Cablegate: Capital Budget Snapshot: Dhi-Qar.

DE RUEHGB #3394/01 2980608
P 240608Z OCT 08




E.O. 12958: N/A

1. Summary. Dhi Qar Capital budget planning is marked by a mild
trend towards transparency and input from local government. While
party politics politicized budget negotiations at the Council and
Sub-district level, the negotiation of a Provincial Development Plan
and Strategy helped focus the early stages of 2009 budget
development on the common interest. While capital budget planning
is strengthening, capital budget execution has not shown similar
degrees of improvement. Although the central government has not
released funds in a timely manner or provided clear instructions,
the chief weakness affecting budget execution is the lack of
expertise in provincial government to manage project implementation
and an unfounded confidence that contractors will pick up the slack.
In order for Dhi Qar to make effective use of new tools like
GAPTIS, the GOI and its international partners need to shift the
focus of technical training from senior levels of government to the
persons and offices who are actually charged with developing,
monitoring and evaluating projects. End Summary.

2. Several weaknesses afflict the Dhi Qar capital budget process.
First, the development of a budget remains highly politicized, with
decisions by high level and mid level provincial and local
government officials unhelpfully sensitive to the party interests
that secured their positions. Despite some positive steps over the
last few years, budget planning remains a top-down process, with
politics rather than technical merit shaping project lists. Second,
the PRT has noted no particular improvement in the provinceQs
ability to execute projects called for in the budget. In addressing
budget planning and implementation, government officials have
difficulty in breaking free of past practices, with few skills and
fewer tools, equipment or even sensibly organized offices and office
procedures with which to innovate.

--------------------------------------------- ---------
Dhi Qar Capital Budget Planning: Stumbling in the Right Direction
--------------------------------------------- ---------

3. Dhi QarQs approach towards preparing provincial capital budgets
evolved over the past three years, moving incrementally but
perceptibly towards greater transparency and local level
participation despite a clear lack of capacity in budget planning.
Provincial Director Generals of central ministries shoulder the
development of projects lists for their areas of expertise. In the
2006 and 2007 budgets, consolidation of these lists into a draft
budget was centralized in the hands of the Provincial Council and
its Financial Manager. The politicized negotiations produced a wish
list that more accurately reflected the political calculations of
the newly elected council members than the technical challenges that
needed to be addressed in order to deliver essential services. For
the 2008 budget, participation broadenedQ local government had some
limited involvement, political parties tussled over preparations,
and their provincial council members prepared rival drafts. In the
end, the Provincial Chair (Fadilah) and Governor (ISCI) agreed to
submit a common draft. The 2009 draft budget is no less a wish
list, but at least it used the Provincial Strategic Plan as a
starting point for discussions. In addition, local councils and
government officials, including managers of districts and
sub-districts, reviewed and commented upon the draft. With
Ministries of Planning (MoP) and Finance (MoF) commitments in hand,
a final list of 09 projects based on the Provincial Development Plan
is to be handed over to the central government by mid-October. The
capital budget process is stimulating the interest and participation
of different levels of provincial government and political
movements, which suggests that political factions are recognizing
their stake in budget discussions and believe that they can
influence them.

4. Estimates for projects that make up these lists are ballpark
figures based on prior experiences, with little effort invested in
capturing the current costs of inputs. The lack of detail in
expenditure creates some flexibility to adjust to changes in prices
and conditions during implementation but also creates a temptation
to cross-fund projects. (Think PopeyeQs Wimpy Q QI will gladly pay
you twice for a burger on Thursday in exchange for a burger on
Wednesday.Q) Project management, maintenance and service costs are
not separately calculated in the capital budget or taken into
account elsewhere in the provincial budget. The failure to account
for maintenance and service costs at the capital budget planning
stage remains a serious indicator of inadequate budget skills. The
failure to account for maintenance and service costs at the capital
planning stage is not so much an indicator of inadequate budget
skills, as it is a reflection that governorates receive a
substantial amount of capital funds, but only a meager amount of
operating funds, and the fact that there is no body of national law
or regulations that clearly indicate respective expenditure
assignments among the various levels of government. Thus, not only
do governorates not have sufficient budget allocations to operate
and maintain assets that they construct, it is unclear as to whether
they have the legal responsibility to do so. On the plus side,
MoPDC investment project request forms have recently begun to
require the provision of operating cost information

