IFIS, DONORS DISCUSS FISCAL GOVERNANCE AND

C O N F I D E N T I A L SECTION 01 OF 03 ABIDJAN 001036

SIPDIS

SIPDIS

STATE PASS TO USTR C. HAMILTON, JACKSON
TREASURY FOR D. PETERS
USAID FOR C. GARRETT, S. SWIFT, M LEMARGIE
ADDIS, PARIS, LONDON FOR WEST AFRICA WATCHERS
ACCRA FOR WARP P. RICHARDSON, MCCOWN
DAKAR FOR FAS, FCS

E.O. 12958: DECL: 10/02/2017
TAGS: EFIN IMF ECON PGOV PREL EMIN EAGR ENRG EPET
IBRD, IV
SUBJECT: IFIS, DONORS DISCUSS FISCAL GOVERNANCE AND
EVENTUAL HIPC; UNOCI DISAPPOINTMENT WITH ROLLOUT OF
AUDIENCES FORAINES

REF: A. ABIDJAN 765


B. ABIDJAN 753

C. ABIDJAN 1347 (2006)

Classified By: POL/ECON: ERV MASSINGA, reasons 1.4 (b,d)


1. (C) Summary. International Financial Institutions
(IFIs) staff convened top bilateral donors September 28 to
discuss their negotiations with the Government of Cote
d'Ivoire (GOCI) on fiscal controls and next steps. Cote
d'Ivoire is staying current with the July 2007 arrears
financing package (reftel a),and has raised money to pay its
50 percent of outstanding arrears on the local bond market.
The IFIs are imposing stiff fiscal control and transparency
measures in the energy and cocoa sectors, and appear
reasonably upbeat at the prospect these policies will
succeed. If the GOCI remains current with its arrears
clearance plan and the fiscal controls work as designed, Cote
d'Ivoire could begin Highly Indebted Poor Country (HIPC)
negotiations in earnest by mid-2008. The IFIs are pushing
forward with these aggressive plans despite obvious
disappointment among the international community at the
failure to move forward on disarmament and the weak showing
so far in the audiences foraines program to provide birth
certificates to potentially millions of Ivorians. End
Summary.


2. (C) The World Bank, African Development Bank (AfDB) and
the IMF convened top bilateral donors on September 28 to
provide a status report on efforts to create durable,
transparent fiscal controls and next steps towards a Poverty
Reduction and Growth Facility (PRGF) and eventual
consideration of a HIPC debt reduction. Despite overall
disappointment with the failure to move on disarmament and
the feeble rollout of the audiences foraines process seen
thus far (see para 9),IFI staff were relatively upbeat at
the prospect of making enough strides in the coming year to
allow for entering into serious HIPC negotiations by mid 2008.


3. (C) IFI Staff reviewed with satisfaction the successful
financing of the July 2007 package that cleared World Bank
and AfDB arrears and which paved the way for the IFI's
reengagement with Cote d'Ivoire. In September 2007, Cote
d'Ivoire launched a successful bond issuance for CFA 225
billion (USD 460 million) at 6 percent interest, of which CFA
120 billion will be used to repay the World Bank for its
up-front loan to clear 50 percent of the over USD 400 million
arrears as called for in the July agreement. Another CFA 80
billion will be used to repay the AfDB 33 percent of the
country's arrears with that institution (again, according to
the July package) and the rest to be used to finance urgently
needed infrastructure improvements. During roundtable
discussions, IFI staff noted that 80 percent of the bonds
were sold within the region, a not-so-subtle point of pride
at having convinced Ivorian authorities to avoid riskier and
more expensive options such as the proposed summer 2007 JP
Morgan deal (reftel a).


4. (SBU) The IFIs presented an aggressive Governance
Support and Economic Relaunch (AGRE in French) program
designed to produce substantially greater levels of
transparency in government spending. The AGRE has
successfully pushed the Ministry of Finance to return to
regular budgeted expenditure mechanisms for at least 70% of
national spending for the 2007 budget, an improvement over
the past three years, in which the Ministry has largely
abandoned its formerly good governance practices by financing
spending through unbudgeted and opaque ad hoc "advances."

Energy
======


5. (C) On the critical question of energy (which in 2006
topped cocoa and coffee as the country's top income
generators, producing approximately USD 1.35 billion versus
USD 1.1 billion),the IFIs have succeeded in finishing audits
of the state-owned refinery (SIR) and the state petroleum
company PETROCI. Both audits are being reviewed by IFI staff
in Washington before being made public. The third energy
audit, covering the electrical generation industry, should be

ABIDJAN 00001036 002 OF 003


done by the end of 2008. The petroleum and gas producing
sector were subject of a number of recommendations to assure
Cote d'Ivoire and the sub-region better supplies of
gas-fueled electricity in the medium and long term, perhaps
the most important of which is a suggestion to change the
manner in which gas is priced. This is a an indirect
critique of the current controversy involving the Ministry of
Energy, PETROCI and U.S. firm Devon Energy, in which Devon's
existing gas contract keeps the price of delivered gas at
roughly 1/2 that of gas produced by competitors CNR
(Canadian) and Foxtrot (a 80/20 percent consortium between
French company Bouygue and PETROCI). PETROCI would like to
purchase Devon's Ivorian production network, and Devon
executives have told Emboff that PETROCI has attempted to
pressure the Ministry of Energy into avoiding renegotiating
Devon's gas production contract to allow higher gas prices
(which would thus encourage new investment and production) in
order to keep Devon's asking price down. Based on the
couched language of the aide memoire distributed at the Sept
28 meeting and conversations with Devon executives, the IFIs
have made known their reluctance to see a state-owned firm
purchase major new assets while the country itself is the
beneficiary of substantial debt reduction and international
assistance.


