Palestinian economy - Supporting the private sector

16 May 2008
While optimism is returning to the Occupied Territories, the flood of foreign aid is hampering efforts to encourage entrepreneurialism.

Optimism is a scarce commodity in the Palestinian Occupied Territories. The realities of life under Israeli occu-pation have taught the local population not to indulge in false hope. Nonetheless, a measure of optimism has returned.

The Palestine Investment Conference in Bethlehem on 21-23 May will lead to a renewed effort to breathe life into the beleaguered local economy, offering foreign investors an opportunity to look behind the endless slew of negative headlines.

The government and event organisers will seek to convince businesses that despite the restrictions imposed by Israel and the grinding poverty in the West Bank and Gaza, there are genuine business opportunities in the Occupied Territories.

“There is misery out there but we have to be determined about this,” Palestinian Prime Minister Salam Fayyad tells MEED.

“There is a vibrant and resilient private sector in Palestine, and Bethlehem is an opport-unity to lift the spirit of our people. We are determined to build towards statehood despite the occupation.”

Business interest in the conference has fluctuated in recent weeks. An original $1m threshold for projects to be presented in Bethlehem had to be lowered to $100,000 to attract greater volumes of business. However, there are now almost $1.7bn worth of new opportunities to be presented at the event.

Growing confidence

Hopes are high among the local business community that the event will stimulate the private sector, and general confidence is growing. A survey of local businesses carried out in April by the Palestinian Central Bureau of Statistics found that 61.7 per cent expected production to improve over the next six months, with only 15.5 per cent expecting conditions to worsen.

However, no one within the Palestinian Authority (PA) believes that a conference can solve the problems of the Occupied Territories overnight. Life on the ground remains almost entirely dictated by the apparatus of Israeli occupation. The hope within government and among local business leaders is that a process can be started to steadily attract private sector investment over time, and that running concurrently with improvements in the peace process and security situation, the basis for sustained economic development can be established.

After such a catastrophic slump since the start of the second Intifada in 2000, the feeling among many is that if Bethlehem is not a disaster, it will have been a success.

“The most important part of the con-ference is the message,” says Mohammed Shtayyeh, president of the Palestinian Economic Council for Development & Reconstruction (Pecdar), speaking to MEED in Ramallah. “We are
realistic. We hope some investments will come here but expectations are not very high. The message is that it is still possible to do business here. If we can bring some projects to the table and make a success of them, hopefully next year and the year after the process may grow.”

Peace process

Bethlehem will also provide a useful benchmark for the progress made since the brief flurry of optimism for the Palestinian cause late last year. The reopening of the US-led peace process in Annapolis led to bold predictions from Washington about the possibility of an independent Palestinian state being established by the end of 2008. Three weeks later, the $7.7bn pledged by international donors in Paris offered a fresh injection of funds to the shattered local economy.

It has not taken long for that optimism to dissipate. The Annapolis process has almost ground to a standstill. Within days of the December conference, Israel had announced plans to accelerate its expansion of settlements in East Jerusalem. Months of negotiations brought a grudging agreement to dismantle 50 of the almost 600 checkpoints, barriers and roadblocks scattered throughout the West Bank. In the event, the barriers selected turned out to be on secondary or redundant roads. In some cases, locals claim that Israeli bulldozers erected new obstacles one morning before inviting the media to witness them being removed in the afternoon.

Bethlehem offers a new test of Tel Aviv’s declared willingness to allow the Palestinians to rebuild, creating the conditions for sustained economic development through a steady easing of restrictions on the ground.

“Bethlehem is a test for Israel,” says Shtayyeh. “It has claimed it is ready to facilitate private sector investment in Palestine; this is its chance to prove it. Palestinians have been successful all over the world, but not given the chance to do something in their own country. If Israel will allow businessmen permits to come and go, we might see real investment. If they are allowed one visit only, they won’t bother.”

