On 5 August, Baghdad announced it was seeking an investment of $3bn to fund a masterplan to revitalise the capital’s infrastructure. The scheme envisages the construction of new roads and bridges to relieve the traffic congestion in the capital, while rebuilding the Abu Nawas highway that straddles the Tigris.

That the Iraqi authorities can afford to think about upgrading infrastructure and services is a reflection of the improved security situation in the capital. But the announcement is also timely because Baghdad is under pressure to overhaul its poor track record in spending state revenues on its delapidated infrastructure.

The day after the Baghdad masterplan was announced, Iraq’s government received a stark warning from the US about its failure to spend the country’s burgeoning revenues on urgently needed reconstruction.

A report from the US Government Accountability Office (GAO), commissioned by senators Carl Levin and John Warner, reveals that the US has spent $23.2bn in the critical areas of security, oil, electricity and water since the 2003 invasion. In contrast, from 2005 to April 2008, Baghdad spent barely $3.9bn on similar services.

Neglecting reconstruction

The message is clear: Iraq needs to start spending a much greater proportion of its income on reconstruction. The GAO report suggests Iraq only spent 28 per cent of its $12bn reconstruction budget in 2007, about half of which was accounted for by the Kurdistan Regional Government (KRG), which disbursed $2bn that year. In contrast, Iraq spent 80 per cent of its $29bn operating budget.

Reconstruction has been neglected. The GAO report says that from 2005 to 2007, Iraq allocated only 1 per cent of total expenditure to maintaining Iraq and US-funded investments, which includes the maintenance of roads, bridges, vehicles, buildings, water and electricity installations, and weapons. The situation is particularly bad at the provincial level.

As of March 2008, the Finance Ministry reports that $93.2m had been spent by the provinces, just 2.7 per cent of the total capital budget directed to the provinces for the full-year 2008.

From 2005 to 2007, Iraq spent 90 per cent of its $67bn expenditure on operating costs – salaries, pensions and services.

Underspending

This year, the GAO predicts the government will face a $14bn underspend on its $49.9bn budget for 2008, calculating that it will spend between $35.3bn and $35.9bn, without taking into account an additional $21bn worth of budgetary expenditure earmarked in July.

The problem is particularly acute for infrastructure and essential services. According to Joseph Christoff, director of the GAO’s international affairs and trade team, the proportion of the budget that the central ministries responsible for essential services have been spending declined from 14 per cent in 2005 to 11 per cent in 2007.

This scathing assessment is not accepted by all sides. Iraqi and even some US officials suggest the GAO has underestimated the amount spent by Baghdad. Stuart Bowen, the US Special Inspector General for Iraq Reconstruction (Sigir), says the government’s record is getting better and it has significantly improved its ability to spend Iraqi money on reconstruction.

According to Sigir, Baghdad is set to spend an amount almost equal to the US share this year. It says in the three months to June 30 2008, the US has allocated $50.46bn, the Iraqis are contributing $50.33bn, and international donors have pledged $17bn.

The GAO acknowledges that things may finally be taking a turn for the better. “For the first four months of 2008, expenditure rates have been going up compared to recent years,” says Christoff.

“Spending in the period is equivalent to the entire previous year’s levels, so there is a slight improvement.”

However, it is clear that the Kurdish region’s stronger performance has skewed the figures. The 42 per cent increase in investment expenditure is down to the KRG, not the central ministries responsible for providing critical services.

As the Sigir report says, of the $1.8bn increase in investment expenditure in 2007, more than 70 per cent was due to a reported increase in KRG investment. Investment by the federal ministries declined that year.

Another US assessment, this time from the Department of Defense, finds that the authorities are still having trouble executing their budgets at the national level, particularly in the provinces. Complex budgetary funding processes and a lack of contracting capacity continue to hamper budget execution.

There are extenuating circumstances, however. One obstruction was a requirement from the High Contracts Committee (HCC) to approve all projects worth more than $5m, inserting a further layer of bureaucracy preventing smaller-scale projects from moving forward.

Bureaucratic impediments, combined with the limited availability of resident contractors, continue to slow progress, says the Department of Defense report.

The government has tried to improve spending performance. In 2008, the threshold for authorisation was increased to $10m, and the HCC was replaced by the Central Con-tracts Committee, a new approving authority intended to be more responsive to requests for approval.

The cabinet has also given authority for ministers, heads of agencies and governors to enter into contracts worth up to $50m.

Nine ministries were granted this authority, including Health, Electricity, Industry & Minerals, Water Resources, and Municipalities & Public Works.

The 2008 Iraqi Budget Law also allows the provinces and central ministries to roll over their prior-year allocations into the current budget year accounts to give them more time to spend them.

This does not necessarily resolve the central problem that has thwarted more effective spending on reconstruction. Iraq’s government is bereft of adequately qualified staff to draft and execute budgets, which has had a material impact on its ability to spend revenues, says Christoff.

The roots of this date back to the poor strategic decisions made in the immediate post-Saddam era. “A lot of de-Baathification efforts were aimed at the technicians and middle managers in the Iraq government who were trained in budgeting,” says Christoff. “This is expertise they currently lack and is one reason why they have not been able to contract out more in terms of infrastructure investment.”

The government’s decision to sanction a supplementary budget reflects the booming oil revenue position, expected to reach $79bn in 2008. On July 8, the cabinet approved the $21bn supplemental budget, with $4.7bn allocated to capital expenditure and $13.6bn to operational expenditure.

The government needs to do more to make its spending performance effective if Iraq’s physical infrastructure is to feel the impact of these measures.

It has palpably failed to capitalise on the pool of international donor finance that was available to Iraq five years ago. The original commitments towards Iraq’s reconstruction made at the 2003 Madrid conference totalled $14bn, of which 70 per cent was in the form of loans.

Prime Minister Nouri al-Maliki’s proposed National Reconstruction & Development Council, granted executive powers, may speed up the process, bypassing layers of ministerial bureaucracy to push through strategic national projects. However, Baghdad is unlikely to find such a sympathetic stance in Washington if it wants to tap US expertise in future.

“US efforts to reconstruct Iraq are coming to an end,” says Christoff. “Congress will not be putting in additional funds for reconstruction projects, so it will have to be on the part of the Iraqi government. Iraqis are going to have to step up to the plate.”