US embassy cable - 05COLOMBO1031

UNCLAS SECTION 01 OF 03 COLOMBO 001031 
 
SIPDIS 
 
DEPT FOR SA/INS; MCC FOR D.NASSIRY; TREASURY FOR C. CARNES 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EAID, ECON, EFIN, CE 
SUBJECT: GSL AIMS FOR MID-SUMMER MCA COMPACT PROPOSAL 
FOLLOWING REVIVED CONSULTATIONS 
 
 
1.  (SBU) Summary: The Government of Sri Lanka (GSL) has 
begun to use provincial-level meetings to form local 
steering committees to review the GSL's Millennium 
Challenge Account (MCA) Concept Paper and provide feedback 
to the Finance Ministry.  The process has largely been an 
effort to get validation of the Government's main 
priorities, though it does offer the local representatives 
an opportunity to raise other ideas for projects to spur 
economic growth.  Comments during the initial organizational 
meetings have ranged from interest in pet projects, with 
only tangential relevance to the key question of economic 
growth, to skepticism about one of the concept paper's main 
projects - the rehabilitation of rural irrigation reservoirs. 
We expect this latest stage of the consultative process to 
last through mid-June, and expect the GSL to formulate its 
compact proposal by sometime in August.  Overall, Post has 
been disappointed in the GSL effort at consultations, but 
hopes this latest effort serves to better inform their compact 
proposal.  We are highly dubious of the irrigation rehab 
project, though there may be scope to use it to spur other 
needed agriculture sector reforms.  We do believe the effort 
on the part of the business community to press for small and 
medium enterprise (SME) development programs, however, 
merits further scrutiny.  End Summary 
 
Provincial-level Consultative Process 
------------------------------------- 
2.  (SBU) Following a lackluster initial effort to develop 
a concept paper for its MCA proposal, and the intervening 
tsunami, which sidetracked most normal Government 
 
SIPDIS 
operations for the better part of four months, the GSL has 
commenced island-wide meetings to discuss the concept paper 
presented to the Millennium Challenge Corporation (MCC) and 
further develop its compact proposal. 
 
3.  (U) The plan involves provincial-level meetings 
conducted by the Department of Development Finance (DDF) of 
the Ministry of Finance.  A wide cross section of 
provincial level representatives is invited to these 
meetings including government officials, provincial council 
members, politicians, NGO representatives, academics from 
regional universities, and regional chambers.  These 
meetings are used to form provincial steering committees, 
which are responsible for conducting additional meetings to 
review the concept paper, discuss economic problems in the 
area and draft submissions for consideration by the 
national steering committee in Colombo.  The provincial 
chief secretary, who is a GSL civil servant, chairs the 
steering committee in each province. 
 
4.  (SBU) Already, the DDF has held six initial meetings in 
the following provinces: Central, North Central, Wayamba, 
Sabargamuwa, Uva and Western Provinces.  Emboffs have 
attended two of the meetings.  There were approximately 100 
participants at each meeting.  The meetings have provided 
information on the MCA (its intentions, requirements, and 
country selection) and the initial concept paper presented 
by the GSL, and appointed steering committees to continue 
discussions at the provincial level.  The meetings appear 
to be used primarily to ask for advice to fine tune 
existing project proposals, rather than discuss problems 
and approaches to solving underlying challenges to economic 
growth.  For example, the GSL's approach tends to be one of 
asking leading questions such as "which irrigation 
reservoirs are most in need of repair" or "which roads 
should we repair to give the greatest local benefit?" 
 
5.  (U) While these initial provincial-level meetings are 
not consultations, but planning meetings to start 
provincial level discussions, the audiences have mostly 
sought clarifications about the MCA program and funding 
opportunities.  In the two meetings Post attended, 
participants mostly inquired about funds for projects 
related to their personal interests.  For example, one 
person asked if funds would be available for housing; 
another, a medical practitioner, proposed assistance to 
improve the availability of health-related personnel, while 
a youth activist asked if funds could be used to build 
recreational facilities.   All suggested that their 
programs could have indirect benefits to economic growth. 
 
6.  (SBU) Unfortunately, the meetings do not appear to have 
been used to discuss fundamental issues like economic 
constraints in each province, reasons for persistent 
poverty or how best to overcome such problems.  We expect 
the appointed steering committees to look into these 
questions. 
 
Perceptions from Meeting Participants 
-------------------------------------- 
7.  (SBU) During the meetings, Emboffs had the opportunity 
to meet civil servants from the provinces, with wide 
ranging experience working in rural districts.  As for the 
GSL's favored irrigation reservoir rehabilitation program, 
the Provincial Planning Secretary for Sabaragamuwa province 
told Emboffs that supplying water to farmers in her area 
would not do much to lift farmers out of poverty. 
Subsistence farmers who have small plots and engage in low- 
tech farming methods do most of the farming in the area. 
She said that unless steps are taken to resolve land 
problems and improve agricultural productivity, an 
irrigation rehabilitation program alone would not 
substantially increase economic growth.  Such a limited 
program would more likely promote continued subsistence 
farming. 
 
