Rebuilding Iraq:

Integrated Strategic Plan Needed to Help Restore Iraq's Oil and Electricity Sectors

GAO-07-677: Published: May 15, 2007. Publicly Released: May 15, 2007.

Additional Materials:

Contact:

Joseph A. Christoff
(202) 512-8979
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

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.

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.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to set milestones and assign resources to expedite efforts to develop adequate ministry budgeting, procurement, and financial management systems.

    Agency Affected: Department of State

    Status: Closed - Implemented

    Comments: In response to our recommendation, the Department of State commented that Ministry Advisory Teams were working with the Ministries of Oil and Electricity and that their principal focus was on activities cited in the recommendation. The Department of State acknowledged that the Iraqi government bureaucracy was a hindrance to these capital intensive sectors, and stated that it planned to continue to offer assistance on reforming the Iraqi procurement process. Improving Iraqi budget execution was part of a broader U.S assistance effort to improve the capacity of the Iraqi government through automation of the financial management system, training, and advisors embedded with ministries. USAID, through its Tatweer program, provided administrative technical support on procurement and budget execution across multiple ministries within the Iraqi government, including for the oil and electricity sectors. In addition, as of May 2010, the Department of the Treasury had dedicated 5 advisors to the Iraqi government who were responsible for budget and other issues. Also, as of May 2010, the Treasury, World Bank, and United Kingdom Department for International Development had (1) encouraged and sponsored two budget strategy workshops that were chaired by the Ministry of Finance and included other ministries, and (2) supported development of an Iraqi accounting manual to be distributed throughout the government that would bring Iraq into compliance with international financial management standards.

    Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to improve the existing legal and regulatory framework, for example, by setting milestones and assigning resources to expedite development of viable and equitable hydrocarbon legislation, regulations, and implementing guidelines that will enable effective management and development of the oil sector and result in increased revenues to fund future development and essential services.

    Agency Affected: Department of State

    Status: Closed - Not Implemented

    Comments: In response to our recommendation, the Department of State agreed with the need for this action and remained committed to assist the Iraqi government, but stated that it was the direct responsibility of the Iraqi government. In 2007, the U.S. Embassy-Baghdad provided technical assistance and conducted diplomatic efforts to develop and expedite the passage of hydrocarbon legislation. These efforts were met with resistance from the Iraqi government. To address the sensitivity in Iraq over the distribution of oil revenues and other matters, the hydrocarbon legislation was divided into four separate pieces of legislation. The U.S. government continued to provide technical assistance. However, the hydrocarbon legislation has not passed.

    Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to set milestones and assign resources to expedite efforts to establish an effective metering system for the oil sector that will enable the Ministry of Oil to more effectively manage its network and finance improvements through improved measures of production, consumption, revenues, and costs.

    Agency Affected: Department of State

    Status: Closed - Not Implemented

    Comments: In response to our recommendation, the Department of State agreed with the need for this action and remained committed to assist the Iraqi government, but stated that it was the direct responsibility of the Iraqi government. In 2007, the United States funded the installation of meters on the Al Basrah Oil Terminal. The Department of State also supported the government of Iraq's efforts to work with a private firm to develop a strategy to meter production at the fields and the refineries. However, as of May 2011, independent audits continued to find that Iraq lacks an effective system of metering for its oil sector.

    Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to develop an integrated energy strategy for the oil and electricity sectors that identifies and integrates key short-term and long-term goals and priorities for rebuilding, maintaining, and securing the infrastructure; funding needs and sources; stakeholder roles and responsibilities, including steps to ensure coordination of ministerial and donor efforts; environmental risks and threats; and performance measures and milestones to monitor and gauge progress. The strategic plan should include an integrated fuel strategy to ensure the delivery of appropriate refined fuels for more efficient electricity production and a risk-based method for prioritizing future projects.

    Agency Affected: Department of State

    Status: Closed - Implemented

    Comments: In response to our recommendation, Multinational Force-Iraq (MNF-I) set up an Energy Fusion Cell with the Ministries of Oil and Electricity to unify efforts on Iraq's energy sector among the coalition and to pursue the development of an Iraqi national energy strategy. An Energy Development Committee chaired by U.S. Embassy Iraq Transition Assistance Office's (ITAO) Electrical and Oil sectors and the Energy Attach was also established to coordinate overall efforts and to discuss high-level strategic energy issues with the Iraqi government. In late 2007, ITAO presented the Iraqi government with a draft outline of an Iraqi integrated energy strategy as the basis for a national strategy. In a May 2008 letter, the MNF-I Commanding General asked the Iraqi Prime minister to establish a ministerial-level oversight committee to develop an Iraqi national energy strategy. In 2009 the Iraqi government directed that a group be formed as part of the Council of Ministers to work with ITAO, the State Department's Economics section, and the Energy Fusion Cell to identify and recommend an appropriate international consulting firm for the Iraqi government to retain and draft a formal National Energy Strategy Plan. As of 2010, the World Bank had the lead on assisting Iraq in developing a national energy policy and strategy. The World Bank funded an international contractor to provide technical assistance in developing the strategy which was to be completed in June 2012. Subsequently, in June 2012 the World Bank and the Iraqi Prime Minister's Advisory Commission extended the technical assistance for developing an integrated national energy strategy (INES) to June 30, 2013. According to the World Bank, the final INES Report containing critical strategic recommendations for the development of Iraq's energy sector is now in the final stages of completion. Endorsement of the INES by the Iraqi Cabinet will be followed by further dissemination of the report to Ministerial stakeholders; Parliament; academia; the international community; the media; and others over a period of several months.

    Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to implement a viable donor mechanism to secure funding for Iraq's future oil and electricity rebuilding needs and for sustaining current energy sector infrastructure improvement initiatives once an integrated energy strategic plan has been developed.

    Agency Affected: Department of State

    Status: Closed - Implemented

    Comments: Despite diplomatic efforts, the Department of State and the Iraqi government continued to face challenges in securing adequate funding to sustain Iraq's current energy infrastructure improvements and for future oil and electricity reconstruction. Given the commercial potential associated with Iraq's oil and electricity sectors, the U.S. embassy, coalition partners, and the Iraqi government concluded that the process of finding funding for this sector would be best handled by an international financial institution. According to the Department of State, as of 2010 the World Bank had taken the lead on seeking funding for the Iraqi government's oil and electricity sectors as part of the development of a national energy strategy. Although the goal to secure funding for the electricity and oil sectors remains, investors rather than donors are now being pursued.

    Apr 3, 2014

    Apr 1, 2014

    Mar 13, 2014

    Mar 11, 2014

    Mar 10, 2014

    Mar 6, 2014

    Feb 14, 2014

    Feb 11, 2014

    Jan 7, 2014

    Looking for more? Browse all our products here