US embassy cable - 05COLOMBO739

UNCLAS SECTION 01 OF 03 COLOMBO 000739 
 
SIPDIS 
 
DEPT FOR EB A/S ANTHONY WAYNE; SA/INS FOR J. BRENNIG, N. 
DEAN; PLEASE PASS TO TSUNAMI RECONSTRUCTION TASK FORCE; 
TREASURY FOR C. CARNES 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EAID, ECON, PGOV, CE, MV, LTTE - Peace Process, Tsunami 
SUBJECT: SRI LANKAN POST-TSUNAMI RECONSTRUCTION UPDATE 
(APRIL 20, 2005) 
 
REF: A. COLOMBO 712       E. COLOMBO 704 
     B. COLOMBO 696       F. ENTWISTLE-HARTWICK 041905 
     C. COLOMBO 725          EMAIL 
     D. COLOMBO 697 
 
1. This cable is for the Tsunami IAWG meeting on April 20, 
2005. 
 
2. (SBU) Summary: The transition from relief to rebuilding 
continues to be mixed.  Assistant Secretary Rocca visited 
affected communities in the east and found many positive 
examples of community rebuilding efforts.  The GSL and the 
LTTE appear close to finalizing a joint mechanism for the 
delivery of assistance to the north and east.  Regarding 
Maldives, Post continues to believe the Maldives Government 
National Fund is the best mechanism for channeling USG 
assistance.  UN sources have informed us that Erskine 
Bowles may come for the May 16-17 Development Forum in 
Kandy and that President Clinton may visit Sri Lanka in 
late-May.  We continue to push for GSL and private sector 
participation in the May 12 Private Sector conference in 
Washington, but its proximity to the Development Forum will 
dilute Sri Lankan participation.  Post is concerned about 
the potential for numerous USG agency initiatives in the 
tsunami supplemental to divert funding from our key 
 
SIPDIS 
infrastructure projects.  In particular, we believe OPIC's 
novel loan scheme may not be applying the appropriate 
solution to the problem of access to capital for small and 
medium sized enterprises (SME) here.  End Summary 
 
USAID Field Visits 
------------------ 
3.  (U) Over the past week, two USAID teams have returned 
from field visits (Ref B and C) where they found mixed 
evidence of progress on the transition from relief to 
rebuilding.  While USAID NGO partners are largely able to 
move ahead with projects, it remains at a measured pace, 
with land allocation and materials supply posing the main 
obstacles. 
 
A/S Rocca Visit 
--------------- 
4.  (SBU) Assistant Secretary Rocca, Ambassador and USAID 
Director visited the east on April 19 and met with USAID- 
funded transitional housing project reps and USAID Office 
of Transition Initiative (OTI) program reps. During a 
subsequent press event, A/S Rocca commented on the many 
positive developments that were evident, but that were 
punctuated by clear challenges, including progress due to 
land allocation problems (much more pronounced in the east) 
and a shortage of building materials and skilled labor. 
 
5.  (SBU) During a breakfast meeting with Rocca on April 
20, members of the American business community noted that 
their efforts to sponsor rebuilding projects have been 
hampered by "high administrative costs" imposed by NGOs. 
USAID believes this concern may stem from a 
misunderstanding and a representative from USAID's Global 
Development Alliance plans to meet with individual US 
companies to assist in matching companies with NGOs and 
projects. 
 
Norwegian Brokered Aid Delivery Mechanism for North-East 
--------------------------------------------- ----------- 
 
6.  (SBU) We will report septel on Norwegian Special Envoy 
Eric Solheim's visit, but early indications from his visit 
are that the progress on a joint mechanism between the LTTE 
and the GSL for the delivery of assistance to the north and 
east has been positive.  Nonetheless, the GSL is unlikely 
to move forward prior to May 1, in order to avoid giving 
its Marxist/Nationalist governing "ally", the Janatha 
Vimukthi Peramuna (JVP - which staunchly opposes any form 
of cooperation with the LTTE), fodder for its May day 
celebrations and speeches. 
 
Maldives 
-------- 
7.  (U) As reported in ref A, Ambassador visited Maldives 
April 7-8 (Refs D and E) and found continuing high-level 
commitment to a transparent and efficient rebuilding 
process.  Ambassador was assured that the Government of the 
Republic of Maldives (GORM) would work with the USG to 
coordinate any potential donations through its national 
fund mechanism.  Post has provided additional input (Ref F) 
on the fund option.  We continue to believe the National 
Fund presents the best channel for USG funds to Maldives. 
 
Problem Areas 
------------- 
8.  (SBU) As mentioned in Ref A, we continue to work with 
the GSL to resolve our ongoing dispute over value added tax 
(VAT) payments by USAID contractors.  The GSL has deemed 
"illegal" a long-standing solution of providing exemption 
letters to contractors and prefers to discuss a 
reimbursement mechanism.  Senior GSL officials have 
indicated this is a result of pressure of IFIs to bolster 
GSL accounting procedures and tighten its revenue 
collection mechanisms. 
 
9.  (SBU) While we have had fewer reports of customs 
clearance problems over the past two weeks, we are 
concerned that next week's (April 26) expiration of the 
period for duty-free entry of certain relief items will 
lead to a fresh spate of calls and requests for assistance. 
We will try to pre-empt this process somewhat, by working 
with the Ministry of Finance and the Customs Department to 
find a mechanism for resolving disputes. 
 
Meetings and Conferences 
------------------------ 
 
10.  (SBU) To update on the meetings and conferences 
discussed in Ref A: 
 
--Sri Lanka Development Forum on May 16 and 17 in Kandy: 
we have heard from UN sources that President Clinton will 
not attend, but that Erskine Bowles might.  We have also 
heard that Clinton may come to Sri Lanka, as part of a 
larger regional trip, in "late-May." 
 
--Asia Society et al Private Sector Forum: We continue to 
press the GSL and TAFREN to send representatives to the May 
12 conference, but GSL participation will be sparse as a 
result of the proximity to the development forum.  We are 
encouraging the GSL to send several senior private sector 
representatives. Maldivian participation is also extremely 
important. 
 
--"Big Three (TAFREN, TAFOR and FinMin) Meeting: a new bi- 
weekly meeting mechanism is supposed to begin this week. 
We have yet to get confirmation of the meeting time though, 
and are checking to see if the commitment to hold this 
meeting is firm. 
 
Other USG Agency Initiatives 
---------------------------- 
11.  (SBU) While post looks forward to the outcome of the 
President's supplemental request, we remain concerned about 
the plethora of USG-sponsored initiatives under discussion 
and the unintended consequence that their adoption could 
divert funding from our signature infrastructure and 
planned reconstruction activities.  To cite one example, we 
continue to hear about OPIC's novel funding initiative to 
leverage USG funds against private sector donations and 
provide access to credit for SMEs. 
 
12.  (SBU) We applaud this kind of effort to link USG and 
private sector resources, but have the following concerns 
about OPIC's plan: 
 
--Access to capital for SMEs in Sri Lanka has not typically 
been limited as a result of lack of funds, but rather an 
unwillingness by banks to assume risk in lending. 
 
--OPIC plans to have the local bank partners assume the 
risk of the loans, but will also insist that loans be lent 
at below market rates.  We believe this could potentially 
paralyze lenders - much as the Central Bank's initial 
infusion of liquidity into the banking system was not lent, 
as Banks insisted on seeking collateral and documentation 
from borrowers who had just lost everything in the tsunami. 
13.  (SBU) We look forward to hearing more from OPIC about 
their idea, and would suggest that perhaps a discussion 
with representatives of the banking community and the 
Central Bank about potential capacity building programs for 
loan analysis and risk mitigation or possible loan 
guarantee mechanisms might be a better starting point for 
OPIC's initiative. 
 
LUNSTEAD