VZCZCXRO5169
RR RUEHBC RUEHDE RUEHIHL RUEHKUK RUEHMOS
DE RUEHGB #1244/01 1071108
ZNY CCCCC ZZH
R 171108Z APR 06
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 3927
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHC/DEPT OF AGRICULTURE WASHDC

C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 001244 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 02/17/2016 
TAGS: EAGR ECON ETRD KCOR KDEM KPRV PGOV IZ
SUBJECT: BEGINNING MUCH-NEEDED FOOD SUBSIDY REFORM 
 
REF: A. BAGHDAD 375 
 
     ¶B. BAGHDAD 241 
 
BAGHDAD 00001244  001.2 OF 004 
 
 
     ¶C. 2005 BAGHDAD 5079 
     ¶D. 2005 BAGHDAD 4559 
     ¶E. 2005 BAGHDAD 4108 
 
Classified By: Economic Section Minister Counselor Thomas Delare, reaso 
ns 1.4 b/d 
 
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PLEASE CANCEL BAGHDAD 1244 AND ALL ASSOCIATED MCNS.  WILL RESEND 
UNDER NEW MRN.  SORRY FOR THE INCONVENIENCE. 
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BAGHDAD 00001244  002.2 OF 004 
 
 
U.S. military field reports confirm that most Iraqis do not 
receive their entire allotted ration basket each month.  This 
 
is particularly damaging in the poorest areas of Iraq -- 
located mainly in the far western regions of Anbar and Ninewa 
provinces and pockets of southeast Iraq -- where according to 
the 2003 UN WFP Baseline Food Security Analysis (the most 
recent available), about a third of the population is highly 
dependent on the PDS for survival. 
 
¶6.  (C) The PDS is reportedly rife with corruption at every 
stage of its operation, from procurement contracting to final 
distribution of items to the Iraqi public.  DG Kareem has 
stated that PDS-laden trucks sometimes disappear enroute to 
food distribution points, and that MoT officials sometimes 
sell PDS food articles to enrich themselves.  A previous Iraq 
Reconstruction Management Office (IRMO) Trade Senior 
Consultant strongly suspected that foreign wheat shipments 
were being resold to fund terrorist operations and indicated 
that the MoT Inspector General office was likely involved in 
corrupt activities.  Recent Iraqi press reports credit MoT 
with being the most corrupt ministry in the GOI. 
 
¶7.  (C) The PDS hinders agricultural and private-sector 
development by sapping entrepreneurial initiative and 
encouraging dependence on the government.  Deputy Prime 
Minister Chalabi has told us that he instructed MoT to offer 
higher prices to Iraqi producers for wheat and rice (ref B). 
(Note:  We do not have evidence beyond verbal assurances from 
MoT officials that they actually pay higher prices to Iraqi 
producers.  End note.)  However, using Ministry of 
Agriculture production estimates and MoT procurement records, 
we estimate that less than half of Iraqi wheat production is 
considered fit for PDS procurement, and the farmers are 
currently only capable of producing about 12% of annual PDS 
wheat needs.  In addition, as ration recipients and corrupt 
MoT officials reportedly sell PDS items into the marketplace, 
they deflate and distort true market prices, making it 
difficult for Iraqi farmers to recover production costs on 
wheat and rice that they do not sell to MoT.  In effect, MoT 
has set itself up as the dominant buyer of high-grade wheat 
and rice in Iraq, providing no incentive to private-sector 
buyers to enter the market, and decreasing the need for GOI 
investment in distribution infrastructure that would benefit 
small farmers and private distributors. 
 
---------------------------- 
Cutting "Nonessential" Items 
---------------------------- 
 
¶8.  (C) According to DG Kareem, the most important items of 
the PDS are flour, rice, sugar, and cooking oil, mainly 
because Iraqis most need these items for daily living and 
because Iraqi farmers are currently incapable of producing 
sufficient quantities.  "Nonessential" PDS items, according 
to Kareem, make up 25% of PDS expenditures and include adult 
milk, infant milk, baby food, beans, salt, tea, soap, and 
detergent.  According to Kareem and local sources, Iraqis 
generally view these "nonessential" items as inferior in 
quality and prefer to buy higher-quality replacements in 
local retail markets.  These same sources indicate that the 
Iraqi recipients sometimes sell the "nonessential" items for 
income, though the income they receive is significantly lower 
than what the GOI paid to provide the item initially.  Kareem 
has told us that MoT plans to discontinue providing 
"nonessential" PDS items in 2006.  (Note:  Though press 
reports state that the MoT has done this, MoT sources 
indicate it has not happened.) 
 
