Rebuilding Iraq: Status of Funding and Reconstruction Efforts	 
(28-JUL-05, GAO-05-876).					 
                                                                 
Rebuilding Iraq is a U.S. national security and foreign policy	 
priority and constitutes the largest U.S. assistance program	 
since World War II. Billions of dollars in grants, loans, assets,
and revenues from various sources have been made available or	 
pledged to the reconstruction of Iraq. The United States, along  
with its coalition partners and various international		 
organizations and donors, has embarked on a significant effort to
rebuild Iraq following multiple wars and decades of neglect by	 
the former regime. The U.S. effort to restore Iraq's basic	 
infrastructure and essential services is important to attaining  
U.S. military and political objectives in Iraq and helping Iraq  
achieve democracy and freedom. This report provides information  
on (1) the funding applied to the reconstruction effort and (2)  
U.S. activities and progress made in the oil, power, water, and  
health sectors and key challenges that these sectors face.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-876 					        
    ACCNO:   A31497						        
  TITLE:     Rebuilding Iraq: Status of Funding and Reconstruction    
Efforts 							 
     DATE:   07/28/2005 
  SUBJECT:   Federal aid to foreign countries			 
	     Federal funds					 
	     Foreign governments				 
	     Foreign policies					 
	     Funds management					 
	     International cooperation				 
	     International economic relations			 
	     International relations				 
	     Financial analysis 				 
	     Economic analysis					 
	     Foreign economic assistance			 
	     Performance measures				 
	     Iraq						 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-05-876

                 United States Government Accountability Office

                     GAO Report to Congressional Committees

July 2005

REBUILDING IRAQ

                  Status of Funding and Reconstruction Efforts

                                       a

GAO-05-876

July 2005

REBUILDING IRAQ

Status of Funding and Reconstruction Efforts

[IMG]

  What GAO Found

As of March 2005, the United States, Iraq, and international donors had
pledged or made available more than $60 billion for security, governance,
and reconstruction efforts in Iraq. The United States provided about $24
billion (for fiscal years 2003 through 2005) largely for security and
reconstruction activities. Of this amount, about $18 billion had been
obligated and about $9 billion disbursed. The State department has
reported that since July 2004, about $4.7 billion of $18.4 billion in
fiscal year 2004 funding has been realigned from large electricity and
water projects to security, economic development, and smaller immediate
impact projects. From May 2003 through June 2004, the Coalition
Provisional Authority (CPA) controlled $23 billion in Iraqi revenues and
assets, which was used primarily to fund the operations of the Iraqi
government. The CPA allocated a smaller portion of these funds-about $7
billion-for relief and reconstruction projects. Finally, international
donors pledged $13.6 billion over 4 years (2004 through 2007) for
reconstruction activities, about $10 billion in the form of loans and $3.6
billion in the form of grants. Iraq had accessed $436 million of the
available loans as of March 2005. As of the same date, donors had
deposited more than $1 billion into funds for multilateral grant
assistance, which disbursed about $167 million for the Iraqi elections and
other activities, such as education and health projects.

The U.S. reconstruction effort in Iraq has undertaken many activities in
the oil, power, water, and health sectors and has made some progress,
although multiple challenges confront each sector. The U.S. has completed
projects in Iraq that have helped to restore basic services, such as
rehabilitating oil wells and refineries, increasing electrical generation
capacity, restoring water treatment plants, and reestablishing Iraqi basic
health care services. However, as of May 2005, Iraq's crude oil production
and overall power generation were lower than before the 2003 conflict,
although power levels have increased recently; some completed water
projects were not functioning as intended; and construction at hospital
and clinics is under way. Reconstruction efforts continue to face
challenges such as rebuilding in an insecure environment, ensuring the
sustainability of completed projects, and measuring program results.

Funding Distribution by Sector of $18.4 Billion for Iraq Relief and
Reconstruction

Note: Other includes democracy, education, governance, agriculture,
transportation, telecommunications, health, employment, privatization, and
administrative costs.

                 United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
Multiple and Diverse Funding Sources Support Iraq Reconstruction

and Government Operations Some Progress Achieved in Select Sectors While
Facing Significant

Challenges Conclusions Agency Comments and Our Evaluation

1 2 4

6

12 34 35

Appendixes

Appendix I: Scope and Methodology 40

Appendix II:	Comments from the U.S. Agency for International Development
43

Appendix III: GAO Contact and Staff Acknowledgments 44

Figures	Figure 1: Figure 2:

Figure 3: Figure 4:

Transition of Reconstruction Management from DOD
Authority to State Authority 5
Funding Distribution by Sector of the $18.4 Billion for
Iraq Relief and Reconstruction in the Fiscal Year 2004
Emergency Supplemental 7
Iraqi Oil Production, Export, and Revenue, June 2003
through May 2005 16
Daily Electricity Produced in Iraq, January 1, 2004-June
30, 2005 23

Contents

Abbreviations

bpd barrels per day
CERP Commander's Emergency Response Program
CPA Coalition Provisional Authority
DFI Development Fund for Iraq
DOD Department of Defense
IAMB International Advisory and Monitoring Board
IMF International Monetary Fund
IRFFI International Reconstruction Fund Facility for Iraq
IRMO Iraq Reconstruction and Management Office
PCO Project Contracting Office
PMO Project Management Office
UN United Nations
USACE U.S. Army Corps of Engineers
USAID U.S. Agency for International Development

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

July 28, 2005

Congressional Committees

Rebuilding Iraq is a U.S. national security and foreign policy priority
and constitutes the largest U.S. assistance program since World War II. In
October 2003, the World Bank and United Nations reported that in the
summer of 2003 most Iraqis had limited or no access to essential services,
that water supplies were contaminated, and that the health system was
overburdened. In addition, the lack of basic infrastructure and services,
particularly in the electricity sector, had contributed to a lack of
security in various parts of the country.1 As of March 31, 2005, billions
of dollars in grants, loans, assets, and revenues from various sources had
been made available or pledged to the reconstruction of Iraq. The U.S.
effort to restore these services is important to attaining U.S. military
and political objectives in Iraq and helping Iraq achieve democracy and
freedom.

The reconstruction of Iraq is occurring in a difficult environment.
Looting and sabotage of many infrastructure facilities and offices were
pervasive after Operation Iraqi Freedom and have continued to varying
degrees. In addition, according to senior military officials, the
insurgency in Iraq has grown in size, complexity, and intensity and has
affected reconstruction priorities. Infrastructure in such areas as the
oil, water, and electricity sectors has been subject to attacks. In
addition, workers have been threatened, the ability to safely transport
materials has been compromised, and access to work sites has been
hindered. Another complicating factor in the reconstruction effort,
according to Coalition Provisional Authority (CPA) and U.S. officials, has
been the state of some Iraqi infrastructure, which was more severely
degraded than officials anticipated or initial assessments indicated and
was exacerbated by post-2003 conflict looting and sabotage.

This report is part of our effort under the Comptroller General's
authority to monitor Iraq reconstruction and is being addressed to you
because of your committee's jurisdictions. It provides a broad overview of
funding made available for the relief and reconstruction of Iraq, U.S.
relief an reconstruction activities for select sectors in Iraq, and
challenges associated with these sectors. This report does not link the
funding to

1United Nations/World Bank, Joint Iraq Needs Assessment (New York, October
2003).

program results, nor does it evaluate the quality of program results.
Specifically, this report provides information on (1) the funding applied
to the reconstruction effort and (2) U.S. activities and progress made in
the oil, power, water, and health sectors and key challenges that these
sectors face.

To address these objectives, we obtained and analyzed records, reports,
and data from government officials and contractors, as well as multiple
funding databases. We also examined reports of other oversight entities
that performed reviews related to contract management, internal controls,
and oversight of some CPA and U.S. relief and reconstruction activities.
We interviewed U.S. government and former CPA officials and contract
personnel in the United States and Iraq. Although we did not travel to
Iraq to make project site visits during this period due to security
concerns, we interviewed U.S. and Iraqi officials via teleconference and,
when possible, in person when these officials traveled to the United
States. (See app. 1 for details on our scope and methodology.) We
conducted this part of our review from September 2004 through May 2005 in
accordance with generally accepted government auditing standards.

Results in Brief	As of March 2005, more than $60 billion had been pledged
or made available from U.S. appropriations, Iraqi resources, and
international sources for Iraq's reconstruction and government operations.
Of this amount, the United States provided about $24 billion from fiscal
year 2003 through 2005, largely for reconstruction activities in security
and essential services. As of March 2005, about $18 billion of this amount
provided by the United States had been obligated and about $9 billion
disbursed for activities including infrastructure repair of the
electricity and oil sectors; infrastructure repair, training, and
equipping of the security and law enforcement sector; and CPA and U.S.
administrative expenses. Over the course of the reconstruction effort,
this funding has been realigned several times from large-scale
infrastructure projects in electricity and water to meet immediate needs
in security and economic development and to fund smaller, more visible
reconstruction projects. Since July 2004, the United States has reportedly
reallocated about $4.7 billion of the $18.4 billion fiscal year 2004
emergency supplemental among the various sectors, as priorities have
changed. Iraqi revenues and assets-which totaled about $23 billion in
cumulative deposits from May 2003 through June 2004-have largely funded
Iraqi government operations. A smaller portion of these funds,
approximately $7 billion, was allocated for relief and reconstruction
projects, primarily for the import of refined fuel products, security,
regional

programs, and oil and power projects. Finally, most of the $13.6 billion
pledged by international donors for reconstruction assistance from 2004
through 2007 is in the form of loans-about $10 billion. The remainder is
in the form of grants to be provided multilaterally or bilaterally. As of
March 2005, Iraq had accessed $436 million of the available amount pledged
in loans. Donors have deposited grants of more than $1 billion into a
funding mechanism for multilateral assistance to Iraq, which had obligated
$683 million and disbursed about $167 million to individual projects as of
March 2005. These funds were used primarily for reconstruction activities
in public and essential services, including support for the Iraqi
elections and infrastructure rehabilitation, capacity building, and
governance and public sector reform projects.

The United States has undertaken many relief and reconstruction activities
in the oil, power, water, and health sectors in Iraq and has made some
progress; however, multiple challenges confront each sector. The U.S.
program has accomplished activities focused on restoring basic essential
services, such as rehabilitating oil wells and refineries to restart
Iraq's oil production and export, increasing electrical generating
capacity by reportedly adding about 1900 megawatts of generation capacity
to Iraq's power grid, restoring some water treatment plants, and
reestablishing Iraqi health services by providing vaccines and completing
initial health clinic rehabilitation and training projects. However,
restoring and sustaining Iraq's crude oil production and export capacity
have been slower than originally planned, and these levels were lower in
May 2005 than in March 2003. Similarly, Iraq's overall power generation
through May 2005 was lower than before the 2003 conflict, although power
generation exceeded this level in the latter part of June 2005. Progress
in the water sector is difficult to measure, and some completed water
construction projects are not functioning as intended. Finally, health
care projects to expand the availability of basic health care, such as
constructing facilities and providing medical equipment, are under way as
of May 2005. Reconstruction efforts continue to face challenges, such as
rebuilding in an insecure environment, ensuring the sustainability of
projects to be turned over to the Iraqis, and measuring program results.

In commenting on a draft of this report, the U.S. Agency for International
Development (USAID) disagreed with our statement that agency metrics for
tracking water projects do not show how the U.S. program affects the Iraqi
people. USAID stated that the agency tracks increases in the amount of
water treated and estimates increases in beneficiary numbers. However,
these metrics do not address the quality of water and sanitation services
in

Iraq, which may hinder the U.S. ability to gauge progress toward its goal
of providing essential services. The Departments of Defense and State and
USAID also provided technical comments.

Background	From May 2003 through June 2004, the CPA was the UN-recognized
coalition authority led by the United States and the United Kingdom that
was responsible for the temporary governance of Iraq and for overseeing,
directing, and coordinating the reconstruction effort. Within the CPA, the
Project Management Office (PMO) was established to provide prioritization
and management of projects and contract support of U.S.-funded
reconstruction projects. In May 2004, the President issued a National
Security Presidential Directive, which stated that after the transition of
power to the Iraqi government, the Department of State (State) through its
ambassador to Iraq would be responsible for all U.S. activities in Iraq,
with the exception of U.S. efforts relating to security and military
operations, which would be the responsibility of the Department of Defense
(DOD). On June 28, 2004, the CPA transferred power to a sovereign Iraqi
interim government, and the CPA was officially dissolved. At that time,
the U.S. role-under DOD leadership-changed from being part of the
coalition-recognized authority for temporary governance of Iraq to
supporting the sovereign Iraqi government as an ally and friend, under
State leadership. Management authority and responsibility of the U.S.
reconstruction program also transitioned at that time from DOD to State.

The Presidential Directive also established two temporary offices: the
Iraq Reconstruction and Management Office (IRMO) to facilitate transition
of reconstruction efforts to Iraq; and the Project and Contracting Office
(PCO) to facilitate acquisition and project management support for
U.S.-funded reconstruction projects. Iraq-based personnel from both
offices are under U.S. chief of mission authority in Baghdad, although the
U.S. Department of the Army funds, staffs, and oversees the operations of
the PCO. IRMO is a State Department organization and its responsibilities
include strategic planning, prioritizing requirements, monitoring
spending, and coordinating with the military commander. Under the
authority of the U.S. Chief of Mission in Baghdad, the PCO's
responsibilities include contracting for and delivering services,
supplies, and infrastructure funded

by $12.4 billion of the $18.4 billion for Iraq relief and reconstruction
in the fiscal year 2004 emergency supplemental passed by the Congress.2
(See fig. 1.)

Figure 1: Transition of Reconstruction Management from DOD Authority to
State Authority

Coalition Provisional Authority Supporting Sovereign Iraqi Government (May
2003-June 2004) (July 2004-present)

Contracting, prioritizing, and Prioritizing and managing Contracting
support of management support of of U.S.-funded projects. U.S.-funded
projects U.S.-funded projects. Sources: Departments of Defense and State;
GAO (analysis).

Other U.S. government agencies also play significant roles in the
reconstruction effort. For example, USAID is responsible for projects to
restore Iraq's infrastructure, support healthcare and education
initiatives, expand economic opportunities for Iraqis, and foster improved
governance. The U.S. Army Corps of Engineers (USACE) provides engineering
and technical services to the PCO, USAID, and military forces in Iraq,
including planning, design, and construction management support for
military and civil infrastructure construction.

2This was the amount apportioned to PCO as of April 2005. See Emergency
Supplemental Appropriations Act for Defense and for the Reconstruction of
Iraq and Afghanistan, 2004, P.L. 108-106.

  Multiple and Diverse Funding Sources Support Iraq Reconstruction and
  Government Operations

As of March 2005, U.S. appropriations, Iraqi revenues and assets, and
international donor pledges totaling about $60 billion had been made
available to support the relief and reconstruction and government
operations of Iraq. U.S. appropriations of more than $24 billion for
relief and reconstruction activities have been used largely for security
and essential services-including the repair of infrastructure, procurement
of equipment, and training of Iraqis-and have been reallocated over time
as priorities have changed.3 Iraqi revenues and assets, which totaled
about $23 billion in cumulative deposits, were turned over to the new
Iraqi government in June 2004 and have largely funded the operating
expenses of the Iraqi government. International donor funds have been
primarily used for public and essential service reconstruction activities;
however, most of about $13.6 billion pledged over a 4-year period is in
the form of potential loans that have not been accessed by the Iraqis.4

    U.S. Appropriated Funding Focused on Infrastructure Repair and Training of
    Forces; Funding Has Been Reallocated as Priorities Changed

As of March 2005, of the $24 billion in appropriated U.S. funds made
available for relief and reconstruction in Iraq from fiscal years 2003
through 2005, about $18 billion had been obligated and about $9 billion
had been disbursed.5 These funds were disbursed for activities that
include infrastructure repair of the electricity and oil sectors;
infrastructure repair, training, and equipping of the security and law
enforcement sector; and CPA and U.S. administrative expenses. Many current
U.S. reconstruction efforts are consistent with initial efforts the CPA
developed before June 2004. As priorities changed, particularly since the
transition of power to the Iraqi Interim Government, the U.S.
administration reported that it had

3Reconstruction activities include infrastructure rehabilitation and
construction, equipment procurement, operations and maintenance training,
and capacity building.

4The World Bank Group defines a pledge as an indication of intent to
mobilize funds for which an approximate sum of contribution is specified.
International donor pledges for Iraq range from $13.6 billion to $17.3
billion, reflecting the range of loans pledged by the World Bank and
International Monetary Fund (IMF). This amount does not include identified
humanitarian assistance or export credits and guarantees. Given the
uncertainty of the ultimate amount of loans to be provided by the World
Bank and IMF, we have used the lower pledge amount in this report.

5This amount does not include $5.7 billion appropriated in May 2005 for
assistance to the Iraqi security forces in the Emergency Supplemental
Appropriations Act for Defense, the Global War on Terror and Tsunami
Relief, 2005, P.L. 109-13. In addition, it does not include $325 million
from the same Act, which according to DOD, was released for the
Commander's Emergency Response Program in Iraq.

reallocated about $4.7 billion of the $18.4 billion fiscal year 2004
emergency supplemental among the various sectors. (See fig. 2.) These
reallocations were reported in October 2004, January 2005, and April 2005.
As of May 2005, the administration was assessing whether additional
reallocations would be needed for short-term reconstruction efforts.

Figure 2: Funding Distribution by Sector of the $18.4 Billion for Iraq
Relief and Reconstruction in the Fiscal Year 2004 Emergency Supplemental

As of July 2004 As of October 2004 As of April 2005

Other Other Other

Security

and

justice	Security Security and and

justice justice

Water

Water Water

Electricity Electricity Electricity

Oil Oil Oil

Other

Security and justice

Essential services

Source: GAO analysis of State Department data.

Note: Other includes democracy, education, governance, agriculture,
transportation, telecommunications, health, employment, privatization, and
administrative costs.

In October 2004, the administration reported that it had reallocated
appropriated funds from the $18.4 billion fiscal year 2004 emergency
supplemental based on a review of all U.S. reconstruction funding
priorities. The administration reported that it had reprogrammed about
$1.8 billion to security and law enforcement and about $1.2 billion to
economic and private sector development and governance activities. These
funds were reallocated from future water and electricity infrastructure
projects. In addition, about $450 million in the oil sector had been
reprogrammed from refined fuel imports to oil reconstruction projects.

This review, prompted by both the transition from the CPA to a new State
Department-led mission and a significant increase in insurgent activity in
mid-2004, determined that the deteriorating security situation, the desire
of the interim Iraqi government to quickly expand its security forces, and
the need to create more jobs for the Iraqi people demanded a significant
reallocation of funding.

In January 2005, the administration reported that it had reallocated $457
million. The administration reported that $246 million of this amount was
for smaller projects to provide immediate and visible essential services
in four cities-Fallujah, Samarra, Najaf, and Sadr City-affected by
coalition battles with the insurgents. According to agency documents and
officials, these services included critical health needs, power
distribution, and potable water projects. This funding was shifted from
longer term power generation, transmission, water, and hospital projects.
The remaining $211 million of the reallocated funds was redistributed
within the electricity sector from longer range transmission projects to
more immediate needs, such as spare parts procurements, turbine upgrades,
and repair and maintenance programs.

In April 2005, the administration reported that it had reallocated $832
million-$225 million for job creation activities and $607 million for
essential services projects and programs. To fund these efforts, the
embassy cancelled five longer term potable water projects and future
energy projects. The $225 million reallocation for job creation activities
primarily includes activities in targeted Baghdad neighborhoods and
through USAID's Community Action Program throughout Iraq.6 Of the $607
million reallocation for essential services, $444 million is for the
electricity sector, including operations and maintenance projects at a
number of strategic power plants to reportedly enhance the sustainability
of ongoing projects, the completion of several electricity generation and
rehabilitation projects, and the coverage of cost growth due to increased
security costs in the electricity sector. The remaining funds allocated
for essential services programs include funds for gas/oil separation
plants, operations and maintenance projects for water treatment plants
recently turned over to the Iraqis, and prison and courthouse security
projects.

6Subsequently, in July 2005, the administration reported that in response
to congressional action it intended to reallocate $20 million of this
amount to democracy-building activities.

    Iraqi Revenues and Assets Funded Iraqi Government Operations with Limited
    Focus on Reconstruction

Iraqi funds, which totaled about $23 billion in cumulative deposits from
May 2003 through June 2004, are a mix of revenues and assets that the CPA
used primarily to support the Iraqi budget for operating expenses, such as
salary payments and ministry operations. A smaller portion of the $23
billion-approximately $7 billion-was allocated for relief and
reconstruction projects, primarily for the import of refined fuel
products, security, regional programs, and oil and power projects. These
Iraqi funds came from revenues in the Development Fund for Iraq (DFI)7 and
vested and seized assets from the previous Iraqi regime. Of the $23
billion, nearly $17 billion had been disbursed as of June 28, 2004.

The DFI was initially comprised of Iraqi oil proceeds, UN Oil for Food
program surplus funds, and returned Iraqi government and regime financial
assets.8 From May 2003 to June 2004, nearly $21 billion had been
deposited, $17 billion allocated, and $14 billion disbursed. The CPA
turned DFI stewardship over to the new Iraqi government in June 2004.9 The
majority of the funding had been used for Iraqi ministry operations,
including salaries and other Iraqi budget support. Iraqi oil revenues
continued to be deposited into the DFI after June 28, 2004. According to
State Department estimates, about $18 billion in oil revenues had been
deposited into the DFI since the transition from the CPA to the interim
Iraqi government, as of May 31, 2005.

7According to U.N. Security Council Resolution 1483, the funds deposited
into the DFI were to be used to meet the costs of Iraqi civilian
administration, humanitarian needs, infrastructure repairs, economic
reconstruction, and other purposes benefiting the people of Iraq. The
resolution also noted that independent public accountants, approved by the
International Advisory and Monitoring Board (IAMB), are to audit the DFI.
The IAMB's terms of reference define its oversight responsibilities, which
include evaluating the public accountant's reports, monitoring internal
controls and financial reporting, and directing special audits.

8As directed under U.N. Security Council Resolution 1483, 95 percent of
oil proceeds are to be deposited into the DFI. The remaining 5 percent of
oil proceeds are to be deposited into a U.N. Compensation Fund account to
process and pay claims for losses resulting from Iraq's invasion and
occupation of Kuwait.

9According to agency documents and officials, after the transition, the
Iraqis approved the transfer of about $3 billion in funds for remaining
obligations that had been made by the CPA before June 28, 2004. As of
April 30, 2005, about $1 billion of this $3 billion remained to be
disbursed.

The vested assets were former Iraqi regime funds frozen and held in U.S.
financial institutions after the first Persian Gulf War and subsequently
vested by the President in the U.S. Treasury in March 2003.10 In addition,
assets of the former regime were seized by coalition forces within Iraq.
These combined vested and seized assets totaled about $2.65 billion and
had largely been obligated and disbursed by the time the CPA transferred
authority to the Iraqi Interim Government.11 The vested and seized assets
were used primarily on ministry operations, salaries, and regional
programs, such as the Commander's Emergency Response Program.12

    International Reconstruction Assistance Supports Public and Essential
    Service Reconstruction Activities, but Pledges Are Mostly Loans

International donors' funds have been largely used to support public and
essential service reconstruction activities; however, most of donors'
pledges are in the form of loans that have not been accessed by the
Iraqis. International donors have pledged about $13.6 billion in support
of Iraq reconstruction over a 4-year period from 2004 through 2007. Of
this amount, about $10 billion, or 70 percent, is in the form of loans,
primarily from the World Bank and International Monetary Fund (IMF).
Donors have pledged the remaining $3.6 billion as grants, to be provided
multilaterally or bilaterally.

Of the $10 billion in loans pledged over the 4-year period, about $1
billion was pledged to be provided to Iraq in 2004. As of March 31, 2005,
Iraq had accessed $436 million of the available amount. The IMF provided a
$436 million emergency post-conflict assistance loan to Iraq in September
2004 to facilitate Iraqi debt relief. According to a State Department
official, the Iraqi government is currently in discussions with the World
Bank and the government of Japan about lending programs, which total $6.5
billion.

10In March 2003, the President used authorities in the International
Emergency Economic Powers Act (50 USC S: 1701 et seq.), as amended by
provisions in the USA PATRIOT Act of 2001 (P.L. 107-56), to confiscate the
property of the former Iraqi regime under U.S. jurisdiction and vest the
assets in the U.S. Treasury.

11As of April 30, 2005, about $145 million remained to be paid against
liabilities incurred using these assets, according to agency documents and
officials.

12As of June 2005, the Commander's Emergency Response Program (CERP) has
received about $1.4 billion, which includes DFI, Iraqi seized assets, and
appropriated funds, according to DOD. According to agency documents and
officials, these funds are disbursed in the form of small grants to
military commanders to support a range of local relief, reconstruction,
and rule of law activities.

Of the $3.6 billion in grants pledged over the 4-year period, about $700
million was pledged to be provided to Iraq in 2004, some of which would be
provided multilaterally and some bilaterally. The established mechanism
for channeling multilateral assistance to Iraq is the International
Reconstruction Fund Facility for Iraq (IRFFI), which is composed of two
trust funds, one run by the United Nations Development Group and the other
by the World Bank Group. As of March 31, 2005, more than $1 billion had
been deposited into these funds; the largest deposits were made by Japan
($491 million), the European Commission ($227 million), and the United
Kingdom ($127 million). Of that amount, about $683 million had been
obligated and about $167 million had been disbursed to individual
projects.

Of the $167 million disbursed by the IRFFI, the UN trust fund had
disbursed about $155 million for projects in 11 categories, as of March
2005. Currently, the largest portion of UN trust fund disbursements has
been made to activities that support the electoral process (about $87
million), education and culture (about $25 million), health (about $13
million), and infrastructure and housing (about $12 million). The
remaining disbursements have supported activities in refugee assistance;
agriculture, water resources, and the environment; food security;
governance and civil society; water and sanitation; poverty reduction and
human development; and mine action. Funds for projects are disbursed to
participating UN agencies for implementation. The World Bank trust fund
has disbursed $12 million for projects that include capacity building,
textbooks, school and health rehabilitation, water and sanitation
projects, and private sector development. The World Bank is implementing a
capacity-building project, and the Iraqi ministries are implementing the
remaining projects.

Donors have also provided bilateral assistance for Iraq reconstruction
activities; however, complete information on this assistance is not
readily available. As of April 6, 2005, the State Department had been able
to identify about $1.3 billion-of the $13.6 billion pledged-in funding
that donors had provided as bilateral grants directly to Iraqi
institutions, implementing contractors, and non-governmental organizations
for reconstruction projects outside the International Reconstruction Fund
Facility for Iraq. As we reported in June 2004, the United States was
working with the Iraqis to develop a database for tracking all bilateral
commitments made to reconstruction activities in Iraq. One year later,
this database for tracking all donor assistance projects in Iraq remained
under

development with assistance from the United States and the UN.13 In March
2005, the UN gave Iraqi staff of the Ministry of Planning and Development
Cooperation a 7-day training session in the use and management of this
database. The UN plans to provide technical and management support to the
ministry and additional training over the next year. According to a State
Department official, the database was planned to be operational in time
for the IRFFI Donor Committee meeting in Amman, Jordan, which was held
July 18-19, 2005.

  Some Progress Achieved in Select Sectors While Facing Significant Challenges

The U.S. efforts to reconstruct Iraq's essential services sectors have
shown some progress to date yet continue to face significant challenges.
Of the approximately $9 billion of appropriated funds the United States
had disbursed for reconstruction, as of March 31, 2005, approximately $3.1
billion had been spent on restoring Iraq's oil, electricity, water and
health sectors.14 Overall, the U.S. program in these sectors has
accomplished activities that focused on essential services restoration,
such as refurbishing and repairing oil facilities, increasing electrical
generating capacity, restoring water treatment plants, and expanding the
availability of basic health care. Initial activities to restart the oil
infrastructure have largely been completed; however, activities to sustain
production and export levels have been slower than originally planned and
these levels remained below pre-March 2003 conflict capacity, as of May
2005. Progress has been made in rehabilitating electric facilities and
generation capacity has been increased. Overall production levels for the
electricity sector were lower in May 2005 than before the March 2003
conflict, although power generation exceeded this level for the latter
part of June 2005. While the water and sanitation program has made some
progress toward completing a reduced scope of activities, this progress
has been difficult to measure and some completed projects have not
functioned as intended. The U.S. program to expand basic health care has
made progress in helping reestablish health services in Iraq, but larger
health infrastructure projects remained under way as of May 2005.
Implementation of the U.S.

13In response to our draft report, the State Department told us that this
database had been transferred to the Iraqis.

14This amount does not include appropriated funding for reconstruction
activities in these sectors under the Commander's Humanitarian Relief and
Reconstruction Program, Commander's Emergency Response Program, USAID's
Community Action Program, USAID's Office of Transition Initiatives, or
Office of Foreign Disaster Assistance programs.

reconstruction program in these sectors continues to face challenges, such
as security, sustainability, and the measurement of program results.

    Restoring and Sustaining Iraq's Crude Oil Production and Export Have Been
    Slower Than Originally Planned

Background

U.S. efforts in the oil sector have focused largely on (1) restoring
Iraq's oil infrastructure to prewar production and export capacity, (2)
delivering refined fuels for domestic consumption, and (3) developing oil
security and pipeline repair teams. More than $5 billion in U.S. and Iraqi
funds has been made available for these efforts. Progress to date on U.S.
activities has been slower than planned due to a number of factors,
including the security environment and difficulties associated with
funding, project prioritization, contractor reporting, the contract
management processes, and Iraq's political transitions. The oil sector
faces challenges that include establishing effective infrastructure
security forces and pipeline repair teams; addressing issues related to
domestic refined fuel supply and consumption; and defining the oil
sector's organizational structure, foreign investment framework, and
energy priorities.

Iraq's economy is highly dependent on revenues from crude oil export, and
its population is dependent on having sufficient refined fuels for power
generation, cooking, heating, and transport. According to the State
Department, Iraq's oil export revenues are expected to account for at
least 90 percent of Iraq's projected 2005 budget revenues. This revenue is
essential to Iraq's ability to provide for its own needs, including
reconstruction. Iraq's oil infrastructure is an integrated network that
includes oil fields and wells, pipelines, pump stations, refineries,
gas/oil separation plants, gas processing plants, and export terminals and
ports. This infrastructure has deteriorated significantly over past
decades due to war damage, inadequate maintenance, and the limited
availability of spare parts, equipment, new technology, and financing.
U.S. agency documents estimated Iraq's 2003 actual pre war crude oil
production at 2.6 million barrels per day (bpd) and export levels at 2.1
million bpd.15 Considerable looting after Operation Iraqi Freedom and
continued attacks on crude and refined product pipelines have contributed
to Iraq's reduced oil production and export capacities.

15According to Iraqi estimates, 2002 production and export levels averaged
about 2.2 million bpd and 1.5 million bpd, respectively, and 2003 crude
production levels reached 2.8 million bpd.

