STATE AND USAID POLICY PLANNING DIRECTORS VISIT

C O N F I D E N T I A L MANAGUA 000020

SIPDIS

SIPDIS

STATE FOR AID - A. OLSON

E.O. 12958: DECL: 10/29/2015
TAGS: EAID ECIN ETRD PGOV NU
SUBJECT: STATE AND USAID POLICY PLANNING DIRECTORS VISIT
NICARAGUA TO ASSESS U.S. ASSISTANCE PROGRAMS


Classified By: AMBASSADOR PAUL TRIVELLI, REASONS 1.4 (B,D)


1. (SBU) SUMMARY: In their joint visit to Nicaragua, State
Director of Policy Planning Stephen Krasner and USAID
Assistant Administrator for Policy and Program Coordination
Douglas Menarchik made clear that State, USAID and the White
House are considering ways to reduce the complexity of U.S.
foreign assistance delivery while increasing its
effectiveness, especially as it relates to U.S. national
security interests. GON representatives, business leaders
and foreign donors expressed a preference for untied U.S.
assistance, such as budget support. Several requests were
made to expand coordination to participate directly with
other donors in a sector-wide approach program (SWAP)
involving pooled funding, instead of discrete USG/GON
bilateral projects. Embassy staff highlighted efforts to
overcome manipulation of the election process and judicial
corruption, as well as the stark consequences of a Sandinista
(FSLN) victory in the November 2006 Presidential elections.
They also emphasized the vital work that USAID and the rest
of the Mission are providing in the areas of health,
education and trade-capacity building. Representatives of
the GON noted that they consider the benefits of Millennium
Challenge Corporation (MCC) eligibility to be on par with the
IMF program, CAFTA and the Highly Indebted Poor Countries
(HIPC) initiative. The delegation visited two USAID-funded
projects in which 12,000 micro-farmers are graduating from
being food aid recipients and subsistence farmers to pooling
their production to meet the high volume and quality demands
of major supermarket suppliers in the United States and
Central America. Paragraphs Thirteen and Fourteen provide a
primer on international foreign assistance in Nicaragua. A
list of non-Mission participants in the meetings is found at
the end of this message. END SUMMARY

Working for Democracy and Rule of Law
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2. (U) Mission and civil society participants outlined the
threats of FSLN and Liberal Constitutional Party (PLC)
electoral shenanigans, including efforts by allies of the two
parties on the Nicaraguan Supreme Electoral Council (CSE) to
undermine democratic candidates. USAID is supporting the
Consortium for Elections and Political Party Support (CEPPS)
and is awaiting a proposal from the OAS to field a long-term
election observation mission. The Mission is also working
with a broad coalition of Nicaraguan civil society to
pressure authorities to prevent manipulation of the electoral
process and educate voters about their rights. Participants
mentioned that this is an area where relatively modest
financial resources can be crucial to protecting Nicaraguan
democracy. (NOTE: Already budgeted but undelivered FY06 ESF
funding for these activities is urgently needed to prepare
for regional elections on the Atlantic Coast in March 2006.)


3. (C) While corruption remains a problem in various sectors
of Nicaraguan society, anticorruption experts described the
especially pernicious effects of judicial corruption and the
strong efforts - led by USAID - to address this situation.
Former Supreme Court Magistrate Guilermo Vargas described how
the "sinister" pact ("El Pacto") between the PLC and FSLN
have packed Nicaraguan courts with judges who take their
marching orders from the political strongmen who lead the two
parties. Presidential Legal Advisor Fernando Zelaya
1KQQC[uotrafficking, the proceeds of which some allege is being
used to fund the FSLN political campaign. Adela Torrente
from the American Nicaraguan Chamber of Commerce explained
how the lack of rule of law negatively impacts Nicaragua,s
business climate. Mignone Vega, an anticorruption advisor in
the Office of the Presidency, noted the political price that
President Bolanos has paid for leading a campaign against
corruption, with party strongmen Daniel Ortega and Arnoldo
Aleman keeping the country in a constant crisis to avoid
accountability for their corrupt acts. Several participants
hailed the effectiveness of USAID efforts to combat
corruption and said that this is the moment to strengthen
that support.

