Report for the Meeting of the Ad-Hoc Liaison Committee on Action in Support of Palestinian State-Building, 30 September 2015

Report
from Middle East Quartet
Published on 22 Sep 2015 View Original

This report to the September 2015 meeting of the Ad-Hoc Liaison Committee (AHLC) provides an update on developments relevant to the work of the Office of the Quartet (OQ). It highlights areas of OQ’s work that are supporting Palestinian economic growth and institution building, focusing on issues concerning movement and trade, as well as infrastructure issues, and the impact they have on shaping the Palestinian economy.

Since the last AHLC, the Office of the Quartet Representative (OQR) has transitioned to the Office of the Quartet (OQ). The mandate of OQ remains unchanged, continuing to focus on economic and institutional development in the West Bank and Gaza, addressing issues related to strengthening investment in the Palestinian private sector, rule of law, and movement and access. OQ continues to focus its priorities on bringing about tangible improvements to help advance the Palestinian economy, thereby helping to preserve the viability of a two-state solution.

Executive summary

Twenty years after the signing of the interim agreements, we are at a perilous juncture. Palestinian-Israeli negotiations have not resumed since they were suspended in April 2014. There is uncertainty over political transitions in the Palestinian Authority and the PLO. The Hamas-Fatah reconciliation process has not advanced, leaving Gaza and the West Bank disconnected. Gaza is no closer to the basic infrastructure it needs to support its redevelopment. Escalating tension in East Jerusalem further threatens an already precarious status quo. The absence of a clear political horizon presents an increasingly challenging context within which to sustain the Palestinian economy.

The Palestinian Authority (PA) has managed its fiscal situation despite a prolonged period of crises. The PA is coping with dramatic reductions in budget support and increasing demand for public services, while trying to advance its reform agenda. Low investment in productive assets, underdevelopment of infrastructure, and declines in net exports exacerbate an already large balance of payment deficit. The West Bank is experiencing declining income per capita, rising unemployment, and higher poverty, while Gaza continues to endure recurrent humanitarian and economic catastrophes.

In the absence of a political solution, there are meaningful steps that can be taken to shift the status quo and work to build the institutions and economy of a viable state. Growth in the Palestinian economy will remain severely limited as long as disproportionate Israeli administrative and security measures continue. Concrete actions must be taken to bring about positive change throughout the West Bank, including East Jerusalem, and Gaza. Improvements in movement and access, as well as other economic empowerment measures, will help boost private sector activity, create more employment opportunities, and promote stability. Actions should focus on both structural issues – in particular the economic relations between the Palestinian Authority and Israel – as well as the promotion of key projects that can bring about economic and institutional development. Such actions are not intended to be a replacement for a two-state solution but rather to create an environment conducive to restarting a negotiations process.

Our key messages are summarized below:

>Economic empowerment starts with better implementation of existing agreements

The partial and selective application of the economic and trade arrangements between the parties (based on Annex V of the Interim Agreement, also known as the Paris Protocol) combined with restrictions associated with Israeli administrative and security measures, continues to have a significant negative effect on Palestinian economic growth. The Interim Agreement was intended to be transitional, lasting for a period of five years (ending in 1999) while the parties negotiated and agreed on a comprehensive peace treaty. Over the years, with successive negotiations falling short of a final status agreement, the parties continued to apply this agreement, albeit selectively, inconsistently, and often poorly. Presently, more than two decades since the start of the Oslo process and in the absence of an achievable alternative, the parties remain tied to this framework. This has led to unnecessary inefficiencies and restraints on Palestinian economic, trade and fiscal policy, as well as cumbersome institutional and jurisdictional constraints that hamper the PA’s capacity to govern effectively.

The unsustainability of the status quo is clear. Economic viability and fiscal sustainability under the current economic regime has been lost; practical measures are needed that will trigger a substantial and transformative change for the future of the Palestinian economy.

As a first step, a range of specific and feasible measures for more effective implementation of the Paris Protocol should be explored to address its main shortfalls and pave the way for a transition to an improved and sustainable trade regime between the parties. A number of pressing and structural issues need to be addressed, including import policy, tax clearance procedures, bilateral trade regulations, and cooperation and dispute settlement. None of this can be accomplished without a robust and sustained dialogue between the parties through the reactivation of the Joint Economic Committee (JEC). The goal must be to amend agreements where conditions have changed and reform in areas where all parties can agree.

Economic empowerment comes with responsibility and requires a firm commitment from the PA to build the effective institutions required to be self-sufficient. It is imperative that the international community also commits financial and technical support to help the PA in building the necessary capacity.

Recommendations:

  • GoI and PA political leaders, with support from the international community, meet and address reform of the Paris Protocol. Through reactivation of the JEC, the parties should seek to implement measures which have already been agreed and amend measures where conditions have changed.

  • GoI and PA agree to enhance the arrangements for sharing of revenues and to increase Palestinian ability to set and administer an independent trade and economic policy.

