US embassy cable - 04ABUDHABI2930

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 002930 
 
SIPDIS 
 
 
STATE FOR NEA/ARP, NEA/RA, EB/OMA 
STATE PASS FEDERAL RESERVE 
TREASURY FOR MILLS AND NUGENT 
 
E.O. 12958: DECL:8/3/14 
TAGS: EFIN, PGOV, ECON, MARR, TC 
SUBJECT:  SECURITY DOMINATES THE UAE FEDERAL BUDGET 
 
 
Classified by Ambassador Michele Sison for reasons 1.5 (b 
&d). 
 
1. (C) Summary:  Funding for security (including defense) 
is the single largest portion of the 2004 federal budget 
and makes up a full 43 percent of budgeted expenditures. 
This figure does not include an unknown amount of other 
defense spending that is directly paid by the Emirate of 
Abu Dhabi.  Although the lack of transparency in "who is 
funding what and for how much," makes budget analysis 
challenging, we are seeing a shift in emphasis in the UAE's 
security spending from facing conventional external threats 
like Iran to border security and counter terrorism.  We can 
also see how strongly the Emirate of Abu Dhabi dominates 
the federal government as the controller of the "purse 
strings."  Abu Dhabi contributes the lion's share of the 
funding for the federal budget and determines how much of 
it is spent.  Although UAE President Zayed ratified the 
country's 2004 federal budget on August 22, 2004, it only 
makes up a portion of the country's overall spending.  The 
strength of the federal government is largely dependent on 
Abu Dhabi's support -- and willingness to pay for -- a 
stronger federation.  End Summary. 
 
Abu Dhabi's Show 
---------------- 
 
2. (C) UAE president Sheikh Zayed bin Sultan Al-Nahyan 
ratified the federal budget on August 22, with spending set 
at USD 6.5 billion and revenues at around USD 5.91 billion. 
The appointed Federal National Council approved the budget 
at the end of May and passed it to the rulers of the 
various emirates for approval.  Abu Dhabi Emirate plays a 
much bigger role in total government spending than does the 
federal government.  Abu Dhabi's expenditures make up about 
three quarters of the UAE's consolidated government 
spending, which includes federal and emirate level 
spending.  Abu Dhabi contributes at least 55 percent of the 
federal government's revenues.  It also controls how much 
of that money is spent.  We understand that over half of 
Abu Dhabi's contributions to the federal budget are counted 
as "federal services," paid directly by the government of 
Abu Dhabi but recorded on the federal budget.  The federal 
government has no control over how these federal services 
are spent, or even if they are spent in the categories 
reported.  Ministry of Finance Assistant Under Secretary 
for Revenue and Budget Khalid Al-Bustani (protect) 
explained that Abu Dhabi tells the Ministry of Finance how 
much it is spending in a certain budget item.  The UAEG 
never actually sees the money, but merely records the 
spending in the federal budget.  Adding further opacity, 
Abu Dhabi also has budget outlays on national type projects 
-- such as defense or assistance to the northern emirates - 
- that are not recorded as federal expenses. 
 
Defense Spending Stable, but Shifting Focus 
------------------------------------------- 
 
3. (C) One of the largest items in the federal budget (USD 
2.7 billion) is security and justice.  We have heard that 
between USD 1.6 billion and USD 2 billion is earmarked for 
defense spending.  We also understand that all new UAE 
military acquisitions are considered off budget and that 
the Emirate of Abu Dhabi also funds defense related 
expenditures directly.  According to Al-Bustani, defense 
spending is not controlled by the UAEG.  With the exception 
of the salaries of the small Ministry of Defense, which 
supports the titular Minister of Defense Sheikh Mohammed 
bin Rashed Al-Maktoum (who has no role in day to day 
decisions), Abu Dhabi pays all defense  expenditures.  The 
Ministry of Finance officials tell us frankly that they do 
not know how the money is used or what part of the total 
defense bill it makes up. 
 
4. (C) The sheer size of the security portion of the 
federal budget indicates its importance to the UAE, 
especially considering that the budget does not capture the 
Emirate of Abu Dhabi's spending on defense.  Security and 
justice spending are up by less than three percent from the 
2003 federal budget and we do not yet have a breakdown of 
how much of that increase is defense related.  We do 
believe, from our conversations with UAE officials and U.S. 
defense contractors, that the UAE has shifted its defense 
priorities toward border security and counter terrorism. 
For example, the UAE is building a wall on the border with 
Oman and Saudi Arabia.  It is looking for security and 
surveillance packages for its land and sea borders and for 
its offshore oil facilities.  The UAE also moved about 
5,000 troops from its land forces to the ministry of 
interior for a frontier corps.  All of these factors lead 
us to believe that we are seeing a shift in the UAE's 
security emphasis. 
 
What little the Feds Control 
---------------------------- 
 
5. (C) The federal budget makes up about a quarter of total 
government spending.  (Note: Because Abu Dhabi funds the 
federal government, this figure represents some double 
counting with Abu Dhabi's budget.)  About 40 percent of the 
federal government's revenues come from fees and from 
profits on state owned enterprises like Etisalat.  Al- 
Bustani told EconChief that Etisalat was the federal 
government's largest independent source of revenue.  The 
UAEG is not only the majority shareholder in Etisalat, but 
also collects fees from what was a registered monopoly. 
The announcement, therefore, that the UAEG was breaking 
Etisalat's monopoly status caught several people by 
surprise.  The UAE subsequently announced that it would 
hold a majority stake in any new telecom service provider, 
probably to balance revenue concerns with efforts to 
liberalize the sector. 
 
6. (C) Al-Bustani said that the UAEG focused on the parts 
of the budget that it did control, including education, 
health, infrastructure, and salaries for civil servants. 
The UAEG is working with the various ministries to ensure 
that they abide by performance based budgeting to justify 
their expenditures. 
 
What does it mean? 
------------------ 
 
7 (C) The UAE is the ultimate experiment in "state's 
rights," with certain authorities and responsibilities 
ceded to the federal government and others to the 
individual emirates.  Oil and gas revenues belong to the 
individual emirates, not the federal government.  As the 
Emirate of Abu Dhabi owns 95 percent of the UAE's oil 
reserves, it dominates the seven-emirate federation.  The 
federal government has the second largest budget in the 
UAE, but very few independent sources of income.  Funding 
constraints keep the federal government weak compared to 
the Emirate of Abu Dhabi.  In the last 5 years, federal 
revenues have only increased from USD 5.5 billion to USD 
5.9 billion and spending has only increased by about a 
billion dollars.  The UAEG and its spending, do play a 
vital role in strengthening the federation.  This is 
largely, however, because Abu Dhabi supports a stronger 
federation, and is willing to pay for it.  Abu Dhabi earns 
and spends more money than the other six emirates combined, 
spending much of that on "federal" issues. 
 
Sison