VZCZCXRO2625
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3600/01 3030733
ZNR UUUUU ZZH
R 300733Z OCT 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 4118
INFO RUCNRAQ/IRAQ COLLECTIVE
RHEHAAA/WHITE HOUSE WASHINGTON DC//NSC//
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 BAGHDAD 003600 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV IZ
SUBJECT: IRAQ'S PROVINCIAL BUDGET EXECUTION: FORWARD 
MOMENTUM SLOWING 
 
¶1. (U) SUMMARY: Provincial budget execution in 2007 remains 
one of Iraq's major accomplishments in good governance. At 60 
percent, current commitment rates for 2007 remain impressive. 
USG programs in training and capacity building, administered 
nationally and through PRTs, have played an important role in 
improving the technical capabilities of provincial 
governments to carry out capital budget implementation. 
 
¶2. (U) Disbursement rates for 2007 are low, however. In 
addition to the fact that the budget was not passed until 
late February and most provinces did not open their capital 
accounts until late April or early May, security, contractor 
capacity, and poor integration of the provincial budget help 
explain slow disbursements. A major factor that many ePRTs 
identify though is the failure of the GOI to devolve budget 
authority beyond the provincial governor. Continued spending 
in local public infrastructure remains critical to Iraq's 
development. Devolving spending authority to municipalities, 
districts, and other sub-provincial authorities who can make 
spending decisions can contribute to more effective budget 
execution, and as a result, a quicker and more equitably 
targeted impact on Iraq's development. Key to any further 
devolution of capital spending authority is a complementary 
authority for operations and maintenance (O and M) spending. 
Devolving capital spending authority without putting in place 
a mechanism for O and M for capital assets will not improve 
the ability of government, national or local, to deliver 
essential services. END SUMMARY. 
 
---------- 
Background 
---------- 
 
¶3. (U) When provinces were first 'granted' 
capital/reconstruction funds, GOI expectations were that 
these funds would be used for small projects to be executed 
in the same fiscal year during which they were allocated, 
with larger multi-year projects to be carried out by national 
ministries operating in the provinces. Provinces were allowed 
to make commitments, and if unable to execute small capital 
projects within the fiscal year, funds were theoretically to 
revert to the Treasury. 
 
¶4. (U) In the two years that provinces have been allocated 
budgets for capital spending, provincial governments have 
demonstrated a capability to undertake increasingly complex, 
multi-year projects, in some cases co-funded with line 
ministries. Given the lack of a standard and well-defined 
fiscal classification system that includes a published system 
of reporting on programs, expenditures, receipts, and 
outlays, tracking these expenditures is difficult for the 
Iraqis as well as the USG. (Note: Our reporting uses the term 
"commitment" for capital projects to reflect Iraqi use of the 
same term which requires disbursements of all funds in the 
same fiscal year during which they were appropriated. 
Disbursements against these commitments are a challenge to 
report as Iraqi reporting often includes some non-capital 
costs. We continue to try and improve the accuracy of our 
reporting. End Note.) 
 
--------------------------------------------- ------------- 
Iraqi Budget Execution Accomplishments with USG Assistance 
--------------------------------------------- ------------- 
 
¶5. (U) USAID is implementing a Local Governance Program (at a 
cost, to date, of 170 million USD) which has a presence in a 
majority of provinces, trains provincial officials on budget 
execution, works at the national level to improve the 
communication of budget instructions to the provinces, and 
works with governors and provincial councils to integrate 
their strategic planning and budgeting with that of 
provincial directors-general (DGs) in their provinces, as 
well as with the Ministry of Planning and Development 
Cooperation (MoPDC), through Provincial Development 
Strategies. 
 
¶6. (U) Many PRTs have financial advisors who work with, 
train, and mentor technical experts in provincial governors' 
office. We continue to staff such critically needed positions 
as part of the PRT surge. Additionally, in coordination with 
other team members, PRTs are attempting to improve 
communication between provincial councils and provincial DGs 
(who have separate budgets for their individual ministries in 
each province). 
 
¶7. (U) Treasury has funded the training of 50 provincial 
officials on budget execution with additional training 
sessions being offered every month for the next three months. 
 
 
BAGHDAD 00003600  002 OF 003 
 
 
¶8. (U) The Provincial Reconstruction and Development 
Committee (PRDC) program, administered by ITAO, encourages 
good governance best practices at the provincial level by 
requiring that provincial councils designate a provincial 
reconstruction committee that can prioritize provincial 
reconstruction needs and submit prioritized requests in order 
to be eligible for USG funding. 
 
-------------- 
The Challenges 
-------------- 
 
¶9. (U) The GOI's current challenges in capital provincial 
budget execution are varied. Operationally, low disbursement 
rates are attributable to a cumbersome system of fund 
releases, a lack of transparency in procurement regulations, 
and the complete dependence on a single national revenue 
source. Lack of qualified and available contractors and 
little strategic planning in various sectors add to the 
complexity. From a governance perspective, a co-related need 
for better integration of capital budget requests 
horizontally with provincial DGs and vertically with 
municipalities below them and the federal government above 
them is a major impediment to budget execution. USG efforts 
to date are focused on helping the Iraqis in both the 
operational and governance area. Additionally, we have 
identified the need to focus on encouraging adequate 
operations and maintenance budgets to accompany capital 
projects. 
 
----------- 
Way Forward 
----------- 
 
¶10. (U) The Procurement Assistance Center (PAC), an 
ITAO-administered program, funds the Ministry of Planning and 
Development Cooperation in the establishment of PACs focused 
on clear and efficient procurement and contracting 
procedures. The PAC program supports both national ministries 
and provincial governments. PACs established in provinces are 
referred to as Provincial Procurement Assistance Teams 
(PPATs). PPATs have recently been established in a number of 
provinces. Provinces with the greatest difficulty in budget 
execution have been given priority. 
 
¶11. (U) USAID is developing an automated provincial capital 
investment management system to better execute capital budget 
expenditures and build a groundswell for a national financial 
management system. The system will allow for easier tracking 
of funds, transparency, and more efficiency when building the 
required reports for accounting, project management, and fund 
requests. The application is on track for a January roll-out. 
Focus now is on application development and Iraqi buy-in in 
individual provinces. This effort complements a similar 
effort by the PAC program to automate procurement requests. 
 
¶12. (U) With the Iraqi 2008 budget process underway, 
AID/TREAS/OPA are bringing provincial governments together 
with the MoPDC to help integrate comprehensive provincial 
development strategies, which include large provincial 
demands for capital, to the national development strategy as 
well as the central budget allocation process of other 
ministries. The goal is to improve communication between 
provincial and national levels of government with the hope 
that better communication and de-confliction of provincial 
and national priority projects will lead to clearly 
delineated provincial capital projects that can be 
implemented more rapidly in 2008. 
 
------------- 
USG Resources 
------------- 
 
¶13. (U) Currently, the USAID resource plan on provincial 
budget execution support is: 
- 3 public finance advisors at different PRTs, 
- 1 senior fiscal advisor in Baghdad, 
- 1 senior strategic planner in Baghdad, 
- Locally engaged staff in almost every province, 
- 7 financial advisors en route, 
- 10 person team developing a provincial budget execution 
automation system 
 
¶14. (U) Currently, the Office of the Treasury Attache 
resource plan on provincial budget execution is: 
- 1 budget advisor leading budget execution training and 
improving national-local coordination, 
- 1 budget officer collecting provincial budget execution 
data from the MoPDC and Ministry of Finance (MoF) 
 
BAGHDAD 00003600  003 OF 003 
 
 
 
¶15. (U) Currently, OPA's resource plan on provincial budget 
execution is: 
- 1 economic advisor collecting and reporting on provincial 
budget execution data from PRTs as well as helping coordinate 
AID/Treasury/OPA effort on provincial development strategy 
integration with the national development strategy. 
 
¶16. (U) Currently, ECON's resource plan on provincial budget 
execution is: 
- 1 reporting officer analyzing and reporting on budget 
execution across Iraq. 
 
¶17. (U) Currently, ITAO's resource plan on provincial budget 
execution is: 
- 3 American advisors and 24 Iraqi advisors in the PACs 
project for provinces and PPATs. 
 
¶18. (U) As the table below indicates, the proportion of 
spending that Iraq allocates to sub-national levels (25 
percent) is below that of most western countries. Given 
negligible sub-national revenue/tax collection and the 
difficult security situation, the GOI should be credited for 
making major strides in devolving spending to the provincial 
level but it is important to note that, with 25 percent of 
the total spending on infrastructure through the provincial 
governments that the percentage of capital spending through 
sub-national government remains comparatively low. 
 
Country         Percent of               Percent of 
           Sub-national spending      Revenue Generated 
                 Sector                Sub-nationally 
           ---------------------      ----------------- 
 
Canada             57                       50 
United States      40                       40 
Germany            36                       32 
Belgium            34                       11 
Austria            29                       21 
Iraq (incl. KRG)   25                       0.1 
Iraq (no KRG)       8                       0.1 
 
--------------- 
A New Approach? 
--------------- 
 
¶19. (U) Comment: As an example, U.S. engagement remains 
successful in Anbar due to engagement at the sub-provincial 
level (tribal committees). ePRTs are increasingly making the 
observation that capital project bids are limited to 
contractors known to the provincial government, usually 
located in the capital. In the absence of any sort of local 
revenue generation, the GOI should consider devolving budget 
spending authority beyond provincial governors (where it has 
become increasingly concentrated) to municipal authorities. 
End Comment. 
 
BUTENIS