US embassy cable - 03KUWAIT4459

S E C R E T SECTION 01 OF 04 KUWAIT 004459 
 
SIPDIS 
 
EB FOR A/S WAYNE; EB/IFD FOR BRIAN MOHLER; NEA FOR AMB. 
RAPHEL AND NEA/ARP FROM AMBASSADOR DICK JONES 
 
E.O. 12958: DECL: 1.6X6 
TAGS: ECON, PREL, EAID, EINV, IZ, KU 
SUBJECT: (C) IRAQ ECONOMIC RECONSTRUCTION -- THOUGHTS ON 
ENERGIZING KUWAIT 
 
REF: SECSTATE 270486 
 
Classified By: Ambassador Richard H. Jones, reasons 1.5 b and d. 
 
1.  (S) SUMMARY: Relative to the size of its economy, Kuwait 
has been the most generous supporter in the world of OIF and 
of humanitarian assistance to Iraq.  It will likely continue 
to play this role willingly for some time.  There are, 
however, several factors that augur against a large GOK 
pledge for Iraq reconstruction at the Madrid conference. 
Fortunately, the Kuwaiti private sector has considerable 
resources at its disposal and is eager to increase its 
participation in reconstruction.  The approach to the GOK 
most likely to produce real results will be to urge it to 
consider creative ways to facilitate that participation.  For 
example, by channeling resources and providing incentives to 
its private sector (which would build domestic support), the 
GOK could trigger much larger Kuwaiti private investment in 
Iraq.  It could also consider using its offset program to 
encourage third-party investment in Iraq (an approach other 
GCC states could adopt as well).  Finally, some investments 
in Kuwait (e.g., in electrical generation and port 
facilities) could help alleviate investment needs in Iraq. 
Paragraph 5 provides suggested talking points for a demarche 
along these lines.  According to a credible (if unconfirmed) 
report, PM Shaykh Sabah is personally opposed to a GOK 
reconstruction contribution.  Thus, whatever approach is 
taken, it is imperative that we lobby Shaykh Sabah directly. 
A senior-level visitor from the US who enjoys his respect, 
e.g., due to a tie to the 1991 liberation of Kuwait, would be 
best suited to undertake this task.  END SUMMARY 
 
2.  (C) I greatly appreciate this opportunity to comment on 
how best to encourage the Kuwaiti leadership to pledge 
significant aid for reconstruction in Iraq.  We should bear 
several points in mind as we develop such a strategy: 
 
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Kuwait Has Already Provided Relatively Large Amounts of Aid 
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-- Although Kuwait is a wealthy country, it is quite small. 
There are less than 1 million indigenous inhabitants (around 
900,000 Kuwaiti citizens plus maybe 80,000 stateless Arabs 
known as "bidoons") and the total population is less than 2.5 
million.  The projected GNP for this year is $36.3 billion. 
The GOK budget for the current fiscal year, which started in 
April, is $19.1 billion.  (On the other hand, private 
Kuwaitis control an estimated $160 billion, of which $80-$100 
billion may be relatively liquid.) 
 
-- Kuwait has already spent a considerable amount of money in 
support of the liberation of Iraq.  Early this year it won 
parliamentary approval for an Iraq-related $1.65 billion 
supplemental budget request.  We believe that most, if not 
all, of that money has since been spent.  In addition, Kuwait 
has lost considerable revenue from facilities (such as the 
commercial port at Shuaybah, warehouses and other buildings) 
and land provided free of charge to coalition forces. 
 
-- Assistance in kind, including fuel, for our troops has 
probably been the biggest single GOK expense, possibly 
topping $500 million.  In addition, the GOK has spent about 
$120 million on humanitarian assistance for Iraq.  After 
terrorist attacks last winter, tens of millions of dollars 
were spent on overtime for military and security forces 
engaged in force protection for coalition forces.  The GOK is 
providing an unknown amount of support for other members of 
the coalition, including Poland, at our request.  Finally, it 
provides large amounts of fuels of various types for the 
Iraqi commercial market at less than breakeven prices. 
 
-- Kuwaiti PM Shaykh Sabah told his interlocutors in 
Washington that Kuwait had spent $1.5 billion on Iraq in the 
four months prior to his September 10-11 visit to the US.  In 
relation to the overall size of its economy, this expenditure 
alone would be equivalent to our having spent approximately 
$430 billion. 
 
-- As a proportion of the government budget, President Bush's 
request for $87 billion for Iraq and Afghanistan would equate 
to approximately $725 million for Kuwait, less than half of 
what the GOK has already spent. 
 
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There are Real Political Obstacles to GOK Support for Iraq 
Reconstruction 
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-- There is a strong popular perception in Kuwait that Iraq 
is a potentially very wealthy country that should be able to 
finance its own reconstruction and development from oil 
revenues. 
 
