PARLIAMENT FLEXES ITS MUSCLES IN BUDGET PROCESS

C O N F I D E N T I A L SECTION 01 OF 03 MANAMA 000900

SIPDIS

STATE FOR NEA/ARPI, EB, DRL

E.O. 12958: DECL: 06/14/2015
TAGS: ECON PGOV KDEM BA
SUBJECT: PARLIAMENT FLEXES ITS MUSCLES IN BUDGET PROCESS

REF: MANAMA 280

Classified by Ambassador William T. Monroe for reasons 1.4
(b) and (d).

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Summary
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1. (C) The Finance and Economy Committee of the Council of
Representatives (COR, elected lower house of parliament)
completed the bulk of its review of the bi-annual 2005-2006
(calendar years) government budget and is expected to pass it
to the full Council for consideration on July 2. The COR and
upper house Shura Council will likely approve the budget by
the end of July. The Committee was particularly aggressive
about uncovering previously unreported government revenues,
demanding full disclosure of the income of state-owned oil
company BAPCO and aluminum manufacturer ALBA, and even rent
received from the U.S. Navy for its facility in Manama. The
Committee forced the GOB to use a more realistic price for
oil to generate its revenue figures, breaking from the
traditional practice of low-balling the price and using any
surplus income for development and infrastructure projects.
The Committee pushed through a salary increase and bonus for
government employees. Finance Minister Shaikh Ahmed Al
Khalifa lamented to the Ambassador about working with a newly
assertive parliament and complained the Committee had created
an "election year" budget. Political leaders, including
boycotters, recognize the influence the COR has in the budget
process, highlighting the utility of participating in the
system rather than sitting on the sidelines. End Summary.

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Budget to Move to Parliament for Vote
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2. (U) The COR is preparing to approve the 2005-2006
two-year government budget after an unusually long and
bruising seven-month review process in the Finance and
Economy Committee. (Note: The budget is normally completed
in the first quarter of the year.) The Committee has
completed its review of the projects and revenues portions of
the budget and is expected to be finished with expenditures
on June 28. The full Council will begin its consideration of
the budget July 2. After a vote in the COR, the budget will
move to the Shura Council, where it is expected to be
approved by the middle or end of July. During the budget
process, the Committee, chaired by MP Jihad Bu Kamal, called
into question the accuracy of the GOB's revenue estimates and
pressed the government for data it had not previously
provided. The Committee approved revenues of BD 1.2 billion
($3.18 billion) for 2005 and BD 1.3 billion ($3.45 billion)
for 2006. This is down significantly from the 2004 revenue
figure of BD 1.65 billion ($4.37 billion),mostly as a result
of losing a grant of 50,000 barrels per day of oil from Saudi
Arabia (reftel).

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Demands for Detailed Revenue Data
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3. (U) In mid-April, the Committee accused Bahrain's
petroleum company BAPCO of stalling on a request to provide
detailed statistics on oil revenues, according to press
reports. The company denied the charges, and deputy Jassem
Abdul Aal responded publicly that BAPCO had omitted some BD
150 million ($400 million) in revenues from Bahrain's
domestic oil production. He also disputed BAPCO's figures
for revenues from the company's oil refinery. During its
June 25 session, the Committee required that 25 percent of
aluminum manufacturer ALBA's income be included in the
national budget. (Note: ALBA's income had not been included
in the budget for 30 years. In response to a question from a
deputy, Finance Minister Shaikh Ahmed Al Khalifa said the
government's profits from ALBA had been reinvested in the
company or "kept as a backup for the government's immediate
projects.")


4. (C) In mid-May, Abdul Aal announced that the government
had failed to report some $200 million in annual income from
rental fees for the U.S. Navy facility in Bahrain, citing a
Middle East Economic Digest (MEED) article as the source.
The following day the GOB stated publicly that rent from the
USG for the naval facility was approximately $6 million per
year, a figure the Embassy confirmed as accurate. (Note:
Post believes Abdul Aal confused a 10-year total for excess
defense articles transferred to Bahrain from the U.S., which
was mentioned in the MEED article, for rental charges.)

5. (C) Also on the revenue side, the Committee insisted that
the GOB break with its traditional practice of
underestimating the price of oil for the purposes of
developing income figures. The government's reasoning is
that it cannot control the price of oil, which fluctuates
widely and unexpectedly in international markets, and so it
is safer to err on the side of caution and develop a budget
based on a low-end estimate of revenues. In this manner, the
government lives within its means and any additional revenues
are devoted to development projects. Last year, the
government used a price of $18/barrel to estimate revenues;
this year, the GOB agreed to boost the estimated price to
$30/barrel. With the changed calculation, projected oil
revenues soared to BD 890 million ($2.36 billion) in 2005 and
BD 895 million ($2.37 billion) in 2006, yielding annual
estimated BAPCO profits of BD 196 million ($519 million).

