Nowhere is the potential of the Palestinian economy more evident than in the topsy-turvy world of telecommunications in the West Bank and Gaza. Despite the economic impact of the Palestinians' precarious political situation, the telecommunications business is booming.

'We are one of the most competitive markets in the Middle East,' says newly appointed PalTel Group chief operating officer Hakam Kanafani. PalTel Group was formed in June from the existing fixed-line service Palestine Telecommunications Company (PalTel) and its 100 per cent-owned mobile phone subsidiary Jawwal, where Kanafani was chief executive officer (CEO) until 1 October.

Kanafani's statement might have a hollow ring, given that PalTel and Jawwal are the only Palestinian operators in the West Bank and Gaza. PalTel, along with the Palestine Development & Investment Company (Padico), is a pillar of the bullish Palestine Securities Exchange (PSE). The company posted first-quarter 2005 net profits of $14.3 million and is an alluring option for Palestinian investors searching for liquid opportunities. PalTel is a giant among local companies and Jawwal accounts for about 75 per cent of its revenue. Jawwal's income in the first half of 2005 surged to $54.6 million - 70 per cent of its revenue for the whole of 2004. It accounts for 40 per cent of PalTel Group's income. In a further extension of its reach, the group also controls the internet service provider (ISP) sector after purchasing 12 local firms.

'PalTel Group is consolidating its monopoly at a dangerous time. It is trying to milk its position as much as possible,' says Sam Bahour, managing partner of Ramallah-based Applied Information Management. But this is not the whole story. As always in the Palestinian economy, there is an Israeli ingredient.

Under the terms of the Oslo Accords, service operators and providers in the West Bank and Gaza are required to seek approval from the Palestinian Authority. This does not happen. National Israeli operator Bezeq has grabbed a thin, unauthorised slice of the fixed-line market, impinging on PalTel's exclusivity. More significantly, four unlicensed Israeli mobile operators - Pelephone, Cellcom, Partner (Orange) and Mirs - advertise and sell services. This means there are five mobile operators vying for a stake in the 1 million-subscriber market in a tiny, non-contiguous geographical area. Communications consultant Arab Advisors Group puts the Palestine market behind only Jordan as the most competitive cellular sector in the Arab world, followed by Algeria and Iraq. 'Nowhere in the world does a company have exclusivity and only half the market share,' says Bahour.

But Bahour is concerned at the lack of regulation in the market. He participated in the privatisation of the telecommunications sector post-Oslo, when the establishment of a monopoly operator was planned in tandem with a regulator. A telecommunications law and policy papers have been drafted but the process has stalled at executive level, leaving the Palestinian Telecommunications & Information Technology Ministry to act as an interim watchdog.

'The Palestinian Authority [PA] needs to create an agency to develop the sector's capacity. We need to liberalise the telecommunications sector and there is no time to do this before PalTel's exclusive licence expires,' Bahour says. That will happen in November 2006, although its operations licence will last for another 10 years. The ministry has done little to curb Israeli mobile phone operators. In August, it issued a statement asking consumers to stop buying Israeli products, and distributors to stop selling them.

The situation is squeezing out local investment in a sector that is poised to help drive Palestinian economic recovery. Palestinian companies are feeling the double crunch of a domestic conglomerate and fierce international competition. 'The Palestinia