TRADE MINISTRY PLANS RADICAL PDS REFORM 2008-2010

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 000789 SIPDIS DEPT PASS TO DEPT OF AGRICULTURE SIPDIS E.O. 12958: DECL: 03/16/2018 TAGS: EAGR ECON EFIN IZ PGOV SUBJECT: TRADE MINISTRY PLANS RADICAL PDS REFORM 2008-2010 REF: A. BAGHDAD 95 ¶B. 2007 BAGHDAD 4062 Classified By: Economic Minister Charles P. Ries for reasons 1.4 (b) an d (d) ¶1. (C) SUMMARY: The Ministry of Trade (MoT) has indicated that the Public Distribution System (PDS) will remain essentially untouched this year, fully funded either through the 2008 budget alone or with supplemental appropriations as well. The MoT has, however, provided Emboffs a cogent plan it intends to implement to reform radically, and effectively phase out, the Public Distribution System (PDS) by 2010. The roadmap calls for a multi-stage approach. In 2008 the MoT expects to lay the foundations to means-test beneficiaries and monetize benefits beginning in 2009. Also in 2009 the Ministry will import and distribute reduced quantities of basic commodities for the PDS and encourage the private sector to fill the void and progressively handle more of Iraq's needs. The envisaged 2010 end state is a fully monetized PDS allowance, merged with the Social Safety Net (SSN) to form a single social welfare benefit, targeted to poor Iraqis. Under the scheme, beyond 2010 the MoT would continue to import smaller quantities of basic foodstuffs as a strategic reserve to insure the country against acute shortages. Capacity constraints and politics will challenge its implementation, but the MoT's plan should be welcomed: it comports with recommendations long championed by the USG, the World Bank, the IMF, and others; it honors an important GOI undertaking in the International Compact with Iraq (ICI); and, it reflects a hitherto rarely seen capacity to generate a coherent, actionable approach to pursuing a major reform initiative. END SUMMARY. -------------- -- 2008: STAGE ONE: LAY THE FOUNDATIONS FOR REFORM -------------- -- ¶2. (C) On January 31, Abdul Hadi Kadhim Al-Hameiri, Advisor to Minister of Trade Abdul Falah al-Sudnani, provided the Agriculture Attache the MoT's plan (in Arabic) to reform the PDS. The introduction to the plan--notably titled "Road Map for the Government's Way out of the Ration-Card System"--highlights five features the Ministry considers necessary for the success of any PDS reform initiative: that it address the needs of Iraq's poorest citizens; that it not lead to price spikes or shortages; that it empower the private sector to trade in basic commodities; that it establish a clear timeline; and that it be clear and simple to implement. Details of its execution remain to be explained, but the MoT's plan appears to capture most of these characteristics. ¶3. (C) The plan calls for the MoT--in cooperation with the Ministry of Finance and the Ministry of Planning, Development and Cooperation (MoF and MoPDC, respectively)--to begin laying the foundations for reform in the first half of 2008. By June 30 this inter-ministerial group intends to: identify the maximum level of income a family could enjoy and still be covered under the reformed system; design an "Income Declaration Form" to be used to register beneficiaries; prepare and implement a public education campaign to inform citizens about the economic and fiscal imperatives driving the initiative and to allay concerns among the poor; make use of the planned "smart" Iraq National Identification card to replace the current paper ration card; and, to expand the cohort of persons covered by the SSN. (COMMENT: The MoT's early attention to public education regarding the reforms is particularly welcome. Winning the public relations battle will be crucial to the initiative's success: USG polling of Iraqis indicates that a substantial percentage of PDS beneficiaries rely on the system and would prefer to continue receiving rations of food. Less welcome is the MoT's failure to mention cooperation with the Ministry of Labor and Social Affairs (MOLSA),which administers the SSN. END COMMENT.) ¶4. (C) The MoT plans to develop further and phase in the mechanisms for means-testing and monetization during the second half of 2008. The MoT road map calls for the Ministry to distribute the Income Declaration Forms to PDS food agents, from whom beneficiaries receive their monthly rations. Beneficiaries desiring coverage under the reformed program will be required to fill out the form and return it to their agent. Devolving some responsibilities for the reforms from the center, the plan states that ration agents will turn the Income Declaration Forms over to their local Municipal Councils, which will in turn BAGHDAD 00000789 002 OF 003 facilitate a review of the forms by local representatives of the MoT, MoF, and MoPDC. These local inter-ministerial committees are then to pass the reviewed forms to their national-level colleagues, who will generate a new roster of covered individuals. The Ministry intends to cover Iraqis below the predetermined maximum income level. (COMMENT: A significant challenge to the MoT's reform initiative will be cajoling Iraqis to disclose such information to the government, given the country's history of totalitarian repression. Minister of Trade Abdul Falah al-Sudani has told Emboffs he believes many wealthy Iraqis will select themselves out of the PDS rather than disclose their incomes to the government (reftel A). MOLSA's experience with the SSN, which also requires an income declaration, indicates that at least the most vulnerable Iraqis would be willing to fill out the forms in order to receive benefits. END COMMENT.) ¶5. (C) Also in the latter half