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[Senate Prints 111-38]
[From the U.S. Government Publishing Office]

111th Congress  }                                           {   S. Prt.
  1st Session   }           COMMITTEE PRINT                 {    111-38                                                                 _______________________________________________________________________                                    
 
                          FOLLOWING THE MONEY 

                         IN YEMEN AND LEBANON: 

                      MAXIMIZING THE EFFECTIVENESS

                      OF U.S. SECURITY ASSISTANCE 
                      AND INTERNATIONAL FINANCIAL

                          INSTITUTION LENDING

                               __________

                     COMMITTEE ON FOREIGN RELATIONS

                          UNITED STATES SENATE

                     One Hundred Eleventh Congress

                             First Session

                            January 5, 2010

                                     
              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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Washington, DC 20402-0001 

                 COMMITTEE ON FOREIGN RELATIONS        

             JOHN F. KERRY, Massachusetts, Chairman        
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
RUSSELL D. FEINGOLD, Wisconsin       BOB CORKER, Tennessee
BARBARA BOXER, California            JOHNNY ISAKSON, Georgia
ROBERT MENENDEZ, New Jersey          JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland         JIM DeMINT, South Carolina
ROBERT P. CASEY, Jr., Pennsylvania   JOHN BARRASSO, Wyoming
JIM WEBB, Virginia                   ROGER F. WICKER, Mississippi
JEANNE SHAHEEN, New Hampshire        JAMES M. INHOFE, Oklahoma
EDWARD E. KAUFMAN, Delaware
KIRSTEN E. GILLIBRAND, New York
                  David McKean, Staff Director        
        Kenneth A. Myers, Jr., Republican Staff Director        

                              (ii)        

                            C O N T E N T S

                              ----------                              
                                                                   Page
Letter of Transmittal............................................     v

Executive Summary................................................     1

Introduction.....................................................     5

Yemen............................................................     5

    Background...................................................     5

    U.S. Security Assistance to Yemen............................     7

    IFI Lending..................................................    15

Lebanon..........................................................    18

    Background...................................................    18

    Red Flags....................................................    19

    U.S. Security Assistance to Lebanon..........................    20

    IFI Lending..................................................    26

                               Appendixes

Appendix I.--Interlocutors in Yemen..............................    29

Appendix II.--Interlocutors in Lebanon...........................    30

Appendix III.--Acronyms..........................................    31

                                 (iii)

                         LETTER OF TRANSMITTAL

                              ----------                              

                              United States Senate,
                            Committee on Foreign Relations,
                                   Washington, DC, January 5, 2010.
    Dear colleague: In the Fall of 2009, I directed my Senior 
Professional Staff Member for the Middle East, Dorothy Shea, to 
visit Yemen and Lebanon to gather information for two 
forthcoming committee reports. The first concerns security 
assistance, and is in follow up to the committee's 2006 report, 
``Embassies as Command Posts in the Anti-Terror Campaign.'' \1\ 
The second report is the last in a series my staff have 
produced on lending by International Financial Institutions 
(IFIs). Although the circumstances facing Yemen and Lebanon 
differ greatly, I selected these two countries because they 
have both been major recipients of U.S. security assistance, 
particularly under Section 1206 of the National Defense 
Authorization Act. In addition, while both countries have 
received substantial IFI lending, significant structural 
reforms are urgently needed to tackle long-term development 
challenges.
---------------------------------------------------------------------------
    \1\ The report can be found on the Government Printing Office's 
web-site--http://www.gpo.gov/fdsys/search/home.action insert "S. Prt. 
109-52" in the search line.
---------------------------------------------------------------------------
    The stakes in both countries are quite high. As this report 
was going to press, we learned about the magnitude of the 
threat posed by al-Qaeda in Yemen: on December 25, 2009, Umar 
Farouk Abdulmutallab, a Nigerian national who is believed to 
have received training, indoctrination, and explosives in 
Yemen, attempted to blow up a Detroit-bound Northwest Airlines 
flight. On January 3, 2010, the U.S. and British Embassies in 
Sanaa, followed by several other Western embassies, temporarily 
closed due to credible threats of planned suicide attacks by 
al-Qaeda operatives. Separately, Anwar al-Awlaqi, the Yemeni-
American radical cleric, has been linked to numerous terrorism 
suspects, including Nidal Malik Hasan, charged with the 
November 2009 Fort Hood massacre. Many analysts assess that al-
Qaeda in the Arabian Peninsula has taken advantage of the 
Yemeni government's preoccupation with an insurgency in the 
north and a secessionist movement in the south to exploit the 
country's large swaths of ungoverned spaces in an effort to 
consolidate and build capacity to launch terrorist operations.
    In addition to its multiple security challenges, Yemen, 
already the poorest country in the Arab world, faces daunting 
socio-economic crises, such as the depletion of its oil and 
water resources. The literacy rate is a little over 50 percent 
and unemployment was last estimated at 35 percent. Yemen's 
security and socio-economic challenges are inter-related, a 
reality that U.S. assistance programs must address urgently, 
creatively, and with unity of effort within the U.S. government 
and with like-minded donors.
    Lebanon, meanwhile, is still recovering from the 2006 war 
between Israel and Hizballah, as well as the 2007 fighting 
between Lebanese Armed Forces (LAF) and Fatah al-Islam at the 
Nahr al-Barid Palestinian refugee camp. The United States has a 
strong interest in helping to further the professionalization 
of the Lebanese security services and their ability to counter 
terrorist threats. We have made substantial investments toward 
this end, but the work is far from over. We must also work to 
ensure the sustainability of U.S. assistance. In addition, the 
international donor community needs to do a better job of 
encouraging the kinds of structural reforms that will be 
necessary to overcome the country's long-standing economic 
challenges, such as the massive public debt.
    While the key findings of this report will be incorporated 
as case studies in the broader committee reports, I wanted to 
share with you the entire staff trip report, which I believe 
provides useful insight into key issues underpinning the myriad 
challenges these two countries face and which U.S. security 
assistance, as well as IFI lending, is designed to help 
address. As the Congress and the Administration debate the 
issue of foreign assistance reform in general, and the role of 
security assistance in particular, as well as U.S. strategy to 
combat al-Qaeda in the Arabian Peninsula, I hope that you will 
find this information helpful.
    I look forward to continuing to work with you on these 
issues and welcome any comments you may have on this report.

            Sincerely,
                                   Richard G. Lugar,
                                           Ranking Member.

                      FOLLOWING THE MONEY IN YEMEN
                      AND LEBANON: MAXIMIZING THE
                     EFFECTIVENESS OF U.S. SECURITY
                      ASSISTANCE AND INTERNATIONAL
                     FINANCIAL INSTITUTION LENDING

                              ----------                              

                           EXECUTIVE SUMMARY

    During a September 27-October 2, 2009, Senate Foreign 
Relations Committee minority staff visit to Yemen and Lebanon, 
staff gathered information to contribute to two forthcoming 
committee reports, one on security assistance, and the other on 
lending by International Financial Institutions (IFIs). 
Although the circumstances facing Yemen and Lebanon differ 
greatly, the two countries were chosen because the security 
threats facing both have been serious; hence, they have both 
been major recipients of U.S. security assistance, particularly 
under Section 1206 of the National Defense Authorization Act. 
In addition, while both countries have received substantial IFI 
lending, significant structural reforms are urgently needed to 
tackle long-term development challenges.
    In both Yemen and Lebanon, although some problems persist 
in the management of the security assistance portfolios, the 
country teams have made a conscious effort to learn from past 
mistakes, and the U.S. Chiefs of Mission were exercising 
appropriate leadership over U.S. security assistance efforts. 
In both Yemen and Lebanon, U.S. security assistance has had a 
qualitative impact on the ability of the armed forces of the 
respective countries to counter terrorist threats. At the same 
time, in both countries, the United States and other 
international donors must guard against inappropriate uses of 
assistance. In Yemen, for example, the government may be 
tempted to divert U.S.-provided counter-terrorism assistance 
for use in the Houthi conflict in the North; in Lebanon, 
foreign aid donors must be mindful that without proper 
safeguards and transparency, local perceptions of favoritism in 
the apportionment of development assistance could exacerbate 
sectarian tensions. Finally, both Yemen and Lebanon are 
believed to receive substantial off-budget financial infusions 
from Saudi Arabia. While such cash transfers may help meet 
short-term needs, over the long term the lack of transparency 
surrounding them is unhealthy. Moreover, they may enable the 
perpetuation of poor governance practices, such as patronage.
    Among the key findings and recommendations are the 
following:
Yemen
   Yemen is in turmoil. Recent terrorist plots emanating from 
        Yemen against the United States and Western interests 
        have underscored that the threats emanating from a 
        resurgent al-Qaeda in the Arabian Peninsula (AQAP) pose 
        a direct danger to U.S. national security. Yemen is 
        simultaneously facing this and other security threats, 
        as well as impending natural resource debacles, such as 
        the depletion of its oil and water resources, and the 
        fundamental economic development challenges of a least 
        developed country. While the purpose of this staff 
        visit was not to find solutions to these myriad 
        problems, two things were clear:

                  1) The challenges facing Yemen are inter-
                related and cannot be addressed in isolation. 
                However dangerous and immediate the country's 
                security threats, they need to be dealt with in 
                the context of the country's deteriorating 
                socio-economic situation and persistent 
                governance challenges; and

                  2) The United States lacks the leverage to 
                resolve all of the problems facing Yemen on its 
                own. It must work with the international 
                community, including the IFIs, in addition to 
                the Republic of Yemen Government (ROYG) and 
                Yemeni civil society groups to urgently address 
                these challenges before they spin out of 
                control.

   The United States and the ROYG have different priorities 
        with respect to the myriad security threats that Yemen 
        confronts.  While the USG is focused on preventing al-
        Qaeda from making use of the country's ungoverned 
        spaces to recruit terrorists and launch terrorist 
        operations, President Saleh's top priority has been to 
        defeat the Houthi insurgency in the north. December 
        2009 saw a potential turning point, with Yemeni forces, 
        supported by the United States, escalating their 
        operations against al-Qaeda. Military airstrikes on 
        December 17 and 24, 2009 are said to have killed scores 
        of al-Qaeda operatives, including, reportedly, some 
        suicide bombers who were planning attacks against 
        Western interests in Sanaa. Prior to this campaign, the 
        ROYG was likely diverting U.S. counter-terrorism 
        assistance for use in the war against the Houthis, and 
        that temptation will persist. Sustaining ROYG 
        commitment to the fight against al-Qaeda will be 
        critical.

   This potential misuse of security assistance underscores 
        the importance of enhancing the current end-use 
        monitoring regime for U.S.-provided equipment. Indeed, 
        the existing end-use monitoring protocols in place have 
        revealed discrepancies between U.S. records of security 
        assistance and those that are in the possession of 
        Yemeni defense forces. The Defense Security Cooperation 
        Agency (DSCA), the Department of State, and Embassy's 
        Office of Military Cooperation (OMC) should work to 
        reconcile these differences.\1\ In addition, they 
        should conduct a thorough review of physical security 
        and accountability procedures at the Yemeni Special 
        Operations Forces (YSOF) compound.
---------------------------------------------------------------------------
    \1\ For background on the respective roles and responsibilities of 
the various actors, see the December 4, 2009, Congressional Research 
Service (CRS) report prepared by Specialist in International Affairs, 
Nina M. Serafino: ``Security Assistance Reform: Section 1206 Background 
and Issues for Congress,'' which explains that major foreign military 
assistance programs have traditionally been carried out under State 
Department authority, oversight and guidance, while the Defense 
Security Cooperation Agency (DSCA) has been responsible for 
implementation.

   Civilian-military coordination at Embassy Sanaa is now 
        excellent, with the Ambassador exercising Chief of 
        Mission authority, as appropriate, over military local 
        engagement efforts. Past problems resulting from a lack 
        of coordination underscore the importance of unity of 
        effort among all U.S. agencies. Making the most of a 
        situation in which the military has been given a bigger 
        role than is the norm in carrying out development 
        work--under the banner of countering extremism--the 
        USAID Mission in Yemen deserves credit for integrating 
        military counterparts into its efforts, investing 
---------------------------------------------------------------------------
        heavily in training and mentoring them, as appropriate.

   The Mission made the case that it would be well-served if 
        some of the reservists deployed to Yemen for short 
        (usually 6 months) tours could be re-deployed there for 
        follow-on deployments. Considering the substantial 
        investment the Mission makes in training these 
        reservists, and the limited tours of duty for which 
        they typically serve, this proposal is worthy of 
        consideration.
Lebanon
   Lebanon is still recovering from the 2006 war between 
        Israel and Hizballah, which inflicted great damage 
        around Beirut, much of southern Lebanon, and other 
        parts of the country. The 2007 fighting between 
        Lebanese Armed Forces and Fatah al-Islam at the Nahr 
        al-Barid Palestinian refugee camp led to further 
        casualties and damage. These circumstances necessitated 
        a marked increase in U.S. assistance to Lebanon, 
        particularly in the realm of security assistance, 
        totaling several hundreds of millions of dollars.

   Because of these massive infusions of aid, U.S. security 
        assistance programs in Lebanon have already come under 
        substantial oversight. Previous oversight reports have 
        recognized the concrete and measurable benefits that 
        this quick-impact assistance had on the ground. They 
        also identified some problems, many of them logistical 
        in nature, particularly from the early days of 
        implementation of assistance under Section 1206 of the 
        National Defense Authorization Act. While not all of 
        the problems have been eradicated, staff found that 
        U.S. officials had taken steps to learn from past 
        mistakes and avoid their duplication.

   Having received large sums of Section 1206 assistance over 
        the past several years, the U.S. security assistance 
        program for Lebanon is now relying on Foreign Military 
        Financing (FMF) for the longer-term sustainment needs, 
        with no 1206 assistance requested for FY 2010. This is 
        in keeping with the Congressional intent that the 1206 
        program be limited to helping partner nations confront 
        urgent and emerging counter-terrorism threats.

   The problem of official corruption was a recurring theme 
        during this visit, with several interlocutors pointing 
        to an overall lack of transparency, fueled by a lack of 
        accountability in the Government of Lebanon's budget 
        process, including off-budget revenues and 
        expenditures. In addition, many observers perceived an 
        unhealthy influence of the country's confessional 
        political system on the apportionment of state 
        resources. The U.S. Government, the IFIs and major 
        Western donors all have procedures in place to guard 
        against the misuse of foreign assistance. However, in 
        the face of real or perceived confessional biases in 
        the allocation of foreign assistance, donors should 
        encourage still greater transparency.

   One interlocutor argued that, in the face of a succession 
        of crises, the Government of Lebanon has become a 
        master at manipulating international donors, relying on 
        hand-outs rather than taking on much-needed structural 
        reforms. Without minimizing the seriousness of the 
        crises that Lebanon has confronted in recent years, 
        international donors should guard against the pitfalls 
        associated with a crisis-driven approach. Rather, 
        against the backdrop of Lebanon's recent political and 
        economic difficulties, international donors should 
        press for structural reforms to address imbalances, 
        including, importantly, Lebanon's crippling official 
        debt.

                              INTRODUCTION

    On September 27-October 2, 2009, Senate Foreign Relations 
Committee minority staff visited Yemen and Lebanon to gather 
information to contribute to two committee reports. The first 
concerns security assistance, and is in follow up to the 2006 
report, ``Embassies as Command Posts in the Anti-terror 
Campaign.'' The second is the last in a series on lending by 
international financial institutions (IFIs). Although the 
circumstances facing Yemen and Lebanon differ greatly, the two 
countries were chosen for this visit because they have both 
been confronted with serious security threats requiring 
substantial amounts of U.S. security assistance, particularly 
under Section 1206 of the National Defense Authorization 
Act.\2\ In addition, both countries will likely remain 
flashpoints in the foreseeable future, necessitating a long-
term, sustainable, security assistance strategy. In addition, 
both countries have received substantial IFI lending, but 
significant structural reforms are urgently needed to tackle 
long-term development challenges.
---------------------------------------------------------------------------
    \2\ Ibid.  This report provides a thorough review of the evolution 
of Section 1206 authority. Because Lebanon and Yemen are the second and 
third largest recipients of Section 1206 funding to date, totaling 
$105.5 million and $97.3 million, respectively, the report goes into a 
fair amount of detail about the composition of the respective 
assistance packages.
---------------------------------------------------------------------------
    With respect to Yemen, the purpose of the visit was not to 
find solutions to the myriad and urgent challenges facing that 
country, or the particular threat posed by al-Qaeda there, 
which has claimed responsibility for the December 25, 2009 
attempted bombing of a Detroit-bound airplane. Background on 
these issues is offered below, however, to provide context for 
the observations and recommendations for U.S. engagement. 
Lebanon, meanwhile, is still recovering from the 2006 war 
between Hizballah and Israel, and has since been subject to 
prolonged periods of political gridlock. Indeed, the visit took 
place against the backdrop of lengthy negotiations to form a 
government of national unity following that country's June 7 
elections. Therefore, the report offers background on the 
Lebanese political climate, including the sectarian politics 
behind these national unity talks, to provide context for staff 
observations on security assistance and IFI lending. In 
addition to key findings on those subjects, the report has 
sections on ``red flags'' that warrant further attention. 
Recommendations are in italics.

                                 YEMEN

                               Background

    Yemen is in turmoil; many analysts have characterized it as 
a ``failing'' or failed state. Its weak central government is 
led by President Ali Abdullah Saleh, who has been in power 
since the 1990 merger between North Yemen and South Yemen (and 
who was President of North Yemen from 1978 to 1990). There is 
no clear successor. Outside of the capital, the central 
government enjoys little legitimacy, resulting in large swaths 
of ungoverned spaces. The President relies on patronage to 
perpetuate his influence.

    Socio-economic Challenges: The poorest country in the Arab 
world, Yemen faces daunting economic development challenges, 
coupled with serious security threats. On the economic front, 
Yemen is quickly depleting its oil, which has generated over 75 
percent of its income. Water resources are also running out, 
largely as a result of poor resource management and a growing 
popular addiction to the mild narcotic qat, a water-intensive 
crop, the cultivation of which absorbs approximately one-third 
of the country's water. In addition, as a result of government 
subsidies, cultivation of qat has displaced that of other 
agricultural products, increasing the country's food 
insecurity.\3\ Demographic trends are only intensifying these 
problems: population growth exceeds 3.4 percent per year, and 
more than two-thirds of the population is under the age of 24. 
The unemployment rate was last officially estimated (in 2003) 
at 35 percent, and is probably higher. Literacy rates are about 
50 percent.\4\
---------------------------------------------------------------------------
    \3\ According to State Department, only 3% of Yemen's land is 
arable. The country has long been a food importer. In 2009 the World 
Food Programme provided $55 million in assistance to 1.6 million 
beneficiaries in Yemen.
    \4\ Statistics in this paragraph are widely cited in such reports 
as the State Department's Background Notes (http://www.state.gov/r/pa/
ei/bgn/35836.htm); the CIA World Factbook (https://www.cia.gov/library/ 
publications/the-world-factbook/geos/ym.html); and the reports of 
numerous non-governmental organizations.

    Security Threats: The security situation is extremely 
worrying. The Republic of Yemen Government (ROYG) is engaged in 
---------------------------------------------------------------------------
several ongoing conflicts:

   Al-Qaeda has long been active in Yemen, as evidenced by the 
        numerous attacks against Western targets for which it 
        has claimed responsibility, going back to the October 
        2000 attack on the USS Cole. As this report was going 
        to press, al-Qaeda claimed responsibility for the 
        December 25, 2009 attempted bombing of Northwest 
        Airlines flight 253 by the Nigerian-born, Yemeni-
        trained Umar Farouk Abdulmutallab; and on January 3, 
        2010, the U.S., British, and several other Western 
        Embassies in Sanaa temporarily closed, due to credible 
        threats of planned suicide attacks by al-Qaeda 
        operatives. Al-Qaeda twice launched attacks on the U.S. 
        Embassy in September 2008; the second of which resulted 
        16 dead, including the 6 attackers. In January 2009, 
        al-Qaeda affiliates in Yemen and Saudi Arabia merged to 
        form al-Qaeda in the Arabian Peninsula (AQAP). AQAP was 
        likely responsible for the June 2009 kidnapping and 
        murder/mutilation of nine foreign aid workers, as well 
        as the botched suicide bombing that targeted Saudi 
        Assistant Interior Minister Prince Mohammed bin Nayef 
        in August 2009. Yemen is the ancestral home of Osama 
        bin Laden, and a disproportionate number of foreign 
        fighters in Iraq and Afghanistan are said to have been 
        of Yemeni origin. Hundreds of these veterans may now be 
        returning to Yemen, as al-Qaeda seeks to exploit the 
        country's ungoverned spaces to plan and launch attacks.

   Since 2004, there have been several rounds of civil war 
        between al-Houthi guerrillas of the Shi'a Zaidi sect in 
        the North and ROYG forces. Fighting erupted again in 
        August, 2009 and has resulted in thousands of 
        casualties, and 150,000 displaced persons. The ROYG's 
        use of aerial bombardment and artillery has contributed 
        to the high toll of civilian casualties.

   Simmering resentment over perceived, and real, 
        disenfranchisement by residents of the South has 
        perpetuated unrest and irredentism. The latter half of 
        2009 has seen an uptick in clashes between southerners 
        and the now exclusively northern soldiers deployed in 
        the South. Recent calls for secession by former Saleh 
        ally Sheikh Tariq al-Fadhli raise the specter of civil 
        war.

   Finally, Yemen faces the increasing phenomenon of piracy 
        off the Somali coast. According to a report published 
        by the Carnegie Endowment for International Peace, 130 
        piracy incidents occurred in the Gulf of Aden in the 
        first half of 2009, compared to 111 in all of 2008.\5\
---------------------------------------------------------------------------
    \5\ Christopher Boucek, Yemen: Avoiding a Downward Spiral, Carnegie 
Papers, Carnegie Endowment for International Peace Middle East Program 
Number 102: September 2009, p. 16.

    What is the United States Government doing to help the ROYG 
confront these challenges, and how do we prioritize among them 
to best target our assistance? No doubt, the threat posed by 
AQAP is the most critical to U.S. national security interests, 
and the USG must do everything in its power to neutralize that 
threat. As Christopher Boucek argues in the above-mentioned 
Carnegie report, however, it would be a mistake to focus 
foreign aid--and the attention of policymakers--inordinately on 
seeking a military solution to Yemen's manifold problems. There 
is a clear linkage between Yemen's economic and social 
development challenges and its security threats. Indeed, the 
perceived--and real--lack of prospects for the future may be 
contributing to the appeal of Islamic extremism. As one Yemeni 
interlocutor put it: ``Either we give our young people hope, or 
someone else will give them an illusion.''
    The United States lacks the leverage to resolve the 
problems facing Yemen on its own. It must work urgently with 
ROYG and with partner civil society organizations in Yemen, and 
with like-minded partners in the international community, 
including the IFIs, and those with the most influence in Yemen, 
such as Saudi Arabia, urgently to address these challenges 
before they spin out of control.

                   U.S. Security Assistance to Yemen

Trends in U.S. Assistance to Yemen
    U.S. security assistance to the ROYG has increased 
dramatically in the past decade, as illustrated in the below 
table. Since the 2006 creation of Section 1206 authority in the 
National Defense Authorization Act, U.S. security assistance 
has been more heavily weighted to military- rather than 
civilian-funded programs: In FY 2006, Yemen received $4.3 
million in Section 1206; in FY 2007, it received $26 million. 
In FY 2009, that figure jumped to $66.8 million. Levels of 
Foreign Military Financing (FMF), administered by the State 
Department, have been more volatile. After zero funding in this 
category in FY 2001, Yemen benefited from a $20 million spike 
in FY 2002, with significant variations in following years.
    Economic development assistance, meanwhile, has seen a 
steady upward trajectory. USAID-funded development assistance 
has grown from zero in fiscal years 2001-2003 to $4.9 million 
in FY 2008; $11.2 million in FY 2009. USAID has also funded 
Global Health programs in Yemen since FY 2008 at about $3 
million/year. Economic Support Funds (ESF) have also steadily 
increased, from zero in FY 2001 to $15.2 million in FY 2007. 
After a temporary decrease in FY 2008 to $1.5 million, ESF shot 
back up to almost $20 million in FY 2009.
    In FY 2009, Yemen received just over $117 million in U.S. 
assistance, of which roughly $73 million (or 62 percent) was in 
the security domain. The balance went to ESF, Development 
Assistance (DA), Section 1207 Stabilization Programs, and 
Global Health. Some analysts have criticized this relative 
proportion of security assistance as indicative of a 
``misallocation of priorities'' in Yemen.\6\ The reality is 
more complex. In fact, the U.S. military is also supporting 
economic development and good governance. For example, the 
Special Operations Command/Central Command (SOCCENT) has been 
engaged in rural development programs in Yemen's tribal areas.
---------------------------------------------------------------------------
    \6\ Boucek, p. 22.
---------------------------------------------------------------------------
Red Flags
    Different Priorities:  The United States and the ROYG have 
different priorities vis-a-vis Yemen's security threats. While 
the USG is focused on preventing al-Qaeda from launching 
further terrorist attacks from Yemen, and has provided counter-
terrorism assistance to the ROYG for this purpose, President 
Saleh's top priority has been defeating the Houthi rebellion in 
the north. As a result of this difference in focus, there are 
serious concerns that U.S. counter-terrorism assistance, 
provided to assist the ROYG in combating al-Qaeda, has been 
diverted for use in the war against the Houthis.\7\ December 
2009 may mark a potential turning point in the convergence of 
priorities, when Yemeni forces, supported by the United States, 
escalated their operations against al-Qaeda. Military 
airstrikes on December 17 and 24, 2009 are said to have killed 
scores of al-Qaeda operatives, including, reportedly, some 
suicide bombers who were planning attacks against Western 
interests in Sanaa. Even so, the temptation to divert U.S. 
counter-terrorism assistance for use in the war against the 
Houthis will persist. Sustaining ROYG commitment to the fight 
against al-Qaeda will be critical.
---------------------------------------------------------------------------
    \7\ Although the ROYG often seeks to portray the war in the north 
as ``counterterrorist'' in nature and alleges that Iran is supporting 
and supplying weapons to the Houthis, these allegations have not been 
substantiated.

   The reported use of night-time raids in Saada raises 
        questions about whether the 1206-funded night-vision 
        equipment has been used in these raids.\8\
---------------------------------------------------------------------------
    \8\ It is not possible to establish whether these night-time raids 
were enabled by U.S.-provided NVGs. The Yemeni armed Forces have also 
purchased night vision equipment from Russia and other sources.

   Likewise, concerned about the possibility of the Yemeni Air 
        Force using propellant activated devices in aerial 
        campaign in the North, the Embassy has put a hold on 
        the provision of this equipment to the Yemeni Armed 
        Forces.

                                             U.S. Assistance to Yemen (In Millions of Historic Dollars) \9\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                 2010
                                                              2001     2002     2003     2004     2005     2006     2007     2008     2009     Request
--------------------------------------------------------------------------------------------------------------------------------------------------------
Development Assistance....................................        0        0        0      2.0        0        0      1.5      4.9     11.2           35
Food Aid..................................................     38.5      0.6     29.6     38.4        0     11.5        0      2.2        0            0
Economic Support Funds....................................        0      2.0      8.0     16.7      7.8     20.8     15.2      1.5     19.8            0
Foreign Military Financing................................        0       20      1.9     14.9     10.4      8.4      9.7      4.0      2.8         10.0
International Military Education Training.................      0.2      0.5      0.6      0.9      1.0      0.9      1.0      0.9      1.0          1.1
Nonproliferation, Antiterrorism, Demining and Related           1.2      0.8      0.8      0.5      1.9      0.2      2.3      2.5      2.5          3.6
 Programs.................................................
International Narcotics Control and Law Enforcement.......        0        0        0        0        0        0        0      0.5        0          1.0
NDAA Section 1206.........................................        0        0        0        0        0      4.3     26.0        0       67            0
NDAA Section 1207.........................................        0        0        0        0        0       10        0       10       10            0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\9\ To best reflect how much money was spent (not just planned for), where possible data reflects obligations, per fiscal year. Because of different
  U.S. Government accounting practices, however, this is not always possible. Therefore, data for Sections 1206 and 1207 reflects allocations, with data
  provided by the State Department's Office of the Coordinator for Foreign Assistance and the Congressional Research Service (CRS). All other data
  reflects obligations per fiscal year, with data through 2007 per the U.S. Agency for International Development's Greenbook (http://
  gbk.eads.usaidallnet.gov/). Data since that time comes from CRS.

   During the visit, the Embassy's FMF Officer expressed 
        uncertainty about whether there was a clear U.S. policy 
        prohibiting the use of U.S. security assistance in the 
        Houthi conflict, and, if so, how this policy was being 
        communicated to the ROYG. When staff mentioned this 
        officer's apparent need for guidance to Ambassador 
        Seche, he said the policy was clear, and that the OMC 
        Chief was aware of it, as was the Yemeni government. 
        But, he undertook to clarify to all OMC staff that U.S. 
        assistance should not be used against the Houthis. The 
        Ambassador also reviewed several instances in which 
        U.S. policy against using U.S.-provided security 
        assistance in the Houthi conflict had been conveyed to 
        top Yemeni leaders.

    Need for Improved End-Use Monitoring: OMC engages in end-
use monitoring, with an inspection of night-vision equipment 
provided to the Counter-terrorism Unit and the Yemeni Special 
Operations Forces (YSOF) conducted as recently as June, and 
July, 2009, respectively. Several USG interlocutors expressed 
the view that the existing system of biannual monitoring is 
insufficient to determine with precision how U.S. assistance is 
being used, however. Moreover, in the most recent round of 
inspections, the FMF officer found that much equipment was 
unaccounted for. There were also significant discrepancies 
between DSCA's data on the quantity that had been provided and 
that which was in the Yemeni forces' inventories.
Recommendation:
          In light of the above concerns about the Yemeni Armed 
        Forces' use of U.S. security assistance against the 
        Houthis, the USG should develop a more robust end-use 
        monitoring regime for Yemen, and for any other country 
        where there is ongoing armed conflict in which U.S.-
        provided CT resources could be diverted.\10\
---------------------------------------------------------------------------
    \10\ Ambassador Seche told staff on October 20, 2009 that he had 
already directed OMC to develop a much more rigorous system. On 
November 11, 2009, State Department officials confirmed that such a 
system is being developed.

