REFORMING THE PUBLIC DISTRIBUTION SYSTEM -- EASIER

UNCLAS SECTION 01 OF 03 BAGHDAD 002621

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ECON ETRD IZ KCOR PREF WFP
SUBJECT: REFORMING THE PUBLIC DISTRIBUTION SYSTEM -- EASIER
SAID THAN DONE

REF: BAGHDAD 1378 ET AL.

BAGHDAD 00002621 001.2 OF 003



1. (SBU) Summary and Comment: The GOI won't soon take the
tough political decisions needed to reform Iraq's Public
Distribution System (PDS),despite the burden it places on
national finances and the market distortions and corruption
it engenders. The UN World Food Program (WFP) has proposed a
PDS restructuring plan to key GOI officials, who acknowledge
the PDS' endemic inefficiency. WFP Iraq Director Edward
Kallon previewed the proposal in a September 8 meeting with
DCM for Assistance Transition, Patricia Haslach, and formally
presented it to Acting Trade Minister Dr. Safa al-Safie on
September 9. According to UN staff, Prime Minister Maliki
recently "has agreed in principle" to the proposal and the
GOI has followed up with questions on the program,s budget
details. We expect immediate action is unlikely, however,
with national elections looming. This leaves the primary PDS
ministries -- Trade, Finance, Agriculture -- struggling to
pay for personal profiteering and the growing cost of
supplying a shrinking basket of rations. WFP expects to
begin soliciting approximately USD 17 million in funding for
the proposal once/if negotiations with the GOI are complete.
Post fully supports WFP's objectives and looks forward to the
upcoming U.S.-Iraq Dialogue on Economic Cooperation (DEC) to
reinforce the importance of reforming the PDS. End Summary
and Comment.


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Origin of the WFP PDS Reform Proposal
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2. (SBU) According to WFP Iraq Director Edward Kallon, former
Deputy Prime Minister Barham Salih, chairing a GOI PDS reform
committee in May 2009, requested three specific WFP actions
to help the GOI: 1) realign the PDS to better serve
vulnerable Iraqis; 2) devise a system to integrate the PDS
into a strengthened social safety net; and, 3) help Iraq
rehabilitate its agricultural base (ref A). This reflects
the GOI,s professed interest in better focusing the PDS
program and reducing its budgetary impact. The Council of
Representatives (COR) passed in its 2009 Budget Law a
provision for a Ministry of Trade (MOT) study on how to
target PDS benefits on the truly needy. MOT has not yet done
the study, reportedly displeasing the COR. Baghdad's
Treasury Attache, reported that the Council of Ministers, in
reviewing the medium-term budget picture, also discussed
reducing the PDS; we won,t know the results of these
discussions until the introduction of the 2010 budget. The
World Bank has been pushing for a policy pronouncement from
the GOI on phasing out the PDS, moving to cash subsidies,
providing social safety net protections, etc. With a
potential USD 1 billion support loan in the offing, these
calls may carry some weight.


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20% of Iraqis Food Insecure, Without PDS?
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3. (SBU) In late 2007, WFP partnered with the GOI, UNICEF,
FAO, and WHO to conduct the Comprehensive Food Security and
Vulnerability Analysis (CFSVA),a standard WFP pre-crisis
baseline study designed to measure the scope of food
insecurity in Iraq. In late 2008, WFP reported that almost 1
million Iraqis were food insecure and six million more would
be without the PDS, approximately 20 percent of the
population. Iraqis who WFP considered "food insecure"
Qpopulation. Iraqis who WFP considered "food insecure"
include those who lack sufficient income to complement or
replace the PDS commodities basket; non-skilled workers,
agricultural workers and households where chief wage earners
are unemployed, women-headed households, current or recently
resettled IDP households, and households with chronically
malnourished children. WFP has extended its emergency
operations from April to December 2009, and is currently
covering the food needs of 1.1 million Iraqis.


