POLAND'S ECOFUND: CRISIS OR MISUNDERSTANDING?

UNCLAS SECTION 01 OF 04 WARSAW 001161

SIPDIS

SENSITIVE

DEPT FOR EUR/NCE DKOSTELANCIK AND MSESSUMS
DEPT FOR EB/IFD/OMA AND OES/ENV

E.O. 12958: N/A
TAGS: EAID SENV KSCA PL
SUBJECT: POLAND'S ECOFUND: CRISIS OR MISUNDERSTANDING?

REF: A. WARSAW 450


B. WARSAW 1898 05

Sensitive but unclassified - not for internet distribution.


1. (SBU) Action request for State, EB/IFD/OMA and OES/ENV,
paragraph 10.


2. (SBU) Summary. Internal disputes at Ecofund discussed
in Ref A have grown worse, threatening to disrupt the
operations of the Fund. At the heart of the matter is the
role that the Polish Treasury Ministry is playing at Ecofund,
and donor state dissatisfaction over losing blocking control
over the Fund's decisions. Donor state Switzerland is now
considering withdrawing from the Fund, although it is
uncertain whether it will follow through. Assuming continued
full donor state participation, the Fund would expect to
disburse roughly $170 million on projects before its sunset
date in 2009. Of course, this would be less if some donor
states withdraw. As a group, the four remaining European
donor states provide about 50 percent of the Ecofund budget.

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Veto Power Revoked
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3. (U) As described in Refs A and B, Ecofund was set up
with contributions from six original donor states: the US,
Sweden, France, Italy, Norway and Switzerland. (Sweden
withdrew from the Fund in 2004 due to Poland's EU entry, on
the grounds that it does not provide bilateral assistance to
EU members.) The U.S. provided its original funding via
Poland's July 3, 1991 Paris Club debt rescheduling, in which
10 percent of the "principal" was defined as "canceled
principal" to "be used by Poland to finance an environmental
fund ..." In contrast, we understand that the European
donors provide support on an annual basis.


4. (SBU) Ecofund's Supervisory Council can consist of 7 -
15 seats according to its statutes, and now has 15. It
essentially controls the Fund's activities by approving
projects and personnel moves. Votes are decided by a
majority of two-thirds. Originally, each of the six original
donor states had one representative on the council, with the
other nine appointed by the Government of Poland. The 2004
Swedish withdrawal left the fund with 14 council members.
Because the Polish Belka Government did not did not appoint a
Council member to replace the Swedes, the donor states
continued to be able to block decisions by voting as a group.



5. (SBU) This situation changed with the fall 2005 election
of a new Polish Government. The new Secretary of State in
the Ministry of the Treasury responsible for the Ecofund,
Pawel Szalamacha, has sought to make changes in the personnel
and operations of Ecofund (Ref A). The Ministry of Treasury
moved quickly to establish control of the Supervisory Council
by appointing a 15th member that allows a GOP voting bloc to
defeat any threat of donor state veto. Some donor state
representatives, notably the French and Swiss, have reacted
negatively to the change in the Council's decisional balance,
noting that the donor states essentially no longer have
control over how Ecofund spends their financial
contributions. The European donor states believe that the
spirit of cooperation that characterized Ecofund has been
damaged by Szalamacha. We have a less pessimistic
perspective. Misunderstandings have compounded the difficult
changes Szalamacha has pushed through. But he has told us
that he viewed Ecofund as overstaffed and overpaid, certainly
an arguable proposition. Now that he has streamlined
Ecofund's management, he has stated his willingness to
restore the previous decisional balance by vacating one of
the 15 current positions.

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Absence of a Financial Plan
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6. (SBU) Another bone of contention between the GOP and
donor states has been the absence of an Ecofund financial
plan. The Supervisory Council drafted and approved a plan
late last fall, and submitted it to the Ministry of Treasury
for approval. In the absence of a financial plan the
Supervisory Council was not able to approve projects. (Note:
There are currently 11 projects awaiting Council evaluation.)
Secretary of State Szalamacha eventually approved the
financial plan on May 25, 2006, approximately six months
after the draft was received. Furthermore, the donor states
were not officially notified of Szalamacha's action until
June 6, 2006. The fact that Szalamacha failed to either
approve the financial plan or to send it back for so long to
the Supervisory Council for cause arguably constituted a
breach of Ecofund by-laws.
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Politicizing Ecofund
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7. (SBU) There is a perception among European foreign
donors that Ecofund is viewed by the current GOP as a tool of
the state and not an independent Foundation. The GOP seems
bent on coopting the fund entirely after firing all of the
independent members of the Supervisory Council (Ref A) and
recently removing three of five members of Ecofund's
Management Board, ostensibly for mismanagement. Whereas in
March Szalamacha demanded the entire Management Board be
fired, he was content at the May 24 meeting to go after only
three members, notably sparing, at least for the time being,
the Board's embattled President, Maciej Nowicki. The donor
states refused to take part in the meeting, with all five
walking out shortly after the meeting's agenda was approved.
Donor states objected to the motion to fire the Board, since
no explanation to justify the dismissals had been presented,
but were unable to block this item with only five votes
against the rest of the Supervisory Council's 10 votes.


