US embassy cable - 05NDJAMENA1560

C O N F I D E N T I A L  NDJAMENA 001560 
 
SIPDIS 
 
 
SENSITIVE 
 
DEPARTMENT FOR AF, TREASURY FOR OTA, LONDON AND PARIS FOR 
AFRICA WATCHERS 
 
E.O. 12958: DECL: 10/19/2015 
TAGS: ECON, EFIN, ENRG, PGOV, CD, Oil Revenue Management 
SUBJECT: CHAD: GOVERNMENT LOBBYING FOR CHANGES TO OIL 
REVENUE MANAGEMENT LAW 
 
 
Classified By: Lucy Tamlyn, DCM, for reasons 1.4 (b) and 1.4 (d) 
 
1. (SBU)  Summary: Following a chilly reception in Washington 
by the Bretton Woods Institutions, the Government of Chad 
(GOC) is reaching out to development partners and civil 
society in Chad on the need to modify the law governing 
management of petroleum revenues, with the hope of persuading 
the international financial institutions (IFI's) to view the 
changes more sympathetically.  The modifications proposed 
include revisiting the desirability of a "Fund for Future 
Generations," increasing the unearmarked amount intended for 
the National Treasury and integrating the new oil fields into 
the revenue management scheme.  In preliminary meetings on 
this issue with Finance Minister Tolli and Prime Minister 
Pascal Yoadimnadji, Ambassador Wall stressed the importance 
of transparency, the College oversight of petroleum revenues 
and dialogue with Chad's international partners. A recent 
World Bank (WB) hosted seminar on the status of the oil 
project underscored to the GOC the international outcry that 
would arise were such a step to be taken. We do not 
anticipate a precipitous move by the GOC to change the law, 
but it feels under pressure to do so.  If the current 
stand-off is not resolved one way or another, representatives 
of the petroleum consortium shared with Emboffs their fear 
that the consortium would be identified as "the problem." End 
summary. 
 
 
Tolli reports a chilly reception in Washington 
--------------------------------------------- -- 
 
2.  (SBU) Ambassador Wall met with Ministry of Treasury Tolli 
October 17 to discuss Tolli's recent visit to Washington D.C. 
 Tolli described a stiff reception at the WB and an equally 
difficult one at the IMF.  He made the pitch that Chad needed 
to revise the petroleum management law (law 001/99) in order 
to enlarge the share of revenues going to the general budget 
from 15 to 30 percent, integrate the new fields into the law, 
revisit the desirability of the fund for future generations 
and expand the designated priority sectors.  At the same 
time, he stressed that the GOC intended to protect the role 
of the college, the existing priority sectors and allocations 
to the producing region.  Tolli argued that it was senseless 
to reserve funds for the future when the children need new 
schools now.  He also wanted to include justice, higher 
education, territorial administration and certain aspects of 
public security, (salaries, uniforms, etc), but not the army 
on the list of priority sectors.  Tolli argued that the GOC 
was at an impossible conjuncture right now, facing 
simultaneously salary arrears, the need to support troops in 
eastern Chad, and diminished customs revenues (as a result of 
the Darfur conflict destroying lucrative trade through 
Sudan.)  Minister Tolli said that he had advised the Prime 
Minister to "consult with everyone:" donors, the National 
Assembly, NGO's, the College, civil society.  Ambassador Wall 
underlined U.S. support for the College, for the principle of 
transparency and for dialogue with Chad's partners. 
 
Prime Minister conducts consultations 
------------------------------------ 
 
3.  (SBU)  Prime Minister Pascal Yoadimnadji convoked 
Ambassador Wall October 19 to pursue the same discussion.  He 
described a precarious social situation characterized by 
large internal indebtedness, strikes due to salary arrears in 
the health and education sectors and difficulties in paying 
pensions. Referring to recent reports of mutinies in the 
army's ranks, he stated that "they don't have anything to 
eat." Despite the fact that development partners called it 
"premature" to revise the law, he reported that President 
Deby believed that the situation was not sustainable. 
Accordingly, "light modifications" were necessary to which he 
hoped the United States would lend its support.  The 
modifications would be reflected in the government's 2006 
budget which was still in draft and had not been transmitted 
to the National Assembly.  Proposed changes included 
revisiting the Fund for Future Generations, increasing the 
amount attributable to the General Treasury from 15 percent 
to 30 percent and integrating the new oil fields into the 
scheme.  Yoadimnadji also discussed generally looking at 
additional areas for funding (such as human resources), but 
did not specifically mention revising the priority sectors. 
He stated that the GOC wanted to hear from development 
 
 
partners -- especially the United States -- on this issue and 
hoped that we would be able to convince the other development 
partners (i.e. the IFI's).  Yoadimnadji stressed that the 
government needed to demonstrate to the Chadian people that 
tangible efforts were being made to increase the stream of 
revenues -- otherwise the citizens could not understand why 
they were seeing such little improvement in their standard of 
living.  Prime Minister Yoadimnadji also underscored that GOC 
recognized that the oil resources were not sufficient to 
cover all of Chad's needs and emphasized the importance of 
dialogue with the international community on this issue.  He 
noted with chagrin that he "was not proud" of the fact that 
Chad had scored the worst in Transparency International's 
recently released corruption index. 
 
