unable t independently verify the statements by the Central Bank of Iraq and th Ministry of Finance; thus, we report a range using both sets of data. he Ministry of Finance and the Central Bank of Iraq agree on the amount T of cash balances available to the central government for operating and investment budgets in the Central Bank of Iraq and the Development Fund for Iraq. The Governor of the Central Bank provided data on the Ministry of Finance’s account balance as of December 2009. For the account balance of the Development Fund for Iraq, we report data through the end of 2009, which are based on the preliminary estimates published by the International Advisory and Monitoring Board in April 2010. We determined that these data were sufficiently reliable to determine the cash balance of central government deposits at the Development Fund for Iraq.

Iraq’s Estimated Spending on Security

To determine the extent to which Iraq has spent its financial resources on security, we analyzed data on amounts budgeted for and spent by the Ministries of Defense and Interior. We determined expenditures by the Ministries of Defense and Interior from 2005 through 2009 on the basis of data from the 2005 through 2007 Board of Supreme Audit reports, 2008 Ministry of Finance accounts submitted to the board, and 2009 data provided by the Ministries of Defense and Interior. Amounts budgeted to the ministries are based on the 2005 through 2007 Board of Supreme Audit reports, Iraq’s 2008 budget law and supplemental budget, and 2009 data from the Ministries of Defense and Interior—the same three sources. We did not receive 2009 data on expenditures by the Ministry of Interior for projects and reconstruction. We therefore assume that all of the $216 million budgeted to the Ministry of Interior for projects and reconstruction in 2009 was spent. We used Iraqi dinar-dollar exchange rates to convert dinar expenditure figures to dollars. However, we calculated average annual growth rates in expenditures for the Ministries of Defense and Interior in Iraqi dinars to eliminate exchange rate effects on the growth rate in expenditures. We determined that these data were sufficiently reliable to describe expenditures and spending rates by the Ministries o Defense and Interior.

To determine the value of FMS agreements signed by the Ministries of Defense and Interior, we reviewed information provided by DSCA detailing the value of Iraq’s FMS purchases that had been fully or partially implemented as of December 31, 2009. We corroborated this information by reviewing copies of the Letters of Offer and Acceptance for each of Iraq’s FMS purchases, which we obtained from the Defense Finance and Accounting Service in Indianapolis, Indiana, as of June 22, 2009, and October 1, 2009. To determine the value of deposits made by the Min of Defense and Interior into Iraq’s FMS account from 2006 through 2009, we also reviewed information provided by DSCA. We interviewed the Country Program Director and Country Finance Director for FMS in Iraq at DSCA and the Iraq Country Manager at the Defense Finance and Accounting Service to learn about the FMS program and clarify aspects of the information provided to us. We determined that these data were sufficiently reliable for the purposes of this analysis.

To determine the value of Iraq’s FMS purchases in which the United St and Iraq shared the cost, we interviewed officials from DOD’s United States Forces-Iraq (USF-I) during audit trips to Baghdad, Iraq, from September 18 to 25, 2009, and from April 12 to 16, 2010, and reviewed additional documentation provided subsequent to these trips. We interviewed the Country Program Director for FMS in Iraq at DSCA and reviewed the Letters of Offer and Acceptance for Iraq’s FMS purchases to corroborate the accuracy of this information. We determined that these data were sufficiently reliable to determine the value of Iraq’s FMS purchases in which the United States and Iraq shared the cost. To determine the extent to which Iraq has spent its resources through the Iraq-Commander’s Emergency Response Program, Sons of Iraq contracts, and other security contracts, we interviewed officials from and reviewed information provided by USF-I and its subordinate commands.

