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Viewing cable 09ADDISABABA472, WORLD BANK PBS VOTE - SETTING BENCHMARKS AND REVIEW

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Reference ID Created Released Classification Origin
09ADDISABABA472 2009-02-25 12:21 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Addis Ababa
VZCZCXRO1903
PP RUEHROV
DE RUEHDS #0472/01 0561221
ZNR UUUUU ZZH
P 251221Z FEB 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC PRIORITY 3889
INFO RUCNIAD/IGAD COLLECTIVE PRIORITY
RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RUEWMFD/HQ USAFRICOM STUTTGART GE PRIORITY
RUEKJCS/SECDEF WASHINGTON DC PRIORITY
RUEHLO/AMEMBASSY LONDON 3321
RUEATRS/DEPT OF TREASURY WASHINGTON DC
UNCLAS SECTION 01 OF 03 ADDIS ABABA 000472 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR STEPHEN ALTHEIM AND REBECCA KLEIN 
TREASURY PASS TO USED TO THE WORLD BANK 
USAID FOR AA/AFR EGAST AND AFR/SD DATWOOD 
 
E.O. 12958: N/A 
TAGS: EAID ECON PREL PGOV ET
SUBJECT: WORLD BANK PBS VOTE - SETTING BENCHMARKS AND REVIEW 
REQUIREMENTS 
 
REF: 2008 ADDIS 3462 
 
This is an Action Request for Treasury and the USED to the World 
Bank.  Please see para 2. 
 
SUMMARY 
------- 
 
1. (SBU) The World Bank's Protecting Basic Services (PBS) project 
has filled a gap in providing critical health and education services 
to rural Ethiopians while creating a limited window of significant 
transparency in illuminating budget allocation and expenditure data 
to the public.  Still, three years after starting, the program 
continues to provide a "band-aid" approach covering recurrent costs 
which are unsustainable under the current macroeconomic framework. 
In the mean time, broader political space in country has narrowed 
dramatically.  As currently designed, PBS II does not make continued 
funding contingent on actual policy progress.  Setting benchmarks 
and having the World Bank's Board review progress made on needed 
macro-economic or political policy reforms will make PBS II a more 
effective mechanism for achieving sustainable development.  End 
Summary. 
 
ACTION REQUEST 
-------------- 
 
2. (SBU) The Bank's internal deliberation on a PBS II project, and 
the Bank's Board of Directors' subsequent vote on the project, 
provide an opportunity for the United States to break the donor 
cycle of "business as usual" to hold the Ethiopian Government (GoE) 
accountable to provide a sufficiently conducive environment for 
democracy and development to merit sustained receipt of donor 
assistance.  We recommend that Treasury and the USED to the Bank 
raise with the Bank's Operations Committee (OC) the requirement for 
annual or mid-term Bank Board review of the PBS II program.  We 
recommend that the nearly $600 million, three-year PBS II project be 
divided into three annual tranches (or at least two tranches 
reviewed at the mid-point) with each subjected to a new Board vote. 
This approach to the OC prior to its February 27 meeting to review 
PBS II would allow for revisions to the PBS II Project Appraisal 
Document (PAD) before the project goes to a final Board vote in 
April.  If the OC does not break the project into tranches subjected 
to annual Board votes, we recommend that Treasury and the USED 
engage other Executive Directors to send the PBS II project back to 
the Bank for review before the project is subjected to a Board vote 
in April. 
 
THE STANCE OF ADDIS-BASED DONORS 
-------------------------------- 
 
3. (SBU) The UK considers PBS critical to its development efforts in 
Ethiopia.  In light of frustration with Ethiopian policy dynamics 
over the past few years, we understand that the UK Development 
Minister Douglas Alexander has personally refused to sign on to a 
multi-year bilateral PBS assistance package, instead restricting aid 
to annual reviews.  The British Embassy in Addis currently opposes 
subjecting the Bank's PBS II project to a similar annual review 
mechanism, but it is not clear if this is a local decision or 
whether London has considered the proposal.  Other donors, notably 
Holland and Ireland, share our concerns that PBS should focus more 
on enhancing democratic institutions as a way to support economic 
development.  Despite donor concerns over Ethiopia's lack of 
economic and political reforms, aid continues to flow -- 
particularly budget support from the EU -- and the GoE continues to 
expect it. 
 