U.S. Activities and Projects	About $2.7 billion of U.S. appropriated funds
and $2.7 billion in Iraqi funds have been made available for U.S. efforts
to support Iraq's oil sector.16 These efforts focus largely on (1)
restoring Iraq's oil infrastructure to sustainable prewar crude oil
production and export capacity, (2) delivering and distributing refined
fuels for domestic consumption, (3) developing oil security and pipeline
repair teams, and (4) providing technical assistance for organizing and
sustaining Iraq's oil industry. Specific U.S. activities and projects for
the restoration of Iraqi's oil production and export capacity include
restoring the Qarmat Ali water reinjection and treatment plant to create
and maintain sufficient oil field pressure in the Rumailah oil field;
repairing the Al-Fathah oil pipeline crossing; restoring several gas
and/or oil separation plants near Kirkuk and Basrah; and repairing natural
gas and liquefied petroleum gas plant facilities in southern Iraq.17 U.S.
activities also include the restoration of wells, pump stations,
compressor stations, export terminals, and refineries, and providing
electrical power to many of these oil facilities.18 According to agency
and contracting officials, the United States provides primarily
procurement, engineering, technical expertise and some construction
services for these projects. Iraq oil company employees conduct some
repair operations and construction.

16Iraqi fund amounts are based on reporting by U.S. government officials
and KPMG, the external auditor for the International Advisory and
Monitoring Board, and are as of December 31, 2004.

17According to USACE documents, Iraq's gas/oil separation plants, or
GOSPs, separate crude from natural gas liquids and serve approximately 12
to 50 oil wells. Processing some of these liquids results in the
production of liquefied petroleum gas, which is used primarily in Iraq for
cooking and heating.

18The electrical power element of this activity is specifically dedicated
to oil production, pumping, refining, and other oil sector operations
separate from the national electricity system.

In addition to infrastructure restoration activities, the United States
facilitated and oversaw the purchase, delivery, and distribution of
refined fuels throughout Iraq, primarily using DFI funds from late May
2003 through August 2004. Used for cooking, heating, personal
transportation, and private power generation, these imports were required
to supplement domestic production due to increased demand and Iraq's
limited refining capacity.19 The responsibility for this effort was
transferred to Iraq's State Oil Marketing Organization after August 2004.
The United States also assisted in developing an oil security force and
pipeline repair teams to respond to looting, sabotage, and sustained
attacks, primarily on oil pipelines. Finally, the United States also
provided technical assistance and support to the Iraqi Ministry of Oil to
define Iraq's operational, legal, policy, and investment frameworks for
the industry.

Assessment	Although some activities to restart Iraq's oil production and
export have been completed, the implementation of the U.S. program to
assist in restoring and sustaining Iraq's crude oil production and export
levels to pre-March 2003 capacity has been slower than originally planned.
Of the $2.7 billion in appropriated funds for the oil sector, the United
States had obligated about $2 billion and disbursed $1.1 billion, as of
March 31, 2005. In addition, of the $2.7 billion in Iraqi funds, about
$215 million had been spent on these infrastructure restoration efforts.
Initial production and export targets were reached in 2003 and early 2004
as U.S. efforts were made to complete assessments and quick repair
projects, provide dedicated power, and procure spare parts and
equipment.20 Since November 2004, however, crude oil production and export
levels have not been sustained primarily due to pipeline attacks and a
natural decline in production resulting from years of improper reservoir
management, according to U.S. and former CPA officials. From December 2004
through May 2005, estimated production and export levels remained
relatively constant at about 2.1 million bpd and 1.4 to 1.6 million bpd,
respectively.

19U.S. activities to improve refineries have focused on assisting the
Iraqis in improving the reliability and capacity of existing refineries.
According to agency officials, this included providing expertise to help
identify key areas for project improvements and procuring associated spare
parts, materials, and equipment to operate the refineries at levels close
to maximum capacity.

20As of June 2005, DOD and the contractor were reaching agreement on the
number and final cost of these oil restoration projects, including the
expected price of the work completed.

(See fig. 3.) Targets for December 2005 are to reach 2.8 million bpd in
production and 1.8 million bpd in exports.21

Figure 3: Iraqi Oil Production, Export, and Revenue, June 2003 through May
2005

Thousands of barrels per day

Billions of dollars

3,000 2,500

2,000

1,500

1,000

ne '03uJ

y '04Ma

ne '04uJ

y '04lJu

'04Sept.

'04Oct.

                                      '03

03Sept.

'03Oct.

y '03lJu

                                      '03

'03Dec.

                                      '04

'04Jan.

'04Feb.

'04.

Mar

'04.

Apr

                                      '04

'04Dec.

'05Jan.

'05Feb.

'05.

Mar

'05.

Apr

y '05Ma

.gAu

.Nog.

uA

.NoYear

                                   Production

Exports

Revenue

                     Source: Department of State estimates.

21A large portion of the crude oil that is not exported is used to create
refined fuels for domestic use, such as liquefied petroleum gas for
cooking. According to a UN document, 600,000 bpd of crude oil is needed to
meet the domestic requirement. Iraq's 2005-2007 National Development
Strategy stated that Iraq's refining capacity is approximately 550,000
bpd. In commenting on our draft report, State noted that actual
performance of the refining sector has been less than 500,000 bpd.

Several U.S. government, former CPA, and contractor officials stated that
funding uncertainties, project reprioritizations, inadequate contractor
reporting,22 and frequent changes in contract management procedures or
processes have impeded progress. In addition, some officials stated that
the overall security environment has slowed their ability to obtain or
move equipment, materials, and personnel, in some cases delaying project
progress. Some officials estimated that a combination of these factors
have contributed to delays of 2 to 6 months at different points in the oil
sector program's overall implementation. Some significant projects
experienced further delays from late 2004 to early 2005 due to security,
technical, or legal problems that over the past several months, according
to agency officials, resulted in lower crude oil production or export. For
example, one significant project to provide water and field pressure
maintenance in southern Iraq could not be fully utilized, primarily due to
associated infrastructure degradation, thus limiting the facility's
operations and Iraq's level of crude oil production. In general, most
larger scale, higher dollar projects are either under way or scheduled to
begin by August 2005, and IRMO officials stated that sector efforts are
focused on a defined set of projects that the Ministry of Oil agreed to in
November 2004. As of May 2005, U.S. officials and reporting indicated that
the overall program is scheduled to be completed by mid-to late-2006.

U.S. efforts directly facilitated the CPA's purchase and delivery of
imported gasoline, liquefied petroleum gas, kerosene, and diesel for
domestic use in Iraq. About $2.3 billion of the $2.7 billion in Iraqi
funds was used to purchase, supply, and distribute these refined fuel
products. These efforts required the coordination of significant trucking
operations and military convoys to move considerable quantities of fuels
and to increase the capacity to download these fuels at several supply
points throughout Iraq. Although no longer responsible for the purchase
and delivery of these refined fuels, U.S. agencies continue to monitor
Iraq's efforts to maintain a 15-day supply of refined fuel stocks.
Although estimated national supply levels were low from November 2004 to
March 2005, U.S. agency documents report that levels of these products
improved and, as of May

22U.S. officials and documents reported that a prime contractor's
inadequate reporting of costs has been detrimental to the oil sector
program's ability to accurately assess project progress and associated
costs. According to U.S. officials and documents, primarily due to this
issue, some remaining unawarded work was moved from this contractor to
another contractor. According to agency and contractor officials and
documents as of June 30, 2005, the action taken by the contractor to
improve its reporting had been determined to meet government requirements.

2005, only diesel stocks remained significantly below the 15-day supply
targets. However, agency reporting also noted distribution problems such
as criminal attacks on delivery trucks, sabotage to domestic product
lines, and black market activity related to the sale of these products.
These problems continue to negatively affect the population's access to
these fuels for their daily needs.

Of the $2.7 billion of Iraqi funds made available for the oil sector,
about $170 million was used to develop oil security and pipeline repair
teams.23 CPA oil security efforts included the establishment of a U.S.
task force to manage the training and equipping of an oil security force.
This effort began in late 2003 and focused primarily on guarding fixed
facilities and, to a lesser extent, patrolling pipelines. The oil security
force numbers reached over 14,000 as of June 2004, according to agency
officials; however, in responding to our draft report State indicated that
this force was not staffed, trained, or equipped to patrol pipelines.
Because the number and intensity of pipeline attacks increased during the
summer and fall of 2004, the overall effectiveness of this force has been
difficult to gauge. In responding to our draft report, State indicated
that this level of attacks demonstrates the effectiveness of the
insurgency in Iraq and the inability of coalition forces to register the
security of the oil infrastructure as a high priority. According to agency
documents, the Ministry of Oil assumed responsibility for these security
personnel in December 2004.

In a related effort, the CPA established an emergency response
organization in early 2004 to rapidly return damaged pipelines to service.
The primary contractor was responsible for a certain number of repairs; it
was also responsible for training repair crews and providing new tools and
techniques to sustain this effort after its August 2004 contract
expiration. In July 2004, the U.S. government indicated that the
contractor's performance was unsatisfactory and withheld funds. According
to U.S. officials and documents, in August 2004 IRMO mobilized an
emergency repair team; in February 2005, the Ministry of Oil mobilized a
second emergency repair team; and responsibilities for these efforts were
being transitional to the Iraqis as of June 2005.

Challenges	Iraq's economy relies on oil revenues to support its budget. In
the near term, Iraq is dependent on the completion of several of the U.S.
program's

23According to agency documents and officials, $9 million of U.S.
appropriated funds were also set aside for emergency pipeline response
repair.

infrastructure projects, whose successful operations are expected to
generate revenues to support Iraq's 2005 budget. In addition to this
challenge, the Iraqis face shorter and longer term oil sector challenges
that include training, equipping, and funding effective infrastructure
security forces and pipeline repair teams; addressing issues related to
domestic refined fuel supply and consumption; and defining the oil
sector's organizational structure, foreign investment framework, and
energy priorities, among others.

o 	Attacks against the oil infrastructure continue and limit Iraq's
ability to export crude oil and distribute refined products domestically.
The United States and Iraq have attempted to establish infrastructure
security forces as well as emergency response teams to address this issue.
However, difficulties in determining organizational responsibility and
funding for such efforts have impeded their completion and contributed to
insufficient protection of oil infrastructure, particularly pipelines.
According to agency reporting in April 2005, plans were being discussed to
provide mobile security for pipelines. In addition, in response to our
draft report DOD told us in July 2005 that the Iraqi government, with
Coalition support, is leading an effort to enhance oil infrastructure
security.

o 	CPA and U.S. officials have emphasized the importance of restoring
Iraq's refinery capacity to increase the supply of refined fuel products
for domestic use and to decrease the amount spent on refined product
imports. According to a former agency official, replacing existing
refineries with modern technology facilities may require $6 to $7 billion
over a 10-year period, while fuel imports cost over $2 billion annually.
Iraq subsidizes the refined fuels it imports and produces, and the price
of these fuels is less than a few cents per liter. U.S. officials have
reported that low prices also encourage black market activity such as
smuggling or the purchase and resale of refined products, both of which
can ultimately result in local distribution shortages and insufficient
access to these needed fuels. CPA and U.S. officials have provided
assistance to the Iraqis in developing refined fuel pricing reform
strategies. Iraq committed to increase the domestic prices of refined
products to generate an estimated $1 billion in revenues in 2005,
according to IMF and agency documents. However, potentially negative
popular reaction may make it difficult for the Iraqis to implement any
repricing strategies at this time.

o 	Iraq's framework for managing its oil industry and the use of its
energy resources is not yet defined. Decisions by Iraq's new government
may alter how the country runs its oil operations and may also influence
the amount and type of capital investment that Iraqis and foreigners are
willing to provide. In addition, establishing regulations for resource
management and revenue distribution are part of the Iraqi government's
current effort to draft a constitution. Outcomes of these activities will
affect Iraq's overall economic goals and priorities.