-- Iraq continues to owe Kuwaiti citizens and the GOK tens of 
billions of dollars in compensation for claims stemming from 
its occupation of Kuwait.  Earlier this year, UNSCR 1483 
markedly reduced the proportion of Iraqi oil revenues being 
diverted to the UN Compensation Commission fund to settle 
these claims to only 5%.  This change could reduce 
contributions to the UNCC by as much as $3-4 billion per 
year, greatly increasing the time needed to pay off the 
claims.  Kuwaitis at all levels were dismayed.  This 
continues to be a topic of utmost sensitivity here (see 
Kuwait 4451). 
 
-- Iraq also owes Kuwait tens of billions of dollars for oil 
sold on its behalf during the Iran/Iraq war and for loans 
extended prior to the Gulf War.  The GOK knows that any 
meaningful Paris Club agreement on Iraq will no doubt require 
it to write off a substantial proportion of these debts. 
 
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Kuwaiti Businesses Have the Means and are Eager to Invest in 
Iraq 
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-- The Kuwaiti economy is currently booming due to US 
military expenditures in the country (at least $1.5 billion) 
as well as soaring business and consumer confidence.  The 
Kuwaiti stock market has also registered spectacular gains 
this year, setting several records. 
 
-- Kuwaiti businessmen view Iraq as a potentially very 
lucrative market.  Many are already selling goods and 
services there and making ambitious investment plans. 
However, there is a popular perception that Kuwait has not 
gotten its "fair" share of US-funded reconstruction projects 
and that the US has been unresponsive to Kuwaiti efforts to 
get its private sector more involved in Iraq. 
 
-- Popular support for the overthrow of Saddam Hussein was 
probably higher in Kuwait than in any other country in the 
world, except perhaps Iraq itself.  Kuwaiti leaders and 
citizens alike recognize that the coalition's success in Iraq 
is essential for the future welfare of their country and 
perhaps even its continued existence. 
 
-- Kuwaitis at all levels continue to feel a great debt of 
gratitude to the US for its leading role in the liberation of 
their country.  During his recent visit to Washington, PM 
Shaykh Sabah pledged that Kuwait would participate actively 
in the Madrid conference and that it would contribute 
"according to its circumstances". 
 
3.  (C) The foregoing facts lead me to the following key 
conclusions: 
 
-- For its size, Kuwait has already contributed more 
financially to the war effort and to humanitarian assistance 
than any other country in the world, including the US --even 
taking into account the President's latest request.  However, 
the pattern of its support so far suggests that Kuwait much 
prefers providing support to the coalition and that it is 
likely to focus grant assistance to Iraq on humanitarian 
projects. 
 
-- The GOK understands that success in Iraq is essential and 
it will continue to support the coalition financially. 
However, several factors (such as the large amounts it has 
already spent, delayed payment of UNCC claims, the prospect 
of substantial debt relief, and slow development of 
opportunities for Kuwaiti businessmen in Iraq) will likely 
constrain domestic political support for a generous pledge to 
Iraqi reconstruction.  American pressure for substantial GOK 
contributions to reconstruction could well lead to an 
offsetting reduction in GOK support in other areas. 
 
-- Nonetheless, the US continues to enjoy great popularity in 
Kuwait.  The country has already benefited greatly from the 
overthrow of Saddam and Kuwaiti businessmen are eager to 
capitalize on liberation for financial gain.  Many have large 
amounts of capital at their disposal that they would be 
willing to invest in Iraq, especially with our blessing and 
in cooperation with American firms.  However, they are risk 
averse and need some reassurance that their money will not be 
wasted. 
4.  (C) In sum, the GOK wants to contribute to a successful 
Madrid conference, but it is loathe to donate much if 
anything directly to Iraq reconstruction efforts.  If we make 
such a pledge a litmus test for Kuwaiti support, we will 
likely fail.  On the other hand, efforts to mobilize private 
Kuwaiti funds for Iraq could lead to substantial net 
increases in reconstruction resources.  Our focus should 
therefore be on urging the GOK to find creative ways to 
encourage such investment.  GOK programs to support its 
private sector's activity in Iraq would be popular 
domestically and could have a substantial multiplier effect. 
I recommend we approach the GOK along the lines below. 
 
5.  (C, releasable Kuwait) Suggested Talking Points: 
 
-- The US recognizes and greatly appreciates the crucial 
contribution that Kuwait has made and continues to make to 
the success of coalition efforts in Iraq as well as the 
extremely generous humanitarian assistance it is providing to 
the Iraqi people. 
 
-- Great strides are being made every day inside Iraq. 
Unfortunately, the damage that Saddam had done to his country 
exceeded all reasonable expectations.  In addition, his 
supporters are continuing that damage through a tragically 
misguided effort to delay the inevitable success of our 
coalition. 
 
