GOP DECENTRALIZATION "SHOCK" A NECESSARY BUT

UNCLAS LIMA 004519

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV KDEM SNAR PE
SUBJECT: GOP DECENTRALIZATION "SHOCK" A NECESSARY BUT
INCOMPLETE STEP FORWARD

REF: A. LIMA 4451


B. 05 LIMA 4661

C. 05 LIMA 4634

D. 05 LIMA 4633

E. 05 LIMA 4217

Sensitive But Unclassified. Please handle accordingly.

Summary:
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1. (SBU) President Garcia has announced a series of measures
to accelerate the GOP's decentralization process, including
the transfer of many government functions and over $1 billion
USD to the regions and municipalities in 2007. The political
motive behind the initiative is clear -- Garcia will be
transferring substantial blame for poor services to
mostly-opposition controlled regions and municipalities.
Many local governments are unprepared to assume the new
duties. For all that, the Garcia proposal has some strong
merits. The Toledo government's effort to build professional
capacity before transferring authorities moved too slow.
Moreover, moving resources and decision-making closer to the
people is a rational way to address the dangerous feelings of
exclusion that this year's elections made so evident in
Peru's highlands. One controversial proposal in the package
would cede parts of the GOP's control of the licit coca
market to the Cuzco regional government. End Summary.

Garcia's decentralization "shock"
--------------

2. (U) President Garcia has declared that decentralization,
or the transfer of government responsibility and resources
from the national to the regional and municipal governments,
is his most important state reform. On 10/18 Garcia
announced 20 measures to advance the GOP's decentralization
process and moved up the deadline by three years for the
central government to transfer certain financial and
operational responsibilities to regional and local
authorities. (Ref C, D). In total, the package would shift
185 government functions, including some social programs and
3.5 billion soles (over $1 Billion USD) to regional and
municipal governments by the end of 2007. Significant
elements in Garcia's package include:

-- Through pilot projects, the national government will
transfer primary health care and primary educational
responsibilities to the municipalities;

-- Regional governments will select and manage regional
program directors, who currently report to the central
government ministries;

-- The regional government of Cuzco will assume the functions
of the National Coca Company (ENACO) (see para 7);

-- The national government will transfer road projects,
financed by World Bank and International Development Bank
credits, to the regions;

-- The regions will manage electricity distribution;

-- The Transportation and Communications Ministry will
connect over 4000 communities to the internet in the next
year;

-- The government will offer tax incentives for municipal
infrastructure projects and industry in the Andean highlands;

-- The government will relaunch the process to form
"megaregions" that stalled in October 2005 after failed
referenda (ref B); and,

-- The government will provide training for local and
regional governments as they assume more responsibilities.

All that glitters...?
--------------

3. (SBU) The head of USAID's Pro Decentralization Program
(PRODES) told Poloff the proposals are a necessary step
forward and the political will appears real, but he
identified three concerns: 1) legal structures are lacking


(i.e., an Organic Law for the Executive Branch, a Public
Service Employment Law),2) the would-be regional and local
implementers need training and preparation to be able to
successfully take over the responsibilities, and 3) the GOP's
National Decentralization Council (CND) that will coordinate
and facilitate the transition lacks the technical
capabilities to do so.


4. (SBU) USAID program experts highlighted three additional
areas that need attention for the decentralization effort to
be successful. First, to date the GOP has made little
progress on setting national standards for the delivery of
services that now will be responsibility of regional and
local government, raising the prospect of discrepancies in
the quality of services provided by the regions. Second, the
national government agencies have a limited capacity to
monitor local performance. Third, decentralization raises
complex financial management and accountability issues
regarding the transparent transfer of resources from the
central to the regional and local levels. While the GOP has
taken steps with a system to track general movements of
resources, additional monitoring and oversight are necessary.