Working for Economic Growth and Stability
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Acting Foreign Minister Pitches Budget Support
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4. (SBU) Acting Foreign Minister and Development Coordinator
Mauricio Gomez provided his detailed analysis of various
assistance programs for Nicaragua. He described
international support as consisting of 580 official
development projects with 40 partners and 300 missions,
accounting for 14% of Nicaragua's GDP. The need to
coordinate with all of those entities "develops a lot of
bureaucracy on the part of the Government and hurts the
capacity to govern," he argued. He claimed that reliance on
programs run by foreign governments, international
organizations and NGOs in place of government ministries
creates inefficient and duplicative "parallel structures"
that hinder the GON's ability to efficiently serve the needs
of the people. He believes that Nicaragua needs to generate
its own resources to make GON social spending sustainable.


5. (SBU) Gomez opined that the reason for the unwillingness
of some donors to provide budget support is "perception" that
the GON lacks transparency. Gomez asserted that, while the
former Aleman Government "had to spend a lot of time
defending its actions, we're better now," adding that the
present government is "built on efficiency and transparency."
In his view, Nicaragua does not need more money, but rather
more flexibility to use existing levels of support so that
less is spent on outside entities
-especially contractors- that use up a good deal of the funds
on overhead. (NOTE: Gomez directed some of this criticism
directly at USAID - probably because the USG has declined to
participate in budget support, which he champions, or to
commit to much of the Harmonization and Alignment process,
which he coordinates. See Paragraph Fourteen for details.)

International Donors Call for More Coordination - And Budget
Support
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6. (SBU) Representatives of several donor countries and
international organizations repeated many of the themes from
the Gomez meeting. International donors called for more
direct USG involvement in the coordination of foreign
assistance in Nicaragua. Swedish Ambassador Eva Zetterberg
lamented the lack of USG involvement in multilateral
development cooperation efforts (known as the Sector Wide
Approach - see Paragraph Fourteen for details),and suggested
that U.S. representatives at least participate as observers
in the Budget Support Group, which includes representatives
of entities that provide budget support to the GON. IDB
official Eduardo Balcarcel acknowledged the time-consuming
nature of some donor coordination initiatives but called for
ad hoc "coordination in the field" to ensure that efforts are
complementary. Jurg Benz, Swiss Development Agency (COSUDE)
Country Director and chair of the Budget Support Group,
lamented that there are too many donors working on too many
priorities, and not enough donor specialization. (Note:
USAID chairs the Trade-Capacity Building Donor Group ("mesa")
and the Mission is active in the Election, Health and
Education Mesas. Also, federal law prohibits the pooling of
donations with foreign governments, other than via
international institutions of which the U.S. is a member.)


7. (SBU) IDB Representative Balcarcel offered examples of how
budget support lets ministries manage multiple projects -
some of them very small - for themselves to avoid duplication
of efforts. "Budget support avoids transaction costs,
particularly for small donors," he noted. Colleen Littlejohn
of the World Bank commented that donors place a burden on the
GON. For example, an officer in the Education Ministry spent
his first three weeks on the job doing nothing but attending
coordination meetings.
She used the same term as Acting Foreign Minister Gomez in
decrying "parallel structures." Dr. Menarchik reasoned that
results are difficult to measure with budget support and
underlined the reality of having to be accountable to
taxpayers for results.

Donors Address Concerns About "Turning Off the Tap"
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8. (SBU) International donors also addressed Dr. Krasner's
concerns about budget support limiting leverage should
democracy be threatened. He noted that the history of
conditionality is that too often recipients make commitments
and do not keep them, but nonetheless, donors keep on paying.
Their response was that donors flag corrupt or
anti-democratic actions, in which case some would likely
continue funding while others would pull out. Responding to
a comment by Dr. Krasner about the difficulty of "turning off
the tap", Ambassador Zetterberg recalled that the Budget
Support Group had to some extent turned off the tap in 2005.
They had promised $120 million, but when Nicaragua,s
macroeconomic program went off track, intense discussions
arose over whether disbursements should continue. In the
end, most donors disbursed, but very late, and only $89
million.