of this year, the MoT, MoF and MoPDC will determine the amount of the monetized allowance beneficiaries will receive, taking into account forecast commodities prices for a full basket of benefits, import and distribution costs, and a reasonable profit margin for the food agents, nearly all of whom are also ordinary grocers. In order to formulate jointly the 2009 budget request for the PDS, the three ministries will add together (a) the cost of providing the cash allowance to the means-tested roster of beneficiaries and (b) the cost to the MoT of importing and distributing 50 percent of the total estimated demand for PDS ration items for 2009. -------------- -------------- 2009: STAGE TWO: IMPLEMENT THE PLAN AND ENCOURAGE THE PRIVATE SECTOR TO IMPORT, MOVE, AND SELL BASIC FOODSTUFFS -------------- -------------- ¶6. (C) In 2009 the MoT plans to distribute the new list of covered beneficiaries to state-owned and private banks. The plan foresees that the MoT will distribute the monetized allowance to the covered individuals and their families through the banks, allocating it to the beneficiaries' smart cards. The MoT thus intends to empower beneficiaries to purchase PDS goods, creating a monetized demand. The MoT plans to partially address supply by importing 50 percent of the system's total forecast needs and distributing the same those food agents who agree to sell the merchandise to beneficiaries at cost plus a reasonable profit to the agent. The roadmap asserts that reducing the MoT's role as an importer and distributor will leave room for private sector merchants to import and distribute the remainder of the system's needs. These steps will also, the argument continues, acculturate food agents to operating more of their businesses on a commercial basis. The plan further states that the process will accustom the private sector to buy and sell at prices determined by market forces. Separately, in 2009 the MoT will prepare a list of unneeded assets and facilities and offer them for sale or lease to the private sector. (NOTE: The MoT owns, for example, a network of warehouses and a fleet of delivery trucks for which it will presumably have less use given its reduced role in importation and distribution. END NOTE.) -------------- 2010: STAGE THREE: MOVE TOWARD THE END STATE -------------- ¶7. (C) In 2010 the MoT intends to administer the PDS much as in 2009, though further reducing its own importation and distribution of basic foodstuffs to 25 percent of the system's forecast need. Steps will begin to prepare the MoT to become nothing more than a purchaser of a "strategic reserve" of basic foodstuffs. The GOI will set up an oversight committee--comprised of representatives from the MoT, MoF, and MoPDC, as well as the Ministry of Transportation, the Trade Bank of Iraq, and others--to approve the MoT's purchases for the strategic reserve. Each quarter the MoT will circulate its imports through the food agents to ensure a strategic reserve of essentials is available to the market. Privatization of MoT assets and facilities is set to continue. Finally, beginning in January 2011, the monetized allowance for the PDS will be combined with MOLSA's SSN benefit into a unified social welfare benefit transferred to all beneficiaries' smart cards. -------------- COMMENT -------------- ¶8. (C) The MoT's plan to phase out the PDS is well BAGHDAD 00000789 003 OF 003 presented, and its timetable is ambitious. Constraints on the MoT's technical capacity will challenge the plan's implementation. The MoT will need to train scores, if not hundreds, of people to administer whatever technology the Ministry adopts for the smart card. Also, thousands of food agents throughout the country will need readers so that beneficiaries can use their smart cards to purchase goods. Reliable use of such technology at the retail level will require steady access to electricity. ¶9. (C) Politically the plan's execution will be fraught with difficulties as well. Means-testing beneficiaries could lead to allegations of sectarian bias. Critics will likely argue (many already have) that corruption at the Ministry, not increasing commodities and shipping prices, renders the PDS unviable in its present form. Monetization will likely elicit concerns among beneficiaries that inflation will erode the value of their benefits over time. And support for the plan at the MoT is apparently not universal: a recent Reuters article cited an unnamed source at the Ministry arguing, somewhat paradoxically, that plans to allow a greater private sector role in food import and distribution will exacerbate "political interference" in the system. ¶10. (C) Notwithstanding these and other challenges, the MoT's plan should be greeted warmly. The plan reflects reform recommendations long championed by the USG, the World Bank, the IMF, and other multilateral organizations. The plan also honors an important GOI undertaking in the International Compact with Iraq. Last, and perhaps most important, it evidences a hitherto rarely seen capacity to generate a coherent, actionable approach to pursuing a major reform initiative. ¶11. (C) MoT efforts to implement the plan present an opportunity for the GOI with significant upside and downside risks. Successful reform of such a high-profile program would provide ordinary Iraqis with a good reason to have greater confidence in their government's ability to reliably deliver goods and services to them and could thus be a significant achievement for political reconciliation. Failure, on the other hand, could open the door to even more heated allegations of sectarianism, corruption, and incompetence than the government already endures. CROCKER