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April 26, 2005

Iraq: Security Problems Slow Reconstruction

by Charles Recknagel

Iraqi oil wells

Much of the focus on Iraq these days concerns efforts to form a new government. But day-to-day life is ruled more by economic and security problems than political issues. Billions of dollars have been pledged or allocated for projects to revitalize Iraq's economy, but relatively little has so far been spent.
Prague, 26 April 2005 (RFE/RL) -- In the two years since the United States toppled Saddam Hussein, the international community has promised substantial funds for reviving Iraq's moribund economy.

But only a small part of that money has been spent.

Washington alone has promised more than $18 billion. As of last month, one-third of that amount had been disbursed, according to the U.S. State Department.

Neil Partrick, who tracks reconstruction progress for the London-based Economist Intelligence Unit, called the pace of spending much slower than was originally expected when the former U.S. civil administration for Iraq -- the Coalition Provisional Authority -- initiated reconstruction in 2003.

"The expectation with the setting up of the Coalition Authority following the change of regime in Iraq was two-fold, principally that the 18 billion-plus U.S. aid commitment could be disbursed quite quickly [and] indeed initially it was projected to run through only to the end of last year," said Partrick. "And also, in an improved security environment that that would potentially contribute to, that Iraqi oil revenues would begin to substantially feed the reconstruction process."

For money pledged by countries other than the United States, spending has been still slower.


According to a December 2004 report by the Congressional Research Service -- part of the U.S. government -- such donations, including loans, total some $14.5 billion. But the report says just 12 percent of that was spent by the end of 2004.

Other reconstruction funds come from Iraq's own oil revenues. But those funds also pay for operating the government, making it difficult to calculate how much is spent directly on reconstruction projects.

Partrick said a major reason for the slow reconstruction spending is security problems.

Those problems have caused one major U.S. company that won a contract to rebuild transportation infrastructure to terminate its work in December.

The company said skyrocketing security costs made it impossible to fulfill its contract.

In another measure of the security problems, Washington decided in September to divert some $3.5 billion in U.S. reconstruction funds into mostly security programs.

But reconstruction is also slowed by the slow bureaucratic process of awarding contracts and identifying projects. It is also hampered by corruption -- something particularly apparent today in Iraq's fuel market.

Partrick said that up to two-thirds of the fuel for vehicles that is produced in Iraq or imported is currently diverted to the black market.

"There is a significant falling-away of the commitments that are being made in terms of meeting domestic fuel needs, for example, by the Iraqis and the amount of fuel that is actually being delivered at the local level," Partrick said. "Local estimates suggest that at present possibly as much as three-quarters of the refined oil that is either bought outside or is processed inside the country is not being delivered through formal channels and is entering the black market."

On the black market, the price of fuel is far higher than the official price. But the long queues at filling stations for the little fuel available there prompt people to pay the black market price anyway.

The black market prices for fuel contribute to a general inflation rate that is hard to estimate accurately but is rising. Unemployment, meanwhile, remains high, with official Iraqi government figures putting the jobless rate at 35-50 percent over the past 12 months.

The unemployment varies from lower than the national average in the Kurdish-administered north to higher than the national average in the Shi'a-majority south.

Still, there are some notable successes in the reconstruction effort so far.

In the south, where insurgent violence has fallen off after militant leaders joined the political process, major infrastructure projects are proceeding.

A port near Al-Basrah has been dredged and new railroad tracks are being laid. This will allow 30 freight and passenger trains a day to travel north at three times the speed of the old system -- spurring commerce.

Across Iraq, construction is under way on 93 new primary health-care facilities, and 19 hospitals are under renovation.

The pace of reconstruction could accelerate if security improves and foreign spending quickens. But until that happens, any swifter progress could depend upon the Iraqi government's own ability to generate more oil revenues.

So far, the Iraqi oil industry has raised output substantially in comparison to the months immediately after the U.S.-led intervention. But it has only rarely surpassed prewar averages.

The Economist Intelligence Unit's Partrick estimated that output for 2005 would average some 2.25 million barrels per day (bpd).

"The average over 2005 will be something in the region of 2.25 [million bpd]. By end of 2005, we could be up within the region of 2.5 million barrels a day. That's really no more than we were seeing in the weeks leading up to Iraq war," Partrick said. "On the more positive side though, of course, Iraq is fairly substantially up in terms of total output on where it was in the first few months after the invasion, where it was struggling throughout June and July [2003] to be about 1.5 million barrels per day."

Partrick said that the way the Iraqi government decides to spend its reconstruction funds will greatly determine the long-term ability of the economy to recover.

He warned that top government officials have so far tended to use funds to recreate the large ministries that characterize most regional governments.

"I think in many instance what we are seeing is a relatively loose approach to the use of Iraqi resources reflecting the need to build patronage," Partrick said. "Iraqi ministries have very quickly reestablished themselves as fiefdoms, in a way, for ministers to consolidate support amongst parts of the Iraqi community. It is a mild version in many ways of what was going on in the former regime [of Saddam Hussein] and what goes on in neighboring countries."

He said that practice creates jobs and puts money immediately into peoples' pockets but it does little to revive industry and other forms of commercial production that the country will ultimately need for a thriving economy.
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