(C) IRAQ ECONOMIC RECONSTRUCTION -- THOUGHTS ON

S E C R E T SECTION 01 OF 04 KUWAIT 004459

SIPDIS

EB FOR A/S WAYNE; EB/IFD FOR BRIAN MOHLER; NEA FOR AMB.
RAPHEL AND NEA/ARP FROM AMBASSADOR DICK JONES

E.O. 12958: DECL: 1.6X6
TAGS: ECON PREL EAID EINV IZ KU
SUBJECT: (C) IRAQ ECONOMIC RECONSTRUCTION -- THOUGHTS ON
ENERGIZING KUWAIT

REF: SECSTATE 270486

Classified By: Ambassador Richard H. Jones, reasons 1.5 b and d.


1. (S) SUMMARY: Relative to the size of its economy, Kuwait
has been the most generous supporter in the world of OIF and
of humanitarian assistance to Iraq. It will likely continue
to play this role willingly for some time. There are,
however, several factors that augur against a large GOK
pledge for Iraq reconstruction at the Madrid conference.
Fortunately, the Kuwaiti private sector has considerable
resources at its disposal and is eager to increase its
participation in reconstruction. The approach to the GOK
most likely to produce real results will be to urge it to
consider creative ways to facilitate that participation. For
example, by channeling resources and providing incentives to
its private sector (which would build domestic support),the
GOK could trigger much larger Kuwaiti private investment in
Iraq. It could also consider using its offset program to
encourage third-party investment in Iraq (an approach other
GCC states could adopt as well). Finally, some investments
in Kuwait (e.g., in electrical generation and port
facilities) could help alleviate investment needs in Iraq.
Paragraph 5 provides suggested talking points for a demarche
along these lines. According to a credible (if unconfirmed)
report, PM Shaykh Sabah is personally opposed to a GOK
reconstruction contribution. Thus, whatever approach is
taken, it is imperative that we lobby Shaykh Sabah directly.
A senior-level visitor from the US who enjoys his respect,
e.g., due to a tie to the 1991 liberation of Kuwait, would be
best suited to undertake this task. END SUMMARY


2. (C) I greatly appreciate this opportunity to comment on
how best to encourage the Kuwaiti leadership to pledge
significant aid for reconstruction in Iraq. We should bear
several points in mind as we develop such a strategy:

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Kuwait Has Already Provided Relatively Large Amounts of Aid
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-- Although Kuwait is a wealthy country, it is quite small.
There are less than 1 million indigenous inhabitants (around
900,000 Kuwaiti citizens plus maybe 80,000 stateless Arabs
known as "bidoons") and the total population is less than 2.5
million. The projected GNP for this year is $36.3 billion.
The GOK budget for the current fiscal year, which started in
April, is $19.1 billion. (On the other hand, private
Kuwaitis control an estimated $160 billion, of which $80-$100
billion may be relatively liquid.)

-- Kuwait has already spent a considerable amount of money in
support of the liberation of Iraq. Early this year it won
parliamentary approval for an Iraq-related $1.65 billion
supplemental budget request. We believe that most, if not
all, of that money has since been spent. In addition, Kuwait
has lost considerable revenue from facilities (such as the
commercial port at Shuaybah, warehouses and other buildings)
and land provided free of charge to coalition forces.

-- Assistance in kind, including fuel, for our troops has
probably been the biggest single GOK expense, possibly
topping $500 million. In addition, the GOK has spent about
$120 million on humanitarian assistance for Iraq. After
terrorist attacks last winter, tens of millions of dollars
were spent on overtime for military and security forces
engaged in force protection for coalition forces. The GOK is
providing an unknown amount of support for other members of
the coalition, including Poland, at our request. Finally, it
provides large amounts of fuels of various types for the
Iraqi commercial market at less than breakeven prices.

-- Kuwaiti PM Shaykh Sabah told his interlocutors in
Washington that Kuwait had spent $1.5 billion on Iraq in the
four months prior to his September 10-11 visit to the US. In
relation to the overall size of its economy, this expenditure
alone would be equivalent to our having spent approximately
$430 billion.

-- As a proportion of the government budget, President Bush's
request for $87 billion for Iraq and Afghanistan would equate
to approximately $725 million for Kuwait, less than half of
what the GOK has already spent.

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There are Real Political Obstacles to GOK Support for Iraq
Reconstruction
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-- There is a strong popular perception in Kuwait that Iraq
is a potentially very wealthy country that should be able to
finance its own reconstruction and development from oil
revenues.

