Supporting the Peace Process

Submission to the UK Treasury

4 November 2005

Mr. J Cuncliffe
Managing Director
Treasury's Macroeconomic Policy and International Directorate
HM Treasury,
1 Horse Guards Road,

Mr. E Balls, MP
20-22 Cheapside
W Yorkshire,

Dear Sirs,

Re: Supporting the Middle East Peace Process through Economic Development; Treasury Notice, 21 September 2005

The Funding for Peace Coalition (FPC) actively campaigns to ensure that the financial commitments of the European Community towards the Palestinians reach their target population.

The need to re-establish an effective Palestinian economy is apparent now more than ever. The FPC strongly welcomes UK initiatives to support the efforts of Mr. James Wolfensohn and the Quartet to promote economic development in the Palestinian territories.

Socio-Economic Background:

It is generally accepted that following the launch of the Palestinian Intifada, the economic status of Gaza and the West Bank deteriorated significantly. The Israeli market, the main focus for Palestinian trade, was closed off. Whether due to Israeli military procedures or internal Palestinian violence, there has been a marked reduction of economic movement.

The World Bank has confirmed that from September 2000, over 100,000 relatively well-paid Palestinian jobs within Israel were lost. Today, there is an immediate need to find proper employment for tens of thousands of people currently in the pay of a myriad of militias.

On top of these issues are the social inequities. Transparency International (TI) is the world's leading independent observer of corruption in individual countries. TI's chairman, Peter Eigen, has emphasised the importance of fighting corruption: "Corruption is a major cause of poverty as well as a barrier to overcoming it. The two scourges feed off each other, locking their populations in a cycle of misery. Corruption must be vigorously addressed if aid is to make a real difference in freeing people from poverty."

The Palestinian Authority (PA) publicly adopted the reforms outlined by the IMF in its September 2003 report and demanded by the international community as a pre-requisite for ongoing financial support. In the following two years, TI's index has shown a 13% decline in the PA's absolute score and a drop from 78th position to 107th.

Many of the injustices are given form in the presence of the refugee camps. For years, UNRWA and numerous NGOs have been working in Gaza and the West Bank. Yet, as the Palestinians participants noted in the recent BBC sponsored Doha Debate, there is a credible case for stating that the leadership of the PLO and the PA have ensured that the residents of UNRWA camps have been kept in squalor; pawns in a larger game.

The FPC looks to the UK Treasury to ensure that these practices are brought to end, in the name of both peace and social equality. TI clearly points out that a poor Corruption Index score is not a reason to stop aid. What it advocates is that all aid should be strictly and firmly controlled to prevent it becoming a cause rather than a cure for poverty.

The Finances Of The Palestinian Authority:

Encouragingly, Mr George Abed, a former senior official at the IMF and now governor of the Palestinian Monetary Authority, gave an interview in September to the San Francisco Chronicle. He stated that the Palestinian banking sector was "overflowing" with funds, thus demonstrating the ability of some local commercial sectors to sponsor new infrastructure schemes. He was insistent that wealthy Palestinians, resident locally or abroad, "are, generally speaking, attached to their homeland. If the environment improves, they will definitely come exploring investment opportunities."

At government level, the lack of transparency of PA's accounting methodology was exposed by a detailed IMF report in September 2003.

The most publicized finding of the IMF report was the discovery and partial recovery of some $890m in diverted revenues, where the Palestinian Investment Fund (PIF) acted as a transparent holding company for the diverse assets of the PA which had been hidden. Less noticed was the IMF discovery of PA expense budgets being open to abuse and diversion to corruption and violence. This was detected in poor budgeting and expenditure controls, bad purchasing practices, cash payrolls, and excessive public service salary budgets.

In order to refute charges of the diversion of its budgets toward corruption and violence, the PA started publishing its accounts on the internet. An analysis of the figures and recent reports reveal:

  1. The PA itself appears well funded. Its financial reports show that, since January 2003, it has transferred $151 million to Financial Reserves, and its net lending (or debt retirement) over the period was a further $ 528 million. The PIF accounts are not available on line in English as was anticipated by the IMF, but it is noted that the PIF transferred some $ 106 million to the PA Treasury this year.

