US embassy cable - 05ROME987

C O N F I D E N T I A L  ROME 000987 
 
SIPDIS 
 
 
E.O. 12958: DECL: 03/01/2015 
TAGS: EAID, IT 
SUBJECT: ITALY'S FOREIGN AID: LATE PAYMENTS, TSUNAMI RELIEF 
TO BOOST 2005 SPENDING 
 
REF: A. ROME 574 
 
B. 04 ROME 4796 
 
Classified By: Minister-Counselor for Economic Affairs 
Scott Kilner for  reasons 1.4(d). 
 
1. (SBU) Summary: On March 10, the Italian parliament passed 
a special appropriation to: 1) allow Italy to make up its 
missed 2004 euro 100 million payment (euro=$1.33) to the 
Global Fund to Fight HIV/AIDS, Tuberculosis, and Malaria; 2) 
fund a euro 70 million appropriation for tsunami-related aid; 
and 3) fund replenishments to several international financial 
institutions.  These payments should help Italy maintain 
foreign aid spending levels of at least 0.17 percent of GDP 
(approximately euro 2.4 billion) in 2005.  However, one 
Ministry of Foreign Affairs (MFA) official reports that 2005 
aid spending could be significantly higher, as much as 0.23 
percent of GDP (or about euro 3.2 billion).  Such increased 
aid spending, however, would reflect mainly make-up payments 
and one-off appropriations, and would probably not be 
sustainable, given Italy's deteriorating finances. 
 
2. (SBU) In fact, Italy's "formal" foreign aid budget (i.e., 
funds appropriated through the regular calendar year budget 
cycle without consideration of make-up and one-off 
appropriations) is shrinking.  The 2005 budget contains euro 
1.78 billion (0.13 percent of GDP) for foreign aid, down from 
euro 2.17 billion (0.16 percent of GDP) in 2004.  Unless 
Italy's new Foreign Minister, Gianfranco Fini, can win a 
dramatic increase in foreign aid funding (which does not look 
likely), the GOI will probably fall far short of its stated 
goal of doubling aid levels to 0.33 percent of GDP by 2006. 
Budgetary pressures may make Italian officials increasingly 
receptive to USG views on official development assistnce 
(ODA)--specifically, that fostering good governance and 
private sector development in target countries is more 
important to poverty reduction than achieving arbitrary 
increases in ODA levels. End summary. 
 
Italy's Fragmented Foreign Aid Structure 
---------------------------------------- 
 
3. (U) Econoff met February 23 with Giorgio Guglielmino, 
Office Director for Budget and Finance in the Foreign 
Ministry's Directorate for Development Cooperation. 
Guglielmino is responsible for all budget issues related to 
the Directorate, which is Italy's USAID-equivalent.  He 
briefed Econoff on the current status of Italian aid funding 
and the supplemental appropriation decree, which passed two 
weeks after our meeting. 
 
4. (U) Italy's foreign aid budget is highly fragmented, with 
most ministries carrying out some assistance programs.  The 
main components of the 2005 foreign aid budget are: euro one 
billion (euro=$1.33), administered by the MFA; euro 473 
million, administered by the Finance Ministry (and which 
includes Italy's payment for EU development programs and to 
international financial institutions); euro 127 million, 
administered by the Defense Ministry; and euro 101 million, 
by the Environment Ministry. 
 
5. (U) Though not part of the official foreign aid budget, 
the Department of Civil Protection (Protezione Civile), an 
agency within the Prime Minister's office with a 2005 budget 
of euro 1.7 billion, plays the lead role in providing 
disaster relief both at home and abroad.  In years when a 
major disaster takes place abroad, such as the Indian Ocean 
tsunamis, Protezione Civile's funds can represent a 
 
SIPDIS 
significant portion of Italy's foreign assistance spending. 
 
6. (U) Guglielmino also pointed out that aid and relief 
activities implemented by Italy's local governments, 
typically as part of sister-city/region programs in the 
developing world, are not always included in the official aid 
figures. He estimated such local government aid initiatives 
could amount to about euro 60 million per year in additional 
foreign assistance. 
 
Past Due: Italy Missed Key Aid Payments in 2004 
--------------------------------------------- -- 
 
7. (C) Budget shortfalls forced Italy to delay or cancel 
disbursements of several aid commitments in 2004, most 
notably its euro 100 million pledge to the Global Fund.  As 
part of an emergency budget cutting program in summer 2004, 
the GOI froze euro 250 million in the MFA aid budget.  Then, 
in a common maneuver, finance officials waited until 
end-December to release much of this money because the 
 
 
Finance Ministry knew, according to Guglielmino, the MFA 
could not spend it all before the end of the year.  (Italy's 
fiscal year follows the calendar year.) This bureaucratic 
ruse resulted in the MFA experiencing an effective cut of 
euro 100 million for 2004, roughly ten percent of MFA's 
foreign assistance funding for that year. 
 
8. (U) Guglielmino maintained that, despite this cut, Italy's 
total foreign aid spending in 2004 probably reached 0.17 
percent of GDP (exact figures for 2004 are not yet 
available), about the same as 2003.  Even with the shortage 
of funds, the MFA did manage to pay its euro ten million 
contribution to UN/World Bank International Reconstruction 
Fund Facility for Iraq (IRFFI) (ref B) just before the year 
end.  The MFA also funded a relief supply flight to Sri Lanka 
immediately following the December 26 Indian Ocean tsunamis. 
Protezione Civile's relief programs, which included several 
flights of relief supplies the week after the disaster, also 
boosted 2004 aid spending, although figures are not available. 
 