-- Iraq continues to owe Kuwaiti citizens and the GOK tens of
billions of dollars in compensation for claims stemming from
its occupation of Kuwait. Earlier this year, UNSCR 1483
markedly reduced the proportion of Iraqi oil revenues being
diverted to the UN Compensation Commission fund to settle
these claims to only 5%. This change could reduce
contributions to the UNCC by as much as $3-4 billion per
year, greatly increasing the time needed to pay off the
claims. Kuwaitis at all levels were dismayed. This
continues to be a topic of utmost sensitivity here (see
Kuwait 4451).

-- Iraq also owes Kuwait tens of billions of dollars for oil
sold on its behalf during the Iran/Iraq war and for loans
extended prior to the Gulf War. The GOK knows that any
meaningful Paris Club agreement on Iraq will no doubt require
it to write off a substantial proportion of these debts.

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Kuwaiti Businesses Have the Means and are Eager to Invest in
Iraq
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-- The Kuwaiti economy is currently booming due to US
military expenditures in the country (at least $1.5 billion)
as well as soaring business and consumer confidence. The
Kuwaiti stock market has also registered spectacular gains
this year, setting several records.

-- Kuwaiti businessmen view Iraq as a potentially very
lucrative market. Many are already selling goods and
services there and making ambitious investment plans.
However, there is a popular perception that Kuwait has not
gotten its "fair" share of US-funded reconstruction projects
and that the US has been unresponsive to Kuwaiti efforts to
get its private sector more involved in Iraq.

-- Popular support for the overthrow of Saddam Hussein was
probably higher in Kuwait than in any other country in the
world, except perhaps Iraq itself. Kuwaiti leaders and
citizens alike recognize that the coalition's success in Iraq
is essential for the future welfare of their country and
perhaps even its continued existence.

-- Kuwaitis at all levels continue to feel a great debt of
gratitude to the US for its leading role in the liberation of
their country. During his recent visit to Washington, PM
Shaykh Sabah pledged that Kuwait would participate actively
in the Madrid conference and that it would contribute
"according to its circumstances".


3. (C) The foregoing facts lead me to the following key
conclusions:

-- For its size, Kuwait has already contributed more
financially to the war effort and to humanitarian assistance
than any other country in the world, including the US --even
taking into account the President's latest request. However,
the pattern of its support so far suggests that Kuwait much
prefers providing support to the coalition and that it is
likely to focus grant assistance to Iraq on humanitarian
projects.

-- The GOK understands that success in Iraq is essential and
it will continue to support the coalition financially.
However, several factors (such as the large amounts it has
already spent, delayed payment of UNCC claims, the prospect
of substantial debt relief, and slow development of
opportunities for Kuwaiti businessmen in Iraq) will likely
constrain domestic political support for a generous pledge to
Iraqi reconstruction. American pressure for substantial GOK
contributions to reconstruction could well lead to an
offsetting reduction in GOK support in other areas.

-- Nonetheless, the US continues to enjoy great popularity in
Kuwait. The country has already benefited greatly from the
overthrow of Saddam and Kuwaiti businessmen are eager to
capitalize on liberation for financial gain. Many have large
amounts of capital at their disposal that they would be
willing to invest in Iraq, especially with our blessing and
in cooperation with American firms. However, they are risk
averse and need some reassurance that their money will not be
wasted.

4. (C) In sum, the GOK wants to contribute to a successful
Madrid conference, but it is loathe to donate much if
anything directly to Iraq reconstruction efforts. If we make
such a pledge a litmus test for Kuwaiti support, we will
likely fail. On the other hand, efforts to mobilize private
Kuwaiti funds for Iraq could lead to substantial net
increases in reconstruction resources. Our focus should
therefore be on urging the GOK to find creative ways to
encourage such investment. GOK programs to support its
private sector's activity in Iraq would be popular
domestically and could have a substantial multiplier effect.
I recommend we approach the GOK along the lines below.


5. (C, releasable Kuwait) Suggested Talking Points:

-- The US recognizes and greatly appreciates the crucial
contribution that Kuwait has made and continues to make to
the success of coalition efforts in Iraq as well as the
extremely generous humanitarian assistance it is providing to
the Iraqi people.

-- Great strides are being made every day inside Iraq.
Unfortunately, the damage that Saddam had done to his country
exceeded all reasonable expectations. In addition, his
supporters are continuing that damage through a tragically
misguided effort to delay the inevitable success of our
coalition.

