US embassy cable - 05TELAVIV2940

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 002940 
 
SIPDIS 
 
E.O. 12958: DECL: 05/09/2015 
TAGS: ECON, EFIN, KWBG, IS, ECONOMY AND FINANCE, U.S.-ISRAEL RELATIONS, GAZA DISENGAGEMENT 
SUBJECT: FINANCE MINISTRY DIRECTOR GENERAL TELLS AMBASSADOR 
GOI ASSISTANCE REQUEST STILL AT PLANNING STAGE 
 
Classified By: Ambassador Daniel C. Kurtzer for Reasons 1.4 (b,d) 
 
1. (C) Summary.  The Ambassador met May 9 with Finance 
Ministry DG Yossi Bachar to discuss a full range of bilateral 
economic issues, including Israel's request for U.S. 
assistance to promote Negev/Galilee development, an overview 
of the recently-concluded Joint Economic Development Group 
(JEDG) meeting, IPR and other issues.  During the meeting, 
Bachar: 
 
-- Noted the GOI has not yet fleshed out its plans for the 
Negev/Galilee regions and the issue was not likely to be 
raised formally by the GOI in the upcoming visit of PM Sharon 
to the U.S.; 
-- Said he would be chairing a meeting May 24 with all 
involved ministries to consider next steps on the issue and 
that he might travel to the U.S. for further discussions on 
the issue; 
-- Said the GOI did not yet have an exact accounting of its 
disengagement expenses to provide to the USG, in part because 
the possibility existed that the GOI would pay more for 
compensation if it would help secure a successful, peaceful 
disengagement; 
-- Noted the April JEDG meeting had gone "smoothly" and MoF 
and Embassy staffs were working on closing out remaining 2005 
terms sheet issues; 
-- Explained that he had possibly misspoken at the JEDG when 
he claimed GOI legislation includes a 3.4% budget deficit 
target, including disengagement, for 2006 as well as for 
2005.  Bachar promised to provide clarification soon; 
-- Admitted he felt the GOI could have done more on IPR and 
promised to look into ways to deal with the issue; 
-- Promised to help resolve a major tax issue involving the 
American International School; and 
-- Said he would look into the GOI's purchase of a non-U.S. 
scanner for the Haifa port utilizing US FMF funding. 
 
End Summary 
 
------------------------------ 
Israeli Negev/Galilee 
Assistance Request "Not Ready" 
------------------------------ 
 
2. (C) Bachar briefed the Ambassador on Israel's request for 
U.S. assistance for Negev and Galilee development.  He said 
he had participated in a useful meeting with Deputy National 
Security Advisor for Economic Affairs Shirzad, in which 
Bachar had outlined some of the GOI's thinking on the issue. 
Bachar termed the meeting a "kickoff" in which the "rules of 
the game" had been discussed.  Bachar said the GOI was 
thinking along the lines of a long-term development plan 
augmented by U.S. assistance, and not in terms of U.S. 
assistance somehow related to an undefined plan.  Bachar said 
the meeting did not focus on potential U.S. assistance for 
Israeli disengagement.  Furthermore, it had generated no 
follow-up taskings.  Bachar seriously doubted whether the GOI 
would be in a position to raise assistance for either 
Negev/Galilee or for disengagement during the PM's scheduled 
May 24-25 visit to Washington, although he noted he might 
travel to Washington for further discussions. 
 
3.  (C) Bachar said the idea for resuscitating GOI plans for 
the Negev and Galilee had originated with the PM's Director 
General Ilan Cohen.  Since then, Shimon Peres had taken the 
lead on the civilian aspects of the development plan.  Bachar 
said the concept of such development was not new, but noted 
that the GOI had decided to give them a newly energized push. 
 Bachar expected to chair a meeting of all involved 
ministries on May 24 to consider next steps on the project. 
 