5. (SBU) Some commentators have criticized the proposals as a
collection of cherry-picked announced measures with political
motivations. The former head of the GOP's National
Decentralization Council (CND),Luis Thais, in an "El
Comercio" editorial said the measures were disjointed and
lacked a focused vision and an integrated national strategy.
Others speculated that the announcement was timed to benefit
APRA in advance of the November regional and municipal
elections. The current head of the CND, who will oversee the
transition, fed this skepticism when he told press after
Garcia's announcement that he was unfamiliar with over a
third of the measures. Analysts in Arequipa told PolCouns
that the regional and municipal governments doubt the central
government's commitment and intentions, and will wait for
tangible changes before they believe.


6. (SBU) CND Technical Secretary Wilfredo Silva defended the
GOP plan, but acknowledged that the schedule for transferring
responsibility is ambitious and a major roadblock is the
local and regional capacity to assume these new roles. He
blamed the skepticism surrounding decentralization on the
prior government's lack of commitment, which was exacerbated
following its decisive loss in the 2002 regional elections.

ENACO to Cuzco - A Danger of Increased Coca Cultivation?
-------------- --------------

7. (U) One of the more controversial proposals is the
transfer the National Coca Company (ENACO),which oversees
management of the licit coca market, to the Cuzco regional
government (Septel). (Note: ENACO is the state-owned company
responsible for buying and selling licit coca. According to
law, only the GOP through ENACO can commercialize coca. End
Note.) The GOP sent implementing legislation, which is still
under consideration, to Congress for this transfer. The
draft law proposed that the national government retain two of
the five seats on ENACO's governing board. According to GOP
proponents, this would allow the national government to
ensure that ENACO maintains the licit coca control and
marketing functions at a national level and that Peru
complies with international treaty commitments.


8. (SBU) Comment: Although 70 percent of Cuzco coca goes to
narcotrafficking, Cuzco has the highest concentration of
traditional coca users and the most suppliers of licit coca.
Both we and the GOP are interested in driving a wedge between
traditional licit producers and coca farmers who supply
narcotraffickers. Cuzco Regional President Carlos Cuaresma
last year tried to strengthen his political hand with a
regional ordinance, eventually overturned, that declared all
coca in Cuzco legal (Ref E). The challenge with the ENACO
proposal will be to give Cuzco the appropriate traditional
use status without letting regional politicians use it as a
banner to "legitimate" newer coca that goes to
narcotraffickers; the latter would only stimulate increased
coca production. End Comment.

Comment:
--------------


9. (SBU) A massive shift in government authority is
complicated in Peru because the country has always been
highly centralized and has few domestic models to learn from.
Moreover, President Garcia's decentralization proposals are
freighted with controversial political motives. Garcia knew
even before the November 19 regional elections that his party
would take a pasting in them; his rapid transfer downward of
funds and responsibilities will make it harder for
opposition-led regional governments and municipalities to
blame the central government for poor services and
infrastructure.


10. (SBU) A fundamental challenge in Peru is the lack of
citizen confidence in democratic institutions. Pushing down
responsibility for essential services to unprepared local and
regional Governments without adequate preparation may
exacerbate this problem. At the same time, the profound
feelings of exclusion that were so visible during the spring
2006 national elections (and which fed Ollanta Humala's
radical candidacy) are best addressed by putting more
decisions and resources close to communities, particularly in
the highlands.


11. (SBU) Given this mixed picture, the Garcia government's
plan may be among the best choices in a menu of bad options.
The Toledo administration's approach, which emphasized
building capacity before transferring authority, moved so
slowly that it was hard to see when the process would come to
fruition. Many local governments were in no hurry to assume
more responsibility -- and blame -- for providing services.
While Toledo can be justly faulted for giving only
intermittent attention to decentralization, it is equally
true that many regional/local governments appeared to give
low priority to building the capacity to take on more
functions. There is justification for thinking that they
need to be stressed by having a quicker-paced process thrust
upon them. Many unprepared governments will fail the test
they are about to undergo. It remains unclear whether and
how the national government will address such failures.


12. (U) The Embassy, through USAID, has provided technical
assistance to the key agencies and has trained nearly
one-third of the country's municipalities and regional
governments, but the need for additional capacity building is
large. We will remain engaged in supporting and
consolidating the decentralization process as an important
component of our efforts to promote good governance. End
Comment.
STRUBLE