Status and Concerns: Establishment of P-MDTF in Zimbabwe

UNCLAS HARARE 000098 SENSITIVE SIPDIS AFR/AA FOR EGAST AFR/SA FOR JHARMON AND LDOBBINS AFR/GC FOR KD'ABOVILLE PRETORIA FOR JSANDEFUR AND MFISCHER AF/S FOR BWALCH AND SBROWN TREASURY FOR OFFICE OF AFRICAN NATIONS DPETERS AND LPARTUSCH NSC FOR SENIOR AFRICA DIRECTOR MGAVIN E.O. 12958: N/A TAGS: EAID EFIN PHUM PREL ZI SUBJECT: Status and Concerns: Establishment of P-MDTF in Zimbabwe THIS IS AN ACTION CABLE. See paras 3 and 13 below. -------------- SUMMARY -------------- ¶1. (SBU) The donor community in Harare has been in consultations with the World Bank (WB) since April 2009 regarding the establishment of a Programmatic Multi-Donor Trust Fund (P-MDTF) for the purpose of implementing recovery projects in support of the transitional government. There is collective agreement among the donors in Harare that the P-MDTF is a crucial vehicle to pool bilateral resources for high-cost social infrastructure rehabilitation projects that would have a high return in terms of lives and assets saved and demonstrate good will toward the Zimbabwean people. ¶2. (SBU) Agreement has been reached between the donors and the WB on both the governance parameters and the programmatic scope of the P-MDTF; however, continued lack of resolution on how to ensure that funding does not inadvertently benefit sanctioned individuals and companies threatens to scuttle the establishment of the trust fund. Donors in Harare have been working with the World Bank to consider the feasibility of alternative ways to structure the P-MDTF to enable it to come to fruition but have been unable to resolve the problem, putting into question the entire effort. Post believes that the P-MDTF continues to have an important role in Zimbabwe, and requests the USG's Executive Director (USED) at the WB to consult with his bilateral counterparts on the issue and take up with senior-most leaders in the WB and the Board the seriousness of the current impasse for not only the establishment of Zimbabwe's MDTF but for the establishment of trust funds in other countries where donors have similar concerns as those that arise in Zimbabwe. ¶3. (SBU) We believe that it is in the interest of the WB's Board to consider carefully the implications of the WB's current policy of not accommodating donor restrictive measures in the legal arrangement of programmatic MDTFs. Without the necessary assurances from the WB that it will make every effort to ensure that donor resources are programmed in line with bilateral restrictions and legislative requirements, the P-MDTF is dead in the water. ACTION REQUEST: Post requests USED's assistance in raising this issue to the appropriate decision makers in consultation with the EDs from other like-minded countries. END SUMMARY. -------------- Advantages of the P-MDTF -------------- ¶4. (U) MDTFs are an integral part of many post-crisis transitions. They can provide targeted resources for recovery and reconstruction efficiently and effectively. MDTFs reduce transaction costs by achieving economies of scale in the administration, planning, and overall management of the funds, and by harmonizing rules and procedures for disbursing and using the funds. As such, MDTFs provide an opportunity for practical application of the Paris Principles. They also promote accountable use of resources aligned with Zimbabwe's 2010-2012 budgets and national ownership of post-conflict recovery efforts with reduced transaction costs for the Government of Zimbabwe (GOZ). In the case of Zimbabwe, the P-MDTF would allow the WB to re-engage with Zimbabwe despite the outstanding arrears. ¶5. (U) The WB has developed significant experience as an administrator of MDTFs, and is uniquely placed to establish coherent and qualified management of the trust fund based on lessons learned. These lessons include the need for a dedicated, well-staffed secretariat; quick mobilization of sector specialists; a clear communications strategy; and an awareness of political, operational, and governance risks. Furthermore, the WB has extensive experience with large infrastructure projects and has a long-standing and rapidly growing presence in Harare capable of managing the trust fund. ¶6. (SBU) Currently, there are no large-scale rehabilitation and reconstruction projects being funded. The P-MDTF would provide a means to pull donor resources together to fund such projects, which are by their nature very expensive and require very specific technical expertise seen to be a comparative advantage of the WB. Donors have agreed to fund water supply and sanitation infrastructure rehabilitation throughout the country as the first priority of the P-MDTF. Other potential areas of funding include rehabilitation of electrical and information and communication infrastructure. -------------- Restrictive Measures -------------- ¶7. (SBU) All donor countries that are considering contributing to the P-MDTF (EU member states - UK, Netherlands, Germany, Sweden, Denmark, and Norway - the EC, Australia, Canada, and the USA) currently have restrictive measures targeted against specific individuals and a limited group of companies in Zimbabwe. These restrictive measures prohibit these donors from entering into direct contracts with these individuals/entities. If the WB, through the P-MDTF, entered into a contract with one of the restricted individuals/companies using donor funds it would be a breach of these measures and in some cases a violation of the laws of the donor country. It is therefore imperative that the P-MDTF, in its design, accommodates these restrictive measures. ¶8. (SBU) However, the WB has indicated that it can only implement and enforce UN Security Council sanctions and cannot accommodate targeted measures from individual member countries in the administrative arrangements with the respective donors. Over the last several months the donor community and the WB have explored all possible avenues to accommodate the targeted measures while at the same time respecting current WB policy. The only available option, which would allow the WB to retain oversight of the P-MDTF, would be to change WB policy or make an exception for Zimbabwe. Alternatively, the WB will have a very limited role to play in the reconstruction of Zimbabwe at this point in time. -------------- Possible