    While it is difficult to assess the total wealth of the PA, it emerged from a recent legal dispute in America that the PA holds $1.3 billion in cash assets in the USA alone.

  2. The PA wage bill has now reached approximately $90m per month - or about $1,100m a year. In 2003, the IMF had already identified the annual wages of $673m as excessive, especially as so many of the services one might expect that the PA undertake are provided by UNRWA.

    The EU and individual member states together have proudly claimed to be the major financial supporter of the PA since 1993. However, as the PA is taking on board more Al-Aksa people as "security" personnel and paying their salaries, the soft underbelly of foreign donors is exposed.

    There is ample evidence of ongoing PA employee involvement in terror. Aside from some 20 cases listed in the FPC report of September 2004, reports of more recent acts of violence against innocent citizens, Israeli and Palestinians, clearly implicate PA employees.

    The funding of budgets that pay the salaries of public servants who are involved in terror or its glorification simply cannot be morally justified.

  3. In the first 8 months of 2005, the PA transferred $16m to the PLO. The PLO continues to operate under its unchanged charter, which declares its sole raison d'etre to be the violent removal of Israel from the world map. It is questionable whether transferring funds to the PLO, directly or indirectly, satisfies EU or UK legal requirements.

  4. The level of corruption within the PA itself is still of significant concern; financial, judicial and political. Intelligence assessments are that, as a result of failures of financial proprietary, "all international investment activities in Gaza are subject to the ultimate control of local warlords and terror groups."

    Recent investigative reporting in Time Magazine and other respectable journals highlighted the extent of the corruption and violence. The recent words of a Palestinian Legislative Committee should be stressed. It recommended the dismissal of the current Qurei government due to a failure to impose order on armed gangs and militias and a "clear failure in implementing the reform and development plan, as well as in the war against corruption."

Since 1993, the EU has donated over 2 billion in direct and indirect aid to the Palestinians. The total from individual states doubles the contribution. Currently, the Commission estimates that approximately 0.5 billion is being given out annually. Direct aid to the PA from all donors, including the World Bank Trust Fund, amounts to approximately 25% of current annual expenditures.

Given the current instability in Gaza and the West Bank, aid funding, which is not carefully and scrupulously monitored, runs the significant danger of being used to reinforce corruption. As Mr Eigen of TI emphasises: "Corruption is a major cause of poverty as well as a barrier to overcoming it."

International Agency Recommendations:

The UK Treasury is advised to consider the workings of OLAF, the EU anti-fraud squad. Resulting from its 2-year investigation of contributions from Brussels to Palestinian organisations, OLAF established a unique international expertise in advising how donors should handle taxpayers' money. It sought to investigate if the target population had been serviced efficiently, while leaving no doubts in the minds of the citizens at home as to the propriety of their representation.

In its press statement of March 2005, OLAF concluded that

...misuse of the Palestinian Authority's budget and other resources, cannot be excluded, due to the fact that the internal and external audit capacity in the Palestinian Authority is still underdeveloped.

OLAF outlined 5 recommendations. Once generalised, these should appropriately form the backbone of any effort, directed to help the Palestinians. They ensure that resources are not be diverted towards violence or corruption. These include:

a) Agreements must contain safeguard and monitoring provisions, closely co-ordinated across the international community.

b) A single system of auditing and monitoring shared by all members and duly implemented.

c) Support and controls for internal auditing and on-going monitoring processes.

d) Funds circulating outside statutory budgets must also be subject to accountability.

e) Practices, which are considered supportive of terrorism, must be halted. These include paying the salaries of those convicted for violence and other contributions liable to be misunderstood.

The UK Treasury is also urged to consider the 11 recommendations of the Financial Action Task Force (FATF), of which the UK is a member. The FATF is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing.

