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Sat 6 Oct 2007 04:00 AM

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Iraq: where has the money gone?

Bribes, corruption, death, and torture. A look into Iraq's missing billions.

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.

A large portion of the money ended up being spent not on reconstruction security, but being diverted.

"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."

Bringing in the money Madrid Donor Conference

On the 23-24 October 2003, representatives from 73 countries and 20 international organisations met in Madrid to discuss funding Iraq's reconstruction. Between them they pledged more that US$33bn, over two thirds of which was donated by the US. Ayad Allawi, then president of the Iraqi Governing Council, told donors "your success here will be a success for humanity and a help for peace and security in the world."

Despite falling short of raising the estimated US$55bn needed to rebuild the country over several years, the Madrid Donor's Conference was a success. Non-US donations amounted to more than the Washington administration had expected. The US itself gave nearly US$18.4bn, a sum approved by Congress days after the conference.

Many countries, France, Germany and Russia among them, did not offer new funds, but agreed to co-operate with efforts to reduce Iraq's debt burden. Others donated products or services instead: Iran offered electricity, gas, and oil export facilities; Vietnam gave rice; Sri Lanka 100 tonnes of tea.

The following were among those who pledged financial aid in the form of loans and grants. Much of this money has not yet been given or disbursed:

Japan:US$5bn in grants and loans over four years
The European Union:US$1.4bn
South Korea:US$200m over four years
Canada:over US$150m
World Bank:US$3-5bn in loans over five years
International Monetary Fund:US$2.5-4.25bn in loans spread over three years

But there is evidence to suggest that in Iraq, these costs may not be reasonable. The US Congress's Committee on Oversight and Government Reform has found "multiple violations of federal acquisition regulations and procedures, placing millions of taxpayer dollars at risk and leaving questions unanswered." These relate to the US Defence Department's decision to pay KBR nearly US$221m in costs questioned by the Defence Contract Audit Agency during its audits of the Restore Iraqi Oil contract for reconstruction work on Iraq's oil infrastructure.

The reliance on private security contractors is compounded by a classic "case of the US not providing enough troops for their generals," Drummond explains. That these companies are attracting recruits from the armed forces with higher wages is an irony that perpetuates the situation.

The whole thing is dependent on the stability of the security situation, which in turn, is dependent on other elements.

The Committee on Oversight and Government Reform estimates that private security contractor Blackwater has received over US$1bn in federal contracts since 2001; and "is charging the government over US$1200 per day for each ‘private security specialist' employed by the company." Blackwater is currently under investigation in relation to a fatal shoot-out in which at least 17 Iraqi civilians were killed.

But the reconstruction problems do not end with security problems and fraud in the contracting process. "Another thing you need to keep in mind in addition to the inferior financial oversight is that there has actually been a very, very serious problem with project follow-up," comments White. Take building a school: "payments are made and no-one shows up to see if it is being done. That's going on constantly."

Claridge refers to a "lack of coordination. You build a substation and you also need a power station. But the power station project doesn't get authorisation or can't take place."

Ultimately though, the success of many projects returns to the issue of security. "You can build a school and even if it's not looted and it is finished people are too afraid to go to it. It doesn't matter whether you have rebuilt the school because the security environment around it has made it irrelevant," White concludes. "It's a very depressing story."

Funding the insurgency

But there is an even more sinister result of the misguided and corrupt funding of Iraq's reconstruction process. Through various ways money intended for development projects has found its way into the hands of insurgents.

"Many of the people in the security forces, either the police or the army, have handed over parts of their salary to the militias, Al Qaeda in Iraq, or to the insurgents. Either because of sympathy or because of blackmail," White explains. "US funds are pouring into the insurgency."

And violence remains intense in many areas. "Certainly Al Qaeda has had its Ramadan," admitted General David Petraeus, the top US commander in Iraq at the end of September. His remarks coming just days after his return to Baghdad where he delivered the anticipated report on the status of the country in Washington.

The Future

"Essentially we're dealing with an economic system that is bleeding from 1000 cuts," says White. "That's the problem. If it isn't insurgent violence, if it isn't militia intimidation, if it isn't police and official corruption, if it isn't contractors charging vast sums far and above what is required for projects, it's something else."

So what does the future hold? There is no doubt that the successful development of Iraq's enormous oil and gas reserves is the most critical economic factor in ensuring the county's progress. Lawmakers are still negotiating Iraq's new oil law. Hamid Dhiya Jafar, CEO of UAE-based Crescent Petroleum Group, believes that "after decades of mismanagement, underinvestment and political manipulation, Iraq has a golden opportunity to set the right policy and regulatory framework."

In August Abdul Falah Al Sudani, Iraq's trade minister, ambitiously announced that the country expected to be a "fully-fledged member" of the World Trade Organisation by 2008-2009. But stabilising the economy will take time. "If we take Iraqi Kurdistan as an example, where it took 10 years to stabilise the economy, I would expect the same applies for the rest of Iraq," says Al Mulla of Iraqi Consultants and Construction Bureau.

In the northern city of Erbil a new media precinct is being developed to rival Dubai's Media City. All the investment incentives are being packed into the free zone, including allowing 100% foreign ownership of companies.