The billions pledged to the PA in Paris in December emphasise the internal conundrum facing the Palestinian economy. The Occupied Territories are now the fifth most aid-dependent territory on earth. In the short term, economic development is impossible without foreign assistance, but that money makes it harder to realise the vision of a thriving private sector.

Some 180,000 Palestinians currently work for the government in some capacity. In Gaza, public sector workers comprise 50 per cent of the labour force. The security services alone employ about 90,000 workers, causing stagnation in the job market. With foreign aid available to secure government salaries and the commercial environment so unstable, there has been little incentive for entrepreneurialism.

Moreover, the infusion of international aid has led to a massive increase in the number of non-governmental organisations (NGOs) in the West Bank and Gaza. These operations pay higher salaries than are available from a start-up private business, discouraging Palestinians from branching out and diversifying the private sector.

Education in particular has suffered. Many well-qualified and much-needed professors have been lured away by improved salaries to start their own NGOs.

House prices and rents in Ramallah, where many of the NGOs are based, have been driven out of the range of ordinary Palestinians by the numbers of international workers based in the city. “We are heavily reliant on donors’ money,” says Shtayyeh. “It is very important but it has created dependency. It kills local initiative and does not allow creativity in society.

“We need much greater investment in the infrastructure to put the private sector in the driving seat of the economy. There is no business incubator in the whole West Bank, no venture capital instrument to allow new ideas, no research and development in the universities, no link between industry and academia. These are the things that make a country stand on firm ground. This is the direction the PA should be heading in.”

Tackling corruption

Salam Fayyad’s government is encouraging private sector investment, taking steps to tackle the corruption that has dogged the PA throughout its history and introducing a series of initiatives to overhaul the tax and regulatory environment.

Palestinian banks, many of which are highly profitable but have been reluctant to lend to local businesses without unrealistic collateral demands, are now being encouraged to participate in lending programmes through joint ventures with international institutions.

Things will not change overnight. Co-operation between the public and private sectors has generally been in short supply in the West Bank and Gaza. Again, however, the Bethlehem conference has spurred the government into action. On 23 April, Fayyad hosted the first meeting of a new economic committee drawing together ministers and senior figures from private business.

The Prime Minister is aware of the deficiencies in the system and the PA’s poor record of encouraging the private sector. However, he is convinced the right steps are being taken to move the economy forward, and that the new legislative framework to be presented in Bethlehem can reassure potential investors that the risks of these projects are worth taking.

“Can we realign the incentive structure in a way to make it profitable to employ Palestinians and hence to seek employment in business?” he asks. “The answer is yes, depending on the degree to which we are enabled to function by Israel, which controls the context in which we are operating.

“There is an imbalance of jobs in government. This bloated bureaucracy is clearly not sustainable. We had to cut the civil service and we are doing it, but it is not easy in the best of circumstances, and you can imagine how much harder it is in conditions of abject poverty and degradation.”

Not everyone has been impressed with the PA’s efforts to trim the public sector. An initiative to cut the security services has met with particular disdain. Staff have been offered voluntary retirement, often on full salary. “If you retire people and are paying 99 per cent of their salaries, you can make the argument that you are saving 1 per cent, but what is the point of sending people home?” asks Shtayyeh.

“Who leaves under this structure? The good ones - those who can get jobs elsewhere. So they get 200 per cent salaries. We are actually wasting resources.”

Ending waste

The Hamas opposition continues to contest the government’s claims that it is cutting red tape, alleging that more ministerial and civil service appointments have been made in recent months despite pledges to trim the public sector (see box above). Despite some success in curbing corruption, nepotism and simple disorganisation remain rife.

“We sold x-ray equipment to the Health Ministry, and had to stop because it did not pay us,” says Fadi Kattan, managing director of Transjordan Engineering, a Palestinian importer and distributor of international branded goods. “After three years, we have still not got all our money back. Now they are stuck because they need x-ray films in Gaza.

“Someone else better connected than me has been awarded a contract on our specifications. I supply him, he pays me cash, and he supplies the ministry. Because of his contacts, he gets paid where I did not. Is that a healthy structure? It is just disorganised.”