    Electricity Production Lower in May 2005 Than before the March 2003 Conflict

Background

U.S. efforts in the electricity sector have focused on restoration and
construction of Iraq's electrical system. As of March 31, 2005, about $5.7
billion-about $4.9 billion in appropriated funds and $816 million in Iraqi
funds-had been made available to provide electricity services that meet
Iraq's national needs. Some progress was made in restoring Iraq's
electricity infrastructure, reportedly adding about 1900 megawatts24 of
generating capacity to Iraq's power grid between March 2003 and May 2005.
Iraq's overall power generation was lower through May 2005 than before the
2003 conflict, although power generation exceeded this level for the
latter part of June 2005. The causes for lower overall power generation
included planned and unplanned maintenance needs for power stations and
fuel shortages. The electricity sector faces a number of challenges to
meeting Iraq's electricity needs, including the lack of appropriate fuel
supplies, Iraqi operation and maintenance capacity, the unstable security
environment, financing needs for distribution projects, and effective
management of electricity generation and distribution.

According to senior U.S. agency officials, Iraq's electricity
infrastructure was in worse condition following the 2003 conflict than
initially anticipated or reported in the 2003 UN/World Bank needs
assessment. The report noted the severe degradation of Iraq's generating
capacity-from about 5,100 megawatts in 1990 to about 2,300 megawatts
post-1991 Gulf War-largely due to war damage to generation stations.
Although the report notes that production was restored to about 4,500
megawatts before the 2003 conflict, U.S. officials said that Iraq's
electrical infrastructure had experienced significant deterioration due to
the war and years of neglect under Saddam's regime. Spare parts were
largely unavailable when UN sanctions

24A megawatt is a measurement of the rate at which electric energy can be
transferred and is used as a measure of electric generation capacity.

were in place between 1991 and 2003. Equipment and facilities had not been
maintained and required significant overhauls. In addition, some
facilities and transmission lines were damaged by U.S. forces during the
1991 Gulf War or by the looting and vandalism of facilities following the
2003 conflict.

U.S. Activities and Projects	About $4.9 billion in appropriated and $816
million in Iraqi funds from the DFI have been made available for U.S.
reconstruction efforts in the electricity sector. These efforts focus on
restoring or constructing generation, transmission, distribution, and
automated monitoring and control systems in Iraq's electrical system.
Other projects have included capacity building25 and training security
forces to protect the electrical infrastructure. According to agency
documentation, the majority of financial assistance in this sector has
focused on generation projects, such as rehabilitating and repairing
existing equipment or procuring and installing new turbines and
generators. Transmission projects, such as erecting transmission towers
and stringing transmission lines, have been another significant focus.

Assessment	Although some progress has been made in rehabilitating many
Iraqi electric facilities as of May 2005, electricity production in Iraq
was lower than before the March 2003 conflict. However, for the latter
part of 2005 power generation exceeded this level. Of the $4.9 billion
appropriated as of March 31, 2005, the United States had obligated $3.7
billion and disbursed $1.7 billion, mostly for generation projects to
repair existing equipment or procure new turbines and generators for power
plants.26 In addition, of the $816 million in Iraqi funds authorized for
U.S. activities in the electricity sector, about $758 million had been
disbursed as of March 31, 2005.

25Capacity building includes training to build management capability
within the ministry and operations and maintenance capability at the power
stations.

26This amount does not include appropriated or Iraqi funding disbursed for
electricity sector activities from the Commander's Humanitarian Relief and
Reconstruction Program, Commander's Emergency Response Program, Rapid
Regional Response Program, Accelerated Iraqi Reconstruction Program, or
USAID's Community Action Program, Office of Transition Initiatives
programs, or Office of Foreign Disaster Assistance programs.

Two key targets of the U.S. reconstruction effort are increasing total
generating capacity and daily megawatt hours of electricity produced. The
first key target is to increase Iraq's total generating capacity by 3,100
megawatts by June 2005.27 As of May 2005, U.S.-funded projects reportedly
had added or restored about 1900 megawatts of generating capacity to
Iraq's power grid. However, U.S. program and contracting officials have
raised concerns about the ability of the Ministry of Electricity and local
power plant operators to sustain the added generation capacity.

The other key target has been to help Iraq produce 120,000 megawatt-hours
of electricity per day by June 2005. In May 2005, agency reports show this
target was revised to producing 110,000 megawatt-hours by December 2005.
As shown in figure 4, Iraq produced more than 100,000 megawatt-hours of
electricity most days between July and November 2004; however, production
dropped below prewar production levels through May 2005, varying between
51,000 and 99,800 megawatt-hours daily. Agency reports attribute the
decreased production figures to several causes, including planned and
unplanned maintenance on power stations, fuel shortages due to insurgent
attacks on oil pipelines that provide fuel to the power plants, and
limited supply of fuels allocated by the Ministry of Oil. In commenting on
our draft report, State noted that planned outages are necessary
operational procedures to ensure reliable and sustainable operations at
the plants and that the central reason for high unplanned outages is that
Ministry of Electricity workers do not yet have the necessary skills to
ensure adequate operations and maintenance practices. As of June 2005,
Iraq's electricity production was increasing to meet greater summer demand
and exceeded 100,000 megawatts in the latter half of the month. U.S.
officials attributed the increased production to (1) power plants that
were returned to service after maintenance was completed, (2) imported
power and fuel supply from neighboring countries, and (3) activation of
U.S. funded power projects.

27The date for meeting this target was extended to December 2005.

  Figure 4: Daily Electricity Produced in Iraq, January 1, 2004-June 30, 2005

Megawatt hours 120,000

100,000 80,000

60,000

40,000

20,000

0

Date

Target

Prewar

Actual

7 day average

             Sources: U.S. Department of State and USAID estimates.

Challenges	The electricity sector faces a number of challenges to meeting
Iraq's electricity needs. These challenges include the lack of appropriate
fuel supplies, Iraqis lack of capacity in operation and maintenance, the
unstable security environment, financing needs for distribution projects,
and ineffective management of electricity generation and distribution.

o 	Iraq's limited accessible supply of natural gas and diesel fuel affects
the operation of the new gas combustion turbines provided by the United
States28 and continues to affect the operations and production capacity of
Iraq's electrical power plants. The United States purchased and installed
gas combustion turbines to operate several Iraqi power plants, including
Bayji and Qudas. These turbines were readily available for

                               6/1/2004 1/1/2005

1/1/2004

    2/1/2004 3/1/2004 4/1/2004 5/1/2004 7/1/2004 8/1/2004 9/1/2004 10/1/2004
        11/1/2004 12/1/2004 2/1/2005 3/1/2005 4/1/2005 5/1/2005 6/1/2005

28The UN Oil for Food Program also purchased gas combustion turbines for
Iraq's electricity sector.

purchase, could be installed in less than 1 year, and could also be
modified to burn oil-based fuels, although with some negative effect on
the turbines' efficiency and operation. Although Iraqi power plants have
largely relied on steam turbines that use crude oil or oil-derived fuels,
these turbines are less readily available for purchase on the world market
and require a longer installation time. Due to limited access to natural
gas, some gas combustion turbines at Iraqi power plants are operating on
low grade, oil-based fuels. The use of liquid fuels, without adequate
equipment modification and fuel treatment, decreases the power output of
the turbines by up to 50 percent, requires three times more maintenance,
and could result in equipment failure and damage that significantly
reduces the life of the equipment, according to U.S. and Iraqi power plant
officials.

o 	U.S. agencies report they have incorporated operations and maintenance
training into the reconstruction program. However, the Iraqis' capacity to
operate and maintain the power plant infrastructure and equipment provided
by the United States remains a challenge. Contractors cited several
instances where the Iraqis had significant problems operating and
maintaining projects after they were transferred to the government. For
example, in December 2004, the Iraqis' inability to operate a recently
overhauled plant at Bayji led to a widespread power outage. U.S. officials
said that contractors installed the equipment and provided the Iraqis
onsite training in operating the new or refurbished equipment. However,
Iraqi power plant officials from 13 locations throughout Iraq, including
Bayji, indicated that the training did not adequately prepare their staff
to operate and maintain the new gas turbine engines. U.S. officials have
acknowledged that more needs to be done to train plant operators and
ensure that advisory services are provided after the turnover date of the
projects. To address this issue, in February 2005, USAID implemented a
project to train selected electricity plant officials (plant managers,
supervisors, and equipment operators) in various aspects of plant
operations and maintenance.29 According to DOD, PCO also has awarded one
contract and is developing another to address operations and maintenance
concerns. A June 29, 2005, USAID Inspector General report stated that
until the operations and maintenance challenges are addressed at both the
Iraqi power plants and ministry levels and practices at the power plants
are

29USAID-sponsored training is being provided for select participants in
Amman, Jordan, and Atlanta, Georgia.

significantly improved, reports of damaged equipment and infrastructure
will continue and the electrical infrastructure rebuilt and refurbished by
USAID's program will remain at risk of sustaining damage following its
transfer to the Ministry of Electricity. In comments on our draft report,
State department said that there has not been enough focus on
strengthening operations and maintenance capacity and that such
strengthering had not been a U.S. government priority in the early phases
of the reconstruction effort.

o 	Providing security for power plants, transmission lines, and
distribution stations is another key challenge to electricity
reconstruction projects and to meeting Iraq's electricity needs. According
to U.S. agency officials and contractors, insurgent attacks on people and
infrastructure have increased project costs and caused scheduling delays.
Our analyses of five U.S.-funded electricity sector contracts indicate
that security costs to obtain private security services and
security-related equipment as of December 31, 2004, ranged from 10 to 36
percent of project costs.30 In March 2004, the United States awarded a $19
million contract to train and equip Iraq's Electrical Power Security
Service to protect electrical infrastructure, including power plants,
transmission lines, and Ministry of Electricity officials. Although the
program was designed to train 6,000 guards over a 2-year period, fewer
than 340 guards had been trained when the contract was terminated early.
According to agency reporting in April 2005, current plans are for the
Iraqi Ministry of Defense to provide mobile security for linear assets
such as transmission lines and pipelines.

o 	The Iraqi electricity sector will require additional financial
assistance to restore its infrastructure to meet the national needs. The
Ministry of Electricity estimates that Iraq needs about $20 billion to
restore its electricity sector, including over $3 billion to update the
distribution network system, that provides electricity from the
distribution station to the end user. The activities of the U.S.
assistance program have focused on generation, transmission, and
distribution projects to improve the electricity sector and have provided
about $100 million to address the provision of power from the distribution
station to the end user.

