STATEMENT OF STUART W.
BOWEN, JR.
SPECIAL INSPECTOR
GENERAL FOR IRAQ RECONSTRUCTION
BEFORE THE
UNITED STATES HOUSE OF
REPRESENTATIVES
COMMITTEE ON FOREIGN
AFFAIRS’ SUBCOMMITTEE ON INTERNATIONAL RELATIONS, HUMAN RIGHTS, AND OVERSIGHT
AND THE SUBCOMMITTEE ON THE MIDDLE EAST AND SOUTH ASIA
CAN IRAQ PAY FOR ITS OWN
RECONSTRUCTION?
Tuesday, March 27, 2007
Washington, D.C.
Chairman Delahunt, Chairman Ackerman, Ranking Member
Rohrabacher, Ranking Member Mike Pence, Distinguished Members of the Committee,
Ladies and Gentlemen. Thank you for this opportunity to address a very
important question facing the U.S.
reconstruction program in Iraq.
SIGIR’s Mandate
The Special Inspector General for Iraq Reconstruction
(SIGIR) has a well defined and narrow mandate to provide oversight of the U.S. efforts in the Iraq relief and reconstruction program.
In addition to our duties to promote economy, efficiency, and effectiveness,
SIGIR provides Quarterly Reports to the Congress, the Secretary of State and
the Secretary of Defense that update the status of relief and reconstruction
programs, as well as SIGIR’s oversight of these efforts. Within the context of
that second part of our mission, our organization gathers and analyzes a
significant amount of data that provides insight into the question posed by
this Committee. Although SIGIR has no statutory authority to audit any entity
of the Government of Iraq (GOI), we have interacted with the GOI, the various
international organizations that assist the GOI, and the United States
Government entities that engage with the GOI on these issues.
In addition, I have recently returned from my 15th
trip to Iraq
since I was appointed IG in January 2004. During those extended visits, I have established
a dialogue with many of the leaders and implementers of this effort and will give
this Committee my best estimate of progress within the historical context of
this complicated and challenging endeavor.
Reconstruction in Context
The term “reconstruction” needs to be examined within the
context of this hearing and the ongoing efforts in Iraq. Reconstruction is commonly
understood to describe the rebuilding of infrastructure in Iraq that has been degraded over
the last three decades by war, sanctions, and mismanagement by the Saddam Hussein
regime. However, during the last three years, much of the “reconstruction”
efforts undertaken with U.S., donor, and Iraqi funds—including new
construction, the rehabilitation of existing facilities, the purchase of
supplies and equipment, and a number of non-construction expenditures—have focused
on programs, such as democracy development and building the governance capacity
of both central and provincial leaders.
There is an oft-quoted report published by the World Bank
early in 2004 that estimates the total cost of “reconstruction” at $60 billion.
Over the last four years, the United States,
foreign donors, and the GOI revenues dedicated to “reconstruction” have totaled
more than $100 billion, yet there is widespread recognition that much remains
to be done to stabilize the infrastructure in Iraq. I have brought a chart from our last Quarterly
Report that lays out the various sources of those funds. In the past few weeks,
the head of the U.S. Army Corps of Engineers, Gulf Region Division, has been
quoted as saying $100 billion more is likely to be needed. Deputy Prime Minister Barham Saleh has stated
publicly that it will take $200 billion. These amounts are estimates of a
long-term effort and are not benchmarked or calculated based on specific plans.
To date, the most comprehensive approach for Iraq’s
long-term economic development is contained in the International Compact. Still
awaiting final approval, the compact lays out priorities that Iraq and the international community agree are
necessary for Iraq’s
long-term stability. But the very diversity in each of these estimates highlights
an essential point: the amount of “reconstruction” said to be required has generally
been driven by the amount of money available. An international development
expert used the following analogy to describe the situation; the GOI may want
to buy a luxury sedan, but it can function just fine with an economy car. How
much reconstruction is necessary to achieve a stable, democratic Iraq
is likely to remain an open question. Although the compact begins to lay that
out, substantial planning and assessment of the state of Iraq’s current infrastructure is
necessary before a figure can be agreed on. Without the figure, it is difficult
to provide a clear answer to the question, “Can Iraq pay for its own
reconstruction?”
