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Report to Congressional Committees:

United States Government Accountability Office:

GAO:

January 2008:

Iraq Reconstruction:

Better Data Needed to Assess Iraq's Budget Execution:

GAO-08-153: 

GAO Highlights:

Highlights of GAO-08-153, a report to congressional committees. 

Why GAO Did This Study:

The President’s New Way Forward in Iraq identified Iraq’s inability to 
spend its resources to rebuild infrastructure and deliver essential 
services as a critical economic challenge to Iraq’s self-reliance. 
Further, Iraq’s ability to spend its $10.1 billion capital projects 
budget in 2007 was one of the 18 benchmarks used to assess U.S. 
progress in stabilizing and rebuilding Iraq. 

This report (1) examines data the U.S. embassy used to determine the 
extent to which the government of Iraq spent its 2007 capital projects 
budget, (2) identifies factors affecting the Iraqi government’s ability 
to spend these funds, and (3) describes U.S. government efforts to 
assist the Iraqi government in spending its capital projects funds. 

For this effort, GAO reviewed Iraqi government budget data and 
information on provincial spending collected by the U.S. Provincial 
Reconstruction Teams. GAO also interviewed officials from the 
departments of the Treasury, Defense, State, and other agencies and 
organizations.

What GAO Found:

U.S. and Iraq reports show widely disparate rates for Iraqi government 
spending on capital projects. Accordingly, GAO cannot determine the 
extent to which the Iraqi government is spending its 2007 capital 
projects budget. In its September 2007 Iraqi benchmark assessment, the 
administration reported that Iraq’s central government ministries had 
spent 24 percent of their 2007 capital projects budget, as of July 15, 
2007. However, this report is not consistent with Iraq’s official 
expenditure reports, which show that the central ministries had spent 
only 4.4 percent of their investment budget as of August 2007. The 
discrepancies between the official and unofficial data highlight 
uncertainties about the sources and use of Iraq’s expenditure data. 

The government of Iraq faces many challenges that limit its ability to 
spend its capital project budget. Violence and sectarian strife delay 
capital budget execution by increasing the time and cost needed to 
implement contracts. Recent refugee flows and the de-Ba’athification 
process have contributed to the exodus of skilled labor from Iraq. In 
addition, U.S. and foreign officials also noted that weaknesses in 
Iraqi procurement, budgeting, and accounting procedures impede 
completion of capital projects. For example, according to the State 
Department, Iraq’s Contracting Committee requires about a dozen 
signatures to approve projects exceeding $10 million, which slows the 
process.

U.S. agencies have undertaken a variety of programs to help Iraq 
execute its capital projects budget, although it is not clear what 
impact these efforts have had to date. U.S. agencies supported new 
efforts in 2007 targeting Iraq’s ability to spend capital budget funds, 
including an office to provide procurement assistance to ministries and 
provinces and a new position in the U.S. Embassy to coordinate with 
senior Iraqi government officials on budget execution and oversee 
related U.S. assistance efforts. In addition, improving Iraqi 
government budget execution is part of a broader U.S. assistance effort 
to improve the capacity of the Iraqi government. For example, the U.S. 
Agency for International Development (USAID) has trained 500 ministry 
officials in procurement or budget execution. USAID also led an effort 
to implement an automated financial management information system for 
the Iraqi government, although this program was suspended in June 2007 
following the kidnapping of five contractors involved in the project. 
In addition, U.S. advisors work directly with key Iraqi ministries to 
assist with budget execution and procurement, among other 
responsibilities.

What GAO Recommends:

We recommend that the Secretary of Treasury work with the government of 
Iraq and relevant U.S. agencies to enhance the department’s ability to 
report accurate and reliable expenditure data from Iraq’s ministries 
and provinces. Treasury agreed with our recommendation. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-153]. For more information, contact 
Joseph A. Christoff at (202) 512-8979 or christoffj@gao.gov. 

[End of section] 

Contents:

Letter:

Results in Brief:

Background:

Extent of Iraqi Capital Project Spending in 2007 Cannot Be Determined 
Due to Conflicting Data:

The Government of Iraq Faces Many Challenges in Attempting to Spend Its 
Capital Projects Budget:

Several U.S. Assistance Efforts Are Under Way to Improve Iraqi Budget 
Execution:

Conclusion:

Recommendation:

Agency Comments and Our Evaluation:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Comparison of Budget Execution during the First 8 Months 
of 2006 and 2007:

Appendix III: Provincial Reconstruction Team Data on Provinces' 
Spending of 2006 and 2007 Capital Projects Funds:

Appendix IV: Comments from the Department of the Treasury:

Appendix V: Comments from the Department of State:

Appendix VI: GAO Contact and Staff Acknowledgments:

Tables:

Table 1: Capital Projects Budget, Unofficial and Official Data on 
Expenditures for Five Iraqi Ministries with Largest Capital Budgets and 
for Provinces, Fiscal Year 2007:

Table 2: Government of Iraq 2006 Annual Budget and Expenditures through 
August 2006:

Table 3: Government of Iraq 2007 Annual Budget and Expenditures through 
August 2007:

Table 4: Iraq Budget Classification of Expenditures Reported by 
Ministry of Finance, 2006 and 2007:

Table 5: Provincial Capital Projects and Reconstruction Budgets, Funds 
Committed and Spent, 2006 as of October 21, 2007:

Table 6: Provincial Capital Projects and Reconstruction Budgets, Funds 
Committed and Spent 2007, as of October 21, 2007:

Figure:

Figure 1: Iraq's 2006 Budget Expenditures:

Abbreviations:

CPA: Coalition Provisional Authority:

DOD: Department of Defense:

IFMIS: Iraqi Financial Management Information System:

IMF: International Monetary Fund:

IRMO: Iraq Reconstruction Management Office:

ITAO: Embassy Iraq Transition Assistance Office:

MNSTC-I: Multinational Security Transition Command-Iraq:

PRT: Provincial Reconstruction Team:

SIGIR: Special Inspector General for Iraq Reconstruction:

USAID: U.S. Agency for International Development:

[End of section] 

United States Government Accountability Office:

Washington, DC 20548:

January 15, 2008:

Congressional Committees:

The President's February 2007 New Way Forward strategy for Iraq 
identified Iraq's inability to spend its resources to rebuild 
infrastructure and deliver essential services as a critical economic 
challenge to Iraq's self-reliance. Further, the allocation and 
expenditure of Iraq's $10.1 billion capital projects budget in 2007 was 
1 of the 18 benchmarks used to assess U.S. progress in stabilizing and 
rebuilding Iraq.[Footnote 1] Iraqi government funds are a necessary 
source of financing for Iraq's rebuilding effort, particularly because 
the United States has obligated most of the $40 billion it has provided 
to Iraq for reconstruction since 2003. However, the government of Iraq 
has had difficulty spending its resources on capital projects.

This report (1) examines data used by the U.S. embassy in Baghdad to 
determine the extent to which the government of Iraq has spent its 
$10.1 billion capital projects budget for 2007, (2) identifies factors 
affecting the Iraqi government's ability to spend these funds, and (3) 
describes U.S. government efforts to assist the Iraqi government in 
spending its capital projects funds.

To address these objectives, we analyzed reports and interviewed 
officials in Washington, D.C., and Baghdad from the departments of 
State (State), Defense (DOD), and the Treasury (Treasury); the U.S. 
Agency for International Development (USAID); the Economic Affairs 
Section of the U.S. Embassy in Baghdad; and consultants under contract 
with the United Kingdom's Department of International Development. We 
reviewed Iraqi Ministry of Finance capital projects budget and 
expenditure data for fiscal years 2006 and 2007, which were provided by 
Treasury and the U.S. Embassy in Baghdad. We also reviewed information 
on provincial spending collected by the U.S. Provincial Reconstruction 
Teams (PRT) and reported by the U.S. Embassy in Baghdad. We conducted 
this performance audit from April 2007 through December 2007 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. A detailed description of 
our scope and methodology is included in appendix I of this report. Due 
to broad congressional interest in this issue, we performed our work 
under the authority of the Comptroller General of the United States to 
conduct reviews on his own initiative.

Results in Brief:

U.S. and Iraq reports show widely disparate rates for Iraqi government 
spending on capital projects. Accordingly, we cannot determine the 
extent to which the Iraqi government is spending its 2007 $10.1 billion 
capital projects budget. In its September 2007 progress report on Iraqi 
benchmarks, the administration stated that Iraq's central government 
ministries had spent 24 percent of their 2007 capital projects budget, 
as of July 15, 2007. The report concluded that, compared with 2006, the 
government of Iraq was becoming more effective in spending its capital 
projects budget. However, the administration's report is not consistent 
with Iraq's official expenditure reports, which show that the central 
ministries had spent only 4.4 percent of their investment budget, as of 
August 2007.[Footnote 2] The discrepancies between the official and 
unofficial data highlight uncertainties about the sources and use of 
Iraq's expenditure data.

The government of Iraq faces many challenges that limit its ability to 
spend its capital project budget. First, Treasury officials noted that 
violence and sectarian strife delay capital budget execution by 
increasing the time and cost needed to award and monitor contracts, and 
by reducing the number of contractors willing to bid on projects. 
Second, these officials stated that recent refugee outflows and the de- 
Ba'athification process have reduced the number of skilled workers 
available and contributed to the exodus of these workers from Iraq. 
Third, U.S. and foreign officials also noted that weaknesses in Iraqi 
procurement, budgeting, and accounting procedures impede completion of 
capital projects. For example, according to the State Department, 
Iraq's Contracting Committee requires about a dozen signatures to 
approve projects exceeding $10 million, which slows the process.

