VZCZCXRO6805
PP RUEHLMC
DE RUEHLM #0147/01 0241231
ZNR UUUUU ZZH
P 241231Z JAN 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 5230
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0536
RUEHKA/AMEMBASSY DHAKA 9828
RUEHIL/AMEMBASSY ISLAMABAD 6770
RUEHKT/AMEMBASSY KATHMANDU 4831
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 04 COLOMBO 000147 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR SCA/INS AND DRL/IL LAUREN HOLT 
 
DOL/ILAB FOR TINA MCCARTER 
 
MCC FOR S GROFF, D NASSIRY, E BURKE AND F REID 
 
E.O 12958: N/A 
TAGS: ECON ETRD PHUM SOCI EAID EAIR CE
SUBJECT:  MCC IN SRI LANKA:  MAJORITY OF INDICATORS PROBABLY NOW 
BELOW INTERNATIONAL STANDARDS 
 
REF: A) 2006 COLOMBO 1732 (SCORECARD DELIVERED), B) 2006 COLOMBO 
 
1993 (LACK OF DESIRE FOR PEACE MAY IMPEDE ECONOMIC GROWTH), C) 2006 
COLOMBO 2096 (ECONOMIC LEADERS MUST FOCUS ON DEFENSE), D) 2006 
COLOMBO 2119 (CORRUPTION WORSENING IN SRI LANKA), E) 2006 COLOMBO 
2127 (SRI LANKA LOSES HALF OF GERMAN TSUNAMI AID), F) 2006 COLOMBO 
2142 (HUMAN RIGHTS GROUPS VOICE CONCERN), G) 2006 COLOMBO 2063 (SRI 
LANKA FY2007 BUDGET), H) COLOMBO 82 (2007 INVESTMENT CLIMATE 
STATEMENT), I) COLOMBO 100 (NGOS FACE CLIMATE OF INTIMIDATION) 
 
¶1.  (SBU) SUMMARY AND ACTION REQUEST:  Almost three years ago when 
Sri Lanka qualified as a Millennium Challenge Account candidate 
country, many of Sri Lanka's MCC indicators were on a positive 
trend.  Since then, the government has changed hands twice and each 
new government has proven less committed to the MCC principles of 
ruling justly, investing in people, and advancing economic freedom. 
The indicators MCC uses to measure these principles have begun to 
show declines for Sri Lanka, but the latest indicators do not yet 
reflect the serious deterioration that occurred in 2006.  Post 
continues to support concluding an MCC Compact for Sri Lanka 
provided the GSL reverses this negative trend.  We recommend that 
the MCC inform the government of the USG's concern about the 
deterioration in a majority of the key areas tracked by MCC 
indicators and the need for Sri Lanka to take steps to rectify these 
so a compact can be concluded as soon as possible.  End Summary and 
Action Request. 
 
RULING JUSTLY: ALL MEASUREMENTS SLIDING 
--------------------------------------- 
 
¶2.  (SBU) RELEVANT LEGISLATION AND SRI LANKA'S POSSIBLE FAILURE: 
Section 607 of the Millennium Challenge Act of 2003 requires that a 
country demonstrate a commitment to just and democratic governance, 
including a demonstrated commitment to (A) promote political 
pluralism, equality and the rule of law; (B) respect human and civil 
rights, including the rights of people with disabilities; (C) 
protect private property rights; (D) encourage transparency and 
accountability of government; and (E) combat corruption."  While Sri 
Lanka's MCC scorecard indicates that Sri Lanka "passes" all Ruling 
Justly indicators, its scores on each indicator declined between 
2002 and 2005, with four of the six approaching failure.  Post has 
noted further deterioration in the GSL's performance in areas like 
civil liberties and rule of law in 2006; these declines have not yet 
registered in the Freedom House and World Bank Institute reports 
used by MCC.  Further, these two sources do not include human 
rights, another mandated MCC criterion which significantly declined 
in 2006.  Below are updates on several near or actually failing 
indicators: 
 
RESPECT FOR HUMAN RIGHTS DECLINING 
---------------------------------- 
 
¶3.  (SBU) Neither Freedom House nor the World Bank Institute, the 
only sources cited in the scorecard under the Ruling Justly 
criteria, explicitly identify human rights as a criteria within 
their evaluations.  This makes it essential that the negative state 
of human rights in Sri Lanka be considered outside the scorecard 
mechanism. 
 
