CORRECTED COPY: ACCELERATING BUDGET EXECUTION

C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 001576

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/13/2017
TAGS: ECON EFIN PREL EAID PGOV IZ
SUBJECT: CORRECTED COPY: ACCELERATING BUDGET EXECUTION

REF: A. BAGHDAD 1531

B. BAGHDAD 1474

C. BAGHDAD 1408

D. BAGHDAD 441

Classified By: Deputy Chief of Mission Daniel V. Speckhard for reasons
1.4 (b) and (d).

(U) This cable is a corrected copy of Baghdad 1550.
Corrected text is in paragraphs 1 and 13.


1. (C) Summary: Capital budget execution in Iraq is a
problem acknowledged by all levels of the Iraqi government.
The GOI recognizes that delivering goods and services is a
vital aspect of economic governance, and a major element of
the GoI's popular reputation. Given the importance of
capital budget execution as the Iraqi contribution to the
Joint Economic Transition Plan, post has focused intensively
on improving GOI's performance and capacity for both
Ministerial and Provincial budget execution over the past
several months. Deputy Prime Minister for Economic Affairs
Barham Salih is chairing the effort to accelerate capital
budget execution, which averaged 22% for 2006. In this cable
we describe the latest information on capital budget
execution for 2007, the GOI and USG efforts to improve these
rates, provincial budget execution, and clarify terminology
and establish meaningful metrics to quantify progress.
Overall, post expects budget execution to improve in 2007
compared to 2006, as the year-old government develops its
procedures. It is not likely to be, however, a completely
satisfactory process: our and the GOI's ability to assess
progress will be hampered by slow and incomplete GOI
reporting. The 25% goal set forth in the GOI budget law
should be taken as a guideline to measure funds obligated by
August, rather than expended by June. End summary.

--------------
Overall Status Update
--------------


2. (C) The 2007 budget was delayed by Kurdish - Central
Government negotiations, both in reaching the Council of
Representatives (CoR) and during deliberations there. It
passed the CoR on February 8, and was signed by presidential
council the following week. Minister of Finance Bayan Jabr
committed to releasing 10% of the funds 'immediately', but
this step was slowed by the new requirement for spending
units to maintain separate capital and operational bank
accounts. (Note: This development was a recommendation from
the IMF for better financial management, and resolved the
past problem of shifting money from capital spending to
operational spending, in violation of the Financial
Management Law. End note.) While a productive step in the
medium-term, this new requirement did slow the disbursement
of funds to some ministries.


3. (C) As of May 3, the Central Bank confirmed that most of
the ministries had opened their capital accounts and could
receive funds. The exceptions, notably, are the Ministry of
Oil, the Ministry of Interior, and the Ministry of Trade.
The Ministries of Interior and Trade claim to have opened
their accounts but the Central Bank of Iraq has yet to
confirm it has been done. Because the Ministry of Oil's $2.4
billion capital budget represents 24% of the total capital
budget, this delay is of great concern. Other ministries,
such as the Ministries of Communications, Health, (Lower)
Education, and Municipalities & Public Works, have better
expenditure records so far this year, and they have been
granted another tranche of 30% of their allocation past the
initial 10%. The Ministry of Agriculture has developed a
detailed spending plan, by province, for its 2007 funding.

--------------
Focused USG and GOI Efforts
--------------


4. (C) Over the past six months, the GOI at all levels has
become more constructively focused on improving budget
execution. In mid-February, Deputy Prime Minister (DPM)
Barham Salih, Minister of Finance (MoF) Bayan Jabr and the
Minister of Planning and Development Coordination (MoPDC) Ali
Baban formed a Budget Execution Task Force that meets
regularly with a focus on bottlenecks. Our Coordinator for
Economic Transition attends these meetings, which often
include Director-General level officials; the President of
the Trade Bank of Iraq, for example, attended on April 23
(ref C). Results from these meetings are then brought to the
attention of the Council of Ministers (CoM) every other week.
DPM Salih has found the CoM a useful venue for upbraiding
leaders of underperforming ministries, such as the Minister
of Oil (ref B). DPM Salih used his newly-established Budget
Execution Monitoring Unit to follow up in late April by

BAGHDAD 00001576 002 OF 004


sending letters to spending units that had not opened capital
budget accounts.


5. (C) Minister Jabr has also productively engaged in
improving budget execution, even though the Ministry of
Finance remains subject to many complaints about a lack of a
professional staff, and its main building was attacked with a
car bomb on March 21. With significant post encouragement
and support, Minister Jabr and DPM Salih organized an Iraqi
budget execution conference with government officials from
throughout the country on March 7, including provincial
officials (ref D). The first coordinated MoF - MoPDC
implementing regulations were distributed at this conference,
providing badly needed clarification to spending units.
Minister Jabr also has vowed to follow up with regular
conferences to check on progress, encourage officials, and
answer questions. The first of these follow-on conferences
was held on April 5, and Minister Jabr did hold ministers,
his staff, and other officials accountable for not spending
money, evidence of pressure from high levels of the GOI to
execute the capital budget. Promised follow-up at the
provincial level, however, has yet to materialize.


