Corruption: the 'second insurgency' costing $4bn a year
One third of rebuilding contracts under criminal investigationJulian Borger in Washington, David Pallister
Saturday December 2, 2006
The Guardian
"There is a huge smuggling problem. It is the No 1 issue," Mr Bowen told the Guardian. The pipelines that are meant to take the oil north have been blown up, so the only way to export it is by road. "That leaves it vulnerable to smuggling," he said, as truckers sell their cargoes on the black market.
"Corruption is the second insurgency, and I use that metaphor to underline the seriousness of this issue," Mr Bowen said. "The deputy prime minister, Barham Saleh, told Sigir this summer that it threatens the state. That speaks for itself."
The Bush administration's strategy in Iraq hinges on the survival of the government run by Nuri al-Maliki, despite US reservations about the prime minister's readiness or ability to confront extremists in his own Shia community.
But Mr Bowen's office has found that the insurgents and militias have also been abetted by US incompetence. A recent audit by his inspectors found that more than 14,000 guns paid for out of US reconstruction funds for Iraqi government use could not be accounted for. Many could be in the hands of insurgents or sectarian death squads, but it will be almost impossible to prove because when the US military handed out the guns it noted the serial numbers of only about 10,000 out of a total of 370,000 US-funded weapons, contrary to defence department regulations.
Jim Mitchell, a Sigir spokesman, said: "The practical effect is that when a weapons cache is found you're deprived of the intelligence of knowing if they were US-provided, which might allow you to follow the trail to the bad guys."
Mr Bowen's inspectors are among the few US civilian officials who still venture beyond the fortified bounds of the Green Zone in Baghdad into the rest of Iraq, to see how $18bn of American taxpayers' money is being spent. Much of the money has been wasted. Sigir officials have referred 25 cases of fraud to the justice department for criminal investigation, four of which have led to convictions, and about 90 more are under investigation.
A culture of waste, incompetence and fraud may be one legacy the occupiers have passed on to Iraq's new rulers more or less intact. Mr Bowen's office found that nearly $9bn in Iraqi oil revenues could not be accounted for. The cash was flown into the country in shrink-wrapped bundles on military transport planes and handed over by the ton to Iraqi ministries by the Coalition Provisional Authority (CPA) run by Paul Bremer, a veteran diplomat. The money was meant to demonstrate the invaders' good intentions and boost the Iraqi economy, which Mr Bremer later insisted had been "dead in the water". But it also fuelled a cycle of corruption left over from Saddam Hussein's rule.
"We know it got to the Iraqis, but we don't know how it was used," Mr Bowen later told Congress.
In the Hillah region a defence department contract employee and two lieutenant colonels were found to have steered $8m in contracts to a US contractor in return for bribes. The Pentagon contract employee, Robert Stein, pleaded guilty earlier this year, admitting he and his co-conspirators received more than $1m in cash, help with laundering the funds, jewellery, cars and sex with prostitutes. Stein also admitted that they simply stole $2m from the construction fund, accounting for the money with receipts from fictitious construction companies.
Hillah just happened to be the district Mr Bowen's inspectors examined in depth. It is still far from clear how much reconstruction money has gone missing around the whole country.
A potentially far more serious problem has been the way the US government decided to give out reconstruction contracts. It split the economy into sectors and shared them out among nine big US corporations. In most cases the contracts were distributed without competition and on a cost-plus basis. In other words the contractors were guaranteed a profit margin calculated as a percentage of their costs, so the higher the costs, the higher the profits. In the rush to get work started the contracts were signed early in 2004. In many cases work did not get under way until the year was nearly over. In the months between, the contractors racked up huge bills on wages, hotel bills and restaurants.
According to a Sigir review published in October, Kellogg, Brown and Root (a subsidiary of Halliburton, Vice President Dick Cheney's former company) was awarded an oil industry repair contract in February 2004 but "direct project activity" did not begin until November 19. In that time KBR's overhead costs were nearly $53m. In fact more than half the company's $300m project costs from 2004-06 went on overheads, the audit found.
Iraq also represented a grey zone beyond the reach of the US civil courts. KBR was found to have overcharged the US military about $60m for fuel deliveries, but that did not stop it winning more government contracts.
