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Cablegate: Usaid Mission Director Frej Meets with Finance Minister

VZCZCXRO3972
PP RUEHIK
DE RUEHBUL #3732/01 3241139
ZNR UUUUU ZZH
P 201139Z NOV 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 3319
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0943
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC
RUEHRC/USDA FAS WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 KABUL 003732

SENSITIVE
SIPDIS

E.O.12958: N/A
TAGS: EINV EFIN ECON AF
SUBJECT: USAID MISSION DIRECTOR FREJ MEETS WITH FINANCE MINISTER
ZAKHILWAL

KABUL 00003732 001.2 OF 003


1. (U) This is an action message. See paragraph 10.

2. (U) SUMMARY: On November 12, 2009, USAID Director Frej met
Finance Minister Zakhilwal to discuss issues ranging from
anti-corruption efforts to long-term economic growth issues.
Minister Zakhilwal stressed that "the focus on corruption is
important to us, affecting the confidence of our people and our
relationship with the international community. We need to get past
the general statement of (combating) corruption into the details."
He welcomed the pressure and the conditioning of U.S. assistance on
what the government must deliver in terms of reform, while asking us
to acknowledge progress made to date. Zakhilwal also reiterated the
importance of three ongoing initiatives in government
reorganization: 1) the clustering of Ministries around the themes of
Agriculture and Rural Development, Infrastructure, Human Capacity,
and Governance; 2) strengthening the financial management, service
delivery, and oversight of the top six ministries managing 80
percent of the country's development assistance; and 3) pushing the
reform agenda within these institutions to streamline procedures and
enhance transparency, revenue generation and law enforcement
efforts. See action request in paragraph 10. END SUMMARY.

------------
INTRODUCTION
------------

3. (U) Pursuant to his request to revive monthly meetings, Minister
Zakhilwal met with USAID Director Bill Frej to review five specific
agenda items: 1) the Sheberghan gas fields; 2) Salary and Salary
supplements for government officials; 3) the Civilian Technical
Assistance Plan (CTAP); 4) Economic Growth issues (Mining, Non-Tax
Revenues, and Tax Reform); and 5) regional airports.

-------------
ON SHEBERGHAN
-------------

4. (U) The Sheberghan gas field project aims to attract private
investors to develop the fields and construct and operate a
gas-fired electricity generation plant, supplying 100 MW to 150 MW
of power to Kabul and eastern Afghanistan, including Nangarhar
Province. Following serious expressions of interest from the
private sector for this project, USAID plans to provide
capacity-building assistance to key Afghan Ministries such as the
Ministry of Mines (MoM), Ministry of Energy and Water (MEW), and
DABS concerning the principles of private sector arrangements for
gas production as well as power purchase agreements for gas fired
Independent Power Producers. USAID indicated that it had received
two proposals to complete this project and has now completed the
selection process. USAID's Office of Acquisition and Assistance
(OAA) is in contact with the prospective implementer at this time
and estimates that the $6 million contract should be completed by
November 30, 2009.

-------------
MINING SECTOR
-------------

5. (SBU) Finance Minister Zakhilwal said Afghanistan's mining sector
can be a major engine of growth, generating significant investment,
employment, and public-revenue. He indicated that the current
Minister of Mines would be replaced, following the President's
inauguration. As part of Afghanistan's eligibility in the World
Bank's Heavily Indebted Poor Countries Initiative (HIPC) and in line
with ANDS objectives, mining remains a key priority for the
Government of the Islamic Republic of Afghanistan (GIRoA)Q
6. (U) Mission Director Frej noted that USAID's Economic Governance
and Growth Initiative (EGGI) project is committed to providing
advisory support to GIRoA to improve legislation, regulations, and
fee structures to encourage exploration and investment in mining
projects. EGGI programs could include additional support to the
Ministry of Mines for policy analysis, training, and mentoring.

--------------------
GIROA SALARY SUPPORT
--------------------

7. (U) USAID has been funding salaries and salary supplements in the
Office of the President and Ministry of Education. USAID Mission
Director Frej and Minister Zakhilwal agreed to work together on a
way forward to address the issue of funding salaries and salary
supplements for GIRoA officials. As a first step, Mission Director
Frej agreed to share the lists of current USAID-funded staff with
the Ministry of Finance to avoid duplicative payments from other

KABUL 00003732 002.2 OF 003


sources.

