US embassy cable - 05MANAMA900

C O N F I D E N T I A L SECTION 01 OF 03 MANAMA 000900 
 
SIPDIS 
 
STATE FOR NEA/ARPI, EB, DRL 
 
E.O. 12958: DECL: 06/14/2015 
TAGS: ECON, PGOV, KDEM, BA 
SUBJECT: PARLIAMENT FLEXES ITS MUSCLES IN BUDGET PROCESS 
 
REF: MANAMA 280 
 
Classified by Ambassador William T. Monroe for reasons 1.4 
(b) and (d). 
 
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Summary 
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1.  (C)  The Finance and Economy Committee of the Council of 
Representatives (COR, elected lower house of parliament) 
completed the bulk of its review of the bi-annual 2005-2006 
(calendar years) government budget and is expected to pass it 
to the full Council for consideration on July 2.  The COR and 
upper house Shura Council will likely approve the budget by 
the end of July.  The Committee was particularly aggressive 
about uncovering previously unreported government revenues, 
demanding full disclosure of the income of state-owned oil 
company BAPCO and aluminum manufacturer ALBA, and even rent 
received from the U.S. Navy for its facility in Manama.  The 
Committee forced the GOB to use a more realistic price for 
oil to generate its revenue figures, breaking from the 
traditional practice of low-balling the price and using any 
surplus income for development and infrastructure projects. 
The Committee pushed through a salary increase and bonus for 
government employees.  Finance Minister Shaikh Ahmed Al 
Khalifa lamented to the Ambassador about working with a newly 
assertive parliament and complained the Committee had created 
an "election year" budget.  Political leaders, including 
boycotters, recognize the influence the COR has in the budget 
process, highlighting the utility of participating in the 
system rather than sitting on the sidelines.  End Summary. 
 
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Budget to Move to Parliament for Vote 
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2.  (U) The COR is preparing to approve the 2005-2006 
two-year government budget after an unusually long and 
bruising seven-month review process in the Finance and 
Economy Committee.  (Note:  The budget is normally completed 
in the first quarter of the year.)  The Committee has 
completed its review of the projects and revenues portions of 
the budget and is expected to be finished with expenditures 
on June 28.  The full Council will begin its consideration of 
the budget July 2.  After a vote in the COR, the budget will 
move to the Shura Council, where it is expected to be 
approved by the middle or end of July.  During the budget 
process, the Committee, chaired by MP Jihad Bu Kamal, called 
into question the accuracy of the GOB's revenue estimates and 
pressed the government for data it had not previously 
provided.  The Committee approved revenues of BD 1.2 billion 
($3.18 billion) for 2005 and BD 1.3 billion ($3.45 billion) 
for 2006.  This is down significantly from the 2004 revenue 
figure of BD 1.65 billion ($4.37 billion), mostly as a result 
of losing a grant of 50,000 barrels per day of oil from Saudi 
Arabia (reftel). 
 
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Demands for Detailed Revenue Data 
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3.  (U) In mid-April, the Committee accused Bahrain's 
petroleum company BAPCO of stalling on a request to provide 
detailed statistics on oil revenues, according to press 
reports.  The company denied the charges, and deputy Jassem 
Abdul Aal responded publicly that BAPCO had omitted some BD 
150 million ($400 million) in revenues from Bahrain's 
domestic oil production.  He also disputed BAPCO's figures 
for revenues from the company's oil refinery.  During its 
June 25 session, the Committee required that 25 percent of 
aluminum manufacturer ALBA's income be included in the 
national budget.  (Note:  ALBA's income had not been included 
in the budget for 30 years.  In response to a question from a 
deputy, Finance Minister Shaikh Ahmed Al Khalifa said the 
government's profits from ALBA had been reinvested in the 
company or "kept as a backup for the government's immediate 
projects.") 
 
4.  (C) In mid-May, Abdul Aal announced that the government 
had failed to report some $200 million in annual income from 
rental fees for the U.S. Navy facility in Bahrain, citing a 
Middle East Economic Digest (MEED) article as the source. 
The following day the GOB stated publicly that rent from the 
USG for the naval facility was approximately $6 million per 
year, a figure the Embassy confirmed as accurate.  (Note: 
Post believes Abdul Aal confused a 10-year total for excess 
defense articles transferred to Bahrain from the U.S., which 
was mentioned in the MEED article, for rental charges.) 
5.  (C) Also on the revenue side, the Committee insisted that 
the GOB break with its traditional practice of 
underestimating the price of oil for the purposes of 
developing income figures.  The government's reasoning is 
that it cannot control the price of oil, which fluctuates 
widely and unexpectedly in international markets, and so it 
is safer to err on the side of caution and develop a budget 
based on a low-end estimate of revenues.  In this manner, the 
government lives within its means and any additional revenues 
are devoted to development projects.  Last year, the 
government used a price of $18/barrel to estimate revenues; 
this year, the GOB agreed to boost the estimated price to 
$30/barrel.  With the changed calculation, projected oil 
revenues soared to BD 890 million ($2.36 billion) in 2005 and 
BD 895 million ($2.37 billion) in 2006, yielding annual 
estimated BAPCO profits of BD 196 million ($519 million). 
 