¶4.  (SBU) On December 21, 2006, the Ambassador hosted a roundtable 
discussion with human rights activists and civil society 
representatives.  Participants complained of a climate of fear, a 
lack of accountability in government institutions such as the Human 
Rights Commission, limited judicial independence, an anti-NGO 
atmosphere, and threats to media freedom (see Ref F). 
 
¶5.  (U) Alan Rock, the UN Special Advisor on Children and Armed 
Conflict; ; Human Rights Watch; UNICEF; the UN Working Group on 
Forced or Involuntary Disappearances; and the ICRC all currently 
judge  the GSL to be in gross violation of human rights.   In a 
November 2006 statement, Rock reported that he had evidence that 
"certain elements of the government security forces are supporting, 
and sometimes participating in the forced recruitment of children by 
the Karuna faction."   Further, Human Rights Watch investigations in 
eastern Sri Lanka found substantial evidence that the Sri Lankan 
military and police have been involved in abductions. 
 
 
COLOMBO 00000147  002 OF 004 
 
 
¶6.  (SBU) The December 2006 USAID Democracy and Governance 
Assessment Team found a substantial consensus of opinion that the 
democracy and governance environment has deteriorated since 2005, 
and that the speed of the decline has increased in recent months. 
Their specific findings were that: A) the last two years have seen 
an increase in human rights violations and a continuation of Sri 
Lanka's long-standing culture of impunity; B) there is shrinking 
space for political dissent in general and pro-peace, 
non-nationalist discourse in particular; and C) governance is poor 
and remains heavily centralized, and there are signs of increasing 
fragmentation of authority and public sector corruption.  The single 
most immediate and actionable finding for the Mission was that the 
USG needs to initiate programs in rule of law and human rights, 
noting that Sri Lanka's respect for human rights has deteriorated 
sharply in the last two years.  The team determined that "the US 
government can and should contribute to halting the slide and 
strengthening the protection of fundamental rights, not only through 
support to key human rights institutions but through the statement 
that such assistance makes about US concern for the rights 
situation." 
 
RULE OF LAW, TRANSPARENCY AND ACCOUNTABILITY OF GOVERNMENT DECLINING 
 
--------------------------------------------- -- 
 
¶7.  (SBU) The World Bank Institute notes a steady decline in Rule of 
Law from 2002 through 2005.  Transparency International's ranking of 
Sri Lanka dropped from 67 out of 145 (53rd percentile) in 2004 to 84 
out of 163 (48th percentile) in 2006.  These declines can in part be 
attributed to the erosion of already limited checks and balances on 
executive authority, another finding of the USAID Democracy and 
Governance assessment team.  For example, President Rajapaksa 
bypassed the Constitutional Council and directly appointed 
commissioners to independent agencies such as the Human Rights and 
Police Commissions established to prevent the politicization of 
public sector institutions and check the abuse of power.  Not 
surprisingly these Presidential appointees have failed to 
demonstrate the leadership necessary to make these Commissions the 
independent checks that the Sri Lankan constitution intended them to 
be.  Further, President Rajapaksa's extrajudicial powers and 
immunities are far-reaching.  In addition to being elected as 
President, Rajapaksa also appointed himself as Minister of Finance, 
Minister of Defense and Minister of Plan Implementation.  Since the 
Sri Lankan Constitution grants immunity to the President from all 
parliamentary questioning, Rajapaksa does not need to defend the 
policies of those ministries before Parliament.  Therefore, his 
actions involving government finance and defense, among other 
activities, are immune from review.  Parliament does not debate the 
President's budget prior to taking a vote nor does it effectively 
question activities of the military.  The President also has 
bypassed the Constitutional Council to appoint directly the head of 
the Human Rights Commission and other independent commissions, 
thereby undercutting the independence of the HRC. 
 
¶8.  (SBU) Appellate judges and the Chief Justice of the Supreme 
Court are appointed by the President, without a confirmation 
process.  This power gives the President considerable influence over 
the senior judiciary.  EconOff was told by a local attorney that, 
within the Supreme Court, only the Chief Justice's opinion counts 
significantly, since the other Supreme Court judges depend on him 
for continued employment, and almost invariably follow his opinion. 
 
