Rebuilding Iraq: Stabilization, Reconstruction, and Financing	 
Challenges (08-FEB-06, GAO-06-428T).				 
                                                                 
The United States, along with coalition partners and various	 
international organizations, has undertaken a challenging and	 
costly effort to stabilize and rebuild Iraq following multiple	 
wars and decades of neglect by the former regime. This enormous  
effort is taking place in an unstable security environment,	 
concurrent with Iraqi efforts to transition to its first	 
permanent government. The United States' goal is to help the	 
Iraqi government develop a democratic, stable, and prosperous	 
country, at peace with itself and its neighbors, a partner in the
war against terrorism, enjoying the benefits of a free society	 
and a market economy. In this testimony, GAO discusses the	 
challenges (1) that the United States faces in its rebuilding and
stabilization efforts and (2) that the Iraqi government faces in 
financing future requirements. This statement is based on four	 
reports GAO has issued to the Congress since July 2005 and recent
trips to Iraq. Since July 2005, we have issued reports on (1) the
status of funding and reconstruction efforts in Iraq, focusing on
the progress achieved and challenges faced in rebuilding Iraq's  
infrastructure; (2) U.S. reconstruction efforts in the water and 
sanitation sector; (3) U.S. assistance for the January 2005 Iraqi
elections; and (4) U.S. efforts to stabilize the security	 
situation in Iraq (a classified report).			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-428T					        
    ACCNO:   A46517						        
  TITLE:     Rebuilding Iraq: Stabilization, Reconstruction, and      
Financing Challenges						 
     DATE:   02/08/2006 
  SUBJECT:   Critical infrastructure				 
	     Economic stabilization				 
	     Federal aid to foreign countries			 
	     Financial analysis 				 
	     Foreign financial assistance			 
	     Foreign governments				 
	     International cooperation				 
	     International organizations			 
	     Performance measures				 
	     Security threats					 
	     Iraq						 

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GAO-06-428T

     

     * Summary
     * Background
     * Security, Measurement, and Sustainability Challenges in Rebu
          * Strength of the Insurgency Has Made It Difficult to Transfer
               * Insurgency Has Intensified and Delayed the Transfer of Secur
               * Security Situation and Management Issues Have Affected Rebui
               * Recent Actions to Integrate Military and Civilian Rebuilding
          * Limited Performance Data and Measures and Inadequate Reporti
          * Iraq's Capacity to Operate and Maintain U.S.-Funded Projects
     * Iraq Faces Challenges in Financing Future Needs
          * Iraqi Needs May be Greater Than Originally Anticipated
          * Future Contributions for Iraq Reconstruction May Be Limited
          * Iraq Must Address Budget Constraints to Contribute to Future
     * Conclusion
     * Contact and Staff Acknowledgments:
          * Order by Mail or Phone

Testimony

Before the Committee on Foreign Relations, United States Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 9:30 a.m. EST

Wednesday, February 8, 2006

REBUILDING IRAQ

Stabilization, Reconstruction, and Financing Challenges

Statement of Joseph A. Christoff, Director International Affairs and Trade

GAO-06-428T

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss U.S. efforts to rebuild and
stabilize Iraq. The United States, along with its coalition partners and
various international organizations, has undertaken a challenging and
costly effort to stabilize and rebuild Iraq following multiple wars and
decades of neglect by the former regime. This enormous effort is taking
place in an unstable security environment, concurrent with Iraqi efforts
to transition to its first permanent government. The United States'
reconstruction assistance goal is to help the Iraqi government develop a
democratic, stable, and prosperous country, at peace with itself and its
neighbors, a partner in the war against terrorism, enjoying the benefits
of a free society and a market economy.

My testimony today is based on the four reports that we have issued to the
Congress since July 2005 and our recent trips to Iraq. Since July 2005, we
have reported on (1) the status of funding and reconstruction efforts in
Iraq, focusing on the progress we have achieved and the challenges we face
in rebuilding Iraq's infrastructure; (2) U.S. reconstruction efforts in
the water and sanitation sector; (3) U.S. assistance for the January 2005
Iraqi elections; and (4) U.S. efforts to stabilize the security situation
in Iraq (a classified report). We continue to review U.S. efforts to train
and equip Iraqi security forces, develop the oil and electricity sectors,
reduce corruption, and enhance the capacity of Iraqi ministries.

Based on these four reports and recent audit work conducted in Iraq, I
will discuss the challenges (1) that the United States faces in its
rebuilding and stabilization efforts and (2) that the Iraqi government
faces in financing future requirements.

This statement includes unclassified information only and is based on
recent GAO reports. We conducted our reviews for these reports between
September 2004 and October 2005 in accordance with generally accepted
government auditing standards. In addition, we recently conducted audit
work in Iraq in November 2005 and January 2006.

                                    Summary

The United States faces three key challenges in rebuilding and stabilizing
Iraq. First, the continuing strength of the insurgency has made it
difficult for the multinational force to develop effective and loyal Iraqi
security forces, transfer security responsibilities to them, and
progressively draw down U.S. forces in Iraq. The security situation in
Iraq has also affected rebuilding efforts. The security situation has
deteriorated since June 2003, with significant increases in attacks
against the coalition and coalition partners. Second, inadequate
performance data and measures make it difficult to determine the overall
progress and impact of U.S. reconstruction efforts. Although the United
States has set broad goals for providing essential services in Iraq,
limited performance measures present challenges in determining the overall
impact of U.S. projects. Third, the U.S. reconstruction program has
encountered difficulties with Iraq's inability to sustain new and
rehabilitated infrastructure projects and to address maintenance needs in
the water, sanitation, and electricity sectors. U.S. agencies are working
to develop better performance data and plans for sustaining the
rehabilitated infrastructure.

