VZCZCXRO3008
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3394/01 2980608
ZNR UUUUU ZZH
P 240608Z OCT 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 0064
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 04 BAGHDAD 003394 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV IZ
SUBJECT: CAPITAL BUDGET SNAPSHOT: Dhi-QAR. 
 
¶1.  Summary. Dhi Qar Capital budget planning is marked by a mild 
trend towards transparency and input from local government.  While 
party politics politicized budget negotiations at the Council and 
Sub-district level, the negotiation of a Provincial Development Plan 
and Strategy helped focus the early stages of 2009 budget 
development on the common interest.  While capital budget planning 
is strengthening, capital budget execution has not shown similar 
degrees of improvement.  Although the central government has not 
released funds in a timely manner or provided clear instructions, 
the chief weakness affecting budget execution is the lack of 
expertise in provincial government to manage project implementation 
and an unfounded confidence that contractors will pick up the slack. 
 In order for Dhi Qar to make effective use of new tools like 
GAPTIS, the GOI and its international partners need to shift the 
focus of technical training from senior levels of government to the 
persons and offices who are actually charged with developing, 
monitoring and evaluating projects.  End Summary. 
 
¶2.  Several weaknesses afflict the Dhi Qar capital budget process. 
First, the development of a budget remains highly politicized, with 
decisions by high level and mid level provincial and local 
government officials unhelpfully sensitive to the party interests 
that secured their positions.  Despite some positive steps over the 
last few years, budget planning remains a top-down process, with 
politics rather than technical merit shaping project lists.  Second, 
the PRT has noted no particular improvement in the provinceQs 
ability to execute projects called for in the budget.  In addressing 
budget planning and implementation, government officials have 
difficulty in breaking free of past practices, with few skills and 
fewer tools, equipment or even sensibly organized offices and office 
procedures with which to innovate. 
 
--------------------------------------------- --------- 
Dhi Qar Capital Budget Planning:  Stumbling in the Right Direction 
--------------------------------------------- --------- 
 
¶3.  Dhi QarQs approach towards preparing provincial capital budgets 
evolved over the past three years, moving incrementally but 
perceptibly towards greater transparency and local level 
participation despite a clear lack of capacity in budget planning. 
Provincial Director Generals of central ministries shoulder the 
development of projects lists for their areas of expertise.  In the 
2006 and 2007 budgets, consolidation of these lists into a draft 
budget was centralized in the hands of the Provincial Council and 
its Financial Manager.  The politicized negotiations produced a wish 
list that more accurately reflected the political calculations of 
the newly elected council members than the technical challenges that 
needed to be addressed in order to deliver essential services.  For 
the 2008 budget, participation broadenedQ local government had some 
limited involvement, political parties tussled over preparations, 
and their provincial council members prepared rival drafts.  In the 
end, the Provincial Chair (Fadilah) and Governor (ISCI) agreed to 
submit a common draft.  The 2009 draft budget is no less a wish 
list, but at least it used the Provincial Strategic Plan as a 
starting point for discussions.  In addition, local councils and 
government officials, including managers of districts and 
sub-districts, reviewed and commented upon the draft.  With 
Ministries of Planning (MoP) and Finance (MoF) commitments in hand, 
a final list of 09 projects based on the Provincial Development Plan 
is to be handed over to the central government by mid-October.  The 
capital budget process is stimulating the interest and participation 
of different levels of provincial government and political 
movements, which suggests that political factions are recognizing 
their stake in budget discussions and believe that they can 
influence them. 
 
¶4.  Estimates for projects that make up these lists are ballpark 
figures based on prior experiences, with little effort invested in 
capturing the current costs of inputs.  The lack of detail in 
expenditure creates some flexibility to adjust to changes in prices 
and conditions during implementation but also creates a temptation 
to cross-fund projects.  (Think PopeyeQs Wimpy Q QI will gladly pay 
you twice for a burger on Thursday in exchange for a burger on 
Wednesday.Q)  Project management, maintenance and service costs are 
not separately calculated in the capital budget or taken into 
account elsewhere in the provincial budget.  The failure to account 
for maintenance and service costs at the capital budget planning 
stage remains a serious indicator of inadequate budget skills. The 
failure to account for maintenance and service costs at the capital 
planning stage is not so much an indicator of inadequate budget 
skills, as it is a reflection that governorates receive a 
substantial amount of capital funds, but only a meager amount of 
operating funds, and the fact that there is no body of national law 
or regulations that clearly indicate respective expenditure 
assignments among the various levels of government. Thus, not only 
do governorates not have sufficient budget allocations to operate 
and maintain assets that they construct, it is unclear as to whether 
they have the legal responsibility to do so.  On the plus side, 
MoPDC investment project request forms have recently begun to 
require the provision of operating cost information 
 