U.S. agencies have undertaken a variety of programs to help Iraq 
execute its capital projects budget, although it is not clear what 
impact these efforts have had to date. U.S. assistance established in 
early 2007 that specifically targets Iraqi budget execution includes a 
procurement assistance office, which offers technical assistance to 
ministries and provinces, and a Coordinator for Economic Transition 
position in the U.S. Embassy, who met regularly with senior Iraqi 
government officials on matters related to budget execution and oversaw 
related U.S. assistance efforts. In addition, improving Iraqi 
government budget execution is part of a broader U.S. assistance effort 
to improve the capacity of the Iraqi government. For example, USAID has 
trained 500 ministry officials in procurement or budget execution. 
USAID also led the effort to implement an automated financial 
management information system for the government of Iraq, although this 
program was suspended in June 2007 following the kidnapping of five 
contractors involved in the project. U.S. advisors also work directly 
with key Iraqi ministries to assist with budget execution and 
procurement, among other responsibilities. It is difficult to determine 
the impact of these efforts on the capacity of the government of Iraq 
to spend its capital projects budget, given the limitations with 
available data, and because new programs specifically designed to 
improve Iraq's budget execution were established too recently for U.S. 
agencies to evaluate them.

We recommend that the Secretary of Treasury work with the government of 
Iraq and relevant U.S. agencies to enhance the department's ability to 
report accurate and reliable expenditure data from the ministries and 
provinces. Treasury agreed with our recommendation.

In commenting on a draft of this report, Treasury and State raised 
several concerns. First, Treasury stated that our analysis of Iraq's 
budget execution was based on incomplete and unofficial reporting, in 
particular, the data that the administration used in it September 2007 
Benchmark Assessment Report to Congress. We agree that the unofficial 
data that the administration used in the report to Congress do not 
portray a full and accurate picture of the situation. Accordingly, we 
compared these data with official Ministry of Finance data to assess 
the extent to which the Iraqis had spent their capital projects budget. 
Since the spending gap between the administration's unofficial data and 
the Ministry of Finance's official data is strikingly large, we 
recommend that the Department of Treasury work with the Ministry of 
Finance to reconcile these differences.

Second, Treasury stated that our report incorrectly concluded that 
capital spending is only contained in the Iraqi budget item for 
"nonfinancial assets" (which we refer to as "investment"). State made a 
similar comment. Treasury and State asserted that capital spending is 
spread through many chapters in the new chart of accounts and that the 
amount is higher than the 4.4 percent cited in our report. However, 
State and Treasury did not provide us with evidence to demonstrate 
which Iraqi accounts included additional capital expenditures.

State also commented that the draft report failed to accurately portray 
the "tangible progress" that the central and provincial governments 
have made in budget execution. However, we do not believe the data are 
sufficiently reliable to conclude that U.S. assistance efforts have 
already achieved significant success helping the Iraqi government 
execute its capital budget.

In addition, State attributed the discrepancy between the official and 
unofficial data cited in our report to "a time lag in data collection" 
and asserted that the July 15 data were representative of the 
government of Iraq's budget performance. After we provided our draft 
report to State for comment, we received updated data from Treasury 
that clearly refutes State's comment. These updated data show that the 
central ministries spent 4.4 percent of their investment budget through 
August 2007, raising questions about the unofficial data reported to 
Congress in the administration's September 2007 benchmark report.

Background:

The United States, along with its coalition partners and various 
international organizations and donors, have made significant efforts 
to rebuild Iraq's infrastructure and the capacity of its personnel. The 
United States alone has provided more than $40 billion since 2003, most 
of which has been obligated. The February 2007 U.S. strategy, The New 
Way Forward in Iraq, emphasizes a transition of responsibility for 
reconstruction to the Iraqi government.

Iraq's national government was established after a constitutional 
referendum in October 2005, followed by election of the first Council 
of Representatives (Parliament) in December 2005, and the selection of 
the first Prime Minister, Nuri Kamal al-Maliki, in May 2006. By mid- 
2006, the cabinet was approved; the government now has 34 ministries 
responsible for providing security and essential services--including 
electricity, water, and education--for the Iraqi people.

Iraq's Ministry of Finance plays the key role in developing, analyzing, 
and executing the budget, including distributing funds to individual 
spending units, and preparing periodic financial reports. Iraq's 
financial management law directs the Ministry of Finance to consult 
with the Ministry of Planning and Development Cooperation in 
establishing budget funding priorities. Individual Iraqi spending units 
in the 34 central government ministries, the 15 provinces, and the 
Kurdistan region provide expenditure estimates to the Ministry of 
Finance. The Ministry of Finance, in consultation with the Ministry of 
Planning, uses this information to develop the budget and submits the 
draft budget to the Council of Ministers for approval before submitting 
it to the National Assembly for final approval. The Ministry of 
Planning is responsible for centralized project management support, 
including review and analysis of capital project plans and monitoring 
of contractor performance.

As we reported in September 2007,[Footnote 3] the government of Iraq 
spent only 22 percent of its $6.2 billion capital projects budget in 
2006 for the central government and Kurdistan (see fig. 1). The 
provinces received about $2 billion in 2006 funds for infrastructure 
and reconstruction projects, but these funds were included in the 
budget as transfers, rather than as part of the capital projects budget.

Figure 1: Iraq's 2006 Budget Expenditures:

[See PDF for image] 

This figure is a vertical bar graph that illustrates Iraq's 2006 Budget 
Expenditures. The vertical axis of the graph represents dollars in 
billions from 0 to 40. The horizontal axis of the graph represents six 
types of expenditures. The following data is depicted, with approximate 
dollar totals extracted from the graph: 

Salaries: approximately $5 billion; 
Not expended: 1%; 
Expended: 99%. 

Goods and services: approximately $3 billion; 
Not expended: 60%; 
Expended: 40%. 

Transfers and others: approximately $17 billion;
Not expended: 17%
Expended: 83%. 

Capital goods: approximately $1.5 billion; 
Not expended: 83%; 
Expended: 17%. 

Capital projects: approximately $6.2 billion; 
Not expended: 78%; 
Expended: 22%. 

Total expenditure: approximately $34 billion; 
Not expended: 33%; 
Expended: 67%. 

Source: GAO analysis of government of Iraq budget data as reported by 
the U.S. Treasury. 

[End of figure] 

Extent of Iraqi Capital Project Spending in 2007 Cannot Be Determined 
Due to Conflicting Data:

The government of Iraq's fiscal year 2007 budget allocates $10.1 
billion for capital projects, including $6.4 billion for use by central 
government ministries, $2.1 billion for use by the provinces, and $1.6 
billion for use by the semiautonomous Kurdistan region.[Footnote 4] 
However, we cannot determine the extent to which Iraq has spent these 
funds due to conflicting expenditure data. The U.S. government's 
September 2007 benchmark report,[Footnote 5] citing unofficial Ministry 
of Finance data, stated that Iraqi ministries had spent 24 percent of 
their capital projects budgets, as of July 15, 2007. However, according 
to official Ministry of Finance expenditure data, Iraqi ministries had 
spent only 4.4 percent of their budgets for "nonfinancial assets," or 
investment, as of August 31, 2007. Capital projects represent almost 90 
percent of the investment budget, which combines capital projects and 
capital goods. In addition, the administration has relied on unofficial 
PRT data to track the provinces' spending on capital projects and has 
reported the level of funds that the provinces have committed to 
projects as an indicator of spending.[Footnote 6] However, provinces 
had spent only 12 percent of their 2007 funds, as of October 2007, 
according to PRT reporting.

U.S. and Iraqi Reports Show Differing Spending Rates:

Citing unofficial Ministry of Finance data, the administration's 
September 2007 Benchmark Assessment Report stated that the Iraqi 
ministries had spent 24 percent of their capital projects budgets, as 
of July 15, 2007. The report concluded from these data that the 
government of Iraq is becoming more effective compared with 2006 in 
spending its capital projects budget. However, the unofficial data on 
percent of budget spent are significantly higher than official Iraqi 
expenditure data indicate. According to official reporting by the 
Ministry of Finance, as of August 31, 2007, Iraqi ministries spent only 
4.4 percent of their 2007 investment budget (most of which is for 
capital projects). Table 1 compares the two sets of data.

Table 1: Capital Projects Budget, Unofficial and Official Data on 
Expenditures for Five Iraqi Ministries with Largest Capital Budgets and 
for Provinces, Fiscal Year 2007 (Dollars in millions):

Ministry/spending unit: Ministry of Oil; 
2007 capital projects budget: $2,381; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: $500; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: 21%; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: $0.27; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 0.01%.

Ministry/spending unit: Ministry of Electricity; 
2007 capital projects budget: 1,385; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: 354; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: 26; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: 0.05; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 0.004.

Ministry/spending unit: Ministry of Municipalities and Public Works; 
2007 capital projects budget: 338; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: 196; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: 58; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: 102; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 30.2.

Ministry/spending unit: Ministry of Health; 
2007 capital projects budget: 342; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: 11; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: 3; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: 30; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 7.8.

Ministry/spending unit: Ministry of Housing & Construction; 
2007 capital projects budget: 335; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: 79; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: 24; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: 34; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 10.0.

Ministry/spending unit: Other spending units; 
2007 capital projects budget: 1,641; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: 396; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: 24; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: 170; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 6.2.

Ministry/spending unit: Subtotal for central government; 
2007 capital projects budget: 6,421; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: 1,536; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: 24; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: 337; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 4.4. 

Ministry/spending unit: Provinces[C]; 
2007 capital projects budget: 2,071; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: NA; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: NA; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: 2; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 0.09%. 

Ministry/spending unit: Kurdistan region; 
2007 capital projects budget: 1,560; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: NA; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: NA; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: 255; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 15.0.

Ministry/spending unit: Total capital budget; 
2007 capital projects budget: $10,052; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
Amount spent: NA; 
Capital projects expenditures as of July 15, 2007 (unofficial data)[A], 
As percentage of capital projects budget: NA; 
Investment expenditures through August 2007 (official data)[B], Amount 
spent: 594; 
Investment expenditures through August 2007 (official data)[B], As 
percentage of budget: 5.2%. 

Source: GAO analysis of unofficial Iraq Ministry of Finance expenditure 
data through July 15, 2007, and Ministry of Finance official data 
through August 31, 2007, provided by the U.S. Department of the 
Treasury.

Note: Totals may be different due to rounding.

[A] The unofficial July 15, 2007 data do not break out provincial 
expenditures.