4.  (C) The Ambassador reminded Bachar that the USG was 
waiting for an estimate of disengagement costs, which would 
fulfill a request made by U/S Larson late in 2004.  Bachar 
noted that the GOI did not yet have "precise" numbers for 
disengagement, noting that the main area of uncertainty 
remained in the civilian sphere.  The GOI, Bachar stressed, 
would do almost whatever it took in order to make certain 
disengagement went smoothly.  If this took further 
expenditures to keep the settlers quiet, so be it.  Although 
it was possible such expenditures could result in a higher 
2006 deficit than currently estimated, Bachar said he was 
committed to preventing such an outcome.  Bachar hinted that 
one reason the GOI did not want to provide an exact estimate 
of disengagement expenses was that such an estimate would 
provide settlers a stronger position from which to bargain 
for higher compensation levels. 
 
-------------------- 
JEDG: A Good Meeting 
-------------------- 
 
5. (C) Bachar summed up the recently-concluded Joint Economic 
Development Group (JEDG) meeting by noting that it had "gone 
smoothly."  MoF staff, he noted, were now working with the 
Embassy to help iron out the details of the 2005 terms sheet. 
 (Note: The terms sheet outlines the specific economic terms 
Israel must meet to receive future tranches of loan 
guarantees.  End Note)  On a related note, Bachar said that 
he believed he had erred when he informed A/S Wayne during 
the JEDG that GOI legislation had institutionalized a deficit 
level of 3.4 percent, with disengagement, for both 2005 and 
2006, "I believe the legislation includes a specific level 
for 2005 only."  Bachar promised to supply the Embassy with 
more specific information soon.  The Ambassador noted that, 
in relation to the Loan Guarantee Agreement, the U.S. had not 
taken any settlement deductions since 2003.  As a result, and 
in view of Israel's continued funding of settlements, the GOI 
had run up a potentially significant amount of future 
deductions.  Bachar said he recognized this fact.  Econ 
Deputy raised FinMin Netanyahu's reported intention to issue 
a new, ambitious program of tax reductions this year, and 
asked how Bachar saw that relating to the LGA language urging 
the GOI to give due consideration to the reduction of Israeli 
debt/GDP levels.  Bachar responded that, although the GOI was 
also concerned about overall debt levels, states with high 
tax rates were at an economic disadvantage internationally. 
 
--- 
IPR 
--- 
 
6.  (C)  The Ambassador noted that, in the 2004 terms sheet, 
the GOI had agreed to try to work out differences with the 
U.S. on IPR.  This had not yet happened, and Israel had now 
been placed on the Priority Watch List.  Although it was 
unlikely Israel would be moved even higher on the list and 
thus be subject to possible sanctions, the Ambassador noted 
PWL was not a good place to be and urged Bachar to help out. 
While noting that the MoF did not have primary action on the 
issue, Bachar noted that "frankly, I think we could have done 
better on this issue" and promised to see if he could help in 
some way.  The Ambassador also noted negative developments on 
the patent term extension and promised to provide Bachar more 
specific information on the issue. 
 
------------------------- 
American School Tax Issue 
------------------------- 
 
7.  (C)  The Economic Counselor outlined a disagreement 
between the American International School and the GOI tax 
authorities relating to whether the school would have to pay 
VAT tax on property it had purchased for its new campus. 
According to an agreement reached in the 1960s between then 
Ambassador Barbour and then PM Golda Meir, the GOI agreed to 
consider the school legally the same as the Embassy for tax 
purposes.  Unfortunately, it appeared the GOI was taking 
advantage of the school's expansion to reevaluate this 
agreement, a move that was in neither country's interest. 
The Ambassador noted imposing a new tax on such a major 
purchase could unnecessarily put the school's future into 
question.  Bachar appeared genuinely concerned over the 
disagreement and promised to speak to the tax authorities to 
reach a resolution. 
 
------------------ 
Haifa Port Scanner 
------------------ 
 
8.  (C) The Ambassador closed out the meeting by noting the 
GOI had decided to utilize USG FMF funding to purchase a 
non-U.S. origin scanner at Haifa port.  This was against both 
the spirit and the letter of FMF and was unacceptable. 
Bachar asked for more information on the issue and promised 
to do what he could to correct the problem. 
 
-------------------------- 
Bachar Committee 
Recommendations to Knesset 
-------------------------- 
 
9.  (C) Bachar noted that, in spite of all the work the 
ministry was doing to make certain disengagement proceeded 
successfully, it had not dropped economic reform.  In just 
one example, he said that his own recommendations for 
financial market reform would be submitted to the Knesset the 
week of May 20. 
 
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