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Report to the Ad Hoc Liaison Committee, 17 November 2021

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Executive Summary

This report identifies progress achieved since the Office of the Quartet’s (OQ) October 2020 report to the Ad Hoc Liaison Committee and the critical next steps that are now required.

There was some progress in the water sector during the reporting period. While repairs to water infrastructure in Gaza following the May escalation were undertaken rapidly through the effective engagement of the Palestinian Water Authority and the Coastal Municipalities Water Utility, close to 20 million USD is still needed to complete all necessary reconstruction. New connection points with Israel at Bani Said and Bani Suhalia – part of the Gaza Central Desalination Plant’s (GCDP) Associated Works (AW) – were completed, enabling an immediate increase in supply of 5 million cubic metres per year. The procurement process for another three components of the GCDP and AW has also advanced, which will ultimately further reduce Gaza’s severe potable water deficit. However, the GCDP and AW continued to face delays in the disbursement of funds, in tendering, and in the timely entry of materials, mainly those classified as “dual-use”. On a positive note, all major wastewater treatment plants (WWTPs) in Gaza began operating at full capacity over the past year (with the exception of the Khan Younis WWTP, due to limited wastewater inflows), while supply of power from the grid to two of Gaza’s three STLVs increased to 24 hours a day. However, water facilities are still operating with limited capacity mainly due to challenges in human resources, securing funding to cover operations and maintenance costs, and the required construction of a dedicated power line for one of the facilities. In the West Bank, the OQ continues to encourage an in-principle approval from the Government of Israel (GoI) for the package of works identified in Annex C of the OQs September 2019 AHLC report as it would help encourage contributions towards the approximately 500 million USD of funding required. Lastly, key policy decisions were taken to improve the commercial viability of the sector, highlighted by the PA’s release of a water sector reform plan for the West Bank and Gaza; meeting the timeframe of the reform plan is now critical.

In the energy sector, the Gaza for Gaza (G4G) project continued to make progress, including on the detailed design for both the Israeli and Gaza components. The Environmental and Social Impact Assessment in Gaza is also progressing well, with the first phase expected to be completed in Q4 2021. At the G4G Task Force meeting on 2 September, participants agreed on the next steps required to advance the project. Financial commitments from Qatar and the European Union for pipeline construction costs, both of which have attached conditions, are particularly noteworthy. It is now critical that commercial arrangements for the purchase of gas be finalised. Further, in September, the Palestinian Cabinet announced the decision to establish a Palestinian national gas company, a welcome milestone. The following month, the GoI approved the pipeline and associated infrastructure near the Gazan border. The completion of these milestones, combined with an accelerated schedule, could see gas supplied to Gaza by the end of 2024, a critical step considering the humanitarian impact of Gaza’s chronic electricity shortage. In cooperation with the Palestinian Authority (PA), the OQ continued to support the development of renewable energy, having previously undertaken prefeasibility studies for five potential solar photovoltaic sites in Gaza. The OQ is now working with the PA and the GoI to launch a feasibility study and to secure the required approvals for a site within the Access Restricted Area. Securing additional imports, both for Gaza (via Egypt or the 161 kV line) and to the West Bank (through additional imports from Jordan), is key to diversifying supply, thereby improving energy security. In the West Bank, the energization of four new substations following the signing of the interim Power Purchase Agreement (PPA) has significantly increased import capacity and is a crucial step toward the implementation of a comprehensive PPA. Finally, the OQ remains committed to supporting PA efforts to achieve sustainability in the sector, including in the run up and aftermath of COP26.

In the telecom sector, the parties convened the Joint Technical Committee once in April 2021 with a follow up meeting now being considered for mid-November 2021. Concluding a feasible and timely agreement on the allocation of frequencies for the deployment of 4G and 5G in the West Bank and Gaza is encouraged, particularly given the ongoing deployment of Israeli 5G networks in the West Bank. Positive developments were noted in the Palestinian telecom market including the endorsement of the new Telecom Law by the Palestinian President, Cabinet approval of a new licensing scheme for the development and operation of fibre networks, as well as the recent and welcome entry of all outstanding equipment, some of which has been pending since 2016, for the fixed network expansion into Gaza. Further, 60 per cent of repairs following the May 2021 escalation were completed by the telecom companies, and equipment requested for network rehabilitation is scheduled to enter Gaza on a weekly/bi-weekly schedule as of October 2021.

The PA’s deteriorating fiscal situation has reconfirmed the need to bring new revenue streams online to help resolve the fiscal crisis, including through the resolution of a number of longstanding fiscal files. The provision of 500 million NIS to the PA as a combination of a loan and an advance on clearance revenue by the GoI is a welcome step but does not obviate the need for more structural change. In March 2021, the parties agreed to move forward on the long-awaited transition from paper-based VAT invoices and reconciliation to an interconnected eVAT system; discussions and technical work are ongoing, with a target of launching by December 2021. The parties are urged to conclude an agreement on the transfer of customs authority to the PA, which could reduce revenue losses by an estimated 53 million USD. In preparation for this transfer, the PA Ministry of Finance has recently completed a new draft Customs Law. To further narrow the budget gap, a more systematic engagement by the parties is needed on various other longstanding fiscal files, including reduction or waiver of the three per cent handling fee, exemption of PA fuel purchases from excise and other taxes, transfer to the PA of its share of Allenby Bridge exit fees, and resolution of disagreements with respect to deductions and transfers by the GoI from Palestinian labour salaries. In banking relations, while multiple discussions have been held, several issues remain to be addressed to enable the new arrangements for correspondent banking planned for 2022. In the justice sector, recent legislative amendments have raised concerns over their potential effect on the independence of the judiciary; the international donor community has provided recommendations to the committee appointed by President Abbas to review these new laws. In the security sector, further improvements in movement and access are needed to enable PA police and security forces to provide effective law enforcement to Palestinian communities in Areas B and C.

Economic growth and job creation in the Palestinian market requires the expansion and facilitation of trade, both locally and internationally. In this regard, efforts have remained focused on improving the cost-effective movement of goods by expanding the door-to-door programme between the West Bank and Israel through the advancement of a Joint Staging Area to serve small and medium-sized companies. Efforts to create a similar programme for trade with and via Jordan also continue. This has the potential to significantly increase the competitiveness of Palestinian goods, particularly for bulk and raw materials. As the economic situation in Gaza has deteriorated further due to the May escalation and subsequent movement restrictions, an increased focus is now needed on restoring industrial and commercial activity. The recent lifting of some restrictions and the resumption of the transfer of processed foods from Gaza to the West Bank needs to be followed by an expansion of both the companies and products that are benefitting from this initiative. Efforts to resume the Karem Abu Salem/Kerem Shalom crossing upgrade project have also now resumed with commencement of work expected in Q1 2022. This upgrade work stands to significantly reduce costs for Palestinian business and improve the quality of perishable goods entering and exiting Gaza.