30Several contractor officials noted the cost of security relative to
total contract costs can vary over time. For example, they noted that
initial security costs, such as for mobilizing and equipping security
personnel and purchasing armored vehicles, can be considerable in relation
to the amount of reconstruction work authorized. As additional work is
authorized, the relative percentage accounted for by security costs could
decrease considerably.

o 	Effective management of electricity generation, transmission, and
distribution is affected by illegal connections to existing power lines
and the lack of metering. According to industry officials, the inability
of system operators to balance the amount of electric generation with
consumer demand can cause severe failures in both equipment and service,
as evidenced in January 2005 when the national grid collapsed following an
electrical circuit imbalance near Bayji. Further, limited and inaccurate
metering in Iraqi homes precludes the Ministry of Electricity from
measuring the amount of electricity that end users consume. Experts
indicate that the demand for electricity has increased dramatically since
UN sanctions were removed in 2003 and estimate that the demand for
electricity will exceed 8,500 megawatts this summer. In commenting on our
draft report, the State department stated that the demand had passed 8,500
megawatts and may reach 9,000 megawatts.

    Progress in the Water Sector Is Difficult to Measure and Some Completed
    Projects Are Not Functioning

Background

U.S. reconstruction efforts in the water and sanitation sector focus on
improving Iraq's potable water, sewage, and sanitation systems. State
reallocations have reduced available U.S. funding for improving Iraq's
severely degraded water and sanitation sector from a peak of $4.6 billion
to a current level of $2.4 billion. The United States has made some
progress in completing large and small water and sanitation projects, but
it is difficult to determine the impact of its reconstruction effort on
this sector due to limited performance data and measures. The U.S.
reconstruction program has also suffered from delays in completing
projects, and some completed projects lack sufficient Iraqi staff and
supplies to function properly or are not operating at all due to a lack of
electricity and diesel fuel.

Water and sanitation services in Iraq deteriorated significantly after the
1991 Gulf War due to the lack of maintenance, inadequate skilled manpower,
and war damage. In 2003, post war looting destroyed equipment and
materials needed to operate treatment and sewerage facilities. Before the
1991 Gulf War, Iraq produced enough water to supply more than 95 percent
of urban Iraqis and 75 percent of rural Iraqis, according to the 2003
UN/World Bank needs assessment. Actual access was much lower due to
significant losses from leaks in the delivery network. By 2003, these
production levels had fallen to 60 percent of urban Iraqis and 50 percent
of rural Iraqis. According to the same assessment, the sewage system
primarily served Baghdad, where it reached about 80 percent of the
population. However, according to the report the sewage system was
inadequate for moving and processing waste, leading to backups of raw

sewage in the streets and treatment plants were not operational. Less than
10 percent of the urban population outside Baghdad was served by sewage
systems. The rural areas and northern Iraq-including the cities of Kirkuk
and Erbil-had no access to piped sewage systems. According to the UN/World
Bank report, some of these areas had access to pour flush latrines.

U.S. Activities and Projects	U.S. reconstruction efforts in the water and
sanitation sector focus on projects to improve Iraq's potable water,
sewage, and sanitation systems. Specific activities funded by the U.S.
reconstruction program include repairing water and sewage treatment
plants, rehabilitating dam facilities, and conducting irrigation projects.
Work has been implemented through a combination of longer term, large
scale projects and quick impact, smaller scale projects. Agencies are
executing most of their largest efforts through five large contracts with
three U.S. companies. These efforts include rehabilitation of water and
sewage treatment plants, dams, pump station, and irrigation canals, as
well as repairs of sewer lines and drinking water canals. Smaller scale
projects include neighborhood cleanups, water supply improvements, and the
rehabilitation of smaller scale sewage systems and water treatment plants.

Assessment	The U.S. reconstruction program in Iraq's water and sanitation
sector has made some progress toward completing a reduced scope of
activities. As of April 5, 2005, the State Department had reallocated
funding for water and sanitation to other priorities such as security,
thus reducing available funding by 48 percent to about $2.4 billion.31 As
of the end of March 2005, U.S. agencies had obligated about $1.2 billion,
or 50 percent, and disbursed about $280 million, or 12 percent, of the
U.S. funding to specific projects for the sector.32 USAID's
accomplishments included the repair of six sewage treatment plants, two
water treatment plants, and a primary urban water supply in southern Iraq.
As of April 3, 2005, State reported that 64 projects were complete and 185
were in progress. However, State was unable to

31As of March 31, 2005, the amount apportioned to U.S. agencies from this
total was about $2 billion.

32This disbursement amount is an estimate and does not include
appropriated or Iraqi funding disbursed for water sector activities from
the Commander's Humanitarian Relief and Reconstruction Program,
Commander's Emergency Response Program, Rapid Regional Response Program,
Accelerated Iraqi Reconstruction Program, USAID's Community Action
Program, or USAID's Office of Transition Initiatives programs, or USAID's
Office of Foreign Disaster Assistance programs.

provide a list of those completed projects, which would enable us to
evaluate the significance of the project numbers in terms of scope of
work, cost, or size. The United States has also funded a number of smaller
scale, quick impact projects. The primary goals of these quick impact
projects have been to meet pressing local needs and provide employment for
the Iraqi people. Although they are designed to show impact more quickly
in some cases small-scale projects do not have the potential long-term
effect of the larger projects.

Reduced funding and increased costs have limited the work done in the
water and sanitation sector. As of March 2005, PCO had begun 52 projects.
Although PCO initially planned to execute 137 projects with fiscal year
2004 appropriated funds, the full list of 137 projects will not be
completed using appropriated funds given the funding reallocations and
State's focus on completing projects under way and sustaining completed
projects. The reduction in the number of planned projects is the result of
a more than $2 billion decrease in program funding and underestimates of
the cost of doing business in Iraq. According to PCO, the initial CPA cost
estimates for completing projects in Iraq were too low. Increased security
requirements, inflation in the cost of construction materials and labor,
and the unexpectedly poor condition of Iraqi facilities have all
contributed to increases in project cost.

In commenting on the draft of this report, the U.S. Agency for
International Development (USAID) disagreed with our statement that agency
metrics for tracking water projects do not show how the U.S. program
affects the Iraqi people. USAID stated that the agency tracks increases in
the amount of water treated and estimates increases in beneficiary
numbers. However, these metrics do not address the quality of water and
sanitation services in Iraq, which may hinder the U.S. ability to gauge
progress toward its goal of providing essential services.

Challenges	The effect of U.S. water and sanitation sector reconstruction
is difficult to quantify, and metrics used by U.S. agencies to track
progress do not provide a complete picture of results. The program has
encountered delays in execution due to security conditions and other
factors, and completed projects are at risk of failing due to lack of
needed staff and supplies after transfer to the Iraqis.

o 	Iraq has no comprehensive metering of water usage. Without metering,
the ministries lack information on the amount of water consumed or lost.
U.S. officials estimate that approximately 60 percent of water

produced in Iraq is unaccounted for-lost to illegal taps, unmetered usage,
and leaking water pipes. Because of water losses and the lack of metering,
the extent to which clean potable water from improved facilities is
reaching users is unknown.

o 	Agency metrics for tracking progress in the water and sanitation sector
do not show how the U.S. program is affecting the Iraqi people. PCO and
State have developed metrics to track the progress of the U.S. water and
sanitation reconstruction program in terms of projects completed,
treatment capacity, and agricultural area irrigated. While these measures
provide some insights on progress, they do not track the contribution of
projects toward the overall objective of providing essential services or
measure increased access to clean water and improved sanitation in Iraq,
as this data from the end user is difficult to gather. In commenting on
our draft report, USAID said that the agency tracks increases in the
amount of water treated and estimates increases in beneficiary numbers.
However, these metrics do not address the quality of water and sanitation
services in Iraq, which may hinder the U.S. ability to gauge progress
toward its goal of providing essential services. For example, because of
problems with the distribution network, water that is potable at the
treatment plants may be contaminated by the time it reaches users.
According to a senior PCO official in the water sector, potable water and
sewage mains in Iraq are sometimes adjacent to each other, allowing
leaking sewage to enter the water mains. In response to our draft report,
State also noted that there are significant difficulties in accurately
measuring water quantity and water quality delivered to Iraqi households
and that the measurement of access to potable water and improved
sanitation is generally done through the use of surveys. However, State
commented that the department has elected not to reallocate funding away
from projects to conduct regular surveys on essential services.

o 	The U.S. effort to rehabilitate Iraq's water and sanitation sector has
faced challenges from the insurgency, coordination and management
difficulties, and poor onsite conditions. Contractor and agency reporting
cite numerous instances of project delays due to unsafe conditions. PCO
has estimated that deteriorating security has added an average of about 7
percent to project costs in the water and sanitation sector. Contractors
and agency officials also cited difficulties in defining project scope and
coordinating with Iraqi ministries as further impeding progress. For
example, Iraqi ministry and local officials disagreed on the proper scope
of one project, and PCO's resolution of the issue was delayed by security

conditions limiting its ability to meet with Iraqi officials. Unusable
project sites and the unexpectedly poor condition of Iraqi facilities have
also contributed to delays and increased costs. USAID abandoned one
landfill project, projected to cost $20 million if completed, because the
Iraqi government provided an unusable site. Contractors arriving in the
field also found unanticipated conditions, such as sewer blockages and
treatment equipment that required repair.

o 	Both USAID and PCO have incorporated employee and management training
efforts into their reconstruction programs. However, the projects
completed by USAID and PCO have encountered significant problems in
facility operations and maintenance after project handover to Iraqi
management. Iraqis lacked adequate resources and personnel to operate
these facilities in the long term. To address these issues, in April 2005
State reallocated $25 million for a USAID pilot project to provide
continuing operations, maintenance, and supply acquisition training and
support at selected sites after handover. PCO has also developed a risk
assessment process designed to anticipate potential sustainability issues
by evaluating various factors that contribute to the successful transition
of projects to the Iraqis.