          In addition, in accordance with OMC's 
        recommendations, DSCA, the Department of State, and OMC 
        should conduct a thorough review of physical security 
        and accountability procedures at the YSOF compound, 
        making improvements a condition for further U.S. 
        military assistance. A DSCA-appointed and -funded team 
---------------------------------------------------------------------------
        should be sent to Yemen TDY to assist in this review.

    DSCA-OMC Process Problems:  OMC reported numerous 
breakdowns in communications with DSCA. As OMC representatives 
put it, ``DSCA needs to be revamped. It needs to be more 
accountable to Embassies.'' This observation tracks with 
findings in a recent report issued jointly by the Inspectors-
General of the Departments of State and Defense on Section 1206 
assistance, which pointed to numerous instances of problems in 
information flow between DSCA and those who are responsible for 
security assistance at foreign embassies. Such problems 
concerned the status of assistance actually delivered, and even 
the quantity of materiel agreed in contracts.\11\
---------------------------------------------------------------------------
    \11\ See the Interagency Evaluation of the 1206 Global Train and 
Equip Program, Inspectors General of the U.S. Department of Defense 
(Report No. ID-2009-007) and U.S. Department of State (Report No. ISP-
I-09-69), August 31, 2009, in particular Appendix H: Lebanon Case 
Study, pp. 64-66.
---------------------------------------------------------------------------
Pros and Cons of Increasing the Military Involvement in Foreign 
        Assistance
    Asked for his views about the foreign policy implications 
of the growing military role in foreign assistance, Ambassador 
Seche expressed concerns about potential pitfalls if Chief of 
Mission authority in coordinating and overseeing such programs 
is circumvented. For example, the above-mentioned SOCCENT rural 
development program reportedly got off to a rocky start due to 
misperceptions on the part of tribal leaders about what the 
USG's intentions were. Fortunately, an embarrassing 
international incident was avoided. As a result of this 
incident, the Ambassador has more firmly asserted his primacy 
as Chief of Mission in approving such operations. In addition, 
the SOCCENT team learned some important lessons about the need 
to fully integrate its efforts with the Embassy's broader 
vision, and to take advantage of the regional expertise and 
cultural knowledge of their State Department and USAID 
colleagues.
    Asked about the pros and cons of using military resources 
to conduct the kinds of economic development activity that 
traditionally has been the purview of civilian agencies, 
Embassy staff indicated that while USAID has the comparative 
advantage with respect to conceptualizing, implementing, and 
overseeing development assistance, in Yemen at least, the 
Mission has had to learn to live with a bigger military role in 
this field. Many Embassy officers have chosen to embrace this 
reality, pointing out the advantages of being able to draw on 
the U.S. Military's vast personnel and financial resources. In 
addition, because these military officers operate under the 
authority of their respective commands, as opposed to under 
Chief of Mission authority, they are allowed to travel to some 
areas of the country that are off-limits to civilian personnel. 
Due to Embassy travel restrictions for civilian employees, 
USAID officers have not been out to visit some USAID-funded 
projects in many years.
Civ-Mil Coordination Within the Embassy
    The need for better civilian-military coordination within 
the Embassy was identified in the 2006 ``Embassies as Command 
Posts'' report. Ambassador Seche clearly takes seriously the 
exercise of Chief of Mission authority in these matters. He 
chairs bi-weekly meetings of the Embassy's inter-agency 
Counter-terrorism Working Group. Indeed, the military 
assistance program in Yemen has improved, thanks to this 
coordination between the military and civilian sides of the 
Embassy. Asked to characterize internal Embassy coordination, 
one military officer said it was ``phenomenal.'' The USAID 
Mission Director agreed, praising the ``unity of purpose'' 
pursued by the different actors on the country team.
    As evidence of the military's full integration, the USAID 
Mission Director pointed to the fact that military 
representatives had been invited to, and participated 
constructively in, USAID's strategic planning conference in 
Cairo, at which the Mission's new three-year strategy was 
developed. The SOCCENT Forward Lt. Col. in country said his 
team ``wouldn't think of doing anything that had not been fully 
coordinated with the country team.'' Staff found this 
commitment to coordination and unity of purpose exemplary. No 
doubt, the personalities of the Embassy's leaders have 
contributed to this seamlessness, but staff found that the 
structures are in place to sustain it.
Regional Expertise and Continuity of Effort
    Another of the areas of potential pitfall identified in the 
``Embassies as Command Posts'' report was the deployment of 
military personnel with limited regional or linguistic 
expertise for short (usually six-month) tours. This phenomenon 
continues to be a problem in Yemen. The USAID Mission Director 
said he and his team make a substantial investment in training 
new military arrivals with whom they must work closely in 
carrying out joint programs. He emphasized that USAID is 
prepared to make this investment. He would like to see the 
Mission get more return on this investment, however. He 
suggested that reservists who are activated for six-month tours 
in Yemen as Civilian Affairs Officers or with the Military 
Information Support Team (MIST) return to their country of 
assignment for a follow-on deployment.
Recommendation:
          In Yemen, where USAID has invested heavily in 
        training these reservists in development policy 
        management and local culture, it is understandable that 
        the Mission would want to improve returns on this 
        investment. Such follow-on re-deployments also merit 
        consideration more broadly.

    USAID/Sanaa is actively seeking the redeployment of two 
such MIST team members, whose work has been quite well 
received. SOCCENT has also learned that in a country/region 
where local culture is built on relationships, episodic 
engagements will not succeed in delivering results. It has 
therefore embedded teams of trainers with the host government 
counterpart groups.
FMF vs. 1206
    Of the host government officials with whom staff spoke, 
there was little to no understanding of the differences between 
FMF and Section 1206-funded assistance. They did not 
distinguish at all between military-administered or civilian-
administered programs. Their focus, understandably, was on the 
end result, i.e., what kind of materiel and training assistance 
could be provided, and how quickly.
    When asked about the relative advantages of 1206, as 
opposed to FMF, representatives from the Office of Military 
Cooperation (OMC) expressed understanding for the relative 
slowness of the FMF process, from the Letter of Approval phase 
to actual delivery of materiel. Because FMF is meant for long-
term sustainment, they said, long lead times (i.e., as much as 
three years of advance planning) can be built into the planning 
process. Section 1206 funds, while meant to have a quicker 
impact to deal with urgent needs, also suffer from delays, 
however, since a ``pseudo-FMF'' process is followed once the 
funds have been approved.
    To help speed up the 1206 process, Embassy Sanaa's OMC team 
offered the suggestion that some of the steps in the approval 
process should be allowed to be pursued simultaneously, rather 
than sequentially. In addition, to mitigate the sometimes long 
lead times in procurement, one OMC officer suggested that the 
Section 1206 authority be amended to allow for disbursement for 
approved projects over a two-year period.\12\ Finally, to avoid 
situations in which Posts invest significant resources in 
developing proposals that end up not being approved, the 
Combatant Commands, with input from the State Department, 
should provide Embassies with a sense of the likelihood that 
their Section 1206 proposals would receive funding before the 
Embassies spend too much time in proposal development phase.
---------------------------------------------------------------------------
    \12\ In fact, in the FY 2009 Defense Authorization Act, the 
Congress provided authority for Section 1206 funds to be used in 
consecutive fiscal years, i.e., funds for a program that begins in one 
fiscal year may be used for that program in the next fiscal year. It is 
not likely that 1206 authorities would be expanded further for multi-
year funding. Although the idea may warrant consideration from the 
perspective of logistical effectiveness, the notion of multi-year 
programming may run counter to Congressional intent in creating the 
1206 mechanism to help partner nations combat urgent and emerging 
terrorist threats. See the above-referenced CRS report on ``Security 
Assistance Reform: Section 1206 Background and Issues for Congress'' 
for a review of the legislative history and evolution of Section 1206 
legislation.
---------------------------------------------------------------------------
Recommendation:
          These suggestions have the potential to improve 
        effectiveness of the 1206 program and warrant further 
        study.
Constructive Criticism from Host Government End Users
    The Chairman of the Yemeni Coast Guard (YCG) expressed 
gratitude for the significant materiel support and training 
that the USG has provided the Yemeni Coast Guard. Specifically, 
the initial tranche of 44-foot motorized lifeboats allowed the 
YCG to start operating. Asked for constructive criticism about 
the program, the YCG requested additional assistance, more 
timely delivery, and in one case, easier-to-maintain motors:

   A second tranche of Section 1206-funded boats, some 7-
        meters and some 13-meters, boosted the YCG's ability in 
        the realm of protection, search and rescue, and 
        training. These boats have limited endurance in the 
        sea, however. The YCG now seeks to acquire medium-sized 
        boats to conduct anti-piracy, anti-smuggling, and anti-
        terror missions. Without these boats, the YCG is unable 
        to respond to Coalition Forces' warnings about Somali 
        pirates in international shipping lanes. (The USG will 
        provide two 87-foot boats funded under Section 1206, 
        but delivery is not expected in 2011.)

   The Mercury outboard motors provided in some of the boats 
        were deemed ``too sophisticated'' (with their advanced 
        electronic systems) for the YCG to maintain. The YCG 
        expressed preference for Yamaha equivalents, which is 
        better understood by local mechanics and for which 
        spare parts are more easily accessible. (U.S. Marines 
        were able to repair two out of four of these motors on 
        a recent training exercise.)

   Approximately two years ago, the Army Corps of Engineers 
        agreed to build a pier at the Gulf of Aden. This FMF-
        funded contract was opened for bidding, but no U.S. 
        companies bid, either because of the security situation 
        in Yemen or the relatively small size of the project. 
        The YCG fulfilled its part of the agreement by 
        preparing the infrastructure. The Coast Guard was 
        concerned about the length of time that had lapsed 
        without U.S. fulfillment of its commitment.

    Specific areas for improvement cited by the Yemeni Air 
Force Colonel in charge of international cooperation include:

   Provision of English language labs: Through a mix-up at the 
        port of entry, equipment and materials to create 
        English language instruction labs, which had been 
        designated to go to the Air Force, ended up being 
        redirected to the YCG.

   Difficulties in Parts Repair Process: The Air Force has run 
        into repeated problems when it sends parts back to the 
        United States for repair. Many contractors erroneously 
        believe that Yemen is not eligible to receive military 
        assistance, so they disallow third-party transfers.

   A couple years ago, Yemen requested Excess Aerospace Ground 
        Equipment (AGE). The equipment was based in Europe. 
        Unfortunately, a contract was never let for the 
        refurbishment of this equipment, since it was unclear 
        which of the services would be responsible for funding 
        it. According to OMC, DSCA recently instructed the Air 
        Force to take responsibility for this project.
 An Avoidable Problem in Provision of Excess Defense Articles (EDA)
    Yemen benefited from Excess Defense Articles amounting, on 
paper at least, to $36.3 million in FY 2007. According to OMC 
representatives, this number is artificially inflated, as Yemen 
is eligible to purchase EDA at drastically discounted prices. 
The EDA provided consisted of medical supplies, uniforms, and 
personal equipment. Unfortunately, the Ministry of Defense 
subsequently rejected some of the medical equipment provided, 
probably because some of it was Israeli-origin.\13\ Because 
most products in the EDA catalogue are not accompanied by 
descriptive photographs (which in this case would have shown 
Hebrew writing), the origin of the equipment was not known at 
the time of order.
---------------------------------------------------------------------------
    \13\ Of course, the United States actively opposes the Arab League 
boycott of Israel. While some Arab states do not observe the boycott, 
Yemen does.
---------------------------------------------------------------------------
1206: Consultations with Host Government vs. Managing Expectations
    Noting the recommendation in the August 31, 2009 joint 
report by the Inspectors General of State and Defense, OMC 
officials said it would not be helpful to engage in 
consultations with Yemeni military authorities in the 1206 
proposal development phase. They expressed the opinion that the 
partnership is not mature enough to allow consultations prior 
to approval. To do so would risk raising expectations on the 
part of their Yemeni counterparts. OMC representatives 
explained that they make judgments based on their knowledge of 
the Yemeni military's needs.

                              IFI Lending

Overview of Development Issues and International Donor Assistance
    Yemen is beset by extreme poverty, economic stagnation, 
explosive population growth, deficient health and education 
systems, and rapidly depleting natural resources, all made 
worse by weak governance and endemic corruption. The country 
ranks 153rd on the Human Development Index. Yemen was already 
falling behind in its efforts to reach most Millennium 
Development Goals; the global economic crisis has compounded 
its economic woes, both from falling oil revenues and decreased 
remittances from Yemenis working abroad. The UN Development 
Program considers Yemen a least developed country (LDC), and 
the country's socio-economic indicators bear this out. The $16 
in per capita donor assistance it receives is well below 
international averages for LDCs, however. (By comparison, Benin 
receives $36, and Mozambique $51, respectively, in per capita 
assistance.)
    Since its recent pledge of $83 million per year in 
development assistance for the next five years, the United 
Kingdom has become Yemen's largest bilateral donor. At a 
November 2006 donors conference in Paris, international donors 
pledged $5 billion for the period 2007-2010. Donors included: 
Saudi Arabia, the Arab Fund for Socio-Economic Development, 
Qatar, the United Arab Emirates, the World Bank Group, the Arab 
monetary Fund, the Islamic Development Bank, Kuwait, 
Netherlands, Germany, the European Union, and the United 
States. For a number of reasons, many of the funds pledged at 
Paris have not yet materialized however. First, Yemen has not 
met some of the reform conditions some donors tie to their aid. 
In addition, implementation of projects is often constrained by 
Yemen's absorptive and capacity issues. That said, it should 
also be taken into consideration that Yemen is believed to 
receive substantial and regular off-budget financial infusions 
from Saudi Arabia. Many commentators view such cash transfers 
as deleterious, contributing to a lack of transparency and 
enabling the perpetuation of poor governance practices, such as 
patronage.
The World Bank's Program
    Yemen has experienced periods of steep decline in 
international donor assistance, following the 1991 Gulf War, 
when Yemen supported Saddam Hussein; and following its own 
civil war in 1994. Since this latter period, Yemen has been 
gradually rebuilding its relationships with development 
partners, and in recent years a number of donors have increased 
their involvement in Yemen, including beyond formerly project-
based assistance.
    According to the World Bank Resident Representative, the 
Bank has about $1 billion in existing projects in Yemen, some 
of which have been ongoing for 4-5 years. The Bank's annual 
lending is between $120-130 million. For the past two years, 
Yemen has benefited from International Development Association 
(IDA) grants; previously World Bank assistance took the form of 
credits. The Bank's assistance pledged at the 2006 Consultative 
Group (CG) meeting on Yemen account for about 8 percent of 
total pledges (compared to about 50 percent prior to the CG). 
The International Monetary Fund (IMF) does not have a permanent 
presence in Yemen but provides advisory services via the 
Article IV process. The last Article IV consultations took 
place from October 21 to November 3, 2008 in Sanaa.
    The Bank's objective in Yemen is to facilitate Yemen's 
further progress toward the Millennium Development Goals. These 
goals, in turn, are in sync with the ROYG's stated goals, as 
articulated in the National Reform Agenda, the focus of which 
is on human development, including education and health; water 
resource management; and good governance. The Bank measures the 
effectiveness of its programs in accordance with institutional 
standards, i.e., it produces Project Completion Reports when a 
project closes. The Bank brings out a new team not involved in 
the planning or implementation of the project to assess the 
World Bank's role and the government's role and solicits 
government comments. Before the report is made public, it is 
subject to review by the Independent Evaluation Department at 
the World Bank in Washington.
 Need for Private Sector Investment
    Increased foreign direct investment (FDI), as well as 
domestic investment, will be critical if Yemen is to create 
needed jobs--and hope for the future--among its increasing 
population of young job seekers. According to the 2009 report 
of the UN Conference on Trade and Development, Yemen is 
experiencing a downward trend in FDI inflows. Gross domestic 
investment as a percentage of GDP has also declined for the 
past two years. In the face of falling oil revenues and its 
rapidly depleting oil sector, the ROYG had been putting its 
hopes in the development of the liquefied natural gas (LNG) 
sector. As the Country Director for the International Finance 
Corporation put it, however, the slump in the international 
market for LNG renders this strategy no longer viable. He made 
the case that, ``If Yemen's economic development prospects are 
to have any success, it will be as the result of very time-
consuming, hard-slogging micro-financing.'' There are no quick 
fixes. Right now, he said, there is no coordination among 
donors on private sector development--a reality he intended to 
change. Nor were there any micro-finance banks based in Yemen, 
although one--al-Amal--has announced plans to open there.
Recommendation:
           To the extent that micro-finance banks need to be 
        induced to enter the Yemeni market, international 
        donors should provide incentives. Similarly, the 
        international donor community in Yemen and the ROYG 
        itself should focus more attention--and resources--on 
        private sector development. The IFC has thus far 
        provided business education training to 26,000 
        graduates, many of whom will become trainers 
        themselves. Such activities should be expanded and 
        built upon.
World Bank Investigative Panel: Oversight Run Amuck
    On June 18, 2009, the World Bank issued a 167-page World 
Bank Inspection Panel Report on an Institutional Reform 
Development Policy Grant, in which a poorly documented 
complaint on the part of a Yemen-based non-governmental 
organization was scrutinized in minute detail.\14\ Asked about 
how many staff hours had been spent on reviewing and explaining 
the Bank's actions in response to the group's ill-conceived 
accusations, the Bank's Resident Director admitted that an 
inordinate amount of staff time and effort, including at the 
executive level, had gone into this process. He explained that 
there had been political pressure in Washington to look into 
this case, since it was the first complaint ever received from 
the Middle East/North African region.
---------------------------------------------------------------------------
    \14\ The Inspection Panel: Report No. 48995-YE Report and 
Recommendation: Yemen: Institutional Reform Development Policy Grant 
(Grant No. H336-YEM), June 18, 2009.
---------------------------------------------------------------------------
Recommendation:
          This case was not worthy of the substantial staff 
        time and resources that the Bank expended in responding 
        to it. The U.S. Executive Director to the World Bank 
        should weigh in with Bank leadership to ensure that 
        some threshold of credibility is established prior to 
        commitment of Bank resources in investigative panels.
Parliamentary Oversight
    While the Yemeni Parliament does not challenge the 
Executive Branch in exercising its oversight prerogatives, it 
has been more vigorous with respect to reviewing World Bank 
lending. In some cases, this has led to delays in project 
implementation, in one recent case, a 24-month delay. 
Nonetheless, the World Bank Resident Representative welcomed 
the Parliamentary role as ``healthy.''
 Empowering Reform From Within
    Unhappy with the slow pace and uneven results of Yemen's 
reform efforts, a small group of largely Western-educated and 
well-connected intellectuals and technocrats, under the 
auspices of the President's son, developed a targeted action 
plan to focus the government's short- to medium-term reform 
efforts. This group took into consideration the Government's 
Third Five-Year Plan for Poverty Reduction, as well as other 
existing plans and strategies, but determined that these 
various plans sought to take on too many challenges at once. 
They therefore developed 10 priorities on which the ROYG should 
focus for the next year. Indeed, when staff asked the Vice 
Minister of Planning and International Cooperation to describe 
the ROYG's development strategy, he said that this 10-point 
plan was now the operating document. The 10 points are not 
perfect; they do not address head on the need to eliminate 
government subsidies for diesel, for example, relying instead 
on a strategy of seeking lower prices on the international 
market to reduce costs. That said, because this plan is 
``locally owned,'' in the words of one of its drafters, it 
stands a greater chance of success than reforms mandated by 
foreign donors.
Recommendation:
          The international donor community should work to 
        empower and support such locally owned reform 
        processes.

                                LEBANON

                               Background

    Lebanon and the United States have traditionally enjoyed 
close relations, reflecting the countries' cultural and 
political ties, as well as the bonds cultivated by a large 
Lebanese-American community. Lebanon is a democracy, but the 
country's democratic processes and institutions reflect 
entrenched confessional political affiliations. By agreement 
since independence in 1943, and affirmed in the 1989 Ta'if 
Agreement, the country's top three constitutional positions are 
reserved for citizens from specific religious groups: the 
President is Maronite Christian; the Prime Minister is Sunni 
Muslim; and the Speaker of Parliament is Shi'a Muslim. 
Confessional politics can be messy, as was seen in the lengthy 
period of negotiations to form a national unity government 
following the June 7th elections. The result was five months of 
inertia, as the caretaker government was not empowered to make 
significant decisions, including on security assistance and 
international financial institution lending.
    Further complicating matters, the Parliament has not passed 
a budget for the past five years. Official guidance allows 
Ministries to spend 1/12 of the previous year's expenditures 
each month, but a widening deficit suggests that more is being 
spent. Moreover, the substantial off-budget aid that the GOL is 
believed to receive from Saudi Arabia is not accounted for, 
contributing to a general lack of fiscal accountability.\15\
---------------------------------------------------------------------------
    \15\ For a general discussion on the need for fiscal transparency 
in Lebanon, see the 2009 report on Lebanon by the e-Standards Forum of 
the Financial Standards Foundation: http://estandardsforum.org/lebanon/
standards/code-of-good-practices-on-transparency-in-fiscal-policy.
---------------------------------------------------------------------------
    It must also be taken into consideration that Lebanon is 
still recovering from the 2006 war between Israel and 
Hizballah, which left much of southern Lebanon and other parts 
of the country in ruins. The 2007 fighting between Lebanese 
Armed Forces and Fatah al-Islam at the Nahr al-Barid 
Palestinian refugee camp led to further casualties and damage. 
According to the State Department, over $3.7 billion in 
civilian infrastructure was destroyed in both conflicts and 
thousands were displaced. Postwar donors' conferences in 
Stockholm in August 2006 and Paris in 2007 resulted in about $8 
billion in pledges of mostly in-kind assistance, much of which 
was conditioned on economic reforms. U.S. assistance to Lebanon 
increased markedly after the 2006 war and even more so in the 
aftermath of the Nahr al-Barid conflict.
    Finally, no study of the impact of U.S. programs or 
assistance in Lebanon would be complete without taking into 
consideration the constraints imposed by the security situation 
there. Specifically, all U.S. Direct Hire employees must live 
on the Embassy compound. The Embassy's current facility is 
operating at full capacity with only very limited options for 
expansion. Employees' movements outside the compound must take 
place in armored vehicles with bodyguard protection, for which 
there are finite resources. In the words of the Deputy Chief of 
Mission, this reality ``effects everything we do--it limits 
everything we do.'' For example, the USAID Mission is comprised 
of two US Direct Hires, but programs comparable in magnitude to 
the $100 million it will soon be managing would be staffed by 
many more in other countries. All too often, requests for 
official visits to Lebanon end up being denied, simply because 
there is not sufficient space to house the visitors. The 
Embassy is currently engaged in negotiations to purchase a 
property on which to build a new Embassy compound (NEC) that 
would be able to meet anticipated security and infrastructure 
needs, and the State Department has identified funding for this 
construction starting in 2011.
Recommendation:
          Given the importance of U.S. interests in Lebanon and 
        the constraints placed on pursuing those interests by 
        the current infrastructure limitations, the Department 
        should, within existing budgetary resources, make the 
        acquisition of land and building of a NEC a high 
        priority, applying diplomatic pressure on those in a 
        position to influence this outcome, as appropriate.

                               Red Flags

   The problem of official corruption was a recurring theme 
        during this visit, with several interlocutors pointing 
        to an overall lack of transparency, fueled by a lack of 
        accountability in the official budget process, as well 
        as off-budget revenues and expenditures. Many observers 
        also perceive an unhealthy influence of the country's 
        confessional political system on the apportionment of 
        state resources. Speaking to the specific problems of 
        corruption in the management of international donor 
        assistance, one official charged that, ``The entire 
        system is corrupt and inefficient.'' He cited as 
        examples cases in which waste water treatment plants 
        were built with no connection to houses; roads were 
        built before plumbing had been installed, requiring the 
        newly constructed roads to be torn up and re-
        constructed. He attributed some of these problems to a 
        ``shopping list approach'' to foreign aid, and the 
        absence of national priorities or a commitment to 
        exploiting synergies.

   Manipulation of Crises: One interlocutor argued that, in 
        the face of a succession of crises, the GOL has become 
        a master at manipulating international donors, relying 
        on hand-outs rather than taking on much-needed 
        structural reforms. ``The whole international community 
        has been blackmailed for ages. We don't need more 
        money. We need to change the rules of the game. We need 
        to change the structure. We need to break our 
        dependence on foreign aid.''
Recommendation:
          Without minimizing the seriousness of the crises that 
        Lebanon has confronted in recent years, the United 
        States Government and other international donors should 
        guard against this phenomenon. Moreover, it should be 
        kept in mind that, while crises can be used an excuse 
        for inaction, they can also be catalysts for addressing 
        difficult issues.

                  U.S. Security Assistance to Lebanon

Trends in U.S. Assistance
    As documented in the chart below, U.S. assistance to 
Lebanon has mushroomed in recent years. As recently as FY 2004, 
the United States provided Lebanon with little security 
assistance. There was no Foreign Military Financing (FMF) 
program, and funds for International Military Education and 
Training (IMET) were limited to $800,000. The events of 2006 
changed that. Hizballah acted as an independent militia in 
provoking and conducting war with Israel in the summer; it 
later sought to topple Lebanon's elected government. Thus, the 
United States vastly increased its security assistance to 
Lebanon to help enhance the effectiveness of its armed forces 
and their ability to rein in Hizballah. This assistance has 
taken the form of FMF, which has increased dramatically; and 
IMET, which has increased only moderately; in addition to 
significant infusions of assistance under Sections 1206, of 
which Lebanon has been one of the biggest beneficiaries; and 
1207 of the Defense Authorization Act. In addition, in recent 
years Lebanon has benefited from over $60 million in 
International Narcotics Control and Law Enforcement Assistance 
(INCLE) and about $19 million in Nonproliferation, Anti-
terrorism, Demining, and related programs (NADR).
    Economic Support Funds (ESF) have also increased 
appreciably. From a baseline of $33.2 million in ESF in FY 
2004, the figure jumped to $61.9 million in FY 2006 and $137.4 
million in FY 2007. ESF in FY 2008 and 2009 was also 
substantial, but less than the 2007 peak figure. Most USAID 
funding in Lebanon has been provided through the Office of 
Transition Initiatives, which went from zero in FY 2005 for 
$39.7 million in FY 2006, and $25.7 million in FY 2007. Food 
aid also spiked during FY 2006.
Continuing Oversight Leads to Improved Operations
    Because Lebanon has been a major recipient of security 
assistance, it has already come under substantial 
oversight.\19\ These efforts have recognized the timeliness and 
effectiveness of U.S. security assistance, pointing to tactical 
data, such as the number of M-113 tanks that were made mission-
capable as a result of Section 1206 assistance, and the number 
of bombing raids and medical evacuation flights flown with UH-
1's in the Nahr al-Barid conflict. In addition, the Lebanese 
Armed Forces (LAF) earned high marks for following up on the 
1206 program with FMF and FMS investment to make 1206-funded 
capabilities sustainable over the long term. Not surprisingly, 
the reports also identified problems, particularly from the 
early days of Section 1206 implementation. The purpose of this 
report is not to re-hash previously published findings. 
However, staff did ask interlocutors in Lebanon about the 
extent to which they have made progress in resolving the more 
serious problems identified in these reports. For example:
---------------------------------------------------------------------------
    \19\ In addition to the committee's own Embassies as Command Posts 
in the Anti-Terror Campaign: A Report to Members of the Committee on 
Foreign Relations, United States Senate, of December 15, 2006, see 
Interagency Evaluation of the 1206 Global Train and Equip Program, 
Inspectors General of the U.S. Department of Defense and U.S. 
Department of State, August 31, 2009; as well as Assessments of the 
Impact of 1206-Funded Projects in Selected Countries: Lebanon, 
Pakistan, Yemen, Sao Tome and Principe, by Eric Thompson and Patricio 
Asfura-Heim for CNA Analysis and Solutions, July 2008. The Government 
Accountability Office is also currently undertaking a review of Section 
1206, at the conclusion of which it will publish its findings.

   The DOD and State Inspectors General (IGs) identified a 
        ``lack of cost management'' in one case in which the 
        USG paid $779,000 in fees to deliver spare parts for 
        UH-IH helicopters valued at $598,000. In addition, the 
        IGs determined that over $4 million in Section 1206 
        assistance had not been obligated prior to the end of 
        the fiscal year--``a lost opportunity to provide the 
        vetted and approved assistance.'' According to 
        representatives of Embassy Beirut's Office of Defense 
        Cooperation (ODC), in both cases, problems stemmed from 
        the difficulties associated with obligating the one-
        year monies of Section 1206. Although such difficulties 
        persist, they reported that the Embassy has been 
---------------------------------------------------------------------------
        successful in streamlining the 1206 process.

   The ODC is working with the LAF to overcome one of the 
        other deficiencies cited in the IGs' report, i.e., a 
        crippling lack of spare parts and tack shoes for the 
        LAF's M-113 armored personnel carriers. They have 
        opened a new case to refurbish the M-113s, since the 
        spare parts that had been envisioned in an earlier 1206 
        case ended up being obsolete.

   The IGs identified multiple discrepancies between 
        information available to DSCA and ODC about the status 
        of 1206 cases. In several cases, DSCA reported that 
        assistance that had been delivered to the Lebanese 
        Armed Forces, while ODC reported that such assistance 
        had not been delivered. The fact that the IGs were not 
        able to reconcile these differences was telling. DSCA 
        and ODC/Beirut have been working to address this 
        problem through weekly conference calls.
Recommendation:
           The Administration should develop a centralized 
        information management system, with appropriate checks 
        and balances for accuracy, to accurately track the 
        status of all Section 1206 assistance.

