After seven years and $53bn of US reconstruction money, Baghdad still relies on slabs of ice to keep cool.

A vendor uses a saw to cut ice in Baghdad. Iraq in 2010 is far from the middle-income utopia envisaged by some American officials in the early days of the occupation. (Photograph: Hadi Mizban/AP)

Turki is producing large slabs of ice, which most Baghdadis have been using since mid-June to cool their houses. He has been selling up to 6,000 each day to families who have no other means of making their homes even remotely livable in the face of a relentless three-month heatwave.

"We've never had a summer like this," he says, as a police pick-up truck pulls up to collect a half-metre slab of white ice that has freshly spouted from a rusting foot-wide pipe (the policeman doesn't pay). "On some days we can't produce enough to satisfy everyone."

Things weren't supposed to be this way. After seven years of hopes and $53bn of US reconstruction money, it has come to this — an ice machine in a city on fire. Iraq in 2010 is far from the middle-income utopia envisaged by some American officials in the early days of the occupation.

The country under Saddam was a command economy ravaged by war and sanctions, which had taken a particularly heavy toll as the technology driving civic infrastructure had forged ahead throughout the west during the 1990s.

As US forces steadily withdraw, George W Bush's notion of a new Marshall Plan, the blueprint that helped rebuild western Europe after the second world war, for Iraq is increasingly looking illusory. Key benchmarks reveal that all aspects of civic infrastructure have either stagnated or only inched ahead since 2003.

"A lot of the reconstruction has been posited on things that haven't happened, such as the reconditioning of major power stations," says Christine McNab, the resident representative of the United Nations Development Programme in Iraq.

"A lot of what is wrong with infrastructure is from the sanctions period, when people couldn't order spare parts and couldn't modernise."

Access to potable water had been another key goal of US and Iraqi administrators. And while there has been progress at a micro-level, such as a US-built water treatment plant in Sadr City and work by the US Army Corps of Engineers in other deprived regions, an overhaul of Iraq's moribund water delivery system has not happened.

The United Nations says 79% of Iraqis now have improved access to drinking water compared with 2003. However, separate figures reveal that only one in four households have access to tap water in their homes.

Sewage is a serious environmental threat – more than 60% of households dump untreated waste on open land. Electricity remains a major problem.

The streets of Baghdad are strung with a spider's web of makeshift wires, leading eventually to a Dickensian structure belching black smoke into a hazy sky from four stacks. This is Baghdad's only power station, in the southern suburbs of Dora, the engine room of a city that was supposed to power the nation towards a long-promised new beginning.

The Dora station has been providing most households with no more than three hours of electricity a day this summer. It is running at maximum capacity, generating 3,500 megawatts, which supplies roughly 60% of Baghdad's daily needs.

Ghazi Essa, the station director, says all his pleas for new technology or spare parts which could boost output have been ignored for a long time, but particularly in the past six months, when Iraq has been without a functioning government, or anyone to give executive direction.

"We cannot reach more than 70% of the design load," he says. "It has never reached 51C [124F] in Baghdad before. For each degree increase in temperature there is an extra 100 megawatt demand. It is very, very hot and there is so much suffering for the people.

"I feel sorry because we are leaving them many problems and there is nothing we can do."

Iraq is generating only 8,000 of the 13-15,000 megawatts of daily power needed to meet its needs. Supply has increased by around 30% since early 2003, but that is nowhere near enough to keep up with demand, which has soared as people have snapped up cheap Chinese white goods that now flood local markets. The Iraqi government has spent $22.7bn on the electricity sector since 2006, 42% of which has been used for salaries.

The US government has also chipped in, spending $5.3bn on 550 energy-related projects. But even so, it now faces the galling prospect of Iraqis receiving less electricity per day than when US forces arrived here.

Since the inconclusive general election of March 7, ministries have ground to a halt and the parliament has not convened as the country continues to wallow in a political quagmire that started when the incumbent prime minister, Nour al-Maliki, was edged out in a primary vote by former leader Iyad Allawi.

Neither man has been able to form a government since, and much of the goodwill of the March election, which saw a strong turnout across much of the country, has melted away.

"Delay in the formation of the government has delayed payment," says Essa. "We are just hanging on now. This period [of indecision] has delayed everything. It is not only the Dora station. Everything has been affected very badly.

"The ministry cannot give me a decision now. There is no money. There is no budget."

Across Iraq's myriad bureaucracies, it is the same story. Bills are not being paid, contracts are often not honoured and decisions to lead the nation forward are not being taken.

Parliament has not passed a law in almost nine months. There is no agreement on volatile issues such as Kirkuk and other disputed territories, or on a hydrocarbon law that was supposed to act as a blueprint for the development of Iraq's oil wealth.