[B] Official expenditure data are subject to a verification process by 
the Ministry of Finance, according to a Treasury official. Treasury 
officials stated that, for 2007, ministries are reporting capital 
projects expenditures together with capital goods expenditures as part 
of a single budget category for investment. The 2007 budget for 
investment is the sum of the budgets for capital goods ($1.3 billion) 
and capital projects ($10.1 billion).

[C] This allocation of $2,071 million is for "agencies not linked to a 
ministry." Of this amount, the provinces were allocated $2,067 million, 
with the remainder allocated to other agencies.

[End of table]

Although the 2007 Iraq budget has separate categories for capital goods 
and capital projects, the Iraqi government's official expenditure data 
do not break out capital projects expenditures separately in 2007. To 
comply with new International Monetary Fund (IMF) budget classification 
requirements in 2007, the Iraqi government reports capital expenditures 
together under the heading of "nonfinancial assets," which we refer to 
as investment in table 1.[Footnote 7] Capital projects represent almost 
90 percent of the investment budget, combining capital projects and 
capital goods. Appendix II provides further analysis of 2007 Ministry 
of Finance expenditure data and comparable 2006 data.

In reviewing our draft report, Treasury officials stated that our 
official figure of 4.4 percent excluded capital project spending found 
in other budget categories. However, Treasury could provide no 
documentation that would allow us to verify whether, or the extent to 
which this occurs. State Department made similar comments in reviewing 
our report. However, State was unable to provide us with supporting 
documentation and referred us to the Department of Treasury. Also, 
Treasury officials noted that the higher figure of 24 percent capital 
project spending could include commitments in addition to actual 
expenditures.

The Ministry of Oil represents the largest share (24 percent) of the 
Iraqi government's capital projects budget in 2007. According to the 
unofficial data reported by the U.S. administration, as of July 15, 
2007, the Ministry of Oil spent $500 million on capital projects, which 
is 21 percent of the ministry's $2.4 billion capital projects budget. 
This reported level of spending has already surpassed the ministry's 
total for 2006; however, it is not consistent with the much lower level 
of spending reflected in official Ministry of Finance data through 
August (see table 1). According to the Special Inspector General for 
Iraq Reconstruction (SIGIR), U.S. officials stated that the ministry 
may not have spent all of these funds but instead shifted them to 
subsidiaries such as the State Oil Marketing Organization, which have 
responsibility for spending much of the oil ministry's capital projects 
budget.[Footnote 8]

U.S. Administration Relies on Unofficial PRT Data to Track Provincial 
Spending:

The Iraqi government provided $2.1 billion, or over 20 percent of the 
2007 capital projects budget, to the provinces (not including the 
semiautonomous Kurdistan region), in amounts proportional to their 
populations. These funds are in addition to approximately $2 billion in 
2006 provincial funds, most of which had not been transferred to the 
provinces until November and December of 2006. Because of the late 
transfer, the provinces were permitted to carry over unspent 2006 
funds.[Footnote 9] Additionally, the semiautonomous Kurdistan region 
received a separate 2007 budget allocation of $1.6 billion, or 16 
percent of the total 2007 capital projects budget.

To track capital projects budget execution by the provinces, the 
administration uses unofficial commitment and expenditure information 
collected by PRTs.[Footnote 10] The administration's September 2007 
benchmark report cited PRT commitment data as an indicator of 
successful budget execution by the provinces. The September report 
stated that provinces committed almost half of their 2007 capital 
projects budgets. However, the extent to which committed funds indicate 
actual spending is unknown. Given the capacity and security challenges 
currently facing Iraq, many committed contracts may not be executed and 
would not result in actual expenditures, according to U.S. agency 
officials. According to PRT reporting, the provinces committed 58 
percent of their 2007 budget but had spent only 12 percent as of 
October 21, 2007.[Footnote 11] (For additional analysis of PRT data, 
see app. III.) U.S. officials noted that the provinces are still 
spending the 2006 funds they were permitted to carry over, which 
contributes to the low expenditure rate in 2007. Ultimately, actual 
spending by the provinces should be reflected in official 2007 
expenditure data reported by the Ministry of Finance.

The Government of Iraq Faces Many Challenges in Attempting to Spend Its 
Capital Projects Budget:

U.S. government, coalition, and international agencies have identified 
a number of factors that challenge the Iraqi government's efforts to 
fully spend its budget for capital projects. First, Treasury officials 
noted that violence and sectarian strife can delay capital budget 
execution by increasing the time and cost needed to award and monitor 
contracts, and by reducing the number of contractors willing to bid on 
projects. Second, these officials stated that recent refugee outflows 
and the de-Ba'athification process have reduced the number of skilled 
workers available and contributed to the exodus of Iraq's professional 
class from the country. Third, U.S. and foreign officials also noted 
that weaknesses in Iraqi procurement, budgeting, and accounting 
procedures impede completion of capital projects.

Violence and Sectarian Strife Hinder Budget Execution for Capital 
Projects:

U.S., coalition, and international officials noted that violence and 
sectarian strife remain major obstacles to developing Iraqi government 
capacity, including its ability to execute budgets for capital 
projects. The high level of violence has contributed to a decrease in 
the number of workers available and can increase the amount of time 
needed to plan and complete capital projects. The security situation 
also hinders U.S. advisors' ability to provide the ministries with 
assistance and monitor capital project performance.

Violence and sectarian strife have reduced the pool of available talent 
to budget and complete capital projects and, in many cases, have 
increased the time needed to complete projects. International officials 
noted that about half of Iraqi government employees are absent from 
work daily; at some ministries, those who do show up only work between 
2 to 3 hours per day for security reasons. U.S. and UN officials stated 
that, while the Ministry of Planning has a relatively skilled 
workforce, the security situation seriously hinders its ability to 
operate. These officials noted that 20 director generals (department 
heads or other senior officials) in the ministry have been kidnapped, 
murdered, or forced to leave the ministry in the 6 months prior to 
February 2007.

Numerous U.S. and coalition officials also stated that security 
concerns delay the ability of advisors to provide assistance, noting 
that it is often too dangerous for staff to provide training or monitor 
contract performance. The high level of violence hinders U.S. advisors' 
access to their counterparts in the ministries and directly affects the 
ability of ministry employees to perform their work. State and USAID 
efforts are affected by the U.S. embassy restrictions imposed on their 
movement. Embassy security rules limits, and in some cases bars, U.S. 
civilian advisors from visiting the ministries outside the Green Zone. 
For example, a former Treasury attaché noted that his team could not 
visit the Ministry of Finance outside the Green Zone and thus had 
limited contact with ministry officials. Further, USAID suspended 
efforts to complete the installation of the Iraqi Financial Management 
Information System (IFMIS) in May 2007 after five British contractors 
were kidnapped from the Ministry of Finance.

Lack of Trained Personnel Hinders Capital Project Budgeting and 
Execution:

U.S., coalition, and international agency officials have observed the 
relative shortage of trained budgetary, procurement, and other staff 
with technical skills as a factor limiting the Iraqis' ability to plan 
and execute their capital spending. The security situation and the de- 
Ba'athification process have adversely affected available government 
and contractor staffing. Officials report a shortage of trained staff 
with budgetary experience to prepare and execute budgets and a shortage 
of staff with procurement expertise to solicit, award, and oversee 
capital projects. According to State and other U.S. government reports 
and officials, there has been decay for years in core functions of 
Iraqi's government capacity, including both financial and human 
resource management.

Officials also state that today's unsafe environment has resulted in a 
large percentage of Iraq's more skilled citizens leaving the country. 
According to a UN report, between March 2003 and June 2007, about 2.2 
million Iraqis left the country, and about 2 million were internally 
displaced. The UN also has estimated that at least 40 percent of Iraq's 
professional class has left the country since 2003. One Iraqi official 
complained that those leaving the country tend to be from the educated 
and professional classes. As a result, fewer skilled Iraqi workers 
outside the government are available to bid on, design, and complete 
proposed capital projects.

Further, a 2006 Department of Defense (DOD) report stated that Iraq's 
government also confronts significant challenges in staffing a 
nonpartisan civil service and addressing militia infiltration of key 
ministries. The report noted that government ministries and budgets are 
sources of power for political parties, which staff ministry positions 
with party cronies as a reward for political loyalty.[Footnote 12] Some 
Iraqi ministries under the authority of political parties hostile to 
U.S. goals use their positions to pursue partisan agendas that conflict 
with the goal of building a government that represents all ethnic 
groups. For example, until late April 2007, the Ministries of 
Agriculture, Health, Civil Society, Transportation, Governorate 
Affairs, and Tourism provided limited access to U.S. officials, as they 
were led by ministers loyal to Muqtada al-Sadr, who has been hostile to 
U.S. goals.

Procurement, Budgetary, and Accounting Weaknesses Impair Capital Budget 
Execution:

Weak procurement, budgetary, and accounting systems are of particular 
concern in Iraq because these systems must balance efficient execution 
of capital projects while protecting against reported widespread 
corruption. A 2006 survey of perceptions of corruption by Transparency 
International ranked Iraq's government as one of the most corrupt in 
the world.[Footnote 13] A World Bank report notes that corruption 
undermines the Iraqi governments' ability to make effective use of 
current reconstruction assistance.[Footnote 14] According to a State 
Department document, widespread corruption undermines efforts to 
develop the government's capacity by robbing it of needed resources, 
some of which are used to fund insurgency; by eroding popular faith in 
democratic institutions, perceived as run by corrupt political elites; 
and by spurring capital flight and reducing economic growth.

U.S. and international officials have cited many weaknesses in Iraqi 
procurement procedures and practices. The World Bank found that Iraq's 
procurement procedures and practices are not in line with generally 
accepted public procurement practices, such as effective bid protest 
mechanisms and transparency on final contract awards. Iraqi procurement 
laws and regulations are composed of a mixture of Saddam Hussein-era 
rules, CPA Order 87 requirements,[Footnote 15] and recent Iraqi 
government budgetary practices. The complexity of Iraq's contracting 
regulations combined with the inexperience of many new Iraqi officials 
has led to a pervasive lack of understanding of these laws and 
regulations, according to State officials. The Iraqi government has 
sponsored conferences on budget execution in 2007 to clarify budgeting 
and procurement rules and procedures and issued regulations for 
implementing Order 87. However, laws and regulations are still complex 
and are frequently confusing to implement in practice, according to a 
Treasury official.

