Iraq reconstruction moving to local level

WASHINGTON -- The State Department has ordered a major reevaluation of the troubled $18.4 billion Iraqi reconstruction effort, blaming problems on early decisions to hire US companies for major infrastructure projects.

In a report to Congress last week, the State Department said reconstruction officials will cancel several planned water and electricity plants and shift $832 million to focus on immediate job creation and training for Iraqis.

The new approach would also place a strong emphasis on spending remaining funds to contract with Iraqi companies, which have experienced fewer problems with insurgents and have lower overhead than US multinationals.

''Changing conditions meant that the cost and time necessary to start and complete activities increased dramatically, requiring a significant and ongoing reevaluation" of the rebuilding plan, the report says.

The report, along with an earlier draft obtained by the Times, offers the most sweeping analysis to date of the failures in the reconstruction process and outlines the most detailed roadmap yet for the future of the program.

The adjustment, the third such funding change in nine months, is the latest sign of disarray in efforts to help quell the insurgency by improving living standards and providing jobs for Iraqis.

The report lists problems with the performance of some companies, including Houston-based Halliburton. The report revealed that the United States issued a warning to KBR, a Halliburton subsidiary, in January, threatening possible termination on its $1.2 billion reconstruction contract.

Bill Taylor, who heads the civilian reconstruction management office in Iraq, which wrote the report, said that remaining funds will increasingly be focused on ''systems" rather than individual projects. Iraqis have been frustrated, for instance, that new water treatment plants have been built without new water lines, resulting in millions of gallons of clean water with no way to flow to homes.

''When the facts on the ground change, you have to make some adjustments," Taylor said. ''That's what we've been doing."

The draft version of the report says the Pentagon failed to account in its planning for four key factors that have contributed to the slow pace of the reconstruction: insurgent violence, an infrastructure system near the point of collapse from a decade of sanctions, the use of ''restrictive" US contracting laws, and so-called ''cost plus" contracts.

Under such contracts, US companies are reimbursed for all costs incurred in construction and are guaranteed an additional percentage in profit depending on performance.

One of the problems, Taylor said, is that the United States has been forced to pay contractors even when they do not work because of security problems.

All told, more than $1.3 billion in funds is being devoted to pay for costs stemming from contractor delays, higher security demands, and the reconstruction of battle zones such as Najaf and Fallujah, the report said.

The shifting of money also will also help cover an estimated $5 billion shortfall in the Iraqi national budget. Insurgent attacks and the failure of reconstruction efforts in the oil sector have resulted in lower than anticipated Iraqi oil revenues, making it impossible for Iraq to maintain and operate US-funded reconstruction efforts.

A spokesman for the Department of Defense acknowledged ''challenges" to the reconstruction effort. He noted, however, that the number of reconstruction projects underway had increased from 200 to more than 2,000 over the past year. Of those, only around 600 have been completed.

''The trend lines on progress in Iraq are up, and Iraq and the coalition are on track with work to rebuild the country," the spokesman said.

One firm singled out by name was Halliburton, which holds billions of dollars worth of contracts in Iraq. The company formerly headed by Vice President Dick Cheney has drawn withering criticism from Democrats and auditors over alleged overcharges.