-- As President Bush made clear in his recent discussions 
with His Highness Shaykh Sabah in Washington, the 
Administration will stay the course in Iraq.  Failure is not 
an option.  However, success can only be assured if we are 
all prepared to devote the necessary resources to our cause. 
To this end, the President has asked our Congress to 
appropriate an additional $65 billion for continued military 
operations and more than $20 billion for Iraq reconstruction. 
 
-- Even these large amounts will not be sufficient without 
additional generous support from the international community. 
 The Madrid conference is shaping up to be a critical 
opportunity for us to galvanize this international support. 
 
-- As one of Iraq's closest neighbors and a primary victim of 
Saddam Hussein's brutal regime, Kuwait is uniquely positioned 
to provide vital leadership to the Madrid conference.  The 
more active your government is at Madrid, the easier it will 
be for us to persuade other countries to contribute the 
resources necessary to get Iraq back on its feet quickly. 
-- The quicker we can revive the economy and begin to show 
the Iraqi people the benefits of liberation, the sooner we 
will achieve stability and the fewer resources we will all 
have to contribute in the long run, whether to military 
operations, humanitarian aid or reconstruction assistance. 
 
-- To achieve this virtuous cycle, based on our evaluation of 
Iraq's needs and our assessment of donor intent, we are 
asking Kuwait to pledge $ X billion at Madrid over a period 
of Y years. 
 
-- We recognize that this is a very large amount for a 
country of Kuwait's size and that our request comes on top of 
contributions that already far outstrip the generosity of any 
other donor.  However, we think that in the long run it will 
prove a very wise investment for your country.  Good 
relations with a prosperous, stable neighbor are priceless. 
The alternative of continued poverty and instability in Iraq 
would be terribly costly to all. 
 
-- We also recognize that Kuwait will not be able to 
contribute this amount of money without obtaining the 
necessary parliamentary approvals and that it may be 
difficult to win support for all of this amount to be 
provided in cash or kind by your government directly. 
 
-- In this case, we would urge you to consider creative ways 
to mobilize large volumes of Kuwaiti and other private 
capital in the service of reconstruction.  Credible plans for 
doing so would contribute to the goal of economic 
revitalization and could provide important models for other 
donors. 
 
-- For example, Kuwait could establish a special insurance 
program for Kuwaiti companies investing in key sectors in 
Iraq (e.g., housing, local power generation, 
telecommunications, water supply, roads, labor intensive 
industries).  Other incentives to encourage private 
investment in Iraq, such as low-cost loans or other 
subsidies, should also be considered. 
-- Kuwait could also help mobilize third-country investment 
in Iraq.  For example, it could offer to allow foreign 
companies with obligations under Kuwait's offset program to 
satisfy those obligations through projects with Kuwaiti 
investors in Iraq.  This step alone could conceivably 
mobilize several hundred million dollars.  If other GCC 
states followed suit, the potential impact would be 
multiplied several fold. 
 
-- Finally, Kuwait could take steps to alleviate Iraqi 
infrastructure needs, e.g., by agreeing to supply surplus 
power from its electricity grid to Iraq.  (To facilitate 
this, Kuwait could accelerate its construction of power 
stations, or allow private investors to do so.)  Similarly, 
Kuwait could announce it was immediately reserving selected 
facilities at its commercial ports for shipments of goods for 
Iraq reconstruction.  For the medium term it could expand and 
upgrade facilities at existing ports and/or propose 
development of Um Qasr under a joint port authority with 
incentives for private investors. 
 
-- Clearly, this list of ideas is far from exhaustive. 
However, we hope that it will provide the Kuwaiti government 
some useful food for thought as it prepares for the Madrid 
conference.  The United States looks forward to working with 
Kuwait at the conference and in the important task of 
rebuilding to Iraq.  With vision, together we can help the 
Iraqi people to build a better life for themselves. 
 
 
6.  (S) Whatever strategy or set of talking points Washington 
decides on, careful execution will be vital to its success. 
Unfortunately, I recently learned from one of my coalition 
partner colleagues that several Kuwaiti ministers have 
confided in her that Shaykh Sabah has already decreed that 
Kuwait will not contribute funds to Iraqi reconstruction. 
While unconfirmed, I believe this report is unfortunately 
credible.  This suggests that even a private-sector oriented 
approach like that recommended above may not succeed unless 
someone who enjoys Shaykh Sabah's personal respect executes 
it directly with him.  This argues for high-level 
intervention from our side, preferably in person, as far in 
advance of the Madrid meeting as possible.  A visit here from 
a well-known personality with a tie to the 1991 liberation of 
Kuwait would probably make the greatest impact on him. 
 
7.  (U) Baghdad minimize considered. 
JONES