The Economic Outlook

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ѪF8PSME#BOL The World Bank, December 1, 2004 Contents

INTRODUCTION...... 1

1 – THE CONTEXT ...... 4 I – INTRODUCTION ...... 4 II – THE PROCESS...... 4 III – ECONOMIC IMPLICATIONS OF ISRAEL’S DISENGAGEMENT PLAN ...... 5 IV – THE PALESTINIAN ECONOMY AFTER 4 YEARS OF INTIFADA...... 6

2 – DISENGAGEMENT PLUS: ISRAEL’S PROPOSALS FOR EASING CLOSURE...... 8 I – INTERNAL MOVEMENT...... 8 II – BORDERS AND TRADE FACILITATION ...... 10 III – LABOR FLOWS TO ISRAEL...... 15 IV – THE FUTURE OF THE QUASI-CUSTOMS UNION...... 15

3 – PALESTINIAN PLANS TO REVIVE THE ECONOMY...... 18 I – THE PA’S STRATEGY FOR RECOVERY AND GROWTH...... 18 II – PALESTINIAN REFORM ...... 18

4 – THE SETTLEMENT ASSETS...... 23

5 – THE ECONOMIC OUTLOOK...... 25

6 – HOW TO TURN THE CORNER ...... 26 I – ADDITIONAL MEASURES WILL MAKE THE DIFFERENCE ...... 26 II – ECONOMIC RECOVERY ...... 29 III – THE DONOR RESPONSE ...... 30

TABLES ...... 32

ENDNOTES ...... 35

Introduction

“If the PA shows firm commitment to security and economic reform and if Israel seriously addresses closure, another major donor effort definitely would be justified. Under these circumstances an additional US$500 million each year could help the Palestinian economy to turn the corner.”

James D. Wolfensohn, President, the World Bank, June 23, 2004

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1. The World Bank’s June 23 report, line. While prosperity is no guarantee of Disengagement, the Palestinian Econ- tranquility, history teaches that the opposite omy and the Settlements, warns of the is too often true – that destitution, political potential disintegration of the Palestin- instability and violence are constant com- ian economy under the sustained pres- panions. sures of conflict and Israeli closure policies. The report describes a society which 4. At this juncture, it is vital that has, in the space of four years, lost all eco- policy-makers focus on stabilizing and nomic dynamism and experienced a reces- reviving the economy as part of any new sion of historic proportions. As a result, the political process. For the PA to play an strong social cohesion that characterizes effective political role, it must preside over a Palestinian life has begun to crack, while the period in which the Palestinian population Palestinian Authority has lost credibility and experiences positive change in their daily effective control in several parts of Gaza lives – in their the ability to move freely, to and the West Bank. This is a situation which trade, to find work, to earn a living for their is potentially ruinous for both Palestinians families. and Israelis. 5. While money, and in particular 2. Today there is hope that the Is- donor money, has an important role to raeli and Palestinian governments are play in reviving the economy, it is not once again ready to discuss their shared the determining factor. The last four years future. They would do so at a time when exemplify how little donor assistance can Israel is preparing, for the first time, to achieve in the absence of a positive policy evacuate settlements established in Gaza environment – while donor disbursements and theWest Bank after the 1967 war, and doubled to almost US$1 billion per annum, when President Bush has just reminded the real personal incomes fell by almost 40 per- world of his wish to see the emergence of a cent in the same period. “truly free” and democratic Palestinian state before the end of his second term. The PA’s 6. To change this frustrating dy- decision to hold presidential elections in line namic, the underlying causes of eco- with the provisions of the Basic Law and to nomic decline need to be addressed. It is follow them in May with parliamentary elec- important to emphasize this at a time of tions are very encouraging steps; and so too new hope, since it would be a mistake to are indications from the Government of respond to today’s potential opening by ef- Israel of a new interest in holding direct dis- forts to raise large sums of money without cussions with the Palestinian Authority. addressing the root causes of today’s economic crisis. 3. No state can be truly free with its economy in chaos and with the majority 7. For a recovery to take place, the of its population living below the poverty Government of Israel needs to roll back

1 2 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects the system of restrictions on the move- 10. The PA also needs to re- ment of people and goods imposed since invigorate its program of governance re- the beginning of the intifada – it is these forms in order to create an internal envi- various closure measures that are the ronment more attractive to private inves- proximate cause of four years of Pales- tors. Doing this will require that the PA tinian economic distress. Accordingly, complete the cycle of popular elections it much of the work of the Bank and donor has embarked on, control lawlessness, de- team over the course of this summer fo- velop a solid judicial system and address cused on the various facets of closure, with concerns about transparency and corrup- the team benefiting from intensive, profes- tion. The acquisition of the settlement areas sional interaction with both parties. The offers the PA an opportunity to demon- Government of Israel’s willingness to en- strate a new spirit of openness in planning gage with the donors on these issues spoke the disposal of these assets. of a strategic reappraisal of the importance of Palestinian economic stability to Israel’s 11. On the basis of what is on offer own security – while the work of the Bank today, economic revival is a distant and its partners shows that there are solu- prospect, and it would be hard to justify tions that permit a significant dismantling of a major new donor financing drive – the closure measures without endangering Is- challenge, rather, will be to preserve existing raeli security. aid levels of c. US$900 million per annum and thereby ensure that basic budget sup- 8. The Government of Israel has port, humanitarian and infrastructure devel- given encouraging signs of a willingness opment needs continue to be met. to reform the management of border gateways, to enable a much faster and 12. Chapter Six lays out an agenda of more reliable throughput of cargo and actions that the Bank believes would lay people. Unless a number of other key the basis for economic regeneration. It is areas of the closure system are ad- suggested that this agenda be further refined dressed, however, these improvements after the December AHLC meeting in De- will have only limited impact. Of particu- cember, if possible through direct discussion lar concern are the likely persistence of the between GOI and the PA. back-to-back cargo handling system, the continuation of internal closures throughout 13. It is further proposed that the the West Bank, the lack of adequate connec- donor community track progress by the tions between Gaza and the West Bank, and parties in tackling these key precondi- Israel’s stated intention to terminate Pales- tions for economic revival. If significant tinian labor permits by 2008 and to abrogate progress is made against a set of agreed in- the Customs Union in Gaza after with- dicators, a major new donor effort would drawal from Philadelphi. then be justified – and a donor pledging conference should be called. Calling such a 9. For its part, the Palestinian Au- conference in the absence of adequate pro- thority faces two sets of challenges if it is gress would be counterproductive, however, to play its part in bringing about revival. and should not be considered. First is the need to demonstrate strong commitment to security reform, politically risky though this may be. Without a visible and effective effort, the case for per- sisting with certain closure measures is hard to refute. Figure 1 Economic Scenarios, West Bank and Gaza

Nominal GDP Nominal GDI Unemployment Poverty Rate (percent) per capita, US$ per capita, US$ Rate (percent) West Bank Gaza Strip

As at end 2004 934 1,393 27% 38% 65%

Scenario Projected Outcomes by 2008

1. "Status Quo" 807 1,156 37% 53% 76% 2. "Disengagement Plus" 878 1,227 31% 45% 70% 3. "Economic Recovery" 1,090 1,484 19% 31% 58% 4. "Economic Recovery" with extra US$1.7 billion from donors 1,180 1,643 13% 24% 49% over period 2005-2008

Note: Scenarios 1 and 2 assume a decline in Palestinian workers in Israel and Israeli settlements, from 37,700 currently (excluding East Jerusalem residents) to 12,400 in 2008. Scenarios 3 and 4 assume employment of Palestinians (excluding East Jerusalem residents) in Israel and Israeli settlements remains constant at current level.

All four scenarios assume donor contributions of US$900 million in 2004. Scenario 1 assumes contributions of US$900 million in 2005 and 2006 and US$800 million in 2007 and 2008, a total of $3.4 billion over the period 2005-2008. Scenarios 2 and 3 assume an additional contribution of US$200 million in 2005 (total that year of US$1.1 billion), for a total of US$3.6 billion over the period 2005-2008. Scenario 4 assumes donor contributions of US$1.3 billion in 2005, US$1.5 billion in 2006, US$1.4 billion in 2007, and US$1.1 billion in 2008, for a total of US$5.3 billion over the period 2005-2008; this represents an increase in donor contributions of US$1.7 billion compared to Scenarios 2 and 3.

3 1 – The Context

I – Introduction ister to President Wolfensohn on July 18) indicated that they wished to work closely 14. The World Bank report of June with the donor community on this analytical 23, 2004, Disengagement, the Palestin- work program. Over the course of the past ian Economy and the Settlements, ar- four months, therefore, a donor team led by gues that the Palestinian economy is not the Bank and including experts from viable under today’s political status quo, USAID, the European Commission, the 3 and that its continued deterioration will IMF, the UN family and DFID prepared “impoverish and alienate a generation of the four Technical Papers attached to this young Palestinians…(undermining) the report. credibility of the Palestinian Authority (PA), increasing the appeal of militant factions II – The Process and threatening Israel’s security”1. The report demonstrates that the Government of 16. In order to better understand the Israel’s (GOI) Modified Disengagement views of both parties and the extent to Plan of June 6 alone “will not alter this dan- which policy changes might be forth- gerous, unsustainable situation. If imple- coming, the donor team worked in close mented with wisdom and foresight, how- consultation with GOI and PA “refer- ever, it could make a real difference.” This ence groups” – an Israeli group co-chaired will only happen if GOI and the PA can by the INSC and MOFA, and a Palestinian break out of the current policy impasse – group chaired by the PA’s Minister for Na- GOI by dismantling the system of closures tional Economy4. In addition, the donors’ stifling the Palestinian economy, and the PA Local Task Force on Palestinian Reform has by combating terrorism and re-launching the since late September been interacting with halting process of Palestinian reform. If the the PA’s National Reform Committee to parties show they are prepared to carry out support the definition of a core package of these difficult actions, then - and only then - Palestinian reform initiatives for 2005. an additional major donor financing effort is justifiable. With a growth-enhancing envi- 17. The Bank/donor dialogue with ronment in place, a large additional injection GOI and with the PA took place in an of donor capital would “enable the Palestin- environment of mistrust between the ian economy to turn the corner”. The basic parties, with the PA and GOI holding di- thesis in the Bank’s report was accepted by vergent perceptions of the work of the do- both parties. nor team.

15. The Bank report proposed an ¾GOI expectations. For GOI, the dis- analytical work program intended to engagement initiative is “not dependent help define “what can be done to ad- on cooperation with the Palestinians”, dress closure and kick-start the Palestin- since “the State of Israel has reached the ian economy”2. At a meeting of the Quar- conclusion that there is currently no tet Envoys on July 6, the Bank was asked to partner on the Palestinian side with oversee this work program in preparation whom progress can be made on a bilat- for an Ad Hoc Liaison Committee (AHLC) eral peace process”5. GOI was not pre- meeting in late 2004. Both GOI (in a meet- pared to discuss its response to the ing between the Bank and the Israeli Na- Bank’s June 23 paper directly with the tional Security Council (INSC) and the Min- PA, but instead chose to interact with istry of Foreign Affairs (MOFA) on July 21), the donor team and to convey its views and the PA (in a letter from the Prime Min- to the PA through the donors.

4 Overview 5

calls a “rescue phase”, consistent with ¾PA reservations. Unhappy with GOI’s Phase I of the Roadmap (Ending Terror wish to deal with Palestinian economic and Violence, Normalizing Palestinian issues by proxy, the PA was concerned Life and Building Palestinian Institu- lest the GOI/donor dialogue should en- tions)”8. courage donors to forge understandings with GOI which would negate or dimin- ¾Legal agreements defining economic ish the bilateral economic agreements relations between Israel and the Pal- concluded in the pre-intifada “Oslo” era. estinian Territories. The various in- The PA “reference group” underlined terim agreements negotiated between the need to link any discussion of the mid-1993 and 1995, collectively known terms of disengagement with the Road- as the Oslo Accords9, continue to pro- map, and called on the donor team to vide a framework for bilateral economic take account of the provisions of the relations and for donor support to the Oslo Accords as applicable to the PA. Many provisions are not currently movement of goods and people, the op- under implementation - some never eration of passages and crossing points, were10, while others (such as security the territorial link between Gaza and the cooperation of various kinds and the West Bank and the quasi-Customs Un- operation of the “safe passage” between ion. Gaza and the West Bank) were suspended after the outbreak of the intifada. 18. In view of the potential for mis- Statements from GOI suggest that Israel understanding, the Bank clarified to the is not inclined to activate lapsed provi- parties and to donors that these consul- sions, and that parts of Oslo will be- tations were not intended to substitute come irrelevant with the implementation for bilateral negotiations, and that the of the Disengagement Plan11. Nonethe- Bank would take final responsibility for the less, no part of the Oslo Accords has analysis and the conclusions drawn from it. been formally declared invalid by either Though technical and economic in intent, party. All of the measures recommended these papers would reference the broader in the June 23 report and expanded frameworks within which the donor com- upon in this paper are compatible with munity continues to operate: the Oslo economic agreements.

¾The Roadmap6. The political context III – Economic Implications of Is- underpinning this report is provided by rael’s Disengagement Plan the Roadmap, which has to been formally accepted by the PA and the inter- 19. A number of proposals in GOI’s national community, and with some ca- Plan have significant economic implica- veats by GOI. Although the Roadmap is tions for the Palestinian population. not under substantive implementation by either party, it embodies an assump- ¾Evacuation from settlements in Gaza tion that neither has disowned - Presi- and the northern West Bank. Most dent Bush’s vision of an end of Israel’s domestic Israeli and international atten- 37-year occupation of the West Bank tion has focused on GOI’s plan to relin- and Gaza, and of “the emergence of an quish 21 settlements in Gaza and the independent, democratic, and viable northern West Bank. The Plan should Palestinian state living side by side in result in a lifting of closures in the va- peace and security with Israel and its 7 cated areas, and would enable Palestini- other neighbors” . The actions proposed ans to make use of the land and eco- in the Bank’s June 23 report, it was nomic assets left behind. The Israeli noted, “conform to what the Aix Group domestic political risks involved in pur- 6 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

suing the evacuation are apparent to all IV – The Palestinian Economy Af- observers. ter 4 Years of Intifada

¾Physical and economic separation. 20. After a steep decline in 2001 and Israeli policy makers have stressed the 2002, the Palestinian economy stabilized need for separation between Israelis and 12 in 2003. In those two years, Palestinian real Palestinians . A security-driven concept GDP per capita shrunk by almost 40 per- of separation permeates many aspects of cent. This trend was halted in 2003, and Israeli disengagement policy – the in- mild positive growth returned (see Annex tended completion of the Separation Table 1). Real GDP per capita increased by Barrier in the West Bank, the prohibi- one percentage point, but real GDI16 – tion on Israelis entering industrial parks which includes remittances from abroad and in areas not under Israeli security con- foreign assistance – increased by over 11 trol, the planned termination of work percent per capita. This rebound resulted permits for Palestinians in Israel by the from a lull in violence and less intense cur- end of 2008 and the proposed revoca- fews/closures than in 2002 (the year of Op- tion of the quasi-Customs union be- eration Defensive Shield), an increase in la- tween Israel and Gaza (see paragraphs bor flows to Israel and a resumption by 63ff.). GOI of revenue transfers (plus the return of US$178 million in withheld revenues17). Al- ¾Continued Israeli settlement in parts most 100,000 jobs were created, albeit many of the West Bank. The Disengagement of them of poor quality18, and investment Plan states that “it is clear that some grew by 14 percent (though at c. US$840 parts of Judea and Samaria (including million amounting to less than a half of key concentrations of Jewish settle- 1999 levels, and most in residential hous- ments, civilian communities, security ing). Unemployment and poverty and rates zones and areas in which Israel has a declined by 5 and 4 percentage points re- vested interest) will remain part of the spectively. State of Israel”13. The continued presence of 128 settlements and approxi- 21. This fragile recovery has stalled mately 230,000 settlers in the West in 2004, mainly as a result of events in 14 Bank has significant implications for Gaza. The Israeli Defense Forces (IDF) the Palestinian economy. Not only do mounted several extended operations in the settlement areas command natural Gaza in 200419. The operations were ac- resources that are thereby unavailable to companied by segmentation of the Gaza the Palestinian population; the donor Strip and stiff restrictions on movements of team was also informed that internal goods and people across the borders with closures in the West Bank are intended Israel and Egypt. This led to a sharp reduc- in part to protect the access of Israelis to tion in the volume of Gaza’s exports20, as these settlements. In addition, GOI has well as a temporary curtailment of humani- indicated that it does not for the mo- tarian assistance21. The fighting resulted in ment plan to reclassify evacuated areas significant damage to public infrastructure, in the West Bank, now Area C, to either private buildings22. Worker access to the Area A or Area B; this will limit the legal Erez Industrial Estate and to Israel declined competence of the PA to govern in to a daily average of less than 1,000 in the these areas, since under the Oslo Ac- second and third quarters (compared with cords the PA has no civil or security ju- 6,000 the previous year). Compared with 15 risdiction in Area C . 2003, 8,000 jobs have been lost within Gaza. In the West Bank, domestic job growth in 2004 has been positive but anemic (2.4 percent during the first three quarters). Unem- Overview 7 ployment rates stand at 27 percent overall, and 35 percent in Gaza, and poverty is comparable to 2003 – 48 percent overall, 65 percent in Gaza23.

22. If the political and economic status quo persist, the medium-term outlook for the West Bank and Gaza is bleak, as Box 1 explains.

Box 1 – “Status Quo” Scenario

Assumptions: The Bank’s Status Quo scenario embodies the following key assumptions: no appreciable change in the current system of closures, with the Separation Barrier completed in 2005; a gradual decline in the number of Pales- tinian workers in Israel and the settlements from 37,700 today to 12,400 in 2008; and donor assistance of US$900 million in 2005 and 2006, fal- ling to US$800 million in 2007 and 2008. Total donor assistance during the four years 2005- 2008 would amount to US$3.4 billion, for an average of US$850 million per annum.

Projections: With closures continuing to stifle private sector activity, investment will remain flat, and the Palestinian economy’s ability to create jobs will be outstripped by a rapidly growing labor force. Dwindling levels of Palestinian workers in Israel and the settlements, combined with declining levels of donor support, would further dampen economic activity. Under such conditions unemployment would reach 37% in 2008 (49% in Gaza). Real GDP and GDI per capita would decline by a further 17% and 20% respectively by 2008, with poverty afflicting 62% of the population, and 76% of those in Gaza. Fiscally, economically and socially this scenario is not viable; it could lead to a breakdown of governance, the virtual evaporation of the PA and increasing social desperation. 2 – Disengagement Plus: Israel’s Proposals for Eas- ing Closure

23. Over the course of the last four recent economic report, it is estimated that a months, GOI engaged with the Bank-led removal of internal closure alone could lead donor team in an wide-ranging series of to real GDP growth of 3.6% in 200528. discussions of Israeli security policies as they impact on the Palestinian economy. 27. Israel’s Disengagement Plan In responding to the Bank’s June 23 report, would restore full internal movement in the INSC/MOFA team made clear that fos- Gaza and should significantly reduce tering Palestinian economic development is closure in the north-western part of the in Israel’s strategic interest24, and that GOI West Bank. Although several small settle- is “ready to take far-reaching measures to ments are slated to remain in the assist in the recovery of the Palestinian Jenin/Tulkarm/Nablus ‘triangle’, the IDF economy” - while noting that “Israel will would not maintain a “permanent” presence not ignore its security needs, of which it is in the area. This should lead to a meaningful the ultimate judge”25. restoration of internal movement, helping to stimulate local goods and labor markets and 24. The Bank’s 23 June report argues permit people to travel more freely within that “the precipitator of [Palestinian] these governorates. It will not, however, ad- economic crisis has been closure” and dress the need to re-connect the area with that in addition to the intended removal of the rest of the West Bank. internal movement restrictions in Gaza and the northern West Bank, “Palestinian eco- Mobility in the West Bank has been se- nomic recovery depends on a radical easing riously affected by the construction of of internal closures throughout the West the Separation Barrier, particularly in the Bank, the opening of Palestinian external seam zone areas29. This will worsen with borders to commodity trade, and sustaining further Barrier construction, particularly as a reasonable flow of labor into Israel”26. East Jerusalem becomes disconnected from the economic fabric of the remaining West 25. Discussions with the INSC/ Bank. Other economic consequences in- MOFA team centered on these three clude loss of land for Barrier construction domains of closure policy. In addition, and restricted access to land and other in- the future of the customs envelope vestments located in the seam zone (agricul- emerged as a fourth key topic. tural GDP could decline as much as 17%, contributing to a 2% drop in overall GDP), I – Internal Movement losses of income from commercial relations with Israeli customers, and elimination of 26. Internal movement is vital to the (illegal) access to Israeli labor markets. Upon health of the Palestinian economy and completion, the estimated reduction in Pal- economic governance. In May 2003 the estinian gross national income (GNI) could Bank wrote “As long as Palestinian internal range from 3-5%. A full treatment of the economic space remains as fragmented as it economic impact of the Barrier can be is today, and as long as the economy re- found in Impact of Israel’s Separation Barrier on mains subject to extreme unpredictability West Bank Communities: Economic and Legal 30 and burdensome transaction costs, the re- Developments . vival of domestic activity will remain a distant prospect, and Palestinian welfare will 28. The Disengagement Plan indi- continue to decay”27. In the Bank’s most cates that restrictions on internal movement in the remainder of the West Bank

8 Overview 9 will continue31. The donor team was roughly 732 kilometers of roads in the briefed by INSC/MOFA team counterparts West Bank34). A number of the 52 roads on Israel’s proposals for restoring a measure and all of the under/overpasses bear an of “continuous movement” in the West apparent relation either to the Separation Bank. The proposed actions are of two Barrier (restoring access interrupted by kinds: its actual or potential construction) or to settlements and access routes to them. ¾A reduction of the number of checkpoints, earth mounds, ditches etc. as 29. The PA has made it clear that it the Separation Barrier is completed – does not find GOI’s roads and junction The Plan indicates that Israel “will work proposal an acceptable alternative to the to reduce the number of checkpoints lifting of internal closure in the West throughout the West Bank.” In the Bank. In October, the PA Cabinet dis- northern West Bank, since the comple- cussed the proposal and rejected it. The PA tion of Barrier Stage B in July 2004, the has established an inter-ministerial commit- number of checkpoints in Jenin, Tul- tee to prepare screening criteria which karm, Nablus, Tubas, Salfit, and Qalqilia would apply on a case-by-case basis to the governorates has increased from 20 to selection of road projects in the West Bank. 22, while the number of unmanned ob- Roads and other structures perceived to be stacles has decreased from 242 to 21232. helping create a separate transport system, For the West Bank as a whole, recent or which contour the Separation Barrier or trends do not suggest any rapid im- any settlements, would be turned down35. provement. In March 2004 a total of The application of these criteria is likely to 743 obstacles were in place; today’s total permit the construction of a number of the is 72333. As an example, Map 3c shows 52 roads, but this would not bring any fun- the network of movement restrictions in damental improvement. operation in the Hebron area in No- vember, 2004. 30. Israel’s “continuous movement” proposal is not acceptable to the donor ¾The refurbishment/construction of a community36. Donor concerns have been coordinated package of roads and influenced by the recent International Court junctions. The INSC/MOFA team of Justice (ICJ) Advisory Opinion on the proposed that the donor community Separation Barrier37, which states that the consider financing 52 roads (totaling ap- Barrier, its associated regime (which in- proximately 500 kilometers) and 16 un- cludes the seam zone) and the settlements der/overpasses in locations throughout contravene international law, and warns the West Bank – stressing that this against providing international assistance should be seen as a practical suggestion that would serve to maintain the current intended to deal with the realities on the status quo38. ground. The proposal is illustrated in Map 2. To better appreciate the context 31. The incompatibility of GOI’s for GOI’s proposal, Maps 3a/b/c continuous movement proposal with identify Areas A, B and C, settlements in donor and PA funding criteria, allied the West Bank not currently slated for with GOI’s commitment to protecting evacuation, and various roads on which access to Israeli settlements, translate to Palestinian movement has been re- a continuing high level of restriction on stricted (the Israeli human rights organi- Palestinian movement throughout much zation B’Tselem reports that the combi- of the West Bank. Apart from the appre- nation of checkpoints, physical barriers ciable social friction this causes, internal and the arbitrary confiscation of vehicles markets will remain fragmented and prone has resulted in restricted movement on to distortion. Case studies of internal 10 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects movement in the West Bank cited in work and laying a basis for future expansion. done by The Services Group (TSG) as an The potential benefit from the proposed input for Technical Paper I show that in- upgrades, though, may be significantly un- ternal closures can add 50-100 percent to dermined if a number of key issues are not the cost of transporting goods along the adequately addressed. main West Bank truck routes39. Persistence of this situation will significantly undermine 36. As detailed in Technical Paper I, the improvements to border cargo man- needed improvements are of two types – agement in the West Bank which GOI has i) physical improvements, specifically termi- proposed. nal reconfiguration and expansion, the introduction of up-to-date security technolo- 32. Attention therefore needs to re- gies, and the expansion of the Israeli railway turn to ways of dismantling restrictions network; and ii) procedural reforms, featur- on existing roads. ing the introduction and monitoring of sound commercial management methods. II – Borders and Trade Facilitation 37. The PA welcomes “efforts to Border Crossings guarantee a steady volume and flow of cargo”42, but has emphasized that any 33. The economic objective in re- enhancements should be consistent with forming today’s border regime is to the provisions of the Paris Protocol and permit the market to once again deter- other applicable bilateral agreements, mine import and export flows. The and should not detract from the Road- Bank’s June 23 report states that “there are a map’s call for a normalization of Pales- number of steps which can be taken to tinian life and return to the September maintain or even enhance Israeli security 28, 2000 status quo ante. The PA has in while greatly improving cross-border secu- particular stressed that security incidents rity while greatly improving cross-border need to be handled in a manner both pro- cargo management”40, a position that the portional to the event, and coordinated be- 43 INSC/MOFA team accepted. tween the two parties . The PA also advo- cates the use of published principles and 34. The safe and efficient operation rules for border crossings, and the introduc- of border crossings41 is, by definition, a tion of binding dispute settlement mecha- 44 cooperative effort. The difficulty of pro- nisms . posing improvements to two parties in conflict is obvious. While a neutral, technical Proposed Physical Improvements analysis of options has its place, it is no substitute for the renewal of shared understand- 38. GOI is proposing to recon- ings, their translation into transparent oper- struct/upgrade several terminals located ating procedures, and a mutually supportive between West Bank/Gaza and Israel, to effort to monitor and enforce them. With improve traffic flow and berthing facilities this caveat, the following conclusions can be as well as the facilities for travelers. The drawn from the donor team’s extensive in- program would include the relocation of the teraction with GOI and the PA on the sub- Erez terminal to the Israeli side of the bor- ject. A fuller treatment of the issues is to be der and its expansion to accommodate cargo found in Technical Paper I. as well as people, with a planned completion date of August 2005. Initial estimates sug- 35. Israel is proposing to upgrade the gest that these enhancements would cost 45 border crossings. This could make a about US$59 million . significant contribution to restoring cargo movements to pre-intifada levels, Overview 11

