Rebuilding Iraq: Reconstruction Progress Hindered by Contracting,
Security, and Capacity Challenges (15-FEB-07, GAO-07-426T).	 
                                                                 
The Department of Defense (DOD) has relied extensively on	 
contractors to undertake major reconstruction projects and	 
provide support to its deployed forces, but these efforts have	 
not always achieved desired outcomes. Further, the Iraqi	 
government must be able to reduce violence, sustain		 
reconstruction progress, improve basic services, and make a	 
positive difference in the daily lives of the Iraqi people. This 
statement discusses (1) factors affecting DOD's ability to	 
promote successful acquisition outcomes on its contracts for	 
reconstruction and for support to deployed forces in Iraq, (2)	 
the deteriorating security situation and the capabilities of the 
Iraqi security forces, and (3) issues affecting the Iraqi	 
government's ability to support and sustain future reconstruction
progress. The testimony is based upon our work on Iraq		 
reconstruction and stabilization efforts, DOD contracting	 
activities, and DOD's use of support contractors spanning several
years. This work was conducted in accordance with generally	 
accepted government auditing standards. 			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-426T					        
    ACCNO:   A65972						        
  TITLE:     Rebuilding Iraq: Reconstruction Progress Hindered by     
Contracting, Security, and Capacity Challenges			 
     DATE:   02/15/2007 
  SUBJECT:   Budgeting						 
	     Construction contracts				 
	     Contract administration				 
	     Contract oversight 				 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Employee training					 
	     Foreign governments				 
	     Physical security					 
	     Requirements definition				 
	     Service contracts					 
	     Accountability					 
	     Corruption 					 
	     Iraq						 

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GAO-07-426T

   

     * [1]Summary
     * [2]Background
     * [3]DOD Needs to Improve Its Capacity to Manage Contractors

          * [4]Changing Requirements and Resources Complicate Efforts to Ho
          * [5]DOD's Business Arrangements Contributed to Increased Risks o
          * [6]DOD Lacked the Capacity to Properly Manage and Assess Contra
          * [7]DOD Needs Clear and Comprehensive Guidance and Leadership to
          * [8]Military Commanders and Senior DOD Leaders Need to Have Visi
          * [9]DOD Lacks a Sufficient Number of Trained Contractor Manageme

     * [10]A Deteriorating Security Situation Continues to Hamper Recon
     * [11]The Iraqi Government Currently Lacks the Capacity to Sustain

          * [12]Despite Some Progress, Concerns about Ministries' Capacity a
          * [13]Iraq Has Spent Little of Its Annual Capital Budget to Help S

     * [14]Concluding Observations
     * [15]GAO Contacts and Acknowledgments
     * [16]GAO's Mission
     * [17]Obtaining Copies of GAO Reports and Testimony

          * [18]Order by Mail or Phone

     * [19]To Report Fraud, Waste, and Abuse in Federal Programs
     * [20]Congressional Relations
     * [21]Public Affairs

Testimony before the Committee on Oversight and Government Reform,

House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EST

Thursday, February 15, 2007

REBUILDING IRAQ

Reconstruction Progress Hindered by Contracting, Security, and Capacity
Challenges

Statement of David M. Walker
Comptroller General of the United States

GAO-07-426T

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss (1) factors affecting the
Department of Defense's (DOD) ability to promote successful acquisition
outcomes on its contracts for reconstruction and for support to deployed
forces in Iraq, (2) the deteriorating security situation and the
capabilities of the Iraqi security forces, and (3) issues affecting the
Iraqi government's ability to support and sustain future reconstruction
progress. Prudence with taxpayer funds and growing long-range fiscal
challenges demand that DOD maximize its return on the billions of dollars
it has invested in reconstruction projects and support contracts. Further,
strengthening Iraq's fragile government institutions, which have thus far
failed to adequately deter corruption, stimulate employment, or deliver
essential services is critical to establishing a peaceful, stable, and
secure Iraq.

DOD has relied extensively on contractors to undertake major
reconstruction projects and provide support to its troops, but these
efforts have not always achieved desired outcomes or achieved such
outcomes in an economic and efficient manner. The challenges encountered
in Iraq are emblematic of a range of systemic and long-standing challenges
faced by DOD. In this regard, we identified DOD contract management to be
high risk because of its vulnerability to fraud, waste, abuse, and
mismanagement 15 years ago and have reported on DOD's long-standing
problems with management and oversight of support contractors since 1997.
In a report issued in July 2006, we concluded that with awards to
contractors large and growing, DOD will continue to be vulnerable to
contracting fraud, waste or misuse of taxpayer dollars, and abuse.^1 While
DOD has acknowledged its vulnerabilities and taken some actions to address
them, many of the initiatives are still in their early stages and it is
too soon to tell what impact they may have.

The Iraqi situation is more complicated as the United States must rely on
the Iraqi government to play a larger role, which will require capacity
not yet present. As we previously reported, amid signs of progress, the
coalition faces numerous political, economic, and security challenges in
rebuilding Iraq. In addition, the continued violence increases the risk
that the United States will not be able to complete remaining
reconstruction projects as planned and threatens the Iraqi government's
ability to provide essential services to the Iraqi people.

^1GAO, Contract Management: DOD Vulnerabilities to Contracting Fraud,
Waste, and Abuse, [22]GAO-06-838R (Washington, D.C.: July 7, 2006).

This testimony is based upon GAO's extensive work on Iraq reconstruction
and stabilization efforts, DOD contracting activities, and DOD's use of
support contractors spanning several years. This work was conducted in
accordance with generally accepted government auditing standards.

Summary

The challenges faced by DOD on its reconstruction and support contracts
often reflect systemic and long-standing shortcomings in DOD's capacity to
manage contractor efforts. Such shortcomings result from various factors,
including poorly defined or changing requirements; the use of poor
business arrangements; the absence of senior leadership and guidance; and
an insufficient number of trained contracting, acquisition, and other
personnel to manage, assess, and oversee contractor performance. In turn,
these shortcomings manifest themselves in higher costs to taxpayers,
schedule delays, unmet objectives, and other undesirable outcomes. For
example, because DOD authorized contractors to begin work before reaching
agreement on the scope and price of that work, DOD paid millions of
dollars in incurred costs that were questioned by the Defense Contract
Audit Agency. A DOD contracting official noted that the payment of
incurred costs is required for cost-type contracts, absent unusual
circumstances. Similarly, DOD lacks visibility on the extent to which it
relies on contractors to support its operations. In turn, when senior
military leaders began to develop a base consolidation plan, officials
were unable to determine how many contractors were deployed and therefore
ran the risk of over- or under-building the capacity of the consolidated
bases. With about 29 percent of DOD's planned construction work remaining
and the need for continued support for deployed forces, it is essential
for DOD to address these shortcomings if the department is to increase its
return on its investment in Iraq.

U.S. reconstruction efforts also continue to be hampered by a security
situation that continues to deteriorate. Although the number of trained
and equipped Iraqi security forces has increased from about 174,000 in
July 2005 to about 323,000 in December 2006, and more Iraqi Army units
have taken the lead for counterinsurgency operations, attacks on coalition
and Iraqi security forces and civilians have all increased. Consequently,
U.S. forces have continued to conduct combat operations in urban areas,
especially Baghdad. Aggregate numbers of trained and equipped forces do
not provide information on the capabilities and needs of individual units.
Rather, this information is found in unit-level Transition Readiness
Assessment reports that are prepared by coalition advisors embedded in
Iraqi units. GAO has made repeated attempts since January 2006 to obtain
these assessments without success. These data are essential for the
Congress to make fully informed decisions in connection with its
authorization, appropriations, and oversight responsibilities.