8.  (SBU) The Planning Secretary also noted that although 
the Sabaragamuwa province is endowed with many natural 
resources, such as scenic locations, rainforests and 
waterfalls, such locations have not been developed as 
tourist attractions.  Developing those locations and 
providing road access might be more useful for diversifying 
the local economy and promoting broader based growth.  We 
also heard similar sentiments from a divisional secretary 
of the Central province.  He suggested vegetable farmers in 
his area would benefit from a new highway connecting the 
district to business centers. 
 
Next Steps 
---------- 
9.  (U) The Finance Ministry expects to receive provincial 
comments on the MCC proposal by mid-June and hopes to 
submit a revised proposal to MCC in July or August 2005. 
The plan is for the provincial steering committees to feed 
ideas to the Finance Ministry, which would perform a series 
of financial and economic analyses to rate the project 
proposals and then submit the ideas for consideration by a 
centralized steering committee, comprised of GSL officials, 
representatives from business chambers and NGOs.  This is 
the body that provided the initial inputs for the concept 
paper. 
 
Likely Areas of Focus 
--------------------- 
10.  (U) Based on our conversations with the Finance 
Ministry's action officers for MCA, we expect the 
Government's initial compact proposal to focus primarily on 
rehabilitating rural irrigation reservoirs - a politically 
charged issue that was a primary campaign promise of the 
GSL's Marxist-Nationalist coalition partner the Janatha 
Vimukthi Peramuna (JVP) - and SME development through firm- 
level assistance programs.  These have been the most 
consistently mentioned projects by GSL officials and the 
SME program seems to have the support of the country's 
primary business chambers. 
 
Outside Involvement in the Consultative Process 
--------------------------------------------- -- 
11.  (SBU) This current round of consultations has been 
assisted by The Asia Foundation (TAF) and the American 
Chamber of Commerce (Amcham), though the GSL, after seeking 
Asia Foundation and Amcham support, has largely run its own 
process and has sought a much faster timeframe than either 
Amcham or TAF felt prudent. Both organizations have 
continued to suggest participants for the consultative 
process, however. 
 
Comment: 
------- 
12.  (SBU) The GSL resisted initial efforts to channel MCA 
funds into tsunami reconstruction, which is largely 
oversubscribed, and has elected to focus on pre-tsunami 
needs, which should help alleviate inequity between 
tsunami-related and pre-existing development problems. 
 
SIPDIS 
That said, it continues to pursue outreach through an over- 
centralized, Colombo-driven approach that focuses primarily 
on GSL-initiatives, rather than potential projects 
identified through broad-based consultation.  The GSL 
claims it has undertaken consultations through its network 
of village-level government officials.  If this is so, they 
need to produce evidence of these consultations and 
village-level input. 
 
13.  (SBU) There is certainly value in focusing on the 
larger sectors the GSL is interested in - rural development 
is lagging in Sri Lanka and agricultural productivity is a 
key problem. Similarly, SMEs face significant structural 
problems in their efforts to deal with economic challenges, 
particularly the expiration of the multi-fiber agreement, 
and its ensuing impact on small and medium sized garment 
manufacturers and their suppliers.  However the GSL has, so 
far, failed to paint the "bigger picture" of how MCA fits 
into a larger development plan.  This is further hampered 
by the fact the GSL has rejected the poverty reduction 
strategy of the previous government, but has yet to present 
its own alternative, except in the most general terms. 
 
14.  (SBU) We have tried many ways to help the GSL better 
understand the importance to the larger bilateral 
relationship of taking advantage of the MCA opportunity. 
We have also tried to get them to think "outside the box" 
in the development of their proposals.  Both issues will 
become increasingly important given the cuts to USAID 
funding that have been imposed as a result of Sri Lanka 
becoming MCA-eligible, despite the lack of any connection 
between MCA priorities and USAID initiatives (Note: This is 
in direct contravention to USG statements that MCA funding 
would be wholly separate from, and would not reduce, other 
development assistance, an inaccuracy we will need to deal 
with sooner rather than later should the current 
allocations prevail. End note).  Nonetheless, MCA's new 
approach and the diversion of the December 26 tsunami has 
slowed the GSL response and forced them to rethink their 
standard operating procedures.  At this stage, we 
anticipate a compact proposal sometime before the end of 
August and we expect it to focus on the two areas outlined 
above - SME development and the rehabilitation of 
irrigation reservoirs. 
LUNSTEAD