                                            U.S. Assistance to Lebanon (In Millions of Historic Dollars) \16\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                2010
                                                                2004         2005         2006         2007          2008         2009         Request
--------------------------------------------------------------------------------------------------------------------------------------------------------
Development Assistance....................................         0.5          3.8          3.5           6.4            0             0             0
Food Aid..................................................           0          0.1         13.1           0.4            0             0             0
Economic Support Funds....................................        33.2         18.7         61.9         137.4         44.6          67.5         109.0
Foreign Military Financing................................           0            0         29.7     4.8+ \17\          6.9     159.7+ 74           100
                                                                                                           220
International Military Education Training.................         0.7          0.8          0.8           0.9          1.5           2.1           2.5
Nonproliferation, Antiterrorism, Demining and Related              0.1          0.1          1.9           9.8          4.7           4.6           6.8
 Programs.................................................
International Narcotics Control and Law Enforcement.......           0            0            0   0.2+ \18\ 60         0.5           6.0          20.0
NDAA Section 1206.........................................           0            0         10.5          30.6         15.1          49.3             0
NDAA Section 1207.........................................           0            0         10.0             0         10.0          10.0             0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\16\ To best reflect how much money was spent (not just planned for), where possible data reflects obligations, per fiscal year. Because of different
  U.S. Government accounting practices, however, this is not always possible. Therefore, data for Sections 1206 and 1207, as well as the monies
  appropriated in the 2007 and 2009 supplemental spending bills, reflects allocations, with data provided by the State Department's Office of the
  Coordinator for Foreign Assistance and CRS. All other data reflects obligations per fiscal year, with data through 2007 per the U.S. Agency for
  International Development's Greenbook (http://gbk.eads.usaidallnet.gov). Data since that time comes from the Congressional Research Service (CRS).
\17\ In supplemental funding bills for FYs 2007 and 2009, Lebanon benefited from additional allocations for FMF in the amounts of $220 million and $74
  million, respectively.
\18\ Similarly, supplemental funding for FY 2007 allowed for allocation of an additional $60 million in INCLE funding.

Internal and External Coordination
    The Embassy demonstrated excellent internal coordination on 
foreign assistance, with the Ambassador and DCM actively 
overseeing policy and coordination on the full range of issues 
associated with multiple security, reconstruction, and 
development assistance programs. On security issues, either the 
Ambassador or DCM chairs an interagency core group that meets 
weekly. In addition, the Embassy convened a group of 
international donors of security assistance to coordinate plans 
and action in that realm. Staff had the opportunity to meet 
with this group, which gathers every six-eight weeks, and which 
has sub-groups on border security, rule of law assistance, and 
assistance to the LAF. The U.S. Embassy maintains a matrix to 
track all international security assistance that it shares with 
that group.
    As a result of this coordination, there was widespread 
agreement among donors that the Lebanese Government, and the 
LAF in particular, needs to develop a national security 
strategy. In the words of a British defense official, thus far, 
the LAF's approach has been tactical -- built around the kinds 
of materiel and other assistance it has been able to receive 
from donors. His Spanish counterpart agreed, concluding that 
the contrary views sometimes expressed by the Defense Minister 
and the LAF Commander were reflective of the absence of a grand 
strategy. Donors recognized that confessional loyalties are a 
key factor.
FMF vs. 1206
    U.S. security assistance to Lebanon has made a qualitative 
difference in the LAF's counter-terrorism abilities. In the 
words of an ODC representative, ``We've improved their 
mobility, their ability to communicate, and their ability to 
counter terrorist operations. We have helped prepare them for 
whatever the next round may hold.'' This self-assessment is 
backed up by well-documented examples cited in the above-cited 
oversight reports. Asked for a more recent example of a 
tangible impact U.S. assistance had had on the ground, Embassy 
officers pointed to a recent incident in which LAF troops were 
able to use night vision goggles provided under this program to 
find and capture seven terrorists affiliated with Fatah al-
Islam who had escaped from Roumieh prison.
    The question is: what is the best vehicle for providing 
security assistance? The Head of Planning for the LAF, who was 
well aware of the differences between the various pots of 
money, expressed a preference for 1206, which he perceived as 
``more efficient; more timely.'' He indicated that the LAF 
looks to FMF for sustainment of 1206-funded equipment. Ideally, 
he said, the Government of Lebanon should fund such sustainment 
expenses out of its own budget. The current situation in 
Lebanon precludes that, however; he explained that the $30 
million he has been promised for 2009 will meet only a fraction 
of the LAF's equipment and sustainment needs.
    Asked about the comparative advantages offered by FMF and 
1206, representatives from the Office of Defense Cooperation 
indicated that, all things being equal, they preferred FMF as a 
vehicle for delivering security assistance. Even though FMF 
processes are slower than 1206, they welcomed the 
predictability of FMF, which is budgeted for each year, as 
opposed to 1206 which are awarded through a competitive 
process. Although 1206-funded assistance can be delivered more 
quickly, they said that the lack of certainty about whether 
individual 1206 program proposals will be approved detracted 
from the program's overall effectiveness.
    ODC representatives indicated that multi-year funding for 
1206 would help make the program more effective.\20\ In the 
past, the lengthy lead time associated with preparing 1206 
proposals and getting them approved resulted in Embassy 
Beirut's 1206-funded programs not being notified to Congress 
until May, allowing as little as three months for contracting. 
This kind of timeline is unrealistic, they said. In FY 2009, 
the Embassy resubmitted proposals that had not been approved 
the previous year.
---------------------------------------------------------------------------
    \20\ See footnote 12. The referenced CRS report on ``Security 
Assistance Reform: Section 1206 Background and Issues for Congress,'' 
which explains that in the FY 2009 Defense Authorization Act, the 
Congress provided authority for Section 1206 funds to be used in 
consecutive fiscal years, i.e., funds for a program that begins in one 
fiscal year may be used for that program in the next fiscal year.
---------------------------------------------------------------------------
Recommendation:
          While this re-submission resulted in a speeding up of 
        the 1206 process at Embassy Beirut this year, the 
        tactic of re-submitting 1206 proposals that were not 
        funded from a previous year raises questions about 
        immediacy and the extent of the emerging nature of the 
        threats that those proposals were designed to help the 
        host country confront.

    As an example of the interconnectedness that is sometimes 
seen between security assistance provided under Section 1206 
and more traditional forms of security assistance, the ODC 
Chief noted that he had inquired whether 1206 funds could be 
used to cover Joint Combined Exercises and Training (JCET) 
programs in the area of counterterrorism. When ODC checked with 
counterparts with the Joint Chief of Staff, it was determined 
that JCETs, which are funded under Title X, Section 2011 
funding, cannot be funded with Section 1206 monies.
Recommendation:
          Staff believes that this was the proper call, since 
        JCETs, even if for the purpose of improving host 
        countries' counter-terrorism capabilities, represent a 
        long-term training investment; whereas Section 1206 was 
        designed to meet short-term, immediate counter-
        terrorism needs.

    One example of a successful and innovative 1206-funded 
assistance program is the provision to the LAF of the 
``Lebanese Armed Caravan,'' of up to four Cessna aircraft 
modified to provide close air support in counter-terrorism 
operations. Staff had the opportunity to make a site visit to 
the airfield to view the first such aircraft provided and 
receive a briefing on its applications. The assistance package 
included a significant training component. This assistance 
resulted in a qualitative boost in the LAF's capabilities and 
has been extremely well-received.
    Asked if there had been cases in which 1206-or FMF-funded 
programs had not been well conceived, ODC representatives 
pointed to a 1206 case involving D9 armored bulldozers. Because 
the armament had been carried out in Israel, the bulldozers 
would have been undesirable in Lebanon. As noted above, the 
United States opposes the Arab League boycott of Israel, which 
Lebanon observes. Fortunately, the Country Team caught the 
problem before the case moved forward.
Assistance to the Internal Security Forces
    The United States has understandably focused the bulk of 
its security assistance on the LAF, which is responsible for 
border security, counterterrorism, and national defense. In 
addition, however, since FY 2007, the USG has also supported 
Lebanon's police, or Internal Security Forces (ISF), which is 
responsible for maintaining public order. This assistance, 
funded under the International Narcotics Control and Law 
Enforcement (INCLE) and Section 1207, is designed to help 
professionalize what has been a chronically underfunded 
institution lacking in credibility on the Lebanese street. 
Staff had the opportunity to visit the INCLE-funded police 
training center, including newly refurbished buildings and some 
currently under construction. Staff observed an ongoing train-
the-trainer course in community policing, and heard positive 
testimonials from the trainees.
    According to the head of the ISF academy, the ISF started 
out with 7 instructors; as a result of this assistance they now 
have 29. The USG-provided courses include a basic training 
class for new recruits; a course for supervisors; a tactical 
training course; and a community policing program, a new 
concept in Lebanon that was thought to be appropriate for high-
tension communities, including, ultimately, Palestinian refugee 
camps such as Nahr al-Barid. Police commanders expressed 
appreciation for this U.S. assistance, which they credited with 
having a positive effect, as evidenced by increased mobility 
for police units, which was inferred as signifying greater 
acceptance of the ISF on the part of local residents.
Reining in Contractor Expenses
    The security and infrastructure realities described above 
require that the Embassy rely on contractors to implement many 
aspects of U.S. security assistance programs. Because 
contractors are not U.S. direct hire employees, they do not 
fall under Chief of Mission authority and thus are not required 
to stay on the Embassy compound. The downside, according to ODC 
representatives, is that an inordinate proportion of U.S. 
assistance is devoted to contractors' expenses. ``We've let the 
defense contractors go wild'' in the words of one employee. A 
new Embassy compound that will be able to accommodate more 
official visitors will help mitigate this phenomenon.
Constructive Criticism from Host Government End Users
    The LAF's Head of Planning expressed gratitude for U.S. 
security assistance, tinged by some frustration over the long 
lead time required in some cases. For example, the above-
mentioned need to refurbish over 1200 armored personnel 
carriers had taken much longer than had been anticipated. The 
provision of spare tires for light trucks had also been 
delayed. Some of the radios that had been promised in 2007 were 
reported to still not be in use, because they are subject to a 
worldwide contract that has not yet been awarded. Uniforms that 
had been provided to the LAF Rangers were of the desert 
pattern, rather than the preferred urban design, which is more 
appropriate for the kind of fighting in which LAF troops are 
likely to engage.

