RESTRUCTURING ESF ASSISTANCE TO EGYPT: U.S.

C O N F I D E N T I A L CAIRO 001885

SIPDIS

SIPDIS

DEPT FOR NEA, NEA/ELA
NSC FOR DNSA ABRAMS

E.O. 12958: DECL: 03/27/2016
TAGS: EAID PREL PGOV KDEM EG
SUBJECT: RESTRUCTURING ESF ASSISTANCE TO EGYPT: U.S.
DELEGATION PUSHES GOE TO DEVELOP NEW PROPOSALS

Classified by Ambassador Francis Ricciardone for reasons 1.4
(b) and (d).

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Summary
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1. (C) Discussions between a joint USAID/State delegation
with GOE ministers on March 20-21 moved forward considerably
our efforts to restructure ESF. Specifically, the GOE:

- appeared effectively, if not explicitly, to accept
conditionality (via benchmarks) on future U.S. economic
assistance,
- agreed to focus future economic assistance on four sectors,
and
- agreed to present proposals (with benchmarks) for the four
sectors in time for a next round of negotiations in April.

The GOE will undoubtedly try to minimize conditionality by
seeking as much up-front funding as possible. Some of the
ministers continued to push wildly unrealistic hopes for
increased U.S. assistance in various forms, including debt
relief. The GOE's four proposals will be the best indication
of how seriously and urgently the GOE will pursue a new way
to conduct our assistance relationship. End summary.


2. (SBU) USAID Assistant Administrator for ANE James
Kunder, accompanied by NEA DAS Scott Carpenter, NEA DAS Liz
Dibble, NEA Senior Advisor King Mallory, and USAID's Lyn Dunn
joined the Ambassador, USAID Director, and ECPO counselor and
poloff (notetakers),in meetings with the GOE on March 20-21
in Cairo to discuss proposals for restructuring the economic
assistance program.

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GOE Goals
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3. (C) During the March 20 session, the GOE side, led by
Minister Aboulnaga who was joined by both MIC staff as well
as several ministers (Health, Local Development, Education,
Higher Education, and Social Solidarity) as well as senior
staff of other ministries (MFA and Finance),reviewed its
proposal calling for four funds (in
democracy-decentralization, business development, human
resources, and technology transfer/R&D). The GOE also
proposed two new "MOUs," linked to boosting current GOE
reform efforts in taxation and budgeting and revamping the
GOE's subsidy program. Finally, the GOE requested that the
USG consider applying a debt reduction package similar to the
"Pakistani model" to the GOE's debt to the USG. The GOE side
argued that USG support for the GOE proposal would play a
critical role in enabling Egypt to qualify for OECD
membership by 2025, and that USG support would win public
diplomacy benefits for the USG with the Egyptian public.


4. (C) The U.S. delegation noted that debt reduction would
be practically impossible, and advised that a GOE focus on
four sectoral support programs (underpinned by MOUs which
would govern the release of cash in response to the GOE
achieving negotiated benchmarks) would be the best approach
to follow.

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A Model for How to Proceed?
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5. (C) At the Ambassador's suggestion, after the conclusion
of the March 20 session, Senior Advisor Mallory, ECPO
counselor, USAID staff, and Ministry of Health staff and
McKinsey consultants (working on an ongoing MOH strategic
planning effort) met to draft an illustrative MOU for the
health sector, patterned loosely after the existing financial
sector MOU. Both sides agreed that the document was intended
solely to determine if it were possible to identify
benchmarks in GOE health policy reform that could be linked
to USG cash transfers and USG programmatic assistance (and
not to serve as a binding first draft of a MOU). Minister of
Health El-Gabaly--a no-nonsense physician and erstwhile
private hospital manager who is trying to revamp Egypt's
decrepit public health care system--eagerly embraced the
exercise. The resulting document, which both sides agreed
was a useful first step, proposed a series of hypothetical
benchmarks--in human resources training, institutional
reform, and medical insurance reform--which, if achieved,
would result in the release of to-be-negotiated cash
transfers.

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GOE Seeks Up Front Funding for New Programs
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6. (C) During the March 21 session, much of which was
attended by Minister for Investment Mahmoud Mohieldin,
Minister Aboulnaga and Minister for Social Solidarity Ali
El-Moselhy continued to make the GOE's argument that USG
assistance would be most effective if it were to fund
programs--e.g., a proposed social solidarity "smart card, as
good as cash" for the provision of services to the citizenry,
as a means of assisting GOE plans to get rid of blanket
subsidies. In response to a question from the U.S.
delegation about the role for NGOs in Egypt's reform process,
Minister Moselhy (whose ministry supervises Egypt's NGOs)
suggested that he would like to conduct a full survey of
Egypt's 20,000 NGOs, in order to enlist them in the GOE's
effort ("as an executive arm of my ministry") to improve the
distribution of social services. Minister Mohieldin
suggested that President Mubarak's campaign promises and
ongoing reform platform may also offer possible benchmarks
for future assistance agreements, but with the caveat that
many of the President's reform programs "cannot be
benchmarked" and need to be supported "on trust."

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Kunder Delegation Urges Additional Policy Reform
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7. (C) Summarizing the USG position, USAID Director Ellis
urged the GOE side to think about larger policy reforms
(e.g., the costly, inefficient legacies of the Nasser era,
such as constitutional guarantees of free health care and
free education) which, if achieved, could serve as benchmarks
for the release of future ESF tranches. Minister Aboulnaga
demurred when the U.S. side urged the GOE to send an
empowered negotiating team to Washington with Investment
Minister Mohieldin in early April, but she welcomed a return
visit to Cairo in mid-April by USG negotiators. By that
time, she said, the GOE would be able to prepare draft
proposals for follow-up discussions. MFA A/S Shaker pushed
hard for early re-engagement of the two sides. Off line, she
suggested that that the U.S. side discreetly "help" the GOE
officials--presumably in Aboulnaga's Ministry for
International Cooperation--with drafting the four GOE
proposals. A/S Shaker indicated she would stand ready to
assist.

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Comment
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8. (C) Restructuring ESF for Egypt is going to require a
steady, persistent approach, with much prodding and provision
of content and impetus from our side. Having said that, the
first round of negotiations about restructuring the economic
assistance program advanced the ball considerably. At the
end of the two days of meetings both sides had agreed to four
overarching sectoral themes. The U.S. side noted that some
up-front funding could be accepted in order to finance some
of the work the GOE will undertake and the Egyptian side
agreed to a funding mechanism based on benchmarks. The
participants also agreed the GOE would prepare proposals with
benchmarks for the next round of negotiations in late April.
The GOE's most skeptical component--Aboulnaga's MIC--seems to
have moved from outright opposition to wary engagement with
us in shaping the kind of changes that we believe are
urgently needed. Even her element of the GOE appears to
understand the need to move quickly to draft credible
proposals to address our requirements that ESF be
restructured in a way that links release of future cash
transfers to demonstrated GOE policy progress, including in
the crucial area of democracy. We believe that the GOE has
received the message that benchmarks and conditionality will
be essential components of our future assistance program.
The GOE naturally will continue to press for most assistance
to be provided up front (arguing the need to jump-start
reforms),and will try to resist our effort to hold back most
assistance money until they have met key benchmarks (often in
the areas of tough policy reform). The proposals that the
GOE drafts will indicate how far the GOE has accommodated
itself to the new realities of our assistance goals. End
comment.
RICCIARDONE