Progress Made in Expanding Basic Heath Care, and Larger Infrastructure
Projects Are Under Way

U.S. reconstruction efforts in the health sector focus on restoring and
expanding the availability of basic health care in the country. The United
States has provided about $866 million in appropriated funds for health
activities to reestablish, restore, and expand the availability of health
care in Iraq. The majority of this funding-about $750 million-is focused
on infrastructure projects and medical equipment supplies; the remainder
provides for medical staff training and management training for the
Ministry of Health. While U.S. agencies have completed initial activities
to reestablish Iraqi health services, larger infrastructure, equipment,
and training projects to restore and expand the availability of basic
health care are still under way. The Iraqi health sector faces a number of
challenges in providing basic and preventive health services, including
procurement and delivery of medical equipment and supplies and measuring
program results. At the same time, long-term technical assistance will be
required to build the management and infrastructure capacity needed to
provide access to a quality health care system over time.

Background	More than 30 years ago, Iraq was a regional leader in health
care, but years of neglect and mismanagement under Saddam's regime left
the Iraqi health system in a deteriorated state and a segment of the Iraqi
population and the

poor with little or no health care. The 2003 UN/World Bank needs
assessment described the Iraqi health care system as inefficient and
inequitable, noting that health care facilities and equipment were in poor
condition. The Iraqi health system was a hospital-oriented model that did
not emphasize sustainable health development; care was centralized in
urban areas and services only partially matched the needs of the
population. The 2003 UN/World Bank needs assessment further noted that the
health system did not provide equitable access to basic health services;
lacked cost-effective public health interventions; required large-scale
imports of medicines, medical equipment, and health workers; and collected
little health service data. The 2003 assessment determined that basic
health care services needed to be restored and that the system needed to
be transformed into a national health care system based on primary care,
that provides health services reflecting population needs and priorities
with a focus on prevention and treatment.33

According to the 2003 UN/World Bank needs assessment, Iraqi health care
spending during the 1990s had fallen by as much as 90 percent and Iraq's
health outcomes were among the poorest in the region-well below the levels
found in comparable income countries. Infant, child, and maternal
mortality rates more than doubled from 1990 to 1996 with 65 percent of
births occurring outside of health institutions; adult mortality
increased, and life expectancy fell to 60 years of age. Widespread looting
after Operation Iraqi Freedom, the subsequent unpredictability of
electricity and the water supply, and attacks by insurgents further
weakened the functional capacity of Iraqi health care services. According
to the Iraqi Ministry of Health, about one-third of primary care clinics,
more than 12 percent of hospitals, 30 percent of family planning clinics,
and 15 percent of child care clinics were looted or damaged or both; two
main public health laboratories were destroyed; and four of seven central
warehouses for storage of drugs and supplies were partially looted and
their vaccine supply was lost.34

33The World Health Organization defines primary health care by the
principles outlined in the 1978 Declaration of Alma-Ata, which states that
primary health care is essential health care based on practical,
scientifically sound and socially acceptable methods and technology made
universally available to individuals and families in the community through
their full participation and at a cost the community and the country can
afford to maintain.

34Iraqi Ministry of Health, Health in Iraq: A Review of the Current Health
Situation, Challenges Facing Reconstruction of the Health Sector, and Our
Vision for the Immediate Future (September 2004).

Activities and Projects	The U.S. program for the Iraqi health sector is
primarily focused on restoring and expanding the availability of basic
health care, including maternal and child health care, to the majority of
the population. Activities funded by the U.S. reconstruction program (1)
address medical facility needs to support an evolving health care model
for equitable access to basic health care;35 (2) provide medical equipment
and training of medical staff; and (3) provide training to strengthen
management by the Ministry of Health. The majority of U.S. financial
assistance in this sector-over 80 percent-is focused on rehabilitating and
constructing hospitals and health care centers and supplying medical
equipment for hospitals and clinics. The remainder of this assistance
provides for the training of medical staff and capacity building within
the Ministry of Health, including management training for infectious
disease control, national health policy reform, and decentralization of
health care activities at the local, governorate, and ministry levels.
U.S. activities in the Iraqi health sector fall into four key areas:
health phase I ($80 million36), nationwide hospital and clinic
improvements ($439 million), equipment procurement and modernization
training ($297 million), and the construction of the Basrah Pediatric
Facility ($50 million).

Assessment	The United States has made some progress in its effort to
restore and expand the availability of basic health care in Iraq; however,
the majority of large-scale infrastructure projects remain under
construction. As of March 31, 2005, U.S. agencies had obligated $533
million and disbursed $116 million of the $866 million allocated for
health activities in Iraq.37 According to agency reporting, initial
activities to reestablish Iraqi health services

35According to the Iraqi Ministry of Health, the core elements of its
health system reform include population empowerment with patient choice,
community involvement, integration of health services delivery system with
strengthened primary healthcare, financial risk protection, health
provider management autonomy, quality improvement, and human resources
supply and development.

36The Health Phase I program reflected USAID activities funded by fiscal
year 2003 appropriated funds for the reestablishment of health services.
Activities included the rehabilitation of primary health clinics, a
vaccination program for Iraqi children against measles, mumps, rubella and
polio, procurement of equipment for primary health clinics, and technical
assistance to the Iraqi Ministry of Health.

37This amount does not include appropriated or Iraqi funding disbursed for
health sector activities from the Commander's Humanitarian Relief and
Reconstruction Program, Commander's Emergency Response Program, Rapid
Regional Response Program, Accelerated Iraqi Reconstruction Program, or
USAID's Community Action Program, Office of Transition Initiatives
programs, and Office of Foreign Disaster Assistance programs.

have been largely completed, including the vaccination of 70 percent of
eligible Iraqi children, about 5 million Iraqi children against measles,
mumps, and rubella and 3 million children against polio; rehabilitation of
110 health clinics; training of about 700 health care trainers; and the
procurement of medical equipment kits for 600 health centers. However, due
to the security environment and procurement delays, 37 of 600 medical
equipment kits had not been delivered as of May 20, 2005, according to
U.S. officials.

Further efforts to improve hospitals and clinics, procure equipment, and
provide training are under way. For example, according to IRMO reporting,
as of April 6, 2005, of the planned renovations for 20 hospitals and new
construction for 1 hospital, the United States had started planned
renovations on the 20 hospitals and begun construction of the Basrah
Pediatric Facility. According to agency documentation, the execution phase
of these health projects took longer than expected to complete due to the
complex designs for health care facilities, long lead times for medical
equipment manufacturing and delivery, construction delays due to land
ownership issues, the poor quality of sites, and security issues related
to the contractors and the delivery of construction supplies. In addition,
according to U.S. officials, the training program for the medical staff
for the new primary health clinics was expected to begin in June 2005.

Challenges 	Iraq's health sector needs long-term financial support for its
health care system. In addition, the U.S. program to restore and expand
the availability of basic health care faces challenges in the procurement
and delivery of medical equipment and supplies and in measuring program
results.

o 	According to the UN/World Bank assessments, Iraqi and agency documents,
and U.S. officials, the Iraqi health sector will require continued
long-term financial assistance to restore and strengthen its health system
to modern day medical levels; support infrastructure maintenance and
medical supply requirements; and support management operations-assistance
that is not available in the U.S. program or through the international
community. The activities of the U.S. assistance program-largely focused
on improving the physical infrastructure of the health system-is likely to
have a longer term impact on the health sector; however, the impact of
these infrastructure improvements is not likely be visible until
construction is complete, new equipment is in service, and management
capacity of the Iraqi health ministry has been strengthened. U.S.
officials acknowledge that additional resources will be needed over the
next 3 to 5 years for Iraq to

address health services and strengthen the delivery of primary health care
services, although the continuation of such activities is not an element
of the U.S. program in Iraq at this time.

o 	The U.S. program to provide medical equipment and supplies to hospitals
and health clinics across Iraq is an important element in strengthening
Iraqi health service delivery. Delays in the delivery of U.S.-provided
equipment may affect the Iraqis' ability to provide primary health care.
For example, the completed delivery of USAID-funded health kits, coupled
with primary health care provider training, is expected to result in an
increase in the capability of primary health care providers to deliver
care to the Iraqi population. Although the equipment items for these
health kits were received by May 2004, the delivery of these kits to Iraqi
health clinics was still incomplete, as of May 2005. Agency documents and
officials indicated several reasons why medical equipment had not been
delivered, including long lead times for medical equipment manufacturing
and delivery, the security environment, the timing of equipment delivery
with the completion of infrastructure construction, and the need to obtain
agreement on equipment lists from the Ministry of Health. To address the
Ministry of Health's limited capacity to accept, store, and distribute
large shipments of supplies and equipment, the PCO has developed a revised
distribution plan, according to a U.S. official. Further, as of May 2005,
the construction plans for 150 primary health clinics did not have an
identified procurement plan for backup power generators, furniture,
consumable supplies, incinerators, or a security perimeter. According to a
U.S. official, without full power supply-by generators or from the power
grid-these clinics will be able to provide only the most basic services
and limited or no maternal and/or pediatric services. In response to our
draft, DOD told us that they plan to build 142 primary health clinics
supplied with generators, furniture, and three months of consumables.

o 	IRMO has developed metrics to track the progress of the U.S. health
reconstruction program in Iraq. Limitations to the available metrics and
data make it difficult to assess the outcome of U.S. activities in the
health sector. For example, IRMO's measurements of progress track the
completion of facilities, which is an indicator of increased access to
health care. However, the measures available do not indicate how well
these facilities are equipped or staffed to provide primary health care
services. The measures used by IRMO do not relate the progress of U.S.
projects to the overall effort of improving the quality and access of
health care in Iraq.