39. An unresolved issue relates to the ¾The second project would connect number and location of border crossings Sha’ar Efraim (near Tulkarm) to the Is- between the West Bank and Israel46. The raeli national railway grid via a spur to Oslo Accords do not specify border cross- join the Eastern Railway. A short rail ings for persons and goods between Israel link an a tunnel would be needed once and the West Bank47, but refer only to the main line is built (at present the movement being controlled by applicable Eastern Railway is planned for construc- laws and regulations. Israel is proposing five tion only after 2010). This, it is intended, border crossings (see Map 5b); of the five, would permit a cargo connection to however, three are situated on the alignment Ashdod and a passenger connection be- of the Separation Barrier where it deviates tween the northern West Bank and east from the Green Line. Neither the PA Gaza. The project’s anticipated cost is nor the majority of donors will support around US$18 million. these proposed locations, particularly in view of the International Court of Justice’s 42. The PA has indicated that it Advisory Opinion48. An alternative that would in principle welcome the two would satisfy both the PA and the donor railway projects, while noting that this community would be to locate all five cross- new mode of transport should comple- ing terminals on the Green Line. The ongo- ment, not replace existing modes53. The ing realignment of the Separation Barrier, Bank agrees with this position, since this pursuant to the Israeli High Court’s decision would help foster competition. The PA has on the petitions filed by residents of Beit indicated that it would also welcome this Sourik contesting the route of the Separa- project as an alternate transport mode. tion Barrier north-west of Jerusalem49, should facilitate this. 43. Israel is seeking an external financing contribution to the capital costs 40. GOI is proposing to introduce of the terminal infrastruc- major technological upgrades, to include ture/equipment program, currently esti- the purchase and installation of modern mated at US$135 million54. electronic systems that would permit much faster and more secure scanning of cargoes New Procedures and people passing through the border crossings. The menu of technologies would 44. While reconstructing and re- vary in accordance with the projected usage equipping border terminals paves the of a particular crossing and the funds avail- way for secure, rapid and predictable able. Initial estimates for an optimal tech- cargo handling, this will not occur with- nology upgrading of the 9 crossings and out a significant adjustment in facility terminals under consideration by GOI50 management policies; without them in amount to some US$76 million. fact, the net result could be higher levels of restriction. GOI has proposed four sig- 41. GOI is also considering two rail- nificant improvements: way projects. ¾Extending terminal operating hours. ¾The first would be a 4 km. spur to link ¾Adoption of the ‘redundancy principle’. The Erez with the national grid and thereby INSC/MOFA team stated that “an al- connect to Ashdod and Haifa ports. The ternative passage will be made available project would likely take about two years if a primary passage is closed”55. This to complete51. The estimated cost of the position acknowledges a need to avoid rail line, a terminal in Erez and the train imposing blanket closures in response to would be approximately US$ 21 mil- specific incidents or threats, and is evi- lion52. denced in plans to reconfigure Erez and 12 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Karni to handle both people and goods56 ble with an efficient flow of imports and – though its meaning and application in exports. The Bank’s view is that a combina- the West Bank have yet to be worked tion of the following measures will allow out. It will be important to clarify GOI’s GOI to do away with mandatory back-to- policy position to transport operators; a back transfer without appreciable additional clear written statement would have a security risk. significant impact on investors’ and shippers’ risk perceptions57. ¾Containerization/sealing. With the excep- ¾The application of service standards. The in- tion of bulk cargoes such as sand and troduction of published norms has im- building aggregates (which are not espe- proved border cargo management in cially time-sensitive), all cargoes should many countries58. Under such a pro- be transported in containers or trailers gram, an individual shipper is made that can be sealed. This can be facilitated aware of the procedures applicable to by establishing consolidation areas on his shipment, and the terminal agrees to the Palestinian side of border crossings. abide by a set of performance measures ¾Scanners. Full truck/container scanners (such as average time per inspection, would be used to perform inspections and the percentage of shipments sub- with subsequent physical inspections jected to various levels of inspection). limited to situations where anomalies are Service standards should be applied to observed during the scanning. both security and customs inspections, ¾One-Stop Inspection. Containers can be and to both Israeli and Palestinian ter- fitted with tamper-proof seals at the minal managers. The INSC/MOFA point of shipment or the entry port (for team shared with the donor team a set imports), or at the border terminal (for of service standards which have been exports). Once sealed, subsequent in- agreed for Israeli terminals (see Techni- spections would be limited to ensuring cal Paper I); this is promising evidence the seals are intact. of a new approach to managing Palestin- ¾Trailer Circulation. Back-to-back proce- ian cargo59. It is proposed that these ser- dures can be avoided if container trailers vice standards be further refined in dis- are permitted free circulation between cussion with Israeli and Palestinian Israel and West Bank/Gaza, exchanging commercial operators, and that they be tractors and drivers in the process. invited to help GOI monitor their im- Scanning of the container would be plementation. combined with a simple chassis inspec- ¾GOI is considering placing the management of tion. New trailer chasses could be cus- all terminals in the hands of civilian contrac- tom-built without compartments or tors. other features that can be used for illicit purposes. GOI has indicated that it is 45. An important unresolved issue is willing to test this concept. GOI’s position that “at this time, the ¾Order and Selectivity in the Inspections System. “back-to-back” regime will continue to The number of inspections can, as a re- apply with regard to the movement of sult of the measures listed above, be re- goods”60. The back-to-back system involves duced to a combination of risk-driven the transfer of goods from one and random interventions. Systematizing truck/container to another, and results in this reduced inspection regime will re- extensive delays, damage and additional quire that GOI introduce an on-line cost; it is motivated in part by a prohibition cargo risk management system (combin- on Palestinian trucks from entering Israel, ing basic information on manufacturers and on Israeli trucks from entering Gaza and shippers with specific security intel- (though not, at present, the West Bank61). ligence) in order to identify threats and The application of this system is incompati- build histories of reliability. Such risk Overview 13

management systems are commonly important in demonstrating to investors and used by customs and port authorities to donors that a border regime responsive worldwide. to the needs of the Palestinian economy is under development, and merits considera- 46. Another issue for further discus- tion of donor financial support. sion is the institution of a commercial dispute resolution mechanism62. To en- Gaza Sea and Air Connections sure full commercial confidence, a system for mediating claims made by shippers 48. The Palestinian economy needs against unreasonable delay and/or cargo direct access to international markets. In spoilage, subject to impartial and binding this context, sea and air facilities in Gaza resolution, is the international norm. The assume significant importance. PA believes such a mechanism is necessary (see paragraph 38), though GOI has indi- 49. GOI has shown interest in sup- cated this may be impractical in today’s se- porting the early construction of a Roll- curity context63. In an improving bilateral On, Roll-Off cargo port in Gaza, but has environment, however, the subject should not made any commitments so far. In be reviewed once again. Models that can view of uncertainties about how quickly provide indicative guidance include the commercial demand for a Gaza port will WTO Agreements and the TIR Conven- grow, the RoRo approach offers a relatively tion64. rapid and cost-effective way to initiate the development of a full-service seaport. GOI Piloting Change has suggested that this projects may not after all need to await Israeli withdrawal from 47. The combination of commit- Philadelphi65. For its part, the PA would ments, intentions and possible solutions “welcome a RoRo facility with Port Said related to border crossings should now which will lead to the opening of a fully be tested in the field. It is therefore rec- functional Gaza port in the near future”. ommended that integrated cargo manage- The RoRo concept is described in more de- ment programs be developed as a matter of tail in Technical Paper I. urgency at Karni Terminal (Gaza) and Jalame Terminal (northern West Bank). 50. Air services are also important, These pilots, it is suggested, should feature i) and preference should be given to recon- terminal infrastructure upgrades on both struction of the airport and a resumption sides of the border; ii) the introduction of of fixed-wing air services. The Bank has electronic and biometric security equipment suggested beginning the restoration of on the Israeli side; iii) the development of Gaza’s air services with a helicopter connec- on-line information systems, with data links tion to Amman66, again arguing that this of- between GOI and the PA; iv) the abolition fers a rapid first step in enabling business of back-to-back procedures for containers; connections. The PA insists that the airport and v) the development, in consultation should be reopened quickly, since a helicop- with Israeli and Palestinian shippers, of ter- ter service alone is not considered adequate minal service standards and recourse meth- for Gaza’s current air transport needs67. For ods. The pilot should be closely coordinated its part, GOI has indicated that it is not in between GOI and the PA. It is further pro- favor of fixed-wing services on security posed that an independent service provider grounds, but has said it would consider a with recognized international credentials helicopter service with Amman68. observe the progress of the pilot and report on it to the two parties and to interested 51. For sea and air services to pro- donors. An early and successful implemen- ceed, credible security arrangements tation of this pilot program would be very need to be in place in Gaza. The Gov- 14 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects ernment of Egypt has indicated that it is made must safeguard the spirit of the safe willing to receive vessels and cargoes from passage arrangements in Oslo”72 Gaza69, and would perform security inspections on incoming and outgoing cargoes. 53. Today’s arrangements do not This would not insulate a vessel against in- even satisfy minimal economic require- terference on the high seas, however. Since ments. The number of trucks crossing be- Israel is committed to evacuating all Israeli tween the West Bank and Gaza is far fewer citizens from Gaza, and since PA security than in the pre-intifada period and cargoes inspections alone are unlikely to satisfy Is- are subject to long en-route inspection de- raeli requirements at this time, rapid devel- lays and low priority status at Karni, disad- opment of the RoRo initiative and of air vantaging them relative to cargoes from Is- services would require a third party security rael73. involvement. One potentially workable approach would combine the use of a special- 54. International experience in estab- ized border security firm and the active lishing and maintaining an efficient pas- sponsorship of one or more concerned sage for people and goods has increased countries. The PA would not in principle be dramatically in recent years. Significant averse to this, as long as the third party progress has been made in the design of works in partnership with the PA70. For Is- protocols, procedures and protection to fa- rael, third party involvement in matters per- cilitate the movement of goods and people taining to Israeli security would break new through such corridors. Such experience ground, and requires further consideration. could be brought to bear in the local context. Linking Gaza and the West Bank 55. The link between Gaza and the 52. Building a strong transport con- West Bank should permit flexible and nection between Gaza and the West low-cost transport compatible with im- Bank is vital – but finding a mutually proved Palestinian market competitive- acceptable solution has not been possi- ness. A simple road connection offers the ble to date. An unfettered flow of people best solution. Border security can be assured and goods between Gaza and the West using a combination of container scanning Bank is needed to link the two territorial and sealing technologies, combined with elements of the Palestinian economy, and to vehicle tracking devices to monitor move- lay the basis for viable statehood. A func- ment across Israel74. As a practical measure, tioning link would create a larger effective it is proposed to pilot such an arrangement internal market, help trigger price and in- on one designated route as soon as the come convergence between Gaza and the Karni and Tarkumiya border crossings have West Bank (by directing factors of produc- been equipped with the required technology. tion more efficiently), and provide a path- In the meantime, and without prejudice to a way from the economy of the West Bank to return to the provisions of previous agree- a future seaport in Gaza. Both GOI and the ments, an escorted convoy system could be PA have taken strong positions on the issue. reinstated75. GOI is not willing to re-instate the “safe passage” arrangements provided for in the 56. Options for a dedicated link are Oslo Accords71. For its part, the PA has in- technically problematic. These would re- dicated that “in the immediate term, a terri- quire the construction of permanent infra- torial link (TL) must be devised which will structure; rail connections, elevated roads, address the immediate economic (and other) fenced roads and tunnels have all been sug- needs of the Palestinians, without prejudic- gested. GOI has proposed a rail connection, ing any permanent arrangements regarding initially for people, between Tulkarm and the TL. Also key is that any arrangements Ashdod (see paragraph 42). The short dis- Overview 15 tances and limited volume of bulk cargo to develop a genuine competitive edge (see would likely make this more costly and less Technical Paper III). During this period, convenient than road transport, however. priority must be given to preserving em- An elevated road or tunnel would be expen- ployment. Phasing out permits would result sive to build because of the civil works in- in a loss of 9,000 of today’s jobs – but in volved; furthermore, the traffic volumes un- addition, most of the approximately 20,000 der the most optimistic recovery scenario illegal workers still crossing the Green Line may make such an investment hard to jus- each day would lose their jobs if the Separa- tify. A structure of this kind could also be tion Barrier is completed in 2005. This vulnerable from a security perspective. amounts to a net loss of nearly 30,000 jobs by the end of 2008. III – Labor Flows to Israel 60. A reinvigorated industrial estates 57. GOI is proposing to stop issuing program can create employment and can work permits to Palestinians by the end seed an export-based transition, but of 2008. In the Bank’s view, this would have prospects appear modest over the com- serious negative impacts on Palestinian in- ing few years. (see Technical Paper II). comes and on the prospects for Palestinian Analysis carried out by The Services Group economic recovery. (TSG) on behalf of USAID and by the Bank shows that an open border regime could 58. Few economists would dispute create perhaps 8,500 new jobs by the end of the wisdom of moving away from a de- 2008 – but only if GOI changes its current pendency on labor exports to Israel to a stance and allows Israeli investors to enter growth-path based on the export of areas over which it does not exercise secu- 78 goods and services to Israel and to other rity control . countries. This policy shift was advocated by the Bank in early 200376. An adjustment 61. GOI is urged to be flexible on the 79 of this kind has in reality been underway for issue of Palestinian labor . With Palestin- some time. On the eve of the intifada, the ian economic stability a shared objective, it daily average of Palestinian workers entering is recommended that Israel at least maintain Israel stood at 116,000 workers. By 2004, current Palestinian labor access over the these numbers had fallen to 37,70077. Due to next several years. Doing so would involve continued conflict, political uncertainty and replacing illegal labor with additional permit- a weak commercial enabling environment, ted labor if the Separation Barrier is com- this loss of work has not been counterbal- pleted in 2005. If illegal work is thereby anced by adequate export growth. Palestin- eliminated, Israel’s security clearance of Pal- ian real incomes have fallen steeply, and estinian workers would be much more as- would have fallen much further were it not sured than today. for the cushion afforded by donor assistance. IV – The Future of the quasi- Customs Union 59. Managing this structural transition, though, will be key. The Palestinian 62. During the course of the summer, economy is weak, with unemployment dan- GOI opposition to the maintenance of gerously high and private investment se- the quasi-Customs Union (qCU) with verely depressed. With a reversal of the clo- the West Bank and Gaza emerged. The sure regime, a sustained effort to reform June 6 Modified Disengagement Plan indi- Palestinian institutions and generous addi- cates that “in general, the economic ar- tional donor assistance, it is possible to en- rangements that are currently in effect be- visage a transition to growth.. It will, how- tween Israel and the Palestinians will remain ever, take time for the West Bank and Gaza valid. These arrangements include …. taxa- 16 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects tion arrangements and the customs enve- ¾Maintaining the common customs lope”80. As of November 14, though, the and tariff envelope in one part of the INSC/MOFA position was that “if and Palestinian territories while abrogat- when Israel withdraws from the Philadelphi ing it in the other would further corridor, it will not be possible to maintain fragment the Palestinian economy. the customs union with Gaza (although it Under such a scenario, goods and ser- will continue to apply in the West Bank)”81. vices traded between the West Bank and It is further understood that “adjustments” the Gaza Strip would need to be cleared might be in time be implemented in the by customs in both directions, since the West Bank82. tax regimes would be different in the two jurisdictions. This would add an- 63. Many economists believe it other layer of controls, increasing trans- makes sense to move away from the action costs that are already very high, qCU in due course. A more independent, and would exacerbate the division of the non-discriminatory trade policy vis-à-vis two parts of the Palestinian economy. third countries would help diversify Pales- tinian trade. The qCU has advantages for 65. The technical case for the qCU’s the West Bank and Gaza, including prefer- abrogation is questionable. GOI is con- ential access to the Israeli market, and re- cerned that the PA would not protect the duced PA customs administration costs – at common customs envelope once Israel the same time, however, the provisions of evacuates Philadelphi, and if and when di- the Paris Protocol do not provide for the rect sea access to Gaza is established. As an collection/remittance of taxes on indirect im- interim measure, though, the PA could con- ports. The Bank has estimated that this tract a private organization to manage the omission results in fiscal losses to the PA of customs function on the Egyptian border – about US$175 million each year83. an arrangement for which there are many useful precedents86. In addition, the IMF 64. The World Bank and the IMF would be willing to oversee technical assis- both believe that a rapid and uncoordi- tance to upgrade Palestinian customs capac- nated abolition of the qCU would dis- ity, and could monitor the effectiveness of rupt any recovery of the Palestinian collection activities under its current economy. There are three reasons for this. monthly reviews of budget execution, fiscal revenues and PA expenditures. Together ¾There is a risk of significant Palestin- these measures should be sufficient to en- ian revenue loss. Trade taxes are cur- sure that existing customs policies continue rently collected by Israel and remitted to to be implemented in accordance with the the PA through the clearance system; Paris Protocol. these clearance revenues make up almost two thirds of total PA revenues84. 66. New customs arrangements PA customs capacity is weak, and time is should not be imposed unilaterally. Writ- needed to equip it to take over from ing of the transition to statehood, the Aix GOI85. The PA cannot afford transi- Group has stressed the importance of fiscal tional revenue losses at this stage. cooperation, and warns against any precipi- tate transfer of functions: “The Group rec- ¾Abolition of the qCU would hurt Pal- ommends that both parties closely coordi- estinian (and Israeli) trade in the nate indirect taxation policies and their ad- short run. Palestinian exporters would ministration, in order to avoid smuggling … lose their preferential access to the Is- the cost of neglect in this case would be raeli market at a time when jump- immense for the [future] Palestinian state as starting Palestinian exports is critical. well as Israel, as the stability of both tax systems would be threatened”87. Overview 17

67. During the coming period, a preferable approach would be to improve the implementation of the Paris Protocol. In particular, the revenue losses to the Palestinian budget from indirect imports should be addressed88. In addition to this, the PA would like to see the creation of an effective dispute resolution mechanism, and a revision of lists A1, A2 and B89. Under today’s changing circumstances, consideration should also be given to reviving the Joint Economic Committee90. 3 – Palestinian Plans to Revive the Economy

68. Israel’s withdrawal from the Gaza loan guarantees to encourage commer- Strip and the northern West Bank – be it cial banks to participate in capital forma- unilateral, coordinated or negotiated – tion. The need to build human capital presents the PA with an opportunity to through technical and vocational educa- show how well it can exercise political, tion is also given high priority. security and economic leadership, and to demonstrate how smoothly it can as- ¾The Plan recognizes the entrenched sume control over and disposes of the nature of Palestinian poverty, and the assets that Israel leaves behind. Palestin- need for a sustained and targeted effort ian, Israeli and international attention will to cater to those who have lost their focus intensively on PA performance in the ability to participate meaningfully in the coming months. Success in these areas economy without assistance. should lead to a much more forthcoming attitude by GOI to bilateral cooperation, as ¾Improving the effectiveness of PNA well as creating donor and investor confi- governance by building capacity and dence. accelerating reform is an overarching Plan objective. The MTDP builds on I – The PA’s Strategy for Recovery the PA’s One-Year Reform Action Plan and Growth (September 2004-September 2005) – see paragraph 76. 69. The PA is finalizing the Medium- Term Development Plan (MTDP) 2005- 70. The Plan employs two economic 7. Like the SESP before it91, the MTDP scenarios. The more cautious “delayed seeks a balance between short-term relief progress” scenario estimates likely donor requirements and the policies and invest- disbursements at US$900 million each year 92 ments intended to spark an economic re- during 2005-2007 , while the “rapid pro- vival. gress” scenario assumes that donors would The Plan places heavy reliance on the pri- disburse US$1.05 billion in 2005, US$1.25 vate sector, coupled with efforts to protect billion in 2006 and US$1.45 billion in 93 the poor and vulnerable. The MTDP’s over- 2007 . In 2005, disbursements for budget all strategy is sound, and its estimates of po- support and projected at US$419 million tential donor contributions are based on an under “delayed progress” and US$359 mil- 94 assessment of what is probable, rather than lion under “rapid progress” . what is desirable – consistent with the SESP’s pragmatic approach. II – Palestinian Reform

¾The recovery strategy focuses on ac- 71. It is imperative that the Palestin- tions to address unemployment in a ian leadership revitalize the Palestinian sustainable manner, recognizing that reform process. The Bank’s June 23 report, this can only be done in a context of reflecting PA and donor analysis, listed eight private sector growth. This in turn will areas of reform with particular importance require that GOI restore greater Pales- to the economy95. These include gaining tinian freedom of movement, both control of the domestic security environ- within the West Bank and Gaza and ment, renewing the legitimacy of the PA across borders. The MTDP private sec- through national and local elections, main- tor support strategy stresses policy and taining fiscal stability, and combating long- technical support to agriculture, tourism standing resistance to legal and judicial re- and industry, along with the provision of form. Since June some progress has been

