Iraq's faltering oil revenues hurt public services

BAGHDAD Tue Mar 31, 2009 2:44pm BST

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BAGHDAD (Reuters) - Iraq's falling oil income will force it to cut spending on basic services that its war-weary citizens crave, such as sewage treatment and power supply, officials say.

The authorities have already canceled around $600 million in electricity contracts with U.S. company General Electric (GE.N), French heavy engineering group Alstom (ALSO.PA), German conglomerate MAN AG (MANG.DE) and South Korean firm Hyundai (005380.KS), said deputy electricity minister Raad al-Haris.

"We asked for $1 billion in budgeted funds for short-term contracts. We got $400 million, which means $600 million in contracts have been canceled," said Haris. "We have scrapped everything not considered essential for a year or two."

The fall in global oil prices from a high last summer of $147 per barrel to under $50 now forced the Iraqi government to slash its 2009 spending plans twice, from an initial $80 billion to roughly $62 billion.

Parliament then unilaterally decided to chop more off, leaving the government with $58.6 billion to spend on rebuilding a nation left in tatters after decades of war, international sanctions and the violence unleashed by the U.S. invasion in 2003 to topple Saddam Hussein.

Parliament's version of the budget has yet to be approved by the council of ministers, and so much of the government is in a state of paralysis and plans to build or renovate dilapidated infrastructure have been left to gather dust.

Among the projects affected are plans to lay electricity cables underground, and upgrade switches to cope with increasing power consumption. Plans to raise electricity output by 2,000 MW have been cut to 600 MW, Haris said.

For Baghdad's mayor, Saber al-Issawi, the biggest problem caused by a shortage of funds is with regard to sewage.

The Iraqi capital's sewage treatment plants and pipes have not been renovated for 15 years and there are parts of Baghdad where the sewage system is completely deteriorated.

He said Iraqi municipalities were initially allocated $5 billion for development, but that had been chopped by 60 percent. Baghdad, with around 7 million people, will get around $340 million compared to nearly $600 million initially proposed.

"We started two sewage renovation projects and have four more that we need to undertake. We had planned to launch two new projects this year and another two next year to treat sewage. Now we can't. The two will become one and the four will be two."

Planning Minister Ali Baban said the budget crisis had laid bare Iraq's dangerous dependency on oil exports, which account for more than 95 percent of government income.

It also revealed the limitations of the state.

"The state cannot carry all the burdens it used to carry," Baban said. "The state needs to transfer more work and burdens to the private sector and attract foreign investment. I believe if we move toward privatization, we will see improvements."

(Editing by Michael Christie and Myra MacDonald)

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