BAGHDAD 00003394 002 OF 004

--------------------------------------------- ---------
Capital Budget Execution: Learning to Recognize Problems
--------------------------------------------- ---------

5. In 2009, Dhi Qar will inaugurate its Construction Committee to
oversee budget execution and build capacity in provincial government
offices. It has a considerable challenge before it. Budget
execution capacity has shown no improvement since the 2006 and 2007
budgets. The province lacks the expertise to effectively contract,
manage procurement, and monitor projects. Problems are compounded
by the lack of clear instructions from MoP and MoF, the failure of
the central government to release funds in a timely fashion, the
lack of a strategy for monitoring and evaluating budget execution,
and the absence of outside expertise with whom to consult. Local
contractors have little expertise with which to make up for these
weaknesses. The government estimate of the workload to be
shouldered by contractors on provincial projects is overly

6. Resources and the timing of their availability are other
constraints. The 2007 Budget law envisions that between 1-3 percent
of the budget may be used for oversight and administration Q an
extraordinary low figure by international standards. Although the
law stipulates that these funds could only be used to support
certain items and activities linked to enforcement, the temptation
exists to treat them as discretionary income that may be redirected
towards supporting other worthy projects or used for maintenance.
Management is also complicated by the lack of multiyear budgeting.
Contracting regulations from the MoP and accounting and budgeting
regulations from the MoF force the Provinces to execute single-year
budgets.(Note: The regulations reflect the provisions of the
Financial Management Act, Order No. 95, which does not allow for
multi-year budgeting. The problems cause by the inability to do
multi-year capital budgets have been offset, to some extent by the
following: (1) ability to carry-forward unspent budget allocations
that was provided for in the 2007 and 2008 Budget Laws; and (2) the
ability to fully fund projects across fiscal years by using Letters
of Credit. While many keep multiyear contract data Qoff budgetQ,
this process has had the effect of encouraging provinces to focus on
projects executable in one year.

Dhi QarQs Capital Budget Execution Record

7. The 2006 capital and supplemental budget, totaling 179 billion
and 69 billion ID respectively, authorized 823 projects. While the
MoF released the full amount, approximately 11 percent of the
capital budget and 21 percent of the supplemental budget has not
been disbursed because certain contracts have not been finalized.
The 2007 capital and supplemental budgets called for 174 billion and
60 billion ID to undertake 436 projects (later to grow to 475 as
ambitiously large projects were broken into constituent parts).
However, of the capital budget, the MoF only released 139.2 billion
ID. From the monies actually released by MoF, the province
disbursed approximately 114 percent and 60 percent of the capital
and supplemental budgets respectively. In order to disburse more of
the 2007 capital budget than it received, the province tapped the
2008 budget for an additional 16.6 billion ID per MoF instructions
and in the hope that all would be sorted out later. In 2008, the
MoF and MoP allocated 259 billion and 191 billion to support the
capital budget and supplemental budget. By August, 27.1 percent of
the 2008 base budget and none of the supplemental budget had been
disbursed. (As noted above, a further 6.4 percent of the 2008
capital budget went to the 2007 budget). In 2009, the MoP proposed
396 B for Dhi Qar to fund 2009 activities and outstanding projects
from 2008. Of this amount, 30 percent is intended to support
province-wide services and 70 percent will be divided among
districts and sub-districts in accordance with their population.
(Budget figures are forwarded separately.)

Dhi Qar: Growing Provincial Capital and Operating Budgets (rounded
to billions ID)
Note: The capital and operating budgets only reflect transfers from
the central government and exclude locally-raised revenue.

Budget Operating Capital Supplement Total
Year Budget Budget Budget Budget

2006 6 179 69 254
2007 3 174 60 237
2008 4 259 191 454
2009 N/A 395 N/A N/A

Bolstering Capacity

8. Various tools and programs have sought to mitigate weaknesses in
capital budget planning and execution. Training related to the 2006