 
BAGHDAD 00003394  002 OF 004 
 
 
--------------------------------------------- --------- 
Capital Budget Execution:  Learning to Recognize Problems 
--------------------------------------------- --------- 
 
¶5. In 2009, Dhi Qar will inaugurate its Construction Committee to 
oversee budget execution and build capacity in provincial government 
offices.  It has a considerable challenge before it.  Budget 
execution capacity has shown no improvement since the 2006 and 2007 
budgets.  The province lacks the expertise to effectively contract, 
manage procurement, and monitor projects.  Problems are compounded 
by the lack of clear instructions from MoP and MoF, the failure of 
the central government to release funds in a timely fashion, the 
lack of a strategy for monitoring and evaluating budget execution, 
and the absence of outside expertise with whom to consult.  Local 
contractors have little expertise with which to make up for these 
weaknesses.  The government estimate of the workload to be 
shouldered by contractors on provincial projects is overly 
ambitious. 
 
¶6.  Resources and the timing of their availability are other 
constraints.  The 2007 Budget law envisions that between 1-3 percent 
of the budget may be used for oversight and administration Q an 
extraordinary low figure by international standards.  Although the 
law stipulates that these funds could only be used to support 
certain items and activities linked to enforcement, the temptation 
exists to treat them as discretionary income that may be redirected 
towards supporting other worthy projects or used for maintenance. 
Management is also complicated by the lack of multiyear budgeting. 
Contracting regulations from the MoP and accounting and budgeting 
regulations from the MoF force the Provinces to execute single-year 
budgets.(Note:  The regulations reflect the provisions of the 
Financial Management Act, Order No. 95, which does not allow for 
multi-year budgeting. The problems cause by the inability to do 
multi-year capital budgets have been offset, to some extent by the 
following: (1) ability to carry-forward unspent budget allocations 
that was provided for in the 2007 and 2008 Budget Laws; and (2) the 
ability to fully fund projects across fiscal years by using Letters 
of Credit.  While many keep multiyear contract data Qoff budgetQ, 
this process has had the effect of encouraging provinces to focus on 
projects executable in one year. 
 
 
----------------------------------------- 
Dhi QarQs Capital Budget Execution Record 
----------------------------------------- 
 
¶7.  The 2006 capital and supplemental budget, totaling 179 billion 
and 69 billion ID respectively, authorized 823 projects.  While the 
MoF released the full amount, approximately 11 percent of the 
capital budget and 21 percent of the supplemental budget has not 
been disbursed because certain contracts have not been finalized. 
The 2007 capital and supplemental budgets called for 174 billion and 
60 billion ID to undertake 436 projects (later to grow to 475 as 
ambitiously large projects were broken into constituent parts). 
However, of the capital budget, the MoF only released 139.2 billion 
ID.  From the monies actually released by MoF, the province 
disbursed approximately 114 percent and 60 percent of the capital 
and supplemental budgets respectively.  In order to disburse more of 
the 2007 capital budget than it received, the province tapped the 
2008 budget for an additional 16.6 billion ID per MoF instructions 
and in the hope that all would be sorted out later.  In 2008, the 
MoF and MoP allocated 259 billion and 191 billion to support the 
capital budget and supplemental budget.  By August, 27.1 percent of 
the 2008 base budget and none of the supplemental budget had been 
disbursed.  (As noted above, a further 6.4 percent of the 2008 
capital budget went to the 2007 budget).  In 2009, the MoP proposed 
396 B for Dhi Qar to fund 2009 activities and outstanding projects 
from 2008.  Of this amount, 30 percent is intended to support 
province-wide services and 70 percent will be divided among 
districts and sub-districts in accordance with their population. 
(Budget figures are forwarded separately.) 
 
Dhi Qar:  Growing Provincial Capital and Operating Budgets (rounded 
to billions ID) 
Note:  The capital and operating budgets only reflect transfers from 
the central government and exclude locally-raised revenue. 
 
Budget Operating  Capital Supplement Total 
Year  Budget  Budget Budget  Budget 
 
2006  6   179   69   254 
2007  3   174   60   237 
2008  4   259  191   454 
2009  N/A   395  N/A   N/A 
 
------------------- 
Bolstering Capacity 
------------------- 
 
¶8.  Various tools and programs have sought to mitigate weaknesses in 
capital budget planning and execution.  Training related to the 2006 
 
BAGHDAD 00003394  003 OF 004 
 
 
and 2007 budgets was directed at senior level government officials 
and failed to deliver tools into the hands of personnel actually 
responsible for day-to-day management.  It also produced little 
additional coordination between provincial, local and central 
governments.  Tools have included IFMIS, which was not extended to 
the provinces; a simple budget execution tool intended for use in 
2008 that was never released; and this simple toolQs next-generation 
format, GAPTIS, which is being released in the fall of 2008.  In its 
present form, GAPTIS is likely to generate an incomplete view of 
budget implementation.  It is not likely to capture the unofficial 
Qre-directionQ of funds as implementers informally cross-fund 
projects, maintenance payments (if any), use of oversight monies or 
independent sources of income that may complement investment by 
central government funds.  GAPTIS provides an excellent opportunity 
to link budget execution with the Provincial Strategic Plan process, 
thereby ensuring information flow on planning and execution between 
local and provincial governments, and provincial and central 
authorities, but the needed staff-level training has not occurred to 
date. 
 