U.S., coalition, and international officials have identified 
difficulties in complying with Iraqi procurement laws and regulations 
as a major impediment to spending Iraqi capital project budgets. For 
example, according to an Iraq Reconstruction Management Office 
(IRMO)[Footnote 16] official, the Iraqi procurement process often 
requires a minimum of three bids through a competitive bidding process. 
However, when less than three technically qualified bids are received, 
all bids are thrown out and the project cycles through a new round of 
bidding. The result has been fewer bids submitted in subsequent rounds. 
In addition, Iraqi procurement regulations require about a dozen 
signatures to approve oil and electricity contracts exceeding $10 
million, which also slows the process, according to U.S. officials. 
Procurements over this amount must be approved by the High Contracting 
Commission, chaired by the Deputy Prime Minister, which causes further 
delays. U.S. advisors to the Ministry of Oil noted that the $10 million 
threshold is far too low, given the size of infrastructure projects in 
the energy sector. In June 2007, the Council of Ministers raised the 
dollar thresholds for contracts requiring High Contracting Commission 
approval from $10 million to $20 million for the Ministries of Defense, 
Electricity, Oil, and Trade, and raised the level from $5 million to 
$10 million for other ministries. However, the embassy noted that the 
increased thresholds may not improve budget execution without an 
increase in the number of trained personnel or technical assistance 
from the Ministry of Planning.

Other features in the Iraqi budgetary and accounting systems adversely 
affect the tracking of capital projects spending. For example, 
government spending on reconstruction projects is not coordinated with 
spending for donor-financed projects, according to the World Bank. As a 
result, significant donor-financed expenditures are not included in the 
budget. In addition, according to U.S. officials, the budget is 
appropriated and tracked at too high a level of aggregation to allow 
meaningful tracking of decisions because multiple projects can be 
combined on a single line. Reconciliation of budget accounts is often 
impossible as budget execution reports are submitted late or with 
incomplete information. In addition, as discussed earlier, in response 
to IMF requirements, the government of Iraq began implementing a new 
budget classification and chart of accounts in 2007 that does not 
provide a separate breakout of capital projects spending. Appendix II 
provides further analysis of 2007 Ministry of Finance expenditure data 
and comparable 2006 data.

U.S. agencies, the World Bank, and independent auditors have reported a 
number of serious internal control weaknesses in Iraqi government 
accounting procedures. U.S. officials reported that the government of 
Iraq uses a manual reporting system to audit expenditures, which does 
not provide for real-time reports. According to a Treasury official, 
the Iraqi government reports capital expenditures by ministry but not 
by specific project, which limits its ability to track capital projects 
expenditures. The World Bank reported that reconciliation of government 
of Iraq accounts is impossible because the government lacks 
consolidated information on the exact number of government bank 
accounts it has and the balances in them. The World Bank also noted 
that provincial governments do not provide an accounting of funds they 
receive. In addition, the independent public accounting firm for the 
Development Fund for Iraq[Footnote 17] reported numerous internal 
control weaknesses in Iraqi ministries for 2006, including that Iraqi 
ministries do not have policies and procedures manuals that detail 
comprehensive financial and internal controls. It also reported that 
the ministries do not have unified procurement policies and procedures, 
do not have proper project management and monitoring systems, and lack 
written project management policies and procedures manuals. Finally, 
the firm noted that the ministries' internal audit departments do not 
cover the operations of state-owned companies and entities that are 
related to the ministries and that there are no proper monitoring 
procedures over the operations of the related companies.

Several U.S. Assistance Efforts Are Under Way to Improve Iraqi Budget 
Execution:

In early 2007, U.S. agencies increased the focus of their assistance 
efforts on improving the Iraqi government's ability to effectively 
execute its budget for capital projects, although it is not clear what 
impact this increased focus has had, given the inconsistent expenditure 
data presented earlier in this report. Several new U.S. initiatives 
were established targeting Iraqi budget execution, including 
coordination between the U.S. embassy and an Iraqi task force on budget 
execution, and the provision of subject-matter experts to help the 
government track expenditures and to provide technical assistance with 
procurement. According to U.S. officials, these targeted efforts also 
reflect an increased interest of senior Iraqi officials in improving 
capital budget spending. In addition, improving Iraqi government budget 
execution is part of a broader U.S. assistance effort aimed at 
improving the capacity of the Iraqi government through automation of 
the financial management system, training, and advisors embedded with 
ministries.

We recently reported on U.S. efforts to build the capacity of Iraqi 
ministries led by State, DOD, and USAID.[Footnote 18] The findings and 
recommendations from that report also apply to assistance efforts 
targeting Iraqi Budget Execution, which are a part of U.S. capacity- 
building efforts. Our report found that U.S. capacity building efforts 
in Iraq faced several challenges that posed risks to their success. The 
report also found that U.S. agencies implementing capacity development 
projects have not developed performance measures for all of their 
efforts, particularly outcome-related performance measures that would 
allow them to determine whether U.S. efforts at the civilian ministries 
have achieved both U.S.-and Iraqi-desired goals and 
objectives.[Footnote 19] The report recommended that State, in 
consultation with the Iraqi government, complete an overall capacity- 
building strategy that includes plans to address risks and performance 
measures based on outcome metrics.

In early 2007, U.S. agencies began providing technical assistance and 
coordination specifically targeted to addressing Iraq's capital budget 
expenditure bottlenecks. This assistance includes the following:

* Coordinator for Economic Transition in Iraq. State established this 
position in the U.S. Embassy in February 2007 to work with senior Iraqi 
government officials and to coordinate with U.S. agencies that provide 
assistance related to improving Iraq's budget execution. The 
coordinator participated in regular meetings of an Iraqi government 
budget execution task force, which includes the Deputy Prime Minister 
and the Ministers of Finance and Planning, to address impediments to 
spending the government's capital projects budget. The coordinator also 
worked with the U.S. Treasury attaché to help the Iraqi government hold 
conferences on budget execution to educate government officials about 
Iraqi budget and procurement processes. According to a State official, 
the responsibilities of this position were transferred to Ambassador 
Charles Reis in June 2007, when he assumed responsibility for 
coordinating all economic and assistance operations in the Embassy.

* Budget Execution Monitoring Unit. The Iraq Reconstruction Management 
Office supported the creation of this unit in the Deputy Prime 
Minister's office with four to six subject-matter experts to help 
assess budget execution by collecting and aggregating spending data for 
key ministries and provinces. The unit was established in spring 2007. 
State officials noted that the Budget Execution Monitoring Unit tracks 
aggregate spending by ministry. Although some ministries have 
demonstrated some capability to track what projects are undertaken with 
capital projects spending, the U.S. Embassy does not have a mechanism 
to track the results of capital projects spending across all ministries 
and provinces, according to State officials. Embassy officials and the 
Treasury Attaché are analyzing how to help Iraqi ministries and 
provinces develop project tracking tools.

* Procurement Assistance Program. State and DOD provided funding for 10 
to 12 international subject-matter experts to support this program 
within the Ministry of Planning and Development Cooperation to help 
ministries and provinces with procurement and capital budget execution, 
including policy interpretation, training, acquisition consulting, and 
technical assistance. The program was established in May 2007 and 
consists of two Procurement Assistance Centers in Baghdad and one in 
Erbil. The program is currently setting up 18 Provincial Procurement 
Assistance Teams that will provide direct assistance to provincial 
officials.

In addition to these recently established efforts, which are 
specifically designed to help the Iraqi government execute its capital 
projects budget, several broader, ongoing capacity-building assistance 
efforts are under way. These efforts include assistance related to 
budget execution, although that is not their primary focus. These 
efforts include the following:

* Iraqi Financial Management Information System (IFMIS). USAID and IRMO 
awarded contracts beginning in 2003 to BearingPoint to install a Web- 
based financial management information system for the government of 
Iraq to support a fully automated and integrated budget planning and 
expenditure reporting and tracking system at the central and provincial 
levels.[Footnote 20] The IMF has highlighted the importance of 
implementing IFMIS in its reviews of Iraq's progress toward meeting the 
terms of the IMF Standby Agreement. However, according to USAID 
officials, the project experienced significant delays, due in part to a 
lack of full support by Iraqi government officials. USAID suspended 
assistance to the Ministry of Finance to implement IFMIS in June 2007, 
following the kidnapping of five BearingPoint employees. A USAID 
official stated that the Iraqi government continues to rely on its 
legacy manual accounting system, which contributes to delays in the 
government's reporting of expenditure data. In lieu of IFMIS, Treasury 
and USAID are now assisting provincial governments with the use of 
inexpensive spreadsheet software to improve their financial management 
capability, according to Treasury officials.

* National Capacity Development Program. This USAID program is to 
improve public administration skills at the ministerial level and has 
provided training in a range of issues, including project management, 
budgeting, fiscal management, leadership, and information technology. 
As of October 2007, the program had trained more than 2,000 ministry 
officials from 30 different Iraqi institutions since November 2006 when 
the training program was first established, according to USAID 
officials. The program has trained 500 Iraqi government officials 
specifically in procurement, and 51 of the 500 completed the "Train the 
Trainers" course to enable them to train additional ministry officials 
in procurement. USAID officials also noted that the program includes 
imbedded teams at the Ministry of Planning and Development Cooperation 
that are helping ministries set up proper procurement units with 
procurement tracking systems.

* Local Governance Program. This program, operated under a USAID 
contract, supports Iraq's efforts to improve the management and 
administration of local, municipal, and provisional governments. 
According to USAID officials, this program includes several activities 
to assist with provincial budget execution. These efforts include the 
development of reference materials refreshed annually to reflect new 
guidance by the Minister of Finance and Minister of Planning and 
Development Cooperation; national and regional conferences that bring 
together provincial council members, governors, and members of their 
staffs to discuss provincial budget execution; and local staff in many 
provincial government centers assisting with provincial budget 
execution, as well as public finance advisors in some of the PRTs and 
at its Baghdad headquarters.