To determine the amounts that the Ministries of Defense and Interior did not spend or set aside for FMS and other purchases from 2005 through 2009, we reviewed data on budgeted expenditures and expenditures from the Board of Supreme Audit and Ministries of Finance, Defense, and Interior, as previously described in this section of the report. We subtracted dinar-denominated expenditures from the amounts budgeted to these ministries in dinars from 2005 through 2009 to determine their annual unspent funds during this period. We then calculated the sum of these annual unspent funds to determine their cumulative unspent resources. Finally, we used the 2009 Iraqi dinar-dollar exchange rates to convert the cumulative total to dollars. To determine the additional amounts set aside by these ministries for FMS purchases, we reviewed a report provided by DSCA detailing the amounts deposited by the Ministries of Defense and Interior in Iraq’s FMS account as of December 31, 2009. To determine amounts that the Ministries of Defense and Interior have set aside to finance purchases from foreign vendors through letters of credit, we obtained data from the Trade Bank of Iraq on letters of cr issued that remained outstanding as of December 31, 2009. Finally, we als received documentation from the Ministry of Defense indicating that it set aside about $100 million for advances on domestic contracts through the end of December 2009. With the exception of these Ministry of Defense data on advances for domestic contracts, our analysis did not reflect any additional funding that the security ministries may have set aside to pay for advances. We requested this information from the Ministries of Defense and Interior through the USF-I advisors to these ministries, but the ministries did not provide us with any additional data. In our analysis, we therefore assumed that other advances for the Ministry of Interior total zero.

To calculate the amount of cumulative unused funds by these ministries from 2005 through 2009, we subtracted the cumulative unexpended funds set aside for FMS purchases, letters of credit, and other advances from the total unspent funds over the same period. We calculated a range of unused funds to reflect uncertainty regarding the portion of funds set aside for FMS purchases, letters of credit, and other advances that had been recorded as an expenditure. To determine the portion of funds set aside for FMS purchases that may have resulted in the delivery of equipment or services, and that therefore may have already been recorded as an expenditure by the Ministries of Defense and Interior, we reviewed a report from the Defense Finance and Accounting Service showing the value of FMS deliveries to the security ministries, as of December 31, 2009. Similarly, to determine the value of letters of credit that may have resulted in expenditures, we reviewed data from the Trade Bank of Iraq on letters of credit that were closed as of December 31, 2009. Finally, to determine the portion of other advances that may have been expended, we reviewed data on advances for domestic contracts provided by the Ministry of Defense. Again, we did not receive any additional data on other advances from the Ministries of Defense or Interior. Our low estimate of unused funds assumes that none of the funds set aside for FMS purchases, letters of credit, or Ministry of Defense advances on domestic contracts have resulted in expenditures. Our high estimate assumes that $1.7 billion in FMS deliveries, $0.9 billion in closed letters of credit, and about $0.1 billion in Ministry of Defense advances on domestic contracts are already reflected in Ministry of Finance expenditures.

Examples of Other Countries’ Contributions to the Cost of U.S. Security Support

To identify examples of other countries’ contributions to the cost of U.S. security support (see app. IV), we reviewed relevant documents and data, including Letters of Offer and Acceptance for FMS purchases; military assistance; cost-sharing and other implementing agreements that document host country contributions to U.S. security costs; World Bank country economic income classifications; and DOD security assistance organization and security assistance program data. We also interviewed officials from various DOD offices—including the Office of the Under Secretary of Defense for Policy, DSCA, Central Command, European Command, and Pacific Command. In addition, we interviewed officials fic from State, including officials in the Bureaus of East Asian and Paci Affairs, Near Eastern Affairs, and Political and Military Affairs and at U.S embassies in Manila, Seoul, and Tokyo. Furthermore, we interviewed other knowledgeable military and academic experts, such as experts at the Defen Baghdad, Iraq, in September 2009 and April 2010 and interviewed officials from USF-I and the U.S. Embassy Baghdad Office of Political-Military Affairs. . se Institute for Security Assistance Management. We traveled to In selecting countries as illustrative examples of cost-sharing for U.S. security support from the number of U.S. cost-sharing arrangements we ion, reviewed, we considered several factors, including geographic locat economic income classification, whether the U.S. organization that manages security support is under Chief of Mission or military command, and the presence of a major U.S. military force. Although our review is a comprehensive review of all cost-sharing agreements that the United States has negotiated to share in the cost of U.S. security support activities, we provide a range of examples of the type of host country contributions that the United States has received to support security support activities overseas.

Appendix II: Iraq’s Oil Revenues

This appendix provides information on Iraq’s oil revenues. Oil export the Iraqi government’s primary source of revenue. Since 2005, oil exports constituted about 83 to 92 percent of the government’s annual revenues (see table 9).