BAGHDAD 00003394 003 OF 004

and 2007 budgets was directed at senior level government officials
and failed to deliver tools into the hands of personnel actually
responsible for day-to-day management. It also produced little
additional coordination between provincial, local and central
governments. Tools have included IFMIS, which was not extended to
the provinces; a simple budget execution tool intended for use in
2008 that was never released; and this simple toolQs next-generation
format, GAPTIS, which is being released in the fall of 2008. In its
present form, GAPTIS is likely to generate an incomplete view of
budget implementation. It is not likely to capture the unofficial
Qre-directionQ of funds as implementers informally cross-fund
projects, maintenance payments (if any), use of oversight monies or
independent sources of income that may complement investment by
central government funds. GAPTIS provides an excellent opportunity
to link budget execution with the Provincial Strategic Plan process,
thereby ensuring information flow on planning and execution between
local and provincial governments, and provincial and central
authorities, but the needed staff-level training has not occurred to

9. Dhi Qar officials would benefit from improved employee skills.
The training should link into skill sets needed for each stage of
budget design and execution Q identify needs; weigh project
feasibility; determine a bill of quantities; prepare total budgets;
win approval from MoP and MoF; prepare detailed project estimates;
approval for execution and publication; procurement processes and
contract awards; project implementation and management; and progress
control and reporting. Expectations for contractors need to be
clear and their skill sets honed as well.

A Dhi Qar Budget Crib Sheet

10. The Dhi-Qar Provincial Budget is divided into two parts,
Operating and Capital budgets. The Operating Budget is primarily
salaries, office costs and other limited expenses. The Capital
Budget, also called the Investment Budget, is related to projects
and other capital improvements. Supplemental budgets may provide
additional funds for either budget. Nowhere does the budget
contemplate maintenance. Both budgets are transfers from the
central government. Neither budget takes into account the small
amount of monies generated independently by the provincial

OPERATING BUDGET: The Operating Budget of the Provincial Budget
funds the Provincial Council and the District and Neighborhood
Councils. Each of the councils receives a share of the Operating
funds based on the number of members and employees they have along
with other expenses. Each District Council has an accountant that
receives the money for both that council and the Neighborhood
Councils below it. That individual cashes the check from the
Provincial Council and disburses the money accordingly. The
operating budget also demonstrated problems with execution, paying
out 76 percent of its budget in both 2006 and 2007, and a healthier
88 percent of its 2008 budget through October, 2008.

CAPITAL BUDGET: The Capital Budget of the Provincial Budget covers
projects that were proposed and approved the year before. Each of
the spending units has to prepare its own project lists based on the
amount of money it projects to receive for the year. The Provincial
Council approves the Governorate lists and submits them to the MoP.
The approved project list constitutes the Capital Budget for the
year, giving the spending units little room to formally redirect or
reprogram investment monies during the fiscal year.

11. The MoF releases 20 percent of the allocated Capital budget at
the start of the 2008 fiscal year Q essentially a prepayment for
projects. The Provincial Council retains these funds until the
Governorate formally requests them. A signed contract showing that
the funds have been obligated is necessary in order for the Council
to issue the check. The MoF will make additional funds available
upon request based on the progression of work.

12. The 2007 Budget Law defines the amount of resources that may be
retained by central and provincial governments to oversee and
administer project implementation. The Q1-3 percent ruleQ allows
for the use of 3 percent of funds for projects less than 1 billion
ID, 2 percent for projects between 1-10 billion ID, and 1 percent
for projects of 10 billion ID or more. The law stipulates that the
MoP can retain 25 percent of this portion for its role in managing
the particular projects. If a hypothetical project is allocated 1
million ID, 30,000 ID could be retained for overhead (3 percent of
the total project). With the MoP retaining a quarter of the funds
allocated to oversight, 22,500 ID is left to the province. The
Provincial Council may decide to retain a portion for their
oversight and administration of the project. It would not be
unusual for a neighborhood Director General to end up with as little
as a quarter of Q1-3Q allocation to administer and oversee the

BAGHDAD 00003394 004 OF 004

project. The law allows the funds to go to the following activities:
salaries for personnel involved in project execution; training;
project vehicles; computers and cameras; incentives and bonus
payments; and media announcements and advertisements.

13. COMMENT: The reputation of the provincial government lives and
dies by the publicQs perception of its activities. Despite
improvements in basic services and spending on new housing, the
current provincial government is widely viewed as a do-nothing
government when it comes to project implementation. With 80 percent
of the 2006 and 2007 budgets executed, and close to 30 percent of
the 2008 budget, either the Dhi Qar government story is not getting
told or the distribution of funds is not producing results. The Dhi
Qar PRT will continue to work with provincial leaders to measure and
record progress while improving budget execution skills. End


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