* Advisors to civilian and security ministries. These advisors assist 
in the development of the ministries' budget planning and contracting 
skills. As of mid-2007, State and USAID were providing 169 advisors and 
subject-matter experts to civilian ministries to implement capacity 
development projects and provide policy advice and technical assistance 
at key ministries and government entities. In addition, DOD and 
Multinational Security Transition Command-Iraq (MNSTC-I) provided 215 
embedded U.S. and coalition military and civilian advisors to the 
Ministries of Interior and Defense; and a U.S. Treasury attaché advises 
the Ministry of Finance. Treasury reports that it has completed four 
multiday budget execution workshops in 2007 that have trained over 120 
central ministry and provincial government staff members, and it plans 
additional training for January 2008.

The administration's September 2007 Benchmark Assessment Report 
concluded that the government of Iraq has steadily improved its ability 
to execute capital projects spending, as a result of U.S. assistance 
efforts. However, it is not clear what impact these efforts have had to 
date due to limitations with available data, outlined earlier in this 
report, and because much of this assistance specifically designed to 
improve budget execution was established too recently for U.S. agencies 
to fully evaluate them.

Conclusion:

To support continued economic growth and improve the delivery of 
services, the government of Iraq needs to make significant investment 
in its infrastructure. Such investments come from the government's 
efficient execution of its capital budget. The administration's 
September 2007 Benchmark Assessment Report concluded that the 
government of Iraq had steadily improved its ability to execute capital 
projects spending as a result of U.S. technical assistance. However, 
the additional information provided by Treasury and State in commenting 
on a draft of this report did not reassure GAO that accurate and 
reliable data on Iraq's budget exists. State and Treasury continue to 
cite unofficial expenditure data to support assertions that the 
government of Iraq is becoming more effective in spending its capital 
project budget, even though the data differ significantly from the 
official expenditure figures generated under a new IMF-compliant chart 
of accounts. The discrepancies between the unofficial and official data 
highlight the ambiguities about the extent to which the government of 
Iraq is spending its resources on capital projects. Thus, we do not 
believe these data should be used to draw firm conclusions about 
whether the Iraqi government is making progress in executing its 
capital projects budget. The lack of consistent and timely expenditure 
data limits transparency over Iraq's execution of its multibillion 
dollar 2007 capital budget and makes it difficult to assess the impact 
of U.S. assistance.

Recommendation:

To help ensure more accurate reporting of the government of Iraq's 
spending of its capital projects budget, we recommend that the 
Secretary of Treasury work with the government of Iraq and relevant 
U.S. agencies to enhance the Treasury department's ability to report 
accurate and reliable expenditure data from the ministries and 
provinces. This reporting should be based on the IMF-compliant 
standards rather than unofficial data sources that are of questionable 
accuracy and reliability.

Agency Comments and Our Evaluation:

We provided a draft of this report to Departments of Defense, State, 
the Treasury, and USAID. Treasury and State provided written comments, 
which are reprinted in appendixes IV and V. Treasury, State, and USAID 
also provided technical comments and suggested wording changes that we 
incorporated as appropriate. DOD did not comment on the report.

Treasury and State raised several concerns in commenting on our draft 
report. First, Treasury stated that our analysis of Iraq's budget 
execution was based on incomplete and unofficial reporting, in 
particular, the unofficial July 15, 2007 data used to comply with a 
congressional reporting requirement (the September 2007 Iraq Benchmark 
Assessment Report). The administration highlighted this unofficial data 
in the September 2007 benchmark report to Congress to assert that 
Iraq's central government and provinces were becoming more effective at 
spending their capital budgets. We do not believe these data should be 
used to draw firm conclusions about the Iraqi government's progress in 
spending its capital budget. We agree that the unofficial data the 
administration used in the report to Congress do not portray a full and 
accurate picture of the situation. Accordingly, we compared these data 
with official Iraqi Ministry of Finance data to assess the extent to 
which the Iraqis had spent their capital projects budget. Since the 
spending gap between the administration's unofficial data and the 
Ministry of Finance's official data is strikingly large, we recommend 
that the Department of Treasury work with the Ministry of Finance to 
reconcile these differences.

Second, Treasury stated that our report incorrectly concluded that 
capital spending is only contained in the Iraqi budget item for 
"nonfinancial assets" (which we refer to as "investment"). State made a 
similar comment. Treasury and State asserted that capital spending is 
spread through many chapters in the new chart of accounts and that the 
amount is higher than the 4.4 percent cited in our report. However, 
State and Treasury did not provide us with evidence to demonstrate 
which Iraqi accounts included additional capital expenditures.

Third, Treasury questioned our comparison of 2006 and 2007 Iraqi 
spending as displayed in appendix II. Treasury stated that it is 
misleading to compare 2006 and 2007 spending levels because of changes 
in Iraqi spending accounts between the 2 years. We added this note of 
caution to appendix II. However, we also made adjustments to account 
for the differences in the budget classification systems, thereby 
enabling valid comparisons between 2006 and 2007 data. Table 4 outlines 
the key differences in the 2006 and 2007 classification systems. After 
updating the draft report with data through August 2007, budget 
execution ratios in 2007 are still lower in most cases than 
corresponding ratios in 2006. We believe this analysis provides 
additional perspective on the comparisons between 2006 and 2007 
expenditures made in the administration's September 2007 Benchmark 
Assessment Report to Congress.

State also raised several concerns in commenting on a draft of this 
report. First, State commented that the draft report fails to 
accurately portray the "tangible progress" that the central government 
and provincial governments have made in budget execution. State 
commented that this progress represents a tangible example of Iraq's 
leaders working together successfully. However, we do not believe these 
data are sufficiently reliable to conclude that U.S. assistance efforts 
have already achieved success helping the Iraqi government execute its 
capital budget.

Second, State attributed the discrepancy between the official and 
unofficial data cited in our report to "a time lag in data collection" 
and asserted that the July 15 data are representative of the government 
of Iraq's performance as of the publication of the administration's 
September 2007 Benchmark Assessment Report. After providing our draft 
report to State for comment, we received updated data from Treasury 
that clearly refutes State's comment. These updated data show that the 
central ministries spent 4.4 percent of their investment budget through 
August 2007, raising questions about the unofficial data reported to 
Congress in the administration's September 2007 benchmark report.

Finally, State commented that the amount of money committed and 
dispersed in the provinces during 2007 is "especially impressive." 
However, as we noted in our report, commitments do not represent 
expenditures. The absence of provincial spending data in official 
Ministry of Finance reporting makes it difficult to determine the 
extent to which the Iraqi government was spending its 2007 capital 
projects funds. As Treasury noted in their comments, the official 
Ministry of Finance reporting does not show provincial spending and is 
working to determine the discrepancy.

We are sending copies of this report to interested congressional 
committees. We will also make copies available to others on request. In 
addition, this report is available on GAO's Web site at [hyperlink, 
http://www.gao.gov]. If you or your staffs have any questions 
concerning this report, please contact me at (202) 512-8979 or 
christoffj@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Key contributors to this report are listed in appendix VI.

Signed by: 

Joseph A. Christoff: 
Director, International Affairs and Trade: 

[End of section] 

List of Congressional Committees:

The Honorable Carl Levin: 
Chairman: 
The Honorable John S. McCain: 
Ranking Member: 
Committee on Armed Services: 
United States Senate:

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

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

The Honorable Patrick J. Leahy: 
Chairman: 
The Honorable Judd Gregg: 
Ranking Member: 
Subcommittee on State, Foreign Operations, and Related Programs: 
Committee on Appropriations: 
United States Senate: 

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

The Honorable Tom Lantos: 
Chairman: 
The Honorable Ileana Ros-Lehtinen: 
Ranking Member: 
Committee on Foreign Affairs: 
House of Representatives: 

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

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

The Honorable Nita M. Lowey: 
Chairman: 
The Honorable Frank R. Wolf: 
Ranking Member: 
Subcommittee on State, Foreign Operations, and Related Programs: 
Committee on Appropriations: 
House of Representatives: 

[End of section]

Appendix I: Objectives, Scope, and Methodology:

In this report, we review the Iraq government's progress in expending 
its fiscal year 2007 capital projects budgets. Specifically, we (1) 
examine the data the U.S. embassy uses to determine the extent to which 
the Iraqi government has spent its 2007 capital projects budget, (2) 
identify factors affecting the Iraqi government's ability to spend 
these funds, and (3) describe U.S. government efforts to assist the 
Iraqi government in spending its capital projects funds. We undertook 
this review under the Comptroller General's authority to conduct 
reviews on his own initiative, and in recognition of broad 
congressional interest in Iraq and the critical importance of Iraqi 
capital expenditures in rebuilding its infrastructure.

To examine the data the U.S. Embassy in Baghdad uses to measure Iraqi 
government spending, we obtained expenditure data from the U.S. 
Department of the Treasury and the U.S. Embassy in Baghdad and 
interviewed knowledgeable U.S. agency officials. We reviewed three 
different sets of data on Iraqi government expenditures: official 
monthly expenditure reports from the Ministry of Finance through August 
2007;[Footnote 21] unofficial Ministry of Finance data on expenditures 
by central ministries, as of July 15, 2007; and U.S. Provincial 
Reconstruction Team (PRT) data on expenditures by Iraq's provincial 
governments, as of October 21, 2007. The official Ministry of Finance 
expenditure reports reflected a much lower rate of spending on capital 
projects than the unofficial Ministry of Finance and unofficial PRT 
data showed. We did not independently verify the precision of the data 
on Iraq's budget execution. However, the disparity between the 
different sets of data calls into question their reliability and 
whether they can be used to draw firm conclusions about the extent to 
which the Iraqi government has increased its spending on capital 
projects in 2007, compared with 2006. We are presenting the PRT data in 
appendix III for informational purposes, even though our field work 
raised questions about their reliability. To obtain a better 
understanding of Iraqi capital budget and spending data and Iraqi 
practices in developing expenditure data, we interviewed U.S. officials 
with the Departments of Defense (DOD), State (State), and the Treasury 
(Treasury); and the U.S. Agency for International Development (USAID) 
in Washington, D.C., and Baghdad. We also interviewed advisors to the 
Ministry of Finance, working under a contract with the United Kingdom's 
Department for International Development. We also reviewed U.S. embassy 
reports on Iraqi budget execution, Iraqi government instructions for 
executing the budget, Iraq's Financial Management Law, the Special 
Inspector General for Iraq Reconstruction (SIGIR)'s July 2007 Quarterly 
and Semiannual Report to the Congress, and the administration's July 
and September 2007 Benchmark Assessment Reports.