The price of Iraqi oil spiked during the summer of 2008 before dropping precipitously at the end of 2008 and the beginning of 2009. Prices have since rebounded, averaging $74.36 per barrel through the first 3 months of 2010 (see fig. 3). This exceeds the average price for Iraqi oil in 2009 ($56.54 per barrel) as well as the average for 2004 through 2009 ($58.70 per barrel). According to DOD and the IMF, Iraq’s 2010 budget assumes an average oil price of $62.50 per barrel.

Iraq possesses an estimated 115 billion barrels of proved crude oil reserves, the world’s third-largest stock (see fig. 4). Iraq’s capacity to further exploit its oil resources underlies the government’s ability to generate additional revenue.

According to DOD, since June 2009, the Iraqi cabinet has approved 10 foreign investment contracts to develop or rehabilitate Iraqi oil fields that account for 65 percent of Iraq’s estimated oil reserves. While U.S. officials acknowledge that it will take some time for Iraq to begin exporting oil extracted from these reserves, the contracts offer the Iraqi government the opportunity to significantly increase its exports and generate greater government revenue.

Appendix III: Amount and Categories of Iraq’s Outstanding Advances through 2008

Appendix IV: Cost-Sharing Arrangements for U.S. Security Support Activities in Other Countries

This appendix describes cost-sha ng arrangemen for U.S. ecurity support activities in selected partner nations. The United St a range of security support under State and D D authorities to many O countries representing a variety of income levels. To subsidize U.S. activities, several countries share in their costs under bilateral security and cost-sharing agreements with the United States.

The United Sta s Undertakes a Va iety r of Security Support Activities in Other Countries

The United DOD authorities to many countries. per of programs as FMS, Foreign Military Fi Secief of Mission.urity assistance activities include such Ed of and and training through FMS or Direct Commercial Sales channels. The ists of tra. defense articles, servional organizchase U.S to purations internat ining p Int U.S. facili for oreign military personnel in the nited S at and participating countries on a grant basis.

States provides a variety of security support under State and ies, U.S. urity assistance under the direction and supervision nancing, and International Military nancing ts and loans to elig ition, In in South Ko support activities, such as organizations reaS. unde and U. Forces uthor y, n, condu t training foreign forces, i cluding joi special oper aining of U.

S.

For the purposes of this report, we use the term security support to describe a range of Security assistance activities are generally codified in Title 22 of the United States Code. ities are often referred to as Title 22 activities. Security cooperation activities These activ are generally codified in Title 10 of the United States Code. These activities are often referred to as Title 10 activities. logistics support for foreign militaries, including agreements with elig countries and regional or international organizations for the reciprocal provision of logistic support, supplies, and services; and military contact and cooperation, including bilateral and multilateral contacts with foreign militaries and payment of selec for certain training partners.

Countries at Varying Income Levels Contribute to the Cost of U.S. Security Support Activities

Several countries, represen and assistance-in-kind to share in the cost of U.S. security support activities. According to State and DOD officials, the extent and type of host government contributions for U.S. security support activ o ability and willingness to contribute to U.S. security support costs. The United States and host countries also may renegotiate these cost-sharing arrangements to reflect changes in a host nation’s economic income or the nature of the bilateral security relationship. U.S. cost-sharing arrangements with Kuwait, Saudi Arabia, Japan, The Philippines, South ting a variety of income levels, provide cash ities depend n the U.S. and host country security relationship as well as the country’s Korea, and Thailand represent a range of geographic locations, income levels, U.S. troop levels, and U.S. security support organizations s, U.S. troop levels, and U.S. security support organizations (see fig. 5). (see fig. 5).

Because the U.S. government does not centrally collect information on cost-sharing arrangements between the United States and other countries, we could not conduct a comprehensive assessment of the various ways in which other countries subsidize the cost of U.S. security support. These cost-sharing arrangements may be included in U.S. defense assistance, cost-sharing, and implementing agreements or in FMS purchase agreements. DOD last reported to Congress on contributions for defense costs from allied host nations in 2004. See Department of Defense, 2004 Statistical Compendium on Allied Contributions to the Common Defense (2004), which covers allied contributions in 2003. for U.S. military exercises. See table 11 for selected contributions six countries.