4. (SBU)  Ambassador Wall responded that the world was 
looking to Chad as an example of management of oil revenues 
in a developing country. He reiterated the importance of 
transparency and the role of the College -- also of the 
dialogue with development partners.  That being said, it 
might not be possible to complete the necessary consultations 
in two months.  He promised to raise these questions with 
Washington and mentioned his upcoming visit in November.  He 
commented that the additional resources from revising the law 
would not be adequate to meet Chad's needs.  Chad needed to 
address the bigger problem of improving management of its 
public finances.  In conclusion, he stated his hope that if 
there is a revision of the law, it should be in consultation 
with all partners. 
 
 
What are the alternatives 
-------------------------- 
 
5.  (C)  In a meeting with Ambassador Wall October 6, WB 
representative Noel Tshiani reported on the efforts by 
President Deby and Prime Minister Pascal Yoadimnadji to 
elicit IFI support for changes to the revenue management law 
and the subsequent (coordinated) WB/IMF response that this 
was premature.  Tshiani reported that President Deby had 
hinted that whoever came after Deby could not be expected to 
honor the agreements, and that popular disillusionment over 
the slim impact of oil revenues threatened the President's 
political base -- particularly among the military where funds 
were urgently needed for demobilization. 
 
6.  (C)  Ambassador Wall and Emboffs also discussed with 
Tshiani and, separately, with Esso reps, the implications of 
 
SIPDIS 
Chad unilaterally changing the revenue management law. 
According to the WB, the cost to Chad of modifying the 
revenue management law without WB support would be an 
immediate bill of USD 30 million (the amount outstanding on 
the WB loan for the pipeline) as well as suspension of other 
WB programs, African Development Bank loans (and possibly 
European Commission funding).  It would also derail meeting 
the HIPC completion point and the ensuing debt relief. 
Nonetheless, according to the WB, the GOC might be receiving 
encouragement (including possibly promised financial support) 
from neighboring countries -- countries (such as Libya and 
Gabon) that had a vested interested in ensuring that the 
"Chad model" of transparent oil revenue management failed. 
 
7. (SBU) Esso representative Ron Royal pointed out to 
Ambassador Wall on October 7 that, starting in 2008, taxes 
from the consortium will bring in approximately USD 800 
million unearmarked funds annually to the state coffers. 
Knowing that this money was in the offing, the GOC might try 
to make the changes unilaterally and "tough it out" until 
2008.  However, in the near term, with royalties only 
clearing about USD 14 million a month, the GOC would not be 
able to pay all of its expenses (even if they closed down the 
revenue management scheme).  Therefore, absent some new 
source of funding, Royal observed Chad would still need the 
WB, the IMF and other donors. In any event, and more to the 
point for Esso, if the current stand-off is not resolved one 
way or another, Royal observed that the consortium would be 
identified as "the problem." 
 
8. (SBU) A World Bank hosted seminar October 24-25 examined 
the impact of the oil project "two years later." The seminar, 
which had broad participation by private sector and civil 
society representatives, served to remind the GOC and other 
attendees of the firestorm of criticism that the government 
 
 
would be expected to receive were it to change the oil 
revenue management legislation.  Civil society coalesced 
around the position that the lack of visible impact from the 
oil revenues was the result of the government's poor 
management of the resources, not of the law's failings. 
Overall, they did not support changes to the revenue 
management law. 
 
What is the impact 
------------------ 
 
9.   (SBU) The IMF representative, Wayne Camard, has 
confirmed that the GOC's budget woes are real enough.  Faced 
with an approximately USD 150 million budget deficit from 
2004, the government was able to pay off or renegotiate some 
USD 70 million.   The recent release of Euro 12 million in 
African Development Bank (ADB) grant money has alleviated 
some pressure on civil service salaries which are now current 
through August 2005.   However, failure to meet IMF 
performance criteria has delayed the release of additional 
funding (about USD 6 million from the IMF and about USD 15 
million from EC).  According to Camard, increasing the share 
of oil revenues going into the general Treasury account as 
proposed by the government would not amount to much in 2006 
as most of the oil money has already been programmed for road 
building projects.  The revenues from the Nya field (the only 
one producing that is not part of the current law) are also 
paltry. He reiterated that any unilateral change to the law 
would jeopardize IMF and EC funding. 
 
10. (C) Comment: The proposed modifications are unlikely to 
increase government revenues significantly in the near term. 
With or without modifications, the GOC will still experience 
difficulties meeting pension and salary obligations 
(particularly in the health, education and military sectors) 
and repaying internal debt.  The GOC could change the law 
without World Bank acquiescence, but the punitive costs of 
doing so appear to outweigh the benefits and we do not 
consider this a likely scenario. While the law is not 
perfect, and reasonable arguments can be made in favor of 
some modifications, we will continue to stress the importance 
of transparency, College oversight and reaching consensus 
with international partners on any revision to the law. 
 
WALL 
 
 
NNNN