On 25 January 2006, the Palestinian Legislative Council election was won by the rejectionist Palestinian group Hamas. The result was a surprise to many, not least Hamas itself. But the sense that Fatah had failed to make progress in peace talks with the Israeli government, and that its government had allowed nepotism and inefficiency to grow, meant that Palestinian public opinion shifted prior to the election.
The Israeli and US governments immediately stated that they would not work with a government that included Hamas. On 30 January, the Quartet (the US, the European Union (EU), the UN and Russia, the four-party group that oversees the peace process defined in the Road Map) issued a statement saying: 'the Quartet reiterates its view that there is a fundamental contradiction between armed group and militia activities and the building of a democratic state. A two state solution to the conflict requires all participants in the democratic process to renounce violence and terror, accept Israel's right to exist and disarm, as outlined in the Road Map'.
At the time of the elections, the Palestinian economy was in a dire situation. Underpinning its problems is its status as a non-sovereign entity. Export, customs and imports are all regulated by Israel. The PA cannot borrow from international markets, issue bonds or print money. Palestinian exports, most of which are low-value products, and its migrant labour, mostly go to Israel. This means that, when Israel places restrictions on the movement of goods and labour within the territories, and when it limits exports through borders to markets in Israel and beyond, the Palestinian economy suffers. The last six years of the Intifada have witnessed increased restrictions, and the economy has been in continuous decline. At the end of 2005, the Palestinian economy was 30% smaller in per capita terms than in 1999.
As the economy declined, the public sector grew to absorb unemployment, with one in five labour force Palestinians employed in the public sector by the beginning of 2006. They in turn support around one-third of the Palestinian population. Slightly more than half of these are civil employees, providing the bulk of the social services that Palestinians receive. The remaining 50,000-60,000 PA employees work in the security services. The entire economy has therefore become ever-more dependent on public revenues. In turn, the PA is dependent on Israel for the bulk of these revenues: 45%-50% of the PA's revenue comes from customs which Israel collects on the PA's behalf. The PA accesses just 15%-20% of its revenues from its own domestic sources. Donor sources and domestic borrowing account for the remaining 30%-40%. During 2005, much of this was provided to the PA through budget support, both from traditional and Arab donors. In addition, the PA managed to raise some funds from domestic banks, raising its borrowings to the maximum it could, at $400 million.
When the Hamas government was formed on 29 March, Israel suspended its transfer of clearance revenues. This denied the PA $65 million a month. At the same time, domestic banks began to reclaim loans, and the main banks ceased operating the government's accounts for fear of anti-terrorism litigation. The public sector faced economic collapse.
The international response
On 30 March, the Quartet called on the newly-formed government to commit to principles of non-violence, recognition of Israel and acceptance of previous agreements and obligations. On 7 April, the EU and the US agreed that, in the absence of agreement to these principles, it was not possible to provide support to the government, and direct aid to the PA ceased. March salaries were not paid, and the PA's medium-term fiscal situation looked increasingly dismal. This led international donors to search for ways to channel aid directly to Palestinians, but without going through the government. The challenge was to find a mechanism which would:
-Provide relief to a large part of the Palestinian population, particularly those hit by the non-payment of salaries, and also those who depended on the PA for social protection.
-Ensure basic services continued for Palestinians, with a priority on health services, but also water, sanitation, electricity and education.
-Not establish permanent systems, or undermine existing PA institutions.
-Not exacerbate, and where possible mitigate, intra-Palestinian conflict.
-Provide an effective, quick response capable of accommodating non-traditional donor contributions.
-Operate within the policy environment established under the Quartet statement on principles and within existing anti-terror banking legislation.
Three options presented themselves: (i) to redirect support, particularly the provision of basic services, through non-government organisations; (ii) use the UN emergency response process; and (iii) establish something new. NGOs were quick to point out that, while they were prepared to scale up operations, they did not have the capacity to deliver services in place of the PA. The UN system likewise recognised that it could not replicate the PA. Moreover, the emergency appeal was geared to providing help in addition to government services, not addressing the new situation Palestinians found themselves in.
The international community therefore agreed to find a new form of aid - a mechanism that could make payments outside the government, and ensure the continued delivery of PA services. Following extensive work among European member states, the European Commission's External Relations Commissioner Benita Ferrero-Waldner proposed establishing a Temporary International Mechanism, which would pay non-salary expenditures for basic services directly, as well as paying allowances to key PA personnel directly into their bank accounts. The Council of Ministers approved the mechanism on 16 June, and it was endorsed by the Quartet on 17 June.
