PROPOSAL FOR REBUILDING LIVELIHOODS IN STAN-

UNCLAS SECTION 01 OF 05 GUATEMALA 002684

SIPDIS

STATE FOR WHA TOM SHANNON
AID FOR DEPUTY ADMINISTRATOR SCHIECK, AA/LAC FRANCO, DAA/LAC
MAGAN, LAC/CEN MAXEY, AA/LPA FOX
DHS FOR SECRETARY CHERTOFF AND AMBASSADOR ARCOS
NSC FOR KIRSTEN MADISON

E.O. 12958: N/A
TAGS: EAID AEMR PREF MOPS GT
SUBJECT: PROPOSAL FOR REBUILDING LIVELIHOODS IN STAN-
AFFECTED WESTERN HIGHLANDS OF GUATEMALA



1. SUMMARY. Post requests State and USAID support for a
two-year program "Rebuilding Rural Livelihoods in Western
Highlands" to respond to U.S. national interests and assist
the GOG in the recovery and reconstruction from damages
caused by Hurricane Stan. This program responds
directly to important U.S. interests in Guatemala by
stemming illegal immigration due to the loss of livelihoods,
stabilizing a conflictive, lawless border area, facilitating
CAFTA implementation and MCA selection, and mitigating
populist pressure and political instability in the next
elections. The objective is to help the GOG and private
sector rebuild the rural economy and hence
livelihoods, generating better incomes and employment for
thousands of mostly indigenous families in the poorest and
most severely damaged rural areas of Guatemala's Western
Highlands. The Department of San Marcos would be the top
priority followed by Huehuetenago, and Quetzaltenango, and
selected employment-generating areas of Retalahuleu. This
program reflects GOG interest in U.S. assistance and
leadership in stabilizing and revitalizing this remote
highland area where USAID has unique experience among other
donors. It builds upon the emergency assistance provided by
OFDA and diverted from current health and food aid programs.
Based upon estimates currently available, the total cost of
this program will be approximately $50 million over two
years to be funded in roughly equal parts from re-directed
or reprogrammed bilateral funding planned for FY06 and FY07,
and an additional amount of $24 million in DA/ESF funding
over the same two-year period. END SUMMARY.

IMPACT OF HURRICANE STAN

2. During the week of October 3, 2005, Hurricane Stan
wrought havoc in Guatemala, particularly in the most
populated departments where the rural poor are concentrated.
The serious damage from this storm was triggered by heavy
and continuous rains, which led to severe flooding and more
than 900 mudslides, burying entire villages. At least a
third of the national territory (about 36,000 square
kilometers--larger than the size of El Salvador) was
affected, with varying levels of damage reported in 251 of
331 municipalities, and in 15 of the country's 22
departments. Stan hit the most productive and populated
areas of the South Coast and the Central-Western highlands.
The GoG estimates that around 3.5 million Guatemalans (30%
of total population) suffered either loss of life, property
or access to basic services. Hurricane Stan damaged 1,158
communities and affected some 475,000 persons directly. The
human toll of the Storm was 670 dead, 386 wounded and 845
missing. Compared to Stan, Hurricane Mitch in 1998 was far
less destructive in Guatemala, leaving 268 deaths, 280
wounded, and 121 missing in its wake.

RAMIFICATIONS OF DAMAGE

3. The most serious impact of Stan has fallen on thousands
of poor farmers in San Marcos and other densely populated
that were already impoverished even prior to the Storm.
Damage to smallholders in the Western highlands,
particularly in the Department of San Marcos, was most
severe: 60% of the corn crop was ruined; farm fields were
severely eroded; and tertiary, farm-to-market roads were
blocked by landslides or washed away. The World Food
Program recently announced that the lack of food supplies
outside Guatemala City has now reached critical levels.
This situation is being aggravated by inflation, which shot
up in October to an average annual rate of 10.29%, the
country's highest rate since the beginning of 1997. Price
increases will only further impede the ability of affected
Guatemalans to access food for their families.


4. While the response to humanitarian needs from the
disaster has been solid, the longer-term economic damage is
only now being fully appreciated. The November 8 Damage
Assessment for Guatemala conducted by ECLAC estimates the
overall damage and losses to the country to be $983 million
or 3.4% of the country's 2004 GDP. (See septel for report
summary). The economic impact was highest in terms of the
country's infrastructure, followed by damage and losses to
the productive sectors, the social sectors (housing,
education and health) and the environment. According to the
ECLAC Report, 59% of the Storm's damage was to private
sector assets, but the public sector will face increased
expenditures and investments to assist the most directly
affected and vulnerable populations (some 475,000, or 4% of
the country's population) to rebuild their lost assets and
sources of incomes. The disaster represents a blow to the
government's progress in addressing the country's
development needs, as scarce tax revenues will now have to
be spent bringing the country back to where it was pre-Stan.
Damage to the country's infrastructure was significant --
the Ministry of Public Works reports that 26% of the
country's paved roads were affected, 52% of its unpaved
roads, 45 bridges, and more than 10,000 homes (a total
assessed damage of approximately $450 million) -- will also
limit Guatemala's full participation in the benefits of
CAFTA for some time to come.

