WORLD BANK PBS VOTE - SETTING BENCHMARKS AND REVIEW

UNCLAS SECTION 01 OF 03 ADDIS ABABA 000472

SENSITIVE
SIPDIS

TREASURY FOR STEPHEN ALTHEIM AND REBECCA KLEIN
TREASURY PASS TO USED TO THE WORLD BANK
USAID FOR AA/AFR EGAST AND AFR/SD DATWOOD

E.O. 12958: N/A
TAGS: EAID ECON PREL PGOV ET
SUBJECT: WORLD BANK PBS VOTE - SETTING BENCHMARKS AND REVIEW
REQUIREMENTS

REF: 2008 ADDIS 3462

This is an Action Request for Treasury and the USED to the World
Bank. Please see para 2.

SUMMARY
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1. (SBU) The World Bank's Protecting Basic Services (PBS) project
has filled a gap in providing critical health and education services
to rural Ethiopians while creating a limited window of significant
transparency in illuminating budget allocation and expenditure data
to the public. Still, three years after starting, the program
continues to provide a "band-aid" approach covering recurrent costs
which are unsustainable under the current macroeconomic framework.
In the mean time, broader political space in country has narrowed
dramatically. As currently designed, PBS II does not make continued
funding contingent on actual policy progress. Setting benchmarks
and having the World Bank's Board review progress made on needed
macro-economic or political policy reforms will make PBS II a more
effective mechanism for achieving sustainable development. End
Summary.

ACTION REQUEST
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2. (SBU) The Bank's internal deliberation on a PBS II project, and
the Bank's Board of Directors' subsequent vote on the project,
provide an opportunity for the United States to break the donor
cycle of "business as usual" to hold the Ethiopian Government (GoE)
accountable to provide a sufficiently conducive environment for
democracy and development to merit sustained receipt of donor
assistance. We recommend that Treasury and the USED to the Bank
raise with the Bank's Operations Committee (OC) the requirement for
annual or mid-term Bank Board review of the PBS II program. We
recommend that the nearly $600 million, three-year PBS II project be
divided into three annual tranches (or at least two tranches
reviewed at the mid-point) with each subjected to a new Board vote.
This approach to the OC prior to its February 27 meeting to review
PBS II would allow for revisions to the PBS II Project Appraisal
Document (PAD) before the project goes to a final Board vote in
April. If the OC does not break the project into tranches subjected
to annual Board votes, we recommend that Treasury and the USED
engage other Executive Directors to send the PBS II project back to
the Bank for review before the project is subjected to a Board vote
in April.

THE STANCE OF ADDIS-BASED DONORS
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3. (SBU) The UK considers PBS critical to its development efforts in
Ethiopia. In light of frustration with Ethiopian policy dynamics
over the past few years, we understand that the UK Development
Minister Douglas Alexander has personally refused to sign on to a
multi-year bilateral PBS assistance package, instead restricting aid
to annual reviews. The British Embassy in Addis currently opposes
subjecting the Bank's PBS II project to a similar annual review
mechanism, but it is not clear if this is a local decision or
whether London has considered the proposal. Other donors, notably
Holland and Ireland, share our concerns that PBS should focus more
on enhancing democratic institutions as a way to support economic
development. Despite donor concerns over Ethiopia's lack of
economic and political reforms, aid continues to flow --
particularly budget support from the EU -- and the GoE continues to
expect it.


4. (SBU) To promote policy reforms necessary to render PBS
sustainable, Embassy Addis Ababa discussed with donors and World
Bank/Ethiopia the idea of breaking the three-year, $600 million
grant-based PBS II project into three, one-year tranches (or at
least two tranches reviewed at the mid-point) with each subjected to
a new vote by the Bank's Board of Directors which will be predicated
on GoE adherence to the pledges of policy action and intent
currently made. This one-year tranched approach is consistent with
the UK's approach to its bilateral PBS support. The Dutch, Irish,
Swedes, and to some extent the Canadians share U.S. concerns about
the Bank's program, but without us lack an adequate voice.

NEED ASSURANCES ON MACROECONOMIC BENCHMARKS

ADDIS ABAB 00000472 002 OF 003


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5. (SBU) We recognize that PBS has been essential for the GoE to
achieve the huge impacts in recent years toward achieving Millennium
Development Goals in health and education. Still, in May 2006, the
United States abstained in the World Bank vote on PBS arguing that
"the country... [did] not present a sufficiently reliable political
and macroeconomic environment to assure sustainability." Two years
later, in December 2008, the U.S. noted in another Board vote that
Ethiopia had "not yet demonstrated the political will to take on the
reforms needed to deliver macroeconomic stability." That December
statement further noted that "we also want to make clear to the Bank
that future programmatic operations should incorporate commensurate
policy commitments aimed at correcting economic distortions in the
country, especially in the agricultural sector." While the Bank has
received some commitments from the GoE on economic policy
commitments, the current project assessment document (PAD) leaves it
to the Bank and PBS contributors to determine the appropriateness of
continued funding over PBS II's three-year lifespan. Based on our
discussions with donors here in Addis, we believe that an internal
World Bank review is inadequate and that we need to make continued
funding contingent on actual policy progress.


