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PP RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #2621/01 2721413
ZNR UUUUU ZZH
P 291413Z SEP 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 4881
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHRN/USMISSION UN ROME PRIORITY 0014
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RUEHGV/USMISSION GENEVA PRIORITY 0348

UNCLAS SECTION 01 OF 03 BAGHDAD 002621 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ECON ETRD IZ KCOR PREF WFP
SUBJECT: REFORMING THE PUBLIC DISTRIBUTION SYSTEM -- EASIER 
SAID THAN DONE 
 
REF: BAGHDAD 1378 ET AL. 
 
BAGHDAD 00002621  001.2 OF 003 
 
 
 ¶1. (SBU) Summary and Comment:  The GOI won't soon take the 
tough political decisions needed to reform Iraq's Public 
Distribution System (PDS), despite the burden it places on 
national finances and the market distortions and corruption 
it engenders.  The UN World Food Program (WFP) has proposed a 
PDS restructuring plan to key GOI officials, who acknowledge 
the PDS' endemic inefficiency.  WFP Iraq Director Edward 
Kallon previewed the proposal in a September 8 meeting with 
DCM for Assistance Transition, Patricia Haslach, and formally 
presented it to Acting Trade Minister Dr. Safa al-Safie on 
September 9.  According to UN staff, Prime Minister Maliki 
recently "has agreed in principle" to the proposal and the 
GOI has followed up with questions on the program,s budget 
details.  We expect immediate action is unlikely, however, 
with national elections looming.  This leaves the primary PDS 
ministries -- Trade, Finance, Agriculture -- struggling to 
pay for personal profiteering and the growing cost of 
supplying a shrinking basket of rations.  WFP expects to 
begin soliciting approximately USD 17 million in funding for 
the proposal once/if negotiations with the GOI are complete. 
Post fully supports WFP's objectives and looks forward to the 
upcoming U.S.-Iraq Dialogue on Economic Cooperation (DEC) to 
reinforce the importance of reforming the PDS.  End Summary 
and Comment. 
 
 
------------------------------------- 
Origin of the WFP PDS Reform Proposal 
------------------------------------- 
 
 
¶2. (SBU) According to WFP Iraq Director Edward Kallon, former 
Deputy Prime Minister Barham Salih, chairing a GOI PDS reform 
committee in May 2009, requested three specific WFP actions 
to help the GOI:  1) realign the PDS to better serve 
vulnerable Iraqis; 2) devise a system to integrate the PDS 
into a strengthened social safety net; and, 3) help Iraq 
rehabilitate its agricultural base (ref A).  This reflects 
the GOI,s professed interest in better focusing the PDS 
program and reducing its budgetary impact.  The Council of 
Representatives (COR) passed in its 2009 Budget Law a 
provision for a Ministry of Trade (MOT) study on how to 
target PDS benefits on the truly needy.  MOT has not yet done 
the study, reportedly displeasing the COR.  Baghdad's 
Treasury Attache, reported that the Council of Ministers, in 
reviewing the medium-term budget picture, also discussed 
reducing the PDS; we won,t know the results of these 
discussions until the introduction of the 2010 budget.  The 
World Bank has been pushing for a policy pronouncement from 
the GOI on phasing out the PDS, moving to cash subsidies, 
providing social safety net protections, etc.  With a 
potential USD 1 billion support loan in the offing, these 
calls may carry some weight. 
 
 
------------------------------------------- 
20% of Iraqis  Food Insecure, Without PDS? 
------------------------------------------- 
 
¶3. (SBU) In late 2007, WFP partnered with the GOI, UNICEF, 
FAO, and WHO to conduct the Comprehensive Food Security and 
Vulnerability Analysis (CFSVA), a standard WFP pre-crisis 
baseline study designed to measure the scope of food 
insecurity in Iraq.  In late 2008, WFP reported that almost 1 
million Iraqis were food insecure and six million more would 
be without the PDS, approximately 20 percent of the 
population.  Iraqis who WFP considered "food insecure" 
Qpopulation.  Iraqis who WFP considered "food insecure" 
include those who lack sufficient income to complement or 
replace the PDS commodities basket; non-skilled workers, 
agricultural workers and households where chief wage earners 
are unemployed, women-headed households, current or recently 
resettled IDP households, and households with chronically 
malnourished children.  WFP has extended its emergency 
operations from April to December 2009, and is currently 
covering the food needs of 1.1 million Iraqis. 
 