The Bethlehem conference will give a clear indication of whether foreign businesses are prepared to work with locals to overcome these obstacles. The Palestinian cause remains so central to the Arab sense of self that financial assistance remains assured. But the PA and local business leaders will hope to impress upon potential investors that what is needed now is targeted investment in the private sector rather than a continued supply of blanket aid that supports but stifles commercial creativity.

Israel still holds the key to any lasting shift in the economic fortunes of the Occupied Territories, but sufficient opportunities exist for a process of change to begin.

“I don’t want Palestinians or Arabs to come here to invest out of duty, I want them to come because it is profitable,” says Shtayyeh. “There are opportunities, so it all depends on how ready Israel is to allow us to succeed. We do not want Israel to make us a success, we want it to allow us to succeed. There is a huge difference. We will see now if it is ready.”

Regulatory reform

The Palestinian Authority has been pushing through a series of critical reforms ahead of the Bethlehem conference:

  • Company law: New unified legislation in place

  • Investment law: Amended tax breaks introduced

  • Income tax law: Tax break for companies with start-up capital below $1m extended to seven from five years

  • Personal income tax: Basic threshold of tax-free income raised to $7,200 a year from $3,000

  • Top tax bracket: Limit raised to $20,000 a year from $16,000

  • Corporation tax: Reduced to 15 per cent from 16 per cent

Source: The Portland Trust

Proposed investment

  • West Bank: $784m

  • Gaza Strip: $258m

  • Jerusalem: $650m

  • Area total: $1.7bn

Total value of projects to be put forward at the Palestine Investment Conference, 21-23 May. Source: Palestine Investment Conference

Table: Total value of projects according to area

AreaAmount (US$)
West Bank784,038,531
Gaza Strip257,770,000

Table: Total value of projects according to sector and area (US$)

SectorWest BankGaza Strip*JerusalemTotal
Housing, real estate and construction99,691,859197,900,000437,700,000735,291,859

* Gaza Strip: The private sector in the Gaza Strip identified an additional 40 strategic projects to be jointly developed between the public and private sectors with total investment of US$1,599,000,000.

A growing divide

The closure of Gaza will be a depressing subtext to the Bethlehem conference. The Palestinian Authority (PA) and business figures stress they will expand the projects put forward into the strip when the opportunity arises, but no one knows when that time may come. The Israeli lockdown on Gaza is so total, with a bare minimum of materials allowed in, that investment is unviable.

“The Gaza private sector cannot participate constructively in Bethlehem,” says Samir Hulileh, managing director of the Portland Trust, a UK-based non-profit-making organisation dedicated to promoting stability between Israel and Palestine, and a keen supporter of the conference. “They can come, they can speak, but they cannot invest.”

The economic divide between the West Bank and Gaza continues to widen. International aid has ensured that government salaries in the strip are being paid, but the private sector is on the verge of collapse and there is as yet no sign of a rapprochement between the PA and Hamas, which overthrew the Fatah party of Palestinian President Mahmoud Abbas in the summer of 2007.

Members of the former Hamas government are unimpressed with the PA’s claims to be overhauling the inefficient bureaucracy left behind. “The government claims more than 58 per cent of aid is being spent on Gaza,” says Samer Abu-Eisheh, acting finance minister and planning minister for the former Hamas government, speaking to MEED in the West Bank city of Nablus.

“This should be investigated. We know no development budget being spent on Gaza. No operational expenses are being sent to operate the government budget because they consider them [Hamas] ‘hostile entities’. So how can 58 per cent of the budget be being spent on Gaza?”

Naser al-Shaer, deputy prime minister and education minister for the Hamas government, agrees. “We have good relations with Salam [Fayyad],” he says. “We have worked together in the past but we are talking about systems and institutions, about the situation on the ground.”

With this tension between the two opposing sides, the short-term prospects for a reconciliation and the re-establishment of the PA in Gaza are slim. The suffering of the inhabitants of the strip continues unabated and investors will continue to turn their attention to the greater prospects in the West Bank.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications