The United States, Iraq, and Donors Have Funded Reconstruction of Iraq’s Oil and Electricity Sectors, but Iraq’s Future Needs Are Significant and Sources of Funding Uncertain

For fiscal years 2003 through 2006, the United States made available about  $7.4 billion, obligated about $7.1 billion, and spent about $5.1 billion in  U.S. funds to rebuild Iraq’s oil and electricity sectors. However, these sources of funding remain uncertain. The Iraqi government has not made full use of  potential international contributions, and future donor funding is also  uncertain. Additionally, the United States spent $3.8 billion in Iraqi funds on  oil and electricity sector reconstruction activities. Billions of Additional Dollars Needed to Rebuild Oil and Electricity Sectors, but Future Iraqi Funding Is Uncertain

According to the Iraqi government, the UN, and the U.S. government, Iraq’s  Ministries of Oil and Electricity will need billions of additional dollars to  rebuild, maintain, and secure Iraq’s oil and electricity infrastructure and  achieve production goals. According  to U.S. and foreign officials, the Ministries of Oil and Electricity have  encountered difficulties spending these budgets because of government  weaknesses in budgeting, procurement, and financial management. Some grants have been  provided to the electricity sector. Iraq’s Oil and Electricity Production Goals Have Not Been Met, Oil Production Figures May Be Overstated, and Iraq Faces Difficulties Sustaining Infrastructure

Oil and electricity production have consistently fallen below U.S. program  goals, undermining U.S. and Iraqi government efforts to improve essential  services. If the Ministry of Electricity’s master plan for 2006 to  2015 to rehabilitate and expand the national grid is implemented, the  ministry estimates that Iraq will be able to meet its projected demand for  electricity in 2009. However, these projections assume a stable supply of  fuel for electricity generation, which has been lacking in the past due to  poor coordination between the ministries. Second, corruption, smuggling, and other illicit activities have diverted  government revenues potentially available for rebuilding efforts. Poor Security Conditions Have Slowed Reconstruction and Increased Costs

The U.S. reconstruction effort was predicated on the assumption that a  permissive security environment would exist. Moreover, looting and vandalism have  continued since 2003. Lack of Integrated Energy Planning Creates Inefficiencies and Could Hinder Future Rebuilding Efforts

Although the oil and electricity sectors are mutually dependent, the Iraqi  government lacks integrated planning for these sectors, according to U.S.  and international donor community officials. In addition, the lack of a  clear legal and regulatory environment impedes new foreign investment. However, no supporting details were released on what  additional financial commitments, if any, are being provided to Iraq’s  energy sector as part of this compact. Appendix I: Objectives, Scope, and Methodology

To examine U.S. activities directed at rebuilding the oil and electricity  sectors, we assessed (1) the funding made available to rebuild Iraq’s oil  and electricity sectors and the factors that may affect Iraq’s ability to meet  its future funding needs, (2) the U.S. goals for the oil and electricity  sectors and progress in achieving these goals, and (3) the key challenges  the U.S. government faces in helping Iraq restore its oil and electricity  sectors.
Why GAO Did This Study

Since 2003, the United States has provided several billion dollars in reconstruction funds to help rebuild Iraq oil and electricity sectors, which are crucial to rebuilding Iraq's economy. For example, oil export revenues account for over half of Iraq's gross domestic product and over 90 percent of government revenues. The U.S. rebuilding program was predicated on three key assumptions: a permissive security environment, the ability to restore Iraq's essential services to prewar levels, and funding from Iraq and international donors. This report addresses (1) the funding made available to rebuild Iraq's oil and electricity sectors, (2) the U.S. goals for these sectors and progress in achieving these goals, and (3) the key challenges the U.S. government faces in these efforts.

What GAO Found

Billions have been provided to rebuild Iraq's oil and electricity sectors, but Iraq's future needs are significant and sources of funding uncertain. From fiscal years 2003 through 2006, the United States spent about $5.1 billion to rebuild the oil and electricity sectors. The United States also spent an additional $3.8 billion in Iraqi funds on these sectors. However, Iraq will need billions of additional dollars to rebuild these sectors. The Iraqi government and donors represent important sources of potential funding. However, the oil and electricity ministries have encountered difficulties spending capital improvement budgets because of weaknesses in budgeting and procurement practices and major security challenges. Moreover, Iraq has not made full use of potential international contributions. It is also unclear what additional financial commitments, if any, will be provided to Iraq's oil and electricity sectors as part of a new international compact. Despite 4 years of effort and the substantial resources expended, production in both sectors has consistently fallen below U.S. program goals. In addition, State's estimate of Iraq's oil production levels may be overstated due to inadequate metering that does not allow precise measurement of crude oil production. The Iraqi government projects that it will be able to meet the demand for electricity in 2009. However, these projections assume that the Ministry of Electricity will be assured of the stable supply of the fuel needed for electricity generation, which has been lacking due to poor coordination between the oil and electricity ministries. A variety of security, corruption, legal, and planning challenges have impeded U.S. and Iraqi efforts to restore Iraq's oil and electricity sectors. The challenging security environment and insufficient protection efforts have continued to place workers and infrastructure at risk. Corruption, smuggling, and other illicit activities result in revenue losses and low cost recovery. Furthermore, the Iraqi government has difficulty attracting foreign investment because, according to the World Bank, it lacks an adequate legal framework, including comprehensive hydrocarbon legislation that would govern distribution of future oil revenues and granting of exploration rights. Finally, although the oil and electricity sectors are mutually dependent, the Iraqi government lacks integrated planning for these sectors, which has led to inefficient management of the country's resources.