As the United States attempts to turn over its reconstruction efforts, the
capacity of the Iraqi government to continue overall reconstruction
progress is undermined by shortfalls in the capacity of the Iraqi
ministries, widespread corruption, and the Iraq government's inability to
fund and execute projects for which funds were previously budgeted. Iraqi
government institutions are undeveloped and confront significant
challenges in staffing a competent, non-aligned civil service; using
modern technology; and managing resources and personnel effectively. For
example, according to U.S. government reports and international
assessments, ministry personnel are frequently selected on the basis of
political affiliation rather than competence or skills, and some
ministries are under the authority of political parties hostile to the
U.S. government. Further, according to U.S. officials, 20 to 30 percent of
the Ministry of Interior staff are "ghost employees" whose salaries are
collected by other officials. Corruption in Iraq poses a major challenge
to building an effective Iraqi government and could jeopardize future
flows of needed international assistance. According to U.S. officials,
unclear budgeting and procurement rules have affected Iraq's efforts to
spend capital budgets effectively and efficiently. For example, at the
Ministry of Oil, less than 1 percent of the $3.5 billion budgeted in 2006
for key enhancements to the country's oil production, distribution, and
export facilities had been spent as of August 2006.

Background

The broader context of U.S. efforts for Iraqi reconstruction is tied to
how missions and projects are being conducted and managed. Over the past
decade, DOD has increasingly relied on contractors to provide a range of
mission-critical services. Overall, DOD's obligations on service contracts
rose from $82.3 billion in fiscal year 1996 to $141.2 billion in fiscal
year 2005. According to DOD officials, the amount obligated on service
contracts exceeded the amount the department spent on major weapon
systems.

The growth in spending for services has coincided with decreases in DOD's
workforce. DOD carried out this downsizing, however, without ensuring that
it had the specific skills and competencies needed to accomplish DOD's
mission. For example, the amount, nature, and complexity of contracting
for services have increased, which has challenged DOD's ability to
maintain a workforce with the requisite knowledge of market conditions and
industry trends, the ability to prepare clear statements of work, the
technical details about the services they procure, and the capacity to
manage and oversee contractors. Participants in an October 2005 GAO forum
on Managing the Supplier Base for the 21^st Century commented that the
current federal acquisition workforce significantly lacks the new business
skills needed to act as contract managers.

Contractors have an important role to play in the discharge of the
government's responsibilities, and in some cases the use of contractors
can result in improved economy, efficiency, and effectiveness. At the same
time, there may be occasions when contractors are used to provide certain
services because the government lacks another viable and timely option. In
such cases, the government may actually be paying more and incurring
higher risk than if such services were provided by federal employees. In
this environment of increased reliance on contractors, sound planning and
contract execution are critical for success. We have previously identified
the need to examine the appropriate role for contractors to be among the
challenges in meeting the nation's defense and other needs in the 21st
century.^2

The proper role of contractors in providing services to the government is
currently the topic of some debate. In general, I believe there is a need
to focus greater attention on what type of functions and activities should
be contracted out and which ones should not, to review and reconsider the
current independence and conflict of interest rules relating to
contractors, and to identify the factors that prompt the government to use
contractors in circumstances where the proper choice might be the use of
civil servants or military personnel. Possible factors could include
inadequate force structure; outdated or inadequate hiring policies,
classification and compensation approaches; and inadequate numbers of
full-time equivalent slots.

Turning to Iraq, DOD has relied extensively on contractors to undertake
major reconstruction projects and provide support to its troops. For
example, DOD has responsibility for a significant portion of the more than
$30 billion in appropriated reconstruction funds and has awarded and
managed many of the large reconstruction contracts, such as the contracts
to rebuild Iraq's oil, water, and electrical infrastructure, and to train
and equip Iraqi security forces. Further, U.S. military forces in Iraq
have used contractors to a far greater extent than in prior operations to
provide interpreters and intelligence analysts, as well as more
traditional services such as weapon systems maintenance and base
operations support. The Army alone estimates that almost 60,000 contractor
employees currently support ongoing military operations in Southwest Asia
and has spent about $15.4 billion on its single largest support
contract--the Logistics Civil Augmentation Program (LOGCAP)--between 2001
and 2004.

^2GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government,

[23]GAO-05-325SP (Washington, D.C.: February 2005).

Reconstruction and support contracts are often cost-reimbursement-type
contracts, which allow the contractor to be reimbursed for reasonable,
allowable, and allocable costs to the extent prescribed in the contracts.
Further, these contracts often contain award fee provisions, which are
intended to incentivize more efficient and effective contractor
performance.^3 If contracts are not effectively managed and given
sufficient oversight, the government's risk is likely to increase. For
example, we have reported DOD needs to conduct periodic reviews of
services provided under cost-reimbursement contracts to ensure that
services are being provided and at an appropriate level and quality.
Without such a review, the government is at risk to pay for services it no
longer needs.

DOD Needs to Improve Its Capacity to Manage Contractors

DOD's reliance on contractors for key reconstruction efforts and support
to deployed forces requires that DOD create the conditions conducive for
success. Our work has shown that these conditions include a match between
requirements and resources, sound acquisition approaches, leadership and
guidance, visibility and knowledge of the number of contractors and the
services they provide, and the capacity to manage and assess contractor
performance. As we have previously reported, in many cases these
conditions were not present on DOD reconstruction and support contracts,
increasing the potential for fraud, waste, abuse, and mismanagement.

^3In December 2005, we reported that DOD programs engage in award fee
practices that undermine efforts to motivate contractor performance and
that do not hold contractors accountable for achieving desired acquisition
outcomes. See GAO, Defense Acquisitions: DOD Has Paid Billions in Award
and Incentive Fees Regardless of Acquisition Outcomes, [24]GAO-06-66
(Washington, D.C.: Dec. 19, 2005).

Several of my colleagues in the accountability community and I have
developed a definition of waste. As we see it, waste involves the
taxpayers in the aggregate not receiving reasonable value for money in
connection with any government funded activities due to an inappropriate
act or omission by players with control over or access to government
resources (e.g., executive, judicial or legislative branch employees,
contractors, grantees or other recipients). Importantly, waste involves a
transgression that is less than fraud and abuse. Further, most waste does
not involve a violation of law, but rather relates primarily to
mismanagement, inappropriate actions, or inadequate oversight.
Illustrative examples of waste could include:

           o unreasonable, unrealistic, inadequate or frequently changing
           requirements;
           o proceeding with development or production of systems without
           achieving an adequate maturity of related technologies in
           situations where there is no compelling national security interest
           to do so;
           o the failure to use competitive bidding in appropriate
           circumstances;
           o an over-reliance on cost-plus contracting arrangements where
           reasonable alternatives are available;
           o the payment of incentive and award fees in circumstances where
           the contractor's performance, in terms of costs, schedule and
           quality outcomes, does not justify such fees;
           o the failure to engage in selected pre-contracting activities for
           contingent events;
           o Congressional directions (e.g. earmarks) and agency spending
           actions where the action would not otherwise be taken based on an
           objective value and risk assessment and considering available
           resources.
			  