18 Overview 19 made, but the overall pace of reform over the last year has been slow. The Bank’s re- Public awareness of the reform process port pointed out that “an easing of closures has also improved with increasing internal alone….will not attract investors back to the calls for reform. In June 2004, the PLC es- Palestinian economy. A reinvigorated pro- tablished a 14 member Committee to inves- gram of Palestinian reform, designed around tigate the underlying causes of internal measures that will create an investor-friendly fragmentation within the PA. In the third business environment, is essential. There is quarter of 2004, the Committee released its no reason for the PA to delay implementa- report, calling for a reorganized and emp- tion of such a program”. wered government and for the appointment of a parliamentarian mechanism to monitor 72. Reforms in public financial man- the implementation of reforms. In protest to agement continued in 2004. Important the Executive's reluctance to honor its milestones over the past year include96 promises, to approve laws earlier presented by the Committee for signature, and to push ¾The payment of PA security staff salaries the reform process forward, the PLC sus- through direct deposit to personal bank ac- pended its plenary sessions for one month counts rather than in cash paid through until October, 200497. force commanders; ¾International auditing of the Palestine Invest- 75. On September 27, 2004, the PA ment Fund; Cabinet adopted a One-Year Reform Ac- ¾Establishment of a Department of Supplies tion Plan (September 2004-2005). This and Tenders in the Ministry of Finance, with document, like previous PA reform state- full jurisdiction for all PA purchases, in- ments, is very broad – it consists of eight cluding those of the security agencies; main areas, 46 sub-areas, a further 58 spe- ¾Preparation of legislation to create a new public cific items, and at least 26 pieces of needed audit institution, approved by the PLC and legislation. A comprehensive listing of this now before the President for signature; kind is unlikely to spark much progress ¾Passage of a revised income tax law, consis- unless the PA uses the Action Plan to ar- tent with international best practice. ticulate a focused “reform map” – which should identify a priority set of specific re- 73. Progress has also been made in form measures, a time-bound plan for their the area of election reform. A Central implementation, and clearly assigned re- Electoral Commission was established, and sponsibilities. a successful voter registration process was set in motion – a development that will 76. The donor reform support struc- make it possible to conduct presidential ture may have contributed to a disper- elections in January 2005. Importantly, PLC sion of Palestinian effort. Seven donor elections are now planned for May 15 2005. “Reform Support Groups” were created in mid-2002 as a way to engage with the PA 98 74. Public awareness of the reform during the siege of the Muqata . They have process has also improved. The PLC has done much solid analytical work, but today’s become actively engaged, and earlier this need for accelerated action suggests that a year established a committee to investigate light, agile structure in which donors interact the underlying causes of internal fragmenta- constantly with the PA may be more appro- tion within the PA. The committee’s find- priate. ings included a number of specific recom- mendations on internal reform measures, 77. In today’s changed environment, including the passage of legislation defining three reform areas call out for rapid, the role and the authorities of the security concerted effort. forces 20 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Security and the Rule of Law 80. Equally necessary for the rule of law is a sound legislative process and a 78. The Bank’s June 23 paper ob- solid corpus of relevant law. In July the served that “a maximum PA effort to ful- Council Affairs Committee produced a Gen- fill its security obligations under the eral Framework of the Reform and Development Roadmap is needed if the donor com- Program of the Palestinian Legislative Council, a munity is to argue for a major easing of positive step towards improving the effi- today’s closure regime.” While it is be- ciency of the PLC101. From a commercial yond the Bank’s competence to advise on perspective several core pieces of legislation how to approach security reform, it is clear are missing or outdated, lack regulations or that a revival of the private sector will not remain unsigned102, or unimplemented103 – take place in an environment plagued by while the quality of some legislation is ques- conflict with Israel and by domestic lawless- tionable104. Commercial laws differ in the ness. It is also clear that far-reaching West Bank and Gaza, and need harmoniza- changes in the security and police services tion in order to reduce the transaction costs are needed. Some progress has been for firms doing business in both jurisdic- achieved since the beginning of 2004, with tions105. Procedures, particularly those relat- the National Security Council now holding ing to the issuance of licenses and permits, responsibility for all security forces – but require further simplification. much remains to be done to ensure that the security services operate within a structure Fiscal Stabilization of administrative and legal accountability99. 81. The fiscal position of the PA re- 79. An impartial and responsive mains very tenuous. Excessive growth in courts system is essential to a healthy the PA’s wage bill in recent years has com- investment climate, but progress in es- pounded the problems caused by closure tablishing it has languished for many and the erosion of the tax-base106, and the years. A fully functioning court system PA has become too dependent on erratic would instill a higher level of commercial and uncertain donor budget support. trust in the PA. However, a number of fundamental problems remain unresolved, in- 82. It is essential that the PA adhere cluding the lack of clear delineation of the to the Wage Bill Containment Plan de- respective responsibilities of the Ministry of veloped by MOF and approved by the Justice and the Supreme Judicial Council, Cabinet in June 2004107. The PA’s annual the continued absence of a Supreme Court, wage bill this year is some US$125 million and the ambiguous role played by the Diwan greater than in 2003 (an increase of 17 per- al Fatwa100 in the legislative process. These cent), mostly as a result of large public sec- factors have hindered the timely appoint- tor salary increases granted in 2003108. In the ment of judges, impaired court administra- face of declining donor support109, the PA tion and created a large backlog of cases in has been forced to squeeze non-wage ex- the courts. The judicial system’s credibility penditures 17% below budget in the first has been undermined, and needs to be re- nine months of the year, but still faces stored. Creating a fully functional, profes- month-to-month crises to pay salaries110. sional and sustainable judicial/court appara- The PA can not afford to grant any further tus involves establishing clear mandates for salary increases to public employees until the selection of court personnel, enhanced the fiscal situation has manifestly stabilized. judicial training and attention to the admini- Under today’s conditions, in which oppor- stration of the courts. Criteria for the ap- tunities for employment in the private sector pointment and promotion of judges also are limited, large scale retrenchment of pub- need to be specified and enforced. lic servants is not a viable option; as soon as political and economic conditions make it Overview 21 feasible, though, the size of the public ser- effective public financial manage- vice should be reduced in line with what is ment systems (see paragraph 73) – needed and what is affordable – with a par- progress that enabled the Bank to state ticular emphasis on the security services, in early 2004 that “the Palestinian public where unmanaged recruitment has been financial management system is judged most evident. to be adequate insofar as the World Bank’s criteria and standards for ap- 83. The current public sector pension proval of a general budget support op- schemes are unsustainable and would, if eration are concerned”118. not comprehensively reformed, trigger a severe fiscal crisis111. The stock of public ¾Articulate a comprehensive anticor- sector pension liabilities resulting from these ruption strategy which addresses generous and under-funded schemes is cur- prevention, prosecution, and public rently estimated at over 50% of GDP112. sensitization. This strategy should look Without reform the current Gaza system at the existing institutions now charged will go bankrupt in 2-3 years, and the PA with combating corruption (including will either have to default on pensions or the external public audit institution, see make all payments from the budget. The PA below) to assess how their independence is committed to comprehensive reform, and can be strengthened. It should also de- a solid draft law creating a unified pension velop anti-corruption regulations for PA system for all public sector employees is ministries and agencies with major reve- now before the PLC. If passed in its current nue, expenditure or regulatory functions, form, it will establish a scheme for sustain- and should require senior PA officials to able and equitable pension benefits for all sign conflict of interest and financial public sector employees, and will also estab- disclosure provisions119. lish an independent pension agency with governance mechanisms able to protect 85. A visible, sincere effort to prevent pension assets from political interference corruption and to punish offenders would and fraud. For the reform to succeed, the pay enormous dividends for the incoming PLC will need to resist pressure from vari- PA administration, both domestically and ous interest groups to provide them with abroad. excessive benefits113. After reform, PA pension expenditures will amount to US$78-80 86. A number of other key areas million annually114. The PA will need to pay bearing on PA institutional accountabil- all contributions in full if the integrity of the ity also need to be addressed. new system is to be maintained115. ¾The lack of an independent public Transparency and Accountability audit function. The PLC is considering legislation which will create a new exter- 84. The PA needs to take steps to nal audit institution to replace the Gen- counter widespread perceptions of sys- eral Control Institute. The new institu- temic corruption. Polling data shows that tion would report both to the PLC and such perceptions are shared by ordinary Pal- the President, would cover all PA enti- 116 estinians as well as businessmen. Such ties, and would be tasked with auditing perceptions, compounded by PA shortcom- the PA’s financial statements according ings in performing its regulatory functions, to international auditing standards. To can dampen entrepreneurs’ willingness to complement this encouraging draft law, 117 invest . The PA would do well to a major capacity building program will be needed to create an institution capa- ¾Actively publicize the considerable ble of fulfilling this important role. progress it is making in developing 22 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

¾Anti-competitive bias in several practices of the Palestinian Authority. This takes two forms – direct PA involvement in productive activities, and indirect equity participation in private firms. The PA has taken welcome steps to ensure public disclosure of the financial data of the Palestine Investment Fund, the holding company for its in- vestments120. Nevertheless, further increases in transparency and accountability are desirable, including publishing the terms of exclusive licenses to firms, and creating regulatory bodies that are independent of policy ministries.

¾Strengthening public procurement. A significant recent improvement was the abolition of the Al Sahra Company’s monopoly on supplying basic essentials to the security services. However, public procurement remains weak overall. The laws that exist for the procurement of goods and works are only partially enforced, and many spending units have developed their own independent procurement practices – not least because many purchases are funded by donors who insist that their particular practices be adhered to. A PA Procurement Ac- tion Plan is currently being developed and could make a significant difference. Proposed actions include establishing an independent Oversight Procurement Authority to monitor all public procurement, drafting a Unified Procure- ment Law and developing standard bidding documents to simplify and harmonize procedures across ministries and donor-funded projects. 4 – The Settlement Assets

87. Data about settlement assets re- to separate land claims and dispute adjudica- main scarce. No firm decision has yet been tion from the disposal of other assets. taken by GOI on which assets it will transfer, or by the PA on how they will be used. 90. In order to ensure the transpar- Detailed preparatory work for the transfer, ency of the TMD process, clear rules management and disposal (TMD) of settle- and procedures should be formalized ment assets has therefore not been possible. and agreed upon in advance. An infor- Nevertheless, both GOI and the PA have mal, ad hoc process with ambiguous respon- advanced their planning. GOI has set up an sibilities, rules and procedures could be very office dealing with the evacuation, and a damaging – both to the reputation of the compensation law has passed its first read- PA and in terms of missed economic oppor- ing in the Knesset. The PA is finalizing its tunities. Medium-Term Development Plan 2005-7, in which the proposed Palestinian use of relin- 91. GOI has clarified a number of quished settlement assets is discussed. issues related to the transfer of settlement assets. GOI may consider the trans- 88. Some assets will not fit Palestin- fer of some houses intact if the PA were to ian developmental needs; these should propose uses not inimical to Israeli interests. be dismantled and the debris should be Nor would GOI object to the preparation removed. In reviewing available informa- of a manual of procedures, for use by both tion, the Bank has assessed the most appro- parties, explaining the TMD process in de- priate uses of settlement assets. While such tail. Israeli utility companies will continue to decisions will and should be taken by Pales- provide electricity, water, gas, fuel, and tele- tinians themselves, the Bank’s advice is that communications to Gaza and the West public infrastructure can be transferred to Bank under current agreements – and will the relevant Palestinian entities and inte- provide services to the settlement sites if grated into Palestinian systems. Public build- arrangements can be put into place which ings could be maintained if the surrounding offer adequate repayment guarantees. population density and demand for social services justify their use. Productive assets 92. The PA’s position is that under would ideally be handed over as going con- international law decisions on the dispo- cerns, but both technical and legal reasons sition and use of the settlement assets complicate such transfer. Details are pro- must be taken by them121, and it is cur- vided in Technical Paper IV. rently assessing the possible integration of the assets into updated Gaza and 89. Since land is likely to contribute West Bank regional development plans. more to the Palestinian economy than all These plans take into account the need for other remaining assets combined, its additional urban or agricultural land and the proper use is key. The PA should establish protection of natural resources (particularly clear policies to determine whether land water). The PA has indicated that GOI should be restored to its owners, or whether should dismantle any settlement assets that they should be compensated and the land do not fit into the regional plans, and that used for the public benefit. The establish- any rubble should be removed and disposed ment of a special administrative process for of outside Palestinian territory. resolving ownership claims is recommended; claims would be received and re- 93. The PA is advised to establish a solved based on clear criteria for assessing dedicated institutional structure to plan ownership rights. It would also be advisable and implement the TMD process. Deci- sions on this structure need to be taken

23 24 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects soon – and well in advance of actual disen- about the settlement assets to the PA. At the gagement, since additional capacity will be same time, the PA should formally indicate needed irrespective of the detailed setup, which assets it wishes to receive intact, and because establishing any structure will based on current information, and for which take time. Building on international experi- purposes. ence, a three-tiered approach is recommended 97. A first step would be for the PA to set up a formal working group to assess ¾The PLC should pass enabling legisla- institutional options, review applicable laws tion and should provide parliamentary and regulations and draft an enabling law, oversight; determine how claims will be handled and ¾A multi-stakeholder Supervisory Board develop a strategy for consulting the public under PA leadership and assisted by do- on all aspects of the TMD process. nor-financed expertise should direct the TMD process; ¾An existing or new PA body should be responsible for TMD implementation.

94. The involvement of the general public in decisions on how the received assets will be disposed of, and to whom, is essential – as is the need to keep the public closely informed of TMD implementation.

95. In the Bank’s opinion, a small, light special agency structure, without special budget authority and provided with dedicated technical assistance, would be the preferred set-up. Compared to a “business as usual” approach whereby PA entities assume responsibility for assets under their respective jurisdiction, such an arrangement is more likely to bring to bear the necessary focus and sense of institutional accountability. Any special PA structure must not, however, evolve into an alternative power center in Gaza or add bureaucratic dead-weight.

96. Both GOI and the PA have indicated an interest in coordinating the TMD process at a technical level, possibly with the involvement of a third party. GOI does not currently intend to hand assets directly to the PA; at the same time, an acceptable third party to which GOI could transfer the assets as a “custodian” is unlikely to emerge. To make any coordination more productive, GOI needs to furnish detailed information 5 – The Economic Outlook

98. GOI’s proposals for enhanced 2008 than today (see Box 2 and Annex Ta- border cargo management will make a ble 2). difference, as can be seen from a comparison of the Bank’s “Disengagement Box 2 – “Disengagement Plus” Scenario Plus” scenario with the “Disengage- ment” scenario presented in the June 23 Assumptions: The assumptions underlying this report. However, the difference is not scenario reflect GOI’s stated intention of sepa- enough to trigger a Palestinian eco- rating Israelis and Palestinians while effecting nomic recovery. GOI is proposing to im- improvements in movement and access, particularly for goods. Specifically, internal closures are plement some important measures – termi- assumed to be removed in Gaza and the north- nal reconstruction and re-equipment, the ern West Bank, but to remain in place (at a introduction of the redundancy principle slightly reduced level) in other parts of the West and of service standards. In addition, under Bank. The Separation Barrier is assumed to be the Disengagement Plan, Palestinians will completed in 2005. Access between Gaza and gain access to valuable settlement assets and the West Bank improves somewhat but is still would benefit from a reduction in internal difficult, though the inauguration of a closures in Gaza and the northern West Gaza/Tulkarm rail link by end-2007 results in Bank. These positive measures would be improved flows of people. Transitional revenue undercut, however, by several key constrain- and trade losses from the abrogation of the ing factors – maintenance of the back-to- quasi-Customs Union in Gaza are assumed from the end of 2006. The number of Palestinian back cargo handling system, continued in- workers in Israel would decline gradually until ternal closure in the central and southern permits cease to be issued in 2008. Moderate West Bank, completion of the Separation progress is assumed on Palestinian reform. Do- Barrier, continued poor access between nor assistance in 2005 is estimated at US$200 Gaza and the West Bank, the termination of million higher than under the status quo sce- work permits by end-2008 and the abroga- nario, and amounts to US$3.6 billion from tion of the quasi-Customs Union in Gaza. 2005-2008, an average of US$900 million per The collective weight of these factors would annum. overwhelm other positive developments. Projections: In this scenario, after a mild im- 99. An emphatic doctrine of physical provement in key indicators in 2005, long-term decline would resume, albeit it less rapidly than and economic separation cannot be ex- under the status quo scenario. By 2008, real pected to encourage private investment GDP per capita would be 9% percent lower – particularly since the immediate po- than in 2004, and real GDI 14% less. Unem- tential for Palestinian economic recovery ployment would reach 31% in 2008 (44% per- lies in rebuilding trading links with Is- cent in Gaza), while 55% would be living below rael. While it is likely that donors would the poverty line (70% in Gaza). support the emergence of new Palestinian leadership and a renewal of bilateral contact with additional funding in the short-term, it is hard to envisage donors making a major, sustained financial effort if the preconditions for economic recovery are absent. In the “Disengagement Plus” scenario, therefore, after a brief surge in real GDP and GDI per capita in 2005, real incomes would resume their decline and would be lower in

25 6 – How to Turn the Corner

“Today, I wish to address our Arab neighbors…....In this ongoing war, many among the civilian population, among the innocent, were killed. And tears met tears. I would like you to know that we did not seek to build our lives in this homeland on your ruins”

Ariel Sharon, Speech on Israel’s Disengagement Plan to the Knesset, Octo- ber 25, 2004

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I – Additional Measures Will Make curity control. In the case of the Rafah cus- the Difference toms border, a judicious mix of international customs management expertise, IMF oversight and PA capacity building would be 100. As the “Disengagement Plus” adequate to meet the challenge of securing Scenario shows, the basis for vibrant the common customs border. Israel could economic recovery does not yet exist. also inspect goods exiting from Gaza as a form of verification. Both parts of the Pales- 101. Recovery depends above all on a tinian economic entity – Gaza and the West comprehensive Israeli approach to lift- Bank – should have the same customs ing closure. If GOI addresses only some treatment. components of the closure system, the impact of such initiatives will be muted by 103. To accelerate the dismantling of other remaining constraints. Economic life internal closures in the West Bank, the cannot recover if people and goods cannot PA will need to demonstrate strong and move between cities and towns within the sustained commitment to security re- West Bank. If a truck carrying export goods form. If a vigorous PA effort to enforce law from Hebron to Ashdod Port is delayed for and order further reduces the frequency of an unpredictable periods of time en route to attacks on Israelis122, the case for maintain- Tarkumiya, and is then subject to back-to- ing today’s complex and invasive set of re- back unloading procedures, improved ter- strictions will no longer resonate. minal layout and screening equipment will not make an appreciable difference. If goods 104. The other PA governance priori- produced in Ramallah cannot be transported ties identified in this report – early elec- through Israel to Gaza without long delays tions, legal and judicial reform, fiscal and multiple inspections, the feasibility of an containment, deeper transparency – are otherwise attractive Gaza container port will relevant to the internal health of Pales- be in doubt. tinian society and to the creation of an attractive environment for the private 102. Israel is urged to re-examine the sector; they should not be seen as constitut- concept of “economic separation”. If ing preconditions for GOI action on dis- labor permits are no longer issued from mantling closures. 2008 and if the quasi-Customs Union in Gaza is abrogated once Israel withdraws 105. The following paragraphs sum- from Philadelphi, Palestinian economic re- marize key measures which, if imple- covery may stop in its tracks. In each case, mented, will lay the basis for the eco- there are ways to protect Israel’s interests. nomic revival of the West Bank and With illegal labor flows disappearing, virtu- Gaza. The Bank hopes that these measures, ally all Palestinian laborers will be permit which derive from an intensive process of holders, which greatly increases Israel’s se- donor analysis and interaction with both the

26 Overview 27 parties, will be of assistance to them in indi- the sponsorship of a country or an insti- vidual and joint deliberations over the com- tution in which they both have confi- ing months. dence.

The Government of Israel A secure, efficient and reliable Gaza – West Bank transport link should be Borders and Trade Logistics re-established. The parties hold strongly divergent views on this issue. In light of PA and donor objections From an economic perspective, without to their location inside the West prejudice to legal and political argu- Bank, it is recommended that all ments, a quick, reliable and cheap flow West Bank border terminals be lo- of people and goods between the two cated on the 1949 Armistice (Green) parts of the Territories is needed to Line. promote economic efficiency and good government – and technical solutions The back-to-back system should be that can ensure this without undue risk rapidly abolished. A new approach are available (see paragraph 53 and should be tested, as a matter of urgency, Technical Paper I). This is an issue in two locations (Karni and Jalame). which the two parties need deal with These pilot projects should feature ter- face-to-face. They should take as their minal infrastructure upgrades, the intro- point of departure the logic of the In- duction of security technology, the terim Agreement – “The two sides view adoption of terminal service standards, the West Bank and Gaza as a single ter- the introduction of risk-management ritorial unit, the integrity and status of systems and the development of a which will be preserved during the in- commercial recourse mechanism. The terim period”123. pilots should be jointly designed by GOI and the PA, with strong involvement by Internal Movement in the West Bank Palestinian and Israeli businessmen. Needed investments by both parties (in- The system of over 700 checkpoints frastructure, equipment and technical and barriers in the West Bank should services) could be financed by the donor be re-evaluated, and progressively community. Assessment of the progress dismantled. of the pilot can be contracted out to experts acceptable to both parties. If suc- Those areas of the West Bank from cessful, the program could be general- which Israel withdraws should be re- ized out to all border terminals. It is im- designated as Area A. This would con- portant that these pilots be launched stitute GOI recognition of the nature of immediately; they can reach full devel- the jurisdiction that the PA will then ex- opment as and when new infrastructure ercise. and equipment become available. Labor Israel should permit the construction of a RoRo terminal in Gaza as the Israel’s willingness to maintain, as a first stage of a full-service harbor; in minimum, current Palestinian labor addition, air services should be re- levels in Israel beyond this decade stored. Israel’s legitimate security con- would make an important and posi- cerns must be catered to if these pro- tive contribution to economic and jects are to proceed, and GOI and the social stability. PA are both urged to consider the use of third-party security oversight under 28 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

The quasi-Customs Union point of coordination with GOI, and for the past two months have been virtually Current trade, tariff and customs denied access to Gaza. The TFPI has procedures should be maintained in suspended its regular meetings with both Gaza and the West Bank until COGAT due to this channel’s ineffec- re-negotiated by the two sides. The tiveness. This impasse makes no sense at current arrangements should not be ab- a time when Israel is seeking interna- rogated unilaterally. Nor should GOI tional support for the Disengagement treat Gaza and the West Bank differ- Plan. ently in terms of the qCU. Doing so would cause serious damage to the Pal- GOI needs to play its part in facilitat- estinian economy, compromising both ing Palestinian reform. Above all in revenues and trade. The Bank believes the coming months, this will involve that Israel’s customs interests can be enabling Palestinians to move freely protected with a combination of interna- within the West Bank to register and to tional management expertise, Palestinian vote in the presidential, parliamentary customs capacity building and IMF and local elections planned during 2005. monitoring. In addition, GOI should continue to provide long-term permits to reformers, The emphasis in the coming period but should aim to accelerate what has should instead be on improving the proven to be a slow and uncertain proc- implementation of the Paris Protocol, ess. with a particular emphasis on capturing the revenues lost to the PA due to un- The Palestinian Authority taxed indirect imports. Security and the Rule of Law Other Issues Security reform needs to be accorded GOI should provide to the PA de- top priority. As the Bank’s June 23 re- tailed information on the assets it in- port points out, “Easing internal clo- tends to leave behind in the settle- sures throughout the West Bank must ments, to enable the PA’s planning be accompanied by a credible Palestin- process to go forward, and as a first step ian security effort; as long as Palestinian in initiating technical contact between violence persist, the case for dismantling the two sides on this issue. closures will be contestable”124.

GOI needs to pay more serious at- A court system that delivers impartial tention to facilitating the work of the justice within reasonable timeframes donor and aid agencies. The condi- has to be developed without further tions facing the aid community on the delay. The stand-off between the Su- ground, and in particular humanitarian preme Judicial Council and the Ministry agencies and their contractors have con- of Law and Justice should be resolved tinued to deteriorate in 2004, as the by amendments to the Judicial Authority Task Force on Project Implementation Law. This would then open the way to a (TFPI)’s submission to the AHLC de- program of accelerated court develop- scribes. This is at odds with the com- ment, such as the Judicial Training Insti- mitment in the Disengagement Plan that tute project planned by the EC, and Israel will “coordinate with the interna- maximize the benefits of past projects tional organizations the arrangements funded by USAID and the World Bank. that will make [their] activity easier.” As things stand, donors have no functional Overview 29

Fiscal Management pervisory Board and an existing or small new agency to handle implementation, The PA needs to maintain control while the Medium-Term Development over recurrent spending. The eco- Plan discusses the best use of these as- nomic crisis of the past four years has sets. A process of consultation with the brought chronic revenue starvation. De- public should be initiated without delay spite commendable domestic revenue – to discuss both what should be done performance, recurrent spending has in- with the assets, and how the process creased excessively, leading to month- should be conducted. to-month crises which force the Minis- ter of Finance to devote much of his en- II – Economic Recovery ergy to securing PA salary payments. The PA needs to freeze public sector 106. If the package of measures de- wages and adhere rigorously to the tailed above is implemented with com- Wage Bill Containment Plan. mitment, the foundations for economic recovery will be laid. Under these circum- The PA should make every effort to stances, with donor funding levels at US$3.6 ensure that a sustainable Unified billion over four years (the same level as for Pensions Law is quickly enacted. the “Disengagement Plus” Scenario), the Not only is this important in order to improvement in the business environment avoid an impending pensions crisis, but resulting from mutually reinforcing actions it will also enable the PA to carry out an by the PA and the GOI would generate sig- appropriate downsizing of the public nificant increases in investment, employ- sector once the economy recovers and ment and consumption, leading to measur- unemployment falls to more manageable able positive income growth. By 2008, GDP levels. per capita could be 10 percent higher than this year – and 24 percent higher than under Transparency and Accountability “Disengagement Plus” (see Box 3 and An- nex Table 2). An improving economy The PA needs to address perceptions would help stabilize the PA’s fiscal situation of corruption. This can be done and would allow donors to reprogram assis- through a combination of measures. tance away from budget support and hu- First, the PA needs to do a better job of manitarian assistance into development ac- explaining to its own public and to Israel tivities, further solidifying the recovery. the measures that have been taken to improve public financial management. Box 3 – “Economic Recovery” Scenario Second, in order to confront public perception head-on, the PA should develop Assumptions: In addition to the border cargo a proactive anti-corruption strategy, facilitation measures already proposed, the back- drawing on successful approaches used to back system is abolished, internal closures are elsewhere. Third, the PA should acceler- dismantled, the flow of goods and people be- ate efforts to extend control measures tween Gaza and the West Bank is significantly into the sphere of public audit and pro- improved, a Gaza RoRo port comes into operation at the end of 2007, Israelis are permitted to curement reform. enter border-industrial estates (triggering appreciable job creation in the Erez, Karni and Jenin The Settlement Assets industrial estates by 2008), and the quasi- Customs Union is maintained through the pe- The PA needs to decide how it will riod, with enhancements. Palestinian employ- handle the TMD of the settlement ment in Israel and settlements remains at cur- assets. The Bank has advocated a three- rent levels (37,700 excluding East Jerusalem tier structure involving the PLC, a Su- residents). With closures largely dismantled, 30 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects economic transaction costs return to pre-intifada supporting Palestinian reform. All do- levels. Donors contribute US$3.6 billion during nors are advised to route budget support 2005-2008, or US$900 million per annum. contributions through this instrument129. Projections: In this baseline recovery scenario, Providing timely technical and fi- the combination of positive developments out- nancial support to a revitalized Pal- lined above would increase consumption, evoke a strong investor response and lift exports to estinian reform program, including pre-intifada volumes by mid-2007. Real GDP per support for elections and for the TMD capita would increase 10% from current levels process in relation to the settlement as- by 2008. However, real GDI per capital would sets. grow by only 1%. Poverty levels would fall by 7 percentage points to 41% (still 58% in Gaza) Financing essential humanitarian and unemployment would decline to 19% (34% requirements. With almost half the in Gaza). population living below the poverty line and 16%, or 600,000 people mired in III – The Donor Response deep poverty and unable to make ends meet130, donor-financed humanitarian 107. The experience of the past four expenditures have become an essential years has shown that high levels of do- part of the Palestinian social safety net. nor assistance cannot substitute for a In 2003, donor contributions equivalent positive economic environment125, and to US$264 million were devoted to hu- the “Disengagement Plus” scenario recon- manitarian and other emergency expen- firms this message – even with donors con- ditures, and emerging 2004 figures look tributing an average of US$900 million per comparable131. For 2005, the MTDP is annum126, economic decline is not arrested. seeking between US$251 –267 million (depending on scenario) to ensure that 108. Under the base case “Disen- an adequate safety net is provided to the gagement Plus” scenario, there is not poorest and most vulnerable. justification for donors to increase funding dramatically, though a limited addi- 109. Under the high case “Economic tional response can be expected in 2005 Recovery” scenario, though, donors if the PA leadership transition is smooth should be encouraged to make a major and the PA presses ahead with PLC additional effort, since the economic elections. The Bank has therefore assumed benefits of additional donor funds under that disbursements in 2005 could rise to such circumstances would be consider- US$1.1 billion. IN this instance, priority able. An additional US$1.7 billion in 2005- should be given to 2008 could be used to upgrade Palestinian basic and social infrastructure and work- Supporting the PA Budget. According force skills, creating short-term employment to the IMF, the external budget gap for and improving the operating environment 2005 is likely to be “close to US$500 for industrialists and traders (see Box 4 and million”127. The total for donor budget Annex Table 3). support in 2004 will likely amount to about US$345 million. Exceeding this in 110. If, and only if the parties take suf- 2005 will be difficult unless Arab League ficient steps to move the economy back donors honor past pledges and increase onto a path of sustainable growth, a do- their level of disbursements128. Other nor funding conference would be justi- donors in 2004 routed budget support fied, with donors expected to pledge sub- through the multi-donor, Bank-managed stantial additional funds for developmental Public Financial Reform Fund, an im- purposes. portant instrument for promoting and Overview 31

Box 4 – “Economic Recovery” Scenario with an additional US$1.7 billion of donor assistance over 4 years

Assumptions: As for the baseline “Economic Recovery” scenario above, but donors under this scenario provide US$5.3 billion during 2005-2008, or US$1.325 billion per annum on average.

