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Cablegate: Internal Debate On Iraq's Pds Reform

VZCZCXRO6986
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3184/01 2761315
ZNR UUUUU ZZH
P 021315Z OCT 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 9747
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 BAGHDAD 003184

SIPDIS

E.O. 12958: N/A
TAGS: ECON EAGR ETRD ELAB PREL IZ
SUBJECT: INTERNAL DEBATE ON IRAQ'S PDS REFORM

REF: A. BAGHDAD 2898
B. BAGHDAD 2689

SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION.

SUMMARY
-------

1. (SBU) The Ministry of Trade and the Prime Minister's
Advisory Board are actively debating how to reform the Public
Distribution System (PDS), but there is no consensus on the
way forward. Failure to reconcile the two sides could impede
the GOI's ability to phase out the PDS in accordance with its
International Compact with Iraq commitments. End Summary.

2. (SBU) On September 23, the United Nations Development
Program (UNDP) hosted the first joint donor meeting with the
GOI's Public Distribution System (PDS) Reform Steering
Committee at UNAMI headquarters. Participants included
members of the Prime Minister's Advisory Board, the Ministry
of Trade, the Ministry of Finance, and representatives from
the World Bank, World Food Program, Food and Agriculture
Organization, the International Labor Organization (ILO), UK
DFID, and the Danish and U.S. Embassies. The PDS is a
universal food program - administered through the Ministry of
Trade (MoT) - through which the Iraqi Government attempts to
provide a monthly basket of basic foods and assorted
commodities. Under the International Compact with Iraq, the
GOI pledged to phase out the PDS by 2011.

THE MINISTRY OF TRADE'S APPROACH
--------------------------------

3. (SBU) Dr. Abdul Had Al-Hamriri, Senior Counselor to
Minister of Trade (MoT) Al-Sudani, laid out the MoT's
"Roadmap and Exit Strategy of the Government from the Public
Distribution System," a phased plan that would monetize the
PDS and fold it into social safety net payments by 2011.
According to this approach, all Iraqi heads of households
will be required to submit income declaration forms in late
2008 as part of the annual re-registration for PDS benefits.
District Advisory Councils (DAC) would then verify the
information and transmit the forms to the MoT. In
cooperation with the Ministry of Planning and Development
(MoPD), the MoT would use the declaration forms to means test
beneficiaries and then create a new, shorter list of those
eligible for PDS. Moreover, said Al-Hamriri, some Iraqis
would "opt out" of the system, rather than submit
declarations. (Comment: We have heard seperately from
Minister Al-Sudani that, following the means-testing, he
intends to remove the wealthiest 25 percent of Iraqis from
the rolls (reftel A). However, discussion of specific
percentages is an extremely sensitive subject one that
Al-Hamriri was reluctant to discuss in this form. End
Comment).

4. (SBU) By the second half of 2009, families who are
determined eligible to still receive PDS benefits would have
the option of receiving either commodity allocations, as they
do now, or cash payments that MoT would distribute via
private and public banks. Under this plan, the MoT would
import 50 percent of current PDS supplies and distribute the
items to the 60,000 existing PDS agents. PDS beneficiaries
would therefore have the choice of whether to purchase PDS
items through the agents at fixed prices or from the private
sector, depending on price and quality factors. By the end
of 2010, the MoT would transfer the value of PDS monetary
benefits into GOI social safety net payments.

THE PM'S ADVISORY BOARD'S APPROACH
---------------------------------

5. (SBU) Dr. Abdulhussein Alanbaki, Economic Adviser to Prime
Minister Maliki, explained that the PM's Advisory Board
recommended a different approach, which would maintain PDS
allocation numbers and beneficiaries, involve the private
sector in the immediate administration of the PDS, and
eventually move the system to a food stamp-like program.
Stating the GOI had not yet "100 percent" approved the MoT's
plan and citing significant "political, social, and economic"
considerations behind the reform process, Alanbaki said the
GOI needs to keep the PDS in its current form, but transfer
its administration to the private sector in 2009. Under this
plan, the MoT would maintain a funding role, and, in
2010-2011, the MoT, MoF, and MoPD would work together to
begin the process of eliminating benefits for wealthy and
middle class Iraqis, focusing the benefit to Iraq's neediest
households. The GOI would then incorporate a food stamp-like
program that would drive the benefit allocation towards
domestically-produced PDS items in order to bolster the Iraqi
agricultural production.

BOTH PLANS RIFE WITH RISKS

BAGHDAD 00003184 002 OF 002


--------------------------

6. (SBU) Advisory Board members questioned the MoT's capacity
to continue administering the PDS in any form, given its
unwieldy structure and rising food prices. PM Advisor and
Board Member Saad Ibrahim complained of systemic corruption
in PDS, from import to distribution, arguing the private
sector would help improve this problem. PM Adviser Alanbaki
further argued against monetization, referencing a COSIT
survey that cited 90 percent opposition to monetized PDS
benefits. He also doubted whether the banking system was
sufficiently prepared to handle PDS cash payments according
to the MoT's timetable.

7. (SBU) The MoT's Al-Hamriri, on the other hand, ruled out
the Board's private sector strategy and said the MoT needed
to continue to administer PDS. He argued that the private
sector was still grossly underdeveloped and any privatization
of PDS administration would leave the system vulnerable to
even more corruption. "If you give private companies the
contracts one day, they will be selling the products in Amman
the next," he said. A Ministry of Finance representative
agreed with Al-Hamriri, arguing the risk of wide price
fluctuations necessitated the need for significant government
involvement. As for the corruption charge that Board members
leveled against current PDS administration, Al-Hamriri said
the MoT's proposed self income declaration form, combined
with the DAC audit, would help end corruption on the
distribution end by weeding out ghost beneficiaries and by
identifying forgery. Advisory Board members responded that
the MoT was overestimating the DACs' ability to verify
information and underestimating the councils' susceptibility
to corruption.

INTERNATIONAL COMMUNITY WEIGHS IN
---------------------------------

8. (SBU) International Organization representatives expressed
concern over lack of progress on PDS reform. Pointing out
the GOI pledged to phase out the PDS completely by 2011 under
the ICI, the UNDP's Simona Marinescu questioned why the 2009
budget request for PDS was 6.4 trillion ID, essentially the
same amount as in 2008. On the various arguments presented
by the steering committee members, Marinescu emphasized that
both philosophies tied PDS benefits to the social safety net
program, and the principal question was to what extent the
private sector could participate. "We should also bear in
mind how you can publicize this, reduce reliance on imports,
and create jobs," she added. The International Labor
Organization also agreed with the need to move PDS benefits
to the social safety net program, but went further by saying
this would need to be tied to the overall reform of the
social safety net.

COMMENT
-------

9. (SBU) After security and electricity, Provincial
Reconstruction Teams and GOI interlocutors report that many
Iraqis view PDS as perhaps the single most visible indicator
of whether or not a democratically elected government can
deliver services. And Iraqi politicians are keenly aware of
this reality -- a fact made plain by the dramatic disconnect
between the reform strategy the PM,s Advisory Board has
presented and that of the MOT. At least for 2009, this
disconnect will likely not be resolved. MOT Al-Sudani has
already told us even the initial step of collecting income
information from beneficiaries will be delayed by several
months (reftels), and the 2009 budget request is further
proof that this is the case. This said, we remain hopeful
that -- ultimately -- PDS reform will occur. The information
gathering and means-testing phases (i.e., the only points the
Board and the MOT generally agree upon) could even start as
early as 2009. But the final phase -- full monetization and
integration into the social safety net payment system -- will
not occur for years. End Comment.
CROCKER

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