As the new Iraqi government forms, it must plan to secure the financial
resources it will need to continue the reconstruction and stabilization
efforts begun by the United States and international community. Iraq will
likely need more than the $56 billion that the World Bank, United Nations
(UN), and the Coalition Provisional Authority (CPA) estimated it would
require for reconstruction and stabilization efforts from 2004 through
2007. More severely degraded infrastructure, post-2003 conflict looting
and sabotage, and additional security costs have added to the country's
basic reconstruction needs. It is unclear how Iraq will finance these
additional requirements. While the United States has carried the primary
financial responsibility for rebuilding and stabilizing Iraq, its
commitments are largely obligated and remaining commitments and future
contributions are not finalized. Further, U.S. appropriations were never
intended to meet all Iraqi needs. In addition, international donors have
mostly committed loans for the reconstruction of Iraq that the government
is just beginning to access. Iraq's ability to contribute financially to
its own rebuilding and stabilization efforts will depend on the new
government's efforts to increase revenues obtained from crude oil exports,
reduce energy and food subsidies, control government operating expenses,
provide for a growing security force, and repay $84 billion in external
debt and war reparations.

                                   Background

From May 2003 through June 2004, the CPA, led by the United States and the
United Kingdom, was the UN-recognized coalition authority responsible for
the temporary governance of Iraq and for overseeing, directing, and
coordinating the reconstruction effort. In May 2003, the CPA dissolved the
military organizations of the former regime and began the process of
creating or reestablishing new Iraqi security forces, including the police
and a new Iraqi army. Over time, multinational force commanders assumed
responsibility for recruiting and training some Iraqi defense and police
forces in their areas of responsibility.1 In May 2004, the President
issued a National Security Presidential Directive, which stated that,
after the transition of power to the Iraqi government, the Department of
State (State), through its ambassador to Iraq, would be responsible for
all U.S. activities in Iraq except for security and military operations.
U.S. activities relating to security and military operations would be the
responsibility of the Department of Defense (DOD). The Presidential
Directive required the U.S. Central Command (CENTCOM) to direct all U.S.
government efforts to organize, equip, and train Iraqi security forces.
The Multi-National Security Transition Command-Iraq, which operates under
Multi-National Force-Iraq (MNF-I), now leads coalition efforts to train,
equip, and organize Iraqi security forces.

Other U.S. government agencies also play significant roles in the
reconstruction effort. The U.S. Agency for International Development
(USAID) is responsible for projects to restore Iraq's infrastructure,
support healthcare and education initiatives, expand economic
opportunities for Iraqis, and foster improved governance. The U.S. Army
Corps of Engineers provides engineering and technical services to USAID,
State, and military forces in Iraq. In December 2005, the responsibilities
of the Project Contracting Office (PCO), a temporary organization
responsible for program, project, asset, and financial management of
construction and nonconstruction activities, were merged with those of the
U.S. Army Corps of Engineers Gulf Region Division.

On June 28, 2004, the CPA transferred power to an interim sovereign Iraqi
government, the CPA was officially dissolved, and Iraq's transitional
period began. Under Iraq's transitional law,2 the transitional period
included the completion of a draft constitution in October 2005 and two
subsequent elections-a referendum on the constitution and an election for
a permanent government.3 The Iraqi people approved the constitution on
October 15, 2005, and voted for representatives to the Iraq Council of
Representatives on December 15, 2005. As of February 3, 2006, the
Independent Electoral Commission of Iraq had not certified the election
results for representatives.

1The CPA was responsible for police training at the Baghdad and Jordan
academies. The Iraqi army units were trained by the Multi-National
Security Transition Command-Iraq.

2Law of Administration for the State of Iraq for the Transitional Period,
March 2004.

3See GAO, Iraq's Transitional Law, GAO-04-746R (Washington, D.C.: May 25,
2004), for more information on key events during Iraq's transitional
period.

Once certified, the representatives are to form a permanent government.
According to U.S. officials and Iraqi constitutional experts, the new
Iraqi government is likely to confront the same issues it confronted prior
to the referendum-the power of the central government, control of Iraq's
natural resources, and the application of Islamic law. According to U.S.
officials, once the Iraqi legislature commences work, it will form a
committee that has 4 months to recommend amendments to the constitution.
To take effect, these proposed amendments must be approved by the Iraqi
legislature and then Iraqi citizens must vote on them in a referendum
within 2 months.4

     Security, Measurement, and Sustainability Challenges in Rebuilding and
                                Stabilizing Iraq

The United States faces three key challenges in stabilizing and rebuilding
Iraq. First, the unstable security environment and the continuing strength
of the insurgency have made it difficult for the United States to transfer
security responsibilities to Iraqi forces and to engage in rebuilding
efforts. Second, inadequate performance data and measures make it
difficult to determine the overall progress and impact of U.S.
reconstruction efforts. Third, the U.S. reconstruction program has
encountered difficulties with Iraq's inability to sustain new and
rehabilitated infrastructure projects and to address maintenance needs in
the water, sanitation, and electricity sectors. U.S. agencies are working
to develop better performance data and plans for sustaining rehabilitated
infrastructure.

Strength of the Insurgency Has Made It Difficult to Transfer Security
Responsibilities to Iraqi Forces and Engage in Rebuilding Efforts

Over the past 2 1/2 years, significant increases in attacks against the
coalition and coalition partners have made it difficult to transfer
security responsibilities to Iraqi forces and to engage in rebuilding
efforts in Iraq. The insurgency in Iraq intensified through October 2005
and has remained strong since then. Poor security conditions have delayed
the transfer of security responsibilities to Iraqi forces and the drawdown
of U.S. forces in Iraq. The unstable security environment has also
affected the cost and schedule of rebuilding efforts and has led, in part,
to project delays and increased costs for security services. Recently, the
administration has taken actions to integrate military and civilian
rebuilding and stabilization efforts.

4The referendum is successful if it is approved by the majority of the
voters and is not rejected by two-thirds of the voters in three or more
governorates.