----------------------------------------
CIVILIAN TECHNICAL ASSISTANCE PLAN (CTAP)
----------------------------------------

8. (U) The Civilian Technical Assistance Plan (CTAP) is moving
forward. Specifically, the USG intends to support this multi-donor
pilot program via direct transfer to the Ministry of Finance ($30
million over two years). Besides the commitments that the U.S., the
UK, Canada, and Japan have made to support CTAP, other donors such
as Italy have expressed interest in participating.

9. (U) Mission Director Frej noted that no other donors but the US
have begun negotiations with the GIRoA nor have they placed any
advisors in the secretariat. USAID's financial assessment of the
Ministry of Finance, which has been shared via UNAMA, paves the way
for many smaller donors to consider direct budget support. Both
parties agreed that UNAMA also needs to take a more active role in
getting additional donors on board. Finance Minister Zakhilwal
indicated that he will continue to put pressure on donors to fulfill
their commitments, and suggested a potential Joint Coordinating
Monitoring Board meeting in mid-December as the right public forum
to do so.

10. (U) Action Request: We recommend Washington, through the
Secretary's Office of the Special Representative for Afghanistan and
Pakistan, consider undertaking a broader diplomatic effort to
demarche the UK, Canada, and Japan to meet their CTAP pledges and
solicit greater support from other donors. This initiative is
consistent with President Obama's emphasis on greater Afghanization
of assistance, enabling the Afghan government to take the lead in
their own development. End Action Request.

-----------------------------
NON-TAX REVENUES / TAX REFORM
-----------------------------

11. (U) Mission Director Frej noted that USAID's EGGI project
produced an initial assessment for mobilizing non-tax revenue.
Based on data from 1387 (FY 2008-09), total non-tax revenue
collected was 13.5B Afs (or $270M), or 29% of all collected revenue.
There are over 107 different types of non-tax categories, but the
top 20 account for 90% of non-tax revenue (conveying the rates on
the rest are so low they are almost negligible and could be
eliminated or that collections are a lot lower than they should be).
There are 47 Government Agencies that collect and deposit non-tax
revenues, but six of them account for 96% of collections. These
"big six" are the Ministries of Mines, Finance, Transportation,
Foreign Affairs, Communications, and Interior. U.S. Treasury will
focus its efforts on the Ministry of Transportation, while USAID
will address the other five ministries and the issue non-tax revenue
more broadly in cooperation with the Ministry of Finance. As a next
step, and with technical support from EGGI, Frej requested that the
Ministry of Finance identify staff to support this initiative with
other ministries.

12. (U) In agreement with UK-DFID, USAID will explore support to the
MOF to establish a Fiscal Policy Unit that will include a mandate
for Tax Policy formulation, while DFID continues its focus on Tax
Administration and expansion of large and medium tax payer offices
to the regions, under the Deputy Minister (DM) for Revenue. Finance
Minister Zakhilwal concurred that adjustments in the organizational
structure of Mustufiats (MOF provincial offices) that report to the
Deputy Minister for Administration should be adjusted to report to
the Deputy Minister for Revenue. The Deputy Minister for Revenue is
responsible for approximately two-thirds of all MOF staff who
collect customs, tax, and non-tax revenue, and the Revenue
Department should play a more prominent role in hiring, firing,
promoting, and disciplining its staff.

-----------------
REGIONAL AIRPORTS
-----------------

13. (U) The Afghan government requires $12 million to upgrade
airstrips in Faryab, Badakhshan, and Chagcharan. USAID pledged to
match $6 million with a GIRoA or other donor contribution of an
equal amount. Finance Minister Zakhilwal noted that the match is
ready. The next step is that USAID will draft a Memorandum of
Understanding between the Ministry of Finance, Ministry of Transport
and Civil Aviation, Asian Development Bank, World Bank, and USAID.


-------

KABUL 00003732 003.2 OF 003


COMMENT
-------

14. (U) Minister Zakhilwal projected the image of a Cabinet member
who gets things done. He displayed a detailed knowledge of a wide
range of issues and seemed confident that his pragmatic,
results-oriented approaches would continue in the new government.
We believe he has the will to carry through on financial reform --
provided he remains as Finance Minister.
RICCIARDONE

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