U.S. NATIONAL INTEREST IN A RECONSTRUCTION EFFORT

5. The United States has an immediate and proximate
national interest in helping to stabilize and rebuild the
rural, agricultural economy in and around the Western
highlands that was damaged by Hurricane Stan:

-- The Department of San Marcos is Guatemala's poorest and
has historically been a conflictive and destabilizing part
of the country. It is one of the greatest sources of land
conflicts and smuggling and is the locus of increasing poppy
cultivation in Guatemala. Damage to livelihoods in this and
other, already-very-poor areas will likely lead to further
conflicts, trafficking in persons, and drug production as
strategies for survival.

-- San Marcos is also the greatest source of illegal
immigration from Guatemala to the United States. If the
figures captured in a U.S. Government survey conducted six
months after Hurricane Mitch--i.e., that 300,000 had left
Central America for the U.S. in the Storm's wake--are any
predictor, Hurricane Stan is likely produce a wave of
Guatemalans and others passing illegally over U.S. borders.

-- If the Berger Government is perceived as not responding
effectively to the needs of socio-economic revitalization
after this disaster, discontent may spread, decreasing
chances of electing another progressive administration and
increasing the destabilizing influence of populism in the
country in the 2007 elections.

-- Economic losses leading to a drop in tax revenues and new
reconstruction expenditure requirements will seriously
affect the country's social investment goals related to the
MCA. Guatemala has some of the worst social indicators in
the region, yet USAID assistance per capita to Guatemala for
the period 2005-2007 is the lowest by far among USAID
programs in Central America. Post believes the Berger
government has made significant strides toward addressing
MCA objectives (see septels),but these now have been
complicated by the disaster and cost of response.

-- Loss of roads, bridges and other critical economic
infrastructure will limit the country's ability to fully
participate in and take advantage of the benefits of CAFTA.
This will have an impact both Guatemala and the rest of the
region.

PROPOSED USAID RESPONSE

6. Given additional resources, USAID would be able to
launch a targeted program to support the GoG in rebuilding
the rural economy in and around the San Marcos region.
Employment generation is the most urgent need given that
many families have lost their current crops or their jobs in
agricultural enterprises on the south coast (many San Marcos
families migrate to the coast to help with seasonal sugar
and coffee harvests) and will be facing food shortages over
the next several months. Other donors are generally
directing their resources to social needs (Europeans),to
major infrastructure (IBRD and IDB),or to more accessible
regions (Canadians). The GoG has indicated that USAID
should focus on rebuilding livelihoods in the more remote
San Marcos region and surrounding areas, where USAID has
prior experience and partners acquired through its earlier
program to support the Peace Accords and current P.L. 480
Title II programs.


7. The purpose of this new, crosscutting program would be
to help the GoG rebuild improved livelihoods in the San
Marcos and surrounding region by increasing sources of rural
income and employment. Specific activities would include
but not be limited to the following:

-- Restoring rural roads, as highlighted in the ECLAC report
as a priority, and rebuilding infrastructure (e.g., small
bridges) to allow access to supplies and markets. The
multilateral banks intend to focus on primary and secondary
roads, but the tertiary roads, critical for access to and
recovery of those most affected, will largely be left to the
GOG with support from bilateral donors. USAID would focus
its efforts on rural farm-to-market roads in San Marcos to
help farmers get their products back to market.

-- Rebuilding/improving smallholder farming systems,
including small irrigation infrastructure (mentioned as well
as a priority by ECLAC). This is a parallel priority to
restoring the product-to-market transportation chain.
Assistance would include land clearing, replacing/
rebuilding animal stocks, small-scale farm infrastructure,
irrigation systems, and seed recovery, among other possible
support.

-- Rehabilitating and growing small businesses and agri-
businesses. Repair and restoration of rural non-farm
activities is needed in these areas as well, as is taking
agricultural activities to the next level where possible.
This involves expanding existing micro-credit programs for
business recovery and purchase of capital assets, as well as
targeted technical assistance to help enterprises expand.

-- Restoring viability of rural farm households. To
complement the above, USAID will consider supporting "stay-
in-school" family grants come January-successfully used
after Mitch-which will achieve the dual objectives of
keeping children studying and putting cash in the hands of
families for food and other basic necessities. Additional
assistance could include grant or credit for repairing
damaged housing and restoring food preparation and cooking
capacity (e.g., provision of stoves or electrical
generators).