  Insurgency Has Intensified and Delayed the Transfer of Security
  Responsibilities

The insurgency intensified through October 2005 and has remained strong
since then. As we reported in March 2005, the insurgency in
Iraq-particularly the Sunni insurgency-grew in complexity, intensity, and
lethality from June 2003 through early 2005.5 According to a February 2006
testimony by the Director of National Intelligence, insurgents are using
increasingly lethal improvised explosive devices and continue to adapt to
coalition countermeasures.6

As shown in figure 1, enemy-initiated attacks against the coalition, its
Iraqi partners, and infrastructure increased in number over time. The
highest peak occurred during October 2005, around the time of Ramadan and
the October referendum on Iraq's constitution. This followed earlier peaks
in August and November 2004 and January 2005. According to a senior U.S.
military officer, attack levels ebb and flow as the various insurgent
groups-almost all of which are an intrinsic part of Iraq's
population-rearm and attack again.

5For more information on security trends and the makeup of the insurgency,
see GAO, Rebuilding Iraq: Preliminary Observations on Challenges in
Transferring Security Responsibilities to Iraqi Military and Police,
GAO-05-431T (Washington, D.C.: Mar. 14, 2005).

6U.S. Senate, Senate Select Committee on National Intelligence, Current
and Projected National Security Threats to the United States, Washington,
D.C.: Feb, 2, 2006.

Figure 1: Enemy-Initiated Attacks against the Coalition and Its Partners,
by Category, June 2003 through December 2005

aAccording to DIA officials, June 2003 data are incomplete.

As the administration has reported, insurgents share the goal of expelling
the coalition from Iraq and destabilizing the Iraqi government to pursue
their individual and, at times, conflicting goals.7 Iraqi Sunnis make up
the largest portion of the insurgency and present the most significant
threat to stability in Iraq. In February 2006, the Director of National
Intelligence reported that the Iraqi Sunnis' disaffection is likely to
remain high in 2006, even if a broad, inclusive national government
emerges. These insurgents continue to demonstrate the ability to recruit,
supply, and attack coalition and Iraqi security forces. Their leaders
continue to exploit Islamic themes, nationalism, and personal grievances
to fuel opposition to the government and recruit more fighters. According
to the Director, the most extreme Sunni jihadists, such as al-Qaeda in
Iraq, will remain unreconciled and continue to attack Iraqi and coalition
forces. The remainder of the insurgency consists of radical Shia groups,
some of whom are supported by Iran, violent extremists, criminals, and, to
a lesser degree, foreign fighters. According to the Director of National
Intelligence, Iran provides guidance and training to select Iraqi Shia
political groups and weapons and training to Shia militant groups to
enable anticoalition attacks. Iran also has contributed to the increasing
lethality of anticoalition attacks by enabling Shia militants to build
improvised explosive devices with explosively formed projectiles, similar
to those developed by Iran and Lebanese Hizballah.

7Department of Defense, Report to Congress, Measuring Stability and
Security in Iraq, July 20, 2005. National Security Council, National
Strategy for Victory in Iraq, November 2005.

The continuing strength of the insurgency has made it difficult for the
multinational force to develop effective and loyal Iraqi security forces,
transfer security responsibilities to them, and progressively draw down
U.S. forces in Iraq.8 The Secretary of Defense and MNF-I recently reported
progress in developing Iraqi security forces, saying that these forces
continue to grow in number, take on more responsibilities, and increase
their lead in counterinsurgency operations in some parts of Iraq. For
example, in December 2005 and January 2006, MNF-I reported that Iraqi army
battalions and brigades had assumed control of battle space9 in parts of
Ninewa, Qadisiyah, Babil, and Wasit provinces. According to the Director
for National Intelligence, Iraqi security forces are taking on
more-demanding missions, making incremental progress toward operational
independence, and becoming more capable of providing security. In the
meantime, coalition forces continue to support and assist the majority of
Iraqi security forces as they develop the capability to operate
independently.

8As we previously reported, the multinational force attempted to shift
responsibilities to Iraqi security forces during spring 2004 but did not
succeed. In response, resources available for developing Iraqi security
forces were increased during fiscal years 2004 and 2005. In November 2003,
the United States decided to maintain a force level of about 138,000
troops until at least the end of 2005, rather than drawing down to 105,000
troops by May 2004 as DOD had announced in November 2003. In December
2005, DOD announced a drawdown from 17 to 15 U.S. combat brigades, a
decrease to about 131,000 U.S. military personnel, by spring 2006.

9Battle space can be defined as the physical space in which Iraqi security
forces are conducting operations.

However, recent reports have recognized limitations in the effectiveness
of Iraqi security forces. For example, DOD's October 2005 report notes
that Iraqi forces will not be able to operate independently for some time
because they need logistical capabilities, ministry capacity, and command
and control and intelligence structures.10 In the November 2005 National
Strategy for Victory in Iraq, the administration cited a number of
challenges to developing effective Iraqi security forces, including the
need to guard against infiltration by elements whose first loyalties are
to institutions other than the Iraqi government and to address the
militias and armed groups that are outside the formal security sector and
government control. Moreover, according to the Director of National
Intelligence's February 2006 report, Iraqi security forces are
experiencing difficulty in managing ethnic and sectarian divisions among
their units and personnel. GAO's classified report on Iraq's security
situation provided further information and analysis on the challenges to
developing Iraqi security forces and the conditions for the phased
drawdown of U.S. and other coalition forces.11

  Security Situation and Management Issues Have Affected Rebuilding Efforts

The security situation in Iraq has affected the cost and schedule of
reconstruction efforts. Security conditions have, in part, led to project
delays and increased costs for security services. Although it is difficult
to quantify the costs and delays resulting from poor security conditions,
both agency and contractor officials acknowledged that security costs have
diverted a considerable amount of reconstruction resources and have led to
canceling or reducing the scope of some reconstruction projects. For
example, in March 2005, USAID cancelled two task orders12 related to power
generation that totaled nearly $15 million to help pay for the increased
security costs incurred at another power generation project in southern
Baghdad. In another example, work was suspended at a sewer repair project
in central Iraq for 4 months in 2004 due to security concerns. In January
2006, State reported that direct and indirect security costs represent 16
to 22 percent of the overall cost of major infrastructure reconstruction
projects.13

10Department of Defense, Report to Congress, Measuring Stability and
Security in Iraq, October 2005.