6. (C) Effective April 1, the GOI High Contracting
Committee, which must approval all contracts above a certain
amount ($1 million for provinces, $3 million for ministries
and $10 million for the ministries of Oil, Electricity,
Defense and Trade),has agreed to automatic approval of
projects if there are no objections from the committee after
three weeks. This committee was established to prevent
corruption, an understandable concern in the GOI, but it must
balance oversight with the need for a functioning procurement
system. Post argued forcefully for this welcome change in
the rules, as the High Contracting Committee was itself often
a bottleneck blocking the expenditure of capital budgets.


7. (C) While raising awareness and resolving bottlenecks are
important to improving budget execution, ultimately training
and capacity building in the spending units is required to
have a functioning system. The Ministry of Planning and
Development Cooperation is opening an Office of Government
Contracting and Procurement Assistance to act as a resource
open to all government officials. A USG-funded Procurement
Assistance Program will provide technical assistance to the
MoPDC as required, building a 'Center of Excellence' at the
ministry to aid both provinces and other ministries. USG
funding for this program is coming from State Department's
Ministerial Capacity Development initiative, JCC-I, and the
Department of Defense's Business Stabilization Operations.
Additionally, USAID's National Capacity Development project
has supported 13 courses in procurement since November 2006,
blending international best practices with current
implementing regulations. As of March 30, 267 trainees from
11 spending units attended the courses. We have also pressed
Minister Baban, as recently as May 7, to organize MoPDC
'Tiger Teams' to travel around the provinces for specific
assistance to provincial budget efforts. He claims to have
done so (ref A). Additionally, IRMO has funded four experts
to augment the three person Budget Execution 'secretariat' in
DPM Salih's office.


8. (SBU) In a parallel effort, we are encouraging the
ministries and spending units to look forward to formulating
their 2008 budgets, a process that is in danger of falling
behind schedule as it did for the 2007 budget. Late
formulation of the 2008 budget would result in a second
considerably shortened year for execution; due to 2007's late
start, ministries have effectively eight months in which to
expend their budgets.

--------------
Provincial Budget Execution
--------------


9. (C) Provincial capital budgets represent about 24% of the
$10.1 billion capital budget. In contrast to 2006 when
provinces were funded through transfer grants, the provinces
are now considered spending units in the government and are
subject to monitoring and supervision by the Ministry of
Finance and Ministry of Planning. Since 60% of 2006 money
was released by the MoF only in December, and this money has
been allowed to carry-over to 2007, the provinces now are
flush with funds. As a result, several provinces have not
felt an urgent need to open the newly required capital
accounts. Of the 15 provinces outside of the Kurdish region,
five provinces have yet to open accounts. Four provinces
claim to have opened accounts, but the Central Bank has not
yet provided confirmation. The five provinces that the CBI
confirms have opened new capital accounts - Babil, Baghdad,
Karbala, Najaf and Wasit -have received 10% of their 2007
allocations from the Ministry of Finance. Baghdad Amanat
(the city) has also opened its account. Nine of the

BAGHDAD 00001576 003 OF 004


provinces have fully developed project lists.


10. (C) Several of the Provincial Reconstruction Teams
(PRTs) have been invaluable in both assisting Iraqi
counterparts in budget formulation and in tracking budget
execution. The National Coordination Team, now the Office of
Provincial Affairs, developed a monthly survey in
coordination with the Embassy Budget Execution Task Force for
all of the PRT members, soliciting information on funds
released, requested from MoF, and expended; development of a
spending plan and project list, whether that list has been
approved by the MoPC, and if so, whether contracts have been
advertised for bids. Resulting information is cross-checked
against data collected by the Treasury Attache's Office. The
GOI-organized March 7 conference was immediately followed by
a two-day, USG-sponsored conference for PRT members on budget
execution. A follow-up PRT workshop on budget execution and
2008 budget formulation is planned for early June.

--------------
The Key - Meaningful Metrics
--------------


11. (C) Monitoring budget execution has been complicated by
the three to four month delay in finalized reporting from the
Ministry of Finance. The USAID-funded FMIS (Financial
Management Information System) has gained traction in the
ministerial spending units, but the system ) designed to
focus on national-level reporting - does not specifically
track internal financial management of ministries.
Furthermore, the information that is broken out remains
confidential until finalized and released by the Ministry of

SIPDIS
Finance. Subject as it is to ministries' timeliness in
entering data into the system, even the Ministry of Finance
itself rarely has monthly information; so the results of
budget execution improvements are difficult to measure using
"reported expenditures" as a guide. Current information from
the Ministry of Finance indicates that the provincial
expenditures, even once reported, will not include a
breakdown of expenditures by province; we will have to rely
even more heavily on the PRTs for provincial data until
provinces improve their reporting to the central ministries.
For ministerial expenditures, post suggests tracking the
following indicators of progress, some of which have already
been used by the GOI Budget Execution Task Force to
identifying underperforming spending units:

