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Source: Office of the Quartet
19 September 2016

Office of the Quartet

Report for the Meeting of the Ad-Hoc Liaison Committee

on Action in Support of Palestinian State-Building

19 September, 2016 New York

Executive Summary

This report focuses on Palestinian economic independence, exploring the challenges facing key sectors and suggesting solutions.

A state with a high level of economic sovereignty is defined by three characteristics: sustainable government finances, low unemployment, and a balanced economy that is not overly dependent on a small number of economic sectors or a small number of trading partners. Building viable water and energy sectors, as well as other basic infrastructure, is critical to achieving these goals. While the full potential of the Palestinian Territory will only be realized with the end of the occupation, it is, in the interim, possible to make significant progress for the Palestinian people.

The private sector plays a critical role in achieving Palestinian economic independence, along with the PA. There are four possible mechanisms through which growth in the Palestinian economy might be realised: the Palestinian Authority (PA), development assistance, the Israeli economy that provides some employment to Palestinians, and the private sector. Of these four engines, the private sector provides the most sustainable pathway. Development assistance is declining, the PA struggles with a deficit, and dependence on the Israeli economy is not a long-term solution.\1 Though the Palestinian private sector has the potential to be a powerful engine, today the Palestinian economy suffers from underinvestment in Palestinian industry. Investment in plant and machinery in the West Bank and Gaza as a proportion of GDP has fallen from 12.9% in 2000 to 4.8% in 2014. The current annual level of underinvestment in plant and machinery amounts to about $1.4 billion a year.

The Office of the Quartet (OQ) is working to reverse this trend in investment. OQ's mission statement is "Building the State, Empowering the Economy". OQ works with the PA, the Palestinian business community, and actively seeks the support of the Government of Israel (Gol), the international community, and the domestic and international private sector in support of Palestinian institutional development, economic growth and empowerment. Together with the international community, OQ additionally seeks to enable, support, and drive implementation of strategic priorities, as agreed with the PA.

Water, power and telecommunications are key components of the infrastructure base that will provide the necessary groundwork for economic development. They are also sectors that are critical as a basis for private investment. Economic development can only be achieved once basic humanitarian needs such as access to water and energy are met. Furthermore, a sustainable energy supply is essential for job-creating factories, hospitals, and clean water facilities such as desalination plants — all of which are critical for strengthening the Palestinian economy.

The Quartet Principals' statement of September 2015 underscored the importance of such infrastructure in creating the foundations for economic development and stability for both Israelis and Palestinians. The reliable supply of water and power is essential for encouraging investment, and private investment is key to the future direction that the Palestinian Territory will take.

This report suggests a multi-faceted approach to achieving affordable, reliable, and sustainable supply of energy and water in the Palestinian Territory. In Gaza, additional electricity infrastructure needs to be installed urgently. Current electricity demand in Gaza is estimated to be almost twice that of supply. Correcting this requires putting in place a high-voltage transmission grid and implementing the recently approved 161 kV line from Israel. These investments will help stabilize the power supply to homes, offices, factories, and hospitals, all of which are still coping with extensive and debilitating power shortages some two years after the last conflict. These problems have exacerbated poverty, instability and environmental degradation in Gaza.

In the longer term, in order to sustain growth and build a thriving economy, it is critical to secure donor support for key backbone infrastructure projects such as the Gas for Gaza pipeline which will help address basic humanitarian needs and unlock private investment for projects such as the Gaza Power Plant and the Gaza Marine gas field. The OQ is encouraged by the recent statement, in support of a gas pipeline to Gaza, by Israeli PM Netanyahu, along with the selection of a route for the Gas for Gaza pipeline, which will unlock progress with this project.

The West Bank also needs infrastructure improvements and investment in alternative energy sources in order to meet its energy needs. A gas pipeline connection to the West Bank is a necessary prerequisite for the success of the Jenin Power Plant project, which will increase the West Bank's generation capacity. In tandem, investment in renewable technologies, such as solar power, is needed. Commercial-scale solar photovoltaic (PV) power generation is a particularly attractive option for the private sector because of its economies of scale and potential for higher return on investment than other renewables. Palestinian control over generation and distribution of electricity in the Palestinian Territory will enable this. Crucially, the 161 kV transmission line and associated four substations in the West Bank (supported by the European Investment Bank) need to become operational. This together with the transfer of the electricity distribution network to the Palestinians, as part of the recently signed electricity agreement between the Israelis and Palestinians, will constitute a major step towards a viable and sustainable energy sector. The OQ welcomes this important agreement, which will empower the Palestinian power sector by allowing them control of the sector.