11GAO, DOD Reports Should Link Economic, Governance, and Security
Indicators to Conditions for Stabilizing Iraq, GAO-06-152C (Washington,
D.C.: Oct. 2005).

12Task orders are placed against established contracts for the performance
of tasks during the period of the contracts.

In addition, the security environment in Iraq has led to severe
restrictions on the movement of civilian staff around the country and
reductions of a U.S. presence at reconstruction sites, according to U.S.
agency officials and contractors. For example, the Project Contracting
Office reported in February 2006, the number of attacks on convoys and
casualties had increased from 20 convoys attacked and 11 casualties in
October 2005 to 33 convoys attacked and 34 casualties in January 2006. In
another example, work at a wastewater plant in central Iraq was halted for
approximately 2 months in early 2005 because insurgent threats drove away
subcontractors and made the work too hazardous to perform. In the
assistance provided to support the electoral process, U.S.-funded grantees
and contractors also faced security restrictions that hampered their
movements and limited the scope of their work. For example, IFES14 was not
able to send its advisors to most of the governorate-level elections
administration offices, which hampered training and operations at those
facilities leading up to Iraq's Election Day on January 30, 2005.

While poor security conditions have slowed reconstruction and increased
costs, a variety of management challenges also have adversely affected the
implementation of the U.S. reconstruction program. In September 2005, we
reported that management challenges such as low initial cost estimates and
delays in funding and awarding task orders have led to the reduced scope
of the water and sanitation program and delays in starting projects. In
addition, U.S. agency and contractor officials have cited difficulties in
initially defining project scope, schedule, and cost, as well as concerns
with project execution, as further impeding progress and increasing
program costs. These difficulties include lack of agreement among U.S.
agencies, contractors, and Iraqi authorities; high staff turnover; an
inflationary environment that makes it difficult to submit accurate
pricing; unanticipated project site conditions; and uncertain ownership of
project sites.

13Department of State, Report to Congress, Section 2207 Report on Iraq
Relief and Reconstruction, January 2006.

14IFES is a nonpartisan, nonprofit organization founded in 1987 that
provides technical assistance concerning democracy and governance to
transitional democracies. In 2004, USAID gave IFES a $40 million grant to
provide technical assistance to the Independent Electoral Commission of
Iraq through the end of 2005 to help it administer elections.

Our ongoing work on Iraq's energy sectors and the management of
design-build contracts will provide additional information on the issues
that have affected the pace and costs of reconstruction.

  Recent Actions to Integrate Military and Civilian Rebuilding and Stabilization
  Efforts

The Administration has taken steps to develop a more comprehensive,
integrated approach to combating the insurgency and stabilizing Iraq. The
National Strategy for Victory in Iraq lays out an integrated political,
military, and economic strategy that goes beyond offensive military
operations and the development of Iraqi security forces in combating the
insurgency. Specifically, it calls for cooperation with and support for
local governmental institutions, the prompt dispersal of aid for quick and
visible reconstruction, and central government authorities who pay
attention to local needs.

Toward that end, U.S. agencies are developing tools for integrating
political, economic, and security activities in the field. For example,
USAID is developing the Focused Stabilization Strategic City Initiative
that will fund social and economic stabilization activities in communities
within 10 strategic cities. The program is intended to jump-start the
development of effective local government service delivery by directing
local energies from insurgency activities toward productive economic and
social opportunities. The U.S. embassy in Baghdad and MNF-I are also
developing provincial assistance teams15 as a component of an integrated
counterinsurgency strategy. These teams would consist of coalition
military and civilian personnel who would assist Iraq's provincial
governments with (1) developing a transparent and sustained capability to
govern; (2) promoting increased security, rule of law, and political and
economic development; and (3) providing the provincial administration
necessary to meet the basic needs of the population. It is unclear whether
these two efforts will become fully operational, as program documents have
noted problems in providing funding and security for them.

15As of late January 2006, these teams were called Provincial
Reconstruction Teams, or PRTs. A U.S. embassy document, however, called
for changing the name to Provincial Assistance Teams, or PATs, to reflect
the main effort of the teams-capacity development and sustainability of
the provincial government. Three provincial teams were operational as of
mid-January 2006.

Limited Performance Data and Measures and Inadequate Reporting Present
Difficulties in Determining Progress and Impact of Rebuilding Effort

State has set broad goals for providing essential services, and the U.S.
program has undertaken many rebuilding activities in Iraq. The U.S.
program has made some progress in accomplishing rebuilding activities,
such as rehabilitating some oil facilities to restart Iraq's oil
production, increasing electrical generation capacity, restoring some
water treatment plants, and building Iraqi health clinics. However,
limited performance data and measures make it difficult to determine and
report on the progress and impact of U.S. reconstruction. Although
information is difficult to obtain in an unstable security environment,
State reported that it is currently finalizing a set of metrics to track
the impact of reconstruction efforts.

           o  In the water and sanitation sector, the Department of State has
           primarily reported on the numbers of projects completed and the
           expected capacity of reconstructed treatment plants. However, we
           found that the data are incomplete and do not provide information
           on the scope and cost of individual projects nor do they indicate
           how much clean water is reaching intended users as a result of
           these projects. Moreover, reporting only the number of projects
           completed or under way provides little information on how U.S.
           efforts are improving the amount and quality of water reaching
           Iraqi households or their access to sanitation services.
           Information on access to water and its quality is difficult to
           obtain without adequate security or water-metering facilities.
           o  Limitations in health sector measurements also make it
           difficult to relate the progress of U.S. activities to its overall
           effort to improve the quality and access of health care in Iraq.
           Department of State measurements of progress in the health sector
           primarily track the number of completed facilities, an indicator
           of increased access to health care. However, the data available do
           not indicate the adequacy of equipment levels, staffing levels, or
           quality of care provided to the Iraqi population. Monitoring the
           staffing, training, and equipment levels at health facilities may
           help gauge the effectiveness of the U.S. reconstruction program
           and its impact on the Iraqi people.
           o  In the electricity sector, U.S. agencies have primarily
           reported on generation measures such as levels of added or
           restored generation capacity and daily power generation of
           electricity; numbers of projects completed; and average daily
           hours of power. However, these data do not show whether (1) the
           power generated is uninterrupted for the period specified (e.g.,
           average number of hours per day); (2) there are regional or
           geographic differences in the quantity of power generated; and (3)
           how much power is reaching intended users. Information on the
           distribution and access of electricity is difficult to obtain
           without adequate security or accurate metering capabilities.