9. (SBU) Dr. Krasner stressed the advantage of the MCC
approach, where conditionality is up front. The MCC Resident
Country Director pointed to the recent enactment of
legislation to fund the highway trust fund (FOMAV) as a
successful example of donors coordinating to pressure
Nicaragua to pass politically sensitive legislation
establishing a gas tax for FOMAV that would let donors fund
road construction with an assurance that the roads would be
maintained thereafter. Dr. Krasner indicated that focused,
results-oriented interactions between donors on specific
issues rather than holding "countless meetings debating
slides" is a preferable form of cooperation. The
international donors also remarked that USAID is a leader in
health programs in Nicaragua.

Some Business and Civic Leaders Join the Call for Budget
Support
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10. (SBU) A group of Nicaragua's "best and brightest" private
and public sector leaders called for a "pragmatic" approach
to development assistance aimed at trade-capacity building
(TCB). Treasury Minister Mario Arana repeated the now
familiar call for budget support and "flexibility," and
decried the onerous burden of "parallel structures" on GON
ministries. Some other participants questioned the ability
of the GON to properly manage large grants to the national
treasury. The types of TCB assistance called for were
infrastructure development, assistance in developing "niche
market" crops for export, workforce training and
macroeconomic stability. While they did acknowledge that
many USAID and MCC programs are already directed at these
specific items, one participant rejoined that current
programs have given Nicaragua enough high-dollar consultants'
reports to wallpaper the country - a comment very similar to
one made by Acting Foreign Minister Gomez. Several applauded
the MCC approach of focusing on private sector development
and allowing beneficiaries to participate in the process.
The economic leaders also registered their fears that an FSLN
presidential win in November 2006 would devastate Nicaragua's
economy. (Comment: As in the past, some Nicaraguan business
leaders are reportedly prepared to financially support FSLN
leader Ortega,s campaign to ensure that if Ortega wins, he
will not exclude them from their part of the economic pie.
End Comment.)


Mission Staff Emphasize Priorities
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11. (C) Throughout the visit, Mission staff provided input
and observations about U.S. assistance in Nicaragua.
Ambassador Trivelli stated that the Mission's core objectives
in Nicaragua for the next year are 1) survival of the Bolanos
government (which now seems likely),2) ratification and
implementation of DR-CAFTA (which is pending passage of
legislation on IPR and other issues),3) final implementation
of the MCC compact (which is also on track),and 4) free and
fair elections. He remarked that as bad as the level of
poverty in Nicaragua remains, the country has made remarkable
progress in the 15 years since the end of the Civil War.
USAID Mission Director stressed that USAID plays a critical
role in maintaining regional stability and credited USAID
efforts with much of that improvement through democracy
enhancement, economic development and quality health and
education programs. He explained that USAID resources are
currently focused on free and fair elections in November 2006
as a bi-lateral priority interest. USAID is focusing its
economic program on TCB by promoting public and private
sector cooperation. USAID staff said that in order to fully
take advantage of CAFTA, Nicaragua needs to strengthen its
public institutions, invigorate its private sector and
integrate its economy within the region. USAID's emphasis on
TCB programs helped generate 24,000 new jobs last year.


12. (C) USAID staff also stressed the importance of the
Mission's health and education programs, stating that they
are essential for national and regional economic progress and
social stability. The MCC Resident Country Director said his
agency and USAID maintain a collaborative and close
relationship in Nicaragua and are working to avoid
duplication of effort. Mission personnel were very clear
about the dangers of an FSLN victory in the 2006 Presidential
elections. A Sandinista win would likely result in capital
flight, a setback in open markets, an anti-U.S. foreign
policy and an immigration crisis, as many Nicaraguans would
likely seek sanctuary in the United States and neighboring
countries. For these reasons, timing is crucial for the
receipt of election and other financial assistance to bolster
chances for a reform-minded, democratic candidate to win the
elections.

