Cablegate: Sri Lanka: Mcc and Government Agree to Keep Irrigation

VZCZCXRO7493
RR RUEHLMC
DE RUEHLM #1608/01 2760439
ZNR UUUUU ZZH
R 030439Z OCT 06 ZDK
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4378
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0005
RUEHKA/AMEMBASSY DHAKA 9464
RUEHIL/AMEMBASSY ISLAMABAD 6364
RUEHKT/AMEMBASSY KATHMANDU 4409
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 001608

SIPDIS

SENSITIVE, SIPDIS

STATE FOR SCA/INS AND EB/IFD/ODF; COMMERCE FOR E YESIN AND B LOPP;
TREASURY FOR S CHUN; MCC FOR D NASSIRY AND E BURKE

E.O 12958: N/A
TAGS: EAID ECON PREL SENV CE
SUBJECT: SRI LANKA: MCC AND GOVERNMENT AGREE TO KEEP IRRIGATION
COMPONENT OF POTENTIAL COMPACT

COLOMBO 00001608 001.2 OF 002

1. (SBU) Summary: Senior Millennium Challenge Corporation and
Government of Sri Lanka officials agreed to proceed with development
of a proposed USD 590 million MCC compact that would include
projects on irrigation and agriculture, roads, and small and medium
enterprise promotion. MCC officials explained that their due
diligence process would continue for at least 12 months and that it
would be at least 18 months before a compact, if one is concluded,
entered into force. This time span was necessary for completion of
international-standard environmental and social impact assessments
related to Sri Lanka's proposed construction of dams, and would also
allow time for the two sides to identify policy approaches that
would ensure the proposed projects delivered sufficient economic
returns and would be adequately maintained over the long term. End
Summary.

2. (SBU) Senior Millennium Challenge Corporation (MCC) officials met
with Sri Lankan lead MCC liaison Nivard Cabraal (the Governor of the
Central Bank) September 27 to discuss critical elements of Sri
Lanka's proposed USD 450 million MCC compact. The MCC delegation
was composed of Frances Reid, Managing Director for Eurasia;
Margaret Kuhlow, Managing Director for Environment and Social
Assessment; Franck Wiebe, Managing Director for Economic Analysis;
and Darrius Nassiry, Country Director for Sri Lanka. Ambassador
Blake and Econoff also attended the meeting.

3. (SBU) The MCC delegation informed Cabraal that MCC had identified
three aspects of Sri Lanka's proposed compact that would require
accommodation from Sri Lanka in order to meet MCC's due diligence
requirements. First, the proposed dam-supplied irrigation projects
would require international-standard environmental and social impact
assessments that would take twelve months to conduct. These would
have to be completed before a compact could be signed. Second, Sri
Lanka would need to be willing to conduct a good-faith discussion
with MCC on ways to improve the economic benefits of the proposed
projects, especially in the irrigation and agriculture sectors.
Finally, Sri Lanka would need to show clearly how it intended to
adequately budget for long-term operations and maintenance expenses
for the proposed roads and irrigation systems.

4. (SBU) MCC delegation emphasized that the overarching goal of any
investment it would make in Sri Lanka would be to ensure that the
investment reduced poverty and delivered economic growth. Governor
Cabraal affirmed that the Government of Sri Lanka (GSL) had the same
desire and therefore was willing to work with MCC to satisfy its
concerns. He recognized that there was no way to reduce the
duration of the impact assessment process. He explained that
radical policy changes would not be possible, but were not necessary
in order to ensure strong economic benefits from the programs.
Instead, existing laws allowed sufficient flexibility for new
agricultural practices to be pursued. Finally, he assured MCC that
operations and maintenance expenses for projects that produced high
returns would definitely be covered in order to ensure that the
returns endured.

5. (SBU) With the two sides agreeing that they had mutual interest
in identifying a workable way forward, they agreed to use the
remainder of the MCC delegation's visit to discuss implementation
issues in greater detail. On September 28, MCC delegation met with
Mission USAID staff to discuss USAID anti-corruption,
infrastructure, community consultation, and local governance
programs in Sri Lanka; with Sri Lanka's Ministry of Plan
Implementation and Central Environmental Authority to outline the
required features for adequate environmental and social impact
assessments; and with the Federation of Chambers of Commerce and
Industry of Sri Lanka, regarding the Small and Medium Enterprise
component of the proposed compact.

6. (SBU) Comment: Post welcomes the mutual decision to proceed with
MCC compact development. The MCC team's frank description of its
minimum economic, environmental, and social requirements was
important to ensure that Sri Lanka has a realistic understanding
that seeking MCC funds for irrigation projects will lengthen MCC's
due diligence process into 2008. While the GSL would have liked to
get started with MCC projects sooner, it now has decided to take a
slower but more ambitious course. Post will continue to assist MCC
in ensuring that the GSL understands that MCC remains in its due
diligence phase and that MCC will only invest in Sri Lanka when it
is convinced that the investment will deliver sufficient returns in
terms of poverty reduction and economic growth.

7. (U) MCC delegation cleared this cable.

COLOMBO 00001608 002 OF 002

BLAKE

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