VZCZCXRO8593
RR RUEHGI RUEHTRO
DE RUEHNJ #0908/01 1851139
ZNR UUUUU ZZH
R 041139Z JUL 06
FM AMEMBASSY NDJAMENA
TO RUEHC/SECSTATE WASHDC 4017
INFO RUEHUJA/AMEMBASSY ABUJA 1203
RUEHDS/AMEMBASSY ADDIS ABABA 0817
RUEHBP/AMEMBASSY BAMAKO 0683
RUEHGI/AMEMBASSY BANGUI 1206
RUEHDK/AMEMBASSY DAKAR 1119
RUEHKH/AMEMBASSY KHARTOUM 0268
RUEHLC/AMEMBASSY LIBREVILLE 0881
RUEHLO/AMEMBASSY LONDON 1470
RUEHNR/AMEMBASSY NAIROBI 0597
RUEHNM/AMEMBASSY NIAMEY 2738
RUEHFR/AMEMBASSY PARIS 1867
RUEHYD/AMEMBASSY YAOUNDE 1263
RUEHGV/USMISSION GENEVA 0761
RUCNDT/USMISSION USUN NEW YORK 0824
RUEHBS/USEU BRUSSELS
RUEHTRO/AMEMBASSY TRIPOLI 0262
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 NDJAMENA 000908 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT. FOR AF, AFC, DRL, PRM, S/CRS 
LONDON AND PARIS FOR AFRICA WATCHER 
NAIROBI FOR OFDA 
TREASURY FOR OUSED 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID EPET PGOV PREL KDEM KCRS CD
SUBJECT: CHAD: OIL REVENUE MANAGEMENT AND THE PRICE OF 
REGIME SURVIVAL 
 
REF: NDJAMENA 893 
 
--------- 
SUMMARY: 
--------- 
 
¶1. (SBU) The ten-day intensive talks between a Multi-Donor 
Mission and the Government of Chad (GOC) ended June 29.  A 
good start was made on revisions to Chad's Poverty Reduction 
Strategy Paper (PRSP), and on defining urgent actions needed 
to improve public finance management.  The World Bank's 
measure of success for talks over the next three months to 
September 26 will be progress made on reaching an agreement 
on oil revenue management.  World Bank negotiating leverage 
-- a requirement for automatic servicing of its IBRD lending 
through the oil revenue management scheme -- could disappear 
under a windfall of oil tax and customs duties revenues in 
¶2007.  The GOC will be weighing its need for international 
approval and development assistance against its survival 
instinct in the face of armed rebellions when determining the 
level of transparency it will accept in the control of Chad's 
oil wealth.   END SUMMARY. 
 
----------------------------- 
ROYALTIES, DIVIDIENDS, TAXES 
ALL FLOWING AGAIN 
----------------------------- 
 
¶2. (SBU) World Bank team leader Marie Francoise Marie-Nelly 
(Program Manager -- Chad-Cameroon Pipeline Cluster) briefed 
Ambassador June 30 on the outcomes of the World Bank/IMF-led 
Multi-Donor Mission to Chad to discuss a global agreement on 
public finance reform and poverty reduction strategy 
revisions.  Marie-Nelly confirmed that, in keeping with the 
Bank's interim agreement with the Government of Chad (GOC), 
the first tranche of back payments of royalties from the 
frozen CitiBank "transit account" had been approved for 
disbursement.  This meant that the GOC received on or about 
July 1 USD 56.7 million in un-frozen royalties and share 
dividends, and June royalties and dividends.  In addition, 
the GOC collected a quarterly payment of USD 14 million in 
taxes and customs duties (not controlled through the World 
Bank-GOC oil revenue management program), for a total 
end-June lump-sum incomes received of USD 70.7 million. 
 
¶3. (SBU) The Bank's team leader said that further un-frozen 
royalty and dividend back payment disbursements are scheduled 
for July 26 and August 28, amounting to roughly USD 40 
million per tranche.  She reported that the "transit account" 
currently held roughly USD 100 million in frozen 
royalties/dividends, and that the petroleum consortium would 
deposit another USD 20 million to the account on July 22.  A 
last tranche of unfrozen back-payments is to be made on/about 
26 September -- the current deadline for the Bank and GOC to 
reach a final, "global" agreement on oil revenue management. 
 
¶4. (SBU) Marie-Nelly stressed that, during this three month 
negotiating period, the "transit account" remains technically 
frozen.  However, the Bank has told CitiBank to proceed with 
disbursement of successive back-payment tranches unless 
otherwise instructed.  She noted that there were no specific 
criteria or benchmarks of GOC performance governing the 
Bank's disbursement decision, which would be based on an 
assessment of GOC good faith in negotiating toward an 
acceptable oil revenue management program. 
 
