US embassy cable - 05TAIPEI3551

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 003551 
 
SIPDIS 
 
STATE PASS AIT/W 
 
E.O. 12958: DECL: 08/25/2015 
TAGS: PGOV, PREL, MASS, MARR, TW, Foreign Policy, Military Issues, Domestic Politics 
SUBJECT: DEFENSE PROCUREMENT SPECIAL BUDGET:  A PRIMER ON 
TAIWAN BUDGETS AND LEGISLATIVE PROCESS 
 
REF: A. TAIPEI 0071 
     B. TAIPEI 0118 
     C. TAIPEI 1201 
     D. TAIPEI 3489 
 
Classified By: AIT Director Douglas H. Paal, Reason(s): 
1.4 (B/D) 
 
1.  (C) Summary.  A reduced and reconfigured Defense 
Procurement Special Budget will be re-introduced in the 
regular Legislative Yuan (LY) session that begins September 
13.  The Presidential office informed AIT yesterday, August 
24, that President Chen personally was responsible for the 
decision announced in the press to shift PAC-III missiles 
into the  defense regular budget, thus reducing the Defense 
Procurement Special Budget from NTD 480 to 370 billion (USD 
15 to 11.6), in order to facilitate passage by the LY.  After 
being blocked in the LY Procedure Committee 26 times in the 
2004-2005 LY sessions, there are scattered but inconclusive 
signs of a greater willingness by opposition Pan-Blue 
legislators to permit discussion of the Special Budget in the 
fall LY session.  The fact that the legislative process 
requires consensus by the five LY political parties for swift 
consideration, however, means that the apparent continued 
opposition of the People First Party will make rough going 
for the Defense Special Budget this Fall.  End Summary. 
 
2.  (C) Taiwan's tripartite Defense Procurement Special 
Budget (P-3C surveillance aircraft, PAC-III missiles, and 
diesel electric submarines) was voted down twenty-six times 
in the 2004-2005 LY sessions.  The initial Special Budget 
submission of USD 18 billion (NTD 601.8 billion) was reduced 
at the beginning of the second session in February to USD 15 
billion (NTD 480 billion at changed exchange rate) and will 
be once again reduced to USD 11.6 billion (NTD 370 billion) 
in the fall LY session beginning September 13. 
 
Making of a Special Budget 
-------------------------- 
 
3.  (C) The Taiwan government claims it originally decided to 
put the tripartite weapons package into a "special budget" 
rather than into the regular budget for two reasons.  First, 
the regular budget covers only a single fiscal year and 
cannot readily include long-term, multi-year procurements. 
Second, the amount of the tripartite weapons package would 
have exceeded the limit on central government budget deficit 
(expenditure minus revenue) of 15 percent in any fiscal year. 
 Special Budgets are not subject to this limit.  However, 
they are subject to the limit on total outstanding central 
government debt of 40 percent of average GNP over the 
preceding three years. 
 
4.  (C) Special Budgets also require additional legislation 
authorizing the budget, making for a more complicated 
two-step legislative process.  The Defense Special Budget 
package was split into two bills, a "Major Arms Procurement 
Statute" and a "Special Arms Procurement Budget."  The 
Executive Yuan (EY), however, submitted both bills 
simultaneously rather than the usual consecutive submission, 
which gave the opposition Pan-Blue legislators one more 
reason to oppose the Defense Special Budget.  Other reasons 
for opposition included claims of excessive weapons prices, 
opposition to one or more of the three weapons systems, and, 
later, anger at President Chen Shui-bian for criticizing the 
Lien-Soong Mainland China trips in April and May. 
Legislative Gauntlet 
-------------------- 
 
5.  (C) LY draft bills must go through the following 
two-committee, three-readings process: 
 
(1) Submission:  EY submits proposed bill to LY. 
 
(2) Procedure Committee:  Bill must be approved by a majority 
of the Procedure Committee, consisting of legislators from 
the five political parties in the LY, to be placed on the LY 
agenda. 
 