Projections: Exports would exceed their pre- intifada levels by one third, real GDP per capita and real GDI per capita would increase by 22% and 14% percent, respectively, from their 2004 levels. Unemployment would drop to 13% (29% in Gaza), equivalent to the pre-intifada situation. Poverty levels would fall to 33%, though they would remain at about 50% in Gaza (see Annex Table 3 for more detail on the impact of this additional US$1.7 billion).

111. If it becomes clear that substantial progress is emerging, preparations for the conference can commence. As a foundation for such a meeting, the Bank and other donors should work with the PA to prepare a Palestinian Reconstruction Program; this program should be based on the PA’s Medium Term Development Plan. 112. In order to assess the case for such a conference on an continuing basis, it is recommended that every three months the AHLC Chair and Secretariat should review progress by the parties, and should report to the donor community on their findings. This review would need to be based on a set of indicators that should be agreed between GOI, the PA and the donor community, and which could be drawn from the actions recommended in this paper. Tables Annex Table 1. Recent Macroeconomic Indicators 1999 2000 2001 2002 2003 2004 Gross Domestic Product (GDP), US$ million 4,179 4,116 3,329 2,831 3,144 3,336 West Bank 2,874 2,811 2,228 1,924 2,172 2,320 Gaza Strip 1,304 1,305 1,101 907 973 1,016

GDP per capita, US$ 1,493 1,409 1,087 879 925 934 West Bank 1,681 1,576 1,193 983 1,052 1,072 Gaza Strip 1,199 1,147 920 717 729 722

Real GDP growth rate (West Bank and Gaza) 9% -6% -15% -10% 6% 3% Real GDP per capita growth rate (West Bank and Gaza) 4% -10% -19% -15% 1% -2% Cumulative Real GDP per capita change since 1999 -10% -27% -37% -37% -38%

GDI per capita, US$ 1,896 1,839 1,513 1,326 1,467 1,393 West Bank 2,113 2,035 1,662 1,452 1,621 1,557 Gaza Strip 1,555 1,532 1,282 1,130 1,227 1,140

Real GDI growth rate (West Bank and Gaza) 9% -3% -9% -3% 11% -3% Real GDI per capita growth rate (West Bank and Gaza) 4% -7% -13% -7% 6% -8% Cumulative Real GDI per capita change since 1999 -7% -19% -25% -21% -27%

Poverty Rate 20% 27% 37% 51% 47% 48% West Bank 13% 18% 27% 41% 37% 38% Gaza Strip 32% 42% 54% 68% 64% 65%

Unemployment Rate 12% 14% 26% 31% 26% 27% West Bank 10% 12% 22% 28% 24% 23% Gaza Strip 17% 19% 34% 38% 29% 35%

Population (million) 2.8 2.9 3.1 3.2 3.4 3.6 West Bank 1.7 1.8 1.9 2.0 2.1 2.2 Gaza Strip 1.1 1.1 1.2 1.3 1.3 1.4

32 Overview 33

Annex Table 2. Macroeconomic Indicators “Status Quo” "Disengagement Plus" "Economic Recovery" Under Various Scenarios 2004 2005 2006 2007 2008 2005 2006 2007 2008 2005 2006 2007 2008 Gross Domestic Product (GDP), US$ million 3,336 3,390 3,405 3,432 3,472 3,726 3,566 3,655 3,778 3,731 3,817 4,239 4,687 West Bank 2,320 2,374 2,402 2,437 2,483 2,610 2,515 2,596 2,702 2,614 2,693 3,011 3,352 Gaza Strip 1,016 1,015 1,003 994 989 1,116 1,051 1,059 1,076 1,118 1,125 1,228 1,335

GDP per capita, US$ 934 904 867 834 807 994 908 889 878 996 972 1,031 1,090 West Bank 1,072 1,047 1,013 985 962 1,151 1,061 1,049 1,047 1,153 1,136 1,216 1,299 Gaza Strip 722 686 644 607 575 754 674 647 626 755 722 750 776

Real GDP growth rate (West Bank and Gaza) 3% 2% -1% -1% 0% 7% -2% 2% 2% 8% 3% 8% 11% Real GDP per capita growth rate (West Bank and Gaza) -2% -3% -5% -6% -4% 2% -6% -3% -2% 3% -2% 3% 6% Cumulative Real GDP per capita change since 2004 -3% -8% -13% -17% 2% -4% -6% -9% 3% 1% 4% 10%

Gross Disposable Income (GDI) per capita, US$ 1,393 1,333 1,270 1,192 1,156 1,494 1,324 1,257 1,227 1,497 1,408 1,433 1,484 West Bank 1,557 1,499 1,436 1,359 1,327 1,678 1,500 1,437 1,411 1,682 1,600 1,647 1,721 Gaza Strip 1,140 1,080 1,019 941 900 1,212 1,057 987 950 1,215 1,117 1,110 1,128

Real GDI growth rate (West Bank and Gaza) -3% 1% -1% -4% 0% 8% -5% -1% 1% 9% -1% 4% 8% Real GDI per capita growth rate (West Bank and Gaza) -8% -4% -6% -8% -4% 3% -9% -5% -4% 3% -5% -1% 4% Cumulative Real GDI per capita change since 2004 -4% -10% -17% -20% 3% -6% -11% -14% 3% -2% -3% 1%

Poverty Rate 48% 50% 54% 59% 62% 46% 51% 52% 55% 46% 48% 45% 41% West Bank 38% 41% 44% 49% 53% 36% 41% 43% 45% 36% 38% 35% 31% Gaza Strip 65% 66% 70% 74% 76% 64% 68% 69% 70% 64% 64% 62% 58%

Unemployment Rate 27% 28% 32% 35% 37% 25% 28% 30% 31% 24% 25% 22% 19% West Bank 23% 24% 27% 30% 32% 21% 23% 24% 25% 20% 19% 16% 12% Gaza Strip 35% 38% 42% 45% 49% 35% 38% 41% 44% 34% 36% 35% 34%

Population (million) 3.6 3.7 3.9 4.1 4.3 3.7 3.9 4.1 4.3 3.7 3.9 4.1 4.3 West Bank 2.2 2.3 2.4 2.5 2.6 2.3 2.4 2.5 2.6 2.3 2.4 2.5 2.6 Gaza Strip 1.4 1.5 1.6 1.6 1.7 1.5 1.6 1.6 1.7 1.5 1.6 1.6 1.7

34 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Annex Table 3. Selected Macroeconomic Indicators $3.6 billion in $5.3 billion in Impact of Under “Economic Recovery” Scenario with Total Donor Assistance Total Donor Assistance Increasing Different Aid Assumptions Over 2005-2008 Over Period 2005-2008 Over Period 2005-2008 Donor Illustrating Impact of Amount of Donor Support: Amount of Donor Support: Support Increasing Donor Support by $1.7 billion $1.1 bil. $0.9 bil. $0.8 bil. $0.8 bil. $1.3 bil. $1.5 bil. $1.4 bil. $1.1 bil. through 2004 2005 2006 2007 2008 2005 2006 2007 2008 2008 Gross Domestic Product (GDP), US$ million 3,336 3,731 3,817 4,239 4,687 3,946 4,454 4,860 5,074 + 387 West Bank 2,320 2,614 2,693 3,011 3,352 2,764 3,141 3,452 3,629 + 277 Gaza Strip 1,016 1,118 1,125 1,228 1,335 1,182 1,312 1,408 1,445 + 110

GDP per capita, US$ 934 996 972 1,031 1,090 1,053 1,134 1,182 1,180 + 90 West Bank 1,072 1,153 1,136 1,216 1,299 1,219 1,325 1,395 1,406 + 107 Gaza Strip 722 755 722 750 776 798 842 860 840 + 64

Real GDP growth rate (West Bank and Gaza) 3% 8% 3% 8% 11% 11% 15% 9% 5% Real GDP per capita growth rate (West Bank and Gaza) -2% 3% -2% 3% 6% 6% 10% 4% 1% Cumulative Real GDP per capita change since 2004 3% 1% 4% 10% 6% 17% 21% 22% + 12 pts.

GDI per capita, US$ 1,393 1,497 1,408 1,433 1,484 1,608 1,723 1,730 1,643 + 159 West Bank 1,557 1,682 1,600 1,647 1,721 1,802 1,942 1,971 1,897 + 176 Gaza Strip 1,140 1,215 1,117 1,110 1,128 1,312 1,389 1,365 1,260 + 133

Real GDI growth rate (West Bank and Gaza) -3% 9% -1% 4% 8% 14% 15% 5% 0% Real GDI per capita growth rate (West Bank and Gaza) -8% 3% -5% -1% 4% 9% 9% 0% -4% Cumulative Real GDI per capita change since 2004 3% -2% -3% 1% 9% 19% 19% 14% + 13 pts.

Poverty Rate 48% 46% 48% 45% 41% 44% 37% 34% 33% - 8 pts. West Bank 38% 36% 38% 35% 31% 33% 27% 24% 24% - 7 pts. Gaza Strip 65% 64% 64% 62% 58% 62% 53% 50% 49% - 9 pts.

Unemployment Rate 27% 24% 25% 22% 19% 22% 17% 15% 13% - 6 pts. West Bank 23% 20% 19% 16% 12% 17% 11% 8% 6% - 6 pts. Gaza Strip 35% 34% 36% 35% 34% 32% 30% 29% 29% - 6 pts.

Population (million) 3.6 3.7 3.9 4.1 4.3 3.7 3.9 4.1 4.3 West Bank 2.2 2.3 2.4 2.5 2.6 2.3 2.4 2.5 2.6 Gaza Strip 1.4 1.5 1.6 1.6 1.7 1.5 1.6 1.6 1.7

Endnotes

1 See the Disengagement, the Palestinian Economy and the Settlements, World Bank, June 2004. 2 Disengagement, the Palestinian Economy and the Settlements, op. cit., paragraph 85. 3 UNSCO, UNRWA, WFP and UNCTAD. 4 The Israeli team included officials from the INSC, the Ministries of Trade, Defense (including the IDF, the Security Services and the office of the Coordinator of Government Activities in the Territories, COGAT), For- eign Affairs, Finance and Justice. The PA team was composed of officials from the Ministries of National Economy, Planning, Finance and Foreign Affairs, PECDAR and the PLO’s Negotiations Affairs Department, as well as private sector representatives from Paltrade and from the Palestinian Federation of Industries. Meetings were also held with a group of six Cabinet Ministers, chaired by the Prime Minister. 5 Israel’s Modified Disengagement Plan, June 6, 2004 (see Disengagement, the Palestinian Economy and the Settlements, Annex I). 6 A Performance-Based Roadmap to a Permanent Two-State Solution to the Israeli-Palestinian Conflict, Office of the Spokesman, US Government, April 30, 2003. 7 In November 2004, President Bush indicated his commitment to the establishment of a Palestinian state by 2009. "I believe we've got a great chance to establish a Palestinian state, and I intend to use the next four years to spend the capital of the United States on such a state," Bush said in an East Room news conference with Blair, his closest ally. "I believe it is in the interest of the world that a truly free state develop." Washington Post, November 13, 2004. 8 Disengagement, the Palestinian Economy and the Settlements, op. cit, paragraph 36. Salient features of Phase I are a cessation of Palestinian violence accompanied by Palestinian security reform, a freeze on Israeli settlement activity (including ‘natural growth’), an easing of restrictions on the movement of persons and goods, progres- sive Israeli withdrawal from areas occupied since September 28, 2000 and Palestinian elections and institutional reform. 9 Economic arrangements are covered comprehensively in annexes to the Israeli-Palestinian Interim Agreement for the West Bank and the Gaza Strip (Oslo Interim Agreement, September 25 1995), particularly in Annex V (Protocol on Economic Relations), which is based on the Protocol on Economic Relations between the Govern- ment of the State of Israel and the PLO, representing the Palestinian people, Paris, April 19,1994 (the Paris Pro- tocol). See also http://almashriq.hiof.no/general/300/320/327/oslo.html. 10 For example, the provisions covering safe passage of goods and persons have never been fully implemented, and there have been problems with the import of certain goods. In addition, the agreed gradual trade liberalization of agricultural produce never materialized. 11 “While Israel has declared that in principle, existing agreements continue to be in force, it is obvious that the Disengagement Plan renders some parts of these agreements irrelevant” Economic Aspects of the Israeli Disen- gagement Plan, Meeting with the World Bank, INSC, November 14, 2004, PowerPoint presentation. 12 For example, in a recent address to the Israeli Manufacturers Association, the Chairman of the INSC is re- ported as saying that disengagement “is meant to separate Israel from the Palestinians both politically and for security purposes, and this requires economic separation as well”. Eiland: Full Economic Disengagement, Too, Ora Cohen, Ha’aretz, November 1, 2004. 13 Israel’s Modified Disengagement Plan, June 6, 2004 – see Annex 1 of Disengagement, the Palestinian Econ- omy and the Settlements, op. cit. 14 Source: Peace Now Website, November 2004. This excludes 97 “outposts”. 15 Discussions between INSC and the World Bank, November 2004. Under the Interim Agreement, land in the West Bank and Gaza was divided into three categories: Areas A, B and C. Areas A and B correspond to land in populated areas, primarily cities and larger towns. Land in Areas A and B immediately came under the jurisdiction of the PA for civil matters, including zoning and planning. Responsibility for security in Area B is shared by the GOI and PA. Area C constitutes all of the land outside of Areas A and B. Jurisdiction for Area C was to be gradually transferred to the PA. At this time, full jurisdiction for civil and security matters in Area C remains with GOI. 16 Gross Domestic Product is a measure of domestic output. Disposable Income, or GDI, measures all sources of income, including remittances and foreign assistance. In the West Bank and Gaza in 2003, these factors added 59% to average incomes (real GDP per capita stood at US$925, and real GDI per capita at US$1,467). 17 In gross terms, US$294 million. US$116 million was deducted for utility bills owed to Israeli companies. 18 More than half were classified as self-employed or as unpaid family labor. 19 As of October 1, 2004, a total of 453 Palestinians had been killed as a result of fighting in Gaza, while 32 Is- raelis had been killed in Gaza and 4 in the nearby Israeli town of Sderot as a result of Qassam rocket attacks. Source: UN Office for the Coordination of Humanitarian Affairs, OCHA.

35 36 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

20 In January 2004, the volumetric ratio of exports to imports was approximately 1:3. This fell to 1:12 in June and remained at this level until early November. Source: OCHA. 21 On 1 April 2004, UNRWA halted its emergency food distribution activities, which benefit c. 600,000 Gazans. Some food distribution was restarted on 20 April 2004, but at a much lower rate than planned or needed, due to restrictions on movement of goods (including humanitarian) through Karni. Food distribution reverted to previous levels only in October 2004. 22 Approximately 10,000 people were made homeless by house demolitions, and about 6 square kilometers of agricultural land were razed between January and early November. Source: OCHA. 23 A November 2004 report by Israel’s National Insurance Institute warns that poverty levels in Israel reached a worrying 22 percent of the population in 2003 (using a 2002 poverty line of NIS1,763 per month for a single person and NIS2,777 monthly income for a couple). If the same poverty line was applied to the West Bank and Gaza, 88 percent of Palestinians would fall below the poverty line. 24 For example, “Economic stability and growth for the Palestinians is a strategic stabilizer for Israel” -- Con- tinuous Movement in the West Bank – An Economic Component to the Disengagement Plan, office of the Coor- dinator Of Government Activity in the Territories, July 2004, PowerPoint presentation. 25 Israeli Disengagement Plan – Dialogue with the World Bank – Status Report, op. cit. August 29, 2004, PowerPoint presentation. 26 Disengagement, the Palestinian Economy and the Settlements, op. cit, paras. f) and 1. 27 Twenty-Seven Months – Intifada, Closures and Palestinian Economic Crisis, World Bank, May 2003. 28 Four Years – Intifada, Closures and Palestinian Economic Crisis, World Bank, November 2004. 29 Seam zone residents require permits to continue living in the zone, and non-residents, including international and national staff of international organizations, must obtain permits to enter the zone. 30 Assessing the current and future macroeconomic impact of the Separation Barrier is a difficult undertaking, for at least two reasons. First, the final course of the Barrier continues to evolve, particularly in light of the June 30, 2004 decision of Israel’s High Court (Beit Sourik Village Council vs. 1.The Government of Israel and 2. Commander of IDF Forces in the West Bank) which ordered reconsideration of a 30 km stretch northwest of Jerusalem; the Court decision forced IDF planners to reevaluate the planned southern route as well, and as con- sequence to move the planned Barrier closer, if not up to, the Green Line. To this date, the Israeli Cabinet has not formally endorsed its ultimate routing; nor have final decisions been reached in areas around several large Israeli settlement blocs located deep within the West Bank – notably Ariel (east of Qalqilya), Ma’aleh Adumim (east of Jerusalem), Gush Etzion (southwest of Bethlehem), and Kiryat Arba (east of Hebron). The official IDF map of the Barrier currently posted on its website predates the June High Court decision. Nor are the arrangements for passage through (or access to Palestinian land west of the Barrier) finalized, even in areas in the northwestern West Bank where the Barrier has been completed for nearly 18 months. Second, the situation which would prevail in the absence of the Barrier – the counterfactual which would serve to measure, by difference, the impact of the Barrier – is subject to controversy. As for the impact of the Barrier on internal movement, three alternative scenarios are logically possible: 1) the Barrier would compliment and strengthen the existing system of movement restrictions (both internal and external closure), hence aggravating their severity and further increasing transportation costs; 2) the Barrier, because of its success as an impediment to transit into Israel, allows for the relaxation of internal closures, thereby lowering transportation and transaction costs within the West Bank; 3) overall transportation and transaction costs are unchanged. Nevertheless, based on its current alignment (and current operational practices regarding gates, crossings, permits, etc.) and publicly available IDF projections for future construction, analysis suggests that the loss of agricultural output due to land confiscations and access restrictions would be equivalent to approximately US$320 million; this translates into a reduction of agricultural value-added of approximately US$55 million – and a 2% reduction in GDP overall with the introduction of multiplier effects. The other significant impact of the Separation Barrier is its potential for limiting un-documented labor flows to Israel. The elimination of all “clandestine” labor would mean a reduction in Pal- estinian annual income on the order of US$87 million annually when the Barrier is completed. Combined with lost agricultural production, the elimination of clandestine labor would mean that the reduction in gross national income (GNI) would be on the order of US$300-US$350 million annually, equivalent to a 8-10% decline. This estimate is certainly an upper bound; furthermore, the decline in workers’ remittances from Israel and in agricultural income would exert downward pressure on prices overall – hence in real terms the decline would be even less, ranging from 3-5%. See Impact of Israel’s Separation Barrier on West Bank Communities: Economic and Legal Development, The World Bank, December 2004, forthcoming. 31 “Military activity will remain in its current framework in the rest of the West Bank.” Israel’s Modified Disen- gagement Plan, op. cit. 32 These data exclude observation towers. 33 Data exclude observation towers. Source Occupied Palestinian Territories, West Bank Closure Map, OCHA, July and November 2004. Overview 37

34 Research by B'Tselem (Forbidden Roads: The Discriminatory West Bank Road Regime, August 2004) describes three levels of restriction: a) completely prohibited, meaning those on which Palestinian travel is completely forbidden, accounting for roughly 124 kilometers of road at the time the research was carried out, with restrictions enforced by checkpoints; b) partially prohibited, where use requires a permit, accounting for some 244 kilometers of road, and c) restricted use, with frequent IDF checks of vehicles and persons, accounting for roughly 364 kilometers of road. There are no written orders on road usage by Palestinian residents of the West Bank; restrictions are based on verbal orders from Israeli army and police commanders pursuant to the General Order Regarding Defense Regulations. The restrictions are mainly applicable in Area C, which accounts for roughly sixty percent of the West Bank. According to the IDF’s International Law Department, only Highway 443 (connecting Jerusalem with Tel Aviv via Modi’in), is formally closed to Palestinians, although it is acknowledged that security measures can slow travel times. 35 It is understood that projects considered “borderline” from a political perspective, but which serve important humanitarian needs, could be approved. 36 The subject was discussed at a meeting of the donors’ Humanitarian and Emergency Policy Group (HEPG) in September 2004, and at the Local Aid Coordinating Committee in October. See also US Won’t Fund Separate Roads for Palestinians, Ha’aretz, November 30, 2004. 37 Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory, Advisory Opinion, International Court of Justice, The Hague (General List No. 131, 9 July 2004). 38 In a recent note prepared for the donor Humanitarian and Emergency Policy Group (HEPG), it is argued that “As an Occupying Power under international humanitarian law, the GoI is responsible for providing an adequate road system. It also is obligated to allow for freedom of movement under Article 12 of the International Cove- nant on Civil and Political Rights. In addition, Article 11of the Oslo Accords recognizes the territorial integrity of the West Bank”, Roads in the West Bank, HEPG, November 2004. 39 Critical Commercial Transport Routes and Border Cargo Management, The Services Group, September 2004. 40 Disengagement, the Palestinian Economy and the Settlements, op. cit. paragraph 34. 41 These are of five kinds – i) between West Bank/Gaza and Israel, ii) transit gateways (Ashdod, Haifa, Ben Gurion Airport); iii) between West Bank/Gaza and third countries (Gaza and Egypt, West Bank and Jordan), iii) sea and air connections from Gaza; and v) between Gaza and the West Bank. 42 Border Regime: Response to World Bank Presentation, PA/Negotiations Support Unit, August 6, 2004, informal paper. 43 “Any response to a specific and actual threat [should] be dealt with in an individualistic, proportional, and transparent fashion based on necessity. We insist that any such response not ever result in the closure of an entire crossing point, and any partial closure must be regulated, coordinated and not exceed a specific time agreed between the two parties in advance as appropriate for the specific threat posed.” Border Regime: Response to World Bank Presentation, op. cit. 44 Principles Guiding Palestinian Perspectives, Negotiations Support Unit, remarks on August 16 meeting with the donor team, informal paper. 45 INSC note, November 30, 2004. 46 For Gaza, Israel proposed retaining Erez and Karni, but closing Sufa and Rafah in favor of a combined terminal at Kerem Shalom on Israeli soil in the Egypt/Israel/Gaza “triangle”. GOI argued that relocation away from Rafah, which is violence-prone and therefore risky for Israeli terminal operatives, and thus subject to frequent closure, would offer the prospect of much-increased flows of cargo and people; after disengagement, it would then be up to the PA and the Government of Egypt to agree border arrangements. The PA pointed out to the donor team that the Gaza border crossings were agreed bilaterally, and that any new arrangements should also be subject to bilateral agreement. The PA specifically objected to the Kerem Shalom proposal out of concern that this move would perpetuate Israeli control over Gaza by reducing Israel’s motivation to evacuate Philadel- phi (“After the creation of the tri-point crossing point, Israel would have no incentive to cede control, and as such the tri-point is likely to perpetuate such control.” Border Regime: Response to World Bank Presentation, op. cit ). The Government of Egypt also informed the World Bank in September 2004 that it was opposed to moving the terminal to Kerem Shalom. On November 14, the INSC/MOFA team informed the donor team that the Kerem Shalom idea had been dropped for now. 47 Other than in the “safe passage” context – for which the crossing points from the West Bank to Gaza are Tarkumiya and Mevo Horon. 48 “The Advisory Opinion of the ICJ has particular implications for donors, as it specifically declares that all States are under an obligation not to recognize the illegal situation resulting from the construction of the Barrier and that they are under an obligation not to render aid or assistance in maintaining the situation created by such construction…..Such a declaration by the ICJ is most likely aimed at assistance that would directly aid Israel in maintaining the Barrier in operation, for instance contributing to the construction or servicing of the Barrier within the West Bank.” Impact of Israel’s Separation Barrier on Affected West Bank Communities: Economic 38 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Impacts and Legal Developments. Follow-Up Report to the Humanitarian and emergency Policy Group (HEPG) and the Local Aid Coordination Committee (LACC), December 2004. 49 Beit Sourik Village Council vs. 1. The Government of Israel and 2. Commander of IDF Forces in the West Bank, The Supreme Court of Israel Sitting as the High Court of Justice, HCJ 2056/04 (February 29, 2004; March 11, 2004; March 17, 2004; March 31, 2004; April 16; 2004; April 21, 2004; May 2, 2004). In this case the Court ruled that a certain portion of the Separation Barrier (30-40 kilometers) violated international humanitarian law on the basis that it resulted in disproportionate harm to Palestinians in the area, and that construction should be halted until a new route is proposed. The reasoning provided by the Court included the following: more that 13,000 farmers would be cut off from land, which is the source of their livelihood; no attempts were made to provide the farmers with alternative land; and the system of gates would create considerable difficulties for farmers trying to tend to their land. This would compound the already difficult situation, in particular the high rate of unemployment, of residents of the area; thus the proposed route violates their rights to property and freedom of movement. The Court noted that an alternate route that does not separate residents from their land, or which separates them to a lesser degree, would provide proportionality. 50 Gaza: Karni, Rafah, Sufa, Erez; West Bank: Jalame, Sha’ar Efraim, Tarkumiya, Allenby; Israel: Ashdod Port. 51 This extension would be added to a larger project (the Ashdod – Yad Mordechai rail link) which is currently planned for 2008. 52 Or NIS 95 million. This consists of NIS 80 Million for 4km of rail, the terminal and security technology (including scanners), plus NIS 15 million for the train. Source: INSC. 53 Notes on the Territorial Link, PA/Negotiations Support Unit, 16 September 2004, informal paper. 54 “Israel will not be able to bear the full costs associated with such improvements. To meet the desired goals, there would have to be some other form of sharing of the financial burden.” Economic Aspects of the Israeli Disengagement Plan, Meeting with the World Bank, INSC, op. cit. Incremental operating costs associated with managing these various expansions and upgrades, including the costs associated with extra shifts, total some US$5 million per annum; these would be borne by GOI. 55 Israeli Disengagement Plan – Dialogue with the World Bank – Status Report, INSC, op. cit. 56 Currently, Karni handles goods alone, and Erez only people. Under the Oslo Accords, passage between Gaza and Israel is provided through Erez (persons and vehicles, not goods) and Nahal Oz, Sufa and Karni (for commercial goods, not people). 57 This is not to imply that sensitive security information should be shared with commercial operators. 58 The World Bank’s Trade and Transport Facilitation for South Europe project features the use of performance standards; such standards have measurably benefited border cargo management in a number of Eastern Euro- pean and Central Asian countries. 59 “The setting of standards of service, together with the dedication of alternative passages, reflect the goal of enabling the efficient and continuous operation of the passages, but for exceptional security concerns.” Eco- nomic Aspects of the Israeli Disengagement Plan, Meeting with the World Bank, INSC, op. cit. 60 Israeli Disengagement Plan – Dialogue with the World Bank – Status Report, op. cit. 61 At present, Israeli-registered trucks are not allowed into Gaza, and it is understood that this restriction would be extended to the northern West Bank after disengagement. 62 The dispute resolution mechanisms envisioned under the Oslo Accords deal with disputes arising from the implementation of the Accords, and are thus not directly applicable to commercial disagreements. 63 Conversation between the donor team and the INSC team, November 14, 2004. 64 General Agreement on Tariffs and Trade. GATT’s 1994 integrated dispute resolution procedures, as revised and strengthened by the Uruguay Round Understanding on Rules and Procedures Governing the Settlement of Disputes, provides a possible model, as does Article 8.9 of the Free Trade Agreement Between the Government of Canada and the Government of the State of Israel (January 1, 1997). The latter provides for binding arbitration. 65 “If and when the conditions permit the evacuation of [the Philadelphi Route], the State of Israel will be willing to consider the possibility of setting up an airport and a seaport in the Gaza Strip, subject to arrangements agreed upon with the State of Israel.” See Israel’s Modified Disengagement Plan ,Annex 1 of Disengagement, the Palestinian Economy and the Settlements, op. cit. 66 These proposals are discussed in detail in Annex 2 of Disengagement, the Palestinian Economy and the Set- tlements, op. cit. Proposed security and customs procedures at these international Palestinian gateways are described in Technical Paper I. 67 Border Regime: Response to World Bank Presentation, op. cit. 68 “Israel objects to arrangements for fixed-wing services.” Israeli Disengagement Plan – Dialogue with the World Bank, INSC, op. cit. 69 Discussions with the World Bank, August-September 2004. 70 Border Regime: Response to World Bank Presentation, op. cit. Overview 39