6. (C) IFI staff have won Ivorian acceptance of the terms
of the Extractive Industries Transparency Initiative. While
joining the EITI was not a prerequisite for the July arrears
clearance and IFI reengagement package, the IFIs and a number
of bilateral donors (reftel b) put strong pressure on the
GOCI to join. The government reports it is in the midst of
forming an EITI committee (with civil society participation)
and writing its membership agreement. In addition to the
EITI commitment, the IFIs have pushed the government to
create a ministerial Oil Committee (composed of the
Ministries of Finance (nominally independent, but leaning
towards the President's FPI) and Energy (FPI)). The
Committee will monitor oil's physical, revenue and tax flows,
and forward reports to the Council of Ministers (presided
over by the Prime Minister and attended by all ministers) as
an additional means of bringing transparency to the sector.

Cocoa
=======


7. (C) On the question of coffee and more importantly
cocoa, the IFIs have put into place a system of strict
supervision of the quasi-governmental cocoa control
organizations (reftel c). The cocoa bodies will forward to
the IFIs their receipts on a quarterly basis, and will review
with IFIs plans for spending or investing those funds. Since
2001, the IFIs have estimated between USD 600 and USD 800
million in "parafiscal" taxes have been collected for the
ostensible support of the industry and its smallholding
farmer/producers. Much of that sum, according to the IFIs'
aide memoire and other reports "cannot be satisfactorily
accounted for." Bank staff told Emboff separately that the
renewed attention to the scandal of the quasi-governmental
"Fonds del Regulation and Control" purchase of a chocolate
factory in Fulton, New York is representative of
long-standing misfeasance in the sector (septel). In
addition to strict review of cocoa receipts, the IFIs have
won a modest reduction in parafiscal taxes (CFA 2.65 from CFA
36) and are pushing for even deeper cuts in the future. The
EU representative at the briefing pressed the IFIs to demand
the outright elimination of the taxes.

Next Step - HIPC in 2008?
=======


8. (C) If the AGRE, with the critical energy and cocoa
control elements, is well managed, and Cote d'Ivoire stays
current with its arrears clearance package, IFI staff
envisions revising the 2002-era Interim Poverty Reduction
Strategy Paper (I-PRSP) and completing a new PRSP as
precursors to "moving forward" in mid -2008 with negotiations
for a Highly Indebted Poor Country (HIPC) "decision point.
Such a relatively aggressive timetable would enable the IFIs
to decisively reduce Cote d'Ivoire heavy indebtedness (total
indebtedness is 71 percent of GDP, and scheduled debt

ABIDJAN 00001036 003 OF 003


payments, principal and interest, are 3.9 percent in 2007).

Deputy SRSG Discusses SYSG's Consideration of a new SRSG,
Initial Audiences Foraines Rollout
--------------


9. (C) Prior to the IFIs, briefing, Deputy SRSG (and UNDP
Head) Georg Charpentier told Emboff that the United Nations
Operation in Cote d'Ivoire (UNOCI) was disappointed and
mildly surprised at the weak performance of the audiences
foraines teams seen heretofore. He reported that the team in
Ferkessedougou (Prime Minister Soro,s hometown) and Gagnoa
(President Gbagbo,s hometown) had already come back to
Abidjan, citing a lack of support, and after essentially
token efforts in the field. UNOCI had expected these teams
to stay in the field and be supplemented by ever-increasing
numbers of other teams in other locations, all building to an
effort perhaps able to address the potentially massive
numbers to be processed. Initial results are not
encouraging, but UNOCI will push all parties to move the
process forward.


10. (C) Comment. Despite the disappointment related to DDR
and the audiences foraines, the IFIs are moving with alacrity
to fashion a system that can (hopefully) set the stage for
economic growth and encouragement of new investment. The
country's leadership is intensely and almost exclusively
focused on the political crisis, and does not appear to be
focusing on these negotiations, although the measures being
adopted will gradually impinge on the opaque sources of
funding upon which the President's faction has long relied.
The international community, led by the IFIs, are reasonably
optimistic that in the fiscal and economic realm, they will
be successful. The results of the upcoming sale of Devon
Energy's Ivorian assets and the rollout of the 2007-2008
cocoa harvest will be key indicators of how the IFI's
strategy is faring. End Comment.
NESBITT