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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: 

GAO Highlights: 

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

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

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. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-426T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Katherine V. Schinasi at 
(202) 512-4841 or schinasik@gao.gov. 

[End of section] 

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.[Footnote 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. 

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 21ST 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.[Footnote 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. 

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.[Footnote 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. 

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: 

* unreasonable, unrealistic, inadequate or frequently changing 
requirements; 

* 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; 

* the failure to use competitive bidding in appropriate circumstances; 

* an over-reliance on cost-plus contracting arrangements where 
reasonable alternatives are available; 

* 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; 

* the failure to engage in selected pre-contracting activities for 
contingent events; 

* 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.[Footnote 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). 

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

[See PDF for image] 

Source: GAO. 

[End of figure] 

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.[Footnote 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.[Footnote 6] 

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, 

* In 2004, we issued two reports that identified a considerable amount 
of work that was being undertaken in Iraq as undefinitized contract 
actions.[Footnote 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.[Footnote 8] 

* 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.[Footnote 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. 

* 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.[Footnote 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. 

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.[Footnote 11] 

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, 

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

* 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. 

* 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. 

* 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. 

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.[Footnote 12] These breakdowns included: 

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

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

* not properly justifying the decision to use interagency contracting; 

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

* not adequately monitoring contractor performance. 

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.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 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. 

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. 

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.[Footnote 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.[Footnote 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. 

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. 

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.[Footnote 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.[Footnote 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. 

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: 

[See PDF for image] 

Source: Multi-National Force-Iraq and Defense Intelligence Agency. 

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. 

[End of figure] 

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, 

* 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. 

* 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: 

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

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

* 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. 

Ministry: Finance; 
2006 annual budget: Capital goods: $10; 
2006 annual budget: Capital projects: $33; 
2006 annual budget: Total budget: $16,506; 
Expenditures through August 2006: Capital goods: $1; 
Expenditures through August 2006: Capital projects: $74; 
Expenditures through August 2006: Total budget: $8,895. 

Ministry: Planning; 
2006 annual budget: Capital goods: 4; 
2006 annual budget: Capital projects: 27; 
2006 annual budget: Total budget: 55; 
Expenditures through August 2006: Capital goods: 0.4; 
Expenditures through August 2006: Capital projects: 3; 
Expenditures through August 2006: Total budget: 9. 

Ministry: Interior; 
2006 annual budget: Capital goods: 233; 
2006 annual budget: Capital projects: 27; 
2006 annual budget: Total budget: 1,919; 
Expenditures through August 2006: Capital goods: 25; 
Expenditures through August 2006: Capital projects: 0.2; 
Expenditures through August 2006: Total budget: 958. 

Ministry: Defense; 
2006 annual budget: Capital goods: 864; 
2006 annual budget: Capital projects: 33; 
2006 annual budget: Total budget: 3,443; 
Expenditures through August 2006: Capital goods: 12; 
Expenditures through August 2006: Capital projects: 0.0; 
Expenditures through August 2006: Total budget: 831. 

Ministry: Oil; 
2006 annual budget: Capital goods: 2; 
2006 annual budget: Capital projects: 3,533; 
2006 annual budget: Total budget: 3,590; 
Expenditures through August 2006: Capital goods: 0.4; 
Expenditures through August 2006: Capital projects: 4; 
Expenditures through August 2006: Total budget: 40. 

Ministry: Electricity; 
2006 annual budget: Capital goods: 4; 
2006 annual budget: Capital projects: 767; 
2006 annual budget: Total budget: 840; 
Expenditures through August 2006: Capital goods: 0.3; 
Expenditures through August 2006: Capital projects: 267; 
Expenditures through August 2006: Total budget: 279. 

Ministry: Water; 
2006 annual budget: Capital goods: 0.2; 
2006 annual budget: Capital projects: 200; 
2006 annual budget: Total budget: 259; 
Expenditures through August 2006: Capital goods: 0.0; 
Expenditures through August 2006: Capital projects: 49; 
Expenditures through August 2006: Total budget: 78. 

Ministry: Justice; 
2006 annual budget: Capital goods: 3; 
2006 annual budget: Capital projects: 10; 
2006 annual budget: Total budget: 74; 
Expenditures through August 2006: Capital goods: 2; 
Expenditures through August 2006: Capital projects: 0.2; 
Expenditures through August 2006: Total budget: 34. 

Ministry: Others; 
2006 annual budget: Capital goods: 272; 
2006 annual budget: Capital projects: 1,552; 
2006 annual budget: Total budget: 7,290; 
Expenditures through August 2006: Capital goods: 77; 
Expenditures through August 2006: Capital projects: 480; 
Expenditures through August 2006: Total budget: 3,501. 

Ministry: Total; 
2006 annual budget: Capital goods: $1,392; 
2006 annual budget: Capital projects: $6,181; 
2006 annual budget: Total budget: $33,975; 
Expenditures through August 2006: Capital goods: $117.0 (8.4%); 
Expenditures through August 2006: Capital projects: $877.0 (14.2%); 
Expenditures through August 2006: Total budget: $14,623 (43.0%). 

Source: GAO analysis of Iraqi budget data. 

[End of table] 

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. 

FOOTNOTES 

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

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

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

[3] In 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, GAO-06-66 (Washington, D.C.: Dec. 19, 2005). 

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

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

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

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

[8] The 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. 

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

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

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

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

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

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

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

[16] GAO-05-737. 

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

[18] GAO-03-695. 

[19] GAO-03-695. 

[20] GAO-04-854. 

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