O 261214Z FEB 09
FM AMEMBASSY CAIRO
TO SECSTATE WASHDC IMMEDIATE 1752
INFO NSC WASHDC IMMEDIATE

S E C R E T CAIRO 000353
STATE FOR F
AID FOR AME
STATE ALSO FOR NEA/ELA


E.O. 12958: DECL: 02/25/2019
TAGS: EAID PREL KDEM EG
SUBJECT: A NEW APPROACH TO EGYPT´S ESF

Classified by Ambassador Margaret Scobey for reason 1.4 (d).

¶1. (S) Summary and Key points:

--A robust economic assistance program for Egypt serves long-term U.S. interests: it balances a relationship otherwise defined solely on security grounds, it demonstrates U.S. interest in the welfare of average Egyptians, and it creates a bridge to assure access to future potential leaders.

--Resolution of the current impasse over FY 2009 ESF should not be a prelude to picking up where we left off. We should take advantage of the change in the Administration and assistance levels to renew the U.S.-Egypt partnership around common goals, aimed at tackling chronic problems retarding social and economic development.

--We should consider a bold approach -- possibly an initiative endorsed by both presidents -- that focuses resources on a single key sector, such as education.

--Resolution of the impasse will require consideration of future assistance levels, evaluating new delivery mechanisms such as an endowment, and finding a way forward on democratization programs that allows the U.S. to continue to support civil society in a manner less likely to undermine cooperation on other matters.

Why This Matters

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¶2. (S) Egypt has changed dramatically over the past three decades and USAID can take credit for many improvements. Almost all Egyptians have access to electricity, clean water and health care. Maternal and child mortality have plummeted. Polio has been eradicated. More Egyptians, especially women, are literate. With an economic growth rate of seven percent, Egypt appears poised to integrate successfully into the world economy. Yet all is not well. The global economic downturn is hitting Egypt hard and may undo much of the progress made over the past few years of high economic growth. Population growth projections are shocking for a country with limited water and chronic unemployment. This is especially true in Upper Egypt, which has 25% of Egypt´s population, but 66% of its poor. Increasing income inequality not only may contribute to slow economic growth but also may threaten Egypt´s stability and U.S. interests in the region. In short, despite the past gains, the work of development is not yet completed and Egyptian resources will not be sufficient to accomplish its goals alone.

¶3. (S) Beyond the demonstrable need for continued external support for Egyptian development goals, the U.S. should also consider the need to be seen to be assisting the people of Egypt. U.S. military assistance to Egypt is equally important to our goals, but not one that resonates with the public who can easily see it as simply a prop to an unpopular regime. We need to maintain concrete, visible projects that demonstrate U.S. concern for the people of Egypt.

What Is the Correct Funding Level?

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¶4. (S) The Egyptians are proud and will state categorically that they will not bargain for assistance -- ie, they will not barter domestic political concessions in exchange for foreign aid. The Egyptian reaction to FY2008 conditionality language was uniformly negative and, with few exceptions, transcended political lines. It did not work.

¶5. (S) Egypt will also state that their negative reaction to the FY2009 level of $200 million was not about the money, but about the disrespectful way in which the previous administration acted unilaterally in an area that for nearly thirty years had been characterized by joint consultations and mutually agreed decisions. Following this logic, Egyptians want the U.S. now to commit to raising ESF (or some other compensatory arrangement such as debt relief) to a level tat demonstrates U.S. respect for the relationship. We understand that the GOE has been discussing te matter internally and would be prepared to accde to the FY2009 levels if the U.S. will commit o a review of the program with everything on the able: future funding levels, possible endowmentarrangements, and democracy and governance progrmming. There are strong Egyptian expectations tha the ESF level should be increased.

¶6. (S) Te Mission believes that much could be done with a $200 million program spent primarily on project assistance. In recent years, the GOE rarely spent more than $200 million a year in projects, even as unspent funds piled up in the pipeline. While the pipeline has been spent down almost entirely, it is hard to make a case for returning the levels to over $400 million given the other pressures on the U.S. budget. However, assuming the U.S. and Egypt could agree on what we want the ESF program to accomplish, one might make a case for incremental increases in the ESF in the future. We should also note that in the past few years other donors have increased their programs in Egypt so that the U.S. no longer stands alone. The EU now outspends the U.S. on development assistance. Getting to agreement on future levels will take a lot of effort and willingness to look at all options.

Taking a new approach

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¶7. (C) Assuming we come to agreement on future assistance levels, the U.S. and Egypt need to come to agreement on how to structure and deliver assistance. Finding the correct balance, following a period of extreme tensions, will present significant challenges. Now a lower middle income country, Egypt has made significant economic progress. In spite of concern about ESF levels, the Government of Egypt (GOE) is clearly capable of taking greater financial responsibility for development including by accessing resources through its relationships with multilateral institutions and other donors.

¶8. (S) In conversations with GOE officials last year on the future of the ESF program, Egyptian ideas focused on minimizing the profile of U.S. assistance and utilizing funds for non-project purposes. They sought to eliminate U.S. "meddling" in their internal affairs by trying to persuade us to apply ESF to debt relief or to an "endowment" that once established would be more hands off.