--------------------- 
LITTLE LEVERAGE LEFT 
 
NDJAMENA 00000908  002 OF 003 
 
 
--------------------- 
 
¶5. (SBU) Marie-Nelly noted that discussions with the GOC were 
firmly rooted in achieving the goals of (a) ensuring that oil 
revenues are devoted to poverty reduction, and (b) building 
commitment within the GOC to sound public finance management. 
 However, the Bank's leverage in the talks was based at least 
in part on its own requirement that the IBRD 
(non-concessional) portion of its lending to Chad for oil 
exploitation be serviced through the oil revenues management 
program. 
 
¶6. (SBU) She admitted that this leverage might not be 
especially strong, given the financial flows from un-captured 
tax and customs duties streams.  These were set annually, 
looking backward to reflect the price of oil for the previous 
year, and collected quarterly.  For 2006, the amount received 
per quarter, reflecting the price of oil in 2005, was set at 
USD 14 million.  The Bank, Fund, and donors have been well 
aware for some time that, given the price of oil for 2006 had 
averaged much more than it had in 2005, Chad's tax and 
customs duties collections will skyrocket in 2007. 
 
¶7. (SBU) The Bank will continue to insist that its lending be 
automatically serviced from royalties through a 
Bank-controlled off-shore transit account as part of any deal 
with the GOC on a global agreement for oil revenue 
management.  The sanction for not achieving a global 
agreement would be a continued freeze on the transit account, 
as well as putting other Bank programs in jeopardy based on 
what would essentially be GOC intent to default on the IBRD 
loan. 
 
¶8. (SBU) Marie-Nelly pointed out, however, that the GOC might 
simply choose to eliminate this Bank negotiating leverage by 
pre-paying the IBRD loan in full -- at a cost of "only" USD 
32 million.  Because the European Investment Bank's (EIB) 
lending for the oil project is also serviced through the 
transit account, the GOC would likely have to pre-pay that as 
well, to the tune of roughly another USD 20 million.  Such a 
move would certainly not be seen as a wise use of resources, 
but given the large tax and customs duties receipts expected 
in 2007, the GOC might consider it money well spent if it 
cleared away international financial institution obstacles to 
unfettered GOC control of Chadian oil revenues. 
 
---------------------- 
OTHER THAN THAT, GOOD 
PROGRESS IS POSSIBLE 
---------------------- 
 
¶9. (SBU) Marie-Nelly expressed considerable optimism that 
outside the debate over oil revenue control there would be a 
high probability for good progress over the next three 
months.  She reported that, on revisions to the PRSP, a work 
program calendar had been established for the period through 
June 2007, and a technical budget approved of USD 800 
thousand, of which USD 200 thousand from the GOC. 
Discussions on the Plan of Action for Modernizing Public 
Finances (PAMFIP) had also made progress, with a set of 
urgent actions defined, and a partial implementation calendar 
set.  Here, however, Marie-Nelly noted the interface between 
overall public finance management and the oil revenue 
question, pointing out that there is a need for much more 
spending discipline in the budget.  She said that the Bank's 
team had worked hard during the Multi-Donor Mission to bring 
the GOC technical experts to the same starting point on 
seeking to equilibrate "lumpy" revenue streams and "smooth" 
 
NDJAMENA 00000908  003 OF 003 
 
 
spending programs.  Especially important was the idea that 
planning had to be done now for expected decline in revenues 
in ten years.  Marie-Nelly said that GOC respect of a 
cash-flow plan over the next few months would be a key 
short-term measure of its broad political will to manage its 
financial resources for the medium term. 
 
-------- 
COMMENT 
-------- 
 
¶10. (SBU) Post's participation in several days of the 
Multi-Donor Mission revealed an essential dichotomy in the 
GOC approach to the discussions, and preparations for the 
next three months of talks.  On one hand, GOC technical 
staff, and some political-level interlocutors, have a clear 
understanding of the stakes in play in these negotiations. 
They see that Chad's hopes for poverty reduction, financial 
future, and international reputation are on the line.  On the 
other hand, when the question of who should control the 
financial flows from Chad's oil wealth is discussed, there 
appears in the GOC team a combination of economic 
nationalism, and fear for the immediate survivability of the 
Deby regime in the face of armed rebellions.  Development 
plans appear to quickly slide to second tier priority next to 
the need for sufficient ready cash to pay for arms, logistics 
-- and friends. 
 
¶11. (SBU) In a scenario where talks with the Bank are 
relatively constructive through at least early September, and 
then sour as the deadline for an agreement approaches, Chad's 
cash flow may be relatively thin through fourth quarter 2006. 
 The GOC will nonetheless have pulled in by end-August some 
USD 120 million in unfrozen royalty and dividend payments. 
Were the talks with the Bank to then break down and the Bank 
refuse to allow a resumption of regular royalty and dividend 
payments, the GOC would still collect roughly USD 28 million 
in taxes and customs duties to the end of the calendar year. 
First quarter 2007 might be pretty lean; and then, the first 
quarterly payment of taxes and customs duties would arrive, 
newly calculated on the basis of 2006 oil prices. 
END COMMENT. 
 
¶12. (U) Tripoli Minimize Considered. 
WALL