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Cablegate: Hope for the Future: Iraqi Budget Execution

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RR RUEHWEB

DE RUEHGB #3616/01 3191402
ZNR UUUUU ZZH
R 141402Z NOV 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 0391
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BAGHDAD 003616

NEA/I/ECON

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON SOCI PREL IZ

SUBJECT: HOPE FOR THE FUTURE: IRAQI BUDGET EXECUTION

REFS: A) BAGHDAD 508, B) BAGHDAD 3394, C) BAGHDAD 3438

1. Summary. Budget execution in Iraq remains a challenge as the
GOI strives to develop infrastructure, provide essential services to
the populace and devolve authority to provincial governments.
Although vestiges of the Saddam-era command economy and the loss of
skilled workers complicate matters and stifle efficiency, the amount
of funds being expended by the GOI has increased significantly since
2006. Supported by Embassy Baghdad's Public Finance Management
Action Group (PFMAG), PRTs play an important role in promoting
budget execution by working with provincial officials to improve
budget planning and commitment of funds. The Embassy has organized
a series of training programs to assist in this effort. End
summary.

2. The USG's role in Iraq has transitioned to helping facilitate
the GOI's efforts to govern and develop Iraq itself. The GOI's
ability to provide essential services to the Iraqi public is key to
improving their quality of life, which will help increase stability
and defeat the insurgency. Although GOI efforts at budget execution
have been frustrating, the results are improving. In 2008, Iraq is
on track to expend almost 70 percent more than it did in 2007 on its
overall budget ($45 billion versus $26.6 billion).

3. Recently, the Embassy created PFMAG to augment the PRTs in their
effort to improve budget execution (see reftel A). PFMAG
concentrates its efforts on the various provinces' capital budgets
because this is where it can have the most impact (much of the rest
of the budget is dominated by relatively fixed costs such as
payrolls). The capital budget is also a key source of
infrastructure and development funding. In addition, helping the
provincial governments to spend their budgets wisely as they
determine what is best for the province (subject the GOI approval)
helps to promote decentralization.

4. Budget execution is normally measured in terms of the percentage
of the budget spent. However, the Iraqi budget, and especially the
provincial capital budget portion, has increased so dramatically in
recent years that it has challenged the provinces' capacity to
absorb it - a problem most countries would love to have. After
increasing 20 percent in 2007 over 2006 (from $2 billion to $2.4
billion), the provincial capital budget rose another 54 percent in
2008 (to $3.7 billion). Then in August 2008, a supplemental budget
of $3.6 billion, or 97 percent of the original budget, was approved.
In other words, from 2006 to 2008 the provincial capital budget
increased 265 percent, not including over $500 million in
reconstruction funds approved in 2008 for five cities damaged in GOI
counter insurgency operations.

5. The metric of percentage spent will always yield a pessimistic
result when the denominator increases this dramatically. In terms
of the actual amount of dollars disbursed, the GOI is doing a much
better job. Spending grew 16 percent from 2006 to 2007 ($642
million to $745 million) and through August 2008 disbursements ($1.7
billion) were already 132 percent higher than for all of 2007. Many
unspent 2006 funds were rolled over and spent in 2007 and 2008, and
significant amounts of 2007 funds were actually spent in 2008 -
meaning that some provinces were executing three years of budget
funds simultaneously.

6. Budget execution is not only about spending money but spending
it effectively. This large funding influx has challenged the
provinces' absorption capacity, in large part due to a shortage of
budget professionals, project managers to oversee the building
process (see reftels B and C) and construction contractors to carry
out the work. Many international construction firms hesitate to
work in Iraq because of security concerns, leaving less experienced
local firms to perform most of the work. Many PRTs report
increasing levels of corruption, poor quality of workmanship as
contractors rush through one job to get to the next, and greatly
inflated prices as demand for services outstrips supply.

7. The USG has previously provided several budget execution
training programs to members of the GOI, but loss of budget
professionals due to emigration or de-Baathification, leads most
PRTs to report a shortage of working level professionals to make
Iraq's budget system work. The Embassy's Office of Provincial
Affairs (OPA), in conjunction with PFMAG, has organized a series of
training programs for PRT members. In October, approximately 75 PRT
members and military personnel representing 23 PRTs/ePRTs/REOs and
CJ-9 attended a work shop on how they can work with their provincial
contacts to help promote budget execution. The program bundled the
results of several USG-funded programs in Iraq into a more complete
package.

8. In the next step of this training program, PFMAG will work with
PRTs to identify 3-4 projects in each province to monitor and help
usher through the system to help assure faster execution. PFMAG
members have subsequently traveled to the provinces of Ninewa,
Anbar, Salah ad Din and Erbil to work with PRT members and
provincial leaders in this regard. This "retail" form of budget
execution also will allow RFMAG to identify specific problems it can
address with the appropriate central ministry, including the
Ministry of Finance (MOF) to get direct intervention.

9. The Embassy plans more training in November. First, OPA and
PFMAG will host follow up training for PRT and military personnel to
hear from representatives from the Ministry of Planning and
Development Cooperation (MOP), the MOF, the Iraq Trade Bank and
representatives from provincial governments about what they see as
the problems with budget execution. USAID and the GOI will conduct
separate budget planning and budget execution training programs for
provincial officials.

10. Comment. Most of the news on Iraqi budget execution has been
bad, but it is important to recognize the successes in order to
build on them. USG training programs have a long way to go before
they achieve the desired results, but progress is being made. In
addition to demonstrating improved levels of budget execution,
increasingly larger numbers of young Iraqis are gaining training and
experience in the field of budget management thanks to the efforts
of PRTs and other USG-funded programs. These people are a fledgling
class of technocrats that Iraq can utilize for its future
development and they represent success in efforts at capacity
building.
CROCKER

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