			  Changing Requirements and Resources Complicate Efforts to Hold
			  DOD and Contractors Accountable for Outcomes

           A prerequisite to having good outcomes is a match between
           well-defined requirements and available resources. Shifts in
           priorities and funding, even those made for good reasons,
           invariably have a cascading effect on individual contracts, making
           it more difficult to manage individual projects to successful
           outcomes and complicate efforts to hold DOD and contractors
           accountable for acquisition outcomes. I should note such problems
           reflect some of the systemic and long-standing challenges
           confronting DOD, whether on contracts for services or major weapon
           systems. Contracts, especially service contracts, often do not
           have definitive or realistic requirements at the outset needed to
           control costs and facilitate accountability.

           U.S. reconstruction goals were based on assumptions about the
           money and time needed, as well as a permissive security
           environment, all of which have proven unfounded. U.S. funding was
           not meant to rebuild Iraq's entire infrastructure, but rather to
           lay the groundwork for a longer-term reconstruction effort that
           anticipated significant assistance from international donors. To
           provide that foundation, the Coalition Provisional Authority (CPA)
           allocated $18.4 billion in fiscal year 2004 reconstruction funds
           among various projects in each reconstruction sector, such as oil,
           electricity, and water and sanitation.^4 The CPA used a
           multitiered contracting approach to manage and execute the
           projects. In this case, the CPA, through various military
           organizations, awarded 1 lead contractor, 6 sector contractors,
           and 12 design-build contracts in early 2004 (see fig. 1).

^4From May 2003 through June 2004, the CPA was responsible for overseeing,
directing, and coordinating rebuilding efforts.

Figure 1: DOD Construction Program Carried Out through a Multitiered
Contracting Approach

After the CPA dissolved, the Department of State initiated an examination
of the priorities and programs with the objectives of reprioritizing
funding for projects that would not begin until mid- to late-2005 and
using those funds to target key high-impact projects. By July 2005, the
State Department had conducted a series of funding reallocations to
address new priorities, including increased support for security and law
enforcement efforts and oil infrastructure enhancements. One of the
consequences of these reallocations was to reduce funding for the water
and sanitation sector by about 44 percent, from $4.6 billion to $2.6
billion. One reallocation of $1.9 billion in September 2004 led DOD's
Project and Contracting Office to cancel some projects, most of which had
been planned to start in mid-2005.

Additionally, higher than anticipated costs associated with using the
large design-build contracts contributed to DOD's decision to directly
contract with Iraqi firms. For example, in the electricity sector, high
cost estimates by one design-build contractor resulted in the termination
of five task orders and the resolicitation of that work. After the task
orders were canceled, the design-builder was slow to reduce overhead costs
in accordance with the reduced workload, according to agency officials and
documents. DOD is now directly contracting with Iraqi firms to reduce the
costs of reconstruction efforts not requiring advanced technical and
management expertise, such as erecting electrical distribution projects.
Similarly, in the transportation sector, the design-build contractor
demobilized and left Iraq shortly after award of the contract in March
2004 because DOD and the contractor agreed that the overall program costs
were too high. Subsequently, DOD has made greater use of Iraqi contractors
who were experienced in building roads and bridges.

Further, the lack of a permissive environment resulted in higher than
anticipated security costs, which in turn, resulted in diverting planned
reconstruction resources and led to canceling or reducing the scope of
certain reconstruction projects. As we reported in July 2005, U.S.
civilian agencies and the reconstruction contractors we evaluated
generally obtained security services from private security providers.^5 We
noted that the use of private security providers reflected, in part, the
fact that providing security was not part of the U.S. military's stated
mission. We also found, however, that despite significant role played by
private security providers, U.S. agencies generally did not have complete
data on the costs associated with their use. In June 2006, we reported
that the agencies had agreed to include requirements for reconstruction
contractors to report all costs for private security supplies and services
that the contractor or any subcontractor may have to acquire necessary for
successful contractor performance.^6

5GAO, Rebuilding Iraq: Actions Needed to Improve Use of Private Security
Providers, [25]GAO-05-737 (Washington, D.C.: July 28, 2005).

^6GAO, Rebuilding Iraq: Actions Still Needed to Improve Use of Private
Security Providers, [26]GAO-06-865T (Washington, D.C.: June 13, 2006).

DOD's Business Arrangements Contributed to Increased Risks on Individual
Contracts

Agency procurement personnel generally had limited advance warning prior
to awarding the initial reconstruction contracts and were uncertain as to
the full scope of reconstruction activities that were required. The need
to award contracts and begin reconstruction efforts quickly contributed to
DOD using business arrangements that potentially increased DOD's risks.
Such arrangements included allowing contractors to begin work before
agreeing on what needed to be done and at what price and, during the
initial stages of reconstruction, awarding contracts that were not awarded
under full and open competition.

To produce desired outcomes within available funding and required time
frames, DOD and its contractors need to clearly understand reconstruction
objectives and how they translate into the contract's terms and
conditions: the goods or services needed, the level of performance or
quality desired, the schedule, and the cost. When requirements were not
clear, DOD often entered into contract arrangements that posed additional
risks, in particular by authorizing contractors to begin work before key
terms and conditions, including the work to be performed and its projected
costs, were fully defined. For example,

           o In 2004, we issued two reports that identified a considerable
           amount of work that was being undertaken in Iraq as undefinitized
           contract actions.^7 For example, we reported that as of March
           2004, about $1.8 billion had been obligated on reconstruction
           contract actions without DOD and the contractors reaching
           agreement on the final scope and price of the work. Similarly, we
           found that as of June 2004, the Army and the contractor had
           definitized only 13 of the 54 task orders on the LOGCAP contract
           that required definitization. The lack of definitization
           contributed to the Army's inability to conduct award fee boards to
           assess the contractor's performance.^8

           o In September 2005, we reported that difficulties in defining the
           cost, schedule, and work to be performed associated with projects
           in the water sector contributed to project delays and reduced
           scopes of work.^9 We reported that DOD had obligated about $873
           million on 24 task orders to rebuild Iraq's water and sanitation
           infrastructure, including municipal water supplies, sewage
           collection systems, dams, and a major irrigation project. We
           found, however, that agreement between the government and the
           contractors on the final cost, schedule, and scope of 18 of the 24
           task orders we reviewed had been delayed. These delays occurred,
           in part, because Iraqi authorities, U.S. agencies, and contractors
           could not agree on scopes of work and construction details. For
           example, at one wastewater project, local officials wanted a
           certain type of sewer design that increased that project's cost.

           o In September 2006, we issued a report on how DOD addressed
           issues raised by the Defense Contract Audit Agency in audits of
           Iraq-related contract costs.^10 In particular, we found that DOD
           contracting officials were less likely to remove the costs
           questioned by auditors if the contractor had already incurred
           these costs before the contract action was definitized. In one
           case, the Defense Contract Audit Agency questioned $84 million in
           an audit of a task order proposal for an oil mission. In this
           case, the contractor did not submit a proposal until a year after
           the work was authorized, and DOD and the contractor did not
           negotiate the final terms of the task order until more than a year
           after the contractor had completed the work. In the final
           negotiation documentation, the DOD contracting official stated
           that the payment of incurred costs is required for cost-type
           contracts, absent unusual circumstances. In contrast, in the few
           audit reports we reviewed where the government negotiated prior to
           starting work, we found that the portion of questioned costs
           removed from the proposal was substantial.

^7GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and
Management Challenges, [27]GAO-04-605 (Washington, D.C.: June 1, 2004);
and GAO, Military Operations: DOD's Extensive Use of Logistics Support
Contracts Requires Strengthened Oversight, [28]GAO-04-854 (Washington,
D.C.: July 19, 2004).

