VZCZCXRO1906
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #4062/01 3481109
ZNR UUUUU ZZH
R 141109Z DEC 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 4843
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 02 BAGHDAD 004062 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EFIN PGOV IZ
SUBJECT: GOI TESTING THE WATERS ON PDS REFORM 
 
¶1. (SBU) Begin Summary: In recent weeks, GOI officials, 
including the Ministers of Trade and Finance, have spoken 
publicly about the need to institute changes in the public 
distribution system (PDS). World prices for wheat alone, one 
of the commodities provided in the PDS basket, have risen 
significantly, spurring the need for a USD 522 million 
supplemental, which was grudgingly approved by the Council of 
Representatives (CoR) only after bitter debate. Prominent 
religious leaders rebuked the governmental calls for PDS 
reform, but the GOI's statements coupled with two contentious 
parliamentary sessions dominated by PDS (including the vote 
on the budget supplemental) indicate that the time for reform 
may be ripe. What previously we believed a political 
non-starter may, through a combination of fiscal pressures 
and political maturity, have become an issue for serious 
consideration. End Summary. 
 
---------- 
Background 
---------- 
 
¶2. (U) The PDS is a massive food ration system that was 
introduced during the period of UN sanctions and was 
supplemented in 1996 under the Oil for Food program. In 2003, 
the Coalition Provisional Authority (CPA) assumed 
administration of the PDS; full control returned to the 
Transitional Government of Iraq in 2004-05. Although the 
Ministry of Labor and Social Affairs targeted cash-based 
social safety-net program continues an expansion (with 
guidance from the World Bank), the PDS remains Iraq's primary 
safety net mechanism. 
 
¶3. (U) The PDS system suffers from chronic inefficiencies. 
Currently, the number of beneficiaries registered to receive 
PDS benefits hovers around 27 million. While the PDS was 
essential during the period of UN sanctions to ensure the 
availability of food, sanctions are no longer in effect, and 
the primary reason for the PDS in its current form is no 
longer extant. A 2005 World Bank (WB) study of the PDS 
estimates that the cost of providing USD 1 worth of food to a 
poor beneficiary costs the government USD 6.30. Another 
significant issue is a lack of targeting. Between 2005 and 
2007, the number of PDS beneficiaries registered increased by 
more than 2 million. During that time, barely more than 100 
deaths were registered, and a simple search yielded 700,000 
registrants with the same first and last name and date of 
birth. 
 
---------------------------- 
CoR Debates PDS Supplemental 
---------------------------- 
 
¶4. (SBU) On November 15, the CoR approved a USD 522 million 
budget supplemental. (Note: While the measure was approved, 
the legislation was not passed to the Presidency Council for 
ratification, as is constitutionally mandated; rather, the 
CoR sent its endorsement directly to the Council of 
Ministers, which has given rise to legal ambiguity. End 
Note.) The issue sparked acrimonious debate, with supporters 
of the supplemental invoking the argument that poor Iraqis 
desperately needed support and detractors decrying that the 
real problem was corruption and not financing. A first vote 
failed, and in spite of ambiguity concerning the presence of 
a quorum of members, CoR Speaker Mahmoud Mashhadani held a 
second vote and declared the measure passed. 
 
¶5. (SBU) During a November 22 meeting with Econoffs, Azez 
Hassan Jaffar, a senior advisor at the Ministry of Finance, 
stated that the Ministry of Finance considered the measure 
passed and would accordingly make the funds available to the 
Ministry of Trade (MoT). Similarly, in a December 13 meeting 
with EMIN, Trade Bank of Iraq (TBI) President Hussein al-Uzri 
expressed his belief that the budget supplemental had passed, 
and noted that the MoT had already spent USD 370 million over 
its 2007 budget allocation for the PDS for the ongoing fiscal 
year. He added that FinMin Bayan Jabr had called him earlier 
that same day instructing him to authorize an additional 
release of USD 48 million for the MoT to cover outstanding 
freight charges related to the transport of PDS commodities. 
 
