US embassy cable - 05BAGHDAD4041

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 004041 
 
SIPDIS 
 
DEPT PLS PASS TO DEPT OF AGRICULTURE 
 
E.O. 12958: DECL: 09/29/2015 
TAGS: EAGR, ECON, ELAB, EFIN, IZ 
SUBJECT: MOVING TOWARDS FOOD SUBSIDY REFORM 
 
REF: A. BAGHDAD 3805 
     B. BAGHDAD 2821 
 
Classified By: ECON MINCOUNS Thomas Delare, Reasons 1.4 b/d 
 
1.  (C) Summary:  The Public Distribution System (PDS) for 
food has failed to ensure adequate food to needy Iraqis.  It 
is inefficient, underfunded, and corrupt.  The proposed 2006 
budget includes provision to zero out GOI funding to the PDS 
over the next four years (reftel A), and planning is underway 
for an introduction of a safety net that would aim to provide 
the most needy Iraqis with cash payments as the PDS gradually 
disappears.  End summary. 
 
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PDS - What is it? 
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2.  (U) The purpose of the PDS program is to provide food 
rations to 100% of the Iraqi population.  Total budgetary 
cost is $4 billion.  It is widely regarded by outside 
observers as an inefficient and corrupt welfare tool. 
Created by Saddam, it has evolved from a means to meet the 
nutritional needs of the genuinely poor into a bloated system 
that has become regarded as a "right" by much of the 
population.  Aside from direct costs, it has helped disrupt 
normal agricultural production by destroying the normal 
agricultural market for domestic products. 
 
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PDS Problems 
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3.  (SBU) The PDS has not met its object of ensuring food 
security for Iraqis.  We have nothing to contradict 2003 data 
from the UN World Food Program (WFP) that says that 25% of 
Iraqis are dependent on the PDS for food.  While PDS failure 
is partially attributable to insufficient funding, 
inefficiency and corruption in the operation of the PDS are 
also key factors. 
 
4.  (SBU) The food distribution problems caused by 
insufficient funding and PDS inefficiencies and corruption 
are widespread throughout Iraq.  However, the impact is most 
severe in impoverished areas.  A 2005 USAID study of 17 of 
Iraq's most impoverished districts found that over half of 
the surveyed households sometimes or often did not have 
enough to eat.  These highly dependent households are located 
for the most part in Ninewa and Anbar provinces (primarily 
Sunni in makeup) and scattered locations throughout southeast 
Iraq (mainly Shi'a). 
 
5.  (C) Corruption is rampant.  Drivers transporting food 
between Trebil, on the Jordanian border, and Baghdad must 
frequently stop in Ramadi to pay a "fee" to the local mosques 
or not be allowed to pass.  In April of this year, over 30 
MoT trucks were hijacked at a border checkpoint, ten of them 
stolen, and one driver kidnapped.  It is speculated -- by 
more than one source -- that higher-quality foreign wheat is 
mixed with domestic wheat at lower quantities than required. 
The excess foreign wheat is rumored to be sold to finance 
insurgent activities.  Moreover, PDS distribution agents 
sometimes sell food rations on the black market first, and 
then substitute lower-quality food in its place for final 
distribution.  Acting Deputy Minister Kais Hassan recently 
withdrew contracting authority from two 
state-owned-enterprise (SOE) Director Generals because of 
their &illegal8 activities (under the current division of 
labor, MoT runs the PDS program). 
 
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PDS Reform Plans 
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6.  (C) The Ministry of Finance (MoF) has stated that it will 
decrease the PDS budget by 25% (the 2005 budget as baseline) 
per year over the next four years.  The proposed budget for 
2006 under this scenario will be $3 billion.  Beginning 2006, 
MoT plans to eliminate soap, powdered milk, detergent, tea, 
and lentils -- the least important items -- from the food 
basket.  Beyond that, Abdul Kareem Fajer, Acting DG for 
Foodstuffs, an SOE operated by MoT, told us: "There is no 
clear vision on reform." 
 
7.  (SBU) USAID's Agriculture Reconstruction Development 
Program in Iraq (ARDI) recommends that PDS recipients be 
given a choice between food and money so those who wished to 
could buy food on the open market.  While encouraging 
private-sector development, this approach could also provide 
significant savings to GOI because ARDI's plan would offer 
money equivalent to the market value of PDS rations 
(approximately $11), rather than the higher amount that GOI 
pays for the food (approximately $50).  Also, ARDI's plan 
could reduce corruption by eliminating a large number of 
state contracts to procure food. 
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A Safety Net for the Most Needy 
--------------------------------- 
 
8.  (SBU) Iraq's current safety net provides $35 per month to 
each family with a monthly income lower than this amount, 
resulting in coverage of 3% of Iraq's 4,452,000 families. 
The amount does not vary according to family size, and 
coverage stops once one child in the household reaches the 
age of 18.  We do not believe that $35 per month is enough to 
cover the needs of the poorest families, especially since the 
average family size in Iraq is six. 
 
9.  (SBU) USAID is working with MoF and MoLSA to help them 
develop a plan for a new safety net that could be implemented 
in conjunction with a PDS phase-out.  Current thinking 
envisions coverage of all families with a monthly income of 
less than $1 per day per individual, about 20% of Iraq's 
households.  The size of the aid payment would vary according 
to family size and overall income.  Eligible families would 
also receive an additional payment for each child below the 
age of 18.  The plan would also provide for vocational 
training, micro-financing, and other assistance programs. 
The total budget would be approximately $350 million, and the 
benefit would be revised every quarter and indexed in orer 
to presrve the purchasing power of poor families. 
 
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Moving Forward 
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10.  (C) Comment:  USG is working with this government and 
will continue to do so with the next to develop a unified 
position with the goal of implementing a social safety net 
targeted on the genuinely needy.  So far, we have limited 
buy-in, with the Ministry of Finance a strong ally.  However, 
anti-reform pressures will be exerted by those profiting from 
the current corruption.  In addition, it is unclear what 
position will be taken by either the new government or 
national assemby.  End comment. 
Khalilzad