--------------------------- 
Providing Freedom of Choice 
--------------------------- 
 
¶9.  (C) Deputy Prime Minister (DPM) Chalabi recently told us 
that the GOI plans to monetize the PDS, giving Iraqis the 
opportunity to procure what they believe they need and 
spurring private-sector development in areas that the market 
(and not the government) dictates.  Minister of Planning 
Barhim Salih has echoed this position to Embassy officials. 
According to recent Baghdad market prices, the annual cost to 
the GOI to provide every Iraqi with the monetary equivalent 
of a PDS basket would be approximately $2.7 billion.  Embassy 
supports the monetization decision and believes that the GOI 
should monetize gradually, starting in a province where 
private food distribution and marketing channels are already 
fairly strong, and then expanding to other provinces over 
time.  As the monetization program spreads, the GOI will 
likely need to continue providing flour, rice, sugar, and 
cooking oil to the provinces where monetization has not yet 
been implemented. 
 
¶10.  (C) The GOI recently completed a "catch-up" voucher 
program, through which they compensated all Iraqi households 
 
BAGHDAD 00001244  003.2 OF 004 
 
 
for food shortages from January thru August 2005.  The GOI 
distributed approximately $450 million through over four 
 
million vouchers, which Iraqis cashed at the nearest branch 
of the Rafidan or Rashid state-owned bank.  According to 
Embassy, DFID, and GOI officials, initial indications are 
that the program has been successful, despite glitches in a 
few cities.  DPM Chalabi said the program demonstrates the 
GOI's ability to successfully monetize the PDS. 
 
¶11.  (C) According to USAID's Agriculture Reconstruction and 
Development Program in Iraq (ARDI), most of Iraq's retail 
markets would likely be capable of providing sufficient 
quantities of most PDS items in the absence of a 
government-operated PDS.  The main exception would possibly 
be flour.  Embassy Econ has collected market surveys that 
monitor price and availability of PDS items across Iraq, and 
though the recent fuel-price increases have caused food 
prices to go up in some areas, most PDS items have been 
readily available during "spot" surveys.  (Note:  It is 
uncertain how much of the local markets' food comes from PDS 
items sold into the market by undesiring recipients or 
corrupt MoT officials.  End note.) 
 
¶12.  (C) As the GOI gradually discontinues procuring immense 
amounts of food, initially there may be supply shortages and 
price spikes in certain areas as private markets become fully 
functional.  DPM Chalabi has said that the GOI plans to 
maintain reserves of flour and rice to sell on the open 
market at predetermined price marks (above market prices) to 
help hedge against food-price inflation.  Embassy supports 
this action and believes that the GOI should also maintain 
reserves of cooking oil and sugar because there is no 
domestic production of these key PDS items.  The GOI could 
also distribute the reserves to impoverished areas if food 
shortages occur. 
 
--------------------------------- 
Encouraging Private-Sector Growth 
--------------------------------- 
 
¶13.  (C) DPM Chalabi told us that he has instructed MoT to 
procure domestically as much of its flour and rice reserves 
as possible, exhausting all Iraqi procurement options before 
turning to foreign suppliers.  Iraq's population is projected 
to grow to 43 million by 2030, and it will need to import 
food supplies for the foreseeable future; however, this 
policy of maximizing domestic procurement will encourage 
Iraqi farmers to produce more wheat and rice, traditionally 
strong agricultural products for Iraq.  It will also 
indirectly encourage private-sector development in Iraq's 
food distribution and marketing channels. 
 