2005 Aid Spending Will Rise As Italy Tries to Catch Up 
--------------------------------------------- --------- 
 
9. (U) The special appropriation decree-law passed March 10 
contains an additional euro 215 million in new development 
and humanitarian aid funding.  The bulk of this money, euro 
180 million, is earmarked for the Global Fund: euro 100 
million to make up Italy's missed payment for 2004 and euro 
80 million towards Italy's 2005 donation.  The decree-law 
also includes an extra euro 35 million to fund Italy's euro 
70 million response to the Indian Ocean tsunamis.  (Note: 
Italy plans for much of this money to go towards debt relief 
for the affected countries.  Protezione Civile is charged 
with distributing an additional euro 45 million donated by 
the Italian public.  End note.) Regarding Iraq aid, 
Guglielmino predicted that, unlike in 2004, Italy should be 
able to disburse its planned euro ten million 2005 
contribution to the IRFFI prior to October. 
 
10. (U) The decree-law also authorizes several replenishments 
to international financial institutions, including euro 182 
million for the International Development Association, euro 
59 million for the Global Environmental Facility, and euro 91 
million for the African Development Fund.  These 
contributions have been added retroactively to the 2004 
budget, though the money will presumably all be disbursed in 
2005.  When the new spending provided in the special 
appropriation is added to the formal 2005 budget, Italy's 
projected foreign aid for 2005 reaches euro 2.4 billion, or 
0.17 percent of GDP.  Guglielmino, however, told Econoff that 
Italy's actual foreign aid spending could be as high as 0.23 
percent of GDP (approximately euro 3.2 billion) this year, 
though he was not clear where this additional money will come 
from. 
 
But Official Aid Budget is Falling 
---------------------------------- 
 
11. (U) Though aid disbursements in 2005 may increase, thanks 
to the supplemental, Italy's formal aid budget (including aid 
disbursed through the MFA, Finance, Defense, and Environment 
Ministries) shows a downward trend.  According to the 
Embassy's own analysis of Italy's 2005 budget, Parliament cut 
Italy's total foreign aid budget to euro 1.78 billion (0.13 
percent of GDP) from euro 2.17 billion (0.16 percent of GDP) 
budgeted in 2004.  (Note: These figures are higher than the 
foreign aid numbers reported in Embassy's 2005 budget roundup 
(ref A).  Ref A figures include Italy's multilateral, but not 
bilateral, aid.  End note.) 
 
12. (U) Many of these cuts for 2005 were made to Italy's 
contributions to international development and financial 
organizations, included in the Finance Ministry budget.  The 
MFA saw its overall aid budget cut three percent to just over 
euro one billion.  The MFA's budget for projects in least 
developed countries (LDCs) experienced a cut of 2.7 percent. 
 
13. (SBU) The GOI remains officially committed to doubling 
current aid levels to 0.33 percent of GDP (the level of 
Italy's foreign aid in the early 1990s) by 2006.  However, 
even the normally optimistic Guglielmino admitted that it was 
unlikely Italy would manage to achieve such a large jump in 
aid funding by next year. 
 
Foreign Minister Fini to the Rescue? 
------------------------------------ 
 
14. (C) Guglielmino, and other MFA aid officials, expect the 
 
 
MFA to fare better in future budget battles, thanks to the 
political clout of Italy's new Foreign Minister, Gianfranco 
Fini.  Fini is the head of the National Alliance, the 
second-largest partner in Prime Minister Berlusconi's 
coalition. Also, in addition to being Foreign Minister, Fini 
continues to hold the title of Deputy Prime Minister.  His 
predecessor as Foreign Minister, Franco Frattini, currently 
the EU Commissioner for Justice, Freedom, and Security, had 
no comparable independent political base.  Guglielmino 
speculated that Fini is better placed to defend the MFA from 
the kind of emergency funding "freezes" that hampered Italy's 
2004 aid payments.  So far, however, Fini has been unwilling 
to provoke a confrontation with Finance Minister Siniscalco 
over the MFA's budget. 
 
Comment 
------- 
 
15. (C) Guglielmino's prediction that aid spending could 
reach 0.23 percent of GDP this year is probably unrealistic, 
given the GOI's precarious financial situation (which will 
likely grow worse as Berlusconi's new tax cuts take effect). 
Nevertheless, officials here chafe at the suggestion that 
Italy is a laggard among European aid donors.  Guglielmino 
expressed irritation with a recent report by the NGOs Oxfam, 
ActionAid, and Eurodad that labeled Italy the "leading 
villain on the EU stage" for its low aid-to-GDP ratio. 
Because Italy is unlikely to meet its goal of doubling aid 
levels by 2006, the GOI may become more receptive to USG 
views on official development assistance (ODA)--specifically, 
that fostering good governance and private sector development 
in target countries is more important to poverty reduction 
than achieving arbitrary increases in ODA levels. End comment. 
 
16. (U) Baghdad minimize considered. 
 
SEMBLER 
 
 
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 2005ROME00987 - Classification: CONFIDENTIAL