8. (SBU) In a letter (text below) dated June 6, 2006,
Szalamacha suggests that two Board members will not be
replaced, and that an open competition will be held to
determine the third member. Szalamacha has stated he
believes the Board should consist of only three members.
Furthermore, Szalamacha describes as "urgent" the need to
address the high salaries of Board members. Ecofund by-laws
state the Management Board's President should earn 12 times
the average Polish annual salary. A survey is conducted each
year to determine the President's salary, which is currently
approximately USD 10,000 monthly. Szalamacha also mentions
the "Supreme Chamber of Control's" (Note: GOP equivalent of
the GAO) seemingly negative position on this matter, again
suggesting that the GOP sees Ecofund as a state organization,
and concluding that Ecofund's salary levels greatly exceed
the normal public service scale. Szalamacha will also
reportedly seek to cut an unknown number of Ecofund's staff,
currently 42 strong. It is important to note that overhead
costs, such as staff salary, are paid for by donor states'
contributions. Ecofund salaries in 2005 constituted
approximately 3.6% of Ecofund's total income.

BEGIN TEXT

Warsaw, 6 June, 2006

The Council of the EkoFundusz Foundation
ul. Bracka 4,
00-502 Warszawa

Dear Sirs,

With reference to the passing, on May 24, 2006, by the
Council of the Foundation, of a resolution on dismissal of
three out of five Members of the Board of the Foundation, I
would like to thank those of you who supported the Founder's
motion. I acknowledge the results of the voting.

Additionally, I would like to inform the Members of the
Council of the Foundation that, on May 25, 2006, the Minister
of the Treasury approved the Financial Plan of the EkoFundusz
Foundation for the year 2006.

In connection with the changes made to the composition the
Board, I would like to kindly inform you that I uphold the
position of the Ministry of the Treasury comprised in the
letter of March 13, 2006, concerning the manner in which the
candidates for the Board are selected, and put forward a
motion for holding a competition in order to select the third
Member of the Board of the Foundation. In the opinion of the
Founder, selection of a candidate by way of competition will
ensure transparency of the procedure and will allow
appointment of a person who is politically neutral, solely on
the basis of the criteria of competence and suitability for
the position. In the Founder's view, the requirements that
must be met by candidates should, in particular, take into
account experience in the field of project budgeting,
familiarity with financial issues (e.g. banking) and
environmental problems.

At the same time, I would like to draw your attention to the
urgent issue of solving the problem of remuneration received
by the Foundation's President and Members of the Board. The
position of the Supreme Chamber of Control in that matter
placed the Ministry of the Treasury in an uncomfortable
situation, as the general public is sensitive to such
ethically dubious behaviour.

With kind regards,

Pawel Szalamacha

END TEXT

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Ecofund Withdrawal
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9. (SBU) Against this backdrop, the European donor states
are considering their options. The Swiss representative has
advised FCS, which represents the U.S. on the Council, that
it can cancel its financial commitment and withdraw from the
Ecofund and this move is under consideration in Bern. Italy,
France and Norway have also investigated this option, but
reportedly can not decommit funding at this time, and so are
not able to withdraw completely from Ecofund. The European
donor states simply can not accept that they no longer have
control over Ecofund's activities, despite funding them
(along with USG contributions, described in Ref B). This
fact, coupled with the Ministry of Treasury's blunt personnel
moves at the Fund, has left the European donors irate and
looking for options to recapture influence. However, at this
point, it is not clear what the European donors will demand
from the GOP to settle the quarrel. They will likely demand
that the fifteenth Council member be removed, restoring their
veto power. Szalamacha could preempt such a proposal through
unilateral action. Furthermore, no institutionalized
procedures would prohibit the GOP from reappointing a
fifteenth Council member in the future.


10. (SBU) The next Ecofund Council meeting is scheduled for
June 19. Given Treasury's approval of the financial plan, it
is hoped that the Council will review and decide upon eleven
projects currently up for review. Two projects have
significant U.S. content. At a pre-Council meeting strategy
session convened on June 12 between representatives of the
donor states at the Swiss Embassy, it was agreed that all
donors representatives will attend with the exception of the
Swiss representative, who is on emergency leave and can not
attend. Donor representatives are taking a careful "wait and
see" approach, mindful that Ecofund operations have been
politicized, but optimistic that passage of the financial
plan will allow the Fund to return to its core function of
financing needed environmental projects.


11. (SBU) For Department's background: It is our
understanding that the main U.S.-Polish agreement providing
general guidance on this subject is Poland's 1991 Paris Club
debt rescheduling agreement, initialed July 3, 1991. As
reported in Ref B, neither the U.S.-Polish agreement -- nor
any subsequent communications between our governments on GOP
Ecofund payment schedules which we could locate in Embassy
Warsaw files -- provides guidance on how the environmental
foundation should operate or evaluate projects. In contrast,
the subsequent agreements between Poland and other donors --
the Polish-Italy, Polish-France, and Polish-Switzerland
agreements -- stipulate in one way or another that a certain
share of Ecofund projects will go to companies with donor
nation involvement. The U.S. agreement also involved a
one-time cancellation of debt in 1991. In contrast, we
understand that Italy, France, Switzerland, and Norway fund
their Ecofund participation annually, presumably out of their
current development assistance budgets. While Post does not
believe consideration should be given now to withdrawal, it
would be useful for Post to have a strong grasp of the legal
status of the remaining U.S. funds that have not been
disbursed.

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Comment and Action Request
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12. (SBU) Action request. For our own benefit, Post
requests Department to clarify the legal status of the
theoretically remaining U.S. originated Ecofund funding yet
to be disbursed.

13. (SBU) Comment. Throughout the dispute at Ecofund, Post
has tried to maintain neutrality and sought to act as a
bridge between the two quarreling sides. Post ultimately
views Ecofund's continued operations as being more important
than the political squabbles currently troubling the Fund.
We believe that if the decisional balance can be restored on
the Supervisory Council, the European donors will begin to
look past their current grievances and will move forward with
Ecofund business. Post notes that Department of Commerce A/S
Bohigian will meet with Pawel Szalamacha on June 22 and will
stress USG interest in the continued operation of Ecofund.
HILLAS