*successful opening of a 2007 capital account
*if more capital funding (past the initial 10%) has been
requested from the MoF
*number of projects approved by the MoPDC
*dollar amount of projects contracted in 2007
*number of contracts submitted to the High Contracting
Committee (HCC)
*number of contracts approved by the HCC
*amount released to the capital account, when available
*amount expended by the spending unit, when available

--------------
Terminology
--------------


12. (U) We have found in our GOI budget discussions that at
times the GOI uses different meanings for familiar US
budgeting concepts. To assist communication among agencies
in Washington and the field when discussing budget execution
metrics, we share the following guide:

*GOI Spending Plan/Budget Allocation: Budgetary authority to
a GoI unit, in accordance with the Budget Law, with
sub-allocations defined by the MoF. This equates to a USG
"commitment," or an internal reservation of funds for a
particular purpose.

*GOI "Release": USG apportionment or release of funds from
the Ministry of Finance (OMB has this responsibility in the
USG) to a spending unit based on project needs or cash flow.
In Iraq, this is essentially an accounting entry where MoF
authorizes the Central Bank of Iraq to engage the banking
system to credit the spending agency accounts.

GOI "commitments": Equates to a USG obligation, i.e. awards a
contract or other binding agreement. Straightforward in the
US, it is less so in Iraq for the reasons outlined above.
The source of this data could be an approved project list,
against which we believe we can track GOI execution. This
list is maintained at the MoPDC, with a copy likely available
at the Budget Execution Management Unit at DPM Salih's office.

GOI "disbursed": USG expenditures or outlays. Cash out the
door is the same in both systems.


BAGHDAD 00001576 004 OF 004


-------------- ---
Creating an Incentive to Spend in the Budget Law
-------------- ---


13. (SBU) The 2007 Budget Law allowed for a mid-year
reallocation of capital budgets for any spending unit that
had failed to expend 25% of their capital budget by the
middle of the fiscal year. Both the Minister of Finance and
DPM Salih consider this stipulation useful in providing a
'use or lose' incentive for spending units to expend their
capital budgets. This provision allows the GOI to reprogram
funds from poorly-performing ministries to those who prove
more capable of utilizing funds, taking into account factors
like security that may have precluded timely expenditures.
Post has determined, after consultation with the GOI, that
the late start on the 2007 budget and exigencies of the GOI
budgeting system outlined above will make it difficult for
most ministries to spend 25% of their capital budgets by
mid-year. It will be more realistic to work towards a 25%
capital budget obligation by August. Our and the GOI's
ability to assess this measurement will be indicative rather
than absolute, because it will be hampered by slow and
incomplete reporting as detailed above. (Note: This
stipulation was changed from 37.5% to 25% during the final
vote of the budget law at the Council of Representatives. End
note.)

--------------
Conclusion: Challenges and Solutions
--------------


14. (C) In addition to the delay passing the budget, the
overall government system for implementing its capital budget
is not well understood throughout the country. Legacy
systems from the Saddam Hussein years co-exist with CPA Order
95, creating confusion. Some entities, particularly the
state-owned operating companies under the Ministry of Oil,
still resist the new rules, which transformed them from
largely autonomous entities into spending units under the
supervision of the Ministry of Finance and the Ministry of
Planning. Officials from these companies argue that the
constraints force them to deviate from standard practice to
such an extent as to make contracting, if not impossible,
then at least extremely difficult. New laws, such as the
change in the provincial allocations from grants to line item
spending units, further complicate implementation. Given the
different security environments throughout the country,
problems with communication, money transfers, and information
flows also interfere with smooth budget execution. During
the March 7 conference, for instance, the representatives
from Rafidain Bank explained that the last time they
transferred money to Diyala Province it was stolen by
insurgents. International transactions involving GOI money
may still be subject to an attachment risk; as a result
almost all GOI international transactions are processed
through the Trade Bank of Iraq's Letter of Credit (LC)
program, creating what amounts to a monopoly. There is also
a problem of lack of political leadership and stability - as
a result of the uncertainty in Iraq working level officials
may believe it is safer not to do anything rather than to try
to make a new system work.


15. (C) Clarification of rules and guidelines, training of
officials, and addressing bottlenecks are the solutions to
the slow rates of budget execution in Iraq. Improved
security would also help, of course, but the overriding
challenges facing GOI budget execution are common among
developing countries - government operations and capacity
need to be strengthened. These structural and situational
elements can be greatly helped or hindered by focused
attention and effort on improving the situation from the
highest levels of the GOI. We have been successful at
convincing the GOI leadership of the importance of this
issue, and post is working closely with the GOI to provide
training of officials via USAID-funded programs. Training is
also being carried out by MoPDC and Iraqi centers, and the
GOI has begun addressing potential bottlenecks such as the
High Contracting Committee and the Trade Bank of Iraq. The
signing of the International Compact with Iraq will play a
key role in maintaining GOI focus because it promotes
economic reform and will help normalize Iraq's financial
relationships with the rest of the world.
CROCKER