US embassy cable - 05BAGHDAD4447

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 004447 
 
SIPDIS 
 
STATE PASS TO USAID 
 
E.O. 12958: DECL: 10/30/2015 
TAGS: ECON, EFIN, PGOV, PREL, MCAP, IZ, IMF, Security, Sunni Arab 
SUBJECT: IMF DISCUSSIONS WITH IRAQ: CHALABI 
 
REF: BAGHDAD 4407 
 
Classified By: CDA David M. Satterfield for reasons 1.4(b) and (d). 
 
 1. (C) Summary:  In a wide-ranging discussion with CDA 
Satterfield, DPM Chalabi emphasized the need for a less 
alienating security posture vis--vis the minority Sunni 
population, including the use of lower tier former Baathist 
officers to lead operations in sensitive areas.  On security 
of infrastructure, Chalabi was downbeat, noting the ability 
of the insurgents to target pipelines and electrical towers 
with impunity.  Concerning the 2006 budget, Chalabi expressed 
frustration about security estimates and flagged procurement, 
life support, and operational needs (for both MoD and MoI) 
for thorough examination.  Finally, despite recent 
commitments made by the GOI to initiate major changes in its 
major subsidy programs -- the Public Distribution System 
(PDS) for foodstuffs and the state fuel sales system -- 
Chalabi was dismissive of possibilities for more rapid reform 
to stem budget outflows and curb corruption.  End Summary. 
 
Concern about Sunni Alienation 
------------------------------ 
 
2. (C) CDA Satterfield, accompanied by EconMinCouns and 
Treasury Attache met with Deputy PM Ahmad Chalabi October 23. 
 Chalabi opened the discussion with a short description of 
several recent audiences with members of the public.  One of 
these, with the families of 36 Sunnis recently executed by 
individuals passing themselves off as members of the Volcano 
Brigade of the MOI, Chalabi found particularly appalling. 
Chalabi noted that those executed were "simple people, not 
terrorists."  He flagged the need to get the Sunni community 
around Baghdad positively engaged.  Toward that end, he is 
encouraged by the recent recruitment and results achieved by 
a Sunni battalion commander in Latafiya, a former officer in 
the old regime army. Chalabi acknowledged that he was a "4th 
level Baathist" but emphasized that the way forward 
necessitated using such people who could drastically cut back 
on the level of alienating incidents.  He also noted that he 
had already spoken to the UK Ambassador and CG Casey about 
the need to get "action" on this issue before the December 
election. 
 
Losing the Battle on Infrastructure Security 
-------------------------------------------- 
 
3. (C) The constant cutting with "impunity" of power lines 
and pipelines in recent weeks led Chalabi to observe that "we 
have lost this battle," even though he conceded that the 
"perfectly reasonable (protection) plan" drawn up by MNSTC-I 
probably would show results in a few weeks' time.  He added 
that, as a result of deficient intelligence, the GOI still 
does not know who is planning, funding or executing the 
attacks.  Chalabi argued that it is a mistake to depend on 
infrastructure security battalions (SIBs), since local 
"penetrated" elements within them are part of the problem. 
He recommended their integration into the army and their 
regular rotation - although not to tribal areas.  Chalabi 
also sought the introduction of better technology: 
inexpensive UAVs (not Predators) for surveillance; creation 
of a command and communication center to quickly dispatch 
react teams to trouble spots (n.b., already done); and a 
combination of hardening and redundancy to add to the 
physical security of the lines.  To cope with the 
intimidation of repair crews by insurgents, Chalabi agreed 
that it would make sense to move these workers to areas where 
their families could not be targeted.  Finally, he stressed 
the need to change the incentive structure for SIBs and 
tribes charged with pipeline security.  At present, they are 
paid whether or not the pipelines or transmission towers in 
their areas of responsibility are hit, leading to suspected 
"double dipping" (i.e., insurgents paying security elements 
to destroy towers and lines). 
 
Security Budget and Lagging Capacity 
------------------------------------ 
 
4. (C) Turning to the subject of the pending agreement with 
the IMF on a Standby Agreement (SBA), Chalabi expressed some 
frustration with the cost estimates submitted for security 
needs.  He observed that procurement, life support and 
operational needs for both MoD and MoI would need to be 
thoroughly studied.  Otherwise, he opined, expenditures for 
security would quickly rise to levels seen over the last two 
years - perhaps reaching $11.0 billion.  In this area, 
Chalabi expected little assistance from within MoD, calling 
it "moribund" and lacking Director Generals with the ability 
to identify and deal with problems. Regarding MoI, he flagged 
major problems, including padding of the active duty rolls as 
well as major equipment and infrastructure needs. 
Subsidy Conundrums 
------------------ 
 
5. (C) Taking a cue from Chalabi's budget discussion, we 
pushed to see if he could be interested in more rapid reforms 
to the two major subsidy programs - the Public Distribution 
System (PDS) for foodstuffs and the state fuel sales system. 
In both cases, commitments have been made that aim at major 
changes. Nevertheless, with just weeks remaining before the 
national election, Chalabi was clearly in no mood to 
entertain politically risky moves.  On the PDS, he agreed 
that monetization of the assistance package currently 
provided needed to be pursued as expeditiously as possible 
(Note: Nothing new there.  End Note.) but offered that the 
pace of change would be seriously slowed by the lack of 
banks, post offices or other governmental offices capable of 
issuing vouchers in lieu of assistance in kind.  On fuel 
price reform, he also did not want to go beyond modest steps 
recently taken to inch up retail prices paid for all fuels, 
even though subsidies continue to claim ever-greater shares 
of the state budget.  Nevertheless, he did recognize the 
debilitating impact of corruption in fuel sales, with state 
supplies siphoned out of official channels for black market 
sale.  His solution, however, is a desire to reinstitute a 
system of inspectors first initiated by the CPA to audit 
government fuel storage facilities and distribution. 
 
Comment 
------- 
 
6. (C) Chalabi's alarm about infrastructure security is 
familiar to us from our once a week participation in his 
Critical Infrastructure Working Group.  His concerns to seek 
concrete solutions to ongoing threats to infrastructure and 
to adopt a less threatening posture toward the minority Sunni 
are both worth our cooperation.  In addition, we detect 
genuine frustration, as we have in discussions with MinFin 
Allawi, over the details of the security budget for 2006. 
There is real uncertainty over what sort of security package 
is needed for the Iraqi military.  Both Chalabi and Allawi 
want to streamline the security budget by focusing on 
priority tasks and ensuring that the budget is not just a 
mirror image of U.S. outlays.  Finally, we attribute some of 
Chalabi's hesitation to move more rapidly on subsidy reform 
to simple political calculation, despite the increasing 
gravity of the budget and fuel situations.  However, he also 
exhibits no understanding of the possibility of using the 
market as a tool or incentive to secure his goals.  As we 
explained, letting state retail prices float toward black 
market levels would gain revenues, curb subsidies, encourage 
investment and inhibit possibilities for insurgency financing 
from black market activity. Increasing the number of state 
inspectors instead is a familiar fallback but one unlikely to 
have any measurable impact. 
Satterfield