The TIM has three windows, responding to three key areas of spending. Window 1 pays for essential supplies and meets the running costs of health and education services, social security and water/sanitation and electricity utilities. Window 2 buys fuel supplies and meets other direct costs, such as East Jerusalem hospital bills for Palestinians. Window 3 supports vulnerable Palestinians through the payment of allowances to the poorest, and to PA workers in essential services.
Two payment systems have been established to ensure that no funds go through the Hamas government. For Window 1, the World Bank established a system whereby line ministries identify their needs for supplies and running costs, and then run the tender and contracting process to buy in supplies. This tendering process is then overseen by a unit established in the Office of the President, and each step of the tendering process is also cleared by the World Bank. When the tender process is complete and authorised by the World Bank, funds are released from a special account established under the Office of the President. Through this process, the World Bank has managed to maintain some involvement of PA systems.
For payments to PA employees, the EC has collected the bank details of all eligible PA employees, and cross-checked these against lists from line ministries and the Ministry of Finance to compile an authorised list of existing PA employees. It then provides payment to these employees through a system run by the Hong Kong and Shanghai Bank (HSBC). In the process, HSBC conducts five counter-terrorism checks and tracks the payments direct to the beneficiary. In addition to the establishment of the TIM, the UN took the unprecedented step of re-issuing and increasing its humanitarian appeal for essential medical supplies, food aid and job creation programmes.
As the humanitarian situation evolved over the summer months the international community responded using all these options. US efforts focused on expanding existing NGO contracts to provide health care supplies. Food aid increased, as did funding for the immediate delivery of medical supplies through UN systems. Under Window 2 of the TIM, fuel was purchased from the Israeli supplier and brought directly to hospitals to power emergency generators after the Gaza power station was seriously damaged by an Israeli air strike. This process was soon extended to cover generators for water and sanitation facilities. When the Gaza power station was brought back on line, the TIM provided fuel to ensure its operation. Since the beginning of July 2006, the TIM has paid for over 4 million litres of fuel for electricity supply, hospitals and water installations in Gaza.
But as the situation got worse the international community recognised that the TIM needed to deliver more. The July 2006 Group of Eight (G8) conference in St Petersburg requested that assistance through the TIM be expanded in scope, and extended until the end of 2006. This statement was reiterated at the September conference in Stockholm on 'Aid to Lebanon and the occupied Palestinian territories'. (The TIM was extended to the end of March 2007.) While the allowance payments initially focused only on health workers, the list of beneficiaries soon grew to include all civilian PA workers who, under the previous government, had earned first less than $476 (NIS 2,000) per month, and then later less than $595 (NIS 2,500). The ceiling has been removed entirely for the latest payment, and all 77,000 civilian PA employees are given an allowance of $357 (NIS 1,500) per month through the TIM. While the mechanism provides a modest proportion of salaries, it has provided a cushion against economic hardship.
However, the crisis continues, and the aim of maintaining PA institutions has proved ever-more difficult to sustain. The TIM can take credit for keeping public servants in PA basic services: without these allowances, more would have sought other forms of employment, or simply stopped turning up for work. But the maintenance of core government functions has been more difficult. President Mahmoud Abbas has also used these allowances as part of the settlement he made to stop a public sector strike. But attempts by the World Bank to try to retain some level of PA involvement in the procurement process have proven ineffective. So far, most of the tendering processes for health supplies, begun in August, have not been completed. The World Bank notes that initial difficulties were internal to itself, but now the main difficulties are more mundane. Since the line ministries in Gaza, and the President's Office is in Ramallah, communications are vital, but Israeli closures mean staff cannot move between the two locations. Documents have to be electronically transferred, which would be easy were it not for the regular electricity blackouts. In addition, the ongoing violence is preventing people from turning up for work. Key employees with the skills essential for bid evaluation are actively seeking alternative employment.
The economic and political crisis has lasted longer than anyone imagined when the TIM was established in June 2006. The systems it offers are perhaps the best response to the current crisis. As the UK International Development Committee (IDC) stated, in its report Development Assistance and the Occupied Palestinian Territories of 31 January 2007: 'in the absence of a solution to the current fiscal crisis we support the continuation of the TIM'. At the same time, as the Secretary of State for International Development, Hilary Benn, put it following his recent visit to the occupied territories: aid alone is not the solution. The Palestinians are the most heavily-aided nation per capita in the world, yet their suffering continues. The solution is a lasting peace, so Palestinians can move freely, get their goods to market and enjoy the prosperity they are capable of achieving.
Poverty in the occupied Palestinian territories is a result of the conflict, and in the short term the immediate need is to establish a functioning national unity government. Only a political resolution offers the prospect of bringing Palestinians out of the current spiral of economic and institutional decline. Until that happens, the international community can only provide a temporary form of aid.
Mark Poston is programme manager of the DFID Palestinian programme.