 
CIVIL LIBERTIES ERODING 
----------------------- 
 
¶9.  (SBU) MCC considers within its Civil Liberties scoring the 
independence of the media and judiciary, protection from police 
terror and unjustified imprisonment, equality of opportunity and 
freedom to travel.  Civil liberties are constrained for Sri Lankans 
in the North and East.  For example, there has been no freedom of 
movement in Jaffna.  Those who wish to leave the area must receive 
clearance from the military.  Approximately 25,000 residents are now 
on a list awaiting clearance.  In response to requests from the 
Ambassador and others, the GSL is making modest efforts to 
facilitate more travel.  Residents of the Jaffna peninsula, while 
 
COLOMBO 00000147  003 OF 004 
 
 
under complete military occupation and a strict curfew, still suffer 
widespread extra-judicial killings and disappearances, most of which 
occur during curfew when only the military and those groups working 
with it are allowed to operate.  This indicates the collusion, if 
not the direct participation, of security forces in these human 
rights violations. 
 
¶10.  (SBU) Reporters Sans Frontieres and Freedom House report that 
attacks against the media have increased sharply.  This conclusion 
was also confirmed by the International Press Institute to Sri 
Lanka.  Media sources report that five media workers were killed in 
2005, and seven in 2006.  A foreign reporter left Sri Lanka in 
December after receiving death threats.  Such threats were not 
common several years ago, but are becoming increasingly common, not 
only against reporters, but against others who question the culture 
of impunity increasingly prevalent in Sri Lanka.  New wide-reaching 
anti-terrorism laws have resulted in media self-censorship, as well 
as the arrest and questioning of two journalists over the content of 
their reporting.  Advertisers can be harassed as well:  the 
Secretary of Defense (the President's brother), recently challenged 
 
SIPDIS 
the Port Authority Chairman's right to advertise in newspapers which 
do not always report in a pro-Government manner.  A key 
recommendation of the USAID DG assessment is that the Mission 
support programs explicitly designed to protect journalists 
nationwide. 
 
CORRUPTION INCREASING 
--------------------- 
 
¶11.  (SBU) According to Transparency International, corruption is 
perceived as most pervasive in terms of political appointments to 
government institutions and in government procurement awards, as 
well as in high frequency/low value transactions.  Corruption in 
high frequency/low value transactions makes government institutions 
inefficient and robs poor Sri Lankans, who can least afford bribes, 
of government services.   Transparency International reports that 
the judiciary and the police force are perceived to be the most 
corrupt institutions in the GSL. 
 
¶12.  (SBU) MCC's criteria include consideration of whether specific 
entities have been established to combat and control corruption. 
Although Sri Lanka boasts eight institutions with some sort of 
mandate to combat corruption, these institutions frequently 
interpret their mandates narrowly, inhibiting their effectiveness 
(Ref D).  For example, the Commission to Investigate Allegations of 
Bribery or Corruption can only act if it receives a written 
complaint.  Few Sri Lankans are willing to write such complaints due 
to fear of retaliation.  Sri Lanka has no whistleblower protection 
law and a Right to Information Law has been stalled in Parliament 
since 2003.  Additionally, death threats and other forms of 
harassment are considered common, to the point that if a case ever 
goes to trial, witnesses frequently do not appear in court.  We 
recommend MCC visitors plan to meet with World Bank and Asia 
Development Bank representatives on the MCC's next visit in order to 
share perspectives on corruption and learn what specific measures 
the IBRD and ADB have put in place to guard against misuse and 
diversion of their project funds. 
 
ECONOMIC FREEDOM: ALSO STARTING TO SLIDE 
---------------------------------------- 
 
¶13.  (SBU) Three of MCC's six Economic Freedom indicators show a 
decline in the 2006 scorecard.  As with other indicators, these 
declines understate the worsening economic freedom in Sri Lanka, due 
to the time lag of the reports.  Inflation shot up in 2006, running 
at nearly 20 percent, as the Central Bank accommodated the GSL's 
heavy defense spending by printing money.  Regulatory quality 
continues to decline, as laws and regulations are frequently imposed 
without appropriate public debate or advance notice.  Some laws are 
applied retroactively, to the detriment of commercial enterprises. 
Trade policy has become more protectionist. 
 
