LEBANON: FY2010 PROHIBITION ON ASSISTANCE TO

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 000068

SIPDIS

STATE FOR EEB/IFD/OMA BRIANA SAUNDERS
ALSO FOR NEA/ELA AND NEA/RA

E.O. 12958: DECL: 01/20/2020
TAGS: EAID ECON EFIN PGOV KCOR LE
SUBJECT: LEBANON: FY2010 PROHIBITION ON ASSISTANCE TO
CENTRAL GOVERNMENTS WHOSE BUDGETS ARE NOT TRANSPARENT

REF: A. 09 BEIRUT 692

B. BEIRUT 35

C. STATE 1923

D. 09 BEIRUT 1229

E. 09 BEIRUT 994

F. 09 BEIRUT 899

Classified By: Ambassador Michele J. Sison for reasons
1.4 (b) and (d).


1. (C) Introduction: In Lebanon, lack of fiscal transparency
is more than a failure of the capacity of the state. It is
at the center of a government system that is designed to be
opaque so as to serve the interests of the leaders of the
political class, rather than the needs of citizens (septel).
Because of this, Embassy Beirut has placed fiscal
transparency at the center of its diplomatic strategy (ref
A),engaging political leaders at the highest levels on the
need for more transparency. The new Lebanese government has
indicated that it has the will to tackle some of these issues
(Ref B),and parliamentarians are playing a role in bringing
some abuses to light.


2. (SBU) In addition to political engagement, we are
coordinating with other donors to provide technical
assistance to Lebanon's finance ministry, under the guidance
of a new minister who appears committed to change. Lebanon's
budget is not a transparent document and given the political
equities involved, it will take years to bring it up to
international standards. Nonetheless, the process is
beginning, and we will continue our engagement on the issue
at the political and technical levels in 2010 and beyond.
End Introduction.


3. (SBU) The following are responses to questions presented
in ref C:

-- Is the central government expected to receive funding
under the FY 2010 SFOAA?

Yes. Helping the Lebanese build credible state institutions
is the USG's top policy priority, and our assistance reflects
this. Lebanon is slated to receive approximately $100
million in FMF funding, $20 million in INCLE, $6.8 million in
NADR, and $2.5 million in IMET in 2010, most of which
constitutes assistance to the central government under the
definition given in ref A. Additionally, part of Lebanon's
$109 million in ESF assistance will fund programs supporting
the justice, economy, and education ministries, among others.

-- Is the host country's annual national budget publicly
available?

Lebanon's parliament has not passed a budget since 2005, and
the public accounts have not been closed since then, but the
proposed budgets from 2006-2009, as well as budgets passed
before 2006, are available on the finance ministry website at
www.finance.gov.lb/public finances/budget. These budgets are
supplemented by reports, prepared by the GOL-funded UNDP team
at the ministry, explaining the rationale behind the budget
and significant changes from previous years.

-- Are incomes and expenditures included in the
publicly-available budget?

Incomes and expenditures are included the budget, though
their breakdown is unclear. In one example, telecom revenues
passed to the treasury are represented by one line item in
the budget, without information on their composition.
Subsidies to the state-owned electricity company are
accounted for as a "transfer," without an indication of the
funds' final disposition.

-- What is post's assessment of the extent to which the
publicly available budget accurately reflects actual
government incomes and expenditures?

A large number of what the GOL calls "public institutions"
(totaling 108 bodies) are excluded from the budget entirely
or accounted for in the budget with a simple line item, such
as "support to public hospitals." The Council for
Development and Reconstruction (CDR),the government agency
responsible for infrastructure planning and contracting,

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receives a modest allocation in the budget, primarily for
salaries, but most of its spending -- which it undertakes
with non-U.S. donor funds -- is not included at all.

-- Have there been any events since the 2009 review that may
have affected fiscal transparency? (e.g. a coup)

No.

-- Since last year's review, what efforts has the host
government undertaken to improve fiscal transparency? What
progress has been made, pursuant to the 2009 demarches on the
subject (reftels)?

We delivered the demarches to a caretaker government that was
in place for five months of 2009 following the June 2009
parliamentary elections. The new government took power on
December 10, 2009, and has shown early indications of a
willingness to reform. Reftels highlight some of the GOL
efforts to improve its record on transparency. Notably, the
finance ministry has signed an agreement with the World Bank
under which the Bank will provide three advisors to the
ministry to work on improvements in budget preparation and
execution. World Bank Lead Country Economist Sebnem Akkaya
told econoff one of the Bank's top priorities in the program
is bringing more spending into the budget, including
infrastructure spending (i.e., the CDR). Meanwhile, both the
previous finance minister, Mohamad Chatah, and the current
minister, Raya el-Hassan, have indicated they would specify
in the budget that transfers to the electricity company are
in fact subsidies, while new Telecoms Minister Charbel Nahas
took extra time in his budget preparation for 2010 to provide
a more thorough breakdown of telecom revenues passed to the
state.

-- USG/Post actions and strategy to promote such efforts,
including pursuant to reftels;

As indicated in reftels, post has engaged the GOL repeatedly
on the importance of fiscal transparency. In addition, as a
result of repeated meetings of the Ambassador and USAID
mission director with the previous and current finance
ministers, a Department of Treasury Office of Technical
Assistance (OTA) team visited Beirut in early January to
assess opportunities for assistance beyond the World Bank
program. Based on the suggestion of Minister Hassan, the
team identified an office in the ministry of finance, the
public accounting directorate, that is responsible for
closing government accounts, particularly those of the public
institutions mentioned above. With USAID funding, OTA plans
to place a resident advisor in the ministry to help the
long-neglected directorate fulfill its mandate, which should
bring much needed transparency to Lebanon's fiscal management
and prepare the way for incorporating more public
institutions in the budget.

-- Any resulting progress;

Because of the long government formation process, the GOL has
not yet had an opportunity to act on post's suggestions.
However, Minister Hassan's embrace of the proposed
USAID-funded OTA project is a good sign of political will, a
necessary ingredient in any progress on reform in Lebanon.

-- An updated 2010 action plan for Post efforts to work with
the host government to improve fiscal transparency and
promote graduation out of the need for a waiver.

Post will continue to engage the GOL at the highest political
levels on the need to improve fiscal transparency, and the
OTA program will offer an opportunity for the USG to nudge
the GOL from within, by building capacity and drawing
political attention to the work of the public finance
directorate. We will also coordinate closely with other
donors on both political messaging to the GOL and assistance
priorities.

SISON