(3) First Reading:  Reading of the draft bill on the LY 
floor, after which the bill is referred to the relevant LY 
committee (or, if uncontroversial, directly to the Second 
Reading).  In this full LY session, however, any of the five 
party caucuses opposed to the bill can call for a prescribed 
four-month negotiation period, aptly termed "the freeze." 
The political parties theoretically have the same obstructive 
muscle in the Second and Third Readings, though this is less 
likely to occur so late in the legislative process.  (Note: 
Conversely, NSC SecGen Chiou I-jen insisted to AIT that there 
is a way to force a floor vote if supporters of the bill can 
obtain the support of a simple majority of legislators and, 
thus, circumvent the four-month negotiation period.  The 
government has never invoked this option, and AIT has not 
been able to verify the claim that this option exists with 
any LY member or staffer. End Note.) 
 
(4) Specialized Committee:  After hearings and testimony in 
the relevant LY functional committee -- the Defense Committee 
in the case of the Defense Special Budget -- draft bills must 
win approval of a simple majority of members.  Some bills 
languish in committee through an entire three-year, 
six-session LY, after which they "automatically return to 
zero" (zidong guiling) and must be reintroduced from scratch 
by the EY in the next session. 
 
(5) Second Reading:  Second reading on the LY floor, followed 
by general discussion, then article-by-article discussion. 
Final revisions occur at this stage. 
 
(6) Third Reading:  Final reading and vote, followed by 
presidential promulgation. 
 
6.  (C) The four-month negotiation provision is tantamount to 
a requirement for unanimous approval by all party caucuses in 
order to avoid the long four-month "freeze" delay.  The 
Defense Special Budget bills, however, never even made it out 
of the Procedure Committee and on to the LY floor in the fall 
and spring 2004-2005 LY sessions.  In twenty-six weekly 
sessions, a simple majority of Pan-Blue-dominated Procedure 
Committee members voted against the Defense Special Budget 
bill, blocking it from entering the LY agenda for a first 
reading. 
 
President Chen Modifies the Special Budget 
------------------------------------------ 
 
7.  (C) Office of the President Senior Counselor Liu 
Shi-chung visited AIT on August 24 to inform the Deputy 
Director that President Chen personally decided to shift the 
PAC-III missiles from the Special Budget into the regular 
defense budget.  This would, Liu explained, reduce the 
remaining Special Budget package for P3c's and electric 
diesel submarines from NTD 480 proposed in the spring LY 
session in February to 370 billion (USD 15 to 11.6 billion) 
in hopes that the lower amount would facilitate LY passage 
this fall.  Liu pointed out that the preceding day, August 
23, President Chen publicly invited new KMT Chairman Ma 
Ying-jeou to meet and discuss the Special Budget.  Noting 
that Ma publicly rejected the invitation, the Deputy Director 
asked if there had been any private discussion with the KMT 
before the President publicly announced his invitation, to 
which Liu responded in the negative.  The government, Liu 
explained, is most concerned about the stance of the PFP, 
which has been adamantly opposed to the Special Budget under 
the leadership of its Chairman, James Soong. 
 
Once Again, Tantalizing Glimmers 
-------------------------------- 
 
8.  (C) The EY will re-submit the revised Defense Procurement 
Special Budget to the fall LY session opening September 13. 
There are scattered signs of more support, or at least 
reduced automatic opposition, from KMT legislators for moving 
the Special Budget out of the Procedure Committee on to the 
LY floor.  KMT's LY Speaker Wang Jin-pyng and Policy 
Committee Director Tseng Yung-chuan have both publicly 
responded positively to reports of the Defense Special Budget 
revision, promising that the KMT would now be willing to at 
least discuss the proposal which, presumably, means passage 
by the Procedure Committee and placement on the LY agenda. 
New KMT Chairman Ma Ying-jeou could also play a role in this 
process; close advisor and KMT legislator Lai Shi-pao stated 
on August 21 that Ma will support the Special Budget, but at 
a lower level of funding -- though Lai did not clarify how 
low, nor what a Special Budget package that Ma might support 
would look like.  Even PFP legislator Lin Yu-fang, a 
self-described defense expert who has been a mainstay of the 
PFP opposition over the past two sessions, announced that he 
now supports moving the two Special Budget bills out of the 
Procedure Committee into the Defense Committee for 
discussion.  Whether other PFP legislators will follow Lin's 
lead remains to be seen. 
 
