Insurgent violence still hobbles the country's $114 billion reconstruction effort, and the possible flood of new money makes it all the more important for Iraqis to fight harder against corruption, said the quarterly report by Stuart W. Bowen Jr., special inspector general for Iraq reconstruction.
Iraq's oil production during the last quarter averaged 2.38 million barrels a day, the highest level since the 2003 U.S.-led invasion although still below prewar levels of 2.6 million, the report said.
That, coupled with record world oil prices, means that Iraq's national income could rise significantly in 2008, "creating the opportunity for significant economic investment," Bowen said in an interview Tuesday in advance of the report.
"How the government of Iraq manages that boon will in part determine the scope of the continuing success in Iraq," he said.
Iraq could get an extra $15 billion for its oil, he estimated. The nation's 2008 budget is about $48 billion with some 84 percent coming from oil. That was calculated using a $57-a-barrel price, whereas the U.S. Department of Energy now estimates the 2008 average price will be $85 per barrel, the report said.
"The possible rise in Iraq's revenue emphasizes the need for the government of Iraq to pursue its fight against corruption with renewed vigor" and for more progress on legislation laying out how oil profits will be shared among the Iraqi people, it said.
Endemic corruption such as theft, bribery, oil smuggling and fraud amount to what Bowen last summer called a "second insurgency" standing right behind violence as a top challenge to Iraq's development.
Previous reports concluded that U.S. efforts against corruption were disorganized, poorly managed and not given high enough priority. Wednesday's report said officials are reorganizing the effort in the U.S. Embassy in Baghdad to provide better staffing and give more attention to anti-corruption programs, on which the United States already has spent millions of dollars.
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The Wednesday report also found, as did Bowen's October report, that violence still hampered reconstruction despite the much-promoted improvement in security in Iraq in recent months.
"Despite the palpably improved security climate, violence continues to impede the efforts of agencies working on Iraq's relief and reconstruction" and "poses a deadly threat," the report said.
There are attacks on both infrastructure and workers. U.S. diplomats and development workers are limited and sometimes barred from leaving the fortified Green Zone to visit Iraqi ministries, and auditors have been unable to visit some project sites because it is too dangerous.
Since the beginning of the U.S. reconstruction effort, 242 U.S. civilian workers have died in Iraq, seven in the past quarter, the report said.
Bowen noted that Iraq is a patchwork of security conditions, with more rebuilding progress being made in places like Anbar province in the west, where commanders say many al Qaeda fighters have been pushed out.
Places to which militants have fled, such as Diyala province to the east of Anbar and Iraq's third largest city of Mosul in the north, are still very difficult areas to work in, he said.
The report said Iraq needs to meet three important milestones in 2008. It must take more control over planning, managing and paying for projects; must take over from the U.S. management of projects already built; and must take more responsibility for security.
As of the end of December, the United States has appropriated $47.5 billion for Iraq's $113.95 billion reconstruction program. Some $35.5 billion of the U.S. money has been obligated and $29 billion spent on projects that include the effort to put in service new Iraqi security forces; rebuild and upgrade infrastructure to restore electricity, water and other basic services; and train Iraqis on governance issues.
The other money in the $113.95 billion total comes from Iraq - $50.6 billion - and the international community - $15.8 billion.
The massive effort has had mixed success. Most services still are lagging, some projects very poorly done and uncounted money lost to waste, fraud and abuse, officials have said.
Bowen said Americans should look at the expense as an investment to get infrastructure working again and services going again after the invasion.
"It was never intended to be a package for the complete reconstruction of Iraq. Therefore, as an investment in getting them started ... it worked," he said. "Did it work as well as we would have liked? No, it didn't."