Tuesday, October 9, 2007

Iraq: where has the money gone?

Over four years after the US-led invasion of Iraq, peace and security for many of the country's citizens remains elusive. Large areas exist in a state of violent conflict while political disarray in Baghdad has paralysed real progress. Despite billions of dollars worth of funds poured into Iraq's reconstruction, that process has stalled.

Corruption, incompetence, a violent insurgency, sabotage, criminality and looting are cited as reasons for Iraq's slow progress. But who is to blame in a country where the government's authority is uneven, where centralised bureaucracy cripples business and where the security situation makes even the simplest meeting almost impossible in many areas? "Everybody must assume responsibility," says Wayne White, head of the US State Department's Iraq Intelligence Team 2003-2005.

"The US military, the Iraqi government, individual ministries, the Shia militias, Sunni insurgents, even down to the individual looters.

"Reconstruction has been seriously hampered by contractor and Iraqi government corruption; US government and military incompetence; and insurgent sabotage. Corruption involving contractors and Iraqis working with them has been a huge problem, in part because of an astonishing lack of oversight."

But when, after the successful removal of Iraqi dictator Saddam Hussein, did things begin to go wrong? In June 2004, the US-led Coalition Provisional Authority (CPA) relinquished civil authority over post-conflict Iraq. This ended 13 months of occupation and marked the creation of an independent interim Iraqi government. It was also the point at which questions began to be asked about where billions of dollars of reconstruction money had gone in the intervening months. These questions have not yet been answered.

Shwan Al Mulla, president of Iraqi Consultants and Construction Bureau, a company managing US$300mn worth of reconstruction projects in Iraq, estimates that more than US$30bn has been poured into Iraq's reconstruction to date.

If the war were to end, he believes it would take up to 15 years to rebuild the country, "depending on how much effort Iraqi politicians are willing to put into it," and a staggering US$150bn.

Financial irregularities

In mid-2004 "financial irregularities" in the dispersion of Iraqi money held in the Development Fund for Iraq (DFI) were discovered by auditors KPMG-Bahrain. This fund was held in a bank account in New York and administered by the CPA. Today lingering questions about that account remain, specifically regarding missing Iraqi money worth an estimated US$8.8bn.

"We're talking hard cash here, we're not talking theoretical money," says David Claridge, managing director of Janusian, a British security contractor operating in Iraq. "There were definitely lumps of cash, the Iraqi dinar being used. That's why they introduced the new Iraqi dinar."

But the situation is hugely complex, and does not end with questions over the CPA's use of DFI money. In late October 2003, international donors pledged more than US$33bn to fund Iraq's reconstruction. Of this US$18.4bn was US money, approved by Congress to be spent on Iraq's redevelopment. The use of this taxpayers' money has also attracted a storm of criticism.

"A large portion of it ended up being spent on security," says Claridge, "and not security for reconstruction, but being diverted." US money was being spent in part on the Iraqi security forces, "not on what it was originally intended for." Its use remains under Congressional investigation in the US. James Drummond, a journalist based in Baghdad between 2004 and 2005, and a former advisor in Iraq to a British contractor describes the situation as a "calamitous waste of money for the US taxpayer."

The use of reconstruction money to fund security is a huge issue in Iraq. In order for any project to establish itself large sums have to be spent on stabilising the environment in which the work is carried out. And sabotage, looting and criminality add to the risks of the ongoing insurgency.

But the extent of the difficulties faced by the reconstruction effort is often overlooked. Iraq's infrastructure was in ruins well before 2003. Sanctions enforced against Baghdad following Saddam Hussein's invasion of Kuwait in 1990 rank among the most comprehensive and crippling on record. In order to keep infrastructure functioning at a basic level the administration "cannibalised what they had and used everything to hand," says Drummond. Even before the war, "by the time 2003 came round entire power stations had to be rebuilt."

Another flow of reconstruction money open to corruption took the form of military ‘discretionary' funds. "There were discretionary funds made available to the US military and these were spent on a large number of scattered infrastructure projects, schools, things like that at a community level. The money was very carefully doled out and focused."

But while the intentions behind the dispersion of these funds were commendable, "you still had to hand it over to a contractor." It is at this stage that the "corruption became intolerable," says White.

Misguided intentions

A particular problem under the CPA in the early days of the reconstruction process was the involvement of the military in the rebuilding process. "The first round of reconstruction efforts were militarily directed," says Drummond. "It is now widely felt that this wasn't particularly well thought through."

Money was spent largely in the west of the country and Baghdad, the country's most dangerous areas. The likelihood of any reconstruction project's success was limited here. Drummond poses the question: What if reconstruction had been applied to areas where it could have worked at the early stages of the post-war programme? This could have had a much greater impact on peoples' lives and been far more successful in winning the support of the Iraqi people.

White explains that under the CPA billions of dollars were committed to large-scale projects that would take several years to complete, "when psychologically, Iraqi's needed quick fixes. They needed projects that they could get relief from within six months or a year."

This diversion of funds from more immediate relief projects was "a terrible mistake," says White. "It was well meaning. But at a time at which the situation was pretty shaky on the ground a lot of short term projects were denied money that could have showed Iraqis much quicker relief."

White identifies the military's involvement in the early stages of the reconstruction as "a problem with expertise. Many projects, particularly during the CPA period, were being administered by military personnel who had absolutely no knowledge of what something costs. They were not financial officers; they were not development officers; they were thrust into the job, and they knew nothing about financial oversight." As a result, "you had a large a number of projects that had expenses running seriously beyond what was required. There was a tremendous waste."

Washington has also been widely criticised for awarding large contracts to American companies, including Halliburton, Bechtel and KBR, in controversial closed or no-bid processes. In many cases these contracts are designed so that the same contractors can be used again at short notice. "Those large US companies had to jump through many hoops even before the Iraq war," says Drummond. "You can wonder about the whole model of the war and occupation, but this is how it works." Pragmatism prevails in reconstruction efforts: "as long as the costs are reasonable. I don't think it is corrupt," offers Drummond, "I think it is misguided."


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