                              IFI Lending

Economic Situation
    The political stalemate and sporadic sectarian violence 
that Lebanon has seen in the past several years have greatly 
hampered economic activity. That said, Lebanon's free market 
economy is often credited for its resilience in the face of 
adversity, and indeed many international economists have 
assessed that the economy has performed reasonably well in the 
face of the international financial crisis. Many commentators 
site official Government statistics, which project the 2009 GDP 
growth rate at 8.5 percent. Similarly, Lebanon has been able to 
attract substantial domestic and international investment, in 
spite of the international financial crisis.\21\ Some GOL 
officials and economic analysts have cast doubt on the 
credibility of the official growth rate, however, and they 
point out that the increase in investment is reliant on the 
country's high interest rates. Moreover, the IMF has pointed 
out both publicly and privately that Lebanon's high public debt 
to GDP ratio remains a key vulnerability.\22\
---------------------------------------------------------------------------
    \21\ According to the IMF's 2009 Article IV Consultation Mission in 
Lebanon's Concluding Statement of March 5, 2009 (http://www.imf.org/
external/np/ms/2009/030509.htm), Lebanon's gross reserves for 2009 were 
projected at over $20 billion, 47% of which were represented as foreign 
currency deposits in the banking system.
    \22\ Ibid.  IMF officials echoed this sentiment in private meetings 
with staff. They pointed out that, although the ratio has fallen to 
160% from a high of 180% in 2006, it remained the highest in the world 
and is not sustainable over the long term. In a November 2009 briefing 
of SFRC staff, State Department officials indicated that the GOL's 
debt-GDP ratio had fallen further to about 150%, in part as a result of 
exchange rate fluctuations.
---------------------------------------------------------------------------
Overview of International Donor Assistance
    The seeds of Lebanon's enduring public debt problem were 
sown in the 1990s during the massive rebuilding effort that was 
launched after the civil war. Although the Government committed 
to a variety of economic reforms as part of the November 2002 
Paris II donors conference, at which $4.4 billion in assistance 
was pledged, little progress was made in addressing mounting 
public debt, which reached a high of about 180 percent of GDP 
in 2006. The 2006 war between Israel and Hizballah, followed by 
the 2007 fighting at the Nahr al-Barid Palestinian refugee camp 
led to further destruction and economic pressures. GOL 
development priorities are outlined in a five-year action plan 
approved by the Cabinet. Focus areas include: water supply, 
waste water management, electricity, irrigation, and public 
infrastructure.
    Donors' conferences in Stockholm in 2006 and Paris in 2007 
(``Paris III'') resulted in about $8 billion in pledges, mostly 
concessional in nature.\23\ The lack of budget transparency in 
Lebanon makes the percentage of national budget funded by 
foreign assistance difficult to determine. Estimates vary 
between 25 and 35 percent. Much of the assistance pledged at 
Paris III was contingent on the Government meeting agreed 
economic reform benchmarks, including the elimination of 
government subsidies for electricity and privatizations of 
state-owned industries, such as telecommunications. Few of 
those benchmarks have been met, however; in particular, Paris 
III reforms that required legislative action went unfulfilled 
as the Parliament became embroiled in a prolonged political 
stalemate. As a result, many pledges have not been 
realized.\24\ With respect to the low rate of compliance with 
Paris III conditionality, one representative of an 
international financial institution questioned whether the 
international donor community should have been less ambitious.
---------------------------------------------------------------------------
    \23\ Of the approximate $7 billion pledged at Paris III, grants 
comprised about $1.5 billion.
    \24\ According to the Paris III progress report issued in December 
2008, By the end of 2008, 71% ($5.384 billion) of the Paris III pledges 
had been signed into agreements.
---------------------------------------------------------------------------
The World Bank
    According to the World Bank Country Director, the Bank's 
current program in Lebanon is valued at $400 million. The 
program is focused on infrastructure and basic services, 
including the provision of electricity and water outside of 
Beirut; social sector support, including education and health; 
and overall financial management, starting with Public 
Financial Management (PFM) reforms. The 2007-2009 Interim 
Strategy Note (ISN) was comprised mostly of budget support, 
driven by the Paris III agenda, but as Bank officials told 
staff, the two years of the ISN program did not allow 
sufficient time to bring about the kinds of structural reforms 
that are needed in the Lebanese economy. They reported that 
there is some internal debate about the right ratio between 
budget support for structural reforms that are not likely to 
materialize in the near future, versus investment lending. Bank 
officials reported that they were working on a new Country 
Partnership Strategy (CPS), but that no figure had yet been 
attached to it. Negotiations could not take place until a new 
government had been formed.
    Asked about the Bank's greatest successes, Bank officials 
told staff that, in the absence of an environment where 
structural reforms could be taken on, they were pleased with 
the progress they have been able to make through their 
technical assistance programs, especially the Public Financial 
Management (PFM) project, the aim of which is to bring a 
greater degree of transparency to the budget process. They 
explained that Lebanon's dual budget process has inherent 
disconnects between the planning and execution phases and is 
characterized by an overall lack of accountability. Through the 
PFM capacity-building project, the Bank has funded the 
provision of advisors to work directly in the Prime Minister's 
office, as well as the Ministries of Finance and Social 
Affairs. Bank staff credited this technical assistance with 
helping to build a culture of transparency in the capital 
spending process, and with spurring debate at the societal 
level about energy sector reform.
    Asked to comment on the obstacles to progress, one bank 
official pointed to the constraints of the domestic political 
situation: ``One lesson we learn over and over again is how 
difficult it is to judge what will be politically feasible.'' 
For example, he said, the second tranche of the last ISN was 
never disbursed, because the GOL did not meet expectations with 
respect to energy sector reforms in the first tranche. In 
addition, they pointed out that all international assistance is 
funneled through the Council for Development and 
Reconstruction, which falls under the Prime Minister's office. 
Some interlocutors faulted the CDR for managing international 
assistance for the political benefit of the Prime Minister. 
Indeed, in a separate meeting, one GOL official asserted that 
the CDR-Prime Ministry relationship effectively circumvents the 
prerogatives of services-providing ministries, and is 
inconsistent with the intent of the constitution.
The IMF in Lebanon
    The IMF opened a regional office in Beirut in January 2008, 
a move that, in the words of one official, was designed to 
signal improved relations. According to the IMF Resident 
Representative, the Fund's principal objective in Lebanon has 
been to help the GOL reduce its debt over time, according to 
the framework of Paris III. The Fund began an Emergency Post-
conflict Assistance (EPCA) program in 2007, which has since 
come to an end. The IMF Resident Director explained that, in 
the absence of a government of national unity with whom to 
partner on implementing the Paris III agenda, there was no 
ongoing program. According to the IMF Resident Representative, 
the IMF would like to negotiate a stand-by arrangement, when 
possible. In the meantime, cognizant that the lack of a 
government could become an excuse for inaction, the Fund has 
proposed a staff monitored program.
Oversight
    As stated above, the Council for Development and 
Reconstruction has a mandate to execute all projects that have 
been agreed by the Cabinet; negotiate loans to finance the 
Cabinet-approved development goals; and develop overall plans 
and programs for sustainable development. Asked about 
opportunities for oversight of the foreign assistance process, 
GOL officials cited two mechanisms. The Lebanese Parliament 
must approve loans over a certain threshold. Indeed, according 
to a CDR official, about $1 billion in loans was awaiting 
Parliamentary approval at the time of this visit. After 
assistance is disbursed, the Lebanese Cour de Comptes (the 
equivalent of a Government Accountability Office) conducts 
audits.
Recommendation:
           As one interlocutor pointed out, the GOL would 
        benefit from some kind of pre-disbursement audit, 
        rather than rely on the ex post facto audits of the 
        Cour de Comptes.

                               APPENDIXES

                              ----------                              

                   Appendix I: Interlocutors in Yemen

  Ambassador Stephen Seche and DCM Angie Bryan
  Acting Political Section Chief Faith Meyers and Economic 
        Officer Roland McCay
  Special Operations, Central Command Forward Lt. Col. Rick 
        Prins
  Office of Military Cooperation Deputy Lt. Col. Brit Smeal and 
        FMF Officer Maj. Greg Mitchell
  Representatives of Yemeni non-governmental organizations 
        working on conflict resolution issues
  Representatives of international organizations working on 
        humanitarian assistance and refugee affairs
  USAID Mission Director Dr. Jeff Ashley and Deputy Director 
        Sean Jones
  Deputy Finance Minister Jallal Yaqoub
  World Bank Resident Director Benson Ateng
  International Finance Corporation Country Director Raymond 
        Conway
  Vice Minister of Planning and International Cooperation 
        Hisham Sharaf
  Chairman, Yemeni Coast Guard Brigadier-General Ali Rassea
  Yemeni Air Force Col. Sheing
  Members of the Embassy Sanaa Military Information Support 
        Team (MIST)
                 Appendix II: Interlocutors in Lebanon

  Ambassador Michele Sisson and DCM Tom Daughton
  Office of Defense Cooperation officials, led by Chief Lt. 
        Col. Jeffrey Pannaman
  Meeting with international donors of security assistance
  USAID Mission Director Denise Herbol
  Internal Security Forces General Munir Chaaban
  Visit to the INL-funded Police Academy with U.S. contractor 
        training
  Visit to the Lebanese Armed Forces' ``Rangers'' base.
  Regional Security Officer Paul Bauer
  Management Officer Christian Charette
  Political/Military Affairs Officer Mike Brennan
  IMF Resident Representative Eric Mottu
  World Bank Economist Sebnem Akkaya and Donor Coordination 
        Chief Stefano Mocci
  Dr. Wafaa Charafeddine, Council for Development and 
        Reconstruction
  Central Bank Director of Financial Operations Youssef El-
        Khalil
  Ministry of Finance Director General Alain Bifani
  Public Affairs Officer Ryan Gliha
                         Appendix III: Acronyms

  AQAP: Al-Qaeda in the Arabian Peninsula
  CG: Consultative Group
  CDR: Council for Development and Reconstruction
  CPS: Country Partnership Strategy
  DSCA: Defense Security Cooperation Agency
  DCM: Deputy Chief of Mission
  EDA: Excess Defense Articles
  EPCA: Emergency Post-conflict Assistance
  ESF: Economic Support Funds
  FDI: Foreign Direct Investment
  FMF: Foreign Military Financing
  GDP: Gross Domestic Product
  GOL: Government of Lebanon
  IFI: International Financial Institution
  IDA: International Development Association
  INCLE: International
  INL: State Department Bureau of International Narcotics and 
        Law Enforcement Affairs
  IMF: International Monetary Fund
  ISN: Interim Strategy Note
  LAF: Lebanese Armed Forces
  LDC: Least Developed Country
  LNG: Liquified Natural Gas
  MIST: Military Information Support Team
  NADR: Nonproliferation, Antiterrorism, Demining and Related 
        Programs
  NEC: New Embassy Compound
  ODC or OMC: An Embassy's Office of Defense Cooperation, 
        sometimes called Office of Military Cooperation
  PMF: Public Financial Management
  ROYG: Republic of Yemen Government
  SOCCENT: Special Operations Component of the U.S. Central 
        Command
  YSOF: Yemeni Special Operations Forces
  USAID: U.S. Agency for International Development
  USG: U.S. Government

                                    

      
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