How To Give Aid:

The World Bank has repeatedly explained that a resolution of the economic crisis facing the Palestinians will come about through steps taken to increase freedom of movement coupled with deep reforms of the Palestinian social, financial and judicial systems.

What is emerging is a unique opportunity to ensure that aid is leveraged to direct the resources and wealth of the PA, the PLO, Palestinian financial institutions and private individuals towards the development of the Palestinian infrastructure and economy, for the benefit of the Palestinian people, allowing them to emerge from the poverty to which they are subjected.

It is recommended that donors direct their efforts to projects that enable all sides to carry out their obligations.

Recommendation No 1:

Future help needs to be delivered in a transparent and accountable manner, directed towards ethically defensible projects. An independent and public monitoring system should immediately be introduced for all funds provided to the Palestinians. The Palestinian public will see what is being provided for them, and the propensity to misuse taxpayers' money will be curtailed.

An appropriate working model is that currently used by the World Bank (WB) for tracking its specific projects in the West Bank and Gaza. The level of fiduciary care and transparency is exemplary - and has no doubt been a major contributing factor to both the success of the WB projects, and the acceptance by the WB as an "honest broker" by all parties. The careful project planning, selection of local partners, and honest appraisals of progress at every point, coupled with posting detailed reports on the internet for all to see must be contrasted with the ongoing criticism the European Commission has been subject to in the same arena.

It is difficult to justify pouring more resources into politicised NGOs or even UNRWA. It is advised that the latter, at least in the Gaza region, be progressively restructured, if not wound down. There is no longer any political validation for keeping Palestinians in refugee camps, when they possess full control over the whole of the Gaza Strip.

Former UNRWA Commissioner-General, Peter Hansen, put it very well on 1 November 2005, in a speech at Washington's Palestine Center:

There is no doubt that, at some point, the Palestinian Authority should take over all of UNRWA's capacity in Gaza and the West Bank. I would say the sooner the conditions for that are ripe and it can be done, the better.

Recommendation No 2:

When considering infrastructure projects, the UK Treasury is advised to consider the " for " concept. The idea is not just to gain Palestinian ownership and commitment and appreciation of the true value of the investment considered. It will also encourage the local populace to take pride in its own economic revival and not rely on long-term charity.

The alternative was exemplified when Mr Wolfensohn sought overseas investors to purchase the greenhouses left by the Israeli settlers, who withdrew from the Gaza region in August 2005. Once the Israelis had ceased to protect the region, Palestinians ransacked the agricultural facilities. It can be surmised that if the investors had included local personalities, such malicious waste may not have occurred.

An alternative to this proposal is to limit donor participation in a project to 40%, 50% or 60% depending on its size, scope and third party involvement.

Recommendation No 3:

The UK Treasury should consider the creation of a seed fund to co-invest in a growing number of Palestinian start-ups. The recent ExpoTech 2005 in Ramallah, sponsored by the Palestinian Information Technology Association, has demonstrated that there are clear opportunities for investment, which will encourage both employment opportunities and long-term economic growth.

A possible derivative to this idea is that certain parts of the investment might be reserved for companies seeking an Israeli partner, thus helping to promote regional coexistence.

Recommendation No 4:

All investment recommendations should carry a pre-requisite of decommissioning of militias and private armies. Both in Northern Ireland and in Afghanistan, this stipulation has provided a greater sense of internal stability for the local population. It has also decreased the potential for distortions in the judicial, financial and democratic processes.

In this sphere, the Palestinian President, Mr Abbas, made a welcome move, demanding that members of militias must resign their posts before taking part in the forthcoming elections.


The FPC calls on the UK Treasury to find a moral set of proposals; proposals, which will show with evident transparency that projects can be established on behalf of the Palestinians themselves, and not just for an oligarchic leadership. Economic growth, especially established in partnership with economic neighbours, can only benefit all seekers of peace in the region.

Yours sincerely,

David Winter

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