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Interior, Defense Ministers Appear Before Committee 
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6.  (C) For the first time since parliament reopened in 2002, 
the Ministers of Defense and Interior were called to provide 
testimony in support of their budgets.  Minister of Interior 
Shaikh Rashid bin Abdulla Al Khalifa told the Committee May 
18 that he had sacked 50 percent of the foreign security 
officers holding high positions at the Ministry.  He also 
revealed a new recruitment program beginning in October to 
hire thousands of Bahrainis and promote officials from inside 
the Ministry to senior positions.  (Note:  As in other Gulf 
states, many police and Interior officials are expats from 
Arab and Muslim countries.)  The Committee said it planned to 
cut the Ministry's budget by BD 500,000 ($1.325 million). 
Following Minister of Defense General Shaikh Khalifa bin 
Ahmed Al Khalifa's May 30 appearance, the Committee said it 
would trim the MOD budget by BD 4 million ($10.6 million). 
(Note:  Changes in the budget must be approved by the Finance 
Ministry; Committee contacts told us the Ministry has agreed 
to the revisions.) 
 
7.  (U) The Committee included language in the budget bill to 
grant all public sector employees a bonus of BD 200 ($530) 
and a monthly pay raise to government employees of between BD 
25 and 50 ($66-132).  Pensions of retired public sector 
employees would rise by the same amount.  The bonus issue had 
been debated for several months before finally being approved 
by the Committee. 
 
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Finance Minister:  "Democracy is Hard Work" 
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8.  (C) The Ambassador discussed the budget process with 
Finance Minister Shaikh Ahmed bin Mohammed Al Khalifa June 
14.  Shaikh Ahmed, reflecting the frustrations of many in the 
GOB unaccustomed to having to work with a more assertive 
parliament, said "the consensus building phase in a 
representative democracy is hard work."  He said his biggest 
substantive concern was that the COR insisted on greatly 
increasing the estimated price of oil used in developing GOB 
revenue projections.  He called the resulting estimate of 
$30/barrel the "maximum possible." 
 
9.  (C) The Minister worried about budgeting so closely to 
likely actual oil revenues.  The markets were unpredictable, 
changing daily.  The GOB already must borrow to finance some 
of its development projects.  If the price of oil drops 
significantly from its current lofty heights, the GOB might 
be forced to try to borrow to pay the salaries of public 
sector employees.  In this case, the IMF and credit rating 
agencies would notice and there would be consequences.  In 
response to the Ambassador's question, Shaikh Ahmed said that 
the government fought the COR's initiative to grant 
government workers both a bonus and a salary increase, "but 
only so far."  He said the MPs were obsessed with the budget, 
which he termed an "election year" budget.  (Note: 
Parliamentary elections will be held in October 2006.)  He 
hoped the process would work better in the future and said 
building confidence between the government and parliament is 
a challenge.  He thought the budget would be wrapped up by 
mid-July, when many Bahrainis (including Shaikh Ahmed) take 
their summer holidays. 
 
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MPs Learning to Exert Pressure 
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10.  (C) Al Asala (Salafi) bloc deputy Ghanem Al Boainain 
told PolFSN that after a few years of experience, MPs are 
more aware of the parliamentary tools at their disposal and 
the importance of a meticulous review of the government's 
budget request.  He added that the Committee did not give in 
to the government's demands for speedy passage of the budget, 
as it had done in the previous cycle.  The parliament now 
understands that it can use the budget to exert pressure on 
the government, including in areas unrelated to finance such 
as movement on other bills and proposals that are languishing 
with the government.  Abdul Aal told PolOff that although 
members of the COR had corrected a number of discrepancies in 
the budget, he believed there were sources of government 
revenues still unaccounted for.  (Note:  Including assistance 
from other Gulf countries, according to recent press reports.) 
 
11.  (C) Even opposition leaders who boycotted the 2002 
elections, and who complain that the constitution unfairly 
gives legislative powers to the executive, acknowledge that 
the COR has real power over the budget.  Prominent 
oppositionist Aziz Abul told PolOff that government spending 
is one of the most important issues in the country, and he 
admitted that parliament exerts a great deal of influence in 
the budget process. 
 
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Comment 
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12.  (C) While operating at a disadvantage vis-a-vis the 
government with regard to constitutional powers, the COR was 
able to play a meaningful role in the bi-annual budget 
process.  Its demands for transparency and accountability on 
government revenues were largely met, and the more active 
members of the COR, including Jassem Abdul Aal, vow to 
continue to fight for full disclosure on financial issues. 
Several of the measures the Finance Committee approved are, 
as the Finance Minister said, indicative of an election year 
budget.  Rosy estimates of oil revenues and increased 
salaries and bonuses for public sector employees could come 
back to haunt the budgeteers.  But their new-found political 
muscle reinforces parliament's role as an important 
institution in Bahrain's democratic development, and helps 
amplify for the general public the utility of participating 
in the system at a time when many oppositionists are sitting 
on the sidelines. 
 
MONROE