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Cablegate: Iraq's Provincial Budget Execution: Forward

VZCZCXRO2625
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3600/01 3030733
ZNR UUUUU ZZH
R 300733Z OCT 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 4118
INFO RUCNRAQ/IRAQ COLLECTIVE
RHEHAAA/WHITE HOUSE WASHINGTON DC//NSC//
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 BAGHDAD 003600

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON PGOV IZ
SUBJECT: IRAQ'S PROVINCIAL BUDGET EXECUTION: FORWARD
MOMENTUM SLOWING

1. (U) SUMMARY: Provincial budget execution in 2007 remains
one of Iraq's major accomplishments in good governance. At 60
percent, current commitment rates for 2007 remain impressive.
USG programs in training and capacity building, administered
nationally and through PRTs, have played an important role in
improving the technical capabilities of provincial
governments to carry out capital budget implementation.

2. (U) Disbursement rates for 2007 are low, however. In
addition to the fact that the budget was not passed until
late February and most provinces did not open their capital
accounts until late April or early May, security, contractor
capacity, and poor integration of the provincial budget help
explain slow disbursements. A major factor that many ePRTs
identify though is the failure of the GOI to devolve budget
authority beyond the provincial governor. Continued spending
in local public infrastructure remains critical to Iraq's
development. Devolving spending authority to municipalities,
districts, and other sub-provincial authorities who can make
spending decisions can contribute to more effective budget
execution, and as a result, a quicker and more equitably
targeted impact on Iraq's development. Key to any further
devolution of capital spending authority is a complementary
authority for operations and maintenance (O and M) spending.
Devolving capital spending authority without putting in place
a mechanism for O and M for capital assets will not improve
the ability of government, national or local, to deliver
essential services. END SUMMARY.

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

3. (U) When provinces were first 'granted'
capital/reconstruction funds, GOI expectations were that
these funds would be used for small projects to be executed
in the same fiscal year during which they were allocated,
with larger multi-year projects to be carried out by national
ministries operating in the provinces. Provinces were allowed
to make commitments, and if unable to execute small capital
projects within the fiscal year, funds were theoretically to
revert to the Treasury.

4. (U) In the two years that provinces have been allocated
budgets for capital spending, provincial governments have
demonstrated a capability to undertake increasingly complex,
multi-year projects, in some cases co-funded with line
ministries. Given the lack of a standard and well-defined
fiscal classification system that includes a published system
of reporting on programs, expenditures, receipts, and
outlays, tracking these expenditures is difficult for the
Iraqis as well as the USG. (Note: Our reporting uses the term
"commitment" for capital projects to reflect Iraqi use of the
same term which requires disbursements of all funds in the
same fiscal year during which they were appropriated.
Disbursements against these commitments are a challenge to
report as Iraqi reporting often includes some non-capital
costs. We continue to try and improve the accuracy of our
reporting. End Note.)

--------------------------------------------- -------------
Iraqi Budget Execution Accomplishments with USG Assistance
--------------------------------------------- -------------

5. (U) USAID is implementing a Local Governance Program (at a
cost, to date, of 170 million USD) which has a presence in a
majority of provinces, trains provincial officials on budget
execution, works at the national level to improve the
communication of budget instructions to the provinces, and
works with governors and provincial councils to integrate
their strategic planning and budgeting with that of
provincial directors-general (DGs) in their provinces, as
well as with the Ministry of Planning and Development
Cooperation (MoPDC), through Provincial Development
Strategies.

6. (U) Many PRTs have financial advisors who work with,
train, and mentor technical experts in provincial governors'
office. We continue to staff such critically needed positions
as part of the PRT surge. Additionally, in coordination with
other team members, PRTs are attempting to improve
communication between provincial councils and provincial DGs
(who have separate budgets for their individual ministries in
each province).

7. (U) Treasury has funded the training of 50 provincial
officials on budget execution with additional training
sessions being offered every month for the next three months.


BAGHDAD 00003600 002 OF 003


8. (U) The Provincial Reconstruction and Development
Committee (PRDC) program, administered by ITAO, encourages
good governance best practices at the provincial level by
requiring that provincial councils designate a provincial
reconstruction committee that can prioritize provincial
reconstruction needs and submit prioritized requests in order
to be eligible for USG funding.

