Costs Whittle Funds to Iraqis

Much of the U.S. aid for rebuilding isn't entering the economy, drained by the insurgency, profits for contractors and salaries for foreigners.

By Paul Richter

Los Angeles Times

September 26, 2004

WASHINGTON — Less than half of the aid in the Bush administration's reconstruction package for Iraq is being spent in ways that will benefit Iraqis, U.S. government officials and independent experts said.

Nearly a year after Congress set aside $18.4 billion for the rebuilding, costs related to the insurgency in Iraq — such as security services, insurance and property losses — are consuming an increasing share of the money, analysts said. Another large chunk of the aid — contractors' profits and American and other foreign workers' salaries — winds up outside Iraq and doesn't help the Iraqi economy, they said.

U.S. officials, pointing to "unusually difficult" conditions in Iraq, acknowledged last week that security and other overhead in Iraq were a large expense. Some government analysts said those costs might eat up half or more of the rebuilding aid. However, private analysts estimated that the "Iraq premium" meant that up to 75% of U.S. spending in the country pr ovided no direct benefit for Iraqis.

"The central point is this money is not reaching the Iraqis," said Frederick Barton, co-director of the reconstruction studies program at the Center for Strategic and International Studies, a Washington think tank, and a former Clinton administration official in the U.S. Agency for International Development. "We're spending a lot of money we believe is helping people and converting Iraq to a new kind of economy. That's where I think we're kidding ourselves."

The issue of the special costs is drawing attention at a time when the administration is facing congressional criticism for spending only about $1 billion of the $18.4-billion package. Sen. Richard G. Lugar (R-Ind.), chairman of the Senate Foreign Relations Committee, complained last week that the slow pace of spending reflected "the incompetence of the administration."

The costs also highlight questions that have been raised about the Bush administration's approach to the re construction, which emphasizes big infrastructure projects.

Barton and his organization estimate that less than 30% of the money spent reaches Iraqis. Another 30% appears to be going to security, about 10% to U.S. government overhead, 6% to contractor profits, and 12% on insurance and foreign workers' salaries. The rest, perhaps 15%, may be lost to corruption and mismanagement, they estimate.

Several government analysts, who spoke on condition of anonymity because of the political sensitivity of the issue, acknowledged that the total amount lost to special costs was probably about 50% and that the administration planned to undertake a study to determine the extent of the extra costs. One government analyst said the costs of security and lost property could be estimated with some precision, "and that gets you close to around 50%."

A senior official with the U.S. Embassy in Baghdad insisted in an interview that "every dollar we are spending is going to benefit Iraqis" but that the secur ity situation in Iraq had worsened since Congress appropriated the money in November.

"We're in an unusually difficult situation over there, and the costs of security are bigger now than when we started out the program," said the senior official, who declined to be identified. "But the taxpayers and the Congress want us to do the job. They want us to protect our workers, and to complete these projects."

The official said he had seen various estimates about these special costs, but could not comment on their accuracy.

At a House subcommittee hearing Friday, Deputy Secretary of State Richard L. Armitage said the tab for contractor security and the government's administrative overhead came to about 30% of total costs.

"However, as we go out to more construction sites and more areas, that number's going to go up," he told Rep. Jim Kolbe (R-Ariz.), chairman of the House Appropriations subcommittee on foreign operations.

The government's predicament stems from choices it made last year when it laid out its original plan for spending the $18.4 billion. It is the largest sum the United States has ever earmarked for the reconstruction of one country, experts said.

In most postwar redevelopment efforts, such as those in Bosnia-Herzegovina, Kosovo and Haiti, U.S. officials have focused on starting small-scale, locally staffed rebuilding projects, training police and other officials, and working to get government agencies and democratic institutions up and running. Larger infrastructure projects came later, often financed by multinational lenders such as the World Bank.

But in Iraq, U.S. officials believed that far more was at stake and wanted to make sure that Iraq became a stable, successful country. They launched a massive rebuilding program that involved major contractors, such as Bechtel and Halliburton, and drew a large number of foreign workers.

The program's goal was to eventually provide Iraqis with a highly advanced utility and oil infrastructure. But in the short run, the program meant that U.S. tax dollars were being funneled through U.S. firms and foreign companies, rather than Iraqi businesses, analysts pointed out. It also meant that there was a lot of people and property to protect.

Huge projects "require them to use big international companies, and inevitably don't pump enough money into the local economy with the speed that's needed," said Larry Diamond, a Hoover Institution political scientist who was a senior advisor to the Coalition Provisional Authority in Iraq earlier this year. "And of course the security situation has not allowed them to get much done."

Diamond said he viewed this approach as "one of several strategic mistakes the administration made in its approach to the postwar situation." The State Department recently acknowledged that it needed to change that approach, asking Congress to shift $3.4 billion of the aid from infrastructure projects to security, job-producing programs and other purposes.

James D obbins, a longtime U.S. diplomat who was President Bush's special envoy to Afghanistan, said beginning the reconstruction with infrastructure projects was "an aberration from the way we've approached post-conflict reconstruction over the last 60 years, including Germany and Japan."

Big contractors such as those now involved in Iraq previously had a "small role or none at all," he said.

As they shifted money toward improving security, U.S. officials and contractors said the costs of working in the combat zone might yet increase.

Insurgents have been attacking construction sites more than once each day, according to Army figures. As they resort to frightening new techniques, including kidnapping contractors in their homes and offices, costs for security and insurance rise further.

Some companies operating in Iraq hire one security employee for each non-security worker on their payroll. Security workers are often former military personnel who can earn up to several hundred thous and dollars a year for their risk — five to six times what they would be earning in the United States, businesspeople said.

Insurance costs, which swing wildly from day to day for companies doing business in Iraq, are often 10% of a contract's value, a U.S. analyst estimated. In rare cases, they have reached far higher, a U.S. official said.

"Security and insurance have become central issues in trying to get anything done," said Anthony DeLuca, a Washington-based executive of SBA Inc., a company with several reconstruction contracts. Many contractors are paying three to four times what they would be paying in the United States for security and insurance, he said.

Experts said the government might have another big headache over costs because of language in many contracts that protected contractors against losses due to sabotage or theft. It's not clear yet how far the government's liability will go, but some experts believe that it could be substantial. "The government may have to write some big checks," one government expert said.

Congress' attitude about how the administration has been handling the aid program will become clearer early next year, when the White House is expected to ask for billions more.

"Congress is going to say, 'Are you sure you know how to spend this money?' " said Gordon Adams, a former federal budget official now with the Elliott School of International Affairs at George Washington University. "I think they're going to have an uphill climb."