FOLLOW-UP WITH ITALY AFTER MEETING OF IRAQI DONORS

C O N F I D E N T I A L ROME 004796

SIPDIS


STATE EB/IFD/ODF FOR DEMARCELLUS

E.O. 12958: DECL: 12/18/2014
TAGS: EAID ECON EFIN IT IZ IRAQI FREEDOM
SUBJECT: FOLLOW-UP WITH ITALY AFTER MEETING OF IRAQI DONORS
IN TOKYO

REF: A. SECSTATE 250700

B. ROME 1092

Classified By: Economic Minister Counselor Scott Kilner for reasons 1.4
(b)(d).


1. (SBU) Summary: The GOI has disbursed approximately Euro 65
million ($86.3 million) in humanitarian and reconstruction
assistance to Iraq for 2003-2004, according to Ministry of
Foreign Affairs officials responsible for Iraq reconstruction
aid. This total includes Italy's long-delayed 2004 payment
of Euro 10 million to the International Reconstruction Fund
Facility for Iraq (IRFFI). In addition, Italy has made an
extra donation of Euro two million to the IRFFI's special
election assistance account. The GOI is counting all
projects presented at the Tokyo Donor's Conference, including
donations of humanitarian assistance, as falling under
Italy's Euro 200 million Madrid pledge. Italy is likely to
disburse around Euro 30 million in grants for Iraq
reconstruction in 2005, though Post's interlocutors expressed
concern that Italy's foreign aid budget might face additional
cuts next year. End summary.

Total 2003-04 Disbursement About Euro 65 Million
-------------- ---


2. (SBU) Per ref A, Ecmin and Econoff met December 16 with
Gianni Ghisi, Deputy Director General of Development
Cooperation at the Ministry of Foreign Affairs, and Luigi
Maccotta, Deputy Director of the MFA's Iraq Task Force, to
seek clarification of the GOI's Iraq assistance
disbursements. At the Tokyo Donors Conference, Ghisi and
Maccotta presented a detailed list of GOI-funded assistance
programs totaling Euro 99,765,000 ($132 million). Ghisi and
Maccotta explained that approximately Euro 62 million (62
percent) of these funds have been disbursed since the start
of the Iraq conflict. (Note: For a copy of this list, please
email Gregory May at MayGC@state.gov. Maccotta also supplied
Econoff with an updated summary of all Italy-funded
reconstruction projects. Post will send this summary septel.
End note.)


3. (SBU) Maccotta and Ghisi explained that two items on the
list remain undisbursed: the Euro 32,410,000 listed as
"unallocated" and the Euro 4,785,000 pledge to the World
Meteorological Organization (WMO). The Euro 32 million,
Maccotta explained, represents the GOI's planned Iraq aid
disbursements for 2005 while, Ghisi added, the WMO's project
to rehabilitate Iraqi meteorological infrastructure has
encountered bureaucratic delays within the Iraqi Interim
Government.


4. (U) Maccotta noted that, in response to calls made at the
Tokyo meeting, the GOI has disbursed an additional Euro two
million to the special "cluster 11" election assistance
account within the International Reconstruction Fund Facility
for Iraq (IRFFI). (Note: This donation is in addition to the
Euro 400,000 Italy has already allocated for training
election workers. End note.) This would bring total Italian
aid disbursements to date to approximately Euro 65 million.

All Italy-Funded Projects Fall Under Madrid Pledge
-------------- --------------


5. (SBU) Maccotta and Ghisi said that the GOI considers all
projects listed, including those involving emergency
humanitarian assistance, as counting towards Italy's Euro 200
million Madrid pledge. They argued that this was appropriate
because humanitarian assistance creates the necessary
conditions for long-term reconstruction to proceed -- the two
are inextricably linked.