Long and Winding LY Road 
------------------------ 
 
9.  (C) The Defense Procurement Special Budget has been 
through the following four and a half year odyssey: 
 
-- April 2001:  USG informs Taiwan MND of Bush Administration 
approval of the sale of major defense systems with an 
estimated value of USD 20-30 billion (NTD 680 billion - 1 
trillion). 
 
-- May 2001:  MND submits 20-year, USD 20 billion procurement 
plan to LY, including Kidd-class destroyers, diesel electric 
submarines, P-3C Patrol Aircraft, Apache Attack Helicopters, 
and M-109 A-6 Self-Propelled Artillery.  LY passes resolution 
demanding U.S. allow state-owned China Shipbuilding to 
participate in production of submarines. 
 
-- Autumn 2002:  In response to Taiwan MND,s inability to 
prioritize among the April 2001 items approved for sale, DOD 
conducts assessment of Taiwan defense priorities, concludes 
most urgent items are C4ISR, anti-air and anti-submarine 
capabilities. 
 
-- January 2003:  Executive Yuan (EY) creates task force to 
promote domestic production of diesel. 
 
-- June 2003:  LY approves budget for purchase of four 
Kidd-class destroyers with enhanced anti-air capability; 
opposition parties force 15% budget reduction. 
 
-- July 2003:  NSC SecGen Chiou I-jen informs USG of plan to 
fund the three priority procurement programs (PAC-III, P-3Cs, 
and diesel electric submarines) via NTD 510 billion (USD 15 
billion) special budget. 
 
-- August 2003:  MND Minister Tang Yiao-ming publicly 
announces plan to fund purchase of PAC-IIIs, P-3Cs, and 
diesel electric submarines via a special budget.  Separately, 
EY submits funding request to LY for the C4ISR program via 
regular defense budget process. 
 
-- March 2004:  Non-binding referendum on accelerating 
procurement of anti-missile systems fails LY passage; 
opposition parties later cite result to demand the government 
scrap plans to procure PAC-III missiles. 
 
-- March 2004:  DOD announces sale of early warning radar 
(EWR) to Taiwan at USD 1.8 billion. 
 
-- May 2004:  President Chen Shui-bian appoints CGS Chief Lee 
Jye Minister of National Defense; Lee immediately approves 
Special Budget proposal and forwards to EY. 
 
-- June 2004:  EY Approves Special Budget proposal of NTD 
610.8 billion (USD 18 billion).  LY President Wang Jin-pyng 
leads delegation of LY Defense Committee members to the U.S. 
to inspect systems included in Special Defense Budget 
package.  Taiwan MND requests the USG cite a lower price for 
construction of the eight diesel submarines to address LY 
complaints over high cost of program. 
 
-- August 2004:  MND announces it will not insist on building 
submarines in Taiwan in order to reduce the overall cost of 
the diesel submarine program. 
 
-- September 2004:  EY submits Special Defense Procurement 
Budget to LY.  Premier Yu Shyi-kun and MND Minister Lee Jye 
defend budget plan during full session of the LY; Pan-Blue 
activists stage anti-defense procurement rally in Taipei. 
MND Minister Lee Jye tells LY Defense Committee he will 
resign if Special Defense Procurement Budget is rejected. 
 
-- November 2004:  LY Procedure Committee rejects 
consideration of the Special Defense Procurement Budget, 
forcing delay in LY review until after December 11, 2004 
legislative elections. 
-- January 2005:  LY Procedure Committee votes down Special 
Defense Procurement Budget in its final meeting. 
 
-- February 2005:  MND announces it will reduce the funding 
amount for the Special Defense Procurement Budget to NTD 480 
billion (USD 15.5 billion) in order to meet opposition 
demands for a price cut. 
 
-- March 2005:  EY approves revised MND,s revised package 
and resubmits budget to the new LY session. 
 
-- March-May 2005:  LY Procedure Committee vetoes the Special 
Budget bill each Tuesday through the end of the session in 
late May. 
 
-- May 2005: PFP announces it will not cooperate absent an 
apology from President Chen for alleging PFP Chairman Soong 
met with Taiwan Affairs Office Director Chen Yunlin in the 
U.S. 
PAAL