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*["...could leave U.S. taxpayers holding the bill for billions of
dollars in equipment Egypt already has ordered on credit, and companies
like Lockheed Martin and General Dynamics that build military hardware
for Egypt would be affected by aid restrictions."]
Freezing U.S. aid to Egypt would not be easy or cost-free***
By Susan Cornwell
<http://blogs.reuters.com/search/journalist.php?edition=us&n=Susan.Cornwell>
and Andrea Shalal-Esa
<http://blogs.reuters.com/search/journalist.php?edition=us&n=Andrea.Shalal-Esa>
Reuters, Aug 16, 2013
http://www.reuters.com/assets/print?aid=USBRE97F11220130816
WASHINGTON Some U.S. lawmakers are calling for the Obama administration
to shut off aid to Egypt in the aftermath of the army's lethal crackdown
on protesters. But untangling the aid relationship with Cairo would not
be simple and could be costly for the United States as well as Egypt.
A special financing arrangement Cairo uses could leave U.S. taxpayers
holding the bill for billions of dollars in equipment Egypt already has
ordered on credit, and companies like Lockheed Martin and General
Dynamics that build military hardware for Egypt would be affected by aid
restrictions.
President Barack Obama said on Thursday that normal cooperation with
Cairo could not continue and announced the cancellation of military
exercises with Egypt next month.
But an aid cutoff - which might see Washington losing what limited
leverage it has with Egypt's interim military government - does not
appear imminent.
Since 1979, when Egypt signed a peace treaty with Israel, it has been
the second largest recipient, after Israel, of U.S. bilateral foreign
aid, the Congressional Research Service says. From 1948 to 2011,
American aid to Cairo amounted to $71.6 billion.
Lately, the U.S. aid has been running at about $1.55 billion a year.
About $1.3 billion of this is military aid, which comes back to the
United States in spending on things like tanks and planes.
"Most of Egypt's military assistance is captured by the U.S. defense
industry that provides the platforms, maintenance and spare parts to
Egypt," said Jeffrey Martini, a Middle East analyst at the RAND
Corporation think tank.
"So in pure economic terms, the Egyptian military would take a hit in
having less money for acquisitions but U.S. defense contractors would
also lose a client," Martini said.
There were calls this week from both ends of the U.S. political spectrum
for Obama to follow a U.S. law that triggers an aid cutoff if a military
coup against a democratically elected government has taken place. The
Obama administration says it has not determined whether the military's
actions in Cairo in the departure of President Mohamed Mursi amounted to
a coup.
"While President Obama 'condemns the violence in Egypt,' his
administration continues to send billions of taxpayer dollars to help
pay for it," said Senator Rand Paul, a Republican with connections to
the conservative Tea Party movement.
EGYPT'S CREDIT CARD
U.S. taxpayers could take a hit if the aid pipeline is shut down. A
special arrangement known as cash flow financing lets Egypt and Israel
make arms purchases from the United States against promises of future
aid and pay for things over time - like a credit card.
The Pentagon declined to discuss what amounts might be outstanding under
Egypt's cash flow financing arrangement, but analysts say it is at least
$2 billion.
"So Egypt has used its credit card recently to buy an additional
squadron of F-16 (fighter jets) and an additional batch of M1A1 (tank)
kits," said Robert Springborg, a professor of national security affairs
at the Naval Postgraduate School in Monterey, California.
"If suddenly we were to say, you are not sending those F-16s or those
M1A1 kits, then the question arises what's going to happen to them. If
nothing else can be found to be done with them, then the U.S. government
would be liable to be sued by the manufacturers ... The estimated
outstanding amounts are somewhere between $2.3 billion and $3.5
billion," Springborg said.
Under cash flow financing, multi-year contracts may be signed and
payment schedules are prepared. This allows for the award of contracts
that are more than the annual appropriation for a country, as long as
the payments estimated in the out years are within the traditional
amount of aid. Springborg said Egypt had contracts going out until 2017.
Democratic Senator Patrick Leahy, who chairs the Senate subcommittee in
charge of foreign aid, has long been a critic of the cash flow financing.
"This arrangement, which has been on autopilot for decades, has gotten
us into a situation where we have mortgaged ourselves well into the
future for equipment which is not necessarily needed, for a military
that can't be trusted, and that is costing us huge amounts of money," he
said in a statement emailed to Reuters.
Cutting military aid to Egypt also would leave some U.S. defense
companies looking elsewhere for clients. Joel Johnson, an analyst with
the Virginia-based Teal Group, said it could lead to layoffs in Lima,
Ohio, where General Dynamics Corp is building kits to upgrade 125 M1A1
Egyptian tanks.
Johnson said a U.S. aid shut-off also would hit small to medium-sized
suppliers that provide components for the tank, which are often more
vulnerable than the prime contractors. One industry official said some
500 suppliers could be hurt.
General Dynamics won the tank contract valued at $395 million in 2011.
It builds the hulls and various parts and then ships the kits to Egypt
for final assembly, said company spokesman Rob Doolittle. He declined to
comment on the possible impact of a decision to cancel the Egyptian tank
order.
The Lima facility has been counting on foreign orders and smaller
contracts with the U.S. government to remain open, given the U.S. Army's
plans to "pause" production of heavy ground vehicles for the United States.
Obama's announcement Thursday that the United States was canceling joint
military exercises with Egypt was the first significant U.S. move to
penalize Egypt's military rulers after the ouster of Mursi. Previously,
the U.S. government had announced a decision to halt delivery to Egypt
of four U.S.-made F-16 fighters.
Fort Worth-based Lockheed Martin is under contract to supply 20 F-16s to
Egypt at a cost of $776 million. Spokesman Ken Ross said 14 of the
planes have been delivered through June 30, including seven this year.
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