Iraq Reconstruction
Better Data Needed to Assess Iraq's Budget Execution Gao ID: GAO-08-153 January 15, 2008The 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.
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.
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Director: Team: Phone:GAO-08-153, Iraq Reconstruction: Better Data Needed to Assess Iraq's Budget Execution
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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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Gloria Jarmon, Managing Director, JarmonG@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