Capacity Development
A recent SIGIR audit addresses an important component of Iraq’s
ability to manage and budget for its own reconstruction. SIGIR’s capacity
development audit completed in January 2007 focused on the U.S. efforts to support ministry
capacity development. The audit found that U.S. government organizations have
received $125 million and requested another $310 million for capacity
development assistance through FY 2008. The audit was unable, however, to
estimate how much funding overall is necessary to achieve the stated goal of a
self-sufficient Iraqi government. Although some attempts have been made to
measure the GOI ability to sustain itself, it remains extremely difficult to
develop a credible measure of this capacity.
Our audit made several recommendations to U.S. implementing agencies:
1. Develop
a baseline capacity assessment for all ministries.
2. Share
information among U.S.
government agencies working on capacity development.
3. Develop
a detailed plan for capacity development in concert with GOI, including identifying
outcomes.
4. Actively
work with international donors to help plan, fund, and execute improved
capacity development.
5. Assign
clear responsibility for overall U.S. government capacity development
efforts to one official or organization.
Senator John Warner requested another SIGIR audit that
touched on this question and focused on the capacity of the Iraqi Ministry of
Defense and Ministry of Interior. The audit reviewed logistics, specifically focusing
on U.S.
efforts to support the Ministry of Defense and Ministry of Interior; however,
it did not directly address GOI components. That audit, published in October
2006, found that the Iraq Ministries of Interior and Defense are not capable,
in the near term, of assuming responsibility for logistics support of the Iraqi
army and local and national police forces. MNF-I needs to do much more if it is
to meet the goal of turning over this responsibility to the Ministry of
Interior and Ministry of Defense by January 1, 2008. The sustainment of
logistics is critical to the turnover of full responsibility for security to
the GOI; DoD recognizes this as a primary focus of its efforts in 2007.
The Iraqi Budget
The 2007 GOI budget is $41.3 billion, which includes $10.1
billion in capital investment. This $10 billion is not a unique item in the
budget dedicated to reconstruction efforts defined by the United States. Rather, it is the
tabulation of the routine capital investment items allotted to the various
ministries—similar to the capital investment portion of any annual government
budget. Of that amount, $2.4 billion is slated to be given to the provincial
governments for regional construction projects. Most of the remaining capital
funds are going to the MOI and MOD. The latest reports from Baghdad indicate that the Ministry of Finance
has already begun the process of disbursing portions of that money to
ministries and provinces to initiate projects.
The 2007 GOI budget is also a deficit budget: it requires $7.7
billion in carry-over money from prior years (2005-2006) to break even. The GOI
allowed the surplus to build up for a variety of reasons, including the
constant turnover of the GOI, which made it difficult to sustain consensus on
how the capital budget should be spent. Whenever ministers have been replaced,
the process for moving forward on capital expenditures has had to restart, and
in many cases, interim ministers have focused on near-term priorities rather
than longer-horizon capital projects. In addition, international financial
organizations such as the IMF have encouraged Iraq to keep some reserve to make
up for its poor credit rating (and still considerable outstanding international
debt, which also tempered spending initiatives).
Another important achievement to note is the use of the
Foreign Military Sales (FMS) program to facilitate expenditures of Iraqi funds on
Iraqi security. At the end of 2006, knowing that the Ministries of Defense and
Interior had outstanding funds that would have to be returned to the Ministry
of Finance, DoD officials persuaded the GOI to move $1.9 billion into an FMS
account. This resulted in a two-fold benefit: first, the money was effectively
“spent” in 2006, and second, the Iraqi funds then became available to pay for
much needed supplies and equipment for the army and police through a
well-established U.S.-managed process.
While the GOI is moving forward in spending its $41 billion
2007 budget, several factors could negatively impact the effective expenditure
of Iraqi’s own revenue for reconstruction efforts.
Limitations on Iraq’s Capacity To Manage its
Reconstruction
A major limitation in Iraq’s
ability to finance more reconstruction can be traced to the Iraqi political
process and the historical distribution of funds by a strong, centrally controlled
Ministry of Finance (MOF). The Iraqis need to reach consensus on where, when,
and how the budget is distributed. The question is contentious not only at the national
level within the line ministries and within the Council of Representatives (COR),
but also in the provinces where consensus is difficult. In the provinces, the budgetary
capability of local officials runs the gamut from experienced execution in the
Kurdish regions, to nascent budgeting capacity in smaller provinces. There is
also the question of the political will of the GOI to make hard budget choices.
