As Iraq's Oil Flows Freely, Profits Are Stuck in Bureaucracy

By Mary Beth Sheridan
Washington Post Staff Writer
Friday, October 17, 2008

BAGHDAD -- Qassim Frez, a senior Iraqi civil servant, has a problem officials in Washington might envy. Iraq has piled up tens of billions of dollars from oil sales, and its bureaucrats are struggling to spend the windfall.

"It is very, very difficult for the ministries," said Frez, a director-general of the Planning Ministry, sitting in a dilapidated office with dirty white walls, lit by bare fluorescent lights that occasionally flicker off.

As U.S. reconstruction spending tails off here, American officials are increasingly concerned about Iraq's ability to assume its own rebuilding. The Government Accountability Office estimates that Iraq's budget surplus will hit $67 billion to $79 billion this year, although some U.S. officials say it will be less because of tumbling oil prices.

The U.S. government is spending millions of dollars to train Iraqi officials to spend their oil wealth. But Iraq's bureaucracy remains hollow, mired in the stacks of paper and rubber stamps of years past, with many of the best technocrats having fled the country.

The Iraqi surplus has ignited bipartisan outrage in Congress, where some lawmakers complain that the United States is spending too much in Iraq while its government accumulates cash. In Iraq, American military officials fear the spending lag could contribute to civil disorder.

Gen. Ray Odierno, commander of U.S. forces in Iraq, said in an interview with The Washington Post that one of the top threats here is "the inability of the government of Iraq to provide basic services, specifically electricity, sewage and water, to the people."

Before the U.S.-led invasion in 2003, Iraq had one of the most centralized economies in the world, with much government spending aimed at consolidating the power of Saddam Hussein. Bureaucrats are still hesitant to show initiative in a country where independent-minded ministers risked execution, American officials say.

Since Hussein's fall, rebuilding has been deterred by violence that has claimed the lives of hundreds of thousands of Iraqis and more than 4,100 Americans, and driven millions from their homes.

"What was once an Iraqi secular middle class has essentially decamped to neighboring states," said Joost Hiltermann, the Middle East deputy program director for the International Crisis Group, a nongovernmental organization. The exodus included many civil servants, he said. "It has a huge impact on the ability of the Iraqi government to function."

The Planning Ministry, which guides development and reconstruction, offers a snapshot of Iraq's fragile bureaucracy. Several hundred of the 2,500 employees, including nearly all the top technical experts, have left the country, Minister Ali Baban said.

"We try to solve this problem by depending on less-qualified people," he said.

Frez, 54, the director general for government investment, is one of the few veteran technocrats who have remained. The gray-haired accountant, wearing wire-rimmed glasses and a pressed beige dress shirt and brown slacks, blamed poor security for Iraq's inability to rebuild. Even though attacks have plunged this year, the country is still plagued by shootings and bombings.

"The foreign companies refuse to come to Iraq" to do large-scale projects, he said.

But violence is only part of the problem, Frez acknowledged. Government-owned land intended for projects has in some cases been occupied by people displaced by sectarian cleansing. And a welter of regulations and procedures -- some from the Hussein era, some from U.N. resolutions and others from more recent anti-corruption legislation -- strangles the procurement process, officials say.

Because of the regulations, it can take six to nine months to get money disbursed for projects already approved in the national budget, Frez said.

"This is the big picture on the delays," he said, drawing a series of circles on a piece of paper to illustrate how ministries get a letter of credit used for big-ticket foreign payments.

"Each ministry, when it is trying to open a credit, asks the Ministry of Planning. The Ministry of Planning asks the Ministry of Finance. The Ministry of Finance will ask the Central Bank. The Central Bank will go to the Trade Bank of Iraq," he said, drawing lines between the circles.

And all this is done via e-mail?

"No, an official letter like this," he said, holding up a document with two round stamps.

Aides frequently scurried into Frez's office, dropping off bundles of paper for him to sign. There was no sign of a computer, although his deputies had desktop PCs. He routinely works until 2 a.m., pushing paper through the slow-motion bureaucracy.

When Frez joined the ministry in 1983, it was a prestigious agency in an oil-rich land. Its headquarters was one of the most modern buildings in Baghdad, towering over the Tigris River.

But decades of war and international sanctions battered the economy. During the U.S.-led invasion, the ministry was shot up, then set ablaze during the looting spree that followed. The ministry moved to a dingy building in a commercial area.

"After 2003, the assassinations started," Frez said. Bureaucrats have been slain in unsolved attacks that may have reflected sectarian or political tensions.

The Iraqi government has reached the point where it is spending most of its operating budget -- paying such things as rent, pensions and salaries to government workers. Its big problem is infrastructure projects, which involve more layers of government approval.

In 2007, Iraq managed to spend less than a third of its $12 billion investment budget, which includes infrastructure and machinery, according to the GAO.

On the provincial level, governments are struggling to spend billions of federal dollars they are receiving under Iraq's new federal system. Lacking trained budget personnel and even computers, some can barely manage the cash.

In the first quarter of this year, the U.S. Treasury reported, Iraq's provincial governments had spent only 31 percent of their capital budgets for 2007. Baban, the minister, said violence-plagued Nineveh province in northern Iraq, home to about 2.5 million people, has spent only about 2 percent of its federal investment funds this year.

"There are some improvements, but limited," he said.

While U.S. military officials and congressional auditors have expressed worry about Iraq's ability to provide basic services, the government has made some progress.

In January, the Iraqi government raised the ceiling for contracts needing the prime minister's approval from $10 million to $50 million. And the Iraqi government has taken the first steps toward automating its financial payments, transferring some funds electronically to ministries, instead of sending trucks loaded with cash.

Some top Iraqi officials say the government will spend its entire budget this year. But GAO officials have been skeptical. Their reports say the Finance Ministry often provides unreliable data, including "columns and rows [that] do not add up."

Frez said that as of the end of August, the Iraqi government had spent 43 percent of the $16 billion in investment funds initially available for 2008, including money committed to letters of credit. But an additional $8 billion is being added to that pot via a supplemental budget drawn up after oil prices skyrocketed this year.

The major U.S. reconstruction funds are beginning to dry up, making it all the more imperative that Iraq take on the task. As of June, the United States had obligated about $42 billion of the $48 billion appropriated since the invasion for stabilization and reconstruction in Iraq, according to GAO.

"We've backed out of bricks and mortar," said one senior U.S. official in Baghdad, speaking on the condition of anonymity. "What we do now is help them spend their money."

Frez said he was seeing some signs of improvement. But even he, a civil servant with a normally calm mien, sometimes despairs about having remained in a country that has crumbled. "If you ask me why I stay in Iraq, it's because I'm a jackass," Frez spat. "We never thought we'd get to this point."

Correspondent Ernesto LondoƱo contributed to this report.

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