¶9. (S) The Mission has a different vision for ESF in Egypt, hopefully one that the Egyptians can share. We propose consideration of a new bilateral approach that highlights U.S.-Egyptian partnership rather than downplaying it. The Mission believes that we should focus on concrete, visible assistance that demonstrates U.S. concern for the Egyptian people in areas such as health, education, and poverty eradication. Deficiencies in these areas undermine economic growth and also undermine the development of a mature political electorate -- a foundation of democracy. Such an approach would call for project-based assistance rather than cash transfers or debt relief. The ESF could be used for a basket of programs which meet our dual objectives of assisting Egypt and having the U.S. seen as addressing the problems of Egyptians. In the transition period of FY2009, we would phase out activities not directly linked to these goals.

¶10. (S) A variation on this approach might be to identify, in consultation with the GOE, a bold, single purpose goal on which we focus all our resources, for example, education. We could agree and announce common objectives, such as eliminating illiteracy, creating a professional and trained teacher cadre, improving girls´ access to quality education through construction of girl-friendly schools and the full application of education reforms developed by the Ministry of Education. It could support vocational training for adult women and chronically unemployed young men. With clear, common, shared goals, we could create a vision for development that Congress might embrace as well.

Getting to agreement with the Egyptians

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¶11. (C) The first challenge will be removing the irritants from the ESF bilateral programs. Current tensions are linked to the sharp drop in FY 2009 ESF to $200 million, but also to the FY 2008 Congressional conditionality on ESF and FMF, and USAID´s direct grants democracy and governance (D&G) program. The FY 2009 draft Omnibus bill appears to provide some relief on conditionality and the overall level of D&G spending. It is our understanding the bill contains no conditionality. Also, the bill´s language places a ceiling of $20 million on D&G spending. The GOE should see both as positive developments.

D&G

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¶12. (C) In recent years, at Congressional direction, bilateral ESF has been used for a direct grants D&G program that has caused deep resentment with the GOE. The GOE believes, correctly, that the U.S. exceeded the terms of the agreement reached in 2004 over how this program would operate. In addition, the direct grants program has grown over time so that from a resources point of view, almost half of the FY 2008 D&G program budget of $54.6 million was used for direct grants. The Mission shares independent assessments that the funding levels have exceeded the absorptive capacity of existing institutions. Given the government´s overall hostility to the programs few results have been achieved. The government also objects to what they see as interference in internal political affairs, both by U.S.-based organizations and by direct funding of unregistered Egyptian NGOs.

¶13. (S) Despite possible overfunding, the Mission believes that a direct grants program has had some positive impact on the capacity of Egyptian civil society, but at a political cost in terms of our working relationship with the Government of Egypt. We do not want to abandon these domestic groups. At the same time, we would like to find a better, less confrontational way to support them. We propose that rather than funding these groups directly using Egypt´s earmarked ESF, we instead provide funding from other sources, for example, from DRL or MEPI, or from a new direct Congressional appropriation. The money should go to an outside, professional organization such as the National Endowment for Democracy, which has a long-term vision of promoting democracy and would not carry the same political baggage as using ESF funds.

¶14. (S) Moving the programmatic side of democracy promotion out of the bilateral program would not remove the Embassy from bilateral discussions of democracy and human rights issues. But by taking USAID Cairo out of the equation, by putting the USG at arms length from the actual funding decisions, and by not continuing to use bilateral ESF, we believe we could support two important goals in Egypt: work to alleviate poverty and promote the development of civil society and democracy. More modest funding levels would also ease the management burden for local NGOs, and call less attention from the GOE security apparatus.

Negotiating a new program

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¶15. (S) The second challenge will be convincing the GOE of the need to focus on project assistance. Moving away from programs such as cash transfers, commodity purchases or the Egyptian proposals for debt relief and an endowment presents an additional political challenge. The Ministry of International Cooperation (MIC), and MIC Minister Fayza Aboulnaga herself, have considerable vested interest in continuing to manage the programs as they have been doing. Previous efforts to implement even minor reforms have met with considerable resistance, and Aboulnaga, using her connections with the Egyptian Presidency, has been able to fend them off. Our plan will likely require a presidential-level endorsement to be successful.

¶16. (C) Finally, there may be some program elements that we might include in our proposal that would make it more interesting for the GOE. For example, the November 2008 proposal from Egypt for the future of the ESF program included, in addition to debt relief, the possibility of an endowment. Egypt´s National Competitiveness Council has identified the lack of an adequately trained mid-managerial class as a significant impediment to development. We could, for example, propose a jointly administered endowment fund focused on education that would support practical, in-country efforts to develop the capacity of large numbers of Egyptian mid-level managers. By listening to and incorporating Egyptian ideas like this, we will be signaling our intent to turn what has become a negative in the bilateral relationship to an area in which we can jointly develop a constructive approach on development goals.

¶17. (S) Finding common ground with Egypt on this program will not be easy and may take several months. But good will is now available and we recommend an urgent policy review leading to an empowered assistance team that can begin discussions with the GOE as soon as possible.

SCOBEY