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Interior, Defense Ministers Appear Before Committee
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6. (C) For the first time since parliament reopened in 2002,
the Ministers of Defense and Interior were called to provide
testimony in support of their budgets. Minister of Interior
Shaikh Rashid bin Abdulla Al Khalifa told the Committee May
18 that he had sacked 50 percent of the foreign security
officers holding high positions at the Ministry. He also
revealed a new recruitment program beginning in October to
hire thousands of Bahrainis and promote officials from inside
the Ministry to senior positions. (Note: As in other Gulf
states, many police and Interior officials are expats from
Arab and Muslim countries.) The Committee said it planned to
cut the Ministry's budget by BD 500,000 ($1.325 million).
Following Minister of Defense General Shaikh Khalifa bin
Ahmed Al Khalifa's May 30 appearance, the Committee said it
would trim the MOD budget by BD 4 million ($10.6 million).
(Note: Changes in the budget must be approved by the Finance
Ministry; Committee contacts told us the Ministry has agreed
to the revisions.)


7. (U) The Committee included language in the budget bill to
grant all public sector employees a bonus of BD 200 ($530)
and a monthly pay raise to government employees of between BD
25 and 50 ($66-132). Pensions of retired public sector
employees would rise by the same amount. The bonus issue had
been debated for several months before finally being approved
by the Committee.

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Finance Minister: "Democracy is Hard Work"
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8. (C) The Ambassador discussed the budget process with
Finance Minister Shaikh Ahmed bin Mohammed Al Khalifa June

14. Shaikh Ahmed, reflecting the frustrations of many in the
GOB unaccustomed to having to work with a more assertive
parliament, said "the consensus building phase in a
representative democracy is hard work." He said his biggest
substantive concern was that the COR insisted on greatly
increasing the estimated price of oil used in developing GOB
revenue projections. He called the resulting estimate of
$30/barrel the "maximum possible."


9. (C) The Minister worried about budgeting so closely to
likely actual oil revenues. The markets were unpredictable,
changing daily. The GOB already must borrow to finance some
of its development projects. If the price of oil drops
significantly from its current lofty heights, the GOB might
be forced to try to borrow to pay the salaries of public
sector employees. In this case, the IMF and credit rating
agencies would notice and there would be consequences. In
response to the Ambassador's question, Shaikh Ahmed said that
the government fought the COR's initiative to grant
government workers both a bonus and a salary increase, "but
only so far." He said the MPs were obsessed with the budget,
which he termed an "election year" budget. (Note:
Parliamentary elections will be held in October 2006.) He
hoped the process would work better in the future and said
building confidence between the government and parliament is
a challenge. He thought the budget would be wrapped up by
mid-July, when many Bahrainis (including Shaikh Ahmed) take
their summer holidays.

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MPs Learning to Exert Pressure
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10. (C) Al Asala (Salafi) bloc deputy Ghanem Al Boainain
told PolFSN that after a few years of experience, MPs are
more aware of the parliamentary tools at their disposal and
the importance of a meticulous review of the government's
budget request. He added that the Committee did not give in
to the government's demands for speedy passage of the budget,
as it had done in the previous cycle. The parliament now
understands that it can use the budget to exert pressure on
the government, including in areas unrelated to finance such
as movement on other bills and proposals that are languishing
with the government. Abdul Aal told PolOff that although
members of the COR had corrected a number of discrepancies in
the budget, he believed there were sources of government
revenues still unaccounted for. (Note: Including assistance
from other Gulf countries, according to recent press reports.)


11. (C) Even opposition leaders who boycotted the 2002
elections, and who complain that the constitution unfairly
gives legislative powers to the executive, acknowledge that
the COR has real power over the budget. Prominent
oppositionist Aziz Abul told PolOff that government spending
is one of the most important issues in the country, and he
admitted that parliament exerts a great deal of influence in
the budget process.

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Comment
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12. (C) While operating at a disadvantage vis-a-vis the
government with regard to constitutional powers, the COR was
able to play a meaningful role in the bi-annual budget
process. Its demands for transparency and accountability on
government revenues were largely met, and the more active
members of the COR, including Jassem Abdul Aal, vow to
continue to fight for full disclosure on financial issues.
Several of the measures the Finance Committee approved are,
as the Finance Minister said, indicative of an election year
budget. Rosy estimates of oil revenues and increased
salaries and bonuses for public sector employees could come
back to haunt the budgeteers. But their new-found political
muscle reinforces parliament's role as an important
institution in Bahrain's democratic development, and helps
amplify for the general public the utility of participating
in the system at a time when many oppositionists are sitting
on the sidelines.

MONROE