U.S. Agency Hid Cost Overruns in Iraq, Audit Finds

WASHINGTON â€”  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 says.

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, including fraud allegations and the soaring costs of protecting work sites and crews from attacks, that have beset the massive rebuilding effort in Iraq.

The report focuses on cost overruns and construction delays at the children’s hospital, whose advocates include First Lady Laura Bush and Secretary of State Condoleezza Rice. But the document also points to similar accounting irregularities on other projects, including a power station in Musayyib and an electricity project in Baghdad.

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 audit found. 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 project were applied to other USAID projects, resulting in a serious misstatement of hospital project costs,� the report says. At the same time, a facility that was supposed to be finished in 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.

State Department spokesman Justin Higgins said he could not comment on the contents of the report. “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,� 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,� he said.

The lead contractor on the hospital had been Bechtel National, based in Frederick, Md. 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 cost overruns and construction delays. Attempts to reach a representative of Bechtel were unsuccessful Saturday.

Cliff Mumm, a Bechtel official, was quoted in a New York Times article Friday as saying 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 says USAID officials went to the Iraq Reconstruction 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 says that 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 Musayyib thermal power station at $6.6 million, and indirect costs at $27.6 million, a ratio wildly out of line with those on other projects, according to the report.

In a more typical case, budgets for an electricity project in Baghdad list direct costs of $164.3 million and indirect costs of $1.4 million -- a surprisingly small sum in a country where the expense of securing work sites typically causes indirect costs to balloon.

The budget problems involving the Basra hospital are likely to add to the criticism that the project has faced since its inception in 2004, when the first lady worked with the National Security Council to push for funding for a state-of-the-art children’s hospital in Iraq.

From the beginning, critics questioned the wisdom of building such a high-end facility in a country where many citizens lack basic healthcare. At the time, Sen. Patrick J. Leahy of Vermont, the ranking Democrat on the foreign operations subcommittee, questioned whether the project was “more the result of political pressure than the best use of taxpayer dollars.