A Brief Primer on International Donor Activities in Nicaragua
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13. (U) Total donor assistance averages about $500 million
per year in grants and loans. The assistance in new grants
and loans (obligations) for 2004 was $532 million of which
$313 million came from bilateral donors and $219 million from
multilateral sources. Principal bilateral donors were Sweden
($56.45 million),United States ($55.87 million - not
including the $175 million 5-year MCC Compact),Denmark
($44.76 million),Japan ($33.7 million),Finland ($22.73
million),and Netherlands ($17.6 million). Multilateral
assistance and loans come primarily from the Inter-American
Development Bank (for competitiveness, tax reform and social
sector adjustment),the World Bank (for support of
implementation of Nicaragua's Poverty Reduction Strategy) the
European Commission (for rural development, agricultural
policy and education) and various UN agencies. In recent
years forgiveness of about $5 billion of Nicaragua's $6
billion plus bilateral and multilateral foreign debt has been
approved. However, substantial internal debt of $6.52
billion remains.


14. (U) The GON has been actively working to improve donor
coordination in the country, and seeks to
harmonize donor activities and align donor assistance to its
national development plan. The GON has expressed strong
interest in budget support or Sector Wide Approaches (SWAPs).
This preference was expressed in the Declarations of Paris
and Managua, and endorsed by donors in 2003. USAID
interprets SWAPs as the coming together of donors, the GON,
and civil society to agree on development objectives,
priorities in a sector and implementation. Some donors
equate SWAPs directly to budget support. While USAID policy
generally precludes budget support assistance (and federal
law prohibits the pooling of resources),the Mission fully
supports the concept of SWAPs for the purpose of setting a
common vision and goals, and ensuring coordination among
donors in implementing assistance programs.

A List of Non-USG Participants in Discussions
--------------


15. (U) The following guests participated in an Electoral
Assistance Discussion: Gilberto Valdes, representing the
International Republican Institute; Deborah Ullmer,
representing the National Democratic Institute; Pablo
Garlarce and Rafael Lopez, representing the International
Foundation for Election Systems (IFES). All of these
organizations are part of the Consortium for Elections and
Political Party Support (CEPPS).


16. (U) The following guests participated in an
Anticorruption Roundtable: Former Supreme Court Magistrate
Guillermo Vargas, Solicitor General Fernando Zelaya, Mignone
Vega, Presidential Anti-corruption Advisor; Adela Torrente,
American Nicaraguan Chamber of Commerce.


17. (U) The following guests participated in an International
Donor Roundtable: Swedish Ambassador Eva Zetterberg,
representing the Donor Group; German Ambassador Gregor
Koebel, representing the European Union; Eduardo Balcarcel,
Inter-American Development Bank representative; Coleen
Littlejohn, World Bank representative; Swiss Development
Agency (COSUDE) Country Director Jurg Benz, representing the
Budget Support Group.


18. (U) The following guests participated in an Economic
Growth/CAFTA Roundtable: Minister Mario Arana, Ministry of
Treasury; Dr. Carlos Sequeira, Secretary for Coordination and
Strategy, Office of the Presidency; Roberto Bendana,
Presidential Competativeness Commission; Dr. Juan Sebastian
Chamorro, presidential advisor; Adolfo Arguello, Multiple
investments Administration; Dr. Adolfo McGregor, business and
civic leader; Juan Carlos Pereira, Nicaraguan Investment
Promotion Agency (ProNicaragua); Lucia Salazar (former
Minister of Tourism and founder of ProNicaragua).


19. (U) The following individuals participated in visits to
the El Verbo Model Farm and Training Center and Hortifruti
Produce Distribution Center: Robert Trolese, El Verbo Country
Director; Jorge Sandoval, farm manager; Alberto Pereira,
Hortifruti General Manager; Tomas Membreno, Chief of Party
for USAID Cooperative Agreement with Michigan State
University.

Dr. krasner reviewed this cable prior to trasnmission.

TRIVELLI