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Report to the Ad Hoc Liaison Committee, 2 June 2020

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Executive Summary

This report focuses on identifying progress achieved since the September 2019 report to the Ad Hoc Liaison Committee (AHLC) and the critical next steps required in order to achieve the short, medium and long-term objectives which, in combination, have the potential to result in the transformational change that is needed in both the West Bank and Gaza. This report covers the period up to mid-March 2020, although more recent significant developments are detailed where appropriate.

In the water sector, funding for the Gaza Central Desalination Plant and Associated Works Program (GCDP & AW) has been fully secured, and donors continue disbursing pledges. This marks an important step in the realization of the program, which will provide 55 million cubic metres (MCM) of potable water to Gaza by 2025. Construction of the Associated Works continued over this reporting period, though some delays were experienced in material entry. The procurement process for the desalination plant is underway. Further, progress was seen with the completion of construction of the Gaza and Middle Area Wastewater Treatment Plant (WWTP) and construction has advanced in the expansion of the Southern Short-Term Low Volume Desalination Plant (STLV), albeit with an anticipated delay in completion. Operations continue at differing levels for the remaining WWTPs and STLVs in Gaza. Progress was made in the implementation of Prime Minister Shtayyeh’s decision to energize these facilities, with the conclusion of two Memoranda of Understanding (MoU) for energizing the Gaza City STLV and the Khan Younis WWTP. Nonetheless, challenges continue in securing sufficient energy supplies for these facilities and recovering costs to enable their full operation. Progress was realized in advancing transitional governance measures in Gaza towards the establishment of a Bulk Water Supply Unit, which is an important step in ensuring a more sustainable water sector. Further governance measures are needed to ensure longer-term commercial viability of the sector. In the short-term, financial support is needed for the operation and maintenance costs for WWTPs and STLV facilities in Gaza until cost-recovery efforts reach their full potential (see Annex A). In the West Bank, while some progress was realized on a few wastewater projects, the Palestinian Water Authority (PWA) delayed the timeline for implementation of their Water and Wastewater Packages due to a significant funding shortfall of 468 million USD, acquiring the needed approvals from the Government of Israel (GoI), and the PA fiscal crisis. Extensive details were provided on the required efforts in the West Bank in the OQ’s report to the AHLC in September 2019. Again, efforts to improve the commercial viability of the sector are essential for sustaining services in the West Bank. In this regard, the PA cabinet advanced a decision to transfer property tax and transportation fees to service providers who pay water and electricity bills. No further progress was achieved in this reporting period on Red Sea-Dead Sea discussions. The parties are commended on their commitment to participating in the Trilateral discussions and subsequent technical discussions on Palestinian groundwater utilization, water supply, infrastructure development, and transboundary wastewater management. No increases in water supply to the West Bank were realised with supply falling further behind demand.

In the energy sector, the Gaza for Gaza project (G4G), a central component of the broader structural solution for Gaza, continued to make progress and will support the planned expansion of the power plant to 600 MW, while leaving additional supply for other users. Bids for the detailed design of the pipeline in Gaza were received and a request for proposals for the Environmental and Social Impact Assessment was recently issued. Reaching commercial agreements and securing financing remain essential next steps to ensure that gas can be supplied in 2023. In the medium term, the construction of a 161 kV line from Israel to Gaza could add approximately 100 MW to Gaza’s power supply. Rehabilitation of the Egyptian lines would allow the 27 MW supply to resume, while future upgrades could enable imports of up to 100 MW. In addition, an agreement was signed in January 2020 that will enable a total of 80 MW of electricity imports from Jordan to the West Bank. These initiatives will help improve the electricity sector’s financial sustainability by displacing medium voltage imports with high voltage imports that have a lower tariff and lower system losses. The Office of the Quartet (OQ), in cooperation with the PA, completed a pre-feasibility study of five potential solar photovoltaic (PV) sites at three separate locations in Gaza in 2019. Based on this work, initial funding from Norway will allow the development of the first phase of a solar PV facility with a capacity of 1.3 MW at a site adjacent to the Khan Younis WWTP, supporting the plant’s electricity requirements. To support progress on the remaining solar sites, the OQ has been working with the relevant PA ministries to identify and secure approval from the landowners for project development. In the West Bank, despite the January 2020 debt repayment of 670 million NIS from JDECO to the Israel Electric Corporation (IEC), the energization of three substations continues to be delayed. Once energized, this will increase the share of high voltage supply and reduce the accrual of additional electricity debt.