INVESTING IN PEOPLE: LOW EXPENDITURES LIKELY TO HURT PERFORMANCE 
--------------------------------------------- ------- 
 
¶14.  (SBU) With the increased scale of the conflict and little 
 
COLOMBO 00000147  004 OF 004 
 
 
official desire for peace, economic leaders are focusing on 
financing the conflict rather than investing in people (Refs B and 
C).  While Embassy had vouched for Sri Lanka's performance on the 
MCC Investing in People indicator (Ref A), the recently announced 
budget increases military expenditures while neglecting health and 
education (Ref H).  Our endorsement was based on Sri Lanka's 
relatively good outcomes, despite low spending.  However 
underfunding will eventually result in worsening health and 
education outcomes and reflects GSL's weak commitment to these 
important services. 
 
OTHER DONORS TAKING A HARDER LINE 
--------------------------------- 
 
¶15.  (SBU) Both the Asian Development Bank and the World Bank have 
recently chosen not to proceed with investments sought by the GSL 
because of concerns that the government would not implement the 
projects effectively and equitably.  These donors and MCC have 
compared notes and found that the GSL had proposed the same project 
for MCC funding.  Further, Embassy reported in Ref E that Germany 
would reallocate half of its tsunami aid from Sri Lanka to 
Indonesia, and would not provide new programming to Sri Lanka 
without resumed negotiations between the GSL and LTTE.  Germany's 
Minister of Overseas Development voiced strong displeasure over the 
resumption of the conflict, which he noted made it impossible for 
Germany to continue its programs in the northeast of the country. 
 
¶16.  (SBU) USAID is increasing spending on unanticipated programs, 
including protection of internally displaced persons, support for 
human rights, and support for the Independent International Group of 
Eminent Persons, a commission established to investigate human 
rights abuses in Sri Lanka.  All of these new programs are caused by 
resumption of the conflict.  As a result of these new commitments, 
USAID will be reorienting its entire program to be 
conflict-oriented. 
 
POSSIBLE INEQUITABLE BENEFITS OF AN MCC COMPACT 
--------------------------------------------- -- 
 
¶17. Some donors believe the Rajapaksa government is intentionally 
trying to steer aid and investment toward the Sinhala south while 
neglecting the north and east.  When a U.S. demining NGO registered 
recently with the GSL, it was asked if it would be willing to move 
its dairy development project from the northern city of Jaffna to 
the predominantly Sinhalese area of Anuradhapura (Ref I).  The 
increased fighting exacerbates this trend, as development work is 
hampered in conflict zones.  Under current conditions, it would be 
unsafe for MCC or its contractors to try to work in conflict areas 
in the north and east.  Yet a main goal of an MCC Compact should be 
transformation of the entire Sri Lankan economy, not just the 
Sinhala majority areas.  Entering into a Compact that would result 
in MCC resources being channeled disproportionately to peaceful 
areas could exacerbate ethnic inequities and fuel the conflict. 
 
COMMENT AND RECOMMENDATION 
-------------------------- 
 
¶18.  (SBU) The Mission's Country Team views the government's 
increasingly tarnished human rights record, lack of fiscal 
discipline, increasing corruption, culture of impunity, intimidation 
of the press, and reversion to open conflict as developments that 
undermine Sri Lanka's MCC goals and qualifications.  Post therefore 
recommends that MCC warn the GSL that its poor recent performance on 
ruling justly, investing in people, and economic freedom could 
jeopardize Sri Lanka's MCC eligibility, and urge the GSL to take 
rapid action to rectify these so a compact can be concluded as soon 
as possible.  The resumption of sustained peace negotiations would 
help significantly diminish human rights violations, as will the 
expected start of work by the Commission of Inquiry appointed by the 
President to work with international observers, including former US 
Assistant Secretary Gene Dewey, to investigate key human rights 
problems and make appropriate recommendations.  But, as the 
discussion above makes clear, progress on other indicators will also 
be necessary. 
BLAKE