Solutions -------------- ¶9. (SBU) The following solutions to the above impediment have been considered. However, none of them have proven feasible. --Implicit or explicit language added into the administrative agreement: Under this option, a standard MDTF would be used but with implicit or explicit language in the administrative agreement that excludes the possibility of the WB entering into a contract with a banned individual or company. This is against current WB policy. --Establish a trust fund administered by a bilateral donor: Under this option, a commercial financial management agent would be hired, with the Bank providing technical advice. While the WB could provide general advice on sector policies, priorities, and investment needs, it would not be possible to separate procurement from project oversight and thus the WB's role with respect to implementation would be limited. None of the bilateral donors have expressed an interest in being the manager of such a trust fund. --Creation of a revolving fund: A third option considered was the use of a revolving fund in which an entity (without restrictions) provides an initial "float" to enable a procurement action to take place. Upon satisfaction that the selected contractor is a permissible partner, the donors with restrictive measures would apply their funding toward the project. Under such an approach, the donor providing the "float" would have a legal agreement with the WB. That legal agreement would not reference any restrictions. It would be through a holding account, under the trusteeship of one of the participating donors, from which other bilateral resources would flow when adequate assurances have been made that the contractor is acceptable. The donors would articulate in an MOU among themselves the rules governing this holding account. The MOU would include explicit language referring to the restricted lists. (NOTE: See para 10 for an explanation of why this option will not work. END NOTE.) --WB procurement without funds: In this set-up, the WB would provide US$1 million of seed money and proceed with procurement, without the funds in the MDTF, under the understanding that funds would be transferred from the donor holding account. In the case of a banned entity being selected, the GOZ would take over the contract. This option is not feasible since there would not be upfront funding for the full amount of the contract to be let. --Government advance: A final option would be for the GOZ to proceed independent of the P-MDTF with advance procurement. If an award recipient were unacceptable to donors, the GOZ would incur the full cost of the contract. The difficulty of this option is that donor funds could not reimburse the GOZ for its initial outlay. This option also would not work for a project with multiple contracts because the process would become impossibly complicated. ¶10. (SBU) Under a revolving fund, the initial funds for the MDTF account could come from three potential sources: --the GOZ: This would require the GOZ to deposit an initial guarantee amount of approximately US$25 million into a WB account, which, as with any trust fund, would be returnable (perhaps plus interest) at the closure of the MDTF, if no contractors on the banned lists have been selected. If and when the restricted lists are withdrawn, donors would contribute directly to the P-MDTF. Though this option appears workable, if government funds are transferred to the WB trust fund, the WB would become vulnerable to lawsuits from vulture funds or other creditors or claimants. --Special Drawing Rights (SDRs): The donors have discussed the possibility that the WB could use SDRs put into its trust but not cashed in. Apart from the problem of vulnerability to vulture funds, SDRs are not really equivalent to cash and this would complicate arrears clearance. --Donor money provided by a non-traditional donor: Several non-traditional donors (i.e., China, South Africa, and South Korea) have expressed interest in becoming members of the P-MDTF. These countries do not have the same restrictions as Western countries and therefore could enter into direct agreement with the WB. This option, which is the WB's preferred solution, is not considered appropriate by donors for two reasons: 1) it is counter-intuitive to rely on countries without targeted measures for the implementation of restrictive measures, as this creates reputational risk, and 2) it is unlikely that any donor country will be convinced to provide a "float" that will not be used for direct project implementation. An additional complication would be the likely delay that would result from bringing non-traditional donors on board. The Japanese have been consulted and they have indicated that they are not yet ready to contribute to the P-MDTF. -------------- Implications for the WB -------------- ¶11. (SBU) With the above options explored and exhausted, donors are close to ruling out the WB as the trustee of a P-MDTF in Zimbabwe at this point in time. This may have serious implications for the WB as an institution in Zimbabwe, as it will be unable to implement activities with donor financing until such time that restrictive measures are lifted. The inability of the WB to accommodate the restrictive measures raises questions about the WB's ability to administer MDTFs effectively in other contexts where similar requirements may arise, particularly in fragile and failing states. The importance of solving this issue therefore goes beyond Zimbabwe. -------------- Way Forward -------------- ¶12. (SBU) At this juncture, the only way forward is for the WB to reconsider its policy of not being able to accommodate targeted measures. ¶13. (SBU) Donors are keen to see the P-MDTF come into existence under the administrative oversight of the WB. However, this would require donors to collectively approach the WB Board and President to pressure them to change policy or make an exception for Zimbabwe. Post requests the USED to discuss this issue with his counterparts from other countries and collectively raise the unresolved concern at the highest levels of the WB in a final attempt to make the P-MDTF possible under the management of the WB. (COMMENT: We understand that ED Netherlands has been fully briefed and may be willing to lead the consultations. END COMMENT.) RAY RAY