 
----------------------------------- 
Commodities Shrinking, Cost Growing 
----------------------------------- 
 
 
¶4. (SBU) Under the Saddam-era PDS, each Iraqi national is 
entitled to a monthly commodities basket that contains enough 
wheat, rice, milk, sugar, vegetable oil, pulses, and infant 
 
BAGHDAD 00002621  002.2 OF 003 
 
 
formula to meet 100 percent of each household member's 
minimum daily caloric needs (2,200 calories).  In recent 
years, however, supply shortfalls and disruptions have meant 
that the PDS supplies less than half of Iraqis' daily caloric 
needs.  This supports anecdotal accounts from Iraqi contacts 
about widespread shortages.  Despite almost universal 
acknowledgement of its failures -- its massive price tag, its 
distorting effects on domestic commodity markets, and its 
myriad opportunities for corruption -- there have been no 
significant reform efforts.  In 2007, the COR passed 
legislation that would have rendered households of government 
officials at the rank of Director General or higher 
ineligible for PDS rations.  The GOI has not implemented this 
reform, however, and even the wealthiest Iraqis remain 
eligible for rations.  Grey-market trade of PDS rations 
remains common, as better-off households seek higher-quality 
products and very poor households consume less to raise cash 
by selling rations or ration cards.  Despite the significant 
shortfalls and supply disruptions, the cost of the PDS has 
risen to between USD 6 and USD 7 billion annually, according 
to World Bank and WFP estimates. 
 
 
--------------------------------------------- -------------- 
Proposal Details - Supply Chain Capacity Building:  CY 2010 
--------------------------------------------- -------------- 
 
 
¶5. (SBU) Kallon told DCM Haslach that within the strategic 
objectives outlined by the GOI the WFP proposed a pilot 
program in which the WFP administers the PDS in six of Iraq's 
eighteen governorates, deploying technical advisors to work 
side-by-side with GOI authorities on procurement, shipping, 
quality control, pipeline management and logistics, including 
land transport, warehousing and commodity tracking, and 
monitoring.  Kallon said that, by WFP estimates, the total 
cost of a WFP-administered PDS would be USD 5.7 billion 
nationwide, assuming the population of Iraq is 31.5 million - 
the GOI's official estimate.  For the six governorates, the 
first stage of the pilot, the cost would be around USD 1.7 
billion.  Under WFP's proposal, Iraq would pay all costs 
except costs derived from contracting the WFP technical 
advisors -- about USD 17 million, the WFP estimates.  (Note: 
Though these costs are not significantly lower than what the 
GOI is currently paying, WFP is basing its cost estimates on 
delivery of 100 percent of the commodities in the basket. 
The GOI is currently delivering about half of the 
commodities.  The WFP also estimated the costs for providing 
only five essential commodities (rather than the ten 
commodities currently in the PDS basket) at USD 4.6 billion 
nationwide and USD 1.4 billion in the six governorates.  Some 
estimates place the cost of delivering USD 1 in PDS 
commodities at USD 6 under the current system.  End note.) 
 
 
--------------------------------------------- --------------- 
Proposal Details - Relief and Recovery Operations: CY 2010-11 
--------------------------------------------- --------------- 
 
 
¶6. (SBU) Kallon told DCM Haslach that phase two of WFP 
proposal included programs designed to strengthen Iraq's 
social safety net as well as capacity-building projects 
divided into 3 categories: 
 
- In-kind conditional transfers which includes: school meals 
and community-based maternal child health and nutrition 
programs; 
Qprograms; 
 
- Conditional transfers which includes: resettlement and 
reintegration of returnees, income generation for female 
headed households, and small farm food production; 
 
- Government institution capacity building for administering 
social safety nets. 
 
 
------------------------------------------ 
Progress Likely to Slow Ahead of Elections 
------------------------------------------ 
 
 
¶7. (SBU) The WFP,s senior policy advisor told us that 
Ministry of Trade officials, in a meeting with her in 
mid-September, claimed that the Prime Minister "agrees in 
principle" with the proposal, and the MOT asked her for a 
more detailed breakdown about the proposal,s $17 million 
 
BAGHDAD 00002621  003.2 OF 003 
 
 
budget.  The WFP may already be able to cover some of the $17 
million program cost through insurance recovery funds it has 
recently received, she claimed.  Despite this interest, all 
indications are that the GOI will continue for now to raid 
its budget to support the corrupt, bulky PDS program.  Dr. 
Abdulhadi al-Hamiri, Senior Advisor to the Acting Trade 
Minister and co-chair of the SFA JCC Trade and Investment 
Working Group has told us repeatedly that the GOI would take 
few, if any, concrete steps on key economic issues -- 
especially PDS reform -- in advance of Iraq's national 
elections scheduled for January 2010 (ref).  He says the 
Acting Trade Minister is acutely aware of the political 
impacts of any reductions to this very visible social 
benefit.  As a "symbolic first step," al-Hamiri has said that 
there may be political space "for this business of" removing 
Iraq's highest income earners from the beneficiary rolls, but 
he has acknowledged such a move would have only negligible 
fiscal impact.  According to al-Hamiri, the GOI has secured 
funding and contracts to continue PDS rations until the 
January elections but not beyond.  Funding for the first 
quarter of 2010 is unclear and the MOT is exploring options 
-- like supplemental budgeting or guaranteed loans from the 
Ministry of Finance - to keep the PDS running. 
HASLACH