Finally, U.S.
and other assistance may have actually created a dependence on outside help to
perform the task of government, which has demotivated Iraqi officials. Thus, in
the current environment in Iraq,
it is very difficult to determine whether the GOI is leaning on international
donors for investments that it could fund and manage on its own and to what
degree sectarian or political interests distort reconstruction budgeting
decisions.
Budget Execution
Another key limitation is slow budget execution. There is a
pervasive lack of understanding of complex GOI contracting regulations among new
Iraqi officials who are often inexperienced. There are, for example,
complicating provisions that require all procurements more than $3 million ($10
million in key agencies like electricity and oil) be approved by the High
Contracting Commission, chaired by the Deputy Prime Minister. This process
results in delays. The U.S. Embassy is supporting a GOI initiative to develop a
manual that will comprehensively cover contracting regulations within the GOI. At
a day-long Budget Execution Conference on March 7, hosted by the Deputy Prime
Minister and the Ministers of Finance and Planning, a CD with budget execution
guidelines and contracting regulations was distributed to ministries to raise
the level of understanding of this complex and otherwise opaque process. On
March 8 and 9, the United
States hosted a follow-on conference for
Provincial Reconstruction Teams (PRTs) to disseminate and review the new GOI
budget execution rules at the local level.
Meanwhile, the Ministry of Oil, the key revenue producing
ministry, falls under the same general contracting rules as other ministries. The
nature of the oil business and its importance to the economy suggests the need
for more flexible contracting procedures, including multi-year capital
contracts, sole-source contracting for unique manufactured parts, and timely
contracting to support urgent operations and maintenance (O&M) needs. Such
flexibility was allowed under Saddam Hussein’s government, but the GOI has yet
to allow such flexibility for the Ministry of Oil. The Minister of Finance cites
the need for tight accountability in its refusal to allow for more flexible
procedures. Because the Ministry of Oil produces more than 94% of Iraq’s
government revenue, this issue is of critical importance.
U.S.
officials working closely with the GOI believe that budget execution will
improve this year. The GOI has indicated that it intends to put a significant
portion of its own revenue into infrastructure and capital projects at the
central government and provincial levels. To spur officials to spend their
capital budgets quickly, the GOI has declared that any ministry that does not
spend 75% of the portion of its capital budget it has been allotted by June
will forfeit the money for reapportionment by the Ministers of Finance and
Planning.
One of the reasons GOI officials have been slow to move on
the capital budget in 2006 is that a permanent government was not formed until
half-way through the calendar year. On the other hand, the GOI record of paying
salaries and pensions is more than 97%; therefore, the government is capable of
spending effectively in certain categories. The slow execution of capital (12%
through August 2006) and O&M budgets (22% through August 2006) is likely a result
of structural factors, such as contracting procedures, the depth of capacity of
the current Iraqi technocratic class, and the lack of sufficient political
will.
The U.S. Embassy and other donors are working to improve the
capacity of the GOI to execute its budget at all levels, including improving
contracting processes and training key officials at the Ministries and in the
various governorates. The U.S. Budget Execution Initiative includes an
interagency task force, established in October 2006, chaired by the Deputy
Chief of Mission.
USAID’s overall capacity development program includes a budget execution
component. Individual IRMO advisors are also working on budget execution in the
ministries for which they are responsible.
Corruption
Extensive corruption is involved in the expenditure of GOI
funds. Reports indicate that untold amounts of money that could be spent
reconstructing the country are siphoned off the budget. The Commission on
Public Integrity (CPI), the Iraqi version of the FBI, estimates the loss at
more than $5 billion annually although that figure is difficult to confirm. The
Board of Supreme Audit (BSA), the most credible and long-standing Iraqi
oversight organization (akin to GAO, formed in 1927), also estimates
significant losses. Its insight into GOI expenditure is probably the most
comprehensive because it performs its oversight function within the GOI. Standing
with the CPI and the BSA are the Iraqi inspectors general and their 2500 staff,
situated in every ministry. The Coalition Provisional Authority (CPA) created
this system three years ago, modeled after the U.S. Inspector General system. Although
the IGs have made some progress, they continue to struggle to gain traction as
a viable government function.