Conclusions	The United States, along with its coalition partners and
various international organizations and donors, has undertaken a
challenging and costly effort to stabilize and rebuild Iraq. Over the past
2 years, the United States, coalition partners, and, more recently the
Iraqis have undertaken and accomplished numerous activities to stabilize
and rebuild Iraq, including efforts to help restore basic essential and
social services. This enormous effort has been undertaken in an unstable
security environment, and is concurrent with the institutional development
of Iraqis to govern and secure the country. As we reported in June 2004,
these challenges continue to affect the pace and cost of reconstruction. A
key challenge to the success of the rebuilding effort will be the Iraqis'
ability to sustain the rehabilitated and new infrastructure and to address
continuing maintenance and basic service needs. U.S. reconstruction
efforts include requirements to build operational and ministerial capacity
to sustain this infrastructure. As U.S. activities that have already
started reach completion by the end of the year, the options and plans
developed and actions taken to address this challenge will be critical to
the success of the U.S. reconstruction program and the overall
reconstruction effort in Iraq.

  Agency Comments and Our Evaluation

We provided drafts of this report to the Departments of Defense and State
and the U.S. Agency for International Development. The Departments of
Defense and State did not provide written comments; however, they provided
technical comments, which we incorporated where appropriate.

The U.S. Agency for International Development provided written comments,
which are reprinted in appendix II. In particular, in response to our
statement that agency metrics for tracking water projects do not show how
the U.S. program is affecting the Iraqi people, USAID stated that the
agency tracks increases in the amount of water treated and estimates
increases in beneficiary numbers. However, these metrics do not address
the quality of water and sanitation services in Iraq, which may hinder the
U.S. ability to gauge progress toward its goal of providing essential
services. For example, because of problems with the distribution network,
water that is potable at the treatment plants may be contaminated by the
time it reaches users.

USAID also provided technical comments, which we incorporated where
appropriate.

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 staff have any questions, please contact me at (202)
512-8979
or [email protected] 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 III.

Joseph A. Christoff
Director, International Affairs and Trade

List of Committees

The Honorable Thad Cochran
Chairman
The Honorable Robert C. Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate

The Honorable Mitch McConnell
Chairman
The Honorable Patrick J. Leahy
Ranking Minority Member
Subcommittee on State, Foreign Operations,

and Related Programs Committee on Appropriations United States Senate

The Honorable Ted Stevens Chairman The Honorable Daniel Inouye Ranking
Minority Member Subcommittee on Defense Committee on Appropriations United
States Senate

The Honorable John Warner Chairman The Honorable Carl Levin Ranking
Minority Member Committee on Armed Services United States Senate

The Honorable Richard G. Lugar Chairman The Honorable Joseph R. Biden, Jr.
Ranking Minority Member Committee on Foreign Relations United States
Senate

The Honorable Susan M. Collins Chairman The Honorable Joseph I. Lieberman
Ranking Minority Member Committee on Homeland Security

and Governmental Affairs United States Senate

The Honorable C. W. Bill Young
Chairman
The Honorable John P. Murtha
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives

The Honorable Jim Kolbe
Chairman
The Honorable Nita M. Lowey
Ranking Minority Member
Subcommittee on Foreign Operations,

Export Financing, and Related Programs Committee on Appropriations House
of Representatives

The Honorable Duncan Hunter Chairman The Honorable Ike Skelton Ranking
Minority Member Committee on Armed Services House of Representatives

The Honorable Tom Davis Chairman The Honorable Henry A. Waxman Ranking
Minority Member Committee on Government Reform House of Representatives

The Honorable Christopher Shays
Chairman
The Honorable Dennis J. Kucinich
Ranking Minority Member
Subcommittee on National Security,

Emerging Threats, and International Relations
Committee on Government Reform
House of Representatives

The Honorable Henry J. Hyde
Chairman
The Honorable Tom Lantos
Ranking Minority Member
Committee on International Relations
House of Representatives

Appendix I

Scope and Methodology

In monitoring resources supporting the reconstruction of Iraq, we focused
on the sources and uses of U.S., Iraqi, and international funding. U.S.
agencies provided us with electronic data files for appropriated funds,
the Development Fund for Iraq (DFI), vested assets, and seized assets.
These files generally included objective or project descriptions with
allocated, obligated, and disbursed amounts. We assigned each of the
funding line items to broad categories based on the descriptive
information available in the data files. To assign the data to a category,
we relied on project descriptions from agency data files.

In addressing the amount of U.S. funds that have been appropriated,
obligated, and disbursed for the Iraq reconstruction effort, we collected
funding information from the Department of Defense (DOD), including the
Project and Contracting Office (PCO), the U.S. Army Corps of Engineers
(USACE), and others; Department of State; the Department of the Treasury;
U.S. Agency for International Development (USAID); and the Coalition
Provisional Authority (CPA). Data for U.S. appropriated funds are as of
March 31, 2005. We also reviewed Defense Contract Audit Agency reports,
U.S. agency inspector generals' reports, Special Inspector General for
Iraq Reconstruction (SIGIR) reports, other audit agency reports, and
Office of Management and Budget (OMB) documents. Although we have not
audited the funding data and are not expressing our opinion on them, we
discussed the sources and limitations of the data with the appropriate
officials and checked them, when possible, with other information sources.
We determined that the data were sufficiently reliable for broad
comparisons in the aggregate and the category descriptions we have made.

To identify sources and uses of DFI funds, vested assets, and seized
assets, we relied on funding data from the CPA and DOD through June 28,
2004. To determine the reliability of these data, we examined the
financial files and interviewed CPA officials responsible for the data.
Based on these evaluations, we determined the data are sufficiently
reliable to describe the major deposits to the DFI and the allocations and
disbursements by major categories. We did not audit these data and are not
expressing our opinion on them. After June 28, 2004, the stewardship of
the DFI was turned over to the Iraqi Interim Government. We continued to
obtain data from DOD regarding DFI funds obligated before June 28, 2004,
and vested and seized funds balances.

To address international assistance for rebuilding Iraq, we collected and
analyzed information provided by the State Department's Bureau of Economic
and Business Affairs. We also collected and reviewed reporting

Appendix I Scope and Methodology

documents from the International Reconstruction Fund Facility for Iraq
(IRFFI). To describe the activities of international donors, we reviewed
documents pertaining to the international donor conferences and the IRFFI
and interviewed U.S. officials. To assess the reliability of the data on
the pledges, commitments, and deposits made by international donors, we
interviewed officials at State who are responsible for monitoring data
provided by the IRFFI and donor nations. We determined that the data on
donor commitments and deposits made to the IRFFI were sufficiently
reliable for the purposes of reporting at the aggregate level.

For the U.S. reconstruction program, we focused our effort on U.S.
activities in the Iraqi oil, electricity, water, and health sectors.
Specifically, we focused on the condition of the sectors, the status of
the U.S. effort in these sectors, and the challenges affecting overall
sector progress. To determine the condition of the sectors, we reviewed
assessments made by the United Nations and World Bank, USAID, CPA, and
contractors. We also discussed sector conditions with cognizant U.S.
agency officials, contractors, and Iraqi officials.

To determine the status of the U.S. effort in the oil, electricity, water,
and health sectors, we reviewed documents obtained from the United
Nations, World Bank, CPA, State's Iraq Reconstruction Management Office
(IRMO), the PCO, USAID, the USACE, agency contractors, and selected Iraqi
ministries. We reviewed reports and planning documents prepared by USACE,
USAID, CPA, State, PCO, and contractors. We also interviewed U.S.
government and former CPA officials and contract personnel in the United
States and Iraq and participated in videoconferences between USACE
headquarters and Baghdad personnel. Specifically, we interviewed USAID,
State, PCO, USACE, and former CPA officials, in Washington, D.C. and Iraq
and their contractor representatives in the United States and Iraq.

To determine the challenges affecting sector progress, we reviewed
contractor and agency reporting and interviewed agency officials in the
United States and Iraq. Specifically, we reviewed CPA, PCO, State, USAID,
the USACE, and other reporting. We also interviewed agency officials in
Washington, D.C. and Iraq from USAID, State, PCO, USACE, Defense
Intelligence Agency, and former CPA officials; their contractor
representatives in the United States and Iraq; and Iraqi representatives
from the Ministry of Electricity, including Iraqi plant operators.

To assess the reliability of the data in the oil, power, water, and health
sectors, we interviewed officials at CPA, DOD, State, and USAID

Appendix I Scope and Methodology

responsible for gathering and monitoring data on reconstruction efforts.
We reviewed the data for discrepancies and checked them against other
sources, when available. We determined that the data were sufficiently
reliable to report general trends in each sector. Data obtained on crude
oil production and refined fuels inventories are based on Iraqi estimates
provided to State. Data on exports are based on U.S. agency estimates
related to daily export activities at terminals. Data on revenue are based
on U.S. agency estimates that use internationally recognized financial
sources for pricing calculations, such as Bloomberg and Platts. According
to State, the information that it periodically reports on production,
export, and revenue represents analysis based on the best available
information. Data obtained on daily electricity produced are from Iraqi,
USAID, or DOD estimates provided to State.

We conducted this part of our review from September 2004 through May 2005
in accordance with generally accepted government auditing standards.
Although we did not travel to Iraq to make project site visits during this
period due to security concerns; we interviewed U.S. officials via
teleconference and videoconference. In addition, when possible we
interviewed Iraqi officials when these officials traveled to the United
States.

Appendix II

Comments from the U.S. Agency for International Development

Appendix III

                     GAO Contact and Staff Acknowledgments

GAO Contact Joseph A. Christoff, (202) 512-8979.

  Staff Acknowledgments

(320315)

Key contributors to this report include Monica Brym, Lynn Cothern,
Aniruddha Dasgupta, Muriel Forster, Charles D. Groves, B. Patrick Hickey,
John Hutton, Sarah J. Lynch, Jodi Prosser, Michael Simon, and Audrey
Solis. Martin de Alteriis, Sharron Candon, Patrick Dickriede, Philip
Farah, Hynek Kalkus, Mary Moutsos, Nanette Ryen, Josie Sigl, and George
Taylor provided technical assistance.

GAO's Mission	The Government Accountability Office, the audit, evaluation
and investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of The fastest and easiest way to obtain copies of GAO
documents at no cost

is through GAO's Web site (www.gao.gov). Each weekday, GAO postsGAO
Reports and newly released reports, testimony, and correspondence on its
Web site. To Testimony have GAO e-mail you a list of newly posted products
every afternoon, go to

www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone:	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

  To Report Fraud, Contact:
  Waste, and Abuse in Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: [email protected] Programs Automated answering system: (800)
424-5454 or (202) 512-7470

Congressional	Gloria Jarmon, Managing Director, [email protected] (202)
512-4400 U.S. Government Accountability Office, 441 G Street NW, Room 7125

Relations Washington, D.C. 20548

Public Affairs	Paul Anderson, Managing Director, [email protected] (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
*** End of document. ***