Kuwait

Under a 2009 agreement, Kuwait, a h istanc $28 million a d ass support the U.S. Office o office administers Kuwait’s FMS program, which totaled nearly $315 million in sales in fi States with a cash transf which DOD reported wa Army and Air Force inst Cooperation Agreement. military Kuwaiti facilities.

Saudi Arabia

Saudi Arabia, a high-income economy, provided approximately $35 million in cash and assistance-in-kind in 2009 to support the two U.S. security support organizations operating under State’s authority—the U.S. Military Training Mission and Office of Program Management-Ministry of Interior. The training mission oversees the FMS program in Saudi Arabia, valued at $3.3 bildes training instruction ear 2009, and provin sales in fiscal ylion i and advisory services for Saudi Arabian Armed Forces personnel. The United States established the Office anagement-Ministry of of Program M Interior in 2009 to prond services, including technvide articles aical assistance, to develoudi Arabia Ministry of acity of the Sap the cap Interior’s Facilities Secur ti y Force in the areas of critical infrastructure protection and United States approximately $285 million from 2009 to 2013 to pay for srt activities managed by DOD’s Office of the Program ecurity suppo Manager-Saudi Arabia National Guard. The DOD office provides training and services to assist Saudi Arabia in modernizing its National Guard. public security.

Japan

Japan, a high-income economy, financially supports two U.S. organizations—State’s Mutual Defense Assistance Office, a security assistance organization that oversees the FMS program, and DOD’s U.S. Forces–Japan, which administers bilateral defense activities. According t a PACOM official, Japan provides the Mutual Defense Assistance Office with five Japanese foreign service employees and several vehicles and drivers under a long-standing agreement to share in the cost of U.S. security support. The office managed FMS cases valued at about $460 million in fiscal year 2009. Japan also provided nearly $6.2 billion in cash and assistance-in-kind to support U.S. Forces-Japan activities in 2009. For example, under a cost-sharing agreement, renewed in 2008, Japan provided the United States with approximately $1.4 billion for labo and utility costs in 2009.

South Korea

South Korea, a high-income economy, contributes cash and assistance-in- kind to support two U.S. organizations—State’s Joint U.S. Military Aff airs Group, a security a ssistance organization, and DOD’s U.S. Forces–Korea, which has thousands of U.S. military personnel on the ground to pursue bilateral defense goals. According to State and DOD officials, South Korea contributes limited assistance-in-kind for housing to support the Joint U.S. Military Affairs Group. The organization manages Korea’s FMS program valued at nearly $720 million in sales in fiscal year 2009. Under a cost- sharing agreement renewed in 2009, South Korea committed to provide approximately $690 million in cash and assistance-in-kind per year from 2009 to 2013 for labor, logistics, and construction costs for U.S. Forces– Korea. According to a State official familiar with the negotiation, this , contribution represents about 40 percent of nonpersonnel stationing costs.

Thailand

nder a long-standing military assistance agreement with the United States. 09 included Thailand, a lower-middle income economy, contributes annual assistance- in-kind and cash payments to support the Joint U.S. Military Advisory Group u The security assistance organization’s activities in fiscal year 20 managing Thailand’s Foreign Military Financing grants, FMS cases, an International Military Education and Training program, which were valued at $1.6 million, almost $53.0 million, and almost $1.5 million, respectively. Thailand provided cash payments of $285,000 for support such as drivers, vehicles, and utilities for the organization in 2009. DOD and State officials reported that Thailand also provides the United States with the use of military grounds for the U.S. military to conduct live-fire exercises a training and the use of a Thai airfield. According to State and DOD officials, Thailand is the only country that provides the United States with live-fir training grounds—a substantial benefit to the United States.

