Cablegate: Status and Concerns: Establishment of P-Mdtf in Zimbabwe


DE RUEHSB #0098/01 0360952
O R 050951Z FEB 10



E.O. 12958: N/A
SUBJECT: Status and Concerns: Establishment of P-MDTF in Zimbabwe

THIS IS AN ACTION CABLE. See paras 3 and 13 below.




1. (SBU) The donor community in Harare has been in consultations
with the World Bank (WB) since April 2009 regarding the
establishment of a Programmatic Multi-Donor Trust Fund (P-MDTF) for
the purpose of implementing recovery projects in support of the
transitional government. There is collective agreement among the
donors in Harare that the P-MDTF is a crucial vehicle to pool
bilateral resources for high-cost social infrastructure
rehabilitation projects that would have a high return in terms of
lives and assets saved and demonstrate good will toward the
Zimbabwean people.

2. (SBU) Agreement has been reached between the donors and the WB
on both the governance parameters and the programmatic scope of the
P-MDTF; however, continued lack of resolution on how to ensure that
funding does not inadvertently benefit sanctioned individuals and
companies threatens to scuttle the establishment of the trust fund.
Donors in Harare have been working with the World Bank to consider
the feasibility of alternative ways to structure the P-MDTF to
enable it to come to fruition but have been unable to resolve the
problem, putting into question the entire effort. Post believes
that the P-MDTF continues to have an important role in Zimbabwe,
and requests the USG's Executive Director (USED) at the WB to
consult with his bilateral counterparts on the issue and take up
with senior-most leaders in the WB and the Board the seriousness of
the current impasse for not only the establishment of Zimbabwe's
MDTF but for the establishment of trust funds in other countries
where donors have similar concerns as those that arise in Zimbabwe.

3. (SBU) We believe that it is in the interest of the WB's Board
to consider carefully the implications of the WB's current policy
of not accommodating donor restrictive measures in the legal
arrangement of programmatic MDTFs. Without the necessary
assurances from the WB that it will make every effort to ensure
that donor resources are programmed in line with bilateral
restrictions and legislative requirements, the P-MDTF is dead in
the water. ACTION REQUEST: Post requests USED's assistance in
raising this issue to the appropriate decision makers in
consultation with the EDs from other like-minded countries. END


Advantages of the P-MDTF


4. (U) MDTFs are an integral part of many post-crisis transitions.
They can provide targeted resources for recovery and reconstruction
efficiently and effectively. MDTFs reduce transaction costs by
achieving economies of scale in the administration, planning, and
overall management of the funds, and by harmonizing rules and
procedures for disbursing and using the funds. As such, MDTFs
provide an opportunity for practical application of the Paris
Principles. They also promote accountable use of resources aligned
with Zimbabwe's 2010-2012 budgets and national ownership of
post-conflict recovery efforts with reduced transaction costs for
the Government of Zimbabwe (GOZ). In the case of Zimbabwe, the

P-MDTF would allow the WB to re-engage with Zimbabwe despite the
outstanding arrears.

5. (U) The WB has developed significant experience as an
administrator of MDTFs, and is uniquely placed to establish
coherent and qualified management of the trust fund based on
lessons learned. These lessons include the need for a dedicated,
well-staffed secretariat; quick mobilization of sector specialists;
a clear communications strategy; and an awareness of political,
operational, and governance risks. Furthermore, the WB has
extensive experience with large infrastructure projects and has a
long-standing and rapidly growing presence in Harare capable of
managing the trust fund.

6. (SBU) Currently, there are no large-scale rehabilitation and
reconstruction projects being funded. The P-MDTF would provide a
means to pull donor resources together to fund such projects, which
are by their nature very expensive and require very specific
technical expertise seen to be a comparative advantage of the WB.
Donors have agreed to fund water supply and sanitation
infrastructure rehabilitation throughout the country as the first
priority of the P-MDTF. Other potential areas of funding include
rehabilitation of electrical and information and communication


Restrictive Measures


7. (SBU) All donor countries that are considering contributing to
the P-MDTF (EU member states - UK, Netherlands, Germany, Sweden,
Denmark, and Norway - the EC, Australia, Canada, and the USA)
currently have restrictive measures targeted against specific
individuals and a limited group of companies in Zimbabwe. These
restrictive measures prohibit these donors from entering into
direct contracts with these individuals/entities. If the WB,
through the P-MDTF, entered into a contract with one of the
restricted individuals/companies using donor funds it would be a
breach of these measures and in some cases a violation of the laws
of the donor country. It is therefore imperative that the P-MDTF,
in its design, accommodates these restrictive measures.

8. (SBU) However, the WB has indicated that it can only implement
and enforce UN Security Council sanctions and cannot accommodate
targeted measures from individual member countries in the
administrative arrangements with the respective donors. Over the
last several months the donor community and the WB have explored
all possible avenues to accommodate the targeted measures while at
the same time respecting current WB policy. The only available
option, which would allow the WB to retain oversight of the P-MDTF,
would be to change WB policy or make an exception for Zimbabwe.
Alternatively, the WB will have a very limited role to play in the
reconstruction of Zimbabwe at this point in time.