¶14.  (U) Embassy PDS Reform Team will encourage the GOI to 
institute additional policies and programs to encourage 
private-sector development in Iraq's food distribution and 
marketing channels.  One way would be for the GOI to sell its 
imported wheat to Iraq's 120 privately-owned flour mills, and 
for millers to in turn make a market in the flour they 
produce through developing private-sector distribution 
channels.  Currently, MoT provides wheat and pays the mills 
to produce flour, which MoT then distributes through the PDS. 
 Another way for the GOI to encourage private-sector growth 
would be to target loan programs to entrepreneurs who want to 
establish small- to medium-sized food-processing or 
distribution companies.  The GOI could also use the savings 
from the declining PDS budget to improve infrastructure and 
support programs that would contribute to improved 
private-sector activity. 
 
------------------- 
Eliminating the PDS 
------------------- 
 
¶15.  (C) The GOI has said it intends to eliminate the PDS 
over a four-year period, gradually drawing down the budget as 
food production, processing, and distribution strengthen, and 
freeing up resources for increased public investment. 
Several GOI officials, including Finance Minister Allawi, 
have said the PDS budget should be cut by 25% per year for 
four years and then eliminated.  The 25% budget reduction 
from 2005 to 2006 supports the seriousness of these official 
statements. 
 
¶16.  (SBU) Saddam appears to have created the PDS by 
executive decree in the early 90s.  (Note:  Attempts to track 
down relevant authorizing documents at the MoT have been 
unsuccessful because such documents, according to the MoT, 
were destroyed during the war.  End note.)  As a result, it 
may be possible for the GOI to reform and eliminate the PDS 
through Executive branch actions, such as Council of 
Ministers directives. 
 
 
BAGHDAD 00001244  004 OF 004 
 
 
-------------------------- 
Educating the Iraqi Public 
 
-------------------------- 
 
¶17.  (U) As the GOI reforms and eventually eliminates the 
multi-billion dollar PDS subsidy, Embassy will encourage the 
GOI to link the recently implemented Social Safety Net to PDS 
reform in the public mind (ref A).  This new Safety Net (ref 
D) is intended to protect the poorest Iraqis as economic 
reforms are implemented, and according to Iraqi public 
affairs officials, Iraqis will not be supportive of subsidy 
reductions unless they believe the Safety Net works.  We will 
also encourage the GOI to educate average Iraqis on how 
corruption and inefficiency have plagued the PDS system, 
outweighing any benefits. 
 
¶18.  (SBU) Embassy Econ and MoF co-chair the Economic Reform 
Public Education Working Group, which also includes Embassy 
Public Affairs, Treasury, USAID, DFID, the Iraqi Government 
Communications Directorate (GCD), and representatives from 
most Iraqi ministries.  PDS reform public-education messages 
could be effectively coordinated through this working group, 
which is currently developing public messages and delivery 
strategies to support fuel-subsidy reductions and 
anti-corruption efforts. 
 
--------------------------------------------- -- 
Comment:  Stopping the Cultural Damage for Good 
--------------------------------------------- -- 
 
¶19.  (U) Two of the main impediments to Iraq's development of 
a healthy market-driven economy are massive government 
subsidies and endemic government corruption.  The PDS 
contributes significantly to both of these.  Most critically, 
however, there is no objective measure for how damaging the 
current PDS is (and has been) to Iraq's development into a 
free and democratic society.  As long as the GOI continues to 
pour billions of dollars into the PDS, average Iraqis will be 
faced with a corrupt government bureaucracy that saps 
personal initiative without supplying any real benefit to the 
population.  To achieve the transparency and citizen 
self-reliance necessary for successful democratic government, 
the GOI should eliminate the PDS and continue to strengthen 
the new Social Safety Net that supports Iraq's truly needy. 
The GOI's recent actions and statements demonstrate increased 
GOI commitment to this line of thinking. 
 
¶20.  (U) Our uncertainty about the permanency of this line of 
Iraqi thinking matches that of DPM Chalabi, Finance Minister 
Allawi, and other current Iraqi leaders.  We will do 
everything in our power to encourage the new Iraqi government 
to continue the PDS reform policies of its predecessor, 
following the established principles of cutting 
"nonessential" items, providing freedom of choice through 
monetization, encouraging private-sector growth, gradually 
eliminating the PDS, and educating the Iraqi citizenry. 
KHALILZAD