ZELIKOW-CHALABI DISCUSSION: GOVERNMENT PRIORITIES

C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 000917

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/19/2016
TAGS: ECON ENRG EPET IZ PGOV PREL KCOR
SUBJECT: ZELIKOW-CHALABI DISCUSSION: GOVERNMENT PRIORITIES
AND MAJOR HURDLES

Classified By: CHARGE D'AFFAIRES DAVID M. SATTERFIELD FOR REASONS
1.4 (B) AND (D)


1. (C/REL GBR AUS) Summary: In a March 16 discussion with
Department of State (DoS) Counselor Philip Zelikow, Deputy
Prime Minister (DPM) Ahmad Chalabi took deserved credit for
a series of strategic and tactical victories to meet the
ongoing energy crisis during the past week, the most
important of which was a Council of Ministers' action to
approve liberalization of the imported fuels market. Asked
to offer advice on building blocks for an initial
government program, Chalabi identified building government
legitimacy, provision of basic services, increasing
revenues, and control of corruption as fundamental tasks.
The DPM responded favorably to the idea of an
"International Compact for Iraq" and, in his initial
reaction to the idea, concentrated on lack of governmental
capacity at all levels as an area for cooperation. Chalabi
also offered some grades, quite good to failing, for a
number of the ministries, following up with his advocacy
for Ja'fari's continuing as Prime Minister. Finally, on
Iran, Chalabi concurred that the Iranians were not anxious
to see Iraq succeed. But he added that current policies
seemed largely motivated by fear and a siege mentality.
End Summary.

--------------
An Eventful Week
--------------


2. (C/REL GBR AUS) DoS Counselor Philip Zelikow led
off a March 16 discussion with DPM Ahmad Chalabi with
congratulations on the latter's leadership in pushing an
administrative measure through the Council of Ministers to
open the petroleum product market to imports -- an initial
critical step for the marketization of the petroleum sector
and for meeting the ongoing fuel crisis. In response,
Chalabi thanked the Embassy for its advocacy and text
assistance, noting that the Ministry of Oil had been
charged with immediately drafting implementing
instructions. He then ticked off a whole series of other
measures taken during the week to meet various aspects of
the fuel and energy crises: prospective installation of
metering equipment in the oil fields; enhanced monitoring
of maritime tanker loadings; first post-war train delivery
of fuel product from the Bayji refinery to Baghdad; and the
approval of a quarter of a billion USD in spare parts for
power generation. Chalabi agreed that the initiative
appeared to be slowly shifting to the Government of Iraq
(GOI) and its allies in the energy area and liked the
comparison of the "energy battle" with the WWII "Battle of
the Atlantic."

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Building Blocks for the First 100 Days
--------------


3. (C/REL GBR AUS) Asked to step back and provide
broad advice on basic building blocks to guide an initial
government program, Chalabi identified security, provision
of services, the budget, and corruption as primary areas of
concern.

(a) On security, Chalabi took a broad view, offering that
the acceptance of "government legitimacy" throughout Iraq
would be the true measure of security. Recounting a
horrific anecdote about inter-sectarian violence in which,
the previous day, he had barely saved a friend from
execution in Sadr City and had then taken him to be treated
for his injuries, Chalabi observed that the security forces
are often seen as "killers." "Ordinary people get
kidnapped or killed while the elites negotiate the release
of a handful of the well connected." He argued that the
police and army must become impartial forces with
confidence of all communities -- with improved training and
better intelligence playing roles in the restoration of
popular confidence in these institutions. Asked about when
or whether the government should confront Shia militias
that were taking over Sadr City, Chalabi was firm. The
time for that, he said, was now.

(b) For the improved provision of services, Chalabi
outlined an activist approach. He flagged the need to move
ahead with the joint U.S.-Iraqi energy plan, with both
sides taking specific responsibility for individual items.
Referring to the Council of Ministers' action to liberalize
fuel imports, he added that the entire production and
import of fuel products needed to be "rationalized." He

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also expressed a desire to "immediately" take the Bayji
refinery complex under control of the government. (Comment:
The reference here is to the penetration of Bayji
management and staff by black marketers and terrorist
sympathizers. End Comment.) He added that redundancies in
the petroleum area would be coming on line, with road, rail
and pipeline shipments complementing each other. On a
downbeat note, he acknowledged that Fadhila Party personnel
inside the Ministry of Oil had derailed Prime Minister (PM)
Ja'fari's order to restore the dismissed head of the State
Oil Marketing Organization (SOMO) to office. He implied
that Fadhila attempts to manipulate various oil contracts
coming in through the South were to blame for recent
shortfalls in Kuwaiti shipments of gasoline and other
products. He called this situation a difficulty for
Ja'fari, who is unable to compel Fadhila behavior, given
his need for their parliamentary support.