--------------
The Challenges
--------------

9. (U) The GOI's current challenges in capital provincial
budget execution are varied. Operationally, low disbursement
rates are attributable to a cumbersome system of fund
releases, a lack of transparency in procurement regulations,
and the complete dependence on a single national revenue
source. Lack of qualified and available contractors and
little strategic planning in various sectors add to the
complexity. From a governance perspective, a co-related need
for better integration of capital budget requests
horizontally with provincial DGs and vertically with
municipalities below them and the federal government above
them is a major impediment to budget execution. USG efforts
to date are focused on helping the Iraqis in both the
operational and governance area. Additionally, we have
identified the need to focus on encouraging adequate
operations and maintenance budgets to accompany capital
projects.

-----------
Way Forward
-----------

10. (U) The Procurement Assistance Center (PAC), an
ITAO-administered program, funds the Ministry of Planning and
Development Cooperation in the establishment of PACs focused
on clear and efficient procurement and contracting
procedures. The PAC program supports both national ministries
and provincial governments. PACs established in provinces are
referred to as Provincial Procurement Assistance Teams
(PPATs). PPATs have recently been established in a number of
provinces. Provinces with the greatest difficulty in budget
execution have been given priority.

11. (U) USAID is developing an automated provincial capital
investment management system to better execute capital budget
expenditures and build a groundswell for a national financial
management system. The system will allow for easier tracking
of funds, transparency, and more efficiency when building the
required reports for accounting, project management, and fund
requests. The application is on track for a January roll-out.
Focus now is on application development and Iraqi buy-in in
individual provinces. This effort complements a similar
effort by the PAC program to automate procurement requests.

12. (U) With the Iraqi 2008 budget process underway,
AID/TREAS/OPA are bringing provincial governments together
with the MoPDC to help integrate comprehensive provincial
development strategies, which include large provincial
demands for capital, to the national development strategy as
well as the central budget allocation process of other
ministries. The goal is to improve communication between
provincial and national levels of government with the hope
that better communication and de-confliction of provincial
and national priority projects will lead to clearly
delineated provincial capital projects that can be
implemented more rapidly in 2008.

-------------
USG Resources
-------------

13. (U) Currently, the USAID resource plan on provincial
budget execution support is:
- 3 public finance advisors at different PRTs,
- 1 senior fiscal advisor in Baghdad,
- 1 senior strategic planner in Baghdad,
- Locally engaged staff in almost every province,
- 7 financial advisors en route,
- 10 person team developing a provincial budget execution
automation system

14. (U) Currently, the Office of the Treasury Attache
resource plan on provincial budget execution is:
- 1 budget advisor leading budget execution training and
improving national-local coordination,
- 1 budget officer collecting provincial budget execution
data from the MoPDC and Ministry of Finance (MoF)

BAGHDAD 00003600 003 OF 003

15. (U) Currently, OPA's resource plan on provincial budget
execution is:
- 1 economic advisor collecting and reporting on provincial
budget execution data from PRTs as well as helping coordinate
AID/Treasury/OPA effort on provincial development strategy
integration with the national development strategy.

16. (U) Currently, ECON's resource plan on provincial budget
execution is:
- 1 reporting officer analyzing and reporting on budget
execution across Iraq.

17. (U) Currently, ITAO's resource plan on provincial budget
execution is:
- 3 American advisors and 24 Iraqi advisors in the PACs
project for provinces and PPATs.

18. (U) As the table below indicates, the proportion of
spending that Iraq allocates to sub-national levels (25
percent) is below that of most western countries. Given
negligible sub-national revenue/tax collection and the
difficult security situation, the GOI should be credited for
making major strides in devolving spending to the provincial
level but it is important to note that, with 25 percent of
the total spending on infrastructure through the provincial
governments that the percentage of capital spending through
sub-national government remains comparatively low.

Country Percent of Percent of
Sub-national spending Revenue Generated
Sector Sub-nationally
--------------------- -----------------

Canada 57 50
United States 40 40
Germany 36 32
Belgium 34 11
Austria 29 21
Iraq (incl. KRG) 25 0.1
Iraq (no KRG) 8 0.1

---------------
A New Approach?
---------------

19. (U) Comment: As an example, U.S. engagement remains
successful in Anbar due to engagement at the sub-provincial
level (tribal committees). ePRTs are increasingly making the
observation that capital project bids are limited to
contractors known to the provincial government, usually
located in the capital. In the absence of any sort of local
revenue generation, the GOI should consider devolving budget
spending authority beyond provincial governors (where it has
become increasingly concentrated) to municipal authorities.
End Comment.

BUTENIS

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