4. (SBU) To promote policy reforms necessary to render PBS 
sustainable, Embassy Addis Ababa discussed with donors and World 
Bank/Ethiopia the idea of breaking the three-year, $600 million 
grant-based PBS II project into three, one-year tranches (or at 
least two tranches reviewed at the mid-point) with each subjected to 
a new vote by the Bank's Board of Directors which will be predicated 
on GoE adherence to the pledges of policy action and intent 
currently made.  This one-year tranched approach is consistent with 
the UK's approach to its bilateral PBS support.  The Dutch, Irish, 
Swedes, and to some extent the Canadians share U.S. concerns about 
the Bank's program, but without us lack an adequate voice. 
 
NEED ASSURANCES ON MACROECONOMIC BENCHMARKS 
 
ADDIS ABAB 00000472  002 OF 003 
 
 
------------------------------------------- 
 
5. (SBU) We recognize that PBS has been essential for the GoE to 
achieve the huge impacts in recent years toward achieving Millennium 
Development Goals in health and education.  Still, in May 2006, the 
United States abstained in the World Bank vote on PBS arguing that 
"the country... [did] not present a sufficiently reliable political 
and macroeconomic environment to assure sustainability."  Two years 
later, in December 2008, the U.S. noted in another Board vote that 
Ethiopia had "not yet demonstrated the political will to take on the 
reforms needed to deliver macroeconomic stability."  That December 
statement further noted that "we also want to make clear to the Bank 
that future programmatic operations should incorporate commensurate 
policy commitments aimed at correcting economic distortions in the 
country, especially in the agricultural sector."  While the Bank has 
received some commitments from the GoE on economic policy 
commitments, the current project assessment document (PAD) leaves it 
to the Bank and PBS contributors to determine the appropriateness of 
continued funding over PBS II's three-year lifespan.  Based on our 
discussions with donors here in Addis, we believe that an internal 
World Bank review is inadequate and that we need to make continued 
funding contingent on actual policy progress. 
 
6. (SBU) There has been some movement.  Following Bank engagements 
with the Finance Ministry (MoFED), the GoE has made economic policy 
pledges to the Bank.  The GoE has committed to reduce inflation from 
55.3% in June 2008 to 20% and 9% by June 2009 and June 2010 
respectively.  The GoE has also committed to increasing official 
reserves from 1.2 months of import coverage as of the end of the 
2007/08 fiscal year to 1.8 months and 2.3 months at the end of 
2008/09 and 2009/10 respectively.  Finally, the GoE has agreed to 
increase the private sector's share of credit in Ethiopia.  While 
these commitments will help stabilize the economy, such actions are 
necessary but not sufficient to support the lasting, 
domestically-based economic growth required to render the PBS gains 
sustainable.  Further, much as was the case in the GoE's Exogenous 
Shocks Facility loan from the IMF highlighted in reftel, as is, the 
GoE's pledge is just that -- a pledge -- upon which no specific 
funding implications are contingent.  We acknowledge that the GoE 
submitted, and has begun taking policy action in line with an 
economic policy letter to the IMF for this loan, but we remain 
cautious due to the GoE's refusal to date to accept any binding 
obligations on economic policy.  We believe that by adopting the 
UK's one-year tranched approach -- with each year subjected to a 
Board vote -- we will convey a clear message from the international 
community that we expect the GoE to follow through on its 
commitments and meet the targets it has set in its messages of 
policy intent during the PBS project negotiation process. 
 
CONCERNS LINGER ON SOCIAL MONITORING 
------------------------------------ 
 
7. (SBU) The original roll-out of PBS in 2006 was a political 
decision in response to political dynamics in Ethiopia following the 
2005 elections and most Ethiopia watchers here agree that the 
project was only adopted because of the robust safeguards put in 
place to ensure transparency and social monitoring in the so called 
"component four (C4)" element.  The C4 element was a major factor 
driving the broad donor support for the original PBS grant in 2006, 
but the final C4 design approved by the GoE was severely watered 
down from the original intention of providing independent oversight, 
scrutiny and accountability for the program.  Since PBS started 
there has been further erosion of freedoms at all levels, especially 
the local level where component four is focused.  Within the limits 
of the planned design there has been some success in the 12 pilots 
in increasing the ability of local actors to scrutinize the delivery 
of basic services.  However, implementation of C4 has lagged badly, 
and has been largely implemented through ruling party controlled 
NGOs and 'member based organizations' (women, youth, peasants) with 
space for independent NGOs participation remaining limited.  In 
fact, one CSO which was monitoring PBS implementation was even 
closed down by local authorities (see para 9 below).  In addition to 
these dynamics, the passage of a highly restrictive law (CSO Law) 
governing NGO activities last month has left many PBS donors and 
watchers concerned for the viability of C4. 
 