71 Under the Accords the safe passage of goods and persons was supposed to take place on designated routes during designated times. Permits were to be provided to persons and vehicles, and even those denied permits could travel via escorted public vehicles. While GOI has restricted safe passage for security reasons, the PA is arguing for changes in the safe passage regime that would permit less restrictive movement than that provided under the Oslo Accords. In particular, the PA has recommended that persons be presumed to access safe passage unless the Israelis provide specific security concerns, as opposed to persons having to first apply for permits. The PA has proposed a possible role for third party involvement in ensuring and administering safe passage in order to help address Israeli security concerns. 72 “The spirit of the safe passage arrangements in the Oslo Agreements provide for movement which is a) guar- anteed to all people at all times, irrespective of their security status, b) safe from Israeli arrests/attacks, c) for public and private Palestinian vehicles, d) for goods and people, e) by multiple routes.” Notes on the Territorial Link, op. cit. 73 Bank interviews with exporters and importers in Gaza indicate that cargoes from the West Bank are often subject to extensive delays, sometimes up to 3 weeks, when entering Gaza. With daily costs for Israeli trucks of US$150 per day, such delays make West Bank goods being sold in Gaza significantly more expensive than equivalent goods coming from Israel. 74 Properly equipped tractor-trailers could travel on their own initiative rather than in convoy. This could be ac- complished using a GPS system or transponder to monitor movement along fixed routes. These systems are costly and data intensive, however, and given the short distance and transit time an alternative would be to record the times of departure and arrival, and to sanction shippers that exceed acceptable norms. Since the vehicles would be security inspected when departing and then sealed, there is no reason to perform more than a cursory examination of the transit documents and seals at the other end of the journey. 75 Prior to the intifada, escorted truck convoys made daily runs between the West Bank and Gaza. Although there were delays associated with organizing the vehicles, with the back-to-back transfers to the special-purpose vehicles that operated within Israel, with securing escorts and traveling at the speed of the slowest vehicle, the convoys provided reliable movement. Transit times, on the order of one day, were greatly superior to today’s times. 76 See Twenty-Seven Months of Intifada, Closures and Palestinian Economic Crisis, World Bank, May 2003, paras. 4.10 – 4.16. 77 Excluding East Jerusalem residents holding Israeli identity cards. Source: Palestinian Central Bureau of Sta- tistics and Word Bank staff estimates. 78 See Technical Paper II. 79 The INSC/MOFA team proposed that 15,000 permits be provided to Gazans, and 20,000 to West Bank residents, to be phased out to zero, albeit not in a linear manner, by end-2008. Apart from the need to prolong the transition beyond 2008, a permit per se does not guarantee employment. Market demand can fluctuate – but more importantly, day-to-day security measures frequently prevent workers from being able to make use of such permits; authorized levels of permits have consistently exceeded the number issued during the intifada. 80 See Disengagement, the Palestinian Economy and the Settlements, op. cit., Annex 1, paragraph XI. 81 Economic Aspects of the Israeli Disengagement Plan, Meeting with the World Bank, INSC, November 14, 2004, PowerPoint. “In Gaza, the customs union will remain in force as long as Israel retains control over the Philadelphi Road, on the Egyptian border, and therefore over the border crossings. Once Israel quits Philadelphi, [Eiland] said, the customs union will end and trade relations with Gaza will…be based on trade agreements”, Ora Cohen, Ha’aretz, op. cit. 82 Conversation with INSC, November 14, 2004. 83 According to the Paris Protocol, trade taxes are remitted according to the so-called destination principle, i.e. only the taxes on goods explicitly destined for West Bank and Gaza are remitted to the PA. Taxes on goods nominally imported into Israel but subsequently re-exported to the West Bank and Gaza are not remitted. The magnitude of indirect imports is difficult to measure – but in Long-Term Policy Options for the Palestinian Economy, July 2002, the World Bank estimated that US$174 million was lost each year (based on 1998 data). 84 Excluding donor support. In 2004, through August, gross clearance revenues amounted to US$394 million, of which 38 percent came from taxes levied on Palestinian imports from third countries. Total PA fiscal revenues amounted to US$612 million. Source: IMF and PA Ministry of Finance. 85 “PA customs is rapidly becoming de-skilled due to lack of real work.” Critical Commercial Transport Routes and Border Cargo Management, The Services Group, op. cit. UNCTAD and GTZ have been working with the PA to introduce the Automated System for Customs Data, ASYCUDA; this work is well-advanced. To exploit the system’s full potential, however, significant investments are needed for infrastructure, institutional development and training. 86 Firms such as the Crown Agents (UK) and SGS (Switzerland) have provided such services, either on a fee- for-service basis or for an agreed proportion of the revenue collected, in a number of countries (e.g. Mexico, the Philippines and Kenya). Activities performed would normally include inspection to verify the quantity, weight 40 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

and quality of traded goods; testing product quality and performance against various health, safety and regulatory standards; and certification that systems or services meet the requirements of standards set by government, standardization bodies or customers. It would be most important that the terms of reference for the firm should include training and skills transfer – should the firm merely substituted for the Palestinian customs service, there would be a high risk of demotivation leading to and further institutional weakening. 87 Economic Road Map – An Israeli-Palestinian Perspective on Permanent Status, The Aix Group, January 2004. 88 This can either be done using a macro formula, or tailored surveys. 89 The Aix Group’s Economic Road Map elaborates on these issues in the context of transition from Phase I and II to Phase III of the Roadmap. 90 The Joint Economic Committee was created under the Paris Protocol to discuss and solve issues pertaining to the implementation of agreed economic arrangements. It ceased to function with outbreak of the intifada. 91 The Socio-Economic Stabilization Plan (SESP) 2004-5. 92 The Bank’s “Status Quo” Scenario assumes disbursements of US$900 million in 2005-6 and US$800 million in 2007-8. 93 The Bank’s “Economic Recovery” Scenario assumes donor disbursements of US$1.3 billion in 2005, US$1.5 billion in 2006, US$1.4 billion in 2007 and US$1.1 billion in 2008. 94 Attaining the budget support targets will require the Arab League states to reverse the decline in their budget support contributions. The Arab countries provided US$388 million in 2001, but this has fallen to a US$109 million this year (of which US$92 million would be from Saudi Arabia alone). Arab countries’ commitment at the Cairo Summit in early 2001 was for US$45 million per month, and this was disbursed without any shortfall and on time. However, Arab countries in the GCC (which contributed 75 percent of these budget support funds) believed that other Arab countries should assume a greater share of the burden. Consequently, in March 2002, at the Beirut Summit, the Arab League made a new commitment to monthly payments of US$55 million, to be made directly by the donor countries. The total amount to be disbursed was distributed among the Arab League member countries in proportion to their shares in the Arab League budget. This, in effect, lowered the proportion payable by the Gulf countries from 75 percent to 43 percent under the new formula. Other relatively poorer members of the Arab League were expected to contribute significantly. In the event many of these did not, and all countries with the exception of Saudi Arabia have failed to meet the new targets. As a result, actual payments fell to an average of US$24 million per month between April and December 2002, declining further in 2003 to US$24 million per month, and to only US$9 million per month in 2004. 95 Disengagement, the Palestinian Economy and the Settlements, op. cit., paras. 40-47. 96 See “Fiscal and Macroeconomic Developments, Outlook and Reform in the West Bank and Gaza”, Paper prepared by the International Monetary Fund for the Ad Hoc Liaison Committee meeting in Oslo December 8, 2004. 97 Palestinian Reform June - September 2004, An Update on Recent Developments. Local Task Force on Pales- tinian Reform, Secretariat. 98 Since then the reform support group on civil society was replaced by a legislation reform support group. 99 There is as yet no law placing the security services and the police under full civilian control; likewise there is no law regulating military courts and thereby ensuring that civil cases are handled only by the civil courts. The rule of law must not only be applied by, but also be fully applied to, the police and security services; this requires that instances of abuse of authority are properly investigated and, where necessary, prosecuted. 100 The Office of the Diwan al Fatwa was created by decree in 1995 and is part of the Ministry of Justice. Its primary responsibilities are to coordinate the drafting of legislation by the executive branch of the PA, and to publish adopted legislation in the Official Gazette. The Diwan’s role in formulating legislation needs to be further clarified so that the separation of powers established in the Basic Law is fully respected and there is no conflict with the role of the PLC. 101 The Committee’s development program concentrates on a reform of PLC administration (including the development of terms of reference for PLC staff) and of its organizational structure – and points to the need to establish a code of ethics for the PLC. 102 A recent statement by the acting President that he will sign all laws in accordance with the Basic Law is a welcome step. 103 The Capital Markets Authority Law, the Companies Law and the Competition Law have not yet been adopted by the PLC, although they are included in the One-Year Reform Action Plan. By-laws and regulations for the implementation of the Labor Law are only gradually being adopted, more than three years after the law’s passage. 104 For example, the Social Security Law, which has been passed but not yet implemented, establishes a pensions system for private sector employees. Unfortunately, adequate analysis was not carried out in advance, and the law as written is financially unsustainable (due to a mismatch between contribution and benefit rates, and Overview 41

due to its early retirement provisions and pension guarantees). It also lacks adequate implementation and governance mechanisms. Because the PA is the guarantor of the social security system under the current law, the PA would be obliged to accept a large and unfunded liability which it could not honor unless its fiscal fortunes were transformed. The PA is taking steps to study and amend the law to ensure that social protection can be provided to old-aged Palestinians on a sustainable basis. 105 The legal framework in both the West Bank and Gaza is based on Ottoman and British Mandate laws, Israeli military orders and PA legislation. However, there are some substantial differences in the legal frameworks. The West Bank inherited some Jordanian legislation, while Gaza still has regulations from the Egyptian Mandate. Thus businesses currently need to observe different regulations in the West Bank and Gaza -- for example those governing permits and licenses. 106 In 2004, PA revenues are expected to reach NIS4.2 billion (US$933 million, or US$78 per month), approximately equivalent to the 1999 level (in nominal terms). Total salary expenditures, by contrast, have increased by more than 80 percent, from NIS 2.1 billion (US$43 million/month) to NIS3.9 billion (US$72 million/month). Source: Macroeconomic and Fiscal Developments, Outlook, and Reform in the West Bank and Gaza, IMF, No- vember 2004 and West Bank and Gaza -- Economic Performance, Prospects, and Policies, IMF 2001. 107 The Wage Bill Containment Plan calls inter alia for a reduction in net public recruitment to 2,000 in 2005 and 1,500 in 2006 (to accommodate the increase in demand for new hires in health and education from demo- graphic trends). It also states that there should be no discretionary salary increases, and that the wage drift from automatic advancement and promotions should be limited to 2% annually. Adherence to the Plan would result in wage bill growth of only 3.7% (in nominal terms) in 2005 and 3.3% in 2006. 108 The PA’s wage bill increased from c. US$62 million monthly in 2003 to c. US$72 million in 2004 – a 17% increase. Implementation of the Civil Service Law involved an increase in monthly wages from US$154 to US$240 at the lowest end of the scale (60%), and from US$1,320 to US$2,147 at the highest end (62.7%). Only half of the increase has actually been paid. Coupled with the abolition of implicit bonuses, the net result was a 15% increase in the average civil service salary. In parallel, security service staff were granted an increase of 8%. 109 In 2001 the PA received US$532 million in budget support, in 2002, US$467 million and in 2003, US$261 million. For 2004, US$346 million is anticipated, but it is not clear that this level will be maintained in 2005. 110 The Ministry of Finance’s debt to domestic banks had risen from US$190 million at the end of 2003 to over US$280 million by the end of September 2004 (equivalent to 10% of GDP). In addition, MOF’s arrears have risen. While the total stock of arrears is not known, arrears to the Gaza Pension and Insurance Company (GPIC) stood at US$180 million as of November 2004. Sums owed to the Israeli Electricity Company and Israeli suppliers of fuel for the Gaza electricity generating company stood at US$80 million at the end of October (subsequently reduced by half in November following the release of some of the PA revenues attached by Israeli courts). Arrears to domestic suppliers have also increased, and are estimated by the IMF to be c. US$45-60 million. 111 These schemes cover only civil service employees. Security services personnel are not currently covered, but the reformed system would cater to them as well. 112 By way of comparison, France's implicit pension debt is about 10% of GDP, and Israel's is around 18% of GDP. 113 The current law provides for an equitable system that will be self-sustaining for the next 20-25 years. How- ever, recent attempts by various groups within the public sector to obtain very high benefit levels could tip the system back into deficit much sooner. 114 This estimate is based on the reformed parameters embodied in the current draft of the law, and refers to average payments over the next ten years. Costs will increase thereafter as more employees retire. Payments to groups not covered by the law, such as security services employees over 45, would require additional budget resources. 115 Because of its tenuous fiscal situation, the PA has not paid pension contributions consistently for several years. It has also been forced to use employees’ contributions (deducted at source) to meet current budget ex- penses, bringing total pension arrears to some US$180 million for the civil service alone. The financing for the reformed public pension system takes these arrears into account, but the sustainability of the new system is dependent on PA avoiding incurring arrears in the future. 116 Both international comparative data and polling within the West Bank and Gaza indicate a strong belief that there is corruption within the Palestinian Authority. Transparency International’s Corruption Perception Index for 2003 ranked West Bank and Gaza 78th out of 133 countries (only Algeria, Sudan and Libya had lower scores among the Arab countries). A poll by the Palestinian Center for Survey Research in September 2004 re- vealed that 88 percent of Palestinians believe that there is corruption within PA institutions. Other popular polls within the West Bank and Gaza – such as those conducted by the Palestinian Center for Policy and Survey Re- search – regularly show similar numbers. 42 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

117 That corruption – whether perceived or actual – hurts investments is widely documented, see e.g. World De- velopment Report – A Better Investment Climate for Everyone, the World Bank 2005. 118 Country Financial Accountability Assessment, the World Bank, June 2004. 119 The new Palestinian Pension Agency to be established under the Unified Pension Law provides a good example of a governance structure where transparency, accountability and the avoidance of conflict of interest are paramount. 120 Also welcome is the statements in the PIF’s Annual Report for 2003 that (i) “the fund shall no compete with the private sector in Palestine in any and all economic investment sectors where the private sector has tradition- ally taken an active participating role”, and (ii) that the fund would gradually withdraw from existing projects consistent also with a concept of privatization, and according to a timely business plan. 121 Compensation in the Context of the Gaza Disengagement, PLO Negotiation Affairs Department (Final Draft). 122 Data from Sept. 00, 2001, 2002, 2003, through Sept. 2004: a) no. of Israelis killed: 47, 297, 453, 214, 97; b) no. of Israelis injured: 265, 1579, 2309, 1004, 441; c) no. of suicide attacks: 4, 35, 60, 26, 13; d) no. of shooting attacks: 2230, 5274, 2917, 2111, 1198. Source: Four Years of Conflict: Israel’s War Against Terrorism, 3rd Oc- tober 2004, Israeli Security Agency, available on www.mfa.gov.il. 123 Article IX, Interim Agreement, op. cit. 124 Disengagement, the Palestinian Economy and the Settlements, op. cit. 125 See, for example, Twenty-Seven Months – Intifada, Closures and Palestinian Economic Crisis, World Bank, op. cit., paragraph 20: “World Bank analysis shows the limited power of donor assistance under the conditions pertaining in 2002. Since the beginning of the intifada, donors have provided about US$315 per person per year, an unprecedented level of international financial commitment. Despite the importance of these contributions in staving off fiscal disintegration and the disappearance of the PA as a viable service provider, the economy has contracted by almost a half. A doubling of donor disbursements to US$2 billion in 2003 and 2004 -- something which there is no reason to believe can happen – would only reduce the poverty rate by seven percentage points by the end of 2004. On the other hand, if internal closures were removed and exports facilitated, GDP could surge by about 21 percentage points by the end of 2003, and poverty could fall by 15 percentage points by the end of 2004.” 126 This would amount to per capita aid transfers of US$225 per person over the period – less than the histori- cally high levels of the past 3 years (over US$300 per person per year) on account of the explosive increase in the Palestinian population, which would reach some 4.3 million in the West Bank and Gaza by 2008. 127 Fiscal and Macroeconomic Developments, Outlook and Reform in the West Bank and Gaza, IMF, November 2004. 128 Arab League budget support was critical in 2001-2, in which US$388 million and US$316 million respectively were disbursed. In 2003 this fell to US$132 million, and in 2004 is expected to amount to US$109 million, with all but US$17 million of this coming from Saudi Arabia. A conservative estimate of commitments owed the PA but not disbursed indicates that the Gulf countries (excluding Saudi) alone owe approximately US$400 million. 129 Donors are also encouraged to support the implementation of a new reformed public sector pension system (see paragraph 83). This would most easily be done through the Reform Fund, which has specific ongoing benchmarks dealing with pension reform. 130 On the basis of the December 2003 National Poverty Survey (NPS) conducted by PCBS, 40.3% of Palestini- ans fell below the official poverty line of NIS 1800 (approximately US$410) per month for family of two adults and four children that month. Accounting for seasonal factors and methodological differences between the NPS and the more extensive Palestinian Expenditures and Consumption Surveys, an average poverty rate for 2003 is estimated at 47%. Subsistence poverty is a measure of deep poverty. Based on the cost of satisfying the minimum caloric intake as established by FAO/WHO, plus a basic allowance for non-food items, such as clothing and shelter, the subsistence poverty line was set at NIS 205 per person per month (approximately US$280 per month for a family of six). Using this definition, 16% of the Palestinian population, or approximately 607,000 persons, cannot afford the basics for survival. See Deep Palestinian Poverty in the Midst of Economic Crisis, World Bank, October 2004. 131 Initial MOP estimates suggest a total of about US$245 million. 4UBHOBUJPOPS3FWJWBM *TSBFMJ%JTFOHBHFNFOUBOE1BMFTUJOJBO&DPOPNJD1SPTQFDUT *

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ѪF4FSWJDFT(SPVQ64"*%BOE8PSME#BOL December 2004 Technical Paper I – Borders and Trade Logistics1

Summary

Costly and unreliable trade logistics – in conjunction with the closure regime – are the most immediate impediment to improving Palestinian market access and competitiveness. Israel’s legitimate security needs notwithstanding, exporters in the West Bank and Gaza must be able to deliver goods to buyers at an agreed price and according to schedule if they are to play their part in reviving the Palestinian economy. What is required, and what is possible today, is a systematic rethinking of the balance between security and trade facilitation through the design of border crossing facilities, the use of security technologies and the adoption and monitoring of new management procedures.

Assuming the maintenance of the quasi-Customs Union, the current arrangements warrant certain improvements. Palestinian customs should once again assume responsibility for clearing cargo and collecting custom duties at the external borders of Gaza and the West Bank. If Pales- tinian exporters are to become more competitive, they should also benefit from direct access to the outside world. A Roll-On, Roll-Off facility and a helicopter service in Gaza are proposed as interim solutions pending the construction of the Gaza seaport and refurbishment of the airport. In both cases, a third party could assist the PA, or be contracted by it, to carry out security and customs procedures. A link between Gaza and the West Bank that permits flexible and low-cost transport whilst ensuring adequate security is also needed to ensure balanced growth and proper governance.

I – Introduction 3. This paper reviews borders4 and trade logistics for trade with Israel, be- 1. According to the Bank’s June 23 tween Gaza and the West Bank and with paper, “Today’s economic crisis has third countries. The principal routes used been caused by restrictions on the for the shipment of Palestinian goods can movement of Palestinian people and be classified into i) cross-border into Israel, goods, or ‘closures’, which the Govern- for exports to Israel and through interna- ment of Israel (GOI) regards as essential to tional Israeli gateways to the rest of the protecting Israeli citizens from attacks by world; ii) cross-border into Jordan and militants. Without a major reform of the Egypt, as well as to other countries through closure regime, however, the Palestinian international Palestinian gateways; and iii) economy will not revive and Israel’s security between Gaza and the West Bank. gains may not be sustainable”2. 4. The paper proposes a number of 2. For the Palestinians, the greatest measures which GOI can take to main- potential for economic growth lies in 3 tain or even enhance Israeli security trade . This trade includes not only the pri- while greatly improving cross-border mary exchange of goods and services with cargo management. Modern terminal de- Israel, but also trade with its neighboring sign, security technology and administrative countries, Egypt and Jordan, and with other procedures can permit the orderly flow of countries. Efficient and reliable trade logis- cargo and the maintenance of security. tics are a prerequisite, however, if Palestin- Where trade routes cross customs borders, ian producers are to be able to compete in customs procedures need to be integrated regional and global markets.

1 2 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects with security screening. A change in the Is- main road directly linking the north and raeli closure policy, however, requires a south of the West Bank (Wadi Al-Narr), at credible Palestinian security effort5. the main commercial crossroads south of Nablus (Howarrah), and connecting Nablus 5. The improvements in facilities, to the Jordan valley (Hamrah). Furthermore, technology and management procedures two checkpoints within the West Bank con- can benefit customs operations as well trol access to Israel, on the most direct route as security. Given the need for planning from Ramallah (Beitunyia) and on the main and coordination, piloting some changes commercial exit from Tulkarm (Taibeh). All with a view to scaling them up on the basis checkpoints are at times closed or have lim- of experience may be appropriate. In this ited opening hours, and are the cause of ex- respect, a realistic timeline should be devel- tensive delays. oped by GOI and the Palestinian Authority (PA) for implementing these measures as 8. Internal transport is expensive rapidly as possible. and inefficient, due to circuitous routing, delays incurred in crossing checkpoints and the need to use inferior and II – Closures and Their Impact on often damaged secondary routes. The Trade material outcome of these barriers has been the fragmentation of Palestinian economic Internal Restrictions space – raising prices, disrupting the predictability of trade, separating workers from 6. Israel operates an extensive sys- the workplace, impairing competitiveness, tem of internal movement restrictions reducing employment and reducing the that have a significant negative impact availability and quality of goods to consum- on Palestinian trade. In November 2004, ers10. Irrespective of the progress that may movement from one locality to another in be achieved in improving the flow of goods the West Bank was controlled by a network through the border crossings and interna- of 674 obstacles – 61 checkpoints, 102 road tional gateways, a persistence of internal clo- blocks, 48 road gates, 374 earth mounds, 28 sures will prevent any appreciable recovery earth walls, and 61 trenches, in addition to of Palestinian commercial agriculture, indus- 49 observation towers and the use of “flying try and trade. checkpoints”6. According to the Israeli organization B’Tselem, Palestinians cannot use Restrictions on Trade to and Through 732 kilometers on 41 West Bank roads be- Israel cause they are either completely or partially closed to Palestinians, require a special per- 9. Existing facilities for border 7 mit or are partially restricted . The construc- crossings into Israel have not been tion of the Separation Barrier in the West planned with trade facilitation in mind. Bank has consolidated and in some loca- Instead, with security the paramount con- 8 tions exacerbated the impact of closure . sideration, ad hoc agglomerations of parking Within Gaza, trade normally moves rela- and inspection facilities have developed. tively freely but has been repeatedly dis- Karni is a prime example of this evolution rupted over the past several months due to (see paragraph 11). The Rafah crossing, de- 9 military incursions and closures . spite substantial investments by both Egypt and Israel, is inefficient because of its loca- 7. There are five major checkpoints tion in a constricted, built-up area. where internal closure has a particularly severe effect on the free movement of 10. Palestinian businesses shipping goods within the West Bank. These are at goods to and through Israel encounter the following strategic locations: on the significant costs. Truck operating costs are Technical Paper I – Borders and Trade Logistics 3 high because the use of both Palestinian and periods at border crossings12. For exports Israeli trucks is mandated by the back-to- through Israeli gateways, the costs associ- back system11, because of difficulties in ob- ated with the border crossing exceed the taining return cargoes to Israel, and because costs of truck transport (see Table 1)13. equipment and drivers are kept for extended

Table 1 Average Transport Costs for Trucking (12 ton truck or chassis with one TEU14)

Origin Port Transport Border Total Crossing

West Bank Ashdod $322 $589 $911 Haifa $384 $588 $972

Gaza Ashdod $161 $589 $750 Haifa $345 $588 $933 Port Said $546 $438 $984 Source: Transit Trade and Maritime Transport Facilitation for the Rehabilitation and Development of the Palestinian Economy, UNCTAD, 2004.