Significantly, Iraq hasn't been deserted by its Gulf neighbours. Whether for humanitarian or investment purposes, money from GCC states has flowed into the country. In August, Sultan bin Saeed Al Mansouri, the UAE's minister of development and public sector, announced that the UAE would play a major role in channeling private investment to Iraq.

Earlier in August, Qatar Telecom (Qtel) entered the Iraqi market through its participation in the Asia Cell Consortium. The Consortium has won a 15-year national mobile telecoms licence in the country at a price of US$1.25bn: one of the largest commercial transactions completed in Iraq this year.

But is it too late to rethink the reconstruction programme? James Drummond, is quick to admit that this simply put, "hasn't worked. The reconstruction effort has not done what it was meant to do. It is too little too late." Furthermore, the approach taken has not reflected the processes of conventional development programmes. "In development economics you don't do this sort of thing," Drummond says of many of the major reconstruction projects overseen by the US military. "You empower people to do it themselves."

It remains to be seen whether those responsible for many of the failures that have punctuated Iraq's development will be held to account. Drummond is more positive on this. When it comes to corruption by US officials and contractors he believes the audit process will eventually catch up with those at fault.

But how do you judge success? Among the fraud, failure and graft, there have been some achievements. "All the projects that we worked on were successful at the time," maintains David Claridge of Janusian. "At that point there was a genuine feeling that we were helping make a contribution towards making people's lives a bit better." Critically however, "the figures around electricity supplies in general don't seem to support that conclusion," he admits. Electricity supplies are lower now than they were before the removal of the late Saddam Hussein.

So while the Iraqi people continue to suffer, the bureaucracy of the US and Iraqi administrations in Baghdad grinds on. "Underpinning the whole affair is an enormous panoply of advisors and their entourages," Drummond states. Their effectiveness depends on their security. Their security depends on the use of private contractors.

"The whole thing is dependent on the stability of the security situation, and the security situation is dependent on other elements. It's about how you break that cycle," believes Claridge, "my view is that it will be broken by attrition and fatigue and a willingness to engage that we are already seeing among some Sunni factions."

It is not yet clear what course more extreme Shia factions will take, but it is clear that "Al Qaeda are as aggressive as ever."

In a sign that things are changing in terms of reconstruction there are reports that the bureaucracy of Baghdad is increasingly being sidelined by provincial administrators to finance regional projects. The efficiency of officials in the southern city of Hilla, the provincial capital of Babil province, has been awarded with an extra US$70m in new money.

But critics fear funds spent in this way will encourage more localised corruption and fuel sectarian divides as winning funds becomes increasingly politicised.

"Considering the amount of money that has been spent or lost you have to conclude that the wrongs things have been done," concludes Claridge. "Or perhaps, the right things have been done, but just at the wrong time."

Bringing in the auditors: the scandal of the missing US$8.8bn.

In the immediate aftermath of the war money was made available to the Coalition Provisional Authority (CPA) - the US-led governing body installed after the fall of Saddam Hussein - to fund Iraq's reconstruction. This Iraqi money included surplus funds from the Oil for Food Programme, frozen assets of the former regime and revenue from the resumption of Iraqi oil exports. It amounted to an estimated US$23bn: the Development Fund for Iraq (DFI), held at the Federal Reserve Bank in New York. UN Resolution 1483 stipulated the expenditure of this money be transparent.

But in 2005 an audit report issued by the Special Inspector General for Iraq Reconstruction (SIGIR), Stuart Bowen concluded that more than US$8.8bn in cash was disbursed by the CPA without adequate financial controls.

In a statement to the US Congress's Oversight and Government Reform Committee in February this year, Bowen testified that "the CPA did not establish or implement sufficient managerial, financial, and contractual controls to ensure funds were used in a transparent manner. Consequently there was no assurance that the funds were used for the purposes mandated by the UN Security Council Resolution 1483."

The SIGIR was not alone in identifying financial irregularities in the CPA's administration of the DFI. In 2004, the International Advisory and Monitoring Board (IAMB), established by the UN to provide oversight of the DFI, released a report by auditors KPMG-Bahrain. The auditors found that the CPA didn't keep accounts of hundreds of millions of dollars of cash stored in Iraq and had awarded contracts worth billions of dollars to US firms without tender.

After analysing 10 CPA disbursements between US$120-US$900m, SIGIR found that "none of them were supported by budget spending plans and two, totaling US$616m, were not accompanied by disbursement vouchers." Another US$2.5bn from the Oil for Food Programme has also gone astray. The auditors identified significant personnel problems with the CPA, noting a lack of clearly defined roles and responsibilities as well as a high staff turnover. In February Bowen testified that "there were not enough experienced people to do the job they were tasked to do."

The lack of transparency and incompetence uncovered by the IAMB and SIGIR led to accusations of corruption in which over-invoicing by contractors has been a recurrent theme. Bowen's office also found that due to inadequate financial controls regarding the payment of Iraqi employees, "there was no assurance that funds were not provided for so-called ‘ghost' employees."

One CPA advisor to the ministry of finance estimated that there were as many as 250,000-300,000 ghost workers on the government's payroll.

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