Audit finds cloudy accounting in Iraq rebuilding

WASHINGTON – The U.S. agency responsible for administering $1.4 billion in reconstruction funds in Iraq has sought to hide major cost overruns on high-profile projects from Congress by engaging in questionable accounting maneuvers, according to a federal audit released late Friday.

The agency has masked budget spillovers on a children’s hospital in the southern city of Basra and other facilities by hiding the expenditures in seemingly unrelated accounts, the report from the Special Inspector General for Iraq Reconstruction said.

Overall, the report found a “lack of effective program management” by the State Department and the U.S. Agency for International Development, which oversees U.S. reconstruction spending in Iraq and other countries.

The accounting issues are the latest in a series of problems that have plagued the massive rebuilding effort in Iraq, ranging from allegations of fraud to the soaring costs of protecting work sites and crews from attacks.

The report focused on cost overruns and construction delays at the children’s hospital, which has been championed by first lady Laura Bush and Secretary of State Condoleezza Rice.

But the document also pointed to similar accounting irregularities on other projects, including a power station in Mussayab and an electricity project in Baghdad.

The report found that USAID has continued to list the hospital project’s cost at $50 million in reports to Congress, even as its actual budget has ballooned to more than $149 million. The discrepancy was disguised by spreading indirect costs associated with the project – such as security and transportation expenditures – to other accounts, according to the report.

As a result, “millions of dollars in indirect costs that should have been applied to the hospital pro- ject were applied to other USAID projects, resulting in a serious misstatement of hospital project costs,” the report said. At the same time, a facility that was supposed to be finished last December is now scheduled for completion in July 2007.

A spokeswoman for USAID, an independent agency that receives overall foreign policy guidance from the State Department, could not be reached for comment.

The lead contractor on the hospital had been Bechtel Corp., the San Francisco-based construction giant.

But the company was reportedly dropped from the project last week – a development first reported in the New York Times – after long-standing complaints about the cost overruns and construction delays. Attempts to reach a spokesperson for Bechtel were unsuccessful Saturday.

Cliff Mumm, a Bechtel official, was quoted in a New York Times story Friday saying that the company had essentially volunteered to bow out of the project, and recommended that work be stopped because of security problems. Any plan to press ahead, Mumm said, “is not a good use of the government’s money.”

The inspector general’s report said USAID officials went to the Iraq Reconstruction and Management Office in March 2005 seeking permission to downsize a number of its projects and adjust its handling of overhead costs to “resolve its funding problems,” largely stemming from escalating security expenses.

The U.S. Embassy’s reconstruction office allowed the changes, but the report said USAID wrongly interpreted the agreement as “blanket permission to change the reporting of all indirect costs.”

Even as the budget for the hospital soared, USAID continued to conceal the overruns from Congress, according to the report. In a series of reports to lawmakers from January 2005 through April 2006, the agency identified the hospital project as a $50 million project,” the inspector general found.

The latest estimates of the cost to complete the hospital range from $149.5 million to $169.5 million, according to the inspector general’s report.

The report also questions the accounting of other reconstruction projects.

USAID documents obtained by the inspector general, for example, list direct costs for the Mussayab thermal power station at $6.6 million, and indirect costs at $27.6 million, a 418 percent indirect cost rate wildly out of line with the ratios on other projects, according to the report.

In another case, budgets on an electricity project in Baghdad list direct costs of $164.3 million and indirect costs of $1.4 million – a surprisingly small amount in a country where the expense of securing work sites typically causes ballooning indirect costs.