11. Karni, which handles cargoes to 13. Long handling delays are some- and from Gaza, is a major bottleneck. times incurred for Palestinian cargoes Since mid-March, when it was closed for arriving at the Israeli ports; these are re- two weeks, the Karni terminal has not oper- lated to procedures rather than secu- ated at full capacity. Because of the length rity16. One problem is that security proce- of delays faced, some consignees have been dures applicable to Palestinian cargoes are obliged to store their containers and cargo not integrated with cargo handling activities. in warehouses, or to leave them at the port Equally important, customs clearance proof Ashdod. The additional costs incurred cedures introduce additional delays. The to- have led some Palestinian consignees to tal delays incurred in inspecting and clearing abandon cargo rather than pay clearance and cargo are such that containerized imports storage fees. must often be removed from their boxes and stored in bonded warehouses specifi- 12. Trucks moving inside Palestinian cally dedicated for Palestinian cargo. More- territory and across the borders with Is- over, shippers and consignees cannot easily rael face common problems. In the event travel to the gateways and do not have the of a security threat, GOI may close several, same influence that an Israeli im- sometimes all border crossings and check porter/exporter would in trying to expedite points. Decisions on how long to enforce the movement of cargo. The additional such closures are made by the Israeli De- costs incurred have on occasion meant that fense Forces (IDF), with the economic con- Palestinian consignees have abandoned sequences of only residual concern. Multiple cargo rather than pay clearance and storage security checks on the same shipment15 lead fees. to lengthy delays and increase costs and the likelihood of damage. Procedures are ap- Restrictions at International Gateways plied in an inconsistent and non-transparent manner, and there is little effective recourse. 14. Until the outbreak of the intifada, Finally, many crossings are operated for less the Palestinian General Directorate of than seven days per week, and/or for lim- Customs and Excise was responsible for ited opening hours. customs clearance at the crossing points 4 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects with Jordan and Egypt. Because of secu- receive lower priority at Karni than Israeli rity concerns, Israeli customs officials now trucks, placing Palestinian goods at a further enforce the customs regime on all interna- competitive disadvantage22. tional borders, including those between the West Bank and Jordan, and between Gaza Impact on Trade and Egypt. The role of the General Direc- torate has thus been reduced to that of audit 17. Costly and unreliable trade logis- activities rather than clearing cargo and col- tics are the most immediate impediment lecting custom duties. While the Directorate to improving Palestinian market access appears to be well organized and staffed and competitiveness. The multiple physi- with competent officials, training in border cal and procedural obstacles Palestinian crossing procedures including review of businesses face significantly impair their documents, assessment of cargo valuation, ability to compete in local and international and cargo inspection procedures as well as markets. effective use of ASYCUDA17 modules would be required before the Directorate ¾ Delays and uncertainty at the border crossings can undertake front-line customs clearance not only increase transit times, but also (see paragraph 43). reduce the rates of order fulfillment. This factor reduces opportunities for 15. Problems similar to those at the export of perishable items, especially Israeli borders impact Palestinian trad- fruits, to markets other than Israel. It ers at the border crossings with Jordan also limit Palestinian manufacturers’ and Egypt. Apart from extensive security ability to trade in time-sensitive goods, and customs delays, significant transit fees such as upscale garments. apply in the case of Jordan. For goods enter- ¾ Lack of flexibility in the routing of goods re- ing/exiting Egypt, serious delays and costs stricts shippers’ freedom to seek out are commonly associated with clearing least-cost options, and increases the risk Egyptian customs18. that a closures at any one point will prevent a shipment from being made. Restrictions Between Gaza and the West ¾ The need to use Israeli trucks in Israel has Bank allowed Israeli transport providers to charge high prices and has put Palestin- 16. Transport between Gaza and the ian goods at a competitive disadvantage. West Bank is expensive and unreliable. ¾ Multiple inspections per shipment reduce The “safe passage” concept agreed under profit margins due to excessive time- Oslo19 is no longer under implementation, penalties and cargo damage. and the movement of people between Gaza ¾ Limitations on the personal travel of Palestin- and the West Bank is limited to selected of- ian exporters, and the consequent need to ficials and businessmen who are able to ob- use Israeli intermediaries, limit the ca- 20 tain special permits . These restrictions pacity of manufacturers to source new have hindered the development of busi- raw material suppliers, develop new nesses relations. The movement of cargo is markets and to interact with existing subject to i) two sets of border security customers outside the region. clearances and at least one back-to-back ex- 21 change (the requirement that only Israeli- 18. Various studies have been under- registered trucks are allowed to move Pales- taken to assess the impact of these ob- tinian goods across Israel affects the com- stacles23. The combination of back-to-back parative advantage that these goods may procedures, delayed processing and numer- have because of the higher transportation ous inspections at internal checkpoints cost), and ii) ad hoc inspections en route. commonly add between 50-100%, and West Bank cargoes entering Gaza appear to sometimes more, to the transport costs of Technical Paper I – Borders and Trade Logistics 5 goods traveling internally within the West III – Enhancing Border Facilities 24 Bank or between the West Bank and Gaza . while Ensuring Security A recent estimate of the cost of trucking for Palestinian traders using a combination of 21. An important feature of any bor- Palestinian and Israeli trucks was about 25 der crossing facility is the design of its US$3 per kilometer . cargo transfer structures. A carefully planned layout has a significant effect on Finding a Balance Between Security and both efficiency and security. The layout of Trade the terminal must permit the efficient flow of different types of vehicles and cargo. Suf- 19. Up to now, Israeli security con- ficient space must be provided for queuing, cerns have dominated policy choices, and to ensure that traffic destined for differ- with trade logistics and efficiency given ent inspection regimes does not become much lower priority. Israel’s legitimate se- entangled. curity needs notwithstanding, exporters in the West Bank and Gaza must be able to 22. The layout should differ by type deliver goods to buyers at an agreed price of crossing, since the volume and mix of and according to schedule if they are to play vehicles will vary, and not all crossings their part in reviving the Palestinian econ- require the same customs procedures. omy. For Palestinian exporters to compete, Saw-tooth loading docks should be consid- trade logistics must be much more cost- ered for all crossings expected to handle effective, rapid and reliable. To date, very significant volumes of traffic. They permit little effort has gone into finding and insti- angular parking, which reduces both the tuting measures whereby both security and time and space required27. In places where trade objectives can be met. It should be inspection queues are prone to back-up, de- noted that this is not an issue limited to this lays can be reduced by parking trailers in a particular economic space – global trade yard and using dedicated tractors to move today takes place in a far more security- them to the inspection area. conscious environment, yet has increased by more than 20 percent when compared with 26 23. There is a range of security tech- the year 2001 . nology available today for checking cargo without removing it from the 20. For Palestinian traders to enjoy truck/container. These technologies could reliable access to Israel and third coun- be used by Israel for Palestinian exports to try markets, border facilities need up- and through Israel and by the PA for direct grading and procedures need reform. imports from Jordan and Egypt and through What is required, and what is possible today, international gateways under its control. is a systematic rethinking of the balance be- Relevant technologies28 include: tween security and trade facilitation through the design of border crossing facilities, the ¾ Imaging systems, also referred to as scan- use of security technologies and the adop- ners29. X-ray inspection technology has tion and monitoring of procedures which advanced considerably, and objects pre- ensure that security requirements are met viously not visible with conventional without unduly compromising the flow of transmission x-rays are now more easily trade. discernible. Gamma ray devices have recently been introduced – these allow thick items to be inspected and their density assessed.

¾ Sniffer technology. The most common form of sniffer technology is the standard ion- 6 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

mobility mass-spectrometry approach ¾ Facial matching technology, which uses a used in airports to identify the presence scannable digital picture ID and a cam- of explosives in electronic devices. The era to match faces and images. new generation of sniffers uses per fluorocarbon taggants (PFTs) to help Such technologies could also be employed detect vapors emitted from explosives. by Palestinian security at its international gateways. ¾ Tamper-proof seals. Such seals ensure that containers have not been interfered with 26. Though recent, these technolo- in transit. By using optical fluorescent gies are being used in various countries fibers randomly embedded into the seal, around the world and have been shown evidence of tampering can be “read” by to perform satisfactorily. Scanners and machine at any point to ensure that con- sniffer technology are used at ports and air- tainers and vehicle tracking devices have ports throughout North America and not been interfered with. Thus they pro- Europe, while Israel itself is testing tamper vide real-time confirmation of the integ- proof sealing technology in the Qualified rity of the container or truck. Industrial Zone (QIZs) in Jordan32. Facial matching technology systems are in use at 24. The key constraints to Palestin- several Canada/US border crossings. Sig- ian cargo handling at the Israeli ports nificant investment would be needed, how- are related to Israeli procedures rather ever, both to purchase hardware/software than security technology30. Israeli gate- as well as to develop the skills of staff oper- ways are already equipped with scanners and ating the equipment. cargo handling equipment, enabling efficient inspection of both inbound and outbound cargo. A new system for the control of IV – Enhancing Trade Flows trucks, vehicles and fully loaded containers Through New Management was installed at the port of Ashdod in 2003. Procedures

25. Technology for verifying the 27. Facility and technology im- identity of people crossing borders has provements need to be complemented also advanced, and could be employed by by new cross-border cargo management GOI for Palestinian workers, business own- procedures and monitoring if their po- ers and travelers crossing into or transiting tential benefits are to be realized. A radi- through Israel. Methods include; cal revision of procedures is the real key to change. Improvements in procedures ¾ Document recognition technology, which veri- can be made without significant funding, fies that a document (in this case, an Is- and quickly. Recommended changes include raeli permit) is valid and unmodified, i) adoption of the “redundancy principle” at captures the information in the docu- the border passages; ii) the introduction of ment, and makes it available for com- service standards and recourse systems; iii) a parison against other data bases, is being single inspection regime; iv) the adoption of used at border crossings around the risk management approaches; v) the use of world and could speed up the crossings free-circulating truck trailers and containeri- significantly31. zation, and vi) special provisions for Pales- tinian imports coming through Israeli gate- ¾ Explosives/weapons detectors, which permit ways33. identification of dangerous material through clothing at safe distances. Technical Paper I – Borders and Trade Logistics 7

Redundancy start by reviewing the draft service standards proposed by the INSC in its dialogue with 28. If one gateway is closed for secu- the Bank/donor team (see Annex 1). Pro- rity reasons, an alternative gateway cedures for the continuous review of per- should be made available instead. This formance and adjustment of the perform- would minimize the wholesale interruption ance measures should also be agreed. Alter- of trade in response to a specific threat or natively, a third party commercial organiza- incident. GOI would need to clarify to the tion could be contracted to assess perform- Palestinian and international business com- ance and recommend adjustments. munities how the new system would work, thereby creating increased business confi- 32. Inevitably there will be disputes dence34. that need resolution. Options include adoption of a commercial arbitration sys- 29. Underlying such a policy is the tem, such as the one used under the TIR need for proper bilateral coordination at Convention37, or a modified approach in- border crossings. Such coordination is re- volving the parties and independents in a quired both between Israeli and Palestinian panel system; this is essentially the approach authorities (on both security and customs used in NAFTA and under other regional issues) as well as within the Israeli admini- trade arrangements. Any system of arbitra- stration (between the security and customs tion should be predicated on initial attempts services). The evolution of information to resolve disputes through consultation or technologies now allows the rapid exchange conciliation. of information and limits the need for face- to-face coordination. Moving to a Single Inspection

Service Standards and Commercial 33. The requirement for inspections Recourse can be minimized by sealing a cargo after its first inspection, and limiting sub- 30. The development and public sequent inspections to ensuring that the sharing of service (performance) stan- seals are intact. This procedure requires dards can help create business confi- the use of a container (or van that can be dence and limit local ad hoc behavior. sealed) and a suitable method to quickly ver- Such measures can also be used to assess the ify there has been no tampering with its impact of changes in procedures. Com- contents; it also requires a quick inspection monly-used performance targets include of the truck chassis to permit through ceilings on the percentage of shipments in- movement of trailers (see paragraphs 37f.). spected, and average times for waiting and For Palestinian imports, screening and seal- for an inspection35. Service standards can be ing would be done at the international Is- applied at all crossings between Israel and raeli or Palestinian gateway; for Palestinian Gaza/the West Bank, and at all international exports and goods originating from Gaza or Palestinian goods gateways. the West Bank, at the crossing point with Israel38. 31. Service standards should be developed in discussion with commercial 34. GOI is already testing electronic shippers36, and should take account of container seals, and is using single in- international standards and recourse sys- spection procedures. Containers with hu- tems. One possibility would be the estab- manitarian supplies imported by UNWRA lishment of a joint committee involving Pal- are sealed at the port of Ashdod and then estinian and Israeli government and private inspected at Karni. Provided there is no evi- sector representatives, advised by (an) inter- dence of tampering with the seal or con- national expert(s). The committee could tainer no further detailed inspection is re- 8 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects quired. Similarly, export containers from the inspections without appreciable additional QIZ in Jordan are sealed at the QIZ and risk. Free circulating trailers could be used at then transported directly to Haifa with only all crossings between Israel and Gaza and a check of the seals. Subsequent routine in- the West Bank as well as for transit cargoes. spection is then performed in Haifa. 38. Additional efficiency could be The Use of Risk Management Systems achieved by creating staging areas for for Security Inspection containerization, in which cargo could be consolidated into container-sized 35. Computer-based risk manage- loads. This would require appropriate ment systems are widely used to select warehouse storage and logistic facilities. shipments that require physical customs Domestic containers can also be sized to inspection. It would be relatively easy to accommodate typical consignments. develop a similar system for security inspections. For instance, the US Container Secu- Palestinian Imports Arriving Through rity Initiative (CSI) consists of four core Israeli Gateways elements: i) using intelligence and automated information to identify and target high-risk 39. For imports via Israeli gateways, containers; ii) pre-screening those containers direct movement of goods in sealed con- identified as high-risk, at the port of depar- tainers or vans could be allowed under ture, before they arrive at U.S. ports; iii) us- bond between the ports and the West ing detection technology to quickly pre- Bank or Gaza. Only a security check would screen high-risk containers; and iv) using be required at the port. From there, imports smarter, tamper proof containers. would be transported under customs seal directly to the relevant border crossing by 36. For a selective approach to be truck and via a Gaza-Ashdod rail link as feasible an integrated data system must proposed by GOI (see paragraph 58)39. The be developed and tested. Clearly such an purpose is to remove the container from the approach would be much more effective if it port area, where goods are stored and labor can be introduced in coordination with Pal- and procedures are costly, and to move estinian border security and customs offi- them towards their destination to avoid un- cials. GOI would then be able to move away necessary delays. This would be linked to from the existing system under which al- more efficient customs procedures (see most all trucks and containers are inspected. paragraphs 42).

Free-circulating Trailers and Containerization V – Improving Customs Procedures 37. Truck trailers that circulate freely both in Israel and the West Bank and 40. Although the issue is under con- Gaza would allow containers to move sideration, it is assumed that the quasi- door-to-door. These trailers would be per- Customs Union between GOI and the mitted to cross the border, exchanging trac- PA will be maintained until final status tors and drivers in the process. To improve negotiations. Current arrangements, security, simple chasses that do not have any however, warrant certain improvements. compartments that could be used for illicit purposes could be used. As part of the 41. A more coherent division of labor package of measures described in this sec- between Israeli and Palestinian customs tion, the introduction of a free-circulating should be introduced. Specifically, Pales- trailer system would permit GOI to abolish tinian customs should once again assume the back-to-back system of border cargo responsibility for clearing cargo and collect- Technical Paper I – Borders and Trade Logistics 9 ing custom duties at the external borders of the customs procedures processes and Gaza and the West Bank. As a first step, systems. such changes could be introduced at Rafah, Allenby and Damiya. Once air and sea links The effectiveness of the Palestinian effort to Gaza have been established, the same could be monitored by the IMF under its approach should apply at these entry points current monitoring of budget execution, as well. fiscal revenues and PA expenditures, on a monthly basis. Taken together, these meas- 42. Customs inspections could be ures should reassure Israeli customs that performed at the border crossing or at an existing policies regarding classification, inland location designated by Palestin- valuation, and collection can be imple- ian customs. Goods arriving at Ashdod, mented in a manner consistent with the Haifa and Ben Gurion and destined for the Paris Protocol and applicable international West Bank and Gaza could be checked for codes. security and then moved under seal to the Palestinian border. There, Palestinian cus- 44. Using risk and compliance man- toms would clear customs and collect duties agement principles, the current focus on and taxes; this presumes that institutional physical inspection should in time be strengthening has been achieved. For goods replaced by post-release verification, in- in marine containers, this internal site cluding audit-based controls. While there should be a designated Inland Container will always be a need for some physical Depot (ICD). An ICD would facilitate the checking it is preferable to encourage com- return of containers to the shipping lines pliance by offering rapid transit for transac- while allowing the consignee to store the tions deemed to be low risk, and to apply container and its contents under bond pend- significant penalties to those who fail to ing customs clearance. comply. If traders know the requirements in advance, this would minimize delays and 43. It will be necessary to strengthen their associated costs. Palestinian customs Palestinian customs capacities through a should adopt service standards in close co- number of initiatives. operation with the Palestinian private sector.

¾ The first would be to contract a professional firm40 to build the skills of the VI – A Gaza Port and Airport Palestinian customs service41. Because of Israel’s concerns about the protection of 45. If Palestinian exporters are to be- the common customs envelope after Is- come more competitive, they should also raeli withdrawal from Philadelphi, benefit from direct access to the outside moreover (see the Overview Paper), world. The establishment of international the PA should consider contracting out sea and air gateways under Palestinian con- the management of customs services at trol would serve this purpose, providing an the Rafah border to such a firm ad in- alternative to border crossings that have terim. been prone to closure. The Bank’s June 23 report proposes that the reconstruction of ¾ A second is to further develop the the seaport and airport could best be initi- ASYCUDA system used by the PA cus- ated through interim projects that are toms, and to integrate these data collec- cheaper and faster to implement than a full- tion activities with the MILAM system 42 service seaport or a fully-reconstructed air- used by the Israeli customs . port43. The rapid development of an effi- ¾ A third would be for the IMF to provide cient Roll-On, Roll-Off (RoRo) container technical assistance for capacity build- port, with reliable shuttle service to Port ing, if requested by the PA, to upgrade Said, would offer potentially faster and more reliable routes, but more importantly would 10 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects create a competitive alternative to the exist- of Ashdod. In order to accommodate future ing routes through Israel. For business trav- growth as well as changes in trade, the port elers and small shipments for which time is facilities should not be located near Gaza important, a helicopter service could be in- City but further south, in an area with ade- troduced to Queen Alia airport in Jordan. quate space to allow for expansion. It is expected that the design and construction of The RoRo Port this terminal would require two years.

46. The Bank’s proposal is to reduce A Helicopter Service the time and cost for developing a seaport by constructing it in stages. The first 49. Access to efficient scheduled stage would be a shallow-draft (5 meter) commercial airline services, both pas- terminal to serve RoRo traffic. This would senger and transport, is important for provide an outlet for containerized high- the Palestinian economy. Since the use of value cargo that is both time-sensitive and Ben Gurion airport is severely restricted for important to the growth of the economy. Palestinian travelers, passengers from the RoRo shipping does not need extensive West Bank generally need to use Queen Alia cargo-handling equipment and requires less airport in Jordan while passengers from berth space and operating draft44. Although Gaza are required to cross to Egypt45. Each RoRo vessels are more costly to operate requires border crossings and thus uncertain than cellular container vessels on longer delays and the potential for missed flights or routes, they can be competitive on short sea long stays in airports to ensure not missing routes where time in port is a substantial connections. part of total voyage time. 50. The airport in Gaza has been de- 47. The RoRo terminal would house stroyed. Even if it were rebuilt, Israel is a short-sea shuttle service loading export currently unwilling to allow fixed wing containers for delivery to Port aircraft to take off and land in Gaza. In Said/Damietta. From there, containers order to provide a minimal air service while would be transferred to the main yard for rebuilding the airport and developing a se- loading onto mainline vessels. For import curity understanding necessary for resuming containers, the reverse would apply. It is regular flights, the Bank has proposed estab- expected that the shipping service would be lishing a helicopter shuttle service to Queen privately operated, initially employing a me- Alia airport from Gaza. dium-sized chartered vessel (850-1200 lane meters) providing 3.5-4 round trips per 51. A private company could provide week (and hence an annual capacity of 20- the service operating a chartered heli- 30,000 TEU in each direction). Capacity copter under visual flight rules on a des- could be increased by introducing additional ignated flight path across Israel. It could vessels and providing more frequent service. operate up to 5 trips per day; for a 14-seat If traffic is insufficient to justify a dedicated helicopter, this implies an annual capacity of vessel, the service could be provided via 20-25,000 passengers in each direction. calls by RoRo vessels already operating in These aircraft have limited capacity for the region. cargo and would only carry courier pack- ages. The helicopter would be based in Jor- 48. The terminal would be sized for dan and only land briefly at a dedicated heli- RoRo operations to minimize initial port in Gaza. Due to the limited number of cost, but the breakwater could in time be passengers and restrictions, the heliport extended to allow construction of deep- could have relatively simple ticketing, immi- water berths for container and bulk ves- gration and customs services. It could be sels, in a manner similar to the development located at the Gaza airport, but the service Technical Paper I – Borders and Trade Logistics 11 would probably be more attractive if it were VII – The Gaza/West Bank Link near Gaza City. The helipad and passenger building are relatively inexpensive, and can 54. Gaza and the West Bank are in- be constructed in a short time. This service tegral parts of the Palestinian economy. would compete with existing transit routes An unfettered flow of people and goods to Cairo and Al Arish by offering a shorter between these two regions would make an transit time and a service that would allow important contribution to economic recov- more reliable connections with international ery and growth. A well-functioning link flights. would create a larger effective internal market, help trigger a price and income conver- Security and Customs gence between Gaza and the West Bank (thereby directing factors of production, 52. Since GOI will not station per- including labor, more efficiently), and pro- sonnel in Gaza after withdrawal, security vide a pathway between the economy of the and customs clearance for the RoRo and West Bank and a future seaport in Gaza. the helicopter service remain at issue. 55. International experience in estab- ¾ RoRo port. Security and customs checks lishing and maintaining efficient pas- for incoming cargo would need to be sage for people and goods has increased undertaken in Gaza, since security per- dramatically in the last few decades, and formed at the port of departure would includes the development of transit corri- not cover the period at sea. Containers dors for land-locked countries47 and coun- coming off the vessel would be security tries lacking adequate deepwater seaports48, scanned and moved off the terminal for and – more recently – corridors to provide customs inspection46; technically it better routes than are available domesti- would be possible to feed the scanner cally49. Significant progress has been made in output directly to Israeli security per- designing protocols, procedures and protec- sonnel located in Israel. Containers con- tion systems for these corridors. tinuing to the West Bank should then be sealed and trucked out of Gaza without 56. The link between Gaza and the further inspection. West Bank should permit flexible and ¾ Helicopter terminal. Standard airport arrival low-cost transport that will improve Pal- security and customs procedures would estinian market competitiveness. A sim- need to be carried out at the heliport in ple road connection offers an immediate Gaza. The task would be much simpler solution at least cost and with maximum than for the port, and could be facili- flexibility. tated with video surveillance. 57. Security along the corridor can be 53. In both cases, a third party could assured using a combination of con- assist the PA, or be contracted by it, to tainer scanning and sealing technologies carry out security procedures. A number at the exit border, combined with vehicle of possible arrangements could be envisaged tracking devices to monitor movement which should be able to satisfy Israel’s secu- across Israel. Properly equipped tractor- rity needs without compromising Palestinian trailers could travel on their own initiative sovereignty; these are likely to involve the rather than in convoy50. This could be ac- use of a professional security contractor complished using a GPS system or trans- sponsored by one or more governments or ponder to monitor movement along fixed entities acceptable to both GOI and the PA. routes51. These systems are costly and data The employment in Gaza of an international intensive, however, and given the short dis- customs service provider has been discussed tance and transit time an alternative would in paragraph 43. be to record the times of departure and arri- 12 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects val, and to sanction shippers that exceed kind would be highly vulnerable from a se- acceptable norms. Since the vehicles would curity perspective. be security inspected when departing and then sealed, there is no reason to perform 59. A reduction in transit time could more than a cursory examination of the be achieved quickly. In the near-term, the transit documents and seals at the other end re-introduction of the pre-intifada convoy of the journey. As a practical measure, it is system (which would not require costly in- proposed to pilot such an arrangement on vestments in infrastructure or technology), one designated route as soon as the Karni accompanied by improved border crossing and Tarkumiya border crossings have been procedures, could provide secure movement equipped with the required technology. with a transit time of less than one day. Within a year, with the appropriate equip- 58. Options for a dedicated link are ment installed, it should be possible to re- technically problematic. These would reduce the transit time to three hours or less. quire the construction of permanent infrastructure, and rail connections, elevated 60. Equally important for trade is the roads, fenced roads and tunnels have all movement of Palestinian businessmen. been suggested. GOI has proposed a rail Restrictions on business travel between connection for people between Tulkarem Gaza and the West Bank can only be partly and Ashdod52. If used for goods as well, the overcome through the use of modern tele- short distance and limited volume of bulk communications. Making additional permits cargo would likely make this more costly available for Palestinian businessmen would and less convenient than road transport. An certainly improve the situation if permits elevated road or tunnel would use truck were easier to obtain, were consistently re- transport, but would be immensely costly to spected and were not subject to cancellation build, and traffic volumes even under a full because of security incidents unrelated to recovery scenario would not justify such an the permit holder. investment. Furthermore, a structure of this Annex 1 Proposed Israeli Border/Gateway Service Standards

Passage Description of Activity Duration Remarks Karni Waiting time for approval to enter the Up to 24 Depends on establish- passage hours ment of a unified order- ing center for coordinating and synchroniz- ing Waiting time for entry of trucks into passage: fresh products Up to 2 hours other cargos 3-4 hours Service time for import/export truck 2-3 hours at passage including loading/offloading and scanning Erez Waiting time for entry of people into 1 hour Not including excep- the passage tional cases Service time from entry into the pas- ~5 minutes sage Service time per container/ truck for Up to half an Based on storage area in export hour passage Ports Waiting time from offloading at port Within 2 days Queue management to release of containers Offloading time 1 hour Container scanning time Half an hour Manual inspection time Up to 2 hours Rafah Waiting time for approval to enter the 24 hours Waiting time prolonged passage due to security concerns Handling at passage (per truck) Up to 1 hour (location of the passage) Handling of outgoing passenger ~ 0.5 hour Handling of incoming passenger 1-1.5 hours Jalame Waiting time for approval to enter the 24 hours passage Service time per truck at passage Up to 2 hours Tarkumiya Waiting time for approval to enter the 24 hours passage Service time per truck at passage Up to 2 hours Allenby Waiting time for approval per truck Up to 24 Depends on upgrading hours the queue management system to allow “appointment” to be set by hours (currently – by days) Waiting time for entry of trucks into 1 hour passage Service time at back to back passage ~ 0.5 hour Departure time per passenger ~ 0.5 hour Source: Economic Aspects of the Israeli Disengagement Plan, Meeting with the World Bank, INSC, Novem- ber 14, 2004, PowerPoint.