^8The LOGCAP award fee process was also hindered because of the failure to
finalize the award fee plan and to appoint individuals to serve on the
award fee boards, as well as concerns that some customers had not been
documenting their LOGCAP experiences.

The need to award contracts and begin reconstruction efforts quickly--a
contributing factor to DOD's use of undefinitized contract actions--also
contributed to DOD using other than full and open competition during the
initial stages of reconstruction. While full and open competition can be a
tool to mitigate acquisition risks, DOD procurement officials had only a
relatively short time--often only weeks--to award the first major
reconstruction contracts. As a result, these contracts were generally
awarded using other than full and open competition. We recently reported
that our ability to obtain complete information on DOD reconstruction
contract actions was limited because not all DOD components consistently
tracked or fully reported this information. Nevertheless, for the data we
were able to obtain, consisting of $7 billion, or 82 percent, of DOD's
total contract obligations between October 1, 2003, through March 31,
2006, DOD competed the vast majority of DOD's contract obligations.^11

9GAO, Rebuilding Iraq: U.S. Water and Sanitation Efforts Need Improved
Measures for Assessing Impact and Sustained Resources for Maintaining
Facilities, [29]GAO-05-872 (Washington, D.C.: Sept. 7, 2005).

^10GAO, Iraq Contract Costs: DOD Consideration of Defense Contract Audit
Agency's Findings, [30]GAO-06-1132 (Washington, D.C.: Sept. 25, 2006).

DOD Lacked the Capacity to Properly Manage and Assess Contractor Performance

An unstable contracting environment--when wants, needs, and contract
requirements are in flux--also requires greater attention to oversight,
which relies on a capable government workforce. Managing and assessing
postaward performance entails various activities to ensure that the
delivery of services meets the terms of the contract and requires adequate
surveillance resources, proper incentives, and a capable workforce for
overseeing contracting activities. If surveillance is not conducted, not
sufficient, or not well documented, DOD is at risk of being unable to
identify and correct poor contractor performance in a timely manner and
potentially paying too much for the services it receives.

We and others have reported on the impact of the lack of adequate numbers
of properly trained acquisition personnel and high turnover rates on
reconstruction efforts. For example,

           o Our June 2004 report found that early contract administration
           challenges were caused, in part, by the lack of a sufficient
           number of personnel.

           o Our September 2005 report on water and sanitation efforts found
           that frequent staff turnover affected both the definitization
           process and the overall pace and cost of reconstruction efforts.

           o The Special Inspector General for Iraq Reconstruction found that
           one of the CPA's critical shortcomings in personnel was the
           inadequate link between position requirements and necessary
           skills.

           o In 2004, an interagency assessment team found that the number of
           contracting personnel was insufficient to handle the increased
           workload expected with the influx of fiscal year 2004 funding. In
           part, the CPA's decision to award seven contracts in early 2004 to
           help better coordinate and manage the fiscal year 2004
           reconstruction efforts recognized this shortfall. As a result,
           however, DOD is relying on these contractors to help manage and
           oversee the design-build contractors.

^11GAO, Rebuilding Iraq: Status of Competition for Iraq Reconstruction
Contracts, [31]GAO-07-40 (Washington, D.C.: Oct. 6, 2006).

DOD's lack of capacity contributed to challenges in using interagency
contracting vehicles in Iraq. In certain instances, rather than develop
and award its own contracts, DOD used contracts already awarded by other
agencies. While this practice may improve efficiency and timeliness, these
contracts need to be effectively managed, and their use requires a higher
than usual degree of business acumen and flexibility on part of the
workforce.

During the initial stages of reconstruction, we and the DOD Inspector
General found instances in which DOD improperly used interagency
contracts. For example, the Inspector General found that a DOD component
circumvented contracting rules when awarding contracts on behalf of the
CPA when using the General Services Administration's federal supply
schedule. The Inspector General cited DOD's failure to plan for the
acquisition support the CPA needed to perform its mission as contributing
to this condition. Similarly, in April 2005 we reported that a lack of
effective management controls--in particular insufficient management
oversight and a lack of adequate training--led to breakdowns in the
issuance and administration of task orders for interrogation and other
services by the Department of the Interior on behalf of DOD.^12 These
breakdowns included:

           o issuing 10 out of 11 task orders that were beyond the scope of
           underlying contracts, in violation of competition rules;

           o not complying with additional DOD competition requirements when
           issuing task orders for services on existing contracts;

           o not properly justifying the decision to use interagency
           contracting;

           o not complying with ordering procedures meant to ensure best
           value for the government; and

           o not adequately monitoring contractor performance.

^12GAO, Interagency Contracting: Problems with DOD's and Interior's Orders
to Support Military Operations, [32]GAO-05-201 (Washington, D.C.: Apr. 29,
2005).

Because officials at Interior and the Army responsible for the orders did
not fully carry out their roles and responsibilities, the contractor was
allowed to play a role in the procurement process normally performed by
the government. Further, the Army officials responsible for overseeing the
contractor, for the most part, lacked knowledge of contracting issues and
were not aware of their basic duties and responsibilities. In part,
problems such as these contributed to our decision to designate management
of interagency contracting a high-risk area in January 2005.

To improve its capacity to plan and award contracts and manage contractor
performance, DOD has merged the Project and Contracting Office with the
U.S. Army Corps of Engineers' Gulf Region Division. Additionally, DOD
established the Joint Contracting Command-Iraq to consolidate and
prioritize contracting activities and resolve contracting issues, among
other things. As noted previously, DOD has also attempted to directly
contract with Iraqi firms, rather than rely on the large U.S. design-build
contracts that it had awarded in early 2004. Although DOD expects this
approach will reduce costs, it will also likely increase the
administrative and oversight burden on DOD's workforce.

DOD Needs Clear and Comprehensive Guidance and Leadership to Manage and Oversee
Support Contractors

Since the mid-1990s, our reports have highlighted the need for clear and
comprehensive guidance for managing and overseeing the use of contractors
who support deployed forces. As we reported in December 2006, DOD has not
yet fully addressed this long-standing problem.^13

Such problems are not new. In assessing LOGCAP implementation during the
Bosnian peacekeeping mission in 1997, we identified weaknesses in the
available doctrine on how to manage contractor resources, including how to
integrate contractors with military units and what type of management and
oversight structure to establish.^14 We identified similar weaknesses when
we began reviewing DOD's use of contractors in Iraq. For example, in 2003
we reported that guidance and other oversight mechanisms varied widely at
the DOD, combatant command, and service levels, making it difficult to
manage contractors effectively.^15 Similarly, in our 2005 report on
private security contractors in Iraq, we noted that DOD had not issued any
guidance to units deploying to Iraq on how to work with or coordinate
efforts with private security contractors.^16 Further, we noted that the
military may not have a clear understanding of the role of contractors,
including private security providers, in Iraq and of the implications of
having private security providers on the battle space.

^13GAO, Military Operations: High-Level DOD Action Needed to Address
Long-standing Problems with Management and Oversight of Contractors
Supporting Deployed Forces, [33]GAO-07-145 (Washington, D.C.: Dec. 18,
2006).

^14GAO, Contingency Operations: Opportunities to Improve the Logistics
Civil Augmentation Program, [34]GAO/NSIAD-97-63 (Washington, D.C.: Feb.
11, 1997).