The Philippines

The Philippines, a lower-middle income economy, contributes cash payments and assistance-in-kind to the Joint U.S. Military Assistance Group. The security assistance organization administers U.S. security support programs, such as the $28.0 million Foreign Military Financing and the $1.7 million International Military Education and Training programs in fiscal year 2009. To financially support this organization, The Philippines provided cash transfers of approximately $217,000 and assistance-in-kind through office facilities and support personnel in 2009. Although The Philippines provides smaller financial contributions to the United States than other countries, State and DOD officials reported that certain assistance-in-kind, such as training grounds, provide significant additional benefits to the United States.

Appendix V: Comments from the Department of State

Following are GAO’s comments on the Department of State’s letter dated August 4, 2010.

GAO Comments

1. We believe that it is premature to assert that the Iraqi government’s available funds are closer to the low end of the ranges of surplus funds and financial deposits noted in this report. Two reviews required under Iraq’s arrangement with the IMF will clarify the total resources available to the Iraqi government. First, Iraq has agreed to prepare a report on its outstanding advances, identify those that are recoverable, and set a schedule for their recovery. Iraq has committed to completing this report by September 30, 2010. Second, the Ministry of Finance must review all central government accounts in the banking system, reconcile them with Iraqi Treasury records, and return any idle balances received from the budget to the central Iraqi Treasury. This review was due to be completed by March 31, 2010, but, according to the IMF, it was still under way as of August 2010. 2. We agree that it would be sensible for Iraq to maintain a fiscal reserve, and it has agreed to do so under the terms of its February 2010 arrangement with the IMF. Iraq agreed to maintain $2.6 billion in the Development Fund for Iraq to provide sufficient funds to cover 2 to 3 months in employee wages for government workers. Iraq was capable of maintaining this amount with at least $15.3 billion in financial deposits it had at the end of 2009. In addition, through June 2010, Iraq generated almost $2 billion more in revenue than had been predicted in its budget. If this trend continues, Iraq may have about $4 billion in additional oil export revenues by the end of the year. Consequently, Iraq should have sufficient resources at the end of 2010 to provide for the fiscal reserve required by the IMF.

Appendix VI: Comments from the Department of the Treasury

Following are GAO’s comments on the Department of the Treasury’s letter dated August 4, 2010.

GAO Comments

1. We report a range of available resources to reflect the uncertainty regarding Iraq’s outstanding advances and government deposits. Furthermore, we believe it is premature to assert that the Iraqi government’s available funds are closer to the low end of our ranges until Iraq has completed its IMF-required reviews of advances and government deposits. These reviews will clarify the total resources that are available to the Iraqi government. 2. We agree that Iraq may need a fiscal cushion to address potential variability in its fiscal revenues. As part of its arrangement with the IMF, Iraq agreed to maintain $2.6 billion in the Development Fund for Iraq to cover 2 to 3 months in employee wages for government workers. Iraq was capable of maintaining this amount with at least $15.3 billion in financial deposits it had at the end of 2009. In addition, through June 2010, Iraq generated $2 billion more in revenue than it had predicted in its budget. If this trend continues, Iraq may have about $4 billion in additional oil export revenues by the end of the year. Consequently, Iraq should have sufficient resources at the end of 2010 to provide for the fiscal reserve required by the IMF. 3. Past data indicate that Iraq’s deficit in 2010 will be far less than projected in its 2010 budget. From 2005 through 2009, Iraq began each year with budgets that projected deficits from $3.5 billion to $15.9 billion, but ended each year with surpluses, measured on a cash basis. Even after adjusting for advances, Iraq generated surpluses from 2005 through 2007 and in 2008 and 2009 produced deficits that were less than one-half of the amounts projected in its budgets for those years.

Appendix VII: Comments from the Department of Defense

Following are GAO’s comments on the Department of Defense’s letter dated August 10, 2010.

