Little progress on halting Iraq's decay

Analysis
By Robert Plummer
Business reporter, BBC News

The US troop surge in Iraq has been accompanied by a similar surge in the amount of US funds devoted to Iraqi reconstruction - but with just as debatable an effect.

Water supplies are unreliable in the Iraqi capital

By the end of 2006, Washington had provided $37.45bn to help rebuild Iraq's shattered infrastructure.

Figures issued just six months later showed that the total has since swollen to $44.54bn - an increase of nearly one-fifth.

But ordinary Iraqis have seen no benefit from this extra cash.

Baghdad's electricity ministry recently warned that the national power grid was close to collapse, while water supplies in the Iraqi capital have been cut off for days at a time.

Conditions are arguably worse than at any time since the US-led invasion overthrew Saddam Hussein in 2003.

The office of the US Special Inspector General for Iraq Reconstruction (Sigir), a kind of super-auditor for rebuilding efforts, has singled out widespread corruption and economic mismanagement as the source of the continuing decay.

The inspector general himself, Stuart Bowen, told the BBC in July that endemic corruption amounted to a "second insurgency" in Iraq, while what he calls "the volatile security environment" has also hindered progress.

But a close look at the accounts covered by Sigir's regular quarterly reports points to another reason for the faltering relief effort.

Iraq's shortfall

US government money, as appropriated by Congress in various spending bills, is only one component of the reconstruction fund. The rest comes from international donors and from Iraq itself.

Between December 2006 and June 2007, international aid went up slightly, from $15.21bn to $18.22bn - although most of the total ($13.59bn) was actually pledged at the Madrid donors' conference in October 2003.

IRAQ RECONSTRUCTION FUNDS US government: $44.54bn International donors: $18.22bn Iraqi funds: $36.88bn Total: $99.64bn Source: Sigir, 30 June 2007

However, during the same period, there was a huge decline in Iraqi funds, from $50.58bn to $36.88bn.

The shortfall is contained in the Development Fund for Iraq (DFI), which represents Iraqi oil export revenues and repatriated assets. It shrank from $23.04bn to $9.34bn.

Sigir gives no explanation for the reduction in the DFI, which is now administered by the Iraqi government and therefore outside the auditor's remit.

But that decline, which completely negates the increase in US financial support, is probably due to the serious problems that continue to plague the Iraqi oil industry.

Confusion

The disarray in the oil sector was fully outlined two months ago in a damning report by another US agency, the Government Accountability Office (GAO), which highlighted "serious challenges" involving corruption, theft and sabotage.

As the GAO acknowledges, rebuilding the Iraqi oil industry is crucial to the country's economy.

Iraqi oil installations are prone to attack by insurgents

Its reserves, at an estimated 115 billion barrels, are the third-largest in the world, while oil export revenues account for more than half Iraq's GDP and more than 90% of government revenues.

However, no-one seems to know exactly how much oil Iraq is currently producing, although the level has certainly fallen drastically since the invasion.

Different parts of the US administration report different figures, while the US and Iraq have different production targets. In any case, production levels may be overstated, because no-one is measuring them properly.

"The deteriorating security environment has led to project delays and increased costs," says the GAO.

"Insurgents have destroyed key oil infrastructure, threatened workers, compromised the transport of materials, and threatened project completion and repairs by preventing access to work sites."

Investor fears

As well as continuing violence, there are also political obstacles to the regeneration of Iraq's oil sector.

As the GAO says, Iraq has still to pass legislation that defines how to share the country's oil wealth and what rights foreign investors would have.

IRAQ'S ENERGY PRODUCTION Electricity: 3,800 megawatts (pre-war: 4,000) Oil: 2.12m barrels per day (pre-war: 2.5m bpd) Source: Sigir, April 2007

"Until this legislation is enacted and implemented, it will be difficult for Iraq to attract the billions of dollars in foreign investment it needs to modernise the sector," the report says.

It's all a far cry from the optimism shown by key members of the Bush administration in the run-up to the Iraq war.

Paul Wolfowitz, who was deputy defence secretary at the time, maintained that Iraqi oil revenues alone would pay for rebuilding the country.

"We are dealing with a country that can really finance its own reconstruction," he assured the House of Representatives' budget committee - falsely, as it turned out.

Now the US wants Iraq to pass an oil law, as what it says is a means of promoting reconciliation among different religious and ethnic groups.

Distribution of oil revenues is a big issue for Sunni Arabs, who mostly live outside oil-producing areas.

But fears are growing that far from uniting Iraqis, the prospect of economic growth may prove to be just another factor dividing them.