>The removal or reduction of restrictions on Palestinian movement, trade, and access is essential to economic growth

The anemic performance of Palestinian exports is at the heart of the Palestinian economy’s structural weaknesses. The share of total exports of goods and services as a percentage of GDP is approximately 17 percent, less than half of the GDP percentage in neighboring Jordan. This GDP figure, however, is reduced to less than 3 percent if exports to Israel are subtracted; exports to Israel currently represent a sizeable 87 percent of total Palestinian exports.

The balance of payment deficit is more than 30 percent of GDP, making the Palestinian economy overwhelmingly dependent on external resources. Palestinian manufacturers suffer from a lack of reliable access to the imports that are necessary to build productive capacity and manage supply chains. In addition, transaction costs of importing and exporting are significantly higher and the process takes longer and is subjected to greater uncertainty than regional peers, hurting competitiveness.

The removal or reduction of restrictions on Palestinian movement, trade and access remain essential to the development of the economy. A fundamental review of the dual-use goods lists and procedures to better focus the contents of the lists, in order to make the processes transparent and readily available to Palestinian importers, is a critical first step. A system needs to be agreed that differentiates “known traders” and addresses the challenges of large scale projects that may take years before completion and cannot be held hostage to unpredictable changes or idiosyncratic implementation of dual-use restrictions. The process for standards approvals is opaque and unpredictable, and together, dual-use approvals and standards approvals largely explain why Palestinian importers spend three times as much as Israeli importers when importing a container.

Recommendations:

  • The GoI, with support from the international community, defines clear strategic parameters for the dual-use goods lists, reforms the dual-use goods lists in line with these parameters, streamlines the processing of dual-use goods approvals, and makes all trade procedures transparent, in a way that meets and balances both Israel’s security criteria and Palestinian trade efficiency.

  • The GoI agrees to a goods transfer system which recognizes traders with an established secure trading history and which addresses the unique challenges of large-scale multi-year projects. The PA immediately reduces the bureaucratic delays and costs in the processes involved in approvals of shipments for export.

>Reinforcing the Jordan Valley trade route increases trade diversification to and from markets to the east, providing a catalyst for acceleration of an export strategy

Allenby Bridge is currently the only international crossing point between the West Bank and Jordan that serves both passengers and trade. Upgrading the Allenby crossing to include special scanners that quickly process containers will spur wider development of the Palestinian economy. In particular, the containerization of Allenby trade would reduce costs for Palestinian businesses, increase potential for imports and exports, and open new markets for Palestinian products. There has been significant progress on this project in recent months, with interim measures expected to come into force before year’s end, but long-term planning is vital to ensure that the process of containerization goes beyond simply handling the current demand.

Recommendation:

  • We call upon all parties (Government of Jordan, Government of Israel, Palestinian Authority) to maintain their current levels of engagement on this important project, to ensure continued resourcing, political support, and technical results.

>The rehabilitation of Gaza’s commercial sector and export markets is essential to recovery

The ongoing effects of the conflicts (especially the 2012 and 2014 conflicts), and close to 10 years of closures and restrictions, continue to take their toll on the population of Gaza, with the economy stifled and few opportunities for growth.

Despite progress enabled by the Gaza Reconstruction Mechanism (GRM), the value chain for exports out of Gaza is severely constrained by a number of factors, including:

  • Atrophied business systems and technical capacity due to constraints on movement of people.

  • Lack of contact with markets outside Gaza due to (a) constraints on movement of people at Erez and Rafah, and (b) inactive business relationships, leading to isolation and out-of-date product design.

  • Run-down and damaged production capacity, energy and water limitations, war damage and Israeli constraints on the import of machinery and parts.

  • Expense and constraints on moving goods to, through and from Kerem Shalom crossing due to the procedures imposed there by Israel, exacerbated by the absence of PA authorities at the crossing.

  • Absence of containerized trade for cold, fragile products or products destined to or from Ashdod port, and packing/height limits on export goods on pallets.

  • Reliance on Kerem Shalom as the only goods crossing which closes periodically for security reasons with no alternative channel.

Containerization of commercial cargo through the Kerem Shalom crossing (through which all trade to and from Gaza must currently traverse) leads to direct cost savings of approximately USD 400-500 per shipment. These savings are generated by streamlining several steps along the value-chain, less damage through the physical handling of goods, and increased security when a container is in transit from a port to Gaza. About half the 9,000 truckloads entering Gaza per month are commodities that could be containerized, which could save traders up to USD 1.8 million monthly. In addition, installing a conveyor at this crossing would enable faster and cheaper import of essential construction inputs, supporting the ongoing reconstruction efforts in Gaza.

Recommendations:

  • The GoI takes a strategic decision to fundamentally change the approach taken to controlling the movement of people and goods across Gaza’s borders. We call for an approach which recognizes that the need for re-development of Gaza’s commercial, business, technical and academic sectors has strategic benefits for Israel, and to put in place a system and processes that balance these needs fairly and transparently against Israel’s immediate security criteria. The PA and international community must work with and support the GoI to develop and build such a system which meets and balances the imperatives of security, free movement, and free trade.

  • The GoI and PA significantly accelerate efforts to increase efficiency and reduce the cost of goods at Kerem Shalom crossing.

  • The PA to facilitate issuance of (P) VAT invoices for those Gazan companies interested in selling products to the Israeli market.

>Reliable infrastructure is critical to any meaningful growth in the West Bank and to recovery in Gaza

Insufficient investment in large-scale infrastructure – power, water, telecommunications – is a serious inhibitor to economic growth throughout the West Bank and Gaza. This lack of investment can be attributed to a wide range of political and economic factors.

Addressing the interim and long-term energy and water needs in Gaza must be an unconditional priority for the Palestinian Authority, the Government of Israel and the international community. There can be no major rehabilitation in Gaza – humanitarian, social, economic, or political – without a permanent solution to the energy and water crises.

Two major multi-year projects are at a critical juncture in 2015-16, and have the potential to transform Gaza’s energy and water deficit: embarking on the connection of Gaza to a reliable natural gas supply via a pipeline; and the construction of large-scale water desalination plant. The direct economic impact of a more than USD 500+ million desalination project would be profound in terms of construction-related employment; the broader economic impact of the project could be as high as USD 3.1 billion. The active mobilization of local stakeholders as well as the international community in support of these two projects is of vital importance to Gaza’s future prospects.

Urgent interim energy and water measures in Gaza (including electricity grid upgrades, additional electricity from Israel and Egypt, additional supplies of diesel for the Gaza Power Plant, allowing import of machinery and spare parts to complete repair of the plant, solar PV, increased water imports from Israel, and the construction of short-term low-volume water desalination plants) are of high priority to help Gaza meet current electricity and water demands during the transition period to natural gas and large-scale desalinated water.

Reliable telecommunications infrastructure is also vital for the development of a modern economy. With the revival of the Joint Technical Committee in August, negotiations are ongoing regarding “technology-neutral” allocation of the spectrum. If successful, these negotiations will allow Palestinian wireless companies to upgrade their service capacity in the West Bank to 3G/4G. A separate but related negotiation involves the long-awaited release of 2G equipment necessary to build Wataniya’s network in Gaza. Deployment of new mobile communications technologies in the West Bank and Gaza would be a significant driver for Palestinian commerce, and we encourage the parties to find a way to move forward without delay.

Recommendations:

  • The GoI unequivocally supports a comprehensive solution to Gaza’s energy crisis, including urgent interim measures, and the ultimate long-term solution of enabling the supply of natural gas to Gaza.

  • With the finalization by the European Investment Bank of tender documents relating to the Water Desalination Plant in Gaza, the international community commits to completing the financing of this project in partnership with the Arab Gulf States (who have already committed to match 50 percent of the total costs).

  • To create an enabling environment for this investment, the international community makes a clear and strong statement of expectation from the Government of Israel to commit to facilitating the access of material for and sustained operation of the desalination project, free of impediment or destruction of the desalination project’s infrastructure.

  • All parties continue to prioritize and to provide support to the ongoing negotiations regarding the deployment of mobile communication technologies in the West Bank and Gaza. We also call on GI to finalize, with a clear commitment, the allocation of spectrum to the Palestinian side and approve the entry of all needed equipment before the end of October 2015 to enable full deployment of technologies in the West Bank and Gaza in the first half of 2016.

>Unblocking access to land resources is key to realizing economic potential

Access to land is critical to realizing the potential in the Palestinian economy. The PA and international community must pursue the untapped land resources in areas A and B. A well-functioning Palestinian Land Authority, with the capacity to manage and register new land, is a key enabler for this. Area C is, however, where the real economic potential lies. Specific proposals for industrial zones, housing, and agricultural projects may be able to unlock some potential, in advance of a broader resolution of the politics around Area C.

Industrial zones can be a powerful private sector mechanism to boost economic development, as long as they have unfettered access to markets - both for import and export purposes. Export-oriented businesses can take advantage of such strategic locations, with good access to trade routes. Industrial zones will provide integrated infrastructure in one location and provide incentives and facilities that would help contain costs, improving inventory efficiency and facilitating entry to foreign markets. The successful development and financial viability of new industrial zones in the West Bank is highly dependent on the ability to develop parts of Area C.

Recommendations:

  • In the absence of a broader political resolution on Area C, the GoI increases and accelerates practical support for the development of specific Palestinian high-impact projects and infrastructure in Area C.

  • To improve Palestinian access to land in Area A and B – and eventually Area C – the PA dramatically accelerates land registration and improves land management capabilities, by institutionally strengthening the Palestinian Land Authority.

Further information

  • Read the report in full (PDF)
  • The OQR prepares a report on its activities ahead of each meeting of the AHLC - a 15-member committee that serves as the principal policy-level coordination mechanism for development assistance to the Palestinian people. The AHLC is chaired by Norway and co-sponsored by the EU and U.S.