Our prior work has shown that it is important for organizations to provide
clear and complete guidance to those involved in program implementation.
In our view, establishing baseline policies for managing and overseeing
contractors would help ensure the efficient use of contractors in places
such as Iraq. DOD took a noteworthy step to address some of these issues
when it issued new guidance in 2005 on the use of contractors who support
deployed forces. However, as our December 2006 report made clear, DOD's
guidance does not address a number of problems we have repeatedly
raised--such as the need to provide adequate contract oversight personnel,
to collect and share lessons learned on the use of contractors supporting
deployed forces, and to provide DOD commanders and contract oversight
personnel with training on the use of contractors overseas prior to their
deployment.

In addition to identifying the lack of clear and comprehensive guidance
for managing contract personnel, we have issued several reports
highlighting the need for DOD components to comply with departmental
guidance on the use of contractors. For example, in our June 2003 report
we noted that DOD components were not complying with a long-standing
requirement to identify essential services provided by contractors and
develop backup plans to ensure the continuation of those services during
contingency operations should contractors become unavailable to provide
those services. We believe that risk is inherent when relying on
contractors to support deployed forces, and without a clear understanding
of the potential consequences of not having the essential service
available, the risks associated with the mission increase.

^15GAO, Military Operations: Contractors Provide Vital Services to
Deployed Forces but Are Not Adequately Addressed in DOD Plans,
[35]GAO-03-695 (Washington, D.C.: June 24, 2003).

^16 [36]GAO-05-737 .

In other reports, we highlighted our concerns over DOD's planning for the
use of contractor support in Iraq--including the need to comply with
guidance to identify operational requirements early in the planning
process. When contractors are involved in planning efforts early, and
given adequate time to plan and prepare to accomplish their assigned
missions, the quality of the contractor's services improves and contract
costs may be lowered. DOD's October 2005 guidance on the use of contractor
support to deployed forces went a long way to consolidate existing policy
and provide guidance on a wide range of contractor issues. However, as of
December 2006, we found little evidence that DOD components were
implementing that guidance, in part because no individual within DOD was
responsible for reviewing DOD and service efforts to ensure the guidance
was being consistently implemented.

We have made a number of recommendations for DOD to take steps to
establish clear leadership and accountability for contractor support
issues. For example, in our 2005 report on LOGCAP we recommended DOD
designate a LOGCAP coordinator with the authority to participate in
deliberations and advocate for the most effective and efficient use of the
LOGCAP contract. Similarly, in our comprehensive review of contractors on
the battlefield in 2006, we recommended DOD appoint a focal point within
the Office of the Under Secretary of Defense for Acquisition, Technology,
and Logistics--at a sufficiently senior level and with the appropriate
resources--dedicated to leading DOD's efforts to improve its contract
management and oversight. DOD agreed with these recommendations. In
October 2006, DOD established the office of the Assistant Deputy Under
Secretary of Defense for Program Support to serve as the office of primary
responsibility for contractor support issues, but the office's specific
roles and responsibilities have not yet been clearly defined.

Military Commanders and Senior DOD Leaders Need to Have Visibility over the
Contractors Who Support Them

DOD continues to lack the capability to provide senior leaders and
military commanders with complete information on support provided by
contractors to deployed forces. Without such visibility, senior leaders
and military commanders cannot develop a complete picture of the extent to
which they rely on contractors to support their operations. We first
reported the need for better visibility in 2002 during a review of the
costs associated with U.S. operations in the Balkans.^17 At that time, we
reported that DOD was unaware of (1) the number of contractors operating
in the Balkans, (2) the tasks those contractors were contracted to do, and
(3) the government's obligations to those contractors under the contracts.
We noted a similar situation in 2003 in our report on DOD's use of
contractors to support deployed forces in Southwest Asia and Kosovo.^18 At
that time, we reported that although most contract oversight personnel had
visibility over the individual contracts for which they were directly
responsible, visibility of all contractor support at a specific location
was practically nonexistent at the combatant commands, component commands,
and deployed locations we visited. As a result, commanders at deployed
locations had limited visibility and understanding of all contractor
activity supporting their operations and frequently had no easy way to get
answers to questions about contractor support. This lack of visibility
inhibited the ability of commanders to resolve issues associated with
contractor support such as force protection issues and the provision of
support to the contractor personnel.

^17GAO, Defense Budget: Need to Strengthen Guidance and Oversight of
Contingency Operations Costs, [37]GAO-02-450 (Washington, D.C.: May 21,
2002).

Moreover, in our December 2006 review of DOD's use of contractors in Iraq,
we found that DOD's continuing problems with limited visibility over
contractors in Iraq unnecessarily increased contracting costs to the
government and introduced unnecessary risk. Without visibility over where
contractors are deployed and what government support they are entitled to,
costs to the government may increase; for example, at a contractor
accountability task force meeting we attended, an Army Materiel Command
official noted that an Army official estimated that about $43 million is
lost each year on free meals provided to contractor employees at deployed
locations who also receive a per diem food allowance. Also, when senior
military leaders began to develop a base consolidation plan, officials
were unable to determine how many contractors were deployed and therefore
ran the risk of over- or under-building the capacity of the consolidated
bases. DOD's October 2005 guidance on contractor support to deployed
forces included a requirement that the department develop or designate a
joint database to maintain by-name accountability of contractors deploying
with the force and a summary of the services or capabilities they provide.
The Army has taken the lead in this effort, and recently DOD designated a
database intended to provide improved visibility over contractors deployed
to support the military in Iraq, Afghanistan, and elsewhere.

^18 [38]GAO-03-695 .

DOD Lacks a Sufficient Number of Trained Contractor Management and Oversight
Personnel

As I previously noted, having the capacity to manage and assess contractor
performance is a critical factor in promoting successful outcomes, yet as
we reported in December 2006, DOD does not have sufficient numbers of
trained contractor management and oversight personnel at deployed
locations. Such personnel include not only the contracting officers who
award contracts, but also those personnel who define the requirements,
receive or benefit from the services obtained, and monitor contractor
performance. The lack of an adequate number of trained personnel limits
DOD's ability to obtain a reasonable assurance that contractors are
meeting contract requirements efficiently and effectively.

Several contract oversight personnel stated that DOD does not have
adequate personnel at deployed locations to effectively oversee and manage
contractors. For example, an Army official acknowledged that the Army is
struggling to find the capacity and expertise to provide the contracting
support needed in Iraq. In addition, officials responsible for contracting
with Multinational Forces-Iraq stated that they did not have enough
contract oversight personnel and quality assurance representatives to
allow the organization to reduce the Army's use of the LOGCAP contract by
awarding more sustainment contracts for base operations support in Iraq.
Similarly, a LOGCAP program official noted that if adequate staffing had
been in place, the Army could have realized substantial savings on the
LOGCAP contract through more effective reviews of new requirements.
Finally, the contracting officer's representative for an intelligence
support contract in Iraq stated that he was unable to visit all of the
locations that he was responsible for overseeing.

The inability of contract oversight personnel to visit all the locations
they are responsible for can create problems for units that face
difficulties resolving contractor performance issues at those locations.
For example, officials from a brigade support battalion stated that they
had several concerns with the performance of a contractor that provided
maintenance for the brigade's mine-clearing equipment. These concerns
included delays in obtaining spare parts and a disagreement over the
contractor's obligation to provide support in more austere locations in
Iraq. According to the officials, their efforts to resolve these problems
in a timely manner were hindered because the contracting officer's
representative was located in Baghdad while the unit was stationed in
western Iraq. In other instances, some contract oversight personnel may
not even reside within the theater of operations. For example, we found
the Defense Contract Management Agency's (DCMA) legal personnel
responsible for LOGCAP in Iraq were stationed in Germany, while other
LOGCAP contract oversight personnel were stationed in the United States.
According to a senior DCMA official in Iraq, relying on support from
contract oversight personnel outside the theater of operations makes
resolving contractor performance issues more difficult for military
commanders in Iraq, who are operating under the demands and higher
operational tempo of a contingency operation in a deployed location.