¶9.  Dhi Qar officials would benefit from improved employee skills. 
The training should link into skill sets needed for each stage of 
budget design and execution Q identify needs; weigh project 
feasibility; determine a bill of quantities; prepare total budgets; 
win approval from MoP and MoF; prepare detailed project estimates; 
approval for execution and publication; procurement processes and 
contract awards; project implementation and management; and progress 
control and reporting.  Expectations for contractors need to be 
clear and their skill sets honed as well. 
 
 
 
--------------------------- 
A Dhi Qar Budget Crib Sheet 
--------------------------- 
 
¶10.  The Dhi-Qar Provincial Budget is divided into two parts, 
Operating and Capital budgets.  The Operating Budget is primarily 
salaries, office costs and other limited expenses. The Capital 
Budget, also called the Investment Budget, is related to projects 
and other capital improvements.  Supplemental budgets may provide 
additional funds for either budget.  Nowhere does the budget 
contemplate maintenance.  Both budgets are transfers from the 
central government.  Neither budget takes into account the small 
amount of monies generated independently by the provincial 
government. 
 
OPERATING BUDGET:  The Operating Budget of the Provincial Budget 
funds the Provincial Council and the District and Neighborhood 
Councils. Each of the councils receives a share of the Operating 
funds based on the number of members and employees they have along 
with other expenses.  Each District Council has an accountant that 
receives the money for both that council and the Neighborhood 
Councils below it.  That individual cashes the check from the 
Provincial Council and disburses the money accordingly. The 
operating budget also demonstrated problems with execution, paying 
out 76 percent of its budget in both 2006 and 2007, and a healthier 
88 percent of its 2008 budget through October, 2008. 
 
CAPITAL BUDGET:  The Capital Budget of the Provincial Budget covers 
projects that were proposed and approved the year before.  Each of 
the spending units has to prepare its own project lists based on the 
amount of money it projects to receive for the year.  The Provincial 
Council approves the Governorate lists and submits them to the MoP. 
The approved project list constitutes the Capital Budget for the 
year, giving the spending units little room to formally redirect or 
reprogram investment monies during the fiscal year. 
 
¶11.  The MoF releases 20 percent of the allocated Capital budget at 
the start of the 2008 fiscal year Q essentially a prepayment for 
projects.  The Provincial Council retains these funds until the 
Governorate formally requests them. A signed contract showing that 
the funds have been obligated is necessary in order for the Council 
to issue the check.  The MoF will make additional funds available 
upon request based on the progression of work. 
 
¶12.  The 2007 Budget Law defines the amount of resources that may be 
retained by central and provincial governments to oversee and 
administer project implementation.  The Q1-3 percent ruleQ allows 
for the use of 3 percent of funds for projects less than 1 billion 
ID, 2 percent for projects between 1-10 billion ID, and 1 percent 
for projects of 10 billion ID or more.  The law stipulates that the 
MoP can retain 25 percent of this portion for its role in managing 
the particular projects.  If a hypothetical project is allocated 1 
million ID, 30,000 ID could be retained for overhead (3 percent of 
the total project).  With the MoP retaining a quarter of the funds 
allocated to oversight, 22,500 ID is left to the province.  The 
Provincial Council may decide to retain a portion for their 
oversight and administration of the project.  It would not be 
unusual for a neighborhood Director General to end up with as little 
as a quarter of Q1-3Q allocation to administer and oversee the 
 
BAGHDAD 00003394  004 OF 004 
 
 
project. The law allows the funds to go to the following activities: 
salaries for personnel involved in project execution; training; 
project vehicles; computers and cameras; incentives and bonus 
payments; and media announcements and advertisements. 
 
¶13.  COMMENT:  The reputation of the provincial government lives and 
dies by the publicQs perception of its activities.  Despite 
improvements in basic services and spending on new housing, the 
current provincial government is widely viewed as a do-nothing 
government when it comes to project implementation.  With 80 percent 
of the 2006 and 2007 budgets executed, and close to 30 percent of 
the 2008 budget, either the Dhi Qar government story is not getting 
told or the distribution of funds is not producing results.  The Dhi 
Qar PRT will continue to work with provincial leaders to measure and 
record progress while improving budget execution skills.  End 
Comment. 
 
CROCKER