Inadequate access to water in Gaza is rapidly turning into a major crisis. Currently, almost all Gaza's water supply comes from the Coastal Aquifer. This supply is being depleted at an alarming and completely unsustainable rate. Gaza needs to find alternative supplies without delay. If the problem is not immediately rectified, the water crisis in Gaza has the potential to become a major humanitarian disaster. The announcement of an additional 10 MCM for Gaza is an important step in increasing bulk water supply and complements the eventual construction of a large-scale desalination plant, which would provide 55 MCM, thus helping to address the projected shortfall of 210-220 MCM required in 2020. In order to avoid costly delays to project implementation, Gol needs to reach agreement with PA on entry of "dual use" materials during the construction and operation of the desalination plant. The full development of the existing Gaza Power Plant, could include a desalination component with a capacity of a further 30 MCM.

The second challenge in Gaza is the inadequate wastewater treatment infrastructure. The recent Gol commitment to ensure that NGEST receives the energy required is welcomed. Rapid implementation would have the additional benefit of giving donors confidence that larger scale, complex infrastructure (such as the proposed desalination plant) can be completed. The completion and full operation of the wastewater infrastructure already under construction at three new treatment plants in Gaza is an essential next step.

The OQ welcomes the Gol decision to increase water supply to the West Bank with 6 MCM per year, as a first step towards the full execution of the Red Sea-Dead Sea water agreement. In parallel, PWA can assist the strengthening of the water and wastewater sector by creating a sustainable financial climate that is conducive to investment and cost recovery. Implementing the 2014 Water Law, establishing the National Water Company, and enhancing the capacity of the Water Sector Regulatory Council are all important steps in this direction.

A comprehensive strategy for Palestinian economic independence based on attracting additional private investment also requires there to be progress in key sectors such as telecommunications, movement and trade, and the rule of law. As part of this push, the PA and the international community should take the opportunity to revisit strategic options, as and when major enablers are unlocked, such as 3G/2G, as well as recent milestones on Gas for Gaza and agreement. The July 2016 Quartet Report underscored the priority given to improving these sectors, stating that, "progress in the areas of housing, water, energy, communications, agriculture, and natural resources, along with significantly easing Palestinian movement restrictions, can be made while respecting Israel's legitimate security needs."

In addition to power and water, it is vital that Palestinian businesses are given access to wireless broadband. The implementation of a comprehensive telecommunications strategy, including a solution to the allocation of wireless spectrum in Gaza and the West Bank, is long overdue. The Gol needs to take urgent action to resolve these issues and allocate the necessary spectrum. In order to encourage increased trade and access for people in the Palestinian Territory, it is also important to improve infrastructure at Allenby and other crossings, ease restrictions on movement, and enable Palestinians to cultivate new trade opportunities. In Rule of Law, progress to date in the support for the justice system, police mapping, court mapping, and the Paris protocol needs to be consolidated and further developed. The annex of this report makes recommendations for these sectors and describes implementation strategies that can be adopted using the economic mapping software and data developed by OQ with the support of the Government of the Netherlands.

Since the last AHLC, Shurook, an entity administered by UNOPS, but separately funded and operated, has been created. Shurook is focused on providing 'seed capital' for early stage project development. It currently has fifteen employees based in Ramallah and Jerusalem and works closely with key Palestinian partners such as the Palestinian Investment Fund (PIF), Consolidated Contractors Company (CCC), Bank of Palestine, and Padico. Shurook is a not for-profit entity that seeks to catalyze investments of strategic importance for economic independence. This currently includes medium-to-large scale solar power, water treatment, low cost housing and healthcare. Whereas OQ focuses most of its attention on public sector policies and projects, Shurook focuses on commercially viable and financially sustainable private sector oriented projects.

1 April 2016, Office of Quartet, AHLC Report.

Complete document in PDF format (Requires Acrobat Reader)

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