Possible Solutions


9. (SBU) The following solutions to the above impediment have been
considered. However, none of them have proven feasible.

--Implicit or explicit language added into the administrative
agreement: Under this option, a standard MDTF would be used but
with implicit or explicit language in the administrative agreement
that excludes the possibility of the WB entering into a contract
with a banned individual or company. This is against current WB

--Establish a trust fund administered by a bilateral donor: Under
this option, a commercial financial management agent would be
hired, with the Bank providing technical advice. While the WB
could provide general advice on sector policies, priorities, and
investment needs, it would not be possible to separate procurement
from project oversight and thus the WB's role with respect to
implementation would be limited. None of the bilateral donors have
expressed an interest in being the manager of such a trust fund.

--Creation of a revolving fund: A third option considered was the
use of a revolving fund in which an entity (without restrictions)
provides an initial "float" to enable a procurement action to take
place. Upon satisfaction that the selected contractor is a
permissible partner, the donors with restrictive measures would
apply their funding toward the project. Under such an approach,
the donor providing the "float" would have a legal agreement with
the WB. That legal agreement would not reference any restrictions.
It would be through a holding account, under the trusteeship of one
of the participating donors, from which other bilateral resources
would flow when adequate assurances have been made that the
contractor is acceptable. The donors would articulate in an MOU
among themselves the rules governing this holding account. The MOU
would include explicit language referring to the restricted lists.
(NOTE: See para 10 for an explanation of why this option will not
work. END NOTE.)

--WB procurement without funds: In this set-up, the WB would
provide US$1 million of seed money and proceed with procurement,
without the funds in the MDTF, under the understanding that funds
would be transferred from the donor holding account. In the case
of a banned entity being selected, the GOZ would take over the
contract. This option is not feasible since there would not be
upfront funding for the full amount of the contract to be let.

--Government advance: A final option would be for the GOZ to
proceed independent of the P-MDTF with advance procurement. If an
award recipient were unacceptable to donors, the GOZ would incur
the full cost of the contract. The difficulty of this option is
that donor funds could not reimburse the GOZ for its initial
outlay. This option also would not work for a project with
multiple contracts because the process would become impossibly

10. (SBU) Under a revolving fund, the initial funds for the MDTF
account could come from three potential sources:

--the GOZ: This would require the GOZ to deposit an initial
guarantee amount of approximately US$25 million into a WB account,
which, as with any trust fund, would be returnable (perhaps plus
interest) at the closure of the MDTF, if no contractors on the
banned lists have been selected. If and when the restricted lists
are withdrawn, donors would contribute directly to the P-MDTF.
Though this option appears workable, if government funds are
transferred to the WB trust fund, the WB would become vulnerable to
lawsuits from vulture funds or other creditors or claimants.

--Special Drawing Rights (SDRs): The donors have discussed the
possibility that the WB could use SDRs put into its trust but not
cashed in. Apart from the problem of vulnerability to vulture
funds, SDRs are not really equivalent to cash and this would
complicate arrears clearance.

--Donor money provided by a non-traditional donor: Several
non-traditional donors (i.e., China, South Africa, and South Korea)
have expressed interest in becoming members of the P-MDTF. These
countries do not have the same restrictions as Western countries
and therefore could enter into direct agreement with the WB. This
option, which is the WB's preferred solution, is not considered
appropriate by donors for two reasons: 1) it is counter-intuitive
to rely on countries without targeted measures for the
implementation of restrictive measures, as this creates
reputational risk, and 2) it is unlikely that any donor country
will be convinced to provide a "float" that will not be used for
direct project implementation. An additional complication would be
the likely delay that would result from bringing non-traditional
donors on board. The Japanese have been consulted and they have
indicated that they are not yet ready to contribute to the P-MDTF.


Implications for the WB


11. (SBU) With the above options explored and exhausted, donors
are close to ruling out the WB as the trustee of a P-MDTF in
Zimbabwe at this point in time. This may have serious implications
for the WB as an institution in Zimbabwe, as it will be unable to
implement activities with donor financing until such time that
restrictive measures are lifted. The inability of the WB to
accommodate the restrictive measures raises questions about the
WB's ability to administer MDTFs effectively in other contexts
where similar requirements may arise, particularly in fragile and
failing states. The importance of solving this issue therefore
goes beyond Zimbabwe.


Way Forward


12. (SBU) At this juncture, the only way forward is for the WB
to reconsider its policy of not being able to accommodate targeted

13. (SBU) Donors are keen to see the P-MDTF come into existence
under the administrative oversight of the WB. However, this would
require donors to collectively approach the WB Board and President
to pressure them to change policy or make an exception for
Zimbabwe. Post requests the USED to discuss this issue with his
counterparts from other countries and collectively raise the
unresolved concern at the highest levels of the WB in a final
attempt to make the P-MDTF possible under the management of the WB.
(COMMENT: We understand that ED Netherlands has been fully briefed
and may be willing to lead the consultations. END COMMENT.)


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