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Cablegate: Goe Proposes New Model for Economic Assistance


DE RUEHEG #1725/01 2461529
O 031529Z SEP 09

C O N F I D E N T I A L CAIRO 001725



E.O. 12958: DECL: 09/03/2019

Classified By: Ambassador Margaret Scobey for reasons 1.4 (b) and (d)
1. (C) Key Points: -- The GOE sees the current U.S. administration's desire to transform the bilateral relationship as an opportunity to revive proposals for USG economic assistance deemed unworkable in the past. -- The GOE's newest proposal closely mirrors its unacceptable November 2007 endowment/debt swap plan. -- Under the proposal, project specific ESF would be eliminated by FY 2011 with all ESF going into a $3.6 billion endowment; annual ESF levels would not be less than GOE debt service to the U.S.; and the GOE's contribution to the endowment would be one LE for each USD. -- The administrative structure of the GOE-proposed endowment would severely limit U.S. oversight. -- USAID Mission Director raised several potential USG concerns, including the size, nature, and duration of the proposed U.S. commitment, the lack of appropriate U.S. oversight, and the inadvisability of a debt relief appeal in this context. The Minister of International Cooperation (MIC) Fayza Aboul Naga showed little inclination to engage substantively on these concerns. -- The Ambassador will meet with Aboul Naga next week to begin the process of narrowing the considerable gap that exists between the MIC proposal and likely USG assistance. -- Post will request septel Department guidance in developing an official response. New Model for a New Era -----------------------

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2. (C) On August 17, the Minister of International Cooperation (MIC) Fayza Aboul Naga presented to USAID a revised version of an August 8 updated proposal for "The U.S. Economic Assistance Program to Egypt FY 2011 and Beyond" (Proposal has been emailed to NEA/ELA). The proposal closely mirrors MIC's November 2007 proposal, with adjustments reflecting more closely the goals laid out in President Obama's June 4 Cairo speech. The proposal, which covers a ten year period, calls for the establishment of an endowment that will be funded by $3.6 billion in contributions from annual ESF appropriations and debt relief (i.e. "redirected" ESF loan repayments), plus a separate GOE commitment of one LE contribution for every USD provided by the U.S. The proposal envisions a declining ESF level glidepath from 2011 to 2020, reducing ESF from $350 million to zero over ten years. The August 17 version of the proposal adds that all ESF project assistance will be eliminated in 2011, with all appropriated ESF going into the jointly managed endowment. The GOE proposes to administer the endowment with a bi-national foundation board, but with separate boards for each area of activity, thus complicating true joint control. The proposal mentions the Bi-national Industrial Research and Development Foundation (BIRD) between the U.S. and Israel as a model. The GOE's ownership of the process and the proposed endowment is emphasized throughout the document. USG Concerns Conveyed ---------------------

3. (C) On August 24, USAID Director, USAID Program Officer and ECON Counselor accompanied a USAID strategy design team when it debriefed Aboul Naga on the team's numerous meetings -- ten chaired by ministers -- focusing on past and future use of ESF assistance. (Note: The team of consultants is drafting a bridge strategy for the use of FY 2009 and FY 2010 ESF, a concept paper responding the above-mentioned GOE proposal for FY 11, and an agenda of issues to be addressed in responding to the GOE proposal, all of which will be presented in final to post by the end of September. End Note.) USAID Mission Director conveyed U.S. overarching policy concerns with the GOE proposal: -- Debt relief -- not a USAID issue -- remains as problematic as it was in November 2007 and will be difficult to move forward. -- Total ESF for the coming years is likely to be, not guaranteed, at $250 million. -- USG is currently unlikely to make multi-year commitments at this stage, so the GOE's ten-year proposal may be unrealistic. -- Funds will continue to be earmarked and thus have to be directed to certain programs with oversight required. -- There are no current USG discussions on setting a date to "sunset" ESF, and the U.S. hopes to maintain a balance in the relationship that includes both economic and military support. USG Contradiction Alleged -------------------------