A California company, Parsons, had its contract terminated this year after it was found to have finished only six of more than 140 primary healthcare centres it was supposed to build, after two years work and $500m spent. However, the contract was ended "for convenience", meaning Parsons was paid in full. In a police college Parsons built for $75m in Baghdad the plumbing was so bad that urine and excrement rained down from the toilets on to the police cadets. Parsons left a sub-contractor to do repairs but in general there is little punitive action that can be taken for shoddy work.
Part of the reason big US contractors have been able to get away with so much is that there has been limited proper supervision. CPA employees were picked not for their financial expertise but for their political loyalty.
Mr Bowen would have passed the test. He campaigned for George Bush in Texas and was one of the small army of Republican lawyers called in to Florida in 2000 to oversee the vote recounts on Mr Bush's behalf. When he started the job in March 2004 few expected he would do anything to embarrass the administration.
However, Mr Bowen has emerged as the scourge of the big corporations who are among the Republican party's biggest donors. Earlier this year a clause extending his mandate was stripped from a military spending bill just before a vote. Sigir, however, seems to have been saved by the Democratic victory in last month's elections.
Mr Bowen bristles at the suggestion that Mr Bush might have had a hand in the attempt to close his office. "I'm doing exactly what the president expects me to do," he said.
Billions in Oil Missing in Iraq, US Study Says
Published on Saturday, May 12, 2007 by New York Times
by James Glanz
Between 100,000 and 300,000 barrels a day of Iraq’s declared oil production over the past four years is unaccounted for and could have been siphoned off through corruption or smuggling, according to a draft American government report.
Using an average of $50 a barrel, the report said the discrepancy was valued at $5 million to $15 million daily.
The report does not give a final conclusion on what happened to the missing fraction of the roughly two million barrels pumped by Iraq each day, but the findings are sure to reinforce longstanding suspicions that smugglers, insurgents and corrupt officials control significant parts of the country’s oil industry.
The report also covered alternative explanations for the billions of dollars worth of discrepancies, including the possibility that Iraq has been consistently overstating its oil production.
Iraq and the State Department, which reports the numbers, have been under relentless pressure to show tangible progress in Iraq by raising production levels, which have languished well below the United States goal of three million barrels a day. Virtually the entire economy of Iraq is dependent on oil revenues.
The draft report, expected to be released within the next week, was prepared by the United States Government Accountability Office with the help of government energy analysts, and was provided to The New York Times by a separate government office that received a review copy. The accountability office declined to provide a copy or to discuss the draft.
Paul Anderson, a spokesman for the office, said only that “we don’t discuss draft reports.”
But a State Department official who works on energy issues said that there were several possible explanations for the discrepancy, including the loss of oil through sabotage of pipelines and inaccurate reporting of production in southern Iraq, where engineers may not properly account for water that is pumped along with oil in the fields there.
“It could also be theft,” the official said, with suspicion falling primarily on Shiite militias in the south. “Crude oil is not as lucrative in the region as refined products, but we’re not ruling that out either.”
Iraqi and American officials have previously said that smuggling of refined products like gasoline and kerosene is probably costing Iraq billions of dollars a year in lost revenues. The smuggling of those products is particularly feared because officials believe that a large fraction of the proceeds go to insurgent groups. Crude oil is much more difficult to smuggle because it must be shipped to refineries and turned into the more valuable refined products before it can be sold on the market.
The Shiite militia groups hold sway around the rich oil fields of southern Iraq, which dominate the country’s oil production, the State Department official said. For that reason, he said, the Shiite militias are more likely to be involved in theft there than the largely Sunni insurgents, who are believed to benefit mostly from smuggling refined products in the north.
In the south, the official said, “There is not an issue of insurgency, per se, but it could be funding Shia factions, and that could very well be true.”
“That would be a concern if they were using smuggling money to blow up American soldiers or kill Sunnis or do anything that could harm the unity of the country,” the official said.
The report by the accountability office is the most comprehensive look yet at faltering American efforts to rebuild Iraq’s oil and electricity sectors. For the analysis of Iraq’s oil production, the accountability office called upon experts at the Energy Information Administration within the United States Department of Energy, which has long experience in analyzing oil production and exports worldwide.