GAO Comments

1. We have not changed our estimates of Iraq’s cumulative adjusted surplus from $41.1 billion to $11.8 billion. In fact, we have consistently reported a range for Iraq’s available surplus on the basis of Iraq’s cumulative cash-based surplus (high estimate) and Iraq’s budget surplus adjusted for advances (low estimate). In a draft of this report, we stated that we were able to independently corroborate about $15.6 billion of the $40.3 billion in advances that were set aside for FMS purchases and letters of credit, but we were unable to corroborate the remaining $24.7 billion. However, in comments on our draft report, DOD noted that data on all advances are from the Board of Supreme Audit and the Ministry of Finance and should therefore be treated consistently. The Board of Supreme Audit raised concerns about all advances, despite our attempt to independently corroborate a portion of these advances. We therefore modified our report by deducting the full $40.3 billion to estimate the low end of our range, but we also noted that the composition of all the advances was unclear, and the Board of Supreme Audit highlighted weaknesses in Iraq’s accounting for them. Under its arrangement with the IMF, Iraq agreed to conduct a review of all outstanding advances, which should further clarify what portion of them is available for government spending. 2. We disagree with DOD’s assertion that the message of our report is inaccurate and not supported by the financial data. As this report states, Iraq ended 2009 with at least $15.3 billion in financial deposits. Moreover, IMF-required reviews of Iraq’s outstanding advances and central government accounts will clarify the total funds available to the government for spending in 2010 and beyond. The review of deposits in central government accounts was due to be completed by March 31, 2010, but, according to the IMF, it was still under way as of August 2010. The review of Iraq’s outstanding advances is to be completed by September 30, 2010. Furthermore, as we note in this report and as DOD acknowledged in its comments on a draft of this report, past data indicate that Iraq’s deficit in 2010 will be far less than projected in its 2010 budget. From 2005 through 2009, Iraq began each year with budgets that projected deficits from $3.5 billion to $15.9 billion, but ended each year with surpluses, measured on a cash basis. Even after adjusting for advances, Iraq generated surpluses from 2005 through 2007 and in 2008 and 2009 produced deficits that were less than one-half of the amounts projected in its budgets for those years. 3. We report a range for Iraq’s available financial deposits on the basis a discrepancy betwe reported by the Central Bank of Iraq to the IMF and the amount that the Ministry of Finance asserted is available for government spending. Under the terms of Iraq’s February 2010 arrangement with the IMF Ministry of Finance is required to complete a review of all central government accounts in the banking system, reconcile them with Treasury records, and return any idle balances received from the budget to the central Iraqi Treasury. This review was to be completed by March 31, 2010, but was still under way as of August 2010. We believe that it is premature to suggest that Iraq’s available resource fall at the low end of this range until the Ministry of Finance has completed its review, as it will clarify the total resources available fo government spending. en the amount of government-sector deposits 4. We agree that it may be prudent for Iraq to maintain a fiscal reserve t o hedge against volatility in oil prices, its primary source of government revenues. Under the terms of Iraq’s February 2010 arrangement with the IMF, Iraq agreed to maintain $2.6 billion in the Development Fund for Iraq to provide sufficient funds to cover 2 to 3 months in employee wages for government workers. As we note in this report, Iraq ended 2009 with at least $15.3 billion in available financial deposits. This amount should be sufficient to provide for a fiscal reserve and cover an $8 billion to $10 billion deficit DOD predicts Iraq will generate in 2010. 5. We note in this report that the security ministries spent more than 90 percent of the funds made available to them in 2009. This reflects the actual value of equipment that has been delivered and training provided to the security ministries. Data we obtained from the U.S. a Iraqi governments do not allow us to determine amounts disburs advances from these ministries’ budgets on an annual basis, including in 2009. Rather, we accounted for advances on a cumulative basis by estimating the total amount of funding spent or otherwise set asi FMS and other foreign and domestic contracts from 2005 through 2009. 6. As we previously noted, Iraq’s arrangement with the IMF requires that Iraq maintain $2.6 billion in reserve to cover 2 to 3 months of employee wages for government workers. Our analysis of Iraqi financial data indicated that Iraq ended 2009 with at least $15.3 billion in available financial deposits. Furthermore, as DOD acknowledged in its comments, past experience suggests that any potential deficit in 2010 is likely to be far less than predicted by Iraq’s 2010 budget. This is particularly likely given that—based on current oil prices and export volume—Iraq may generate more revenue in 2010 than predicted by its budget. Iraq’s 2010 budget was based on oil selling for $62.50 per barrel. From January through June 2010, oil exported by Iraq average almost $75 per barrel, generating revenues almost $2 billion in excess of that which was predicted by its budget. If this trend continues, Iraq may have about $4 billion in additional oil export revenues by the e nd of the year, even if export volume remains lower than expected. Thus, even if Iraq generates an $8 billion to $10 billion deficit in 2010, as expected by DOD, Iraq should have sufficient resources to provide for a small fiscal reserve. DOD provided no documentation to substan Iraqi officials’ statements that a $10 billion to $12 billion reserve is no needed. The IMF does not require this reserve level, nor did any I raqi official indicate to GAO that such a reserve level was needed. aq has some unsettled foreign debt obligations to neighboring countries. However, according to Treasury data, creditors have forgiven more than one-half of Iraq’s prewar debt since 2003, and continued diplomatic efforts may reduce these obligations further.

