US: State Department Faults Use of U.S. Firms in Reconstruction Effort

WASHINGTON - The State Department has ordered a major reevaluation of the troubled $18.4-billion Iraq reconstruction effort, blaming problems on early decisions to hire U.S. firms for major infrastructure projects.

In a report to Congress this week, the department says rebuilding officials will cancel several planned water and electricity plants and shift $832 million to focus on immediate job creation and training for Iraqis.

The new approach will also place a strong emphasis on spending remaining funds to contract with Iraqi companies, which have experienced fewer problems with insurgents and have lower overhead than U.S. multinational firms.

"Changing conditions meant that the cost and time necessary to start and complete activities increased dramatically, requiring a significant and ongoing reevaluation of" the rebuilding plan, the report says.

The report, along with an earlier draft obtained by the Los Angeles Times, offers the most sweeping analysis to date of the failures in the reconstruction process and presents the most detailed road map yet for the future of the program.

The adjustment, the third such funding change in nine months, is the latest sign of disarray in the effort to help quell the insurgency by improving living standards and providing jobs for Iraqis.

The report lists problems with the performance of some firms, including Houston-based Halliburton Co. The report reveals that the U.S. issued a warning to KBR, a Halliburton subsidiary, in January, threatening possible termination on its $1.2-billion oil industry reconstruction contract.

Bill Taylor, who heads the civilian reconstruction management office in Iraq, which wrote the report, said remaining funds would increasingly be focused on "systems" rather than individual projects. Iraqis have been frustrated, for instance, that new water treatment plants have been built without new water lines, resulting in millions of gallons of clean water that has no way to reach homes.

"When the facts on the ground change, you have to make some adjustments," Taylor said. "That's what we've been doing."

The draft version of the report comes to nearly identical conclusions but is more candid in spelling out problems with the reconstruction. It lists several assumptions made by the Pentagon that it says proved incorrect.

The draft says the Pentagon failed to account in its planning for four key factors that have contributed to the slow pace of the reconstruction: insurgent violence, an infrastructure system near the point of collapse from a decade of sanctions, the use of "restrictive" U.S. contracting laws and so-called cost-plus contracts.

Under such contracts, U.S. firms are reimbursed for all costs incurred in construction and guaranteed an additional percentage in profit depending on performance.

One of the problems, Taylor said, is that the U.S. has been forced to pay contractors even when, for security reasons, they do not work.

All told, more than $1.3 billion is being devoted to costs stemming from contractor delays, higher security demands and the reconstruction of battle zones such as Najaf and Fallouja, the report says.

The shifting of money also will help cover an estimated $5-billion shortfall in the Iraqi national budget. Insurgent attacks and the failure of reconstruction efforts in the oil sector have resulted in lower than anticipated oil revenues, making it impossible for Iraq to maintain and operate U.S.-funded reconstruction efforts.

The need for such funds explicitly contradicts a prediction then-Defense Deputy Secretary Paul D. Wolfowitz made before Congress in 2003.

Iraqi ministries have "limited capacity ... to provide their own resources for near-term reconstruction," the report says.

A spokesman for the Defense Department acknowledged "challenges" to the reconstruction effort.

He noted, however, that the number of reconstruction projects underway had increased from 200 to more than 2,000 over the last year. Of those, about 600 have been completed.

"The trend lines on progress in Iraq are up, and Iraq and the coalition are on track with work to rebuild the country," the spokesman said.

Reconstruction experts said a new approach was a long time coming.

"The plan for reconstruction was never a plan," said Steven L. Schooner, director of the Government Procurement Law Program at George Washington University. "It was unrealistic expectations and haste rather than rational decisions."

One of the firms singled out was Halliburton, which holds billions of dollars' worth of contracts in Iraq. The company formerly headed by Vice President Dick Cheney has been criticized by Democrats and auditors over alleged overcharges.

U.S. Air Force Maj. Mike Waggle, the contract officer, said Friday that KBR, formerly known as Kellogg, Brown & Root, had repeatedly failed to control costs under its oil services contract.

In one case, he said, the company showed $436 million in cost overruns. The government later determined that the company had exceeded its budget by no more than $40 million. In another case, Waggle said, the company paid $436,000 in services for a subcontract limited to a maximum expenditure of $100,000.

Waggle said that the company had since taken steps to correct its estimates and that it had reassigned at least three top employees. He said he did not expect the government to terminate the contract, though a decision had not been made.

"We could never make the costs add up," Waggle said. "It was a continued process from the inception of contract."

KBR said it was working to ease the government's concerns.

"KBR has made adjustments to its [oil contract] management team in southern Iraq and is working closely with the client to expeditiously resolve the outstanding cost reporting issues," spokeswoman Stephanie Price said.

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