8. (SBU) In response to donor concerns about the impacts of the CSO 
law on PBS, the Bank elicited a 
"comfort letter" from the GoE on NGO participation in the (C4) 
 
ADDIS ABAB 00000472  003 OF 003 
 
 
element.  While the Bank has argued that the letter conveys the 
intent of the GoE for the CSO law not to affect PBS, we, the Dutch, 
the Irish, the Swedes, and even some Bank insiders, view vague 
language in the letter, combined with the GoE's demonstrated actions 
against NGOs in recent years, as grounds for skepticism.  Some see 
the letter's assurance that the governance structure for C4 
implementation will continue "until alternative arrangements are 
deemed necessary" with particular concern.  Another point, noting 
that "citizens and their organizations are the ones who engage with 
service providers," has drawn particular Dutch and Irish attention 
as the CSO Law would render any NGOs receiving more than 10% of 
their funding from outside sources as "foreign."  With the currently 
vague language, this provision effectively could exclude foreign 
funded NGOs from C4 activities. 
 
9. (SBU) Although the Bank's staff tells us that the letter's 
confirmation that PBS funds will count as government resources 
rather than "foreign" resources for the sake of the 10% rule, NGOs 
that get more than 10% of their funding from outside, would already 
be over the "foreign" threshold and may be excluded from 
participating in PBS.  On another point, while one of the main 
functions for C4 social monitors was to validate impact data 
presented by local governments, the letter's provision noting that 
local NGOs will serve merely as "facilitators and in capacity 
building" fundamentally calls into question the scope of activities 
which the GoE will actually allow even local NGOs to engage in. 
During the first PBS project, the GoE restricted international NGOs 
supporting C4 to "facilitation and capacity building" but local NGOs 
were very much actively expected to participate.  Under the comfort 
letter's current language, it would appear that the GoE is actually 
trying to restrict the role of even GoE-defined "local" NGOs in C4. 
 
 
10. (SBU) While the comfort letter assures the Bank that the GoE 
will sensitize local authorities on the importance of PBS including 
its social accountability activities, recent practice also calls 
this into question.  Aggressive GoE training on the new CSO law at 
the local level attacked NGOs as "rent seekers" and "neo-liberals." 
After it was completed, local officials closed down the PBS C4 pilot 
conducted by an independent NGO in Guraghe Zone (where the 
opposition was strongly supported in the last election, but all 
local government posts are held by the ruling party) despite 
assurances from MoFED that PBS would be insulated from the CSO Law. 
 
 
COMMENT 
------- 
 
11. (SBU) The Embassy believes that there must be accountability and 
assurances that the GoE will honor its economic and C4 social 
monitoring commitments.  The "comfort letters" establish benchmarks, 
but the current three-year project design lacks an adequate review 
mechanism.  After months of encouraging the Bank's Ethiopia staff to 
secure economic and C4 assurances from the GoE, our concerns remain 
on the longer-term sustainability of PBS.  These are the same 
concerns which have forced the United States to abstain on every PBS 
vote since project inception in early 2006. 
 
12. (SBU) Over the past year, international financial institutions 
have granted or lent Ethiopia over US $1 billion and questions have 
been raised on the net impacts of this assistance on the political 
and economic environment.  While Bank staff members concede that 
recent GoE actions, especially the CSO Law, will cause the Bank to 
reduce Ethiopia's IDA allocation "at the next review," the Bank 
remains committed to moving forward in programming the current 
allocation through PBS.  Requiring PBS II to be reviewed by a formal 
Board vote in three annual tranches (or at least once at the 
mid-point) will send a clear message to the donor community as well 
as to the GoE that we take benchmarks seriously and will assess 
future assistance decisions in light of progress toward achieving 
them.  End Comment. 
 
YAMAMOTO