           Opinion surveys and additional outcome measures have the potential
           to gauge the impact of the U.S. reconstruction efforts on the
           lives of Iraqi people and their satisfaction with these sectors. A
           USAID survey in 2005 found that the Iraqi people were generally
           unhappy with the quality of their water supply, waste disposal,
           and electricity services but approved of the primary health care
           services they received. In September 2005, we recommended that the
           Secretary of State address this issue of measuring progress and
           impact in the water and sanitation sector. State agreed with our
           recommendation and stated in January 2006 that it is currently
           finalizing a set of standard methodologies and metrics for water
           and other sectors that could be used to track the impact of U.S.
           reconstruction efforts.

           The U.S. reconstruction program has encountered difficulties with
           Iraq's ability to sustain the new and rehabilitated infrastructure
           and address maintenance needs. In the water, sanitation, and
           electricity sectors, in particular, some projects have been
           completed but have sustained damage or become inoperable due to
           Iraq's problems in maintaining or properly operating them. State
           reported in January 2006 that several efforts were under way to
           improve Iraq's ability to sustain the infrastructure rebuilt by
           the United States.

           o  In the water and sanitation sector, U.S. agencies have
           identified limitations in Iraq's capacity to maintain and operate
           reconstructed facilities, including problems with staffing,
           unreliable power to run treatment plants, insufficient spare
           parts, and poor operations and maintenance procedures.16 The U.S.
           embassy in Baghdad stated that it was moving from the previous
           model of building and turning over projects to Iraqi management
           toward a "build-train-turnover" system to protect the U.S.
           investment. However, these efforts are just beginning, and it is
           unclear whether the Iraqis will be able to maintain and operate
           completed projects and the more than $1 billion in additional
           large-scale water and sanitation projects expected to be completed
           through 2008. In September 2005, we recommended that the Secretary
           of State address the issue of sustainability in the water and
           sanitation sector. State agreed with our recommendation and stated
           that it is currently working with the Iraqi government to assess
           the additional resources needed to operate and maintain water and
           sanitation facilities that have been constructed or repaired by
           the United States.

           o  In the electricity sector, the Iraqis' capacity to operate and
           maintain the power plant infrastructure and equipment provided by
           the United States remains a challenge at both the plant and
           ministry levels. As a result, the infrastructure and equipment
           remain at risk of damage following their transfer to the Iraqis.
           In our interviews with Iraqi power plant officials from 13
           locations throughout Iraq, the officials stated that their
           training did not adequately prepare them to operate and maintain
           the new U.S.-provided gas turbine engines. Due to limited access
           to natural gas, some Iraqi power plants are using low-grade oil to
           fuel their natural gas combustion engines. The use of oil-based
           fuels, without adequate equipment modification and fuel treatment,
           decreases the power output of the turbines by up to 50 percent,
           requires three times more maintenance, and could result in
           equipment failure and damage that significantly reduces the life
           of the equipment, according to U.S. and Iraqi power plant
           officials. U.S. officials have acknowledged that more needs to be
           done to train plant operators and ensure that advisory services
           are provided after the turnover date. In January 2006, State
           reported that it has developed a strategy with the Ministry of
           Electricity to focus on rehabilitation and sustainment of
           electricity assets.

           Although agencies have incorporated some training programs and the
           development of operations and maintenance capacity into individual
           projects, problems with the turnover of completed projects, such
           as those in the water and sanitation and electricity sectors, have
           led to a greater interagency focus on improving project
           sustainability and building ministry capacity. In May 2005, an
           interagency working group including State, USAID, PCO, and the
           Army Corps of Engineers was formed to identify ways to address
           Iraq's capacity-development needs. The working group reported that
           a number of critical infrastructure facilities constructed or
           rehabilitated under U.S. funding have failed, will fail, or will
           operate in suboptimized conditions following handover to the
           Iraqis. To mitigate the potential for project failures, the
           working group recommended increasing the period of operational
           support for constructed facilities from 90 days to up to 1 year.
           In January 2006, State reported that it has several efforts under
           way focused on improving Iraq's ability to operate and maintain
           facilities over time. As part of our ongoing review of Iraq's
           energy sector, we will be assessing the extent to which the
           administration is providing funds to sustain the infrastructure
           facilities constructed or rehabilitated by the United States.

           As the new Iraqi government forms, it must plan to secure the
           financial resources it will need to continue the reconstruction
           and stabilization efforts begun by the United States and
           international community. Initial assessments in 2003 identified
           $56 billion in reconstruction needs across a variety of sectors in
           Iraq. However, Iraq's needs are greater than originally
           anticipated due to severely degraded infrastructure, post-conflict
           looting and sabotage, and additional security costs. The United
           States has borne the primary financial responsibility for
           rebuilding and stabilizing Iraq; however, its commitments are
           largely obligated and remaining commitments and future
           contributions are not finalized. Further, U.S. appropriations were
           never intended to meet all Iraqi needs. International donors have
           provided a lesser amount of funding for reconstruction and
           development activities; however, most of the pledged amount is in
           the form of loans that Iraq has just begun to access. Finally,
           Iraq's ability to contribute financially to its additional
           rebuilding and stabilization needs is dependent upon the new
           government's efforts to increase revenues obtained from crude oil
           exports, reduce energy and food subsidies, control government
           operating expenses, provide for a growing security force, and
           repay external debt and war reparations.