DOD also stated that Iraq does not act like a country with a large fiscalbalance, since it has drawn upon external financing provided through a s Stand-by Arrangement with the IMF. However, as Treasury noted in it lion comments on this draft, the IMF has only disbursed about $455 mil of the $3.6 billion available to Iraq for budget support. It is unclear whether Iraq will need to use the entire IMF financing arrangement in 2010-2011. 8. We disagree that our report asserts that funds reclassified by the Ministry of Finance are available for budget support. Rather, as we point out in comment 3, we report a range for Iraq’s available financial deposits on the basis of a discrepancy between the amount of government-sector deposits reported by the Central Bank of Iraq to the IMF and the amount that the Ministry of Finance asserted is available for government spending. In our report, we note that in November 2009, the Ministry of Finance reclassified $16.9 billion as unavailable for government spending, including $7.6 billion held in central ministry accounts and $9.3 billion held in state-owned enterprises’ accounts.

We also disagree with DOD’s assertion that the Central Bank of Iraq has already recognized that the $9.3 billion held in central ministries’ accounts at state-owned banks does not belong to the central government. The Central Bank of Iraq consolidates these categ its reporting to the IMF, which the IMF in turn reports in its International Financial Statistics. The Ministry of Finance is currently undertaking a review of all central government accounts in ories in the banking system to reconcile them with Iraqi Treasury records and ensure that any idle balances received from the budget are returne the central Iraqi Treasury. This Iraqi review should help to clarify whether some of these government deposits that it reclassified are, in fact, unencumbered and available for future spending. 9. Our draft report clearly stated that, according to the Ministry of Finance, at the end of 2009, outstanding advances should be deduc from available surplus funds, and that $16.9 billion in government deposits that were reclassified by the Ministry of Finance was not available for government spending. However, contrary to that which is implied in DOD’s comment, the Ministry of Finance did not report an amount of outstanding advances in any of the documentation t provided to us, nor did it calculate an adjusted budget balance by subtracting out advances. Rather, GAO estimated outstanding advances to be $40.3 billion as of September 2009 based on our analysis of Ministry of Finance data and deducted these advances estimate Iraq’s adjusted surplus.

Furthermore, we disagree with DOD’s suggestion that the potential future availability of these funds—as determined by the results of IMF- required reviews of Iraq’s central government accounts and outstanding advances—is separate from the question of whether Ira capable of additional cost-sharing. When completed, these reviews will clarify the total resources available for cost-sharing. 10. We modified the section referencing a decrease in deposits from 2008 2009 by explicitly citing the independent Ernst and Young audit reports that have identified problems verifying deposit balances at the Central Bank of Iraq and Iraq’s largest state-owned bank—Rafidain bank. Furthermore, we note in our report that the amount of outstanding advances increased by about $10 billion from the end of 2008 through September 2009, which may offer an explanation for why we did not observe an increase in the deposits of state-owned banks that corresponds to the decrease in deposits at the Central Bank of Iraq over this period. However, we also note in this report that the data on financial deposits do not illustrate a clear relationship between Iraq’s fiscal balance, adjusted for advances, and financial deposits. For example, Ministry of Finance data show that in 2008 Iraq generated a $1.8 billion deficit, after adjusting for advances. However, over the same period, Iraq’s financial deposits increased by $11.7 billion, from $29.4 billion to $41.1 billion. Accordingly, there is no clear relationship between Iraq’s adjusted fiscal balance and financial deposits, as DOD asserts.

11.

Appendix VIII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments