Secretary of State Hillary Clinton issued a mildly worded statement Tuesday criticizing the Egyptian government's decision to extend its "state of emergency" another two years and urged Egypt to adhere to "legal principles that protect the rights of all citizens."

Meanwhile, her department was preparing to enter into negotiations with Egypt over Cairo's proposal for a new $4 billion aid endowment that critics say would unfairly reward an authoritarian regime that has jailed or marginalized its opponents, rigged elections, and censored or manipulated the press for the nearly three decades that President Hosni Mubarak has been in power.

The State Department is still evaluating the proposal, but advocates of the endowment approach say that by setting American economic aid to Egypt for the next 10 years, the United States could build cooperation with the Egyptian government, show long-term U.S. commitment to helping the Egyptian people, and help Egypt develop key sectors of its civic infrastructure.

Critics, which include former Bush administration officials, human rights groups, and regional experts, say Egypt is attempting to secure aid outside of congressional oversight and without being compelled to make progress on democracy and human rights. They question why Egypt, which by all accounts has actually been backsliding on reform in recent years, should be singled out for such a unique and lucrative prize.

Egypt's proposal (pdf), which was obtained by The Cable, seeks for aid to be given in a way that is "predictable and not related to conditionalities that may hamper implementation."

Under the Egyptian plan, about half the money would come from the U.S. government. The other half would largely be redirected from the Egyptian government's debt payments to the U.S., another provision many see as highly unusual.

The State Department has prepared a counterproposal, which has not yet been presented to the Egyptians nor publicly released. A draft version (pdf) was obtained by The Cable. That draft suggests a much smaller endowment, about $300 million over five years, and includes several conditions, such as that the endowment be housed within a U.S.- or internationally based non-profit corporation and that the U.S. be able to terminate the program if it does not meet clear measures of success.

"We're still finalizing our internal deliberations and our hope is that we can present our counterproposal to the Egyptians in the near future," a State Department official told The Cable. "We see this proposal as an opportunity to work and cooperate with Egypt in a field that would directly help the Egyptian people."

A long engagement

Originally, large amounts of U.S. economic aid to Egypt were proffered as part of the Camp David package in 1978, with both Egypt and Israel being guaranteed 10 years of both military and economic aid as part of the overall U.S.-brokered peace agreement.

Both Egypt and Israel renewed those packages twice, but in 2006 the Egyptians decided to propose a new model of economic aid -- the endowment -- which was heavily supported at the time by then Ambassador to Egypt Francis J. Ricciardone and Faiza Abu El Naga, who runs Egypt's Ministry of International Cooperation.

J. Scott Carpenter, who was deputy assistant secretary of state for Near East affairs from 2004-2007, was a key player on this issue toward the end of the Bush administration. "The Bush administration was working very hard with the Egyptians to come up with a new 10-year proposal," he said. "The challenge was trying to figure out what to do with the money."

But no agreement was reached and appropriations were made year to year after that -- inviting unwanted scrutiny and amendments from Congress, which the Egyptians resisted. In its 2009 budget, the outgoing Bush administration cut Egypt's economic aid, some of which was slated for democracy-related projects, from $415 million to $200 million.

Meanwhile, in Foggy Bottom, work on the endowment continued.

"When no one was looking, the State Department managed to move the process forward to the extent that when the Obama administration came in, they were predisposed to reduce the friction between the U.S. and Egypt by going along with this," Carpenter said.

The Obama team worked with Congress to reduce the amount of democracy-related funding from $50 million to $20 million. The first stage of the proposed endowment, as envisioned by the Egyptians, would be called the Mubarak-Obama Education, Science, and Technology Fund (pdf), which they would want to be rolled into the larger endowment later on.

Carpenter said the Bush team had discounted education funding because that sector was so large the endowment funding would have little impact. The State Department official said education funding could be a good focus because "it would really benefit U.S. and Egyptian interests and would be seen by the Egyptian people as something our governments are doing cooperatively that benefits them."

Mubarak's slush fund?

Outside experts, human rights groups, and lawmakers are also raising questions about the proposed endowment and what it says about the U.S. approach to the Egyptian government and its people.

"The (proposed) endowment's lack of a clear governing structure is cause for concern," wrote Stephen McInerney, director of advocacy at the Project on Middle East Democracy in a recent article for Foreign Policy's Middle East Channel. "Congress ought to be wary of allocating resources while leaving those details to be determined after the fact, which would risk turning the endowment into the slush fund that critics fear."

In fact, that's exactly what Congress did last year, when it passed an appropriations bill that authorized $50 million to start the endowment without any strings attached. The money was put in by Sen. Judd Gregg, R-NH, the ranking Republican on the foreign operations appropriations subcommittee. Gregg had previously but unsuccessfully proposed $500 million for the endowment.

It's unclear exactly why Gregg is pushing the endowment so strongly. A Gregg staffer argued that Congress could always rescind the money in the future and that increased cooperation benefits both sides. But the New Hampshire senator's advocacy is opposed by several lawmakers who are critical of Egypt's human rights record, including Sen. Sam Brownback, R-KS, and Rep. Frank Wolf, R-VA.

Tom Malinowski, Washington advocacy director for Human Rights Watch, argued that shifting the bulk of U.S. economic assistance to an endowment will inevitably be seen in Egypt as empowering Mubarak.

"I don't think there's a way to do it that avoids that perception in the mind of Egyptians," he said, "Everything the U.S. does in its relationship with Egypt should be to promote political and economic reform ...  and to convince the Egyptian people we are in line with their aspirations."

The Egyptian proposal comes as the gap between the Egyptian government and its people is getting wider, warned the Carnegie Endowment's Michele Dunne, who worked on Egypt both at State and on the National Security Council. "This would remove congressional oversight and place the aid into the hands of the Egyptian government, which of course is why they are so keen on it."