           Initial assessments of Iraq's needs through 2007 by the U.N.,
           World Bank, and the CPA estimated that the reconstruction of Iraq
           would require about $56 billion. The October 2003 joint UN/World
           Bank assessment identified $36 billion, from 2004 through 2007, in
           immediate and medium-term needs in 14 priority sectors, including
           education, health, electricity, transportation, agriculture, and
           cross-cutting areas such as human rights and the environment. For
           example, the assessment estimated that Iraq would need about $12
           billion for rehabilitation and reconstruction, new investment,
           technical assistance, and security in the electricity sector. In
           addition, the assessment noted that the CPA estimated an
           additional $20 billion would be needed from 2004 through 2007 to
           rebuild other critical sectors such as security and oil.

           Iraq may need more funding than currently available to meet the
           demands of the country. The state of some Iraqi infrastructure was
           more severely degraded than U.S. officials originally anticipated
           or initial assessments indicated. The condition of the
           infrastructure was further exacerbated by post-2003 conflict
           looting and sabotage. For example, some electrical facilities and
           transmission lines were damaged, and equipment and materials
           needed to operate treatment and sewerage facilities were destroyed
           by the looting that followed the 2003 conflict. In addition,
           insurgents continue to target electrical transmission lines and
           towers as well as oil pipelines that provide needed fuel for
           electrical generation. In the oil sector, a June 2003 U.S.
           government assessment found that more than $900 million would be
           needed to replace looted equipment at Iraqi oil facilities. These
           initial assessments assumed reconstruction would take place in a
           peace-time environment and did not include additional security
           costs.

           Further, these initial assessments assumed that Iraqi government
           revenues and private sector financing would increasingly cover
           long-term reconstruction requirements. This was based on the
           assumption that the rate of growth in oil production and total
           Iraqi revenues would increase over the next several years.
           However, private sector financing and government revenues may not
           yet meet these needs. According to a January 2006 International
           Monetary Fund (IMF) report, private sector investment will account
           for 8 percent of total projected investment for 2006, down from 12
           percent in 2005.17 In the oil sector alone, Iraq will likely need
           an estimated $30 billion over the next several years to reach and
           sustain an oil production capacity of 5 million barrels per day,
           according to industry experts and U.S. officials. For the
           electricity sector, Iraq projects that it will need $20 billion
           through 2010 to boost electrical capacity, according to the
           Department of Energy's Energy Information Administration.

           The United States is the primary contributor to rebuilding and
           stabilization efforts in Iraq. Since 2003, the United States has
           made available about $30 billion for activities that have largely
           focused on infrastructure repair and training of Iraqi security
           forces. As priorities changed, the United States reallocated about
           $5 billion of the $18.4 billion fiscal year 2004 emergency
           supplemental among the various sectors, over time increasing
           security and justice funds while decreasing resources for the
           water and electricity sectors.18 As of January 2006, of the $30
           billion appropriated, about $23 billion had been obligated and
           about $16 billion had been disbursed for activities that included
           infrastructure repair, training, and equipping of the security and
           law enforcement sector; infrastructure repair of the electricity,
           oil, and water and sanitation sectors; and CPA and U.S.
           administrative expenses. These appropriations were not intended to
           meet all of Iraq's needs.

           The United States has obligated nearly 80 percent of its available
           funds. Although remaining commitments and future contributions
           have not been finalized, they are likely to target activities for
           building ministerial capacity, sustaining existing infrastructure
           investments, and training and equipping the Iraqi security forces,
           based on agency reporting. For example, in January 2006, State
           reported a new initiative to address Iraqi ministerial capacity
           development at 12 national ministries. According to State, Embassy
           Baghdad plans to undertake a comprehensive approach to provide
           training in modern techniques of civil service policies,
           requirements-based budget processes, information technology
           standards, and logistics management systems to Iraqi officials in
           key ministries.

           International donors have provided a lesser amount of funding for
           reconstruction and development activities. According to State,
           donors have provided about $2.7 billion in multilateral and
           bilateral grants-of the pledged $13.6 billion-as of December
           2005.19 About $1.3 billion has been deposited by donors into the
           two trust funds of the International Reconstruction Fund Facility
           for Iraq (IRFFI),20 of which about $900 million had been obligated
           and about $400 million disbursed to individual projects, as of
           December 2005.21 Donors also have provided bilateral assistance
           for Iraq reconstruction activities; however, complete information
           on this assistance is not readily available. Most of the pledged
           amount is in the form of loans that the Iraqis have recently begun
           to access. About $10 billion, or 70 percent, of the $13.6 billion
           pledged in support of Iraq reconstruction is in the form of loans,
           primarily from the World Bank, the IMF, and Japan. In September
           2004, the IMF provided a $436 million emergency post-conflict
           assistance loan to facilitate Iraqi debt relief, and in December
           2005, Iraq secured a $685 million Stand-By Arrangement (SBA) with
           the IMF.22 On November 29, 2005, the World Bank approved a $100
           million loan within a $500 million program for concessional
           international development assistance.

           Iraq's fiscal ability to contribute to its own rebuilding is
           constrained by the amount of revenues obtained from crude oil
           exports, continuing subsidies for food and energy, growing costs
           for government salaries and pensions, increased demands for an
           expanding security force, and war reparations and external debt.