Our work has also shown the need for better predeployment training for
military commanders and contract oversight personnel on the use of
contractor support since the mid-1990s. Training is essential for military
commanders because of their responsibility for identifying and validating
requirements to be addressed by the contractor. In addition, commanders
are responsible for evaluating the contractor's performance and ensuring
the contract is performed in an economic and efficient manner. Similarly,
training is essential for DOD contract oversight personnel who monitor the
contractor's performance for the contracting officer.

As we reported in 2003, military commanders and contract management and
oversight personnel we met in the Balkans and throughout Southwest Asia
frequently cited the need for better preparatory training.^19
Additionally, in our 2004 review, we reported that many individuals using
support contracts such as LOGCAP were unaware that they had any contract
management or oversight roles.^20 Army customers stated that they knew
nothing about LOGCAP before their deployment and that they had received no
predeployment training regarding their roles and responsibilities in
ensuring that the contract was used economically and efficiently. In 2005,
we reported that military units did not receive specific predeployment
training or guidance about working with private security providers. In our
December 2006 report, we noted also that many officials responsible for
contract management and oversight in Iraq told us they received little or
no training on the use of contractors prior to their deployment, which led
to confusion over their roles and responsibilities. For example, in
several instances, military commanders attempted to direct or ran the risk
of directing a contractor to perform work outside the scope of the
contract, even though commanders are not authorized to do so. Such cases
can result in increased costs to the government.

^19 [39]GAO-03-695 .

^20 [40]GAO-04-854 .

Over the years, we have made several recommendations to DOD intended to
strengthen this training. Some of our recommendations were aimed at
improving the training of military personnel on the use of contractor
support at deployed locations, while others focused on training regarding
specific contracts, such as LOGCAP, or the role of private security
providers. Our recommendations have sought to ensure that military
personnel deploying overseas have a clear understanding of the role of
contractors and the support the military provides to them. DOD has agreed
with most of our recommendations. However, we continue to find little
evidence that DOD has improved training for military personnel on the use
of contractors prior to their deployment.

A Deteriorating Security Situation Continues to Hamper Reconstruction Efforts

The security situation continues to deteriorate, impeding the management
and execution of reconstruction efforts. To improve this condition, the
United States is, among other things, (1) training and equipping Iraqi
security forces that will be capable of leading counterinsurgency
operations, and (2) transferring security responsibilities to Iraqi forces
and the Iraqi government as capabilities improve. Although progress has
been made in transferring more responsibilities to the Iraqi security
forces, the capabilities of individual units are uncertain.

Since the fall of 2003, the U.S.-led multinational force in Iraq has
developed and refined a series of plans to transfer security
responsibilities to the Iraqi government and security forces, with the
intent of creating conditions that would allow a gradual drawdown of the
140,000 U.S. military personnel in Iraq. This security transition was to
occur first in conjunction with the neutralization of Iraq's insurgency
and second with the development of Iraqi forces and government
institutions capable of securing their country.

DOD and the State Department have reported progress in implementing the
current security transition plan. For example, the State Department has
reported that the number of trained and equipped Iraqi army and police
forces has increased from about 174,000 in July 2005 to about 323,000 in
December 2006. DOD and the State Department also have reported progress in
transferring security responsibilities to Iraqi army units and provincial
governments. For example, the number of Iraqi army battalions in the lead
for counterinsurgency operations has increased from 21 in March 2005 to 89
in October 2006. In addition, 7 Iraqi army division headquarters and 30
brigade headquarters had assumed the lead by December 2006. Moreover, by
mid-December 2006, three provincial governments--Muthanna, Dhi Qar, and
Najaf--had taken over security responsibilities for their provinces.

The reported progress in transferring security responsibilities to Iraq,
however, has not led to improved security conditions. Since June 2003,
overall security conditions in Iraq have deteriorated and grown more
complex, as evidenced by the increased numbers of attacks and more recent
Sunni-Shi'a sectarian strife after the February 2006 bombing of the Golden
Mosque in Samarra (see figure 2). Enemy-initiated attacks against the
coalition and its Iraqi partners have continued to increase during 2006.
For example, the average total attacks per day increased from about 70 per
day in January 2006 to about 180 per day in October 2006. In December
2006, the attacks averaged about 160 per day. These attacks have increased
around major religious and political events, such as Ramadan and
elections. Coalition forces are still the primary target of attacks, but
the number of attacks on Iraqi security forces and civilians also has
increased since 2003. In October 2006, the State Department reported that
the recent increase in violence has hindered efforts to engage with Iraqi
partners and shows the difficulty in making political and economic
progress in the absence of adequate security conditions.

Figure 2: Enemy-Initiated Attacks against the Coalition and Its Iraqi
Partners

Note: An unclassified breakout of attacks by category is not available for
September 2006, and an unclassified number of attacks is not available for
November 2006.

Further, because of the level of violence in Iraq, the United States has
not been able to draw down the number of U.S. forces in Iraq as early as
planned. For example, after the increase in violence and collapse of Iraqi
security forces during the spring of 2004, DOD decided to maintain a force
level of about 138,000 troops until at least the end of 2005, rather than
reducing the number of troops to 105,000 by May 2004, as had been
announced the prior fall. Subsequently, DOD reversed a decision to
significantly reduce the U.S. force level during the spring of 2006
because Iraqi and coalition forces could not contain the rapidly
escalating violence that occurred the following summer. Moreover, rather
than moving out of urban areas, U.S. forces have continued to conduct
combat operations in Baghdad and other cities in Iraq, often in
conjunction with Iraqi security forces. As you know, DOD is in the process
of providing additional forces to help stem violence in Iraq.

Understanding the true capabilities of the Iraqi security forces is
essential for the Congress to make fully informed decisions in connection
with its authorization, appropriations, and oversight responsibilities.
DOD and State provide Congress with weekly and quarterly reports on the
progress made in developing capable Iraqi security forces and transferring
security responsibilities to the Iraqi army and the Iraqi government. This
information is provided in two key areas: (1) the number of trained and
equipped forces, and (2) the number of Iraqi army units and provincial
governments that have assumed responsibility for security of specific
geographic areas.

The aggregate nature of these reports, however, does not provide
comprehensive information on the capabilities and needs of individual
units. This information is found in unit-level Transition Readiness
Assessment (TRA) reports. The TRA is a joint assessment, prepared monthly
by the unit's coalition commander and Iraqi commander. According to
Multinational Force-Iraq guidance, the purpose of the TRA system is to
provide commanders with a method to consistently evaluate units; it also
helps to identify factors hindering unit progress, determine resource
shortfalls, and make resource allocation decisions. These reports provide
the coalition commander's professional judgment on an Iraqi unit's
capabilities and are based on ratings in personnel, command and control,
equipment, sustainment and logistics, training, and leadership. These
reports also serve as the basis for the Multinational Force-Iraq's
determination of when a unit is capable of leading counterinsurgency
operations and can assume security responsibilities for a specific area.

DOD provided GAO with classified, aggregate information on overall
readiness levels for the Iraqi security forces--including an
executive-level brief--and information on units in the lead, but has not
provided unit-level reports on Iraqi forces' capabilities. GAO has made
multiple requests for access to the unit-level TRA reports since January
2006. Nevertheless, as of last week, DOD still had not provided GAO
unit-level TRA data, thereby limiting oversight over the progress achieved
toward a critical objective.

