Audit Finds U.S. Hid Cost of Iraq Projects

by James Glanz

BAGHDAD, Iraq, July 29 ­ The State Department agency in charge of $1.4
billion in reconstruction money in Iraq used an accounting shell game
to hide ballooning cost overruns on its projects there and knowingly
withheld information on schedule delays from Congress, a federal audit
released late Friday has found.

The agency hid construction overruns by listing them as overhead or
administrative costs, according to the audit, written by the Special
Inspector General for Iraq Reconstruction, an independent office that
reports to Congress, the Pentagon and the State Department.

Called the United States Agency for International Development, or
A.I.D., the agency administers foreign aid projects around the world.
It has been working in Iraq on reconstruction since shortly after the
2003 invasion.

The report by the inspector general's office does not give a full
accounting of all projects financed by the agency's $1.4 billion
budget, but cites several examples.

The findings appeared in an audit of a children's hospital in Basra,
but they referred to the wider reconstruction activities of the
development agency in Iraq. American and Iraqi officials reported this
week that the State Department planned to drop Bechtel, its contractor
on that project, as signs of budget and scheduling problems began to

The United States Embassy in Baghdad referred questions about the
audit to the State Department in Washington, where a spokesman, Justin
Higgins, said Saturday, "We have not yet had a chance to fully review
this report, but certainly will consider it carefully, as we do all
the findings of the inspector general."

Bechtel has said that because of the deteriorating security in Basra,
the hospital project could not be completed as envisioned. But Mr.
Higgins said: "Despite the challenges, we are committed to completing
this project so that sick children in Basra can receive the medical
help they need. The necessary funding is now in place to ensure that
will happen."

In March 2005, A.I.D. asked the Iraq Reconstruction and Management
Office at the United States Embassy in Baghdad for permission to
downsize some projects to ease widespread financing problems. In its
request, it said that it had to "absorb greatly increased construction
costs" at the Basra hospital and that it would make a modest shift of
priorities and reduce "contractor overhead" on the project.

The embassy office approved the request. But the audit found that the
agency interpreted the document as permission to change reporting of
costs across its program.

Referring to the embassy office's approval, the inspector general
wrote, "The memorandum was not intended to give U.S.A.I.D. blanket
permission to change the reporting of all indirect costs."

The hospital's construction budget was $50 million. By April of this
year, Bechtel had told the aid agency that because of escalating costs
for security and other problems, the project would actually cost $98
million to complete. But in an official report to Congress that month,
the agency "was reporting the hospital project cost as $50 million,"
the inspector general wrote in his report.

The rest was reclassified as overhead, or "indirect costs." According
to a contracting officer at the agency who was cited in the report,
the agency "did not report these costs so it could stay within the $50
million authorization."

"We find the entire agreement unclear," the inspector general wrote of
the A.I.D. request approved by the embassy. "The document states that
hospital project cost increases would be offset by reducing contractor
overhead allocated to the project, but project reports for the period
show no effort to reduce overhead."

The report said it suspected that other unreported costs on the
hospital could drive the tab even higher. In another case cited in the
report, a power station project in Musayyib, the direct construction
cost cited by the development agency was $6.6 million, while the
overhead cost was $27.6 million.

One result is that the project's overhead, a figure that normally runs
to a maximum of 30 percent, was a stunning 418 percent.

The figures were even adjusted in the opposite direction when that
helped the agency balance its books, the inspector general found. On
an electricity project at the Baghdad South power station, direct
construction costs were reported by the agency as $164.3 million and
indirect or overhead costs as $1.4 million.

That is just 0.8 percent overhead in a country where security costs
are often staggering. A contracting officer told the inspector general
that the agency adjusted the figures "to stay within the authorization
for each project."

The overall effect, the report said, was a "serious misstatement of
hospital project costs." The true cost could rise as high as $169.5
million, even after accounting for at least $30 million pledged for
medical equipment by a charitable organization.

The inspector general also found that the agency had not reported
known schedule delays to Congress. On March 26, 2006, Bechtel informed
the agency that the hospital project was 273 days behind, the
inspector general wrote. But in its April report to Congress on the
status of all projects, "U.S.A.I.D. reported no problems with the
project schedule."

In a letter responding to the inspector general's findings, Joseph A.
Saloom, the newly appointed director of the reconstruction office at
the United States Embassy, said he would take steps to improve the
reporting of the costs of reconstruction projects in Iraq. Mr. Saloom
took little exception to the main findings.

In the letter, Mr. Saloom said his office had been given new powers by
the American ambassador in Baghdad, Zalmay Khalilzad, to request clear
financing information on American reconstruction projects. Mr. Saloom
wrote that he agreed with the inspector general's conclusion that this
shift would help "preclude surprises such as occurred on the Basra
hospital project."

"The U.S. Mission agrees that accurate monitoring of projects requires
allocating indirect costs in a systematic way that reflects accurately
the true indirect costs attributable to specific activities and
projects, such as a Basra children's hospital," Mr. Saloom wrote.

"There will always be cruelty, always be violence, always be
destruction.... We cannot eliminate all devastation for all time, but
we can reduce it, outlaw it, undermine its sources and foundations:
these are victories."  - Rebecca Solnit, Hope in the Dark.