           Crude oil exports account for nearly 90 percent of the Iraqi
           government revenues in 2006, according to the IMF. Largely
           supporting Iraq's government operations and subsidies, crude oil
           export revenues are dependent upon export levels and market price.
           The Iraqi 2006 budget has projected that Iraq's crude oil export
           revenues will grow at an annual growth rate of 17 percent per year
           (based on an average production level of 2 million bpd in 2005 to
           3.6 million bpd in 2010), estimating an average market price of
           about $46 per barrel. Oil exports are projected to increase from
           1.4 million bpd in 2005 to 1.7 million bpd in 2006, according to
           the IMF. Iraq's current crude oil export capacity is theoretically
           as high as 2.5 million bpd, according to the Energy Information
           Administration at the Department of Energy. However, Iraq's crude
           oil export levels have averaged 1.4 million bpd as of December
           2005, in part due to attacks on the energy infrastructure and
           pipelines. In January 2006, crude oil export levels fell to an
           average of about 1.1 million bpd.23

           Further, a combination of insurgent attacks on crude oil and
           product pipelines, dilapidated infrastructure, and poor operations
           and maintenance have hindered domestic refining and have required
           Iraq to import significant portions of liquefied petroleum gas,
           gasoline, kerosene, and diesel. According to State, the Iraqi Oil
           Ministry estimates that the current average import cost of fuels
           is roughly $500 million each month.

           Current government subsidies constrain opportunities for growth
           and investment and have kept prices for food, oil, and electricity
           low. Before the war, at least 60 percent of Iraqis depended on
           monthly rations-known as the public distribution system
           (PDS)-provided by the UN Oil for Food program to meet household
           needs. The PDS continues to provide food subsidies to Iraqis. In
           addition, Iraqis pay below-market prices for refined fuels and, in
           the absence of effective meters, for electricity and water. Low
           prices have encouraged over-consumption and have fueled smuggling
           to neighboring countries. Food and energy subsidies account for
           about 18 percent of Iraq's projected gross domestic product (GDP)
           for 2006.

           As part of its Stand-By Arrangement with the IMF, Iraq plans to
           reduce the government subsidy of petroleum products, which would
           free up oil revenues to fund additional needs and reduce
           smuggling. According to the IMF, by the end of 2006, the Iraqi
           government plans to complete a series of adjustments to bring fuel
           prices closer to those of other Gulf countries. However, it is
           unclear whether the Iraqi government will have the political
           commitment to continue to raise fuel prices.

           Generous wage and pension benefits have added to budgetary
           pressures. Partly due to increases in these benefits, the Iraqi
           government's operating expenditures are projected to increase by
           over 24 percent from 2005 to 2006, according to the IMF. As a
           result, wages and pensions constitute about 21 percent of
           projected GDP for 2006. The IMF noted that it is important for the
           government to keep non-defense wages and pensions under firm
           control to contain the growth of civil service wages. As a first
           step, the Iraqi government plans to complete a census of all
           public service employees by June 2006.

           Iraq plans to spend more resources on its own defense. Iraq's
           security-related spending is currently projected to be about $5.3
           billion in 2006, growing from 7 to about 13 percent of projected
           GDP. The amount reflects rising costs of security and the transfer
           of security responsibilities from the United States to Iraq.

           The Iraqi government also owes over $84 billion to victims of its
           invasion of Kuwait and international creditors. As of December
           2005, Iraq owed about $33 billion in unpaid awards resulting from
           its invasion and occupation of Kuwait. As directed by the UN, Iraq
           currently deposits 5 percent of its oil proceeds into a UN
           compensation fund.24 Final payment of these awards could extend
           through 2020 depending on the growth of Iraq's oil proceeds. In
           addition, the IMF estimated that Iraq's external debt was about
           $51 billion at the end of 2005.

           For the past 2 1/2 years, the United States has provided $30
           billion with the intent of developing capable Iraqi security
           forces, rebuilding a looted and worn infrastructure, and
           supporting democratic elections. However, the United States has
           confronted a lethal insurgency that has taken many lives and made
           rebuilding Iraq a costly and challenging endeavor. It is unclear
           when Iraqi security forces will be able to operate independently,
           thereby enabling the United States to reduce its military
           presence.

           Similarly, it is unclear how U.S. efforts are helping Iraq obtain
           clean water, reliable electricity, or competent health care.
           Measuring the outcomes of U.S. efforts is important to ensure that
           the U.S. dollars spent are making a difference in the daily lives
           of the Iraqi people. In addition, the United States must ensure
           that the billions of dollars it has already invested in Iraq's
           infrastructure are not wasted. The Iraqis need additional training
           and preparation to operate and maintain the power plants, water
           and sewage treatment facilities, and health care centers the
           United States has rebuilt or restored. In response to our reports,
           State has begun to develop metrics for measuring progress and
           plans for sustaining the U.S.-built infrastructure. The
           administration's next budget will reveal its level of commitment
           to these challenges.

           But the challenges are not exclusively those of the United States.
           The Iraqis face the challenge of forming a government that has the
           support of all ethnic and religious groups. They also face the
           challenge of addressing those constitutional issues left
           unresolved from the October referendum-power of the central
           government, control of Iraq's natural resources, and the
           application of Islamic law. The new government also faces the
           equally difficult challenges of reducing subsidies, controlling
           public salaries and pensions, and sustaining the growing number of
           security forces. This will not be easy, but it is necessary for
           the Iraqi government to begin to contribute to its own rebuilding
           and stabilization efforts and to encourage investment by the
           international community and private sector.

           We continue to review U.S. efforts to train and equip Iraqi
           security forces, develop the oil and electricity sectors, reduce
           corruption, and enhance the capacity of Iraqi ministries.
           Specifically, we will examine efforts to stabilize Iraq and
           develop its security forces, including the challenge of ensuring
           that Iraq can independently fund, sustain, and support its new
           security forces; assess issues related to the development of
           Iraq's energy sector, including the sectors' needs as well as
           challenges such as corruption; and examine capacity-building
           efforts in the Iraqi ministries.

           Mr. Chairman, this concludes my prepared statement. I will be
           happy to answer any questions you or the other Committee members
           may have.

           For further information, please contact Joseph A. Christoff on
           (202) 512-8979. Individuals who made key contributions to this
           testimony were Monica Brym, Lynn Cothern, Bruce Kutnick, Steve
           Lord, Sarah Lynch, Judy McCloskey, Micah McMillan, Tet Miyabara,
           Jose Pena III, Audrey Solis, and Alper Tunca.