13 14 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Endnotes

1 This paper was prepared by The Services Group/ USAID and the World Bank, December 2004. It draws extensively on Critical Commercial Transport Routes and Border Cargo Management, The Services Group, Septem- ber 2004. 2 Disengagement, the Palestinian Economy and the Settlements, the World Bank, June 23, 2004, page i. See also Four Years – Intifada, Closures and Palestinian Economic Crisis, World Bank, November 2004. 3 This is further elaborated in Technical Paper III. 4 Use of this word in this paper does not imply any judgment by the Bank on the appropriate location of any political borders. The term is used to denote boundaries between areas of economic jurisdiction, and the movement of people and goods across them. Unless otherwise indicated, though, the location of these economic boundaries is assumed to be the security fence that surrounds the Gaza Strip, and the 1949 Ar- mistice Line (the ‘Green Line’) in the West Bank. 5 See Disengagement, the Palestinian Economy and the Settlements, op. cit., and the Overview Paper. 6 OCHA, West Bank Closure Map – Summary, November 2004. 7 B’Tselem, Forbidden Roads: The Discriminatory West Bank Road Regime, 2004. 8 Impact of Israel’s Separation Barrier on Affected West Bank Communities: Economic Impacts and Legal Developments. Follow-Up Report to the Humanitarian and Emergency Policy Group (HEPG) and the Local Aid Coordination Commit- tee (LACC), November 2004. 9 Between May 1 and November 10, 2004, Abu Holi checkpoint (between Deir El Balah and Khan Younis) was closed for 25 days and the Beach Road (between Gaza City and Deir El Balah) for 28 days. When both roads are closed simultaneously, the Gaza Strip is dissected into three parts. 10 Four Years – Intifada, Closures and Palestinian Economic Crisis: An Assessment, World Bank, October 2004; chapter 1. 11 A cumbersome procedure whereby freight must be off-loaded from one truck, carried across the border, and loaded onto another truck. 12 Palestinian industry representatives also note that cargoes imported by Palestinian businesses through Ashdod and Haifa are subject to more stringent clearance procedures than the cargoes of Israeli importers. Critical Commercial Transport Routes and Border Cargo Management, op. cit. 13 The costs at the border crossings include processing and handling fees and delays, but not the costs incurred as a result of loss or damage to cargoes. For perishable and other fragile cargoes, such as fruit and vegetables, these costs can be particularly high. 14 TEU – Twenty-foot Equivalent Unit, a standard measure of container capacity. 15 For instance, cargo moving from Gaza to Nablus will need to undergo back-to-back transfer at least three times: at Karni, at the Tulkarm crossing point and at Howarrah checkpoint. 16 See paragraphs 24. 17 Automated SYstem for CUstoms DAta. 18 Transit Trade and Maritime Transport Facilitation for the Rehabilitation and Development of the Palestinian Economy, UNCTAD, 2003, and TSG interviews. The estimated land transport cost between Gaza and Port Said is about 30% more than between Erez and Ashdod. For shipments to the West Bank, Port Said would be about 50% more expensive than Israeli ports. Even for shipments from Asia to the West Bank, the Israeli ports offer significant savings relative to Aqaba. 19 Annex 1 Protocol Concerning Redeployment and Security Arrangements of the Israeli-Palestinian In- terim Agreement on the West Bank and the Gaza Strip (September 25, 1995) covers transportation issues. Article VIII (Passages) details the joint Israeli-Palestinian control and management of passageways at the Allenby Bridge, Rafah and the Damiya Bridge. However, GOI presently retains full control of these passages. Article IX (Movement Into, Within and Outside the West Bank and Gaza Strip) contains provisions covering movement within the West Bank and between the West Bank/Gaza and Israel. In general, transportation within the West Bank is to be unrestricted, unless restrictions are introduced by GOI for security reasons. Movement into Israel from the West Bank Gaza is to be subject to Israeli laws, and is not restricted to any specific roads, while passage from Gaza to Israel is restricted to Erez, Nahal Oz, Sufa and Karni (commercial goods only) for Palestinian civilians. However, travel within the West Bank and between the West Bank and Israel is now severely restricted by Israeli checkpoints and roadblocks. Travel between Gaza and Israel is minimal due to GOI restrictions. Safe passage between the West Bank and Gaza is covered in Article X (Safe Passage). According to this article, safe passage was supposed to take place at Erez (persons and vehicles), Karni (commercial only), Tarkumiya and Mevo Horon. Permits would be provided to persons and vehicles, and those denied permits would be allowed to travel in public transportation escorted by Israeli police. Safe passage could be suspended by GOI at any time for security reasons, and presently security restrictions limit almost all travel between the West Bank and Gaza. Technical Paper I – Borders and Trade Logistics 15

20 According to the most recent COGAT Weekly Report (October 27, 2004), only 100 traders and senior businessmen (married and aged 35 or above) have received authorization to enter Israel. 21 Since Palestinian cargoes have to transit Israel in Israeli trucks. With Israeli trucks not permitted to enter Gaza, one back-to-back exchange is required at Karni. If the transport within the West Bank is a Palestin- ian rather than an Israeli truck, a second back-to-back exchange is required when crossing between the West Bank and Israel. 22 West Bank cargoes in 2004 have been singled out for the lowest quality of service, with delays extending up to 3 weeks. According to field interviews by TSG, the daily cost of renting an Israeli 12 ton one-chassis truck is currently about US$150. 23 The Gaza Integrated Transport Planning Study, The Services Group/Louis Berger, 2002, Critical Commercial Transport Routes and Border Cargo Management, op. cit., and recent interviews with shippers. 24 A case study was undertaken to examine how the current situation with respect to border crossings and internal checkpoints impacted transport costs. Three transport routes were selected: Allenby Crossing to Nablus, Hebron to Nablus, and Hebron to Gaza. The methodology adopted was to plot how a fully laden Palestinian or Israeli registered goods vehicle would make its way along these routes. 25 The Gaza Integrated Transport Planning Study, Final Report, op. cit. 26 Cumulative growth in world trade volume, Global Economic Prospects 2005: Trade, Regionalism and Develop- ment, World Bank, 2004. 27 The new facility at Jenin has a linear structure with parallel channels for scanning and an adjoining cross- dock facility for physical inspections. While these designs are meant to improve throughput, their principal objective is to maximize security. It is troubling from a trade facilitation standpoint that substantial capacity has been added for physical inspections with cross-docking between trailers rather than an exchange of tractors. Both limit the efficiency of the crossing and are likely to create significant delays. 28 A detailed description of these technologies is provided in Critical Commercial Transport Routes and Border Cargo Management, op. cit. 29 Assuming a two shift operation with 14 hours per day and 360 days per year, and allowing for peaking, the effective operational capacity for a single scanner would be 20,000 vehicles per year. The cost of inspections under a double-shift operation would be approximately US$35 per vehicle. 30 See paragraph 13. 31 New applications include fingerprint identification, smart card technology, and security seals based on public key cryptography and image-processing techniques. 32 For Qualified Industrial Zones, see Technical Paper II. 33 The adoption of the redundancy principle and the application of service standards have already been proposed by GOI. Israeli Disengagement Plan – Dialogue with the World Bank – Status Report, Israeli National Security Council, August 29, 2004, PowerPoint. 34 This is not to suggest that the Israeli authorities can or should be expected to provide details of how they intend to respond to specific security threats. 35 The Bank’s Trade and Transport Facilitation for South Europe (TTFSE) project has made significant efforts to develop and apply such measures in Eastern Europe and Central Asia. Various standards in use are described in Global Facilitation and Partnership in Transportation and Trade, the Australian Customs Service’s annual report. The United States Department of Homeland Security’s border performance guidelines are also relevant. 36 For example, the Australian Customs Service successfully consulted with industry when developing a transport strategy – the Container X-ray Strategy Preferred Transport Model, Australian Customs Service, 2002. 37 A common method of arbitration involving three arbitrators, one selected by each party and one agreed to by the parties. This would only be applied in the event of significant disputes involving important precedence. Israel is a signatory to the TIR Convention. 38 If a manufacturer in the West Bank were able to have his shipment assessed, inspected and sealed in a container at his factory, no additional routine security checks would be needed before the Israeli border, even under today’s conditions. Customs procedures would need to be integrated into this process as appropriate. 39 This new mode of transport should complement, not replace existing modes since this would help foster competition. 40 Such as SGS of Switzerland or the Crown Agents of the United Kingdom. 41 There are many international examples of governments entering into contractual arrangements with private sector organizations to handle customs (for instance, Kenya, Indonesia and Mexico). The role of the contractor is usually similar to that of a sovereign customs administration, applying the customs laws, policies and procedures of the host country. International firms can provide these services on a fee-for-service basis or for an agreed proportion of the revenue collected. 42 Matching the ASYCUDA and MILAM systems would be an important aspect of building the online risk management systems mentioned in paragraph 35f. 16 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

43 Without precluding the eventual construction of a seaport and the reconstruction of the airport; see An- nex 2, Disengagement, the Palestinian Economy and the Settlements, op. cit., Annex 2. 44 This is important given the gradual slope of the eastern Mediterranean coast and the need for a breakwater for year-round operations. 45 Cargo can use Al Arish (close to Rafah on the Egyptian side of the border) for regional flights, or Cairo for international flights. 46 The crew can remain on board during the relatively short turnaround. The only cargo allowed on the terminal should be containers being marshaled for loading or recently unloaded and waiting for scanning. 47 For example, Uganda, Nepal, Laos, Bolivia, and the countries of central Asia. 48 For example, Iraq. 49 For example, the route across Mongolia connecting Russian markets with Chinese ports, the connection between southern Thai markets and the Malaysian ports, and various links between the ports and countries in the Mercosur area. 50 Prior to the intifada, a system of truck convoys making daily runs between Gaza and the West Bank was in operation, although movement was not always completely in accordance with the “safe passage” provision in the Interim Agreement (Article X of Annex I). While these convoys experienced the normal delays associated with organizing vehicles to move en masse, securing escorts, and traveling at the speed of the slowest vehicle, they provided reasonably reliable movement. However, there were problems regarding the agreed hours of operation of the passages and the provision of permits to drivers and vehicles. There were also problems with back-to-back transfers to the special-purpose convoy vehicles that operated within Is- rael, but the transit times – on the order of one day – were vastly superior to current conditions. 51 There are presently two technologies available. The first is a GPS/GSM system, which uses the Global Positioning System to pinpoint the vehicle’s position, and communicates this data via one of the local GSM cellular systems to the control center. The second technology is Radio Frequency Identification (RFID). This technology uses a small short-range cellular-like transmitter and small cell site equipment along the designated roadway to constantly communicate location and timing information to the control center. Both of these technologies are commercially available. 52 The proposed railway would run from Sha’ar Efraim near Tulkarem to Erez, and would be intended for passenger traffic. Israel is proposing to pay for the railway, and possibly for the train and rolling stock. An- other spur between Sha’ar Efraim and Ashdod is also under consideration; this would enable cargo to be transported directly between the West Bank and Ashdod Port. Economic Aspects of the Disengagement Plan, Meeting with the World Bank, INSC, November 2004, PowerPoint. 4UBHOBUJPOPS3FWJWBM *TSBFMJ%JTFOHBHFNFOUBOE1BMFTUJOJBO&DPOPNJD1SPTQFDUT **

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ѪF4FSWJDFT(SPVQ64"*%BOE8PSME#BOL December 2004 Technical Paper II – Industrial Estates1

Summary

After a promising start in the late 1990s, industrial estates (IEs) in the West Bank and Gaza have suffered significantly from political uncertainty and the movement restrictions imposed on Pales- tinian goods and people since the start of the intifada. Reviving the Industrial Estates Program requires a dependable operating environment regarding both access and procedures, which is contingent upon actions by the Government of Israel and the Palestinian Authority. Under the right conditions, and if driven by investor demand, IEs can help foster Palestinian economic recovery, particularly given the duty-free access to the United States and European Union markets. Their contribution toward employment generation, however, is likely to be limited in the near- term. The currently only operating IE employs less than 700 workers. Under today’s policy framework, industrial estates would create no more than about 8,500 new jobs by the end of 2008.

3. The Gaza Industrial Estate and I – Introduction the Erez Industrial Estate illustrate how border estates can be effective in facili- 1. Palestinian economic recovery tating Palestinian trade with Israel and will depend on creating an export-based third country markets. However, experi- economy with unimpeded access to ence at both IEs makes it clear that without global markets. As discussed in Technical a predictable and efficient regime for mov- Paper I, this requires a secure, predictable ing goods across borders there is little future and efficient border crossing regime to help in such initiatives. build Palestinian competitiveness and attract investors. It will also depend on the Pales- 4. As part of the strategy of separa- tinian Authority (PA) creating a business- tion, the Government of Israel (GOI) friendly and secure environment, and on a intends to stop issuing work permits to revitalization of commercial cooperation Palestinians by the end of 2008. Com- with Israel – which is likely to remain the pared to 2004 figures, this would imply a net Palestinians’ main trading partner for some loss of about 30,000 jobs. GOI has ex- time to come. pressed an interest in the expansion of the industrial estates program in the West Bank 2. In an improved operating envi- and Gaza in order to replace this lost em- ronment, Palestinian entrepreneurs and ployment. foreign investors will look for well- serviced industrial land and supporting infrastructure. They will also seek a regula- II – Industrial Estates in the West tory regime with a minimum of ‘red tape’ Bank and Gaza and with clear procedures for conducting business. Industrial estates (IEs), particularly Erez Industrial Estate those on the border between Palestinian and Israeli territory, can fulfill this need and 5. The first IE in the West Bank and thereby play an important role in supporting Gaza was set up in the early 1970s to export-based growth. provide investment opportunities for Palestinian and Israeli businesses, and employment for Palestinian workers in

1 2 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Gaza. The Erez Industrial Estate (EIE) is earnings by promoting non-traditional ex- located on the northern tip of the Gaza ports3. Strip adjacent to the Erez crossing point, on Palestinian land but under Israeli control. 9. The IEP sought to address the Over time, the EIE has expanded to cover physical need for expanded, accessible, 47 hectares. About 200 enterprises have and well-serviced industrial land. It also been established, approximately half of sought to establish a sound policy frame- them Palestinian-owned, in a wide mix of work under which IEs were to operate. This industries – textiles and garments, plastics framework, captured in the Palestinian In- and chemicals, wood furniture, metal work- dustrial Estate and Free Zone Law ing, service and repair shops. These enter- (PIEFZL), is based on a public-private part- prises employed more than 4,000 workers as nership concept4. In addition, PIEFZL es- recently as April 2004. tablished an “industrial free zone” model, whereby enterprises that produce goods 6. The ambiguous administrative primarily for export are exempt from cus- status of the EIE has allowed it to oper- toms and other taxes5 if they operate on an ate outside both Palestinian and Israeli industrial estate which is part of the IEP6. regulatory oversight. As a result, several environmental issues warrant immediate 10. This private-public partnership action. These include uncontrolled wastewa- became a reality with the construction of ter discharges, problems of storm water col- the Gaza Industrial Estate (GIE) at the lection and discharge, polluted air emissions, Karni (Al Montar) border crossing7. occupational health risks arising from asbes- PIEDCO8, a private developer, signed a tos materials, and chemical and industrial long-term lease agreement to develop and hazards caused by the production processes operate the GIE. At the same time a regula- of some tenants. tory authority, the Palestinian Industrial Es- tates Free Zones Authority (PIEFZA), was 7. After several suicide attacks at established to oversee site development and the EIE and the Erez crossing in 2004, operations. Today the GIE offers tenants the estate has been virtually shut down. over 40 hectares of first-rate infrastructure, Employment levels have dropped to 600 including a fully dedicated 10 megawatt before EIE was closed on August 31 and power supply with emergency backup, re- remains closed as of this writing. Israel in- verse osmosis-treated water supply, solid tends to close and abandon the estate, but waste disposal services, a well-lit and main- has suggested to hand it over to Palestinian tained internal road network and on-site se- control2. curity services.

Palestinian Industrial Estates Program 11. Five years after the launch of the IEP, the GIE remains the only industrial 8. Industrial estates have been estate of the nine originally identified viewed as a potential source of economic that has actually opened. After a promis- growth and employment generation ing start9, the GIE has been unable to meet since the 1990s. The Palestinian Industrial its objectives because of the closure regime Estates Program (IEP) was launched in and the impossibility of moving goods in 1999 with a view to increasing private-sector and out of the estate on any predictable employment, attracting foreign and inward schedule. Furthermore, interventions by the private investment (including from Israel, Israeli Defense Forces (IDF) have con- the Palestinian diaspora and Arab countries), strained site development, and have signaled contributing to the growth of Palestinian that GIE’s special status is no guarantee that economy, and generating foreign exchange continuous production is assured10. By mid- 2004, only 16 enterprises remain, employing Technical Paper II – Industrial Estates 3 less than 700 workers – a decline by half 15. As pointed out in paragraphs 1f., since 2000, and a fraction of the estate’s po- investor demand will depend on the tential11. Investor demand is now very low prospects of efficient and predictable and comes mainly from those who have no movement, and on a supportive legal other option than continuing to operate in and regulatory environment. Gaza12. As a result, only 23% of existing capacity is being utilized. 16. Reviving the IE program in the short-term will rely heavily on commer- Municipal Industrial Zones cial cooperation with Israelis15. The IEs are likely to face significant difficulties in 12. A number of municipal industrial attracting third-country investors for the zones have been set up by local authori- time being, because of high labor costs16, ties inside the West Bank, principally to low productivity and continued political un- create more suitable industrial space for certainties. To the Israeli investor though, smaller workshops and entrepreneurs in the the West Bank and Gaza offers a fairly cities13. The main ones are in Ramallah, Al- skilled labor force with lower wages than in Bireh, Nablus, Hebron, Bethlehem, Jenin Israel, along with logistical advantages that and Tulkarm. With few exceptions, all are in the past enabled Israeli management for domestic market production. oversight (to ensure production quality and timely delivery in order to meet the stan- 13. All municipal industrial zones are dards of time-sensitive industries such as currently underutilized, with occupancy garment assembly). Current GOI policy rates of 40-50%. In total, some 8,500 work- does not permit Israeli businessmen into ers in mainly small-scale workshops are em- areas over which Israel does not exert secu- ployed on these zones. In nearly all cases rity control. This is likely to undermine the these zones are owned and operated by the development of the IE program. municipalities in which they are located, and are not formally under PIEFZA’s regulatory 17. Under the right conditions, IEs oversight. Despite attracting some private can contribute to Palestinian economic investments over the years – the Ramallah recovery. It is proposed that the revival of Industrial Area, for instance, has an esti- the IEP focus on a limited number of bor- mated US$200 million in private investment der industrial estates that could help develop – as currently designed, these zones would Palestinian exports. Four border estates not be able to contribute significantly to ex- from the original nine programmed for de- panding exports and creating new employ- velopment under the IEP are potential con- ment (see paragraph 26). tenders – the two estates in Gaza: the GIE and the EIE; and two in the West Bank: Jenin Industrial Estate and Tarqumiya In- III – Reviving the Industrial dustrial Estate17. In addition, the Tulkarm Estate Program Peace Park is a new proposed development with high potential. These estates were se- Prerequisites lected on the basis of their accessibility18, the availability of land and offsite infrastruc- 14. A successful IEP hinges on in- ture/facilities, and the potential ease of vestor demand for industrial land. Ex- movement of goods and people. perience worldwide shows that IEs that are supply-driven in design – rather than devel- Industrial Estates in Gaza oped to fit private sector demand – will in- 14 variably fail . 18. There are a number of issues specific to the EIE that need to be con- 4 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects sidered before a decision can be made considerations could be agreed if consensus about its future. can be reached among the various parties on a viable approach23. ¾ GOI proposes to pay compensation to Israeli business owners at the EIE19. At 21. Given its preferred status under the same time, GOI has told Palestinian PIEFZL and its business-friendly regu- enterprises, which have been operating lations, and in view of its underutiliza- at the EIE under the same conditions as tion, the GIE would seem to be the most Israeli investors, that they will not be logical IEP priority. Potential investments compensated20. Palestinian businesses would include the construction of on-site may contest this policy in the Israeli infrastructure for development phases II courts, and this in turn could complicate and III, as well as of a General Logistics Fa- any decision by the PA to take over the cility to deal with containerized and non- EIE. containerized cargoes. Designs are available, ¾ A thorough clean-up of the EIE would and both these activities could be carried be needed to return it to environmental out immediately24. neutrality prior to handover. GOI has indicated that it is not prepared to do Industrial Estates in the West Bank this, though it would consider participating in sewage projects21. 22. The Tulkarm Peace Park (TPP) ¾ If GOI persists with its ban on Israelis appears feasible, but its development is entering Gaza (including the EIE) and likely to be constrained by its particular absent improvement in the PA security location. The proposed site, with an area of environment after IDF withdrawal, it is 50 hectares, is west of the Separation Barrier unlikely that any Israeli investment will and east of the Green Line, just outside the remain22. In this instance, the EIE may city of Tulkarm. The site is close to the land not be able to attract the level of in- terminal of Sha’ar Efraim, where GOI is vestment necessary to keep it open. considering building a railway terminal for ¾ The proposal by GOI to locate a Busi- the transfer of goods to Ashdod and people ness Services Center on Israeli territory between the West Bank and Gaza. The an- on the border with the EIE is not a real- ticipated demand for the estate is for indus- istic alternative to allowing Israelis to trial, warehousing, storage and logistics ac- visit the EIE. Investors cannot be ex- tivities, as well as for office space, research pected to operate an enterprise to which and training activities. The Tulkarm Peace they are denied access. Park is considered by both the Palestinian and Israeli private sector to be the most 19. The GIE is within a few kilome- commercially attractive of all the West Bank ters of the EIE, has modern facilities sites, due to its proximity to the Israeli High and is significantly underutilized; it is Tech Corridor centered around Herzliya. therefore not immediately evident that However, the construction of the Separation both estates are needed in Gaza at this Barrier to the east of the site, and the TPP’s point in time. location in the Seam Zone, make it problematic from a Palestinian perspective: the 20. In view of the immediate need to estate would be under Israeli security con- develop some kind of handover plan for trol, with access to Palestinians subject to the EIE, it is proposed that a working permits and other controls. Both the PA group be established, to include GOI, and donors are likely be guided by the In- the PA and representatives of both Pal- ternational Court of Justice’s ruling on the estinian and Israeli industry. Donor sup- Separation Barrier, which indicates that the port for studies to address environmental provision of infrastructure in the Seam clean-up issues and other needed technical Technical Paper II – Industrial Estates 5