Euro 10 Million IRFFI Donation Delivered
--------------


6. (U) The disbursement grand total includes Italy's Euro 10
million 2004 payment to the International Reconstruction Fund
Facility for Iraq (IRFFI),which, Ghisi said, has already
been received by the UNDP. Italy, Ghisi explained, has
earmarked its 2004 IRFFI donation for three UNDP projects
targeting development of cottage industry, rehabilitation of
Iraq's dairy industry, and promotion of entrepreneurship

Budget Problems Will Limit 2005 Disbursement
--------------



7. (SBU) Ghisi commented that Italy's foreign aid budget is
under severe strain. The MFA's Directorate of Development
Cooperation (Italy's equivalent of USAID) experienced an
unexpected budget cut of Euro 100 million in 2004. The MFA,
he said, predicts that Italy's ODA spending will be cut in
2005 from the current 0.17 percent of GDP, to 0.14 or 0.135
percent, meaning the GOI will have approximately Euro 700
million available to cover all 2005 bilateral and
multilateral aid commitments. Ghisi stated that, as a result
of this year's budget crunch and the need to prioritize Iraq
contributions, Italy has delayed some projects in other
countries, including a Euro 10 million commitment to Somalia,
that will need to be made up in the coming year.


8. (SBU) For Iraq, Maccotta predicted, Italy would likely
disburse an additional Euro 30 million in reconstruction
grants in 2005. In addition to these grants, the GOI hoped
to negotiate a Euro 25 million bilateral soft loan with Iraqi
authorities next year. If approved, the soft loan would
likely fund development of small- and medium-sized
enterprises, according to Ghisi. (Note: Ghisi has said in
previous meetings that such a loan would also count towards
Italy's Madrid pledge. The GOI had hoped to make such a loan
in 2004, but has yet to stat negotiations with Iraqi
officials. End note.)

Future Focus on Agro Business, Environment
--------------


9. (C) In terms of future Iraq projects, Ghisi said, Italy,
in cooperation with UNIDO, may fund a survey of Iraq's agro
industry. In addition, Maccotta and Ghisi predicted future
Italy-funded projects in Iraq will focus more closely on the
environment. (Note: The GOI plans to continue funding its
"New Eden" marshland recovery project (ref B) in 2005. End
note.) Ghisi remarked that the MFA plans to increase the
environmental component of its Iraq aid partly for public
relations reasons. The Italian public tends to look
favorably on environmental projects, he observed, and the MFA
hopes greater public support will help insulate Italy's aid
budget from further cuts. To this end, Ghisi said,
Development Cooperation officials have also stepped up their
outreach efforts to promote Italy's foreign aid "successes"
and the need to maintain current aid levels.

Renewed Private-Sector Interest
--------------


10. (SBU) At the end of the discussion, we asked Maccotta for
his assessment of current Italian private-sector attitudes
toward doing business in Iraq. Maccotta said he has observed
some renewed interest, which had been dampened considerably
by mounting security concerns. He said 42-50 Italian
companies are presently working with Iraqi ministries,
primarily on projects related to electricity, oil, and water.
Most of these contracts, Maccotta remarked, involve the
supply of Italian-made equipment, rather than on-the-ground
services. Italian companies are still very reluctant to put
their own personnel in Iraq. Maccotta added, however, that
there is lingering disappointment, both among Italian
companies and government officials, that Italian firms have
not been more successful at winning subcontracting work
funded through the USG supplemental appropriation for Iraq.

Comment
--------------


11. (C) Politically, the GOI remains firmly committed to the
reconstruction of Iraq and to fulfilling its Euro 200 million
Madrid pledge. A number of Italian projects appear, from our
vantage point, to be truly well thought-out and responsive to
Iraq's needs. However, harsh budget realities (which are
likely to get worse given the Berlusconi government's 2005
tax cuts) mean Italian disbursements will likely continue to
lag behind other donors. The GOI also appears to be
broadening the number of past and current projects that fall
under the Madrid pledge umbrella as a way of lessening its
future obligations. This is the first time the MFA has
explicitly told Post that essentially all Italian-funded aid
projects in Iraq, including emergency humanitarian relief
conducted in 2003-2004, should be counted towards Italy's
Madrid commitment. End comment.


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2004ROME04796 - Classification: CONFIDENTIAL