IRAQ'S PDS: USG NEXT STEPS

UNCLAS SECTION 01 OF 04 BAGHDAD 002821

SIPDIS

SENSITIVE

STATE FOR EB
USDA FOR FAS/OA/ESTERPSTRA,
FAS/FAA/CALEXANDER/JDEVER
FAS/EX/MMCAMBLISS,
FAS/ITP,
CMP/G&F/PLETARTE, LBACHELDER, DWILLIAMS
FAS/IRAQ TASK FORCE/LASCHATZ

E.O 12958: NA
TAGS: EAGR ETRD PREL PGOV IZ
SUBJECT: IRAQ'S PDS: USG NEXT STEPS

REF: A. 2004 BAGHDAD 1578

B. BAGHDAD 1206

C. BAGHDAD 2299

D. BAGHDAD 2527

THIS CABLE CONTAINS SENSITIVE BUT UNCLASSIFIED INFORMATION
FOR GOVERNMENT USE ONLY NOT FOR DISTRIBUTION ON THE
INTERNET.


1. (SBU) SUMMARY: Despite the efforts of the Iraqi and U.S.
Governments, Iraq's Public Distribution (food ration)
System (PDS) continues to deteriorate, leaving a
significant portion of the population with few options to
o
supplement their food needs. As the Iraqi Transition
Government (ITG) attempts to keep the PDS functional, we
believe USG and ITG efforts should be targeted to support
those in Iraq who are truly dependent on the PDS to
survive. We will continue to urge ITG policymakers to
undertake fundamental reform of the PDS at the earliest
possible opportunity. At the same time, the focus of the
Embassy's efforts will shift from intensive daily
monitoring of the PDS' functioning to encouraging and
assisting the ITG towards put programs in place now that
can create a rudimentary safety net for those most
vulnerable as they continue to see less and less of the PDS
benefit. END SUMMARY

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THE PDS
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2. (SBU) Iraq's Public Distribution System (PDS) was set up
to provide a food ration basket to all Iraqis when U.N.
sanctions were imposed following the first Gulf War. While
it is reported to have worked relatively well during much
of the 1990's, anecdotal and spot reporting from both
Baghdad and Regional Embassy Offices over the past several
months indicate monthly food ration deliveries are now
spotty, at best. Sources at the Ministry of Trade (MOT)
report that of an estimated USD 2 billion needed to fund
the PDS in the first half of 2005, only approximately USD
341 million was allocated and spent with another $250
million promised. There have been reports of shortages of
individual ration products as well as some that are missing
completely from the basket.


3. (SBU) Abd' al-Bassit Kareem, the new Iraqi Minister of
Trade told us on May 25 (REFTEL C) that many warehouses are
empty and deliveries in some areas have not been made in
over 2 months. (NOTE: The Minister's information is not
always complete, as evidenced by his statements, reported
in REFTEL D, that there were sufficient wheat and rice
supplies for June and July. END NOTE) Kareem is convinced
that close to 40% of Iraq's population has difficulty
meeting its food needs without the PDS and tells us that he
is committed to reinstating food procurement and
distribution as soon as possible. In a recent USAID food
security field assessment, 51% of respondent households in
17 poor districts in Iraq indicated that they either
"sometimes" or "often" did not have enough food to eat in
January, February, and March 2005.


4. (SBU) To address this problem, Minister Kareem is
working closely with the Ministry of Finance to ensure
funding for new food procurements as well as reforming
internal Ministry processes. He expects this process to be
completed by the end of July. In the interim, the Minister
intends to prepare the public for continuing shortages in
food basket products and to make procurements from
"reliable suppliers of quality products". While the
Minister understands our concern about the PDS system and
our willingness to assist him, he has not invited our
participation in closely monitoring the whole system as we
did in 2004 (REFTEL A).


5. (SBU) Given that the Minister has been out of Baghdad
for the past several weeks (defending his Ph.D. thesis in
Kurdistan),we are not sure what actions are being taken to
solve these problems above and beyond his statements.
Others within the ITG, however, seem to be moving to at
least secure wheat, rice, sugar, ghee and pulses for
Ramadan in September of this year. A key test will be
current wheat and rice tenders. ITG reps say they will
avoid delays in financing by having funds available to the
Ministry of Trade as soon as contracts are awarded. If
this occurs, it will be a significant ITG improvement in
the management of the PDS. In an effort to ensure that
essential products of the PDS are delivered in an
environment of limited cash flow, the MOT apparently has
already decided not to fund some PDS items including soap,
detergent and other non-food items.

--------------
REFORM
--------------


6. (SBU) Senior officials in the Iraqi Interim Government
(ITG) tell us they remain are disposed to reform the PDS
and recognize that this $4 billion burden on the budget is
rife with corruption and inefficiency (REFTEL A). They
report that the cost of the actual commodities provided is
a fraction of the total $4 billion, which instead goes to
distribution and transportation costs, with a significant
degree of corruption built in. Former Deputy Prime
Minister and current Planning Minister Barham Saleh has
committed to putting PDS reform on the ITG agenda, but in
the current political environment both he and Minister
Kareem, his former chief of staff and good friend, doubt
that large-scale reform is possible. In a recent
discussion with Embassy and USAID representatives Minister
Kareem indicated that he saw "no need to reform" the PDS
until 2007 because "the reforms are theoretical." This
contradicts the outlook of Dr. Saleh and DPM Chalabi, who
indicated that PDS reform is necessary now and should have
private sector participation.