The Iraqi Government Currently Lacks the Capacity to Sustain and Continue
Reconstruction and Security Efforts

While the United States has spent billions of dollars rebuilding the
infrastructure and developing Iraqi security forces, U.S. and World Bank
assessments have found that the Iraqi government's ability to sustain and
maintain reconstruction efforts is hindered by several factors, including
the lack of capacity in Iraq's key ministries and widespread corruption,
and the inability of the Iraqi government to spend its 2006 capital budget
for key infrastructure projects.

Despite Some Progress, Concerns about Ministries' Capacity and Widespread
Corruption Hinder Reconstruction Efforts

The United States has invested about $14 billion to restore essential
services by repairing oil facilities, increasing electricity generating
capacity, and restoring water treatment plants. For example, the U.S. Army
Corps of Engineers reported that it had completed 293 of 523 planned
electrical projects, including the installation of 35 natural gas turbines
in Iraqi power generation plants. Additionally, reconstruction efforts
have rebuilt or renovated schools, hospitals, border forts, post offices,
and railway stations. Despite these efforts, a considerable amount of
planned reconstruction work is not yet completed. DOD estimated that as of
October 8, 2006, about 29 percent of the planned work remained to be
completed, including some work that will not be completed until mid- to
late 2008.

The Iraqi government has had difficulty operating and sustaining the aging
oil infrastructure and maintaining the new and rehabilitated power
generation facilities. For example,

           o Iraq's oil production and exports have consistently fallen below
           their respective program goals. In 2006, oil production averaged
           2.1 million barrels per day, compared with the U.S. goal of 3.0
           million barrels per day. The Ministry of Oil has had difficulty
           operating and maintaining the refineries. According to U.S.
           officials, Iraq lacks qualified staff and expertise at the field,
           plant, and ministry levels, as well as an effective inventory
           control system for spare parts. According to the State Department,
           the Ministry of Oil will have difficulty maintaining future
           production levels unless it initiates an ambitious rehabilitation
           program. In addition, oil smuggling and theft of refined oil
           products have cost Iraq substantial resources.

           o In 2006, electrical output reached 4,317 megawatts of peak
           generation per day, falling short of the U.S. goal of 6,000
           megawatts. Prewar electrical output averaged 4,200 megawatts per
           day. Production also was outpaced by increasing demand, which has
           averaged about 8,210 megawatts per day. The Iraqi government has
           had difficulty sustaining the existing facilities. Problems
           include the lack of training, inadequate spare parts, and an
           ineffective asset management and parts inventory system. Moreover,
           plants are sometimes operated beyond their recommended limits,
           resulting in longer downtimes for maintenance. In addition, major
           transmission lines have been repeatedly sabotaged, and repair
           workers have been intimidated by anti-Iraqi forces.

In part, these shortfalls can be traced to the lack of capacity within
Iraq's central government ministries. Iraqi government institutions are
undeveloped and confront significant challenges in staffing a competent,
non-aligned civil service; using modern technology and managing resources
effectively; and effectively fighting corruption. According to U.S. and
World Bank assessments, ministry personnel are frequently selected on the
basis of political affiliation rather than competence or skills, and some
ministries are under the authority of political parties hostile to the
U.S. government. The Iraqi ministries also lack adequate technology and
have difficulty managing their resources and personnel. For example, the
World Bank reports that the Iraqi government pays salaries to nonexistent,
or ghost, employees that are collected by other officials. According to
U.S. officials, 20 to 30 percent of the Ministry of Interior staff are
ghost employees.

Further, corruption in Iraq is reportedly widespread and poses a major
challenge to building an effective Iraqi government and could jeopardize
future flows of needed international assistance. For example, a World Bank
report notes that corruption undermines the government's ability to make
effective use of current reconstruction assistance. A 2006 survey by
Transparency International ranked Iraq's government as the second most
corrupt government in the world. Moreover, between January 2005 and August
2006, 56 officials in Iraq's ministries were either convicted of
corruption charges or subject to arrest warrants.

According to U.S. government and World Bank reports, the reasons for
corruption in the Iraqi ministries are several, including the following:

           o the absence of an effective Iraqi banking system leaves the
           government dependent on cash transactions;

           o the majority of key Iraqi ministries have inadequately
           transparent, obsolete, or ambiguous procurement systems; and

           o key accountability institutions, such as the inspectors general
           who were installed in each Iraqi ministry in 2004, lack the
           resources and independence to operate effectively and
           consistently.

Corruption is also pervasive in the oil sector, a critical source of
revenue for the Iraqi government. In 2006, the World Bank and the Ministry
of Oil's Inspector General estimated that millions of dollars of
government revenue is lost each year to oil smuggling or diversion of
refined products. According to State Department officials and reports,
about 10 percent to 30 percent of refined fuels is diverted to the black
market or is smuggled out of Iraq and sold for a profit. According to U.S.
embassy documents, the insurgency has been partly funded by corrupt
activities within Iraq and from skimming profits from black marketers. In
addition, Iraq lacks fully functioning meters to measure oil production
and exports, precluding control over the distribution and sale of crude
and refined products.

Iraq Has Spent Little of Its Annual Capital Budget to Help Support
Reconstruction Efforts

Sound government budgeting practices can help determine the priorities of
the new government, provide transparency on government operations, and
help decision makers weigh competing demands for limited resources.
However, unclear budgeting and procurement rules have affected Iraq's
efforts to spend capital budgets effectively and efficiently, according to
U.S. officials. The inability to spend the funds raises serious questions
for the government, which has to demonstrate to skeptical citizens that it
can improve basic services and make a difference in their daily lives. The
U.S. government has launched a series of initiatives in conjunction with
other donors to address this issue and improve the Iraqi government's
budget execution.

When the Iraqi government assumed control over its finances in 2004, it
became responsible for determining how more than $25 billion annually in
government revenues would be collected and spent to rebuild the country
and operate the government. Unclear budgeting and procurement rules have
affected Iraq's efforts to spend capital budgets effectively and
efficiently, according to U.S. officials. As of August 2006, the
government of Iraq had spent, on average, 14 percent of its 2006 capital
projects budget (Iraq's fiscal year begins on January 1 of each year).
Some of the lowest rate of spending occurs at the Ministry of Oil, which
relies on damaged and outdated infrastructure to produce the oil that
provides nearly all of the country's revenues (see table 1).

Table 1: Iraq's 2006 Budget and Actual Expenditures through August 2006

  Dollars in millions                                                            
                 2006 annual budget        Expenditures through August 2006
              Capital  Capital   Total      Capital       Capital         
  Ministry      goods projects  budget        goods      projects   Total budget
  Finance         $10      $33 $16,506           $1           $74         $8,895
  Planning          4       27      55          0.4             3              9
  Interior        233       27   1,919           25           0.2            958
  Defense         864       33   3,443           12           0.0            831
  Oil               2    3,533   3,590          0.4             4             40
  Electricity       4      767     840          0.3           267            279
  Water           0.2      200     259          0.0            49             78
  Justice           3       10      74            2           0.2             34
  Others          272    1,552   7,290           77           480          3,501
  Total        $1,392   $6,181 $33,975 $117.0(8.4%) $877.0(14.2%) $14,623(43.0%)

Source: GAO analysis of Iraqi budget data.