4.(C) Aboul Naga asserted that there is an "apparent contradiction" in USG reluctance to phase out economic assistance while simultaneously avoiding a multi-year commitment. Noting the GOE's "aid to trade" objective, Aboul Naga reiterated that Egypt is proposing a phase out which a jointly-funded endowment would help facilitate. She repeated the long-held GOE position that economic assistance should not be less than what Egypt pays in debt service to the U.S. and asserted that she had received a favorable reply when asserting such in past congressional meetings. She characterized debt relief as "a political issue" that would be decided in Washington. Modest Endowment Plan Proposed... ---------------------------------

5. (C) USAID noted that the GOE proposal formed a good basis for discussion, but cautioned that the proposal raised a number of issues that would be difficult for the USG. USAID suggested a more modest start for an endowment, possibly one starting in FY 2010 with $50 million annual contributions from ESF funds over five years. A careful, successful start-up would be more likely to receive USG support than the GOE-proposed mega endowment. Aboul Naga replied that the endowment would have a specific agenda "so when Congress looks at it, it will see in complete terms where the money will be spent." She added that the foundation managing the fund would have GOE and USG members. In reply to USAID's point that it does not endow public institutions, Abu Naga replied that "If we're getting into a new horizon of cooperation, you need to be more imaginative." She asserted that the concept of an endowment was "already agreed" and was "beyond discussing." ...And Rejected ---------------

6. (C) In a subsequent meeting August 27, USAID Controller, Legal Counsel, and Program Officer along with strategy consultant attended the August 27 MIC meeting, which Senior Advisor Marwan Badr chaired. USAID covered points in a shared document conveying the regulations governing USAID-funded endowments. Badr responded by stating: -- The GOE wants to maintain the proposed endowment size of $4.2 billion ($3.6 billion from the USG and $1.6 billion in matching funds from Egypt). -- The GOE does not believe an NGO along can manage the proposed endowment, thus requiring significant GOE involvement in its management. -- The GOE is not interested in old models of assistance. They want the funds and they will manage them. -- GOE ministers who expressed interest in continued assistance were not in adherence with GOE thinking. They do not make GOE policy; the President and Prime Minister do. -- The GOE finally accepted FY 09 and FY 10 ESF proposals as a symbol of a revived dialogue just prior to President Obama's trip to Cairo. But if the new U.S. administration conducts business the same, there is no reason to move ahead with FY 09 and FY

10. Post-Cairo Speech Plans -----------------------

7. (C) Aboul Naga claimed in the August 24 meeting that the U.S. already had agreed that all $40 million in FY 2009 funds identified to support post-Cairo Speech activities would be used for Egyptians to obtain advanced degrees in the U.S. (Note: The MIC and the Mission have agreed in principle that $40 million of FY 2009 ESF resources will be used to fund a range of activities related to education, science and technology and human capacity development. End Note.) USAID Mission Director repeated the position that half the amount go to other education needs, such as model high schools, an agricultural technology school, and expanding an English language program. She added that the Minister of Higher Education had asked that the USG not focus exclusively on scholarships abroad but also include other efforts in country that would be more cost effective and benefit more students. Aboul Naga reiterated that the funds would be used for U.S. advanced degrees and advised that the Ministry of Higher Education had already formed a selection committee with four GOE representatives and two seats for the U.S. (Note: Later, in a August 30 letter, Aboul Naga formally requested that USAID nominate two representatives to this committee. End Note.) Badr noted separately August 27 that a review of the desired scope of the program has determined that current funding is insufficient. Comment: --------

8. (C) These and other recent exchanges highlight the continuing differences between what the USG may be able and willing to support with appropriated ESF and the GOE's desire to turn toward a type of assistance that is fully host country owned, multi-year in duration, with no risk of annual conditionality and limited earmarking, and significant in size so as to better reflect the importance of the U.S.-Egypt relationship. The GOE may perceive that the change in tone in the bilateral relationship opens up new possibilities in the way ESF is directed and managed.

9. (SBU) The Ambassador and USAID Director will see Minister Aboul Naga on September 9 to begin the effort of bringing MIC views closer to realistic goals. Post will request septel Department guidance on the USG response to the GOE's endowment proposal and to guide consultations with the GOE on ESF level for 2011 and beyond. Scobey

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