6. (SBU) There has been some movement. Following Bank engagements
with the Finance Ministry (MoFED),the GoE has made economic policy
pledges to the Bank. The GoE has committed to reduce inflation from
55.3% in June 2008 to 20% and 9% by June 2009 and June 2010
respectively. The GoE has also committed to increasing official
reserves from 1.2 months of import coverage as of the end of the
2007/08 fiscal year to 1.8 months and 2.3 months at the end of
2008/09 and 2009/10 respectively. Finally, the GoE has agreed to
increase the private sector's share of credit in Ethiopia. While
these commitments will help stabilize the economy, such actions are
necessary but not sufficient to support the lasting,
domestically-based economic growth required to render the PBS gains
sustainable. Further, much as was the case in the GoE's Exogenous
Shocks Facility loan from the IMF highlighted in reftel, as is, the
GoE's pledge is just that -- a pledge -- upon which no specific
funding implications are contingent. We acknowledge that the GoE
submitted, and has begun taking policy action in line with an
economic policy letter to the IMF for this loan, but we remain
cautious due to the GoE's refusal to date to accept any binding
obligations on economic policy. We believe that by adopting the
UK's one-year tranched approach -- with each year subjected to a
Board vote -- we will convey a clear message from the international
community that we expect the GoE to follow through on its
commitments and meet the targets it has set in its messages of
policy intent during the PBS project negotiation process.

CONCERNS LINGER ON SOCIAL MONITORING
--------------


7. (SBU) The original roll-out of PBS in 2006 was a political
decision in response to political dynamics in Ethiopia following the
2005 elections and most Ethiopia watchers here agree that the
project was only adopted because of the robust safeguards put in
place to ensure transparency and social monitoring in the so called
"component four (C4)" element. The C4 element was a major factor
driving the broad donor support for the original PBS grant in 2006,
but the final C4 design approved by the GoE was severely watered
down from the original intention of providing independent oversight,
scrutiny and accountability for the program. Since PBS started
there has been further erosion of freedoms at all levels, especially
the local level where component four is focused. Within the limits
of the planned design there has been some success in the 12 pilots
in increasing the ability of local actors to scrutinize the delivery
of basic services. However, implementation of C4 has lagged badly,
and has been largely implemented through ruling party controlled
NGOs and 'member based organizations' (women, youth, peasants) with
space for independent NGOs participation remaining limited. In
fact, one CSO which was monitoring PBS implementation was even
closed down by local authorities (see para 9 below). In addition to
these dynamics, the passage of a highly restrictive law (CSO Law)
governing NGO activities last month has left many PBS donors and
watchers concerned for the viability of C4.


8. (SBU) In response to donor concerns about the impacts of the CSO
law on PBS, the Bank elicited a
"comfort letter" from the GoE on NGO participation in the (C4)

ADDIS ABAB 00000472 003 OF 003


element. While the Bank has argued that the letter conveys the
intent of the GoE for the CSO law not to affect PBS, we, the Dutch,
the Irish, the Swedes, and even some Bank insiders, view vague
language in the letter, combined with the GoE's demonstrated actions
against NGOs in recent years, as grounds for skepticism. Some see
the letter's assurance that the governance structure for C4
implementation will continue "until alternative arrangements are
deemed necessary" with particular concern. Another point, noting
that "citizens and their organizations are the ones who engage with
service providers," has drawn particular Dutch and Irish attention
as the CSO Law would render any NGOs receiving more than 10% of
their funding from outside sources as "foreign." With the currently
vague language, this provision effectively could exclude foreign
funded NGOs from C4 activities.


9. (SBU) Although the Bank's staff tells us that the letter's
confirmation that PBS funds will count as government resources
rather than "foreign" resources for the sake of the 10% rule, NGOs
that get more than 10% of their funding from outside, would already
be over the "foreign" threshold and may be excluded from
participating in PBS. On another point, while one of the main
functions for C4 social monitors was to validate impact data
presented by local governments, the letter's provision noting that
local NGOs will serve merely as "facilitators and in capacity
building" fundamentally calls into question the scope of activities
which the GoE will actually allow even local NGOs to engage in.
During the first PBS project, the GoE restricted international NGOs
supporting C4 to "facilitation and capacity building" but local NGOs
were very much actively expected to participate. Under the comfort
letter's current language, it would appear that the GoE is actually
trying to restrict the role of even GoE-defined "local" NGOs in C4.



10. (SBU) While the comfort letter assures the Bank that the GoE
will sensitize local authorities on the importance of PBS including
its social accountability activities, recent practice also calls
this into question. Aggressive GoE training on the new CSO law at
the local level attacked NGOs as "rent seekers" and "neo-liberals."
After it was completed, local officials closed down the PBS C4 pilot
conducted by an independent NGO in Guraghe Zone (where the
opposition was strongly supported in the last election, but all
local government posts are held by the ruling party) despite
assurances from MoFED that PBS would be insulated from the CSO Law.


COMMENT
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11. (SBU) The Embassy believes that there must be accountability and
assurances that the GoE will honor its economic and C4 social
monitoring commitments. The "comfort letters" establish benchmarks,
but the current three-year project design lacks an adequate review
mechanism. After months of encouraging the Bank's Ethiopia staff to
secure economic and C4 assurances from the GoE, our concerns remain
on the longer-term sustainability of PBS. These are the same
concerns which have forced the United States to abstain on every PBS
vote since project inception in early 2006.


12. (SBU) Over the past year, international financial institutions
have granted or lent Ethiopia over US $1 billion and questions have
been raised on the net impacts of this assistance on the political
and economic environment. While Bank staff members concede that
recent GoE actions, especially the CSO Law, will cause the Bank to
reduce Ethiopia's IDA allocation "at the next review," the Bank
remains committed to moving forward in programming the current
allocation through PBS. Requiring PBS II to be reviewed by a formal
Board vote in three annual tranches (or at least once at the
mid-point) will send a clear message to the donor community as well
as to the GoE that we take benchmarks seriously and will assess
future assistance decisions in light of progress toward achieving
them. End Comment.

YAMAMOTO