--------------------------------------- 
First Step: Reducing Basket Commodities 
--------------------------------------- 
 
¶6. (SBU) Dr. Haider al-Abadi, Chairman of the CoR Committee 
on Economy, Investment and Reconstruction, told Econoff that 
the Ministry of Trade is working with the Council of 
Ministers Economic Committee as well as his own CoR committee 
on determining a way forward for PDS reform. He suggested 
that, at a minimum, the number of commodities would need to 
be reduced from 10 to 5, in an effort to provide higher 
quality goods over quantity. He predicted that a report on 
 
BAGHDAD 00004062  002 OF 002 
 
 
recommendations for PDS reform would be ready by mid-2008. 
 
¶7. (SBU) Ultimately, he thought that PDS in some form would 
persist for the short to medium term in order to maintain 
price stability, but that real efforts were underway to 
introduce means-testing and partial monetization of the 
benefit. Dr. Haider cited the lack of a robust national 
identification card and the moribund banking sector as the 
principal obstacles to monetization of the PDS. He hoped 
eventually the private sector would be able to efficiently 
procure basic foodstuffs, which would strengthen the argument 
that PDS is no longer necessary. 
 
¶8. (U) Minister of Trade Abdul Falah al-Sudani, whose 
presence was demanded following the outcry during debate on 
the PDS supplemental, repeated similar plans for PDS reform 
in a December 3 presentation at the CoR. The draft Council of 
Ministers-approved budget which the CoR is currently debating 
straight-lines the PDS allocation at approximately USD 3.2 
billion. Given increasing transportation costs and 
commodities prices, and viewed in light of the supplemental 
requested to cover 2007 PDS spending, the 2008 PDS allocation 
will likely be insufficient to cover program costs. 
 
-------------------------------- 
Int'l Organizations also Engaged 
-------------------------------- 
 
¶9. (U) From November 18-20, the World Bank held a workshop 
for the MoT on management of the PDS. The workshop was a 
follow up of the Bank's 2005 study which found that the PDS, 
while effective in reaching the poor and maintaining a 
minimum standard of living, does so expensively and 
inefficiently. WB staff considered the workshop successful 
and were impressed with the openness of the MoT team in 
discussing shortcomings of the system. The Bank is expected 
to release a report soon outlining its analysis of the PDS as 
well as recommendations for reform. 
 
¶10. (SBU) WB staff have met with the OECD Representative in 
Baghdad and the World Food Program Country Director. Both 
organizations are interested in coordinating with the World 
Bank to provide additional assistance. The WB is currently 
considering its options on engaging in PDS reform. 
Furthermore, in an unreleased IMF report, the GOI has 
indicated to the Fund that, "in addition to enhanced 
monitoring and improved procurement procedures, the (GOI is) 
considering to limit the rations in the PDS, and to further 
limit eligibility of well-off families." 
 
------------------------- 
Sistani Opposed to Reform 
------------------------- 
 
¶12. (U) Following MoT al-Sudani's public calls for reducing 
the number of commodities provided by the PDS, a 
representative of Grand Ayatollah Ali Sistani lashed out at 
government plans for changing the PDS, claiming that most 
vulnerable Iraqis would suffer. Additionally, op-ed 
commentators in the local press have been mixed, with some 
expressing strong support and others opposition to the rumors 
that PDS reform may be in the offing. 
 
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Comment 
------- 
 
¶13. (SBU) The GOI's second real experience crafting a budget 
called for making some tough decisions on priorities, and the 
PDS seems to have been an easy target for reduction given its 
notoriously grand inefficiencies. Still, careful 
implementation of whatever reforms are agreed will be 
crucial. Simply reducing the number of commodities provided 
is an obvious first target. Also, making the system 
means-tested is probably among the initial reforms that need 
to be taken, but GOI capacity is severely limited in this 
regard. Here GOI public relations efforts will need to be 
marshaled to demonstrate to the public that the eligibility 
limitations are fair and equitable and are not 
sectarian-based. We will continue to monitor the situation 
closely and report developments as they arise. End Comment. 
BUTENIS