To examine the factors affecting the Iraqi government's ability to 
spend its capital projects budget, we reviewed and analyzed reports and 
interviewed officials from DOD, State, Treasury, and USAID. We also 
interviewed advisors to the Ministry of Finance, working under a 
contract with the United Kingdom's Department for International 
Development. We interviewed these officials in Iraq over the telephone 
and visited Iraq in July 2007. We also reviewed Iraq's Financial 
Management Law and relevant reports from the World Bank, the 
International Monetary Fund (IMF), Ernst and Young, and SIGIR. In 
addition, we reviewed previous GAO reports. We reviewed information 
provided in these interviews and reports to identify the different 
factors affecting Iraq's ability to spend its capital projects budget.

To examine U.S. government efforts to assist the Iraqi government in 
executing its capital projects budget, we interviewed officials from 
DOD, State, Treasury, and USAID. We reviewed several U.S. government 
documents, including State's April 2007 quarterly section 1227 report 
to Congress on the military, diplomatic, political, and economic 
measures undertaken to complete the mission in Iraq; [Footnote 22] 
DOD's quarterly reports to Congress, Measuring Security and Stability 
and Iraq, from November 2006 to September 2007; the USAID contract 
awarded in July 2006 to Management Systems International, Inc., 
Building Recovery and Reform through Democratic Governance National 
Capacity Development Program; a status report on USAID's implementation 
of the Iraqi Financial Management Information System under the Economic 
Governance Project II, and reports from USAID's Iraq Local Governance 
Program.

We conducted this performance audit from April 2007 through December 
2007 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives.

[End of section]

Appendix II: Comparison of Budget Execution during the First 8 Months 
of 2006 and 2007:

Budget execution is a relative measure comparing actual expenditures to 
the budget. Using the budget execution metric, the government spent 36 
percent of its budget during the first 8 months of 2007, compared to 43 
percent during the same period in 2006. Tables 2 and 3 provide a 
breakdown of budget execution for the first 8 months of 2006 and 2007, 
respectively. While we were not able to determine the reliability of 
these official Iraqi expenditure data, we are presenting this analysis 
because it raises additional questions about the data presented by the 
administration in its September 2007 assessment of Iraqi benchmarks. 
Whereas the unofficial Iraqi expenditure data cited by the 
administration suggest that the Iraqi government has improved its 
ability to spend capital projects funds in 2007, this analysis of 
official Iraqi expenditure reports suggests the opposite.

Table 2: Government of Iraq 2006 Annual Budget and Expenditures through 
August 2006 (Dollars in millions): 

Employee compensation: 
Budget: $5,405; 
Expended: $3,531; 
Not expended: $1,874; 
Percent expended: 65%. 

Goods and services: 
Budget: $3,634; 
Expended: $784; 
Not expended: $2,850; 
Percent expended: 22%. 

Transfers and other: 
Budget: $17,363; 
Expended: $9,315; 
Not expended: $8,049; 
Percent expended: 54%. 

Investment: 
Budget: $7,573; 
Expended: $994; 
Not expended: $6,579; 
Percent expended: 13%. 

Total expenditure: 
Budget: $33,975; 
Expended: $14,623; 
Not expended: $19,352; 
Percent expended: 43%. 

Source: GAO analysis of Ministry of Finance data provided by U.S. 
Treasury.

[End of table] 

Table 3: Government of Iraq 2007 Annual Budget and Expenditures through 
August 2007 (Dollars in millions) 

Employee compensation: 
Budget: $11,686; 
Expended: $6,160; 
Not expended: $5,527; 
Percent expended: 53%. 

Goods and services: 
Budget: $6,358; 
Expended: $1,709; 
Not expended: $4,649; 
Percent expended: 27%. 

Transfers and other: 
Budget: $11,623; 
Expended: $6,314; 
Not expended: $5,309; 
Percent expended: 54%. 

Investment: 
Budget: $11,386; 
Expended: $594; 
Not expended: $10,793; 
Percent expended: 5%. 

Total expenditure: 
Budget: $41,054; 
Expended: $14,776; 
Not expended: $26,278; 
Percent expended: 36%. 

Source: GAO analysis of Ministry of Finance data provided by U.S. 
Treasury.

Note: The budget for investment is the sum of the budgets for capital 
projects ($10.1 billion) and capital goods ($1.3 billion) with capital 
projects representing 88 percent. U.S. officials stated that, for 2007, 
ministries are reporting capital projects expenditures together with 
capital goods expenditures as part of a single budget category for 
investment. However, if all the $594 million were capital projects 
expenditures, they would still represent less than 6 percent of the 
$10.1 billion capital projects budget. Totals may not add up due to 
rounding.

[End of table] 

To compare the 2006 and 2007 budgets, we combined various expenditure 
categories into four groups. As explained in the report, beginning in 
2007, the Iraqi government adopted a new chart of accounts as 
recommended by the IMF, which complicates efforts to compare 2006 with 
2007. Column 1 in table 4 shows the nine categories of expenditures 
reported in 2006 and their combination into the four groups presented 
in the table; column 2 shows the eight categories used in the 2007 
chart of accounts.

Table 4: Iraq Budget Classification of Expenditures Reported by 
Ministry of Finance, 2006 and 2007:

2006 Budget classifications: 
A. Employee compensation; 
1. Employee compensation; 
B. Goods and services; 
2. Goods; 
3. Services; 
4. Maintenance; 
C: Transfers and other; 
5. Transfers; 
6. Foreign obligations; 
7. Stipends and pensions; 
D. Investment: 
8. Operating capital; 
9. Capital projects and reconstruction: 

2007 Budget classifications: 
A. Employee compensation; 
1. Employee compensation; 
B. Goods and services; 
2. Goods and services; 
C: Transfers and other; 
3. Interest; 
4. Subsidies; 
5. Grants; 
6. Social benefits; 
7. Other expenditures; 
D. Investment: 
8. Nonfinaincial assets. 

Source: GAO analysis of Ministry of Finance official monthly reports 
provided by the U.S. Treasury.

[End of table]

The percentage of the budget expended as of August 31 is the ratio used 
to measure budget execution for 2006 and 2007 in tables 1 and 2, 
respectively. Only in the category of goods and services did budget 
execution appear to increase, from 22 percent in 2006 to 27 percent in 
2007. In general, the Iraqi ministries have compensated their 
employees. However, even in that category, budget execution decreased 
from 65 percent in 2006 to 53 percent in 2007.

As mentioned previously, the expenditures for capital projects are no 
longer reported as a separate category in official Ministry of Finance 
accounts. The 2007 budget provides separate categories for capital 
goods and capital projects. However, the reported expenditures in the 
category nonfinancial assets, which we refer to as investment, combine 
capital goods and capital projects. The capital projects budget of 
$10.1 billion represents 88 percent of the combined investment category 
of $11.4 billion. The budget execution ratio of this investment 
category was 5 percent for the first 8 months of 2007, compared with 13 
percent for the first 8 months of 2006.

The expenditure performance of the Iraqi government from January 
through August 2007 may even be worse than the dollar expenditure 
figures suggest. The Ministry of Finance reports the government's 
budget and expenditures in its own currency Iraq dinars (ID). The U.S. 
Treasury converts them to dollars using a budget exchange rate of ID 
1,500 per dollar in 2006 and ID 1,260 per dollar in 2007. The dollar 
value of expenditures from January through August 2007 is 19 percent 
higher due to the exchange rate conversion. Expenditures from January 
through August 2007 were ID 18,600 billion or about 15 percent lower 
than the ID 21,900 billion spent over the same period in 2006.

[End of section]

Appendix III: Provincial Reconstruction Team Data on Provinces' 
Spending of 2006 and 2007 Capital Projects Funds: 

Table 5 and table 6 provides additional details on provincial capital 
projects budgets, by allocations, committed funds, and spent funds, for 
2006 and 2007, as of October 21, 2007. These funding levels are based 
on data collected and reported by U.S.-led PRTs. Because the government 
of Iraq only reports provincial spending in the aggregate, the embassy 
relies on PRT data to track provincial capital projects spending. We 
are presenting the PRT data for informational purposes, even though our 
field work raised questions about their reliability.

Table 5: Provincial Capital Projects and Reconstruction Budgets, Funds 
Committed and Spent, 2006 as of October 21, 2007 (Dollars in millions): 

2006 Provincial capital projects budgets: 
Province: Anbar; 
Budget allocation: $97; 
Amount committed: $78; 
Percentage of budget committed: 80%; 
Amount spent: $78; 
Percentage of budget spent: 80%.

Province: Babil; 
Budget allocation: 111; 
Amount committed: 111; 
Percentage of budget committed: 100; 
Amount spent: 98; 
Percentage of budget spent: 88.

Province: Baghdad; 
Budget allocation: 503; 
Amount committed: 503; 
Percentage of budget committed: 100; 
Amount spent: 427; 
Percentage of budget spent: 85.

Province: Basrah; 
Budget allocation: 172; 
Amount committed: 172; 
Percentage of budget committed: 100; 
Amount spent: 115; 
Percentage of budget spent: 67.

Province: Dhi-Qar; 
Budget allocation: 119; 
Amount committed: 119; 
Percentage of budget committed: 100; 
Amount spent: 119; 
Percentage of budget spent: 100.

Province: Diyala; 
Budget allocation: 99; 
Amount committed: 61; 
Percentage of budget committed: 62; 
Amount spent: 0; 
Percentage of budget spent: 0.

Province: Karbala; 
Budget allocation: 62; 
Amount committed: 56; 
Percentage of budget committed: 90; 
Amount spent: 56; 
Percentage of budget spent: 90.