In telecom, the Joint Technical Committee (JTC) reconvened several times in the last quarter of 2019 and the first quarter of 2020, which is a welcome development. Progress was realized with the parties’ exchange of proposals for Palestinian development of 4G and 5G spectrum and the revision and passage of Resolution 12 during the International Radiocommunications Conference in November 2019. The timely agreement between the parties on the allocation and timeline for implementation of 4G and 5G frequencies for Palestinian operators is encouraged, considering the timeline for the shortly anticipated award of the 5G bid in Israel.

The outbreak of the COVID-19 pandemic has further focused attention on the need to resolve the outstanding financial files between the parties. The PA Ministry of Finance (MoF) is projecting a budget deficit of 1.4 billion USD, which will result primarily from a 35-45 per cent projected decrease in the clearance revenue transfers that make up almost 60 per cent of the PA’s total budget. We encourage the current dialogue between the PA and GoI that will, upon completion, allow the PA to ensure a fiscal floor of 500 million NIS per month for the clearance revenue budgetary portion. While the fiscal floor will add stability to the PA fiscal management (i.e. increased certainty in meeting its minimum financial obligations in the coming period), it will not solve the fiscal crisis. To maintain current levels of revenues, three elements need to be addressed in the immediate term. First, outstanding monies that are due to the PA should be released, including, inter alia, VAT on goods imported to Gaza and Allenby Bridge crossing exit fees. Second, the 3 per cent handling fee should be waived or at a minimum significantly reduced, and PA fuel purchases should be exempted from excise and other taxes. Third, in parallel, discussions on a number of long-standing fiscal files which including E-VAT and labour deductions should continue in accordance with an established agenda and timetable to expedite their resolution. In addition, there is a need to finalise the draft agreement on the transfer of customs authority to the PA. Following a renewed commitment by the GoI in the September 2019 AHLC meeting to the transfer of customs authority to the PA, January 2020 saw the parties renew discussions with the aim of concluding an agreement.

In the security sector, the level of security cooperation between the parties increased to face the COVID-19 pandemic, as demonstrated by faster coordination between the sides and access of PA security to areas affected by the pandemic. Further effort is now needed to improve law enforcement in areas such as the suburbs of Jerusalem outside the separation wall.

Economic growth and job creation in the Palestinian market requires the expansion and facilitation of trade, both locally and internationally. In this vein, and to improve the cost-effective movement of goods, the door-to-door (D2D) program between the West Bank and Israel has continued to expand and efforts are now underway to create a similar type of program for trade with and via Jordan. A D2D-type procedure at Allenby/King Hussein bridge (A/KHB), especially for bulk material such as cement and plastics, has the potential to significantly increase the competitiveness of Palestinian products and with it the export potential to third markets. In addition, standards-related import impediments and associated delays at Israeli ports continue to add avoidable costs to productive inputs and outputs thereby reducing the competitiveness of Palestinian goods. The parties continue to work to address this issue, and next steps can build on the improved capacity of the Palestinian Standards Institute (PSI) to carry out relevant inspections and testing functions. The operation of A/KHB for 24-hours/five days a week is benefitting Palestinians, especially those travelling onwards via Amman Airport. Processing at A/KHB, as well as other international gateways, would be further enhanced by Israel enabling the PA to issue biometrically-enabled travel documents. While the situation in Gaza remains dire and the restoration of private sector activity challenging, the progress made in facilitating the export of processed foods from Gaza is an encouraging step that can be expanded upon. Additionally, significant progress was made towards the funding of the Karem Abu Salem/Karem Shalom (KAS) upgrading project. The project, which is expected to reduce costs for Palestinian businesses and improve the quality of perishable goods entering and exiting Gaza, is now almost fully funded and may conceivably commence before the end of this year.