REQUEST FOR GUIDANCE: BORROWING TO FUND IAEA

C O N F I D E N T I A L UNVIE VIENNA 000275

SIPDIS

FOR ISN, IO; DOE FOR NA-24, NA-25, NA-21; NSC FOR
SCHEINMAN, CONNERY; NRC FOR DOANE, SCHWARTZMAN

E.O. 12958: DECL: 06/12/2019
TAGS: AORC PREL KNNP IAEA UN
SUBJECT: REQUEST FOR GUIDANCE: BORROWING TO FUND IAEA
INFRASTRUCTURE PROJECTS

Classified By: Ambassador Greg Schulte for reasons 1.4 b/d


1. (U) This is a request for guidance. Please see paragraph

12.


2. (U) Summary: Member States recognize the IAEA's
infrastructure needs, but many are under instructions to
reject the budgetary increases that would resolve them. As
budget negotiations intensify, Canada, France, Germany, the
UK and others increasingly portray the idea of "borrowing" as
a desirable option, if not a panacea. G-77 representatives
appear to be warming to the idea of borrowing, though there
are many different interpretations of the term. The question
of how to fund the IAEA's infrastructure upgrades is rapidly
become a focal point of budget discussions and may be raised
during upcoming meetings of the Board of Governors. Mission
requests guidance on the U.S. position vis-a-vis borrowing
and its different forms. End Summary.


3. (SBU) Many sources both inside and outside the IAEA point
to the organization's decaying infrastructure, particularly
with regards to the IAEA's Safeguards Analytical Laboratory
at Seibersdorf (SAL). SAL's decline threatens the IAEA's
ability to analyze nuclear material samples and provide for
the safety of SAL employees and the surrounding community.
The IAEA also faces acute infrastructure challenges in
security and IT. It also faces new capital investment needs
that include major safeguards implementation projects in
Japan and at Chernobyl. Despite the deep divisions between
Member States that afflict ongoing budget negotiations for
the 2010-2011 biennium, most Member States agree that
infrastructure improvements, including SAL, constitute a
budgetary priority. The IAEA has put forward three budget
proposals over the past six months, all of which envision
large increases to fund key infrastructure projects through
the financing of a Major Capital Investment Fund (MCIF). The
latest budget proposal, released June 5, features a 2.9
percent increase in the regular budget for the MCIF in 2010,
bringing it to 14 million Euros.


4. (U) Despite the importance of infrastructure upgrades,
many OECD Member States are under instructions to reject a
budget increase of any kind. In their zeal to identify
alternatives to a budget increase, several European states
have joined Canada in reiterating their request that the
Secretariat consider borrowing as a way to fund the MCIF.
The idea gained momentum among OECD and, more recently, among
G-77 Member States, despite wildly differing interpretations
of the term "borrowing." The most fundamental difference
centers on the source of the funds. Some Member States would
like the IAEA to turn to a national bank, host country
Austria, or other major donor to seek funds ("external
borrowing"),while others would like the IAEA to borrow from
its own cash reserves ("internal borrowing").

Internal Borrowing
--------------


5. (SBU) Many OECD states, France in particular, have pointed
to the steadily accruing reserves in the account of the
Technical Cooperation Fund - over 80 million dollars. The
cash build-up is a result of the Technical Cooperation
Department's inability to make disbursements and implement
projects in a timely manner (a problem which has made TC a
longstanding target of criticism by donor states). Since the
money is, as French diplomats say, "just sitting in a bank
account," it makes eminent sense that the IAEA put it to
better use toward funding key investments. Budget and
Finance Director Gary Eidet views internal borrowing as a
logical solution to the IAEA's infrastructure problems, and
suggests that on the order of 10-15M USD could be borrowed
without affecting TC program implementation.


6. (C) In this case logic is far removed from reality, and
the G-77 would likely prevent any attempt to put TCF funds to
good use. Technical cooperation and the funding of technical
cooperation is the most important issue to G-77 Member
States, and "reliable and assured TC funding" is a mantra
included in any standard G-77 statement. As Deputy Director
General David Waller rhetorically asked Msnoff, "Can you
imagine what would happen if we used technical cooperation
money to fund safeguards?" (The unspoken answer: G-77 hue
and cry, followed by a confrontational Board decision.)




7. (SBU) Unfortunately, there may be no other pot of money
readily available for internal borrowing. Voluntary
contributions are generally earmarked for particular projects
and cannot be "borrowed" for another purpose without the
consent of the donor. Programs funded out of the Regular
Budget are not potential resources, because the Director
General is not authorized to transfer money from one Major
Program to another. In the end, the only large pool of
non-earmarked, voluntary contributions is the TCF, yet the
TCF is politically off limits. In fact, any attempt to
"raid" the TCF would likely to lead to counter calls by the
G-77 for major donors to allow borrowing from other
(earmarked) pots of money, such as the Nuclear Security Fund.

External Borrowing
--------------


8. (SBU) An even more popular solution to the investments
issue is a low or interest-free loan from the host country
(Austria) or other major donor. The experience of UNESCO is
offered up as an example of an organization that obtained a
zero interest loan from its host country France to refurbish
its headquarters (Mission has not confirmed these details).
Swiss counselor Giancarlo Kessler confirmed that both the WHO
and the WTO secured 50-year, interest-free loans from a Swiss
government agency in Geneva. In meetings of the Geneva Group
(composed of the sixteen top contributors to the UN),
participants have increasingly placed the idea of an
"interest free loan from Austria" alongside their calls for a
zero growth budget. Recently, G-77 representatives have also
signaled their cautious support for external borrowing.


9. (C) Austrian Mission Counselor Stefan Heisler was unhappy
to hear that other Member States were playing fast and loose
with Austria's generosity. Heisler said that no one had
approached his mission about such a deal, and that the
Austrian government would be disinclined to volunteer funds
on such terms. Heisler described SAL as a laboratory that
analyzes samples from all over the world, which made it a
shared Member State responsibility. Heisler said that
Austria had been "a generous host country," and that no one
had raised the subject of a loan in EU meetings because "they
wouldn't dare."


10. (C) Romanian Second Secretary Dan Necalaescu, who is
deeply involved in budget negotiations, dismissed Heisler's
reaction as overblown. According to Necalaescu, the Romanian
and Austrian ambassadors met several times on budget issues
and reached an understanding that "in the end, something will
be done" for the IAEA. Necalaescu did not clarify what that
"something" might be - whether infrastructure help in the
form of land, buildings and perimeter fences, or hard cash in
the form of an interest-free loan. With respect to SAL, the
Austrian Government would likely find it easier to provide in
kind assistance (concessionary use of land, site
preparations, security, road and utility upgrades) that would
serve both the IAEA labs and the Austria Research Center at
Seibersdorf. The internal Austrian consideration of allowing
use of land at the Austria Research Center may come to
fruition at a meeting of the ARC board on June 26.


11. (SBU) Nevertheless, both Necalescu and his ambassador,
Cornel Feruta, are concerned by all the talk of borrowing.
Feruta views external borrowing as more expensive for Member
States, because they lose an opportunity to earn interest.
He told Msnoff that Member States are looking to borrowing as
if it were an easy way out, when in fact, borrowing money is
a long-term commitment to a large debt that must be honored
(in effect, a delayed budget increase). In his capacity as
Board Vice Chair, Feruta held an open meeting for Member
States on Friday, June 12 during which borrowing was
discussed. In contradiction to interventions by the UK,
France and Germany in support of borrowing, DDG Waller used
the meeting to cast doubt on the wisdom of the approach.

Comment and Request for Guidance
--------------


12. (SBU) Internal borrowing is fiscally sensible but
politically problematic. External borrowing is complex and
expensive. Despite this, "borrowing" has become a buzz word

among budget hawks looking for ways to cut costs. With other
Member States eagerly jumping on the borrowing bandwagon, the
U.S. will also be expected to weigh in on the issue. Mission
feels better solutions could be found by increasing the
Regular Budget in the short term while identifying voluntary
contributions over the long term. Post requests guidance on
the U.S. position vis-a-vis borrowing and its alternatives to
put forward as budget talks progress. The topic will develop
in the context of ongoing budget talks this summer and may
also come up during upcoming meetings of the Board of
Governors.



SCHULTE