-- Stabilizing watersheds and controlling erosion. Much of
the damage post-Stan is the result of poor watershed
management practices, exacerbated by lack of flood control
infrastructure and flood warning systems. To prevent damage
to rural roads and farming systems after future such events,
USAID will support activities to improve watershed
management and flood control systems. Among such support
would be assistance to municipalities and local NGOs in
sustainable management practices on agricultural land and
forests, riverbank reinforcement, reforestation, and
implementation of the practice of payment for environmental
services wherein "downstream" beneficiaries of watersheds
pay "upstream" communities to maintain watershed through
forest and soil conservation.

-- Rebuilding water and sanitation infrastructure. This is
one of the most critical and cost-effective interventions
after a disaster. Proposed activities include rebuilding of
community water system infrastructure and latrines, and
training in proper operation of water systems, water
treatment and storage, and food handling.

-- Strengthening community and municipal organizations. All
of these efforts will require institutional support from
municipalities and community organizations. USAID proposes
to provide through its Local Government Strengthening
Program, technical assistance to municipalities in San
Marcos and surrounding areas to help municipal officials
best manage community reconstruction efforts. This would
include guidance to municipal leaders on managing employment
programs aimed at rehabilitating public works (farm-to-
market roads, small bridges, road embankments,
reforestation, etc.),introducing disaster prevention and
risk mitigation measures, and on accessing state resources
for reconstruction. Reinforcing democratic institutions
during the reconstruction process is a GoG priority.

USAID would implement the above activities primarily with
current partners; no major new procurements are foreseen.
Our partners would work with municipalities, NGOs, and
private sector organizations to develop community projects
with high labor content to provide families with the means
to survive until the next harvest.


8. Several assumptions served to determine the size and
shape of this proposed program:

-- Other donors, with the exception of the Multilateral
Development Banks (MDBs),are focusing on humanitarian
assistance and social services, both in the immediate term
and likely afterwards;

-- The MDBs (IDB, IBRD) will redirect current or make new
reconstruction loans for larger-scale infrastructure such as
major roads, bridges, and utilities (the resource
requirements for these infrastructure needs in any case go
beyond USAID's financial possibilities);

-- USAID is the lead donor in Guatemala on rural development
and has been working closely with the GoG to support policy
reforms and investments in this area, hence the government's
request and USAID's comparative advantage;

-- USAID has significant experience implementing Post-Mitch
reconstruction assistance in Guatemala (for which $28
million in new funding was provided) and can build on these
investments and lessons learned; and

-- The consequence of not addressing the economic impacts of
this disaster, including massive unemployment, will redound
most directly on the United States through increased illegal
immigration and crime, and thus it is in our national
interest to focus on this area.

COST AND SOURCE OF FUNDING FOR USAID PROPOSAL

9. USAID calculates that total cost of the proposed program
would be around US$25 million a year over two years (FY06
and 07),for a total reconstruction program of $50 million.
This budget was arrived at by matching the data on damage
and losses to assets in the department of San Marcos and
surrounding areas (e.g., rural roads, watersheds, livestock,
rural market structures, rural farm structures, etc.) with
what USAID knows from past experience to be the cost per
unit of rehabilitating such assets, and determining what
portion of the damage and losses USAID might realistically
restore. For example, 47,000 hectares of watershed was
damaged in San Marcos alone and at $3,500 per hectare to
restore, USAID proposes to restore some 1,500 hectares (3%
of total in San Marcos) for a total activity cost of $5.25
million. USAID calculated other areas of intervention
similarly and when totaled and combined with a percentage
for management and engineering assistance comes to around
$50 million over the two-year period.


10. The program would be funded both with redirected
bilateral funds and resources from USAID's existing
bilateral portfolio (including reprogrammed food resources
for food for work programs) as well as with additional
bilateral funding. USAID would amend its current five-year
plan to re-direct about a third of its DA/CSH/ESF resources
(around $13m/FY) and requests an additional $12 million
DA/ESF a year over two years, for a total of $25 million a
year over two years for the program. The additional funding
would be necessary both to enable expansion of current re-
directed programs as well as to launch new programs in rural
infrastructure, watershed stabilization and farming systems,
which are not possible under our current strategy and within
existing earmarks. Current health, education, alliance,
enterprise and governance programs would be modified to
concentrate resources and level-of-effort toward the San
Marcos region.


11. Post is of course aware of the planned U.S. private
sector fund-raising effort for post-Stan relief but assumes
the funds raised will be channeled privately through grants
to NGOs. The program proposed in this cable responds to and
directly supports the GoG's Reconstruction Plan and its
specific request that USAID help to re-build livelihoods in
San Marcos and surrounding areas. If USAID does not carry
out this program, the government's reconstruction program
will still go forward; however, no other donor can be
counted on to target San Marcos with an eye to stemming the
illegal immigration, smuggling, trafficking and drug
production that uniquely affects and concerns the United
States. Ambassador Derham will be discussing this proposal
with colleagues in State and USAID during his consultations
in Washington.

WHARTON