Chalabi appeared particularly pleased with progress made in
the rationalization of the Public Distribution System (PDS)
-- the universal entitlement system supplying basic
commodities and some other goods to all Iraqis. He noted
that the government had improved its procurement procedures
for bulk goods like wheat, rice and sugar, achieving lower
cost deliveries from foreign suppliers. At the same time,
the government had shifted to domestic suppliers for other
goods, even offering credit support to importers and
traders, in order to stimulate domestic production or local
procurement of agricultural and other products.
Recognizing the need for the GOI to step away from
non-targeted universal entitlements, Chalabi affirmed that
budget allocations for commodity purchases would continue
to fall and that the entitlement rolls would be pared --
beginning with government officials making more than 1.0M
ID per month.

(c) Budget difficulties would be improved, according to
Chalabi, through the elimination of oil "thievery" via
metering in the oil fields and appointment of government
inspectors. Optimistically, he stated that Iraq could
potentially overtake Iran as an exporter by the end of the
year. He came to that conclusion by adding the restart of
northern exports (0.5 mbpd) to the potential increment (0.8
mbpd) provided by ongoing well workovers in the South.
Pushed by Counselor Zelikow to examine the political
ramifications of sharing out oil revenues, Chalabi conceded
that the question hit square on the matter of national
unity. Even without northern exports at present, Chalabi
claimed that the Kurds were drawing 17 percent of oil
revenues. He mused that the Kurds would like to develop
and get their own oil out to market, but opined that the
"Turks won't accept" an independent arrangement. "We need
some wisdom here", he added. Finally, Chalabi underscored
the real weaknesses of the provincial administrations in
spending their budgets intelligently and asked for our
assistance in training personnel in budgeting and
procurement.

(d) Chalabi repeated a warning on corruption that we have
heard him use before, that "it is as dangerous as
terrorism." He said there were "powerful people" involved
and acknowledged that he was having difficulty supporting
either Judge Rahdi, chairman of the Commission on Public
Integrity (CPI - one of the three key institutions engaged
in anti-corruption activity) or the Central Criminal Court
of Iraq (CCCI - the venue for anti-corruption judicial
proceedings). Turning to a controversial point, Chalabi
complained that he could not seem to get cooperation on
tracing money that disappeared during the celebrated
Ministry of Defense (MoD) procurement scandal last year.
(Note: The GOI has demarched the Embassy and Department
seeking our assistance in having the Jordanian Government
provide information on money flows to and through Jordan in
connection with the MoD case.)

Optimistically, Chalabi claimed that 90 percent of major
procurement corruption has disappeared as a result of the
scrutiny now given to all contracts valued at more than USD
3.0 M. The mechanism for this attention is a contracting
committee chaired by Chalabi himself, upon which also sit
the ministers or designees from major institutions,
including the Ministries of Trade, Finance and the Supreme
Board of Audit (SBA). To date, Chalabi noted that the
committee has met 60-odd times, both approving and
rejecting hundreds of contracts. With amusement, he said
that the procedure has created "fear" among ministries
which might be tempted to bring forward specious contracts
for consideration.

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--------------
International Compact for Iraq
--------------


4. (C/REL GBR AUS) Counselor Zelikow then raised the
idea of an "International Compact for Iraq", acquainting
Chalabi with current thinking on the idea. He stressed
that the Compact would permit reciprocal acceptance of
obligations by the international community and Iraq. Both
sides would work toward establishing enforceable
mechanisms governing their contributions toward economic
and political development. He urged Chalabi to look at the
example of Afghanistan, where a comparable effort had
produced new interest from donors and much improved
fulfillment of pledges of assistance. Counselor Zelikow
added that the USG would like to see the Compact developed
as soon as possible after the inauguration of the new
government. To that end, he encouraged Chalabi to begin
thinking of those items where international assistance
would be particularly useful. As an example, he noted that
Iraq might posit a "normal budget" for itself (assuming
restoration of infrastructure and some oil production
gains) that would permit the provision of desired services,
construction of infrastructure and so forth. As described
by the Counselor, in exchange for Iraqi pledges of
measurable actions, the international community could
pledge resources to make up for temporarily lacking Iraqi
revenues.


