TRADE MINISTER FIGHTING FOOD SUBSIDY CORRUPTION

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002380 SIPDIS SIPDIS E.O. 12958: DECL: 07/05/2016 TAGS: EAGR ECON ETRD KCOR PINR IZ SUBJECT: TRADE MINISTER FIGHTING FOOD SUBSIDY CORRUPTION REF: A. BAGHDAD 2044 (NOTAL) ¶B. BAGHDAD 2004 (NOTAL) ¶C. BAGHDAD 1286 (NOTAL) Classified By: EconMinCouns Delare for reasons 1.4 (b) and (d). ¶1. (C) Summary: Trade Minister Al-Sudani told us on July 3 that he is ready to install electronic tracking systems in the Ministry of Trade's (MoT) trucks and warehouses to fight corruption in the Public Distribution System (PDS). He said he would like Deputy Prime Minister Barham Salih's Economic Affairs Committee to consider monetization of the PDS after the MoT economic committee has fully explored it. Minister Al-Sudani also explained that he supports the idea of privatizing the PDS SOEs, but did not foresee this happening in the near future. The Minister's desire to gradually reform the PDS puts him in the progressive camp of Iraqi government officials and is a welcome change from his predecessor. End summary. -------------- Attacking Transportation Corruption -------------- ¶2. (C) The Minister explained that last year the MoT lost upwards of $20 million in PDS foodstuffs, through just one of its transportation contracts, because of hijacked and stolen trucks. The previous MoT Chief of Staff has informed us that trucks carrying PDS foodstuffs disappear on a regular basis. Late last year, the MoT started doing contracts on a Freight-on-Board (FOB) basis, giving the Ministry of Transportation (MoTrans) responsibility for transportation arrangements from point of origin to final destination. The previous MoT Chief of Staff suspected that the MoTrans profits heavily from this arrangement. Considering the Sadrist affiliation of the MoTrans, it is highly possible that PDS corruption has been a source of financing for the Sadr machine. ¶3. (C) Minister Al-Sudani told us implementation of electronic tracking systems in the MoT's trucks and warehouses is "an easy and good idea," and he is ready to implement such a system to fight corruption in the Public Distribution System (PDS). We told the Minister that the World Bank (WB) is prepared to fund electronic tracking systems for the MoT, and he asked us to put the WB in contact with Adnan J. Shareefi, MoT Chief of Staff. ¶4. (C) We have been encouraging the MoT for at least the last six months to install electronic tracking systems in its trucks and warehouses. The previous Minister resisted such an idea. Minister Al-Sudani's embracing of tracking systems as a tool to fight corruption within the PDS is indicative of his overall attitude towards the PDS, which reflects his belief that it is corrupt, inefficient, and badly in need of reform. -------------- -------------- Moving Monetization, a Corruption Inhibitor, Up a Level -------------- -------------- ¶5. (C) The Minister explained he is creating a special economic committee within the MoT to consider PDS reform and other trade issues. He invited the Embassy to take part on this committee, and we expressed our thanks and desire to assist in any way possible. Minister Al-Sudani said one of the key issues the committee will consider is monetization of the PDS. He explained that he then wants to move the question of whether or not to monetize the PDS to the Economic Affairs Committee, chaired by Deputy Prime Minister Barham Salih. (Minister Al-Sudani said on June 5 that he supports monetization as a means to reduce opportunities for corruption and encourage private sector development in food distribution. (Ref B)) -------------- Building Competence? -------------- ¶6. (C) Minister Al-Sudani told us he has not yet made drastic personnel changes in the management of the PDS. (The Minister on June 5 said he planned to give the PDS Director Generals about 30 days to demonstrate their competence and honesty, and if he was not satisfied, he would replace them. (Ref B)) He explained that he wants to make gradual changes in MoT management positions. Note: Later on July 3, we learned that the Iraqi Commission on Public Integrity had arrested Khalil Assi, Director General of the Grain Board, one of the two MoT state-owned enterprises that manage the PDS. We are not yet sure of the charges against Director Khalil. End note. BAGHDAD 00002380 002 OF 002 -------------- Considering Privatization -------------- ¶7. (C) Minister Al-Sudani said he believes some aspects of the MoT's state-owned operations should be privatized now, while others should wait. He told us privatization could be a "quick solution" for Central Markets, an MoT state-owned enterprise (SOE) that manages shopping centers, because of its poor condition after extensive looting and because 6,000 of its employees currently "have no salaries." The Minister was receptive to longer-term privatization of Foodstuffs and the Grain Board, the two MoT SOEs that manage PDS procurement and distribution, but he did not foresee this in the near future. We explained our position that the GOI needs to first pass a law that ensures fair and transparent privatization, including the creation of an independent agency to oversee the process, before undertaking privatization efforts. ¶8. (C) Minister Al-Sudani's desire to quickly privatize the troubled Central Markets SOE reflects a distorted view shared by other GOI officials of the purpose and role of privatization in Iraq's transition to a free-market economy. Some GOI proponents of privatization view it as a way to unload unprofitable SOEs, while at the same time revitalizing potentially profitable ones and then maintaining significant government ownership in them. Privatization done properly could not only be a powerful tool for increasing efficiency, but would also serve to fight government corruption. In the case of the PDS, privatization would eliminate a major opportunity for corrupt behavior. -------------- Facing Down Reform Opposition -------------- ¶9. (C) Several times during the meeting, Minister Al-Sudani told us he favors "gradual change" of PDS operations, though he fully supports reform. Considering the historical corruption of the PDS, and the likelihood that this corruption has threaded its web throughout the MoT, the Minister's caution is not surprising. The $3 billion procurement budget of Foodstuffs and the Grain Board (9% of the total GOI budget) comprises a significant source of income for corrupt MoT officials and of power for the MoT, which has a combined 2006 operating and capital budget of about $33.5 million. ¶10. (C) As Minister Al-Sudani works to implement his reform vision, which would necessarily decrease the size of the MoT and lessen its influence, he faces significant resistance within his own ministry. Add to this the potential political ramifications of removing an entrenched "entitlement," and the Minister's support for reform and eventual dismantlement of the PDS makes him a liberal and progressive economic reformer by Iraq standards. Indeed, at one point during the meeting, Minister Al-Sudani enthusiastically said to us: "Please bring me ideas!" It will be interesting to see if DPM Barham Salih uses his role as Economic Affairs Committee head to discourage or dampen Minister Al-Sudani's efforts. SATTERFIELD