7. (SBU) Dr. Said Hakki, Senior Advisor to Prime Minister
Ja'afari, told us on June 29 that the government estimates
the total PDS food basket costs $50 per person but it is
worth closer to $15 by the time it reaches the final
consumer. Dr. Hakki suggested to the PM that the Red
Crescent Society, of which he is a member, should manage
the PDS program. According to Hakki, the Society could
receive $25 per person and be responsible for delivering
$20 of goods to the public, enabling it to use the $5
difference for other humanitarian purposes. He acknowledged
however, that this is "just an idea."

--------------
LIMITED INFORMATION, LIMITED OPTIONS
--------------


8. (SBU) Our current access to information and resources
limit our ability to track the PDS as intensively as we did
in the past (REFTEL B). However, we are working with
Minister Kareem and Minister Saleh to obtain support for
the reinvigoration of plans to carry out two PDS
monetization projects, one in the Kurdish North and one in
Iraq's South. During a recent meeting and follow-up
correspondence with Minister Kareem, USAID proposed a small
pilot monetization project in the North, but the Minister
indicated that he sees little use in supporting a pilot
project that would give his Ministry data by which they
could make policy decisions. Barham Saleh continues to be a
proponent, and with both Kareem and Saleh's strong ties to
Kurdistan, we will continue to support the pilot
monetization project in the North as the most realistic
immediate option. USAID will not move forward without top-
level government buy-in. In addition, close inter-
ministerial cooperation will be necessary and may take some
time to achieve.


9. (SBU) To that end, at the recent U.S.-E.U. Conference on
Iraq in Brussels on June 21-22, 2005 Iraq's Strategic
Vision for National Development document clearly states as
an objective: "The Government also expects to remove
ancillary products included in the PDS basket, as well as
implement pilot project for monetization of the PDS's
benefits." Also, they intend to "Enact a social safety net
program for the poor and vulnerable, which may extend from
reform and monetization of the PDS basket." Moreover,
Iraq's Vision foresees "removing constraints to private
sector development...the future engine of job creation and
economic diversifications." This last point is relevant
when considering replacing the PDS with a private
enterprise driven food system for Iraq. USAID remains in a
position to provide some support for a ITG-led reform
program for the PDS.


10. (SBU) Over the past 12 months we have made extensive
efforts to combine IRMO, FAS, ECON, FCS, MNF-I and USAID
resources to obtain as clear a picture of the PDS system as
possible. The results vary depending on Iraqi cooperation.
Although we are often invited to help the MOT "in a pinch"
the Iraqis have made it clear that the system is now theirs
to manage and theirs to dismantle. To a great extent, the
PDS, as noted above, is dismantling itself. It continues
to fray at the edges with consistent food deliveries
replaced by regional shortages of different commodities at
any one time. Prices continue to rise, putting some
commodities out of reach for the poorer strata of the
population and private traders are without the
financing/tools/infrastructure to import foodstuffs into
the country.

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WHAT CAN WE DO? POST CAPABILITIES AND WHAT MAKES SENSE
-------------- --------------


11. (SBU) With limited ability to influence ITG actions on
the PDS and limited resources at the Embassy; we must
target our efforts in the areas where we can affect
positive change. The Iraqi Brussels Vision Statement
clearly sets out goals on the PDS that we can support.
(PARA 6) These include:

-- Continue to urge the ITG to pursue PDS reform. By
supporting monetization pilots as a first step we will be
well placed to continue to push monetization as the first
step towards the elimination of the PDS. We should support
the intentions of some in the ITG to limit recipients
and/or reduce the number of products that make up the PDS
food basket.

-- Identifying funding for USAID/NGO/WFP/ITG nutritional
programs for primary school children, pregnant and
lactating mothers, and malnourished children and their
families. This will help provide support to vulnerable
populations in targeted districts. We will look for a
means by which to expand food security, employment
generation, and livelihood improvement programs that either
reach or ease the pressure on the 40% of Iraq's population
reliant on the PDS for basic necessities. For example, a
World Food Program School Feeding Program is currently 67%
under funded and with additional financial support could
expand quickly to cover more of Iraq's vulnerable
population.

--- Exploring other USG program possibilities. Title I
subsidized loan programs from USDA could also be considered
as a short- to medium-term mean by which to provide the ITG
with another option to address the needs of those left
behind by a failing PDS.

--- Continue to assist the Ministry of Trade when
requested. On several occasions we have been instrumental
in facilitating communications between various Ministries
involved in the PDS process, obtaining producer and/or
contact information, expediting the L/C process or
providing training for key players in the PDS contracting
and procurement process.

-- Continue to initiate reform dialogue across the ITG,
engaging the Ministries of Trade, Planning, and Finance and
the office of DPM Chalabi.

--- Continue to monitor the PDS to the best of our ability
and share information with the ITG. Although our resources
are limited, we will continue to collect information from a
variety of sources and pass it along to the ITG.


12. (U) REOs Basrah, Hillah, Kirkuk, Mosul minimize
considered.

SATTERFIELD