VZCZCXRO7493
RR RUEHLMC
DE RUEHLM #1608/01 2760439
ZNR UUUUU ZZH
R 030439Z OCT 06 ZDK
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4378
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0005
RUEHKA/AMEMBASSY DHAKA 9464
RUEHIL/AMEMBASSY ISLAMABAD 6364
RUEHKT/AMEMBASSY KATHMANDU 4409
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 001608 
 
SIPDIS 
 
SENSITIVE, SIPDIS 
 
STATE FOR SCA/INS AND EB/IFD/ODF; COMMERCE FOR E YESIN AND B LOPP; 
TREASURY FOR S CHUN; MCC FOR D NASSIRY AND E BURKE 
 
E.O 12958: N/A 
TAGS: EAID ECON PREL SENV CE
SUBJECT:  SRI LANKA: MCC AND GOVERNMENT AGREE TO KEEP IRRIGATION 
COMPONENT OF POTENTIAL COMPACT 
 
 
COLOMBO 00001608  001.2 OF 002 
 
 
¶1. (SBU) Summary:  Senior Millennium Challenge Corporation and 
Government of Sri Lanka officials agreed to proceed with development 
of a proposed USD 590 million MCC compact that would include 
projects on irrigation and agriculture, roads, and small and medium 
enterprise promotion.  MCC officials explained that their due 
diligence process would continue for at least 12 months and that it 
would be at least 18 months before a compact, if one is concluded, 
entered into force.  This time span was necessary for completion of 
international-standard environmental and social impact assessments 
related to Sri Lanka's proposed construction of dams, and would also 
allow time for the two sides to identify policy approaches that 
would ensure the proposed projects delivered sufficient economic 
returns and would be adequately maintained over the long term.  End 
Summary. 
 
¶2. (SBU) Senior Millennium Challenge Corporation (MCC) officials met 
with Sri Lankan lead MCC liaison Nivard Cabraal (the Governor of the 
Central Bank) September 27 to discuss critical elements of Sri 
Lanka's proposed USD 450 million MCC compact.  The MCC delegation 
was composed of Frances Reid, Managing Director for Eurasia; 
Margaret Kuhlow, Managing Director for Environment and Social 
Assessment; Franck Wiebe, Managing Director for Economic Analysis; 
and Darrius Nassiry, Country Director for Sri Lanka.  Ambassador 
Blake and Econoff also attended the meeting. 
 
¶3. (SBU) The MCC delegation informed Cabraal that MCC had identified 
three aspects of Sri Lanka's proposed compact that would require 
accommodation from Sri Lanka in order to meet MCC's due diligence 
requirements.  First, the proposed dam-supplied irrigation projects 
would require international-standard environmental and social impact 
assessments that would take twelve months to conduct.  These would 
have to be completed before a compact could be signed.  Second, Sri 
Lanka would need to be willing to conduct a good-faith discussion 
with MCC on ways to improve the economic benefits of the proposed 
projects, especially in the irrigation and agriculture sectors. 
Finally, Sri Lanka would need to show clearly how it intended to 
adequately budget for long-term operations and maintenance expenses 
for the proposed roads and irrigation systems. 
 
¶4. (SBU) MCC delegation emphasized that the overarching goal of any 
investment it would make in Sri Lanka would be to ensure that the 
investment reduced poverty and delivered economic growth.  Governor 
Cabraal affirmed that the Government of Sri Lanka (GSL) had the same 
desire and therefore was willing to work with MCC to satisfy its 
concerns.  He recognized that there was no way to reduce the 
duration of the impact assessment process.  He explained that 
radical policy changes would not be possible, but were not necessary 
in order to ensure strong economic benefits from the programs. 
Instead, existing laws allowed sufficient flexibility for new 
agricultural practices to be pursued.  Finally, he assured MCC that 
operations and maintenance expenses for projects that produced high 
returns would definitely be covered in order to ensure that the 
returns endured. 
 
¶5. (SBU) With the two sides agreeing that they had mutual interest 
in identifying a workable way forward, they agreed to use the 
remainder of the MCC delegation's visit to discuss implementation 
issues in greater detail.  On September 28, MCC delegation met with 
Mission USAID staff to discuss USAID anti-corruption, 
infrastructure, community consultation, and local governance 
programs in Sri Lanka; with Sri Lanka's Ministry of Plan 
Implementation and Central Environmental Authority to outline the 
required features for adequate environmental and social impact 
assessments; and with the Federation of Chambers of Commerce and 
Industry of Sri Lanka, regarding the Small and Medium Enterprise 
component of the proposed compact. 
 
¶6. (SBU) Comment: Post welcomes the mutual decision to proceed with 
MCC compact development.  The MCC team's frank description of its 
minimum economic, environmental, and social requirements was 
important to ensure that Sri Lanka has a realistic understanding 
that seeking MCC funds for irrigation projects will lengthen MCC's 
due diligence process into 2008.  While the GSL would have liked to 
get started with MCC projects sooner, it now has decided to take a 
slower but more ambitious course.  Post will continue to assist MCC 
in ensuring that the GSL understands that MCC remains in its due 
diligence phase and that MCC will only invest in Sri Lanka when it 
is convinced that the investment will deliver sufficient returns in 
terms of poverty reduction and economic growth. 
 
¶7. (U) MCC delegation cleared this cable. 
 
 
COLOMBO 00001608  002 OF 002 
 
 
BLAKE