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Commodities Shrinking, Cost Growing
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4. (SBU) Under the Saddam-era PDS, each Iraqi national is
entitled to a monthly commodities basket that contains enough
wheat, rice, milk, sugar, vegetable oil, pulses, and infant

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formula to meet 100 percent of each household member's
minimum daily caloric needs (2,200 calories). In recent
years, however, supply shortfalls and disruptions have meant
that the PDS supplies less than half of Iraqis' daily caloric
needs. This supports anecdotal accounts from Iraqi contacts
about widespread shortages. Despite almost universal
acknowledgement of its failures -- its massive price tag, its
distorting effects on domestic commodity markets, and its
myriad opportunities for corruption -- there have been no
significant reform efforts. In 2007, the COR passed
legislation that would have rendered households of government
officials at the rank of Director General or higher
ineligible for PDS rations. The GOI has not implemented this
reform, however, and even the wealthiest Iraqis remain
eligible for rations. Grey-market trade of PDS rations
remains common, as better-off households seek higher-quality
products and very poor households consume less to raise cash
by selling rations or ration cards. Despite the significant
shortfalls and supply disruptions, the cost of the PDS has
risen to between USD 6 and USD 7 billion annually, according
to World Bank and WFP estimates.


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Proposal Details - Supply Chain Capacity Building: CY 2010
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5. (SBU) Kallon told DCM Haslach that within the strategic
objectives outlined by the GOI the WFP proposed a pilot
program in which the WFP administers the PDS in six of Iraq's
eighteen governorates, deploying technical advisors to work
side-by-side with GOI authorities on procurement, shipping,
quality control, pipeline management and logistics, including
land transport, warehousing and commodity tracking, and
monitoring. Kallon said that, by WFP estimates, the total
cost of a WFP-administered PDS would be USD 5.7 billion
nationwide, assuming the population of Iraq is 31.5 million -
the GOI's official estimate. For the six governorates, the
first stage of the pilot, the cost would be around USD 1.7
billion. Under WFP's proposal, Iraq would pay all costs
except costs derived from contracting the WFP technical
advisors -- about USD 17 million, the WFP estimates. (Note:
Though these costs are not significantly lower than what the
GOI is currently paying, WFP is basing its cost estimates on
delivery of 100 percent of the commodities in the basket.
The GOI is currently delivering about half of the
commodities. The WFP also estimated the costs for providing
only five essential commodities (rather than the ten
commodities currently in the PDS basket) at USD 4.6 billion
nationwide and USD 1.4 billion in the six governorates. Some
estimates place the cost of delivering USD 1 in PDS
commodities at USD 6 under the current system. End note.)


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Proposal Details - Relief and Recovery Operations: CY 2010-11
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6. (SBU) Kallon told DCM Haslach that phase two of WFP
proposal included programs designed to strengthen Iraq's
social safety net as well as capacity-building projects
divided into 3 categories:

- In-kind conditional transfers which includes: school meals
and community-based maternal child health and nutrition
programs;
Qprograms;

- Conditional transfers which includes: resettlement and
reintegration of returnees, income generation for female
headed households, and small farm food production;

- Government institution capacity building for administering
social safety nets.


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Progress Likely to Slow Ahead of Elections
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7. (SBU) The WFP,s senior policy advisor told us that
Ministry of Trade officials, in a meeting with her in
mid-September, claimed that the Prime Minister "agrees in
principle" with the proposal, and the MOT asked her for a
more detailed breakdown about the proposal,s $17 million

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budget. The WFP may already be able to cover some of the $17
million program cost through insurance recovery funds it has
recently received, she claimed. Despite this interest, all
indications are that the GOI will continue for now to raid
its budget to support the corrupt, bulky PDS program. Dr.
Abdulhadi al-Hamiri, Senior Advisor to the Acting Trade
Minister and co-chair of the SFA JCC Trade and Investment
Working Group has told us repeatedly that the GOI would take
few, if any, concrete steps on key economic issues --
especially PDS reform -- in advance of Iraq's national
elections scheduled for January 2010 (ref). He says the
Acting Trade Minister is acutely aware of the political
impacts of any reductions to this very visible social
benefit. As a "symbolic first step," al-Hamiri has said that
there may be political space "for this business of" removing
Iraq's highest income earners from the beneficiary rolls, but
he has acknowledged such a move would have only negligible
fiscal impact. According to al-Hamiri, the GOI has secured
funding and contracts to continue PDS rations until the
January elections but not beyond. Funding for the first
quarter of 2010 is unclear and the MOT is exploring options
-- like supplemental budgeting or guaranteed loans from the
Ministry of Finance - to keep the PDS running.
HASLACH