Zone would constitute a violation of inter- PIEFZA designation. A Task Force of the national law25. Palestinian Federation of Industry (PFI), the Ministry of National Economy, the Ministry 23. The Jenin Industrial Estate (JIE) of Local Government, and PIEFZA is re- shows promise. The proposed site is lo- viewing the feasibility of this initiative, with cated in a flat plain north of Jenin city and a possible view to developing an action has an area of 113.5 hectares. A feasibility plan27. study was completed in 1998. The Northern International and Industrial Company 26. It is unclear whether municipal (NIIC) was established in 1995 by Palestin- industrial zones have significant export ian investors to develop and operate the es- potential, and each site would need to be tate. The feasibility study predicted an in- reviewed with this in mind. A review dustry mix which would include metal would need to take account of prevailing products, food and beverages, chemicals, institutional arrangements, the feasibility of cosmetics, and building materials. Germany developing on- and off-site infrastructure, has expressed interest in supporting the and potential investor demand. Municipal construction of both off-site and on-site boundaries have not been expanded for a infrastructure. Demand from investors, long time, due in many cases to the presence however, would depend mainly on their of Israeli settlements and military control. perceptions about the future access regime26. As a result, land prices to have been driven to artificially high levels28. From the perspec- 24. Tarkumiya Industrial Estate tive of promoting exports and creating jobs, (TIE) also faces locational issues. The therefore, the upgrading of municipal indus- estate is currently in the pre-feasibility stage. trial zones should be considered an option The site is located close to major Palestinian only once those border IEs identified above population centers (Hebron and Bethlehem) are insufficient to meet investor demand. and is close to the former West Bank–Gaza safe passage route. It has an area of up to Proposed Sinai Industrial Zone 250 hectares, and is one of only a few potential sites on the Green Line west of Heb- 27. Israeli has suggested the estab- ron city, a major industrial area. Tarkumiya lishment of a large industrial zone on is relatively close to the Israeli ports of Ash- Egyptian territory near Rafah, with the dod and Ashkelon. The mix of industry ambitious objective of attracting interna- would include medium to heavy industry tional companies that would employ some (stone, construction materials), logistics and 30,000 Palestinian workers as well as around transit enterprises, and textile and garments 15,000 Egyptian workers29. The proposal production. The site is located in Area C, has been brought to the attention of the however, and would thereby fall under Is- Egyptian Government and the PA, and nei- raeli control of civil and security matters. ther is supportive at this time. This is not acceptable to the PA, in particular as it has no competence for planning or 28. Several factors make the proposal zoning activities in Area C, and it has re- unrealistic. First, wages in Egypt are appre- quested that the status of the site be con- ciably lower than in Gaza30. Recruitment of verted to Area A. Palestinian workers could only occur on non-market principles, for example through Non-Border Industrial Zones substantial wage subsidies. Second, Egyptian law does not permit non-Egyptians to be 25. It has been proposed by the PA recruited to more than 5% of the firm’s em- and the private sector that consideration ployment. For the zone in total, this would be given to upgrading the principal mu- mean only 750 Palestinians for 15,000 Egyp- nicipal zones and providing them with tian jobs. Third, such an investment would 6 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects require significant donor resources. Given 32. If the environmental and loca- that the aim is to help generate Palestinian tional issues associated with Erez, Tul- economic recovery, these funds would be karm and Tarkumiya cannot be resolved better spent in the West Bank and Gaza – and only the GIE and the JIE are devel- for instance, on revitalizing the Palestinian oped, some 8,500 new jobs could be cre- IEP. And finally, it is most unlikely that ated by the end of 2008 – some 5,600 in such a zone would begin to have an appre- the estates themselves and another 4,200 ciable impact on Palestinian employment outside (including short-term construction within the time-frame set by GOI for ceas- work)36, discounted to 8,500 to allow for job ing the issuance of Palestinian labor permits. relocations. This figure represents less than one-third of the Palestinian jobs that will be Qualified Industrial Zones lost in Israel if work permits are revoked by the end of 2008. Even this modest number 29. Comparisons have been made is predicated on a reformed border regime, between the Qualified Industrial Zones the free internal movement of people and (QIZs) established in Jordan and the continued investment by Israeli businesses trade preferences provided to the Pales- even without direct access to IEs under Pal- tinians by the United States31. While the estinian control. Only the first of these QIZ in Jordan has contributed to export measures is currently contemplated by GOI, growth, recent studies suggest that the im- and actual employment generation may thus pact has been less than originally predicted32, be lower37. and the value-added by Jordanian companies in the QIZ has been much less than by the Israeli companies providing the inter- V – Conclusions mediate inputs. In addition, almost half the jobs created have been for expatriates33. 33. There are five key prerequisites for the success of these border industrial 30. Because WBG has its own un- estates: tapped provisions for duty free exports to the US34, it can be assumed that the ¾ The provision of efficient and uninterrupted costs and uncertainties associated with access of goods to and from the industrial es- today’s border regime remain the bind- tates, and to and from ports. The package of ing issue for potential investors. This measures that GOI is proposing (see the again argues that industrial estates, even Overview Paper) crucially includes the with favorable trade status, will be unable to adoption of specific service standards; attract investors and enhance Palestinian these can play a vital part in providing export growth without adequate and reliable investors with an up-front assurance access. that their imported/exported goods will be processed within a reasonable, predictable time-frame. IV – The Potential for ¾ The maintenance, at least in the near-term, of Employment Generation in linkages with Israeli businesses and markets. Industrial Estates The main initial boost will come from the continued involvement of Israeli en- 31. The potential for employment trepreneurs, and access to Israeli mar- 38 generation in industrial estates will de- kets . pend above all on the evolution of Israeli ¾ The use of the IEs as a springboard to the de- border cargo management policy. Three velopment of exports to third countries. Devel- scenarios with different assumptions about opers, operators and tenants of the in- Israeli policy measures were developed to dustrial estates need to diversify their assess this potential35. market outlets and investment sources Technical Paper II – Industrial Estates 7

away from dependence on the Israeli market, regulate, develop and operate private sector. Here it will be necessary the industrial estates. and critical for the PA to create a strong ¾ A protocol should if possible be agreed between domestic enabling culture; see Techni- Israel and the Palestinians that would en- cal Paper III. able investors to take advantage of the ¾ Support to PIEFZA, PIEDCO and other free zone provisions under the Palestinian private development groups to PIEFZL39. 8 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Endnotes

1 This paper was prepared by The Services Group/USAID and the World Bank, December 2004. It draws extensively on Viable and Feasible Border Industrial Estates and Export Processing Zones Under an Improved Border Cargo Manage- ment Regime in West Bank and Gaza, The Services Group, September 2004. 2 “Erez … Efforts should be made to transfer Israeli “live businesses” to Palestinian hands.” Israeli Disengagement Plan – Dialogue with the Word Bank – Status Report, Israeli National Security Council, August 29, 2004, PowerPoint. By contrast, the Modified Disengagement Plan of June 6 noted that “The Erez industrial zone will be transferred to an agreed-upon Palestinian or international body”, Section IV.B. 3 In general, areas designated for industrial use prior to the launch of the IEP were located in urban areas, were of a very small size and had quickly eroded into mixed use workshop-residential areas. Physical planning constraints also meant that many of these areas lacked appropriate water and wastewater services, had insufficient electrical power capacity (resulting in frequent brown-outs), and were not subject to environmental monitoring. 4 This partnership encourages private sector development, financing and operation of industrial estates supported by public sector regulation and “one-stop shop” services for investors, including licenses and permits, facilitation services for tenants, and regulatory procedures and practices which are in line with or better than regional and international industrial zone norms. 5 It is worth noting, however, that the PA is not currently in a position to exempt firms from such fees, levies or taxes because their administration is not entirely under Palestinian control. In practice, Israeli customs at Israeli- controlled crossing points and ports levy full taxes and duties on these goods. Investors are then required to claim a refund through the PA, which in turn would seek refunds from GOI minus a 3 percent processing fee. Such a time- consuming and cumbersome system greatly diminishes the benefits of the proposed exemption. The PIEFZA law exempts investors in the industrial estates from income tax, but GOI imposes it on all Israeli investors in the estates. 6 The EIE is not covered under PIEFZL or regulated by PIEFZA. 7 The GIE has been partly financed by USAID and the World Bank. 8 PIEDCO – Palestinian Industrial Estate Development and Management Company. 9 Before the GIE was built, over 25 investors paid in advance to acquire space. This demand grew as site construction proceeded, and the developer decided in 2000 (just prior to the intifada) to accelerate construction and merge phases II and III of the original development plan. 10 GIE construction has suffered from the denial of contractor access to some areas of the site. The IDF have prevented PIEFZA from completing construction of important infrastructure, including a storm water basin and drain- age pipe system. Most recently, the IDF ordered that construction of a garment factory at the site be halted although it meets all constructions requirements of the GIE according to PIEFZA. The private investor (a joint Israeli- Palestinian venture) was attempting to relocate the business from the EIE to the GIE. 11 Fully developed, the GIE could accommodate 250 industries and 20,000 workers. 12 Businesses in operation currently include garment and thread enterprises, packaging and distribution plant, food processing industries, plastic and aluminum manufacturing and electric assembly. 13 Small enterprises include car mechanics, carpenters, and metal and aluminum assembly workshops. A few larger manufacturing operations comprise food processing, pharmaceuticals, plastics and aluminum frame factories, among others. 14 About 3,000 export processing zones (EPZs) had been created in 116 countries by the end of 2002. However, despite their popularity, not all EPZs succeed. Countries with poor protection of property rights, weak governance or poor infrastructure fail to attract investors to the EPZs. The African experience has been particularly difficult, due to the effects of political unrest, macroeconomic distortions, dilapidated infrastructure and bureaucratic bur- dens. “A Better Investment Climate for Everyone”, World Development Report 2005, World Bank. See also: Dorsati Ma- dani, A Review of the Role and Impact of Export Processing Zones, World Bank Working Paper No. 2238, November 1999. 15 See Technical Paper III. 16 See Disengagement, the Palestinian Economy and the Settlements, the World Bank, June 23, 2004. 17 Ten potential sites were evaluated in total. The earlier feasibility studies for these sites were updated, with the market assessments reflecting the projections found in Technical Paper III, field interviews with Israeli and Pales- tinian businesspeople, and the proposals for border cargo management suggested in Technical Paper III. 18 In particular, close proximity to major Israeli industrial and consumer markets and the major Israeli ports of Ash- dod, Ashkelon and Haifa. 19 Law for the Implementation of the Disengagement Plan, 2004. However, sale of any portion of the business will be taken into account when the GOI calculates compensation. 20 According to Israel’s Ministry of Justice. 21 “Israel will not bear the costs of the cleanup of the [Erez Industrial Zone]. However, as far as sewage projects are concerned, Israel is ready to participate in such projects, from a comprehensive view of sewage and purification Technical Paper II – Industrial Estates 9

projects in Gaza.” Israeli Disengagement Plan – Dialogue with the Word Bank – Status Report, Israeli National Security Council, August 29, 2004, PowerPoint. 22 According to interviews with EIE tenants and members of the Israel Manufacturers Association. 23 If the EIE were transferred to Palestinian control, it would be expected to fall under the regulatory regime established by PIEFZL. 24 The development and construction of a General Logistics Facility at the Gaza side of Karni was under serious consideration prior to September 2000. 25 Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory, Advisory Opinion, International Court of Justice, The Hague (General List No. 131, 9 July 2004). The Advisory Opinion found that the wall, and its associated regime, which includes the Seam Zone regime, violates international law, and therefore states that all states are under an obligation not to recognize the illegal situation created by the construction of the wall and not to render any aid or assistance in maintaining the situation created by it. 26 Relevant here is that the Overview Paper proposes that one of two pilot border access programs be initiated at the Jalame crossing north of Jenin. 27 The Palestinian Regional and Local Industrial Estates: Existing Situation and Future Prospects, Palestinian Federation of Industries, September 2004. 28 Inexpensive land has proven to be an important factor for the success of industrial zones. 29 The indicative target of 30,000 is approximately the same as the number of 2004 Palestinian jobs that would be lost if the Separation Barrier is completed and permits to Israel are terminated; see the Overview Paper. 30 See Technical Paper III. 31 Like the US-Palestinian trade arrangement, the QIZs were created to allow countries to benefit from US trade incentives giving duty free access to the US market for specified commodities. The QIZ in Jordan has operated in direct competition to the GIE, with several potential GIE investors choosing Jordan when conditions deteriorated in Gaza at the end of 2000. It should be noted that Jordan also has a free trade agreement with the US. 32 See Issues in Economic Growth in Jordan: Assessing the Role of Exports and Private Sector Environment, the World Bank, September 2004 and Qualified Industrial Zones and the Jordanian Quest for Sustainable Development, the Jordanian Center for Policy Research and Public Dialogue, June 2004. 33 Indications are that of the 26,533 jobs created at the QIZ in 2003, nearly 43% were expatriates. 34 On October 2, 1996, President Clinton signed the proclamation modifying the Harmonized Tariff Schedule in order to implement duty-free treatment. See West Bank and Gaza Duty-Free Treatment of Products, Trade Compliance Center, June 2004. 35 Viable and Feasible Border Industrial Estates and Export Processing Zones Under an Improved Border Cargo Management Regime in West Bank and Gaza, op. cit. To arrive at the employment projections for each estate, TSG identified the most promising industry sectors and potential sources of investment, and forecast likely demand. 36 Using a factor of 0.75, which is an internationally accepted norm for off-site job creation. 37 If the EIE and the additional IEs in Tulkarm and Tarkumiya can be developed, a total of about 20,000 jobs could be created by 2009. Allowing for off-site jobs and discounting for job relocations, a total of some 30,000 new jobs could in principle be created by then. 38 Both the Israeli and Palestinian private sector businessmen consulted in the course of preparing this Technical Paper expressed this point of view. Viable and Feasible Border Industrial Estates and Export Processing Zones Under an Im- proved Border Cargo Management Regime in West Bank and Gaza, op. cit. 39 See paragraph 9. Possible remedies include a duty drawback system for Palestinian exporters. 4UBHOBUJPOPS3FWJWBM *TSBFMJ%JTFOHBHFNFOUBOE1BMFTUJOJBO&DPOPNJD1SPTQFDUT ***

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ѪF&VSPQFBO$PNNJTTJPOBOEUIF8PSME#BOL December 2004 Technical Paper III – Export Possibilities Under a Reformed Border Regime1

Summary

The future of Palestinian economic development lies in moving from an economy based on labor exports to Israel to an economy exporting goods and services to Israel and the rest of the world. Since the outbreak of the intifada, Palestinian export performance has deteriorated badly, reflecting a substantial erosion in competitiveness. Transforming the productive structure of the West Bank and Gaza will be a formidable challenge. For now, there are compelling reasons to keep the quasi-Customs Union between Israel and the West Bank and Gaza in place. However, a number of aspects of the current arrangements warrant revision and improvement.

Key measures for Palestinian policy makers to enhance competitiveness include: helping enterprises gain access to markets on favorable terms, through the implementation of trade agreements; addressing issues pertaining to high labor costs, addressing diminishing skills and low productivity; stimulating competitiveness at the firm and sector levels; and building a business- friendly environment which is genuinely supportive of productive activity. This will require a climate of law and order, functioning legal and judicial systems, a more responsive financial sector and better public-private interaction.

I – Introduction ¾ restoration of access and movement; ¾ the creation of a supportive internal governance environment; 1. The future of Palestinian eco- ¾ generous capital financing, which will nomic development lies in moving from need to come from additional levels of an economy based on labor exports to donor financing; and Israel to an economy exporting goods ¾ the provision of a transitional “cush- and services to Israel and the rest of the ion”, in the form of emergency budget world. The prostrate condition of the econ- support, sustained humanitarian assis- omy and international experience suggest tance, and the maintenance of labor that it could take a decade or more, under flows to Israel. favorable conditions, for such a major trans- formation2. Two factors specific to the West Bank and Gaza further complicate this II – Recent Export Performance process: restrictions on the movement of people and goods within the West Bank and 3. Since the outbreak of the intifada, Gaza and across borders, and the stated in- Palestinian export performance has de- tention of the Government of Israel (GOI) teriorated badly. Between 1999 and 2003, to eliminate the permit system for Palestini- commodity exports have dropped by 35% ans workers by the end of 2008. (Table 1), and labor exports contracted from over a daily average of 116,000 to 2. Transforming the productive around 37,500 workers today. A survey car- structure of the West Bank and Gaza will ried out in 2002 found that 17% of busi- be a formidable challenge.For the Pales- nesses had ceased to operate, while over tinian economy to make a successful transi- 75% of those still functioning were, on av- tion, four factors are required: erage, operating at under one-third of their previous capacity3. To survive, many enter-

1 2 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects prises have re-oriented their production to ports to Gaza because of the problems in serve very localized markets. getting West Bank products to and through the Karni crossing. 4. The decline in exports reflects a substantial erosion in competitiveness. 5. In the present environment, for- In a competitive global economy, Palestin- eign investors are hesitant to invest in ian exporters cannot overcome the cumula- the West Bank and Gaza. Since most Pal- tive impact of added transport costs, dam- estinian businesses are small- or medium- age caused at borders and checkpoints, in- scale and are found in the manufacturing ability to guarantee time-sensitive deliveries, and/or service sectors, investors’ concerns and constrained access to third country have less to do with the traditional risks as- markets4. Palestinian importers have also sociated with foreign direct investment5, but suffered from extra transport costs and the stem more from the risk of business inter- need to build up expensive inventories to ruption as a result of closures. Risk insur- compensate for unreliable deliveries. Pales- ance cannot readily address these concerns. tinian goods from the West Bank now find it difficult to even compete with Israeli im-

Table 1 Commodity Exports by Sector (US$ million and percent)

Sector Exports 2003 Percentage Drop Projected Ex- Percentage In- 1999-2003 ports by end- crease 2003-7 2007 Total 443 35 690 56 Stone 220 31 402 83 Agriculture 77 54 120 56 Furniture 17 28 25 47 Metal processing 15 49 20 33 Food/ beverages 14 16 20 43 Footwear/leather 14 45 18 29 Textiles/garments 10 42 20 100 Sources: 2003 data: US$ values are Paltrade estimates based on PCBS and sector data. Percentage data are from PCBS; 2007 data: Estimates by Paltrade, the European Commission and Bank staff.

isted can be re-invigorated. In the short- III – The Impact of a Reformed term, Israel would remain the primary mar- Border Regime on Exports ket for exports, and Israeli companies would continue to act as intermediaries – through 6 6. Bank projections suggest that sales, purchase or subcontracting arrange- under a reformed border regime, export ments – for a large proportion of Palestinian volumes could return to pre-intifada lev- exports to third country markets7. els by 2007. Considering the high level of commercial risk faced by Palestinian enter- 7. A reformed border regime would prises, many businesses, particularly those also allow Palestinians to take advantage operating in Gaza, can be expected to revert of favorable trade agreement and direct to the familiar routes and relationships access to export markets outside Israel available prior to September 2000. Both Pal- (see paragraph 17). However, not all sectors estinian and Israeli businessmen believe that are expected to recover at similar rates; see the bilateral trading relationships that ex- Table 1. Enterprises in sectors such as Technical Paper III – Export Possibilities Under a Reformed Border Regime 3 metal processing may find it difficult to re- diversification, and enhancing productivity12. establish their markets and supply links, Because of restrictions on the import of while others, such as shoes and leather, will capital equipment, many enterprises, par- likely find it difficult to re-establish their ticularly manufacturers of metal products competitiveness. and furniture, have been unable to keep up with recent technological developments. Although a proper value chain and cluster IV – Impediments to Exports analysis was not possible in the timeframe for this study, the work Paltrade has done in 8. Apart from movement and access 8 this area provides a useful guide (see Annex problems , various other constraints sig- 1). nificantly impact day-to-day operations and competitiveness, and thus the ability to quickly expand the production needed to V – Market Access and the fuel an export-led economic recovery. Some Transition to Sustained Export of these reflect economy-wide problems, Growth while others are sector- and firm-specific. 12. Short-term recovery, while criti- 9. Many Palestinian enterprises are cal, is not an end in itself. Stability and isolated from global developments and sustained development require the creation from information on international ship- 9 of a competitive, export-based economy ping and commercial transport . They are linked to diverse markets. This will mean a ill-informed about shipping rates, regula- deepening of the productive base and a wid- tions and operating procedures, as well as ening of markets and marketing channels in new rules and regulations relating to stan- order to diversify trading relationships. dards. This is partially a result of reliance on Israeli middlemen as well as the isolation 13. Globalization and trade liberali- imposed by the closure policy. Several initia- zation have greatly sharpened competi- tives are underway to address these difficul- 10 tion in export markets – and today’s mar- ties. ketplace demands stringent quality and labeling requirements, along with strict adher- 10. Palestinian and Israeli standards ence to delivery schedules. Palestinian en- are not well-synchronized. Relationships terprises will need to integrate themselves have been established between the Israeli into global supply chains if they are to suc- Standards Institute (TAKEN) and the Pales- ceed in accessing international markets. This tinian Standards Institute (PSI) in order to will not be easy for the small- to medium- find ways to address this issue. Progress so 11 scale enterprises that dominate the Palestin- far has been modest . Continued contact ian private sector. and technical exchanges between the two institutions can help improve the operation 14. Against this background, the of the quasi-Custom Union (see paragraph Palestinian Authority (PA) faces a major 16). For instance, enabling PSI to check a task in helping enhance competitive- much wider range of products would be im- ness; see Annex 2. It will need to: portant in helping Palestinian enterprises achieve the standards necessary to access ¾ help enterprises gain access to markets international markets. on favorable terms, through the implementation of trade agreements; 11. Sector and firm specific impedi- ¾ address issues pertaining to low produc- ments require targeted actions to in- tivity (compared to labor costs) and di- crease competitiveness – by focusing on minishing skills; enhancing market access, building trading relationships, improving product quality and 4 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

¾ stimulate competitiveness at the firm hicles, pharmaceuticals, foodstuffs and and sector levels; and agricultural products). Palestinian enter- ¾ build a business enabling environment prises suffer from the length of time it which is genuinely supportive of pro- takes for Israeli authorization, and often ductive activity. from inaccurate certificates which make it difficult to clear goods when they ar- The Trade Regime with Israel rive at customs.

15. It is assumed that the current ¾ Palestinians can only enter into inde- quasi-Customs Union (qCU) will con- pendent trade agreements with Arab tinue for the time being13. Looking for- League countries on a restricted range of ward, it is very much in the Palestinian in- products (Lists A-1, A-2, and B under terest to amend the qCU to help promote the Paris Protocol). Palestinian busi- greater economic independence, and to de- nessmen consider this list too limited velop new trade opportunities. In time, the and believe it impairs the PA’s ability to qCU should be replaced by a new trade re- negotiate more favorable trade agree- gime14, but for now there are compelling ments. reasons to keep it in place: ¾ The PA does not capture the import and ¾ A change in the trade regime would re- purchase tax revenues on indirect imports quire the significant upgrading of the into the West Bank and Gaza from Is- Palestinian Customs and Excise De- rael. Indirect imports were estimated by partment in order to avoid revenue the Bank in 2002 at about US$800 mil- losses once Israel ceases to collect taxes lion per year, implying a revenue loss to on the PA’s behalf (see also Technical the PA of some US$174 million16. Paper I). Trade Agreements with Third Countries ¾ The key to a rapid recovery in exports lies in rebuilding commercial ties with 17. A number of preferential trade Israel. Dismantling the qCU would drive agreements exist between the Palestini- up the price of Palestinian exports to Is- ans and current or potential trading rael and would stymie any recovery. partners (see Annex 3), but these have yet to produce significant benefits for the pri- ¾ Trade liberalization and the harmoniza- vate sector17. There are a number of steps tion of standards undertaken by Israel that can be taken to help Palestinian busi- over the last decade have brought Is- nesses take advantage of these agreements: rael’s trade regime into much closer alignment with international norms. ¾ Transit arrangements are needed with border countries (Jordan and Egypt) so 16. A number of aspects of the cur- that the movement of goods can be or- rent arrangements should be revisited ganized without cumbersome and ex- and improved, however15. Most impor- pensive procedural delays (see also tantly: Technical Paper I).

¾ Problems arise with export and import ¾ Technical barriers in potential markets licenses when there are quantitative re- need to be dealt with by adopting mu- strictions on the import of a product tual recognition agreements on stan- and/or when imports are permitted only dards and on health certification. after GOI authorization (applicable, for example, to petroleum and gas, tele- ¾ Helping enterprises to access markets communications equipment, motor ve- and establish trading relationships would Technical Paper III – Export Possibilities Under a Reformed Border Regime 5

boost exports. In a survey carried out in Competitiveness and Support Measures 200218, about 55% of companies inter- at the Sector and Firm Level viewed indicated that their top priority was assistance in participating in trade 21. The Palestinian private sector has missions and trade fairs. proposed a multi-year industrial modernization program. Such a program Labor Costs, Skills and Productivity would focus on the development of small and medium enterprises with the objective 18. Relatively high wages compro- of making them more competitive in the mise the international competitiveness global market place through a wide range of of Palestinian enterprises19. Although Pal- support services – including help with ex- estinian wages are low relative to Israel, av- port marketing, the development of trading erage manufacturing wages are higher than relationships and accessing business infor- in neighboring countries20. The lack of pro- mation, the provision of technology sup- ductive investment in the West Bank and port, training and consultancy services, and Gaza and the upward pressure created by the development of inter-sectoral links23. the proximity of the Israeli labor market are factors which underlie the disconnect be- The Creation of a Supportive Business tween wages and labor productivity21. Environment

19. Over time, production can be ex- 22. Although the PA does not have pected to shift from basic processing (in full autonomy over the local business agriculture and stone), and from simple arena, it should still take action in a assembly or single process manufactur- number of critical areas which are within ing operations, to higher value-added its capacity to influence, and which have activity and technology- or skill- been identified by the Palestinian business intensive activities. There is some evi- community as constraints to operations and dence of this happening in the IT sector22, exacerbating the high risks of doing business and this can be reinforced through educa- in the West Bank and Gaza. These are also tion and worker training programs with a discussed in the Overview Paper. They in- strong emphasis on technical and techno- clude: logical skills. ¾ The Rule of Law and the Judiciary. An ap- 20. The Palestinian tertiary educa- propriate legal and regulatory framework tion system has evolved as a private, not- for commercial activities, and an effec- for-profit system and is better developed tive and independent judicial system that than many other tertiary systems in the will uphold laws, regulations and prop- region. Palestinian universities and colleges, erty rights, are fundamental to the crea- however, lack focus on the skill needs of the tion of a business environment in which Palestinian private sector. Interaction with investors have confidence. The short- the private sector, through industry associa- comings of the Palestinian judiciary sys- tions and partnerships with western univer- tem have been widely acknowledged, sities can be used to help formulate a ‘de- and there is broad consensus on what is mand driven’ agenda. This might include now needed. The reforms of 2002-324 course structures that reflect the forward laid the foundation for the separation of needs of key export sectors, applied indus- executive and judicial powers, and em- trial research and, in time, the provision of powered the civil courts to adjudicate expert services to industry. commercial disputes. The focus should now be on improving the professional competence of judges and providing them with adequate institutional and lo- 6 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

gistical support. The PA’s failure to de- thereby expanding the potential use of velop an effective judiciary is a signifi- land titles as collateral25. cant impediment to the prospects for a Palestinian economic recovery. ¾ Public-private Interaction. The PA has taken some steps to consult more extensively ¾ The Financial System. The PA has facili- with the private