Province: Kurd Prov; 
Budget allocation: 131; 
Amount committed: 126; 
Percentage of budget committed: 96; 
Amount spent: 35; 
Percentage of budget spent: 27.

Province: Maysan; 
Budget allocation: 66; 
Amount committed: 66; 
Percentage of budget committed: 100; 
Amount spent: 50; 
Percentage of budget spent: 76.

Province: Muthana; 
Budget allocation: 46; 
Amount committed: 43; 
Percentage of budget committed: 93; 
Amount spent: 39; 
Percentage of budget spent: 85.

Province: Najaf; 
Budget allocation: 79; 
Amount committed: 72; 
Percentage of budget committed: 91; 
Amount spent: 72; 
Percentage of budget spent: 91.

Province: Ninawa; 
Budget allocation: 202; 
Amount committed: 202; 
Percentage of budget committed: 100; 
Amount spent: 202; 
Percentage of budget spent: 100.

Province: Qadisiyah; 
Budget allocation: 74; 
Amount committed: 74; 
Percentage of budget committed: 100; 
Amount spent: 56; 
Percentage of budget spent: 76.

Province: SaD; 
Budget allocation: 83; 
Amount committed: 82; 
Percentage of budget committed: 99; 
Amount spent: 65; 
Percentage of budget spent: 78.

Province: Tameen; 
Budget allocation: 81; 
Amount committed: 81; 
Percentage of budget committed: 100; 
Amount spent: 73; 
Percentage of budget spent: 90.

Province: Wasit; 
Budget allocation: 74; 
Amount committed: 72; 
Percentage of budget committed: 97; 
Amount spent: 60; 
Percentage of budget spent: 81.

Province: Total; 
Budget allocation: $1,999; 
Amount committed: $1,918; 
Percentage of budget committed: 96%; 
Amount spent: $1,543; 
Percentage of budget spent: 77%.

Source: U.S. Embassy reporting of unofficial data collected by PRTs.

[End of table]

Table 6: Provincial Capital Projects and Reconstruction Budgets, Funds 
Committed and Spent 2007, as of October 21, 2007 (Dollars in millions): 

2006 Provincial capital projects budgets: 
Province: Anbar; 
Budget allocation: $107; 
Amount committed: $52; 
Percentage of budget committed: 49%; 
Amount spent: $0; 
Percentage of budget spent: 0%.

Province: Babil; 
Budget allocation: 112; 
Amount committed: 127; 
Percentage of budget committed: 113; 
Amount spent: 42; 
Percentage of budget spent: 38.

Province: Baghdad; 
Budget allocation: 560; 
Amount committed: 301; 
Percentage of budget committed: 54; 
Amount spent: 70; 
Percentage of budget spent: 13.

Province: Basrah; 
Budget allocation: 195; 
Amount committed: 159; 
Percentage of budget committed: 82; 
Amount spent: 12; 
Percentage of budget spent: 6.

Province: Dhi-Qar; 
Budget allocation: 138; 
Amount committed: 119; 
Percentage of budget committed: 86; 
Amount spent: 2; 
Percentage of budget spent: 1.

Province: Diyala; 
Budget allocation: 110; 
Amount committed: 0; 
Percentage of budget committed: 0; 
Amount spent: 0; 
Percentage of budget spent: 0.

Province: Karbala; 
Budget allocation: 71; 
Amount committed: 62; 
Percentage of budget committed: 86; 
Amount spent: 17; 
Percentage of budget spent: 24.

Province: Kurd Prov; 
Budget allocation: 314; 
Amount committed: 113; 
Percentage of budget committed: 36; 
Amount spent: 0; 
Percentage of budget spent: 0.

Province: Maysan; 
Budget allocation: 76; 
Amount committed: 2; 
Percentage of budget committed: 3; 
Amount spent: 26; 
Percentage of budget spent: 34.

Province: Muthana; 
Budget allocation: 52; 
Amount committed: 38; 
Percentage of budget committed: 73; 
Amount spent: 4; 
Percentage of budget spent: 8.

Province: Najaf; 
Budget allocation: 88; 
Amount committed: 88; 
Percentage of budget committed: 100; 
Amount spent: 23; 
Percentage of budget spent: 26.

Province: Ninawa; 
Budget allocation: 226; 
Amount committed: 54; 
Percentage of budget committed: 24; 
Amount spent: 17; 
Percentage of budget spent: 8.

Province: Qadisiyah; 
Budget allocation: 64; 
Amount committed: 64; 
Percentage of budget committed: 100; 
Amount spent: 13; 
Percentage of budget spent: 20.

Province: SaD; 
Budget allocation: 93; 
Amount committed: 75; 
Percentage of budget committed: 81; 
Amount spent: 11; 
Percentage of budget spent: 12.

Province: Tameen; 
Budget allocation: 90; 
Amount committed: 58; 
Percentage of budget committed: 64; 
Amount spent: 17; 
Percentage of budget spent: 19.

Province: Wasit; 
Budget allocation: 83; 
Amount committed: 65; 
Percentage of budget committed: 78; 
Amount spent: 20; 
Percentage of budget spent: 24.

Province: Total; 
Budget allocation: $2,381; 
Amount committed: $1,379; 
Percentage of budget committed: 58%; 
Amount spent: $275; 
Percentage of budget spent: 12%.

Source: U.S. Embassy reporting of unofficial data collected by PRTs.

Note: The data include $314 million of Kurdistan region's separate 2007 
capital projects allocation of $1.56 billion. The total 2007 budget 
allocation for the provinces, excluding the Kurdistan region, is $2.067 
billion.

[End of table]

[End of section]

Appendix IV: Comments from the Department of the Treasury:

Department Of The Treasury: 
Washington, DC 20220: 

December 13, 2007: 

Mr. Joseph A. Christoff: 
Director, International Affairs and Trade: 
Government Accountability Office: 

Dear Mr. Christoff: 

Thank you for the opportunity to review and comment on the December 
2007 draft of the GAO's report on budget execution in Iraq, Iraq 
Reconstruction: Budget, Security, and Other Factors Limit Iraq's 
Ability to Execute Capital Projects Budget and Track Spending. Treasury 
has been closely engaged with the Iraqi Ministry of Finance on 
improving budget execution, and appreciates GAO's attention to an issue 
that is crucial for reconstruction and growth in Iraq. 

Measuring Iraq's budget execution is a difficult task, as data are 
often revised, and the Iraqis have just implemented a new chart of 
accounts that changes capital expenditure classifications. As the 
report notes, there are many reasons for a slow pace of budget 
execution in Iraq, particularly related to weak capacity and security. 
The U.S. government and Iraqi government have focused on addressing 
these problems, and we believe that incremental progress is being made. 
We expect that building Iraqi capacity in various ministries for a more 
effective financial management will take time and additional 
investment. 

Nonetheless, we are concerned with many of the statements in this 
report and offer comments on each section of the report below. 
Treasury's attaché in Baghdad will also provide extensive informal 
comments on this report. 

1) Assessment of Extent to which GOI has spent its $10.1 billion 
capital projects budget for 2007. 

Due to data limitations and changes in Iraqi financial procedures, the 
pace of execution of capital projects for 2007 will not be fully known 
for some time. Ideally, GAO would wait until all 2007 data are 
available to properly analyze GOI budget execution. The GAO analysis is 
based on incomplete and unofficial reporting that does not portray a 
full and accurate picture of the situation. In particular, the GAO 
report focuses on preliminary data from July 15th that the 
administration used to comply with a requirement to report to Congress. 
The administration has consistently indicated that there were potential 
accuracy issues with the data in this report. More recent Iraqi data 
are helping Treasury understand some of the discrepancies in the 
various reporting formats from the Ministry of Finance, Ministry of 
Planning, Central Bank of Iraq, and PRT data. 

On some specific points: 

* The report incorrectly asserts that capital spending is only 
contained in the Iraqi budget item for "non-financial assets". But, in 
the new chart of accounts, capital spending is spread throughout many 
chapters, and is much higher than the June figure for non-financial 
assets. 

* It is misleading to make comparisons to 2006 below the aggregate 
spending figures because of the different charts of account. Treasury 
is still working with the GOI to determine just how much of the capital 
budget is accurately captured in MOF reports, as many discrepancies 
exist between different GOI reports. 

* The PRT data for the provinces are just one source of data. Comparing 
this with spending data in the special report provides some insight 
into spending by the provinces. The official MOF reporting does not 
show provincial spending, and Treasury is again working to determine 
the discrepancy. 

2) Factors affecting GOI's ability to spend these funds: 

* The lack of skilled workers available is not just because of 
De'Baathification and refugee outflow. Rather these factors compound 
the dearth of capacity that pervades the Iraqi civil service and 
society after 25 years of wars and sanctions. 

* The report would benefit from fuller discussion of the overall 
systemic impediments and Byzantine processes that slow budget 
execution, in addition to the procurement, budgetary, and accounting 
issues highlighted in the report. 

3) USG efforts to assist the GOI in spending its capital project funds: 

* Many capacity development programs require many months before they 
can make slight impacts on outcome-oriented objectives. We would 
encourage GAO to consider intermediate and qualitative indicators in 
its assessment of the impact of USG capacity building programs. 

Signed by: 

Ahmed M. Saeed: 
Deputy Assistant Secretary, Middle East & Africa: 
U.S. Department of the Treasury: 

[End of section] 

Appendix V: Comments from the Department of State: 

United States Department of State: 
Assistant Secretary for Resource Management and Chief Financial 
Officer: 
Washington, D.C. 20520: 

Ms. Jacquelyn Williams-Bridgers: 
Managing Director: 
International Affairs and Trade: 
Government Accountability Office: 
441 G Street, NW: 
Washington, D.C. 20548-0001: 

Dear Ms. Williams-Bridgers: 

We appreciate the opportunity to review your draft report, "Iraq 
Reconstruction: Budget, Security, and Other Factors Limit Iraq's 
Ability to Execute Capital Projects Budget and Track Spending," GAO Job 
Code 320484. 

The enclosed Department of State comments are provided for 
incorporation with this letter as an appendix to the final report. 

If you have any questions concerning this response, please contact Kyle 
Peterson, Desk Officer, Bureau of Near Eastern Affairs, at (202) 647-
9837. 