Baghdad's relationship with the restive north is still tenuous, and especially so since the oil auctions of late last year, which will bring into play revenues from the giant Kurdish oilfields. Both sides remain deeply suspicious of each other on all matters to do with how Kirkuk and the territories are administered. It's very hard to find an Iraqi flag in the north, except above government buildings – and even then, it is always considerably smaller than the Kurdish banner flying next to it.

Standards of governance are of critical concern to the steadily rotating senior diplomats who roll through the giant US embassy in Baghdad. They are even more of an issue to Iraqis, many of whom have little access to the security, rights and services that they were told to expect from democratically elected governments and the institutions that are supposed to serve them. Herein lies one of the greatest fears for post-occupation Iraq.

"It is deeply ingrained that unless you have someone strong at the top of an institution it is not going to function," says McNab.

Throughout the past seven years, ministries have been run in effect as party fiefdoms. None have become anywhere near as strong as the minister who runs them.

"They need to create ministries that have no party role at all, rather than being used as a means of patronage," says one senior western diplomat of Iraq's fiercely partisan politicians.

"I don't think they really understand what politics is really about. They behave like it's about carving up the country and sharing the goodies, not about running the country and good management.

"The fact that key legislation has not been passed means they have not taken on board the full responsibility."

Allawi, whose bid to lead Iraq for a second time helped create the political stalemate, said Iraq's institutions were being used as a tool of regional groups who were determined to use Iraq to further their agendas. "There are elements that are poisoning the well," he said.

"This is the time. This is the moment. Either we want democracy to succeed, or we want the ganging of groups against other groups to succeed."

In health, some projects have taken root, such as new, desperately needed hospitals in areas including Basra and Falluja. There has also been more primary healthcare delivered to most Iraqis nationwide. However, the number of doctors per capita remains low by regional standards, as does the quality of care in many Iraqi districts, according to a UN assessment.

The brain drain of Iraq's professionals has taken an especially heavy toll on doctors. Up to 60% of GPs and specialists present when Baghdad fell have either fled out of fear for their lives or become economic migrants. Doctors were ruthlessly hunted down by militias from 2005 to 2008 and remain attractive targets even now.

Improved security was supposed to change all that. And despite a sharp rise in violence in the past four months, the numbers killed and maimed have dropped in most areas of Iraq by up to 70% compared with the blood-soaked days of mid-2006. The Iraqi army has been heavily mentored and trained by departing US forces and has emerged as a credible institution – perhaps one of the few in the land. Iraqis tend to trust the military, but not the police, whose ranking officers are seen to have facilitated the sectarian war.

In total there are more than 600,000 members of Iraq's security forces. Though strong in number, they are hindered by a brittle rule of law and a judiciary that has struggled to assert its independence in the face of political interference.

Many western diplomats believe the judiciary is reluctant to take on the government, in particular the prime minister's office, and is very susceptible to influence from Iraq's power base. All judges get around in armoured convoys because of a very real risk to their lives. The car park outside Baghdad's central court is littered with up to 30 blown-up four wheel drives as a reminder of what is at stake for them.

Adnan al-Baderi, a judicial investigator who deals with terrorism cases, says his family have twice been targeted. "They tried to kidnap my oldest son last year. He was in a group of many people and he was the only one that they went for," he says from his home inside Baghdad's fortified Green Zone. "This is something we all must live with."

Seven years of war have also undoubtedly opened doors and given Iraqis a worldview. The internet is popular with the country's young, travel to Lebanon, the Gulf, or Europe, is now in reach for a slowly growing middle class, and freedom of expression has replaced fear of who might be listening. But hardships are likely to remain a huge hindrance for many years to come. Even if Essa, the Dora power station director, had the authority to order spare parts to increase Baghdad's power output, two of the four giant turbines in use there are so old that their Italian manufacturer has no replacements in stock.

"They told us they would have to make them," says Essa. "That could take a year at least. Also, the turbines are being run on diesel and heavy fuels, when they were designed to be run on gas. Only the Kirkuk plant is running on gas, because there are no gas lines elsewhere in the country."

The gas that Essa needs is being burnt off in giant flares from refineries around the country that have been wasting around $50 a second, largely because legislators have not been able to agree for years on who should be allowed to harness the gas and develop the desperately needed distribution pipelines.

"Just the fact that individuals are having to spend their own money on buying generators means there is that much less money in the economy," says McNab. "It is the height of absurdity in such an oil-rich country that they don't have the right oil grades to run these stations properly.

"To get investors to come, there needs to be electricity 24/7, with no breaks," she says. "They also want a water supply. They need hygienic solutions and that means the sanitation services need to be working."

Across Iraq, the US withdrawal is increasingly seen as a rush for the exit, when there remains much work to be done.

"They want it to be over, but it doesn't mean it is," says the ice-maker, Turki. "It doesn't bother me though, because I'll be making ice for a decade to come.

"Look at the mess that is Iraq. Do you think they will somehow get it together when the strong man leaves town? No, Iraqis will eat each other for power."