Erik Kreil, an oil expert at the information administration who is familiar with the analysis, said a review of industry figures around the world - exports, refinery figures and other measures - could not account for all the oil that Iraq says it is producing. The administration also took into account how much crude oil was consumed internally, to do things like fuel Iraqi power plants and refine into gasoline and other products.
When all those uses of the oil were taken into consideration, Mr. Kreil said, Iraq’s stated production figures did not add up.
“Either they’re producing less, or they’re producing what they say and the difference is completely unaccounted for in any of the places we think it should go,” Mr. Kreil said. “Either it’s overly optimistic, or it’s unaccounted for.”
Several analysts outside the government agreed that such a large discrepancy indicated that there was either a major smuggling operation in place or that Iraq was incapable to generate accurate production figures.
“That’s a staggering amount of oil to lose every month,” said Philip K. Verleger Jr., an independent economist and oil expert. “But given everything else that’s been written about Iraq, it’s not a surprise.”
Mr. Verleger added that if the oil was being smuggled out of Iraq, there would be a ready market for it, particularly in smaller refineries not controlled by large Western companies in places like China, the Caribbean and even small European countries.
The report also contains the most comprehensive assessment yet of the billions of dollars the United States and Iraq spent on rebuilding the oil and electricity infrastructure, which is falling further and further behind its performance goals.
Adding together both civilian and military financing, the report concludes that the United States has spent $5.1 billion of the $7.4 billion in American taxpayer money set aside to rebuild the Iraqi electricity and oil sectors. The United States has also spent $3.8 billion of Iraqi money on those sectors, the report says.
Despite those enormous expenditures, the performance is far short of official goals, and in some cases seems to be declining further. The average output of Iraq’s national electricity grid in 2006, for example, was 4,300 megawatts, about equal to its value before the 2003 invasion. By February of this year, the figure had fallen still further, to 3,800 megawatts, the report says.
All of those figures are far short of the longstanding American goal for Iraq: 6,000 megawatts. Even more dispiriting for Iraqis, by February the grid provided power for an average of only 5.1 hours a day in Baghdad and 8.6 hours nationwide. Both of those figures are also down from last year.
The story is similar for the oil sector, where - even if the Iraqi numbers are correct - neither exports nor production have met American goals and have also declined since last year, the report says.
American reconstruction officials have continued to promote what they describe as successes in the rebuilding program, while saying that problems with security have prevented the program from achieving all of its goals. But federal oversight officials have frequently reported that the program has also suffered from inadequate oversight, poor contracting practices, graft, ineffective management and disastrous initial planning.
The discrepancies in the Iraqi oil figures are broadly reminiscent of the ones that turned up when some of the same energy department experts examined Iraq’s oil infrastructure in the wake of the oil-for-food scandals of the Saddam Hussein era. In a United Nations-sponsored program that was supposed to trade Iraq’s oil for food, Mr. Hussein and other smugglers were handsomely profiting from the program, investigations determined.
In reports to Congress before the 2003 invasion that ousted Mr. Hussein, the accountability office, using techniques similar to those called into play in its most recent report, determined that in early 2002, for example, 325,000 to 480,000 barrels of crude oil a day were being smuggled out of Iraq, the majority through a pipeline to Syria.
But substantial amounts also left Iraq through Jordan and Turkey, and by ship in the Persian Gulf, routes that could also be available today, said Robert Ebel, a senior adviser at the Center for Strategic and International Studies in Washington.
“Any number of adjacent countries would be glad to have it if they could make some money,” Mr. Ebel said.
Mr. Ebel said the lack of modern metering equipment, or measuring devices, at Iraq’s wellheads made it especially difficult to track smuggling there. The State Department official agreed that there were no meters at the wellheads, but said that Iraq’s Oil Ministry had signed a contract with Shell Oil to study the possibility of putting in the meters.
The official added that an American-financed project to install meters on Iraq’s main oil platform in the Persian Gulf was scheduled to be completed this month.
As sizable as a discrepancy of as much as 300,000 barrels a day would be in most parts of the world, some analysts said it could be expected in a country with such a long, ingrained history of corruption.
“It would be surprising if it was not the case,” said John Pike, director of GlobalSecurity.org, which closely follows security and economic issues in Iraq. He added, “How could the oil sector be the exception?”
Copyright 2007 The New York Times Company
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