Since most of the $34.5 billion in reconstruction funds provided between
fiscal years 2003 and 2006 have been obligated, unexpended Iraqi funds
represent an important source of additional financing. The capital goods
budgets of the Interior and Defense ministries were intended for the
purchase of weapons, ammunition, and vehicles, among other items. However,
as of August 2006, Interior and Defense had spent only about 11 percent
and 1 percent, respectively, of these budgeted funds.

Further, according to U.S. and foreign officials, the ability of the Iraqi
government to fund improvements in its oil and electricity sectors remain
uncertain. For example, the Ministry of Oil has had difficulty operating
and maintaining its aging infrastructure, including some refineries
originally constructed in the 1950s, 1960s, and 1970s. While the Ministry
of Oil's $3.5 billion 2006 capital project's budget targeted key
enhancements to the country's oil production, distribution, and export
facilities, as of August 2006, the ministry had spent less than 1 percent
of these budgeted funds.

Similarly, Iraq's electricity sector suffers from deteriorated, outdated,
and inefficient infrastructure resulting from two decades of
underinvestment in operations and maintenance, replacement, and expansion.
This weakened infrastructure has led to unplanned outages. Despite the
Ministry of Electricity's recent development of a 10-year master plan,
Iraq's ability to fund improvements in its electricity sector remains
uncertain. This uncertainty is due to low electricity tariffs, uncertain
donor commitments, and according to a World Bank assessment, an inadequate
legal and regulatory framework.

Concluding Observations

As I have discussed today, there are a number of conditions that exist in
Iraq that have led to, or will lead to, increased risk of fraud, waste,
and abuse of U.S. funds. DOD's extensive reliance on contractors to
undertake reconstruction projects and provide support to deployed forces
requires DOD to address long-standing challenges in an aggressive,
effective manner. This reliance raises a broader question as to whether
DOD has become too dependent on contractors to provide essential services
without clearly identifying roles and responsibilities, and employing
appropriate oversight and accountability mechanisms.

Continuing reconstruction progress will require overall improvement in the
security situation in Iraq. To do so, Iraqi security forces and provincial
governments must be in a position to take responsibility for the security
of their nation. At this time, their capacity to do so is questionable.
Furthermore, the U.S. and the international community will need to support
the Iraqi government's efforts to enhance its capacity to govern
effectively and efficiently if it is to make a positive difference in the
daily lives of the Iraqi people.

                                    - - - -

Mr. Chairman, this concludes my statement. I would be pleased to answer
any questions that you or other members may have at this time.

GAO Contacts and Acknowledgments

For questions regarding this testimony, please call Katherine V. Schinasi
at (202) 512-4841. Other contributors to this statement were Ridge Bowman,
Daniel Chen, Joseph Christoff, Carole Coffey, Lynn Cothern, Timothy
DiNapoli, Whitney Havens, John Hutton, John Krump, Steve Lord, Steve
Marchesani, Tet Miyabara, Judy McCloskey, Mary Moutsos, Ken Patton, Jim
Reynolds, and William Solis.

(120625)

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www.gao.gov/cgi-bin/getrpt?GAO-07-426T .

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[email protected].

Highlights of [48]GAO-07-426T , a testimony before the Committee on
Oversight and Government Reform, House of Representatives

February 15, 2007

REBUILDING IRAQ

Reconstruction Progress Hindered by Contracting, Security, and Capacity
Challenges

The Department of Defense (DOD) has relied extensively on contractors to
undertake major reconstruction projects and provide support to its
deployed forces, but these efforts have not always achieved desired
outcomes. Further, the Iraqi government must be able to reduce violence,
sustain reconstruction progress, improve basic services, and make a
positive difference in the daily lives of the Iraqi people.

This statement discusses (1) factors affecting DOD's ability to promote
successful acquisition outcomes on its contracts for reconstruction and
for support to deployed forces in Iraq, (2) the deteriorating security
situation and the capabilities of the Iraqi security forces, and (3)
issues affecting the Iraqi government's ability to support and sustain
future reconstruction progress.

The testimony is based upon our work on Iraq reconstruction and
stabilization efforts, DOD contracting activities, and DOD's use of
support contractors spanning several years. This work was conducted in
accordance with generally accepted government auditing standards.

[49]What GAO Recommends

GAO is making no new recommendations in this testimony. GAO has previously
made numerous recommendations to improve DOD's management and use of
contracts. DOD has generally agreed with these recommendations and has
taken some actions to implement them.

The challenges faced by DOD on its reconstruction and support contracts
often reflect systemic and long-standing shortcomings in DOD's capacity to
manage contractor efforts. Such shortcomings result from poorly defined or
changing requirements, the use of poor business arrangements, the absence
of senior leadership and guidance, and an insufficient number of trained
contracting, acquisition and other personnel to manage, assess and oversee
contractor performance. In turn, these shortcomings manifest themselves in
higher costs to taxpayers, schedule delays, unmet objectives, and other
undesirable outcomes. For example, because DOD authorized contractors to
begin work before reaching agreement on the scope and price of that work,
DOD paid millions of dollars in costs that were questioned by the Defense
Contract Audit Agency. Similarly, DOD lacks visibility on the extent to
which they rely on contractors to support their operations. When senior
military leaders began to develop a base consolidation plan, officials
were unable to determine how many contractors were deployed and therefore
ran the risk of over- or under-building the capacity of the consolidated
bases.

U.S. reconstruction efforts also continue to be hampered by a security
situation that continues to deteriorate. Although the number of trained
and equipped Iraqi security forces increased to about 323,000 in December
2006 and more Iraqi Army units have taken the lead for counterinsurgency
operations, attacks on coalition and Iraqi security forces and civilians
have all increased. Aggregate numbers of trained and equipped Iraqi
forces, however, do not provide information on the capabilities and needs
of individual units. GAO has made repeated attempts to obtain unit-level
Transition Readiness Assessments (TRAs) without success. This information
is essential for the Congress to make fully informed decisions in
connection with its authorization, appropriations, and oversight
responsibilities.

As the U.S. attempts to turn over its reconstruction efforts, the capacity
of the Iraqi government to continue overall reconstruction progress is
undermined by shortfalls in the capacity of the Iraqi ministries,
widespread corruption and the inability to fund and execute projects for
which funds were previously budgeted. Iraqi government institutions are
undeveloped and confront significant challenges in staffing a competent,
nonaligned civil service; using modern technology; and managing resources
and personnel effectively. For example, according to U.S. officials 20 to
30 percent of the Ministry of Interior staff are "ghost employees" whose
salaries are collected by other officials. Further, corruption in Iraq
poses a major challenge to building an effective Iraqi government and
could jeopardize future flows of needed international assistance. Unclear
budgeting and procurement rules have affected Iraq's efforts to spend
capital budgets effectively and efficiently, according to U.S. officials.
At the Ministry of Oil, for example, less than 1 percent of the $3.5
billion budgeted in 2006 for key enhancements to the country's oil
production, distribution, and export facilities, had been spent as of
August 2006.

References

Visible links
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-06-838R
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-06-66
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-737
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-06-865T
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-04-605
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-04-854
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-05-872
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1132
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-07-40
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-05-201
  33. http://www.gao.gov/cgi-bin/getrpt?GAO-07-145
  34. http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-97-63
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-03-695
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-05-737
  37. http://www.gao.gov/cgi-bin/getrpt?GAO-02-450
  38. http://www.gao.gov/cgi-bin/getrpt?GAO-03-695
  39. http://www.gao.gov/cgi-bin/getrpt?GAO-03-695
  40. http://www.gao.gov/cgi-bin/getrpt?GAO-04-854
  48. http://www.gao.gov/cgi-bin/getrpt?GAO-07-426T
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