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Iraq's Capacity to Operate and Maintain U.S.-Funded Projects Presents
Sustainability Problems

16See GAO-06-179T and GAO, Rebuilding Iraq: U.S. Water and Sanitation
Efforts Need Improved Measures for Assessing Impact and Sustained
Resources for Maintaining Facilities, GAO-05-872 (Washington, D.C.: Sept.
2005), on limitations in the Iraqis' capacity to maintain and operate
reconstructed facilities.

                Iraq Faces Challenges in Financing Future Needs

Iraqi Needs May be Greater Than Originally Anticipated

Future Contributions for Iraq Reconstruction May Be Limited

17International Monetary Fund, Iraq: Request for Stand-By-Arrangement
(Washington, D.C., January 2006).

18See Emergency Supplemental Appropriations Act for Defense and for the
Reconstruction of Iraq and Afghanistan, 2004, P.L. 108-106.

19According to State information provided in October 2005, in addition to
the $13.6 billion, donors pledged an additional $203 million for Iraq
reconstruction at the IRFFI Donors' Committee meeting in Jordan in July
2005.

20The IRFFI was established in response to the June 24, 2003, UN technical
meeting and the 2003 Madrid conference's calls for a mechanism to channel
and coordinate donor resources for Iraq reconstruction and development
activities. The IRFFI is composed of two trust funds, one run by the
United Nations Development Group and the other by the World Bank Group.

21Data for the UN Iraq Trust Fund portion of the IRFFI are as of November
31, 2005.

Iraq Must Address Budget Constraints to Contribute to Future Rebuilding and
Stabilization Efforts

22If Iraq needs balance-of-payment support, the IMF has agreed to provide
$685 million as part of the SBA.

23According to State Department monthly estimates from January 2005 to
January 2006, crude oil production averages ranged from 1.71 to 2.17
million bpd and monthly crude oil export averages ranged from 1.05 to 1.61
million bpd.

                                   Conclusion

24The UN Security Council established the UN Compensation Commission in
1991 to process claims and pay compensation for damages and losses
resulting from Iraq's invasion and occupation of Kuwait; along with the
Oil for Food program, the commission received funding from Iraqi oil
proceeds. In May 2003, UN Security Council Resolution 1483 directed that 5
percent of oil proceeds are to be deposited into the UN Compensation Fund
account. As of January 2006, the commission had awarded $52.5 billion to
more than 1.5 million claimants and paid out about $20 billion of this
amount.

                       Contact and Staff Acknowledgments:

(320410)

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Highlights of GAO-06-428T , a testimony before the Committee on Foreign
Relations, United States Senate

February 8, 2006

REBUILDING IRAQ

Stabilization, Reconstruction, and Financing Challenges

The United States, along with coalition partners and various international
organizations, has undertaken a challenging and costly effort to stabilize
and rebuild Iraq following multiple wars and decades of neglect by the
former regime. This enormous effort is taking place in an unstable
security environment, concurrent with Iraqi efforts to transition to its
first permanent government. The United States' goal is to help the Iraqi
government develop a democratic, stable, and prosperous country, at peace
with itself and its neighbors, a partner in the war against terrorism,
enjoying the benefits of a free society and a market economy.

In this testimony, GAO discusses the challenges (1) that the United States
faces in its rebuilding and stabilization efforts and (2) that the Iraqi
government faces in financing future requirements.

This statement is based on four reports GAO has issued to the Congress
since July 2005 and recent trips to Iraq. Since July 2005, we have issued
reports on (1) the status of funding and reconstruction efforts in Iraq,
focusing on the progress achieved and challenges faced in rebuilding
Iraq's infrastructure; (2) U.S. reconstruction efforts in the water and
sanitation sector; (3) U.S. assistance for the January 2005 Iraqi
elections; and (4) U.S. efforts to stabilize the security situation in
Iraq (a classified report).

The United States faces three key challenges in rebuilding and stabilizing
Iraq. First, the security environment and the continuing strength of the
insurgency have made it difficult for the United States to transfer
security responsibilities to Iraqi forces and progressively draw down U.S.
forces. The security situation in Iraq has deteriorated since June 2003,
with significant increases in attacks against Iraqi and coalition forces.
In addition, the security situation has affected the cost and schedule of
rebuilding efforts. The State Department has reported that security costs
represent 16 to 22 percent of the overall costs of major infrastructure
projects.  Second, inadequate performance data and measures make it
difficult to determine the overall progress and impact of U.S.
reconstruction efforts. The United States has set broad goals for
providing essential services in Iraq, but limited performance measures
present challenges in determining the overall impact of U.S. projects.
Third, the U.S. reconstruction program has encountered difficulties with
Iraq's inability to sustain new and rehabilitated infrastructure projects
and to address basic maintenance needs in the water, sanitation, and
electricity sectors. U.S. agencies are working to develop better
performance data and plans for sustaining rehabilitated infrastructure.

As the new Iraqi government forms, it must plan to secure the financial
resources it will need to continue the reconstruction and stabilization
efforts begun by the United States and international community. Iraq will
likely need more than the $56 billion that the World Bank, United Nations,
and CPA estimated it would require for reconstruction and stabilization
efforts from 2004 to 2007. More severely degraded infrastructure,
post-2003 conflict looting and sabotage, and additional security costs
have added to the country's basic reconstruction needs. However, it is
unclear how Iraq will finance these additional requirements. While the
United States has borne the primary financial responsibility for
rebuilding and stabilizing Iraq, its commitments are largely obligated and
future commitments are not finalized. Further, U.S. appropriations were
never intended to meet all Iraqi needs. In addition, international donors
have mostly committed loans that the government of Iraq is just beginning
to tap. Iraq's ability to financially contribute to its own rebuilding and
stabilization efforts will depend on the new government's efforts to
increase revenues obtained from crude oil exports, reduce energy and food
subsidies, control government operating expenses, provide for a growing
security force, and repay $84 billion in external debt and war
reparations.
*** End of document. ***