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Cablegate: Goi Testing the Waters On Pds Reform

VZCZCXRO1906
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #4062/01 3481109
ZNR UUUUU ZZH
R 141109Z DEC 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 4843
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 02 BAGHDAD 004062

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EAGR EFIN PGOV IZ
SUBJECT: GOI TESTING THE WATERS ON PDS REFORM

1. (SBU) Begin Summary: In recent weeks, GOI officials,
including the Ministers of Trade and Finance, have spoken
publicly about the need to institute changes in the public
distribution system (PDS). World prices for wheat alone, one
of the commodities provided in the PDS basket, have risen
significantly, spurring the need for a USD 522 million
supplemental, which was grudgingly approved by the Council of
Representatives (CoR) only after bitter debate. Prominent
religious leaders rebuked the governmental calls for PDS
reform, but the GOI's statements coupled with two contentious
parliamentary sessions dominated by PDS (including the vote
on the budget supplemental) indicate that the time for reform
may be ripe. What previously we believed a political
non-starter may, through a combination of fiscal pressures
and political maturity, have become an issue for serious
consideration. End Summary.

----------
Background
----------

2. (U) The PDS is a massive food ration system that was
introduced during the period of UN sanctions and was
supplemented in 1996 under the Oil for Food program. In 2003,
the Coalition Provisional Authority (CPA) assumed
administration of the PDS; full control returned to the
Transitional Government of Iraq in 2004-05. Although the
Ministry of Labor and Social Affairs targeted cash-based
social safety-net program continues an expansion (with
guidance from the World Bank), the PDS remains Iraq's primary
safety net mechanism.

3. (U) The PDS system suffers from chronic inefficiencies.
Currently, the number of beneficiaries registered to receive
PDS benefits hovers around 27 million. While the PDS was
essential during the period of UN sanctions to ensure the
availability of food, sanctions are no longer in effect, and
the primary reason for the PDS in its current form is no
longer extant. A 2005 World Bank (WB) study of the PDS
estimates that the cost of providing USD 1 worth of food to a
poor beneficiary costs the government USD 6.30. Another
significant issue is a lack of targeting. Between 2005 and
2007, the number of PDS beneficiaries registered increased by
more than 2 million. During that time, barely more than 100
deaths were registered, and a simple search yielded 700,000
registrants with the same first and last name and date of
birth.

----------------------------
CoR Debates PDS Supplemental
----------------------------

4. (SBU) On November 15, the CoR approved a USD 522 million
budget supplemental. (Note: While the measure was approved,
the legislation was not passed to the Presidency Council for
ratification, as is constitutionally mandated; rather, the
CoR sent its endorsement directly to the Council of
Ministers, which has given rise to legal ambiguity. End
Note.) The issue sparked acrimonious debate, with supporters
of the supplemental invoking the argument that poor Iraqis
desperately needed support and detractors decrying that the
real problem was corruption and not financing. A first vote
failed, and in spite of ambiguity concerning the presence of
a quorum of members, CoR Speaker Mahmoud Mashhadani held a
second vote and declared the measure passed.

5. (SBU) During a November 22 meeting with Econoffs, Azez
Hassan Jaffar, a senior advisor at the Ministry of Finance,
stated that the Ministry of Finance considered the measure
passed and would accordingly make the funds available to the
Ministry of Trade (MoT). Similarly, in a December 13 meeting
with EMIN, Trade Bank of Iraq (TBI) President Hussein al-Uzri
expressed his belief that the budget supplemental had passed,
and noted that the MoT had already spent USD 370 million over
its 2007 budget allocation for the PDS for the ongoing fiscal
year. He added that FinMin Bayan Jabr had called him earlier
that same day instructing him to authorize an additional
release of USD 48 million for the MoT to cover outstanding
freight charges related to the transport of PDS commodities.

---------------------------------------
First Step: Reducing Basket Commodities
---------------------------------------

6. (SBU) Dr. Haider al-Abadi, Chairman of the CoR Committee
on Economy, Investment and Reconstruction, told Econoff that
the Ministry of Trade is working with the Council of
Ministers Economic Committee as well as his own CoR committee
on determining a way forward for PDS reform. He suggested
that, at a minimum, the number of commodities would need to
be reduced from 10 to 5, in an effort to provide higher
quality goods over quantity. He predicted that a report on

BAGHDAD 00004062 002 OF 002


recommendations for PDS reform would be ready by mid-2008.

7. (SBU) Ultimately, he thought that PDS in some form would
persist for the short to medium term in order to maintain
price stability, but that real efforts were underway to
introduce means-testing and partial monetization of the
benefit. Dr. Haider cited the lack of a robust national
identification card and the moribund banking sector as the
principal obstacles to monetization of the PDS. He hoped
eventually the private sector would be able to efficiently
procure basic foodstuffs, which would strengthen the argument
that PDS is no longer necessary.

8. (U) Minister of Trade Abdul Falah al-Sudani, whose
presence was demanded following the outcry during debate on
the PDS supplemental, repeated similar plans for PDS reform
in a December 3 presentation at the CoR. The draft Council of
Ministers-approved budget which the CoR is currently debating
straight-lines the PDS allocation at approximately USD 3.2
billion. Given increasing transportation costs and
commodities prices, and viewed in light of the supplemental
requested to cover 2007 PDS spending, the 2008 PDS allocation
will likely be insufficient to cover program costs.

--------------------------------
Int'l Organizations also Engaged
--------------------------------

9. (U) From November 18-20, the World Bank held a workshop
for the MoT on management of the PDS. The workshop was a
follow up of the Bank's 2005 study which found that the PDS,
while effective in reaching the poor and maintaining a
minimum standard of living, does so expensively and
inefficiently. WB staff considered the workshop successful
and were impressed with the openness of the MoT team in
discussing shortcomings of the system. The Bank is expected
to release a report soon outlining its analysis of the PDS as
well as recommendations for reform.

10. (SBU) WB staff have met with the OECD Representative in
Baghdad and the World Food Program Country Director. Both
organizations are interested in coordinating with the World
Bank to provide additional assistance. The WB is currently
considering its options on engaging in PDS reform.
Furthermore, in an unreleased IMF report, the GOI has
indicated to the Fund that, "in addition to enhanced
monitoring and improved procurement procedures, the (GOI is)
considering to limit the rations in the PDS, and to further
limit eligibility of well-off families."

-------------------------
Sistani Opposed to Reform
-------------------------

12. (U) Following MoT al-Sudani's public calls for reducing
the number of commodities provided by the PDS, a
representative of Grand Ayatollah Ali Sistani lashed out at
government plans for changing the PDS, claiming that most
vulnerable Iraqis would suffer. Additionally, op-ed
commentators in the local press have been mixed, with some
expressing strong support and others opposition to the rumors
that PDS reform may be in the offing.

-------
Comment
-------

13. (SBU) The GOI's second real experience crafting a budget
called for making some tough decisions on priorities, and the
PDS seems to have been an easy target for reduction given its
notoriously grand inefficiencies. Still, careful
implementation of whatever reforms are agreed will be
crucial. Simply reducing the number of commodities provided
is an obvious first target. Also, making the system
means-tested is probably among the initial reforms that need
to be taken, but GOI capacity is severely limited in this
regard. Here GOI public relations efforts will need to be
marshaled to demonstrate to the public that the eligibility
limitations are fair and equitable and are not
sectarian-based. We will continue to monitor the situation
closely and report developments as they arise. End Comment.
BUTENIS

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