Although each of these entities has had some success
addressing corruption, each has a long way to go to meet its basic mandate. But
tempering the positive aspects of the aggressive development of the three
entities is the “chilling effect” caused by the politicization of
anti-corruption penalties. Some officials—both U.S. and Iraqi—have described a reluctance on the part of some GOI
contracting officials to execute contracts because a political or personal
rival could launch an accusation of improper acts. Under the current patchwork
of laws and regulations, mere accusations can land a potentially innocent
individual in jail for several months—a case supported by much anecdotal
evidence. This has led to extensive debate over one particular corruption
provision—Article 136b of the Iraqi Criminal Procedure Code, which provides
ministers with the blanket authority to unilaterally overturn charges. In
effect, this law provides Ministers with the power to issue “get out of jail
free” cards. On the one hand, this provision can and does undercut efforts to
prosecute real corruption. One report of the Anti-Corruption Working Group of
the Iraq Reconstruction Management Office (IRMO) lists 48 cases involving 102
defendants from September 2006 to February 2007 in which Ministers used 136b to
stop prosecution. On the other hand, Article 136b also provides a
check-and-balance for a nascent system that is itself subject to misuse.
These and many other complex rule-of-law challenges are well
known to Iraqi and U.S. officials and are part of the ongoing efforts to assess
and improve Iraq’s capability to address corruption.
SIGIR has completed one audit and is currently starting a
second that looks at U.S.
government efforts to support anti-corruption programs in Iraq. Progress is slow, but there
are hopeful signs. In the past few months, IRMO has deployed senior advisors to
each of the three anti-corruption entities. In addition, there is a significant
focus by both the GOI and the international community (including the U.S.)
in building capacity through improved legislative authorities, expanded
training programs, and the development of strengthened Iraqi support for
anti-corruption initiatives.
The Way Forward
A key component in helping Iraq
to prepare to shoulder more of its own reconstruction burden is the
International Compact for Iraq.
The draft compact document was negotiated between Iraq and the international donor
community with the help of the United Nations. The document describes in detail
the reforms in the economic, political, and social spheres that Iraq
is prepared to undertake in exchange for clearly articulated types of support
and assistance from the international community. On March 16, the U.N. hosted a
meeting in New York
on March 16 that moved the compact process forward; nevertheless, the signing
date, originally anticipated at the end of 2006, has slipped to later this
spring.
Another key to more effective budget execution is an
automated Financial Management Information System (FMIS) system, which is well
underway. This project, which began in 2004, is being funded by both U.S.
appropriations and the GOI. The BSA President has expressed some concerns to
SIGIR about the FMIS system, noting the hurdles still to be overcome, but the
process is ongoing. In fact, last week, we announced an audit to assess the
management and implementation of this program.
Yet another key to Iraq’s
ability to finance its own reconstruction is passage of the Hydrocarbon Law and
the companion laws necessary to stimulate investment in Iraq’s Oil Industry. While further
progress in the areas of security, operations and maintenance, and capital
investment are required, the Hydrocarbon Law will provide the basic legal
framework needed to attract long term foreign investment in the Oil Industry.
The draft law is not expected to be voted on by the COR for some months, while
remaining issues are considered. One problem is the draft does not clearly
address the overarching tensions between the national and regional authorities.
Investors may be deterred by the absence of provisions that support contractual
rights. Further, enactment of the law depends on concurrent enactment of other
legislation, the status of which is not yet clear. Although there has been good
progress, the end is not yet clearly in sight.
Iraq
is also making progress in meeting its commitments to increase subsidies for
fuels as required by the IMF Stand-By Agreement. By March, the price of gas
will go up to $0.30 per gallon (it was lower than $0.10 per gallon three years
ago). Price increases are key to reducing smuggling incentives and slowly
correcting the economic distortions caused by heavily subsidized petroleum
products.
Conclusion
This brief review of some of the key variables at play in
determining whether Iraq
will be able to fund its own reconstruction underscores the fact that it will
take some time before Iraq
has the resources—both technical and financial—to undertake a fast-paced
reconstruction effort on its own. The difficult security situation and the
increasing sectarianism within Iraqi society and its governing institutions
only increase the challenge.
It is clear that without continuing U.S. and international support, the
GOI will struggle to sustain existing levels of essential services and security.
It is difficult to over-emphasize the degree to which security and stability
are key to the GOI’s ability to promote economic growth and well-being and to
increase the quality of life for its people. Security is also key to enabling
the remaining international funds—a significant portion of the $15 billion
pledged over the last few years—to be expanded.
I thank the Committee for its interest in this important
issue, and I look forward to further discussion.