5. (C/REL GBR AUS) In response, Chalabi began a
discussion of capacity shortfalls that might be addressed
by donors. For example, he noted that the lack of
financial and auditing capacity meant that the GOI cannot
spend the money it has now in a responsible manner. The
governorates were said to be weak at all levels and in all
areas of responsibility. Banking services are not adequate
for standard consumer needs and certainly cannot assist in
a major policy initiative like privatization. The housing
sector is estimated to have a 2 million unit shortfall, yet
promoting private sector developers and housing credits
could be, in Chalabi's view, powerful economic drivers.

--------------
Ministerial Report Card
--------------


6. (C/REL GBR AUS) Looking at prospective government
formation, Counselor Zelikow asked about the respective
strengths and weaknesses of the major ministries. Chalabi
averred that the picture was mixed, with the critical point
everywhere being the quality of leadership at the top.
Quickly running through some of the major ministries,
Chalabi offered the following thumbnail descriptions:

Finance - Best by far, with discipline and quick
availability of critical information. Government assets
are adequately controlled, and there is a realistic
evaluation of capacities of other ministries. Major task
before it is the need to improve the condition of state
banks with an eye toward their sale.

Oil - Terrible situation, lacking in discipline and under
sectarian control (Fadhila). Each deputy minister has
carved out his own fiefdom, and massive reform is needed.

Electricity - Better, but also in need of reform. Lower
levels are ready to respond to good leadership.

Trade - Broken down under the influence of corruption.
Suspect links with "shady merchants" all over the world.

Transport - Similar to Oil, but currently improving after
decision taken to move to FOB import of bulk commodities
for the PDS, thus exposing bogus charges associated with
services and transportation of earlier contracts.

Agriculture - "Ignorance reigns" with no attention to the
needs of farmers.

Water - O.K., but needs help to persuade the Turkish
Government to cooperate on water use and long-term
planning.

Municipalities - "Considerable corruption."

Health - In a terrible state. Brought 61 contracts to the
contracting board, and all were rejected. Another example

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of what results from the idea that individual political
parties "own" certain ministries (in this case, the
Sadrists).

Education/Higher Education - "Pretty good."

Interior - "The minister doesn't go to his office. Each
floor is controlled by a different party, and none of them
talk to each other."

--------------
Looking East to Iran
--------------


7. (C/REL GBR AUS) Counselor Zelikow probed
Chalabi's views on Iran, noting that he did not think Iran
shared the desire of the U.S. for Iraq to become "rich,
strong and independent", given that Iraq could thus become
an investment magnet and major oil competitor. Chalabi
responded that Iran is "motivated by fear" and is afraid
the U.S. will have interests in Iraq that will threaten
it. He then contrasted that Iranian view with that of the
Turks who, he said, favored Iraqi development. Stating
that the U.S. gave the Iranians altogether too much credit
for planning, Chalabi opined that both the Iranian elite
and revolutionary guard were preoccupied with the idea that
Iran is under siege. He thought that Iran, in fact, was
fearful politically, economically and militarily. He
claimed that the Iranians were vulnerable to covert action
(without making any suggestions) and offered that they were
"causing" Al Sadr's forces to undertake offensive actions
against U.S. military. As encouragement for that, he noted
that the Iranians had backed a "winning campaign" by Hamas
in Palestine and had worked to push Israel out of Lebanon.

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A Few Thoughts on Government Formation
--------------



8. (C/REL GBR AUS) Offering some concluding thoughts
on the status of government formation, Chalabi contended
that there was a great deal of tension within the United
Iraqi Coalition (UIC),with Ja'fari's popularity recently
moving up. He said that the UIC will simply find it too
difficult to replace Ja'fari at this stage and claimed that
two days of closeted discussion had produced no change in
the situation. Giving a nod to American concerns, Chalabi
said that Ja'fari is fully prepared to cooperate on
security matters and that any fear that he would permit the
Mahdi Army to operate freely is a "huge exaggeration."

--------------
Comment
--------------


9. (C/REL GBR AUS) At this point it is not clear
whether Ahmad Chalabi, great survivor though he is, will
actually end up with a ministerial appointment. We are
told that his current preeminence, as acting Finance
Minister and "Energy Czar," is regarded as something of a
"poison pill." In other words, the problems of meeting the
current energy crisis are seen as so daunting that his
inevitable failure would have a personal political impact
welcomed by many. Nevertheless, by sheer energy and
decisiveness, Chalabi may succeed. His list of the week's
accomplishments in the energy sectors, including both
strategic and tactical victories, is an indication of
that. Moreover, his political sense continues to be
impressive, and his list of building blocks for a new
government's opening agenda is good. Finally, his
reception of the idea of an "International Compact" should
be seen as altogether positive, though his reactions were
off-the-cuff.


10. (U) Counselor Zelikow cleared this message after
his departure from post.
SATTERFIELD