Sincerely, 

Signed by: 

Bradford R. Higgins: 

cc: GAO – Steve Lord: 
NEA – C. David Welch: 
State/OIG – Mark Duda: 

Department of State Comments on GAO Draft Report: 

Iraq Reconstruction: Budget, Security, and Other Factors Limit Iraq's
Ability to Execute Capital Projects Budget and Track Spending (GAO-08-
153, GAO Code 320484): 

Thank you for the opportunity to review and comment on the December 
2007 draft of GAO's report on budget execution in Iraq, Iraq 
Reconstruction: Budget, Security, and Other Factors Limit Iraq's 
Ability to Execute Capital Projects Budget and Track Spending. As 
indicated by its inclusion as a benchmark in the September 2007 
Benchmark Assessment Report, the Government of Iraq's (GOI) ability to 
create and execute its own budget is vital to Iraq's reconstruction, 
fiscal stability, and the GOI's ability to meet the needs of the Iraqi 
people. Therefore, we welcome GAO's attention to this matter. 

We are concerned that the draft report fails to accurately portray the 
tangible progress that the central government and provincial 
governments have made in budget execution. The GOI's progress on budget 
execution represents a tangible example of Iraq's leaders working 
together successfully. It also reflects increased U.S. and 
international assistance focused on budget execution. 

We strongly disagree with GAO's characterization of the discrepancy 
between the June 2007 official Ministry of Finance (MoF) data and the 
July 15, 2007 unofficial MoF data cited in the September 2007 Benchmark 
Assessment Report. The July 15 unofficial data were provided to the 
U.S. Embassy at our request prior to the September 2007 Benchmark 
Assessment Report. As such, these data represented the most up-to-date 
information on Iraqi budget execution at that time. 

The discrepancy between the June 2007 and July 15 data represents, 
foremost, a time lag in data collection. In the weeks between the two 
data sets, MoF overcame some of the lag in collection experienced 
previously. The 1.1 percent ministerial capital budget execution rate 
cited in the draft report reflects only what the MoF reported. Actual 
performance was higher. Given the late passage of the 2007 Federal 
Budget Law, the MoF was still refining its collection reporting in 
June. By July 15, the MoF had accelerated its data collection. 
Additionally, many ministries that had previously been creating budgets 
and committing funds began to receive and spend their capital funds at 
a greater rate. In summary, we stand by the statement that the July 15 
data is representative of the GOIs performance as of the publication of 
the September Benchmark Assessment Report, and that findings based on 
the outdated June data are misleading. 

The MoF was also delayed in reporting budget execution data because it 
was implementing the International Monetary Fund (IMF)-imposed Chart of 
Accounts. The Chart of Accounts provides for enhanced data collection, 
aligns MoF accounting with international standards, and represents 
significant capacity development on the part of MoF officials. Given 
these refined and improved accounting procedures, the draft report 
citing 1.1 percent expenditure of Non-financial Assets does not reflect 
the entirety of investment spending reported. In fact, capital 
expenditures are recorded through all expenditure categories, including 
Non-financial Assets, Salaries, Goods and Services, Grants, and Other 
Expense. 

One of the most important points about provincial budget execution in 
2007, which is insufficiently highlighted in the draft GAO report, is 
that provincial governments have been simultaneously committing and 
disbursing 2006 and 2007 funds. The amount of money committed and 
disbursed during 2007 is thus especially impressive. Additionally, the 
draft report expresses concern that commitments may not be a good 
indicator of actual disbursements. Our data, however, suggests that for 
the most part they are. 

There is a clear trade-off between using more timely PRT-collected 
data, which acts as a leading indicator, and official MoF provincial 
data, which is more authoritative but less timely. PRT technical 
advisors continually refine their data collection and reporting 
methods. Although some data discrepancies remain, provincial officials 
relay financial data to the PRTs in much the same way they report it to 
the MoF. We agree with GAO's recommendation that "actual spending by 
the provinces should be reflected in official 2007 expenditure data 
reported by the Ministry of Finance." [Footnote 23] We will rely on 
those statistics as they become available. 

Finally, we are concerned with the draft report's assessment that U.S. 
and international assistance efforts have not borne fruit. Based on 
recent data, it is clear that the intense focus on budget execution in 
2007 has increased the technical ability of ministry and provincial 
officials to perform tasks necessary to execute their budgets. In 
addition to the various U.S. assistance efforts mentioned in the 
report, the U.S. Embassy is currently working with the MoF, the 
Ministry of Planning, and others to develop methods of tracking capital 
budget execution by project. This will help address the lack of 
performance measures the report identifies. [Footnote 24] 

In addition to analyzing budget execution data, PRT and Embassy 
officers observe and report tangible projects, levels of services, and 
public opinion of the Government's ability to deliver services. These 
'data points' confirm that the Iraqis are improving both ministerial 
and provincial capital budget execution. 

Based on the above considerations, we recommend that GAO reconsider the 
draft's report's focus to ensure a more accurate characterization of 
the GOI's improvements on budget execution. We would be happy to 
discuss the matter further or provide you with any additional 
assistance. 

[End of section] 

Appendix VI: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Joseph Christoff, (202) 512-8979 or christoffj@gao.gov: 

Staff Acknowledgments: 

In addition, Steve Lord, Acting Director; Lynn Cothern; Howard Cott; 
Martin De Alteriis; Timothy Fairbanks; Victoria H. Lin; Bruce Kutnick; 
Mary Moutsos, and Sidney Schwartz made key contributions to this 
report. 

[End of section] 

Footnotes: 

[1] GAO, Securing, Stabilizing, and Rebuilding Iraq: Iraqi Government 
Has Not Met Most Legislative, Security, and Economic Benchmarks, GAO-07-
1195 (Washington, D.C.: Sept. 4, 2007). 

[2] Iraq's investment budget consists primarily of capital projects. 
The 2007 Iraq budget has separate categories for capital goods and 
capital projects. However, in 2007, Iraq's ministries started reporting 
these expenditures under a single category, "nonfinancial assets," 
which we refer to as "investment" for the purpose of this report (with 
capital projects representing almost 90 percent of the investment 
budget). 

[3] GAO-07-1195. 

[4] According to Section 9 of Iraq's Financial Management law, "funds 
approved for spending units may be used only until December 31st of the 
fiscal year, except to the extent that goods and services have been 
validly ordered and received." 

[5] The White House, Benchmark Assessment Report, Sept. 14, 2007. 

[6] While PRTs' separate reporting of provincial expenditures includes 
the level of funds committed by provinces, Ministry of Finance 
expenditure data do not include commitments. Commitments are defined 
under Iraq's Financial Management Law, as "an undertaking to make an 
expenditure following the conclusion of a binding agreement that will 
result in a payment." 

[7] To achieve debt restructuring, Iraq agreed to implement IMF 
conditions that stipulate specific economic reforms and milestones that 
the government needs to meet. These conditions are contained in the IMF 
stand-by arrangement, which was approved in December 2005, and in 
subsequent IMF reviews of the stand-by arrangement. The conditions 
include adoption of a government budget classification system and chart 
of accounts in line with IMF standards. 

[8] SIGIR, Quarterly Report and Semiannual Report to the United States 
Congress (Arlington, VA: July 30, 2007). 

[9] The approximately $2 billion in 2006 capital projects funds for the 
provinces did not include the Kurdistan region, which received a 
separate allocation of $500 million from the government of Iraq for 
capital projects in 2006. The government of Iraq permitted the 
provinces to carry over an estimated $1.3 billion in unspent 2006 
funds. Unspent 2007 capital funds for the provinces may not be carried 
over, according to U.S. officials. 

[10] PRTs are joint civil-military units formed in fall 2005 to help 
improve provincial governance, including assistance with budget 
formulation and execution. 

[11] This 12 percent figure includes a small portion of the Kurdistan 
region's separate capital projects budget allocation. 

[12] DOD, Measuring Stability and Security in Iraq: Report to Congress 
in Accordance with the Department of Defense Appropriations Act 2007, 
Section 9010, Public Law 109-289 (Washington, D.C.: November 2006). 

[13] Transparency International, Annual Report 2006. 

[14] World Bank, Rebuilding Iraq: Economic Reform and Transition, 
February 2006. 

[15] CPA Order 87 outlines requirements for public contracts in Iraq. 

[16] On May 9, 2007, a presidential order created the Iraq Transition 
Assistance Office (ITAO) as the successor organization to IRMO. 

[17] United Nations Security Council Resolution 1483 noted the 
establishment of the Development Fund for Iraq (DFI). The DFI holds the 
proceeds of petroleum export sales from Iraq, as well as remaining 
balances from the UN Oil-for-Food Program and other frozen Iraqi funds. 
Disbursements from the Development Fund for Iraq must be used for the 
benefit of the Iraqi people. 

[18] See GAO, Stabilizing and Rebuilding Iraq: U.S. Ministry Capacity 
Development Efforts Need an Overall Integrated Strategy to Guide 
Efforts and Manage Risk, GAO-08-117 (Washington, D.C.: Oct. 1, 2007). 

[19] The World Bank defines outputs as the short-term achievements that 
result from activities undertaken to implement a program (e.g., the 
number of public servants trained). Outcomes are the medium term 
changes that result from achieving the outputs (e.g., the improved 
skills of employees). Impacts are the long-term changes that result 
over time from achieving the program's outputs and outcomes (e.g., 
improved program delivery). 

[20] DOD has a separate contract to install this system for the 
Ministries of Defense and Interior. 

[21] Although Iraq's $41 billion budget in 2007 includes $10.1 billion 
for capital projects, the government's official expenditure data do not 
break out capital projects expenditures in 2007. Ministries report 
their capital projects expenditures together with expenditures for 
capital goods under the heading of "nonfinancial assets," which we 
refer to as "investment" expenditures. 

[22] State's quarterly 1227 reports are submitted pursuant to section 
1227 of the National Defense Authorization Act for Fiscal Year 2006 
(P.L. 109-163). 

[23] Page 9, paragraph 2. 

[24] Page 15, paragraph 2. 

[End of section] 

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