-- As President Bush made clear in his recent discussions
with His Highness Shaykh Sabah in Washington, the
Administration will stay the course in Iraq. Failure is not
an option. However, success can only be assured if we are
all prepared to devote the necessary resources to our cause.
To this end, the President has asked our Congress to
appropriate an additional $65 billion for continued military
operations and more than $20 billion for Iraq reconstruction.

-- Even these large amounts will not be sufficient without
additional generous support from the international community.
The Madrid conference is shaping up to be a critical
opportunity for us to galvanize this international support.

-- As one of Iraq's closest neighbors and a primary victim of
Saddam Hussein's brutal regime, Kuwait is uniquely positioned
to provide vital leadership to the Madrid conference. The
more active your government is at Madrid, the easier it will
be for us to persuade other countries to contribute the
resources necessary to get Iraq back on its feet quickly.
-- The quicker we can revive the economy and begin to show
the Iraqi people the benefits of liberation, the sooner we
will achieve stability and the fewer resources we will all
have to contribute in the long run, whether to military
operations, humanitarian aid or reconstruction assistance.

-- To achieve this virtuous cycle, based on our evaluation of
Iraq's needs and our assessment of donor intent, we are
asking Kuwait to pledge $ X billion at Madrid over a period
of Y years.

-- We recognize that this is a very large amount for a
country of Kuwait's size and that our request comes on top of
contributions that already far outstrip the generosity of any
other donor. However, we think that in the long run it will
prove a very wise investment for your country. Good
relations with a prosperous, stable neighbor are priceless.
The alternative of continued poverty and instability in Iraq
would be terribly costly to all.

-- We also recognize that Kuwait will not be able to
contribute this amount of money without obtaining the
necessary parliamentary approvals and that it may be
difficult to win support for all of this amount to be
provided in cash or kind by your government directly.

-- In this case, we would urge you to consider creative ways
to mobilize large volumes of Kuwaiti and other private
capital in the service of reconstruction. Credible plans for
doing so would contribute to the goal of economic
revitalization and could provide important models for other
donors.

-- For example, Kuwait could establish a special insurance
program for Kuwaiti companies investing in key sectors in
Iraq (e.g., housing, local power generation,
telecommunications, water supply, roads, labor intensive
industries). Other incentives to encourage private
investment in Iraq, such as low-cost loans or other
subsidies, should also be considered.
-- Kuwait could also help mobilize third-country investment
in Iraq. For example, it could offer to allow foreign
companies with obligations under Kuwait's offset program to
satisfy those obligations through projects with Kuwaiti
investors in Iraq. This step alone could conceivably
mobilize several hundred million dollars. If other GCC
states followed suit, the potential impact would be
multiplied several fold.

-- Finally, Kuwait could take steps to alleviate Iraqi
infrastructure needs, e.g., by agreeing to supply surplus
power from its electricity grid to Iraq. (To facilitate
this, Kuwait could accelerate its construction of power
stations, or allow private investors to do so.) Similarly,
Kuwait could announce it was immediately reserving selected
facilities at its commercial ports for shipments of goods for
Iraq reconstruction. For the medium term it could expand and
upgrade facilities at existing ports and/or propose
development of Um Qasr under a joint port authority with
incentives for private investors.

-- Clearly, this list of ideas is far from exhaustive.
However, we hope that it will provide the Kuwaiti government
some useful food for thought as it prepares for the Madrid
conference. The United States looks forward to working with
Kuwait at the conference and in the important task of
rebuilding to Iraq. With vision, together we can help the
Iraqi people to build a better life for themselves.



6. (S) Whatever strategy or set of talking points Washington
decides on, careful execution will be vital to its success.
Unfortunately, I recently learned from one of my coalition
partner colleagues that several Kuwaiti ministers have
confided in her that Shaykh Sabah has already decreed that
Kuwait will not contribute funds to Iraqi reconstruction.
While unconfirmed, I believe this report is unfortunately
credible. This suggests that even a private-sector oriented
approach like that recommended above may not succeed unless
someone who enjoys Shaykh Sabah's personal respect executes
it directly with him. This argues for high-level
intervention from our side, preferably in person, as far in
advance of the Madrid meeting as possible. A visit here from
a well-known personality with a tie to the 1991 liberation of
Kuwait would probably make the greatest impact on him.


7. (U) Baghdad minimize considered.
JONES