US embassy cable - 04COLOMBO962

UNCLAS SECTION 01 OF 03 COLOMBO 000962 
 
SIPDIS 
 
DEPARTMENT FOR SA/INS 
DEPARTMENT PASS TO USTR - JROSENBAUM AND AWILLS 
COMMERCE FOR ARI BENAISSA 
MCC FOR RMORFORD, RSANKARAN AND SGROFF 
 
SENSITIVE 
 
E.O. 12958:  N/A 
TAGS: ECON, ETRD, EAID, CE, USTR, ECONOMICS, LTTE - Peace Process 
SUBJECT:  AG AND RURAL DEVELOPMENT GOALS TOP GSL LIST FOR 
MILLENNIUM CHALLENGE ACCOUNT 
 
Sensitive but unclassified, please handle accordingly. 
 
1.  (SBU) Summary:  During its June 1-4 visit to Sri Lanka, 
the Millennium Challenge Corporation team met with a broad 
cross-section of government and society.  Poor agricultural 
policies and slow rural development topped the list of 
perceived obstacles to economic growth, with poor 
infrastructure, particularly power and roads, a close 
second.  While the GSL relishes the chance to become an MCC 
partner country, there are concerns within the donor and 
NGO communities about the GSL's ability to consult 
stakeholders.  Nonetheless, the visit prompted discussion 
about the economic growth models Sri Lanka has pursued and 
how to improved stakeholder consultations.  While the MCC 
funding is attractive, its model, particularly broad 
societal consultations, could be the real benefit to Sri 
Lanka participating in the program.  End Summary 
 
2.  (SBU) During the June 1-4 Millennium Challenge 
Corporation (MCC) visit to Sri Lanka, team members met with 
representatives from the GSL (including the Foreign 
Minister, the Central Bank Governor, the senior economic 
advisor to the President, and the Finance Secretary), 
members of the opposition, local NGOs and civil society, 
international NGOs, bilateral donors, the IFIs, the 
business community and the media. 
 
General Observations 
-------------------- 
 
3.  (SBU) The team found enthusiastic interest in the 
Millennium Challenge Account (MCA) on the part of the GSL 
and the business community.  Local NGOs and civil society 
indicated a strong desire to participate in compact 
implementation, though their optimism was tempered by 
concerns about the GSL's willingness and ability to 
coordinate the process with a broad cross-section of the 
country.  The donor community expressed concerns about aid 
coordination and the relationship of MCA aid to the Tokyo 
process.  IFI reps were generally supportive, with some 
interest expressed in the possibility of cooperation on 
potential projects. 
 
4.  (SBU) During the course of the meetings, a number of 
fallacious ideas were put to rest (regarding funding levels 
and US pre-conceptions about assistance for example) and 
MCC personnel explained in detail the philosophy behind 
MCA, the methodologies used in determining eligibility and 
expectation about next steps.  Discussions were largely 
positive and productive, with observations about issues 
such as the kinds of economic growth Sri Lanka has pursued, 
the causes of poverty in particular areas of the country, 
the need for broad-based consultation and input into the 
potential compact proposal, the need for strong 
implementing mechanisms that can cut-through typical 
implementation problems and the unique problems of 
delivering aid in Sri Lanka, where the terrorist Liberation 
Tigers of Tamil Eelam (LTTE) exercise de facto control over 
as much as 1/3 of the territory. 
 
5.  (SBU) Several obstacles to economic growth were 
repeated by all interlocutors, including poor agricultural- 
related policies, lack of basic infrastructure - 
particularly power and roads, a dearth of the basic worker 
skills demanded by employers and a heavily politicized 
society, which leads to fragmentation and blocks 
implementation of needed projects. 
 
Meeting with the GSL: Do They Get It? 
------------------------------------- 
 
6.  (SBU) MCC met with the Secretaries of the Ministries of 
Finance, Foreign Affairs, Agriculture, Housing and 
Construction, Provincial Councils and Local Government, 
Science and Technology, Skills Development, Small and Rural 
Industries, and Small and Medium Enterprise Development 
during an inter-ministerial meeting; the Foreign Minister; 
the Governor of the Central Bank; and a senior economic 
advisor to the President.  During the course of those 
meetings, it became clear that the GSL had absorbed some of 
the information provided by the Embassy to this point, but 
had focused its initial efforts on project ideas, rather 
than an analysis of the key obstacles to economic growth, 
the measures required to overcome those obstacles and how 
to assess progress in implementing those measures.  By the 
end of most meetings, GSL representatives seemed cognizant 
of MCC aims and the need for a broad, consultative process 
focused on identifying obstacles to growth and seeking ways 
to overcome those obstacles.  At one point during the 
meeting with Treasury Secretary P.B. Jayasundera, the 
Secretary acknowledged that the GSL has not always 
 
SIPDIS 
consulted widely enough in regard to developing its 
policies.  He also indicated that his sense was that for 
MCA assistance to be most effective, it should focus on one 
or two "flagship projects" that are "high-impact." 
 
7.  (SBU) A key component of the MCC visit was to identify 
the primary point-of-contact within the GSL.  None was 
explicitly named, though it appears the President's office 
intends to take on a prominent role, with the Secretary of 
Finance (who is personally close to the President) serving 
as the main working-level POC.  The Minister of Foreign 
Affairs also clearly relishes a role (he grabbed the pen, 
so to speak, putting out the first cabinet paper on MCA), 
though his Ministry is deferring to Finance on many of the 
operational issues involved.  While Post will push the GSL 
to identify the main POC for MCA, these three agencies can 
all be useful in helping to ensure that the MCA criteria 
are fully met during preparation of the compact proposal 
and implementation of a final agreement.  (Note: in the 
end, it appeared that certain officials (Finance Secretary, 
Foreign Minister) "got it" but others remain mired in old- 
style thinking that could limit their effectiveness in 
contributing to the compact process.  How the GSL proceeds 
at this point will indicate which camp has carried the day. 
End note.) 
 
Donors, NGOs, Civil Society and the Business Community 
--------------------------------------------- --------- 
 
8.  (SBU) Meetings with each of the various interest 
segments opened with an explanation about MCC, followed by 
a period of question and answer and then discussion.  In 
each session questions focused on the amount of assistance 
and the requirements for formulating a compact proposal. 
There was almost universal recognition also that: 
-- the GSL does not have a strong history of consultation; 
-- the polarization of society along political lines will 
make implementation difficult; 
-- the existence of the LTTE as an entity, coupled with the 
needs of the North East areas of the country, makes 
providing broad-based assistance challenging; and, 
-- agriculture and rural development, infrastructure and 
skills development are the three main areas in need of 
attention. 
 
9.  (SBU) Local NGOs were interested in how to pursue MCA 
funding for their priority areas and showed a strong 
willingness to participate as implementing agencies.  The 
Business Community seemed interested in using the MCA 
program to continue pressure for market reforms and to 
bolster skills development programs and agricultural sector 
reforms.  International NGOs and donors were concerned 
about how broadly the GSL would consult, particularly with 
large swaths of the North East under de facto rebel control 
and whether the introduction of MCA assistance would 
alleviate some of the pressure currently being brought to 
bear on both the GSL and LTTE to return to negotiations. 
All groups were pleased to hear they would be asked about 
their participation in the consultative process before any 
compact agreement was reached. 
 
Opposition Politicians 
---------------------- 
 
10.  (SBU) In addition to meeting with the GSL and civil 
society, the MCC team met with members of the opposition, 
to solicit their support for MCA in Sri Lanka and urge 
their participation in the GSL's efforts to consult widely 
for the compact proposal.  Southern Province MP Sajith 
Premadasa, son of former President Premadasa, agreed that 
broad-based consultation was key to development assistance 
success and suggested public hearings at the grass-roots 
level to determine what impediments to economic growth the 
people of Sri Lanka perceive.  Sagala Ratnayake, former 
Deputy Minister of Power and Energy and close confidant of 
former Prime Minister Wickremesinghe suggested the creation 
of private boards to vet proposals and ideas, to ensure 
that the process did not become politicized. 
Interestingly, the opposition was very critical of its own 
efforts during the previous administration to launch its 
poverty reduction program, Regaining Sri Lanka (RSL).  They 
did not believe that the RSL program had been sufficiently 
vetted or that a broad range of society had been consulted 
in the initial phase. 
 
Comment 
------- 
 
11.  (SBU) MCA represents an opportunity for Sri Lanka that 
goes beyond specific financial assistance.  There is a 
large sum of money pledged to Sri Lanka (US$ 4.5 Billion) 
from the Tokyo Donors Conference in 2003.  Continued 
stalling of the peace talks, however, has left much of that 
aid sidelined, pending a resumption of progress in the 
talks.  The MCC focus on consultations and broad-societal 
inputs into compact formulation provides an excellent 
opportunity to create better links between the GSL, civil 
society, NGOs and the business community.  MCC can promote 
a model that promotes cooperation and coordination among 
interested parties that can apply in other sectors of Sri 
Lankan economic and political life as well.  The ball is 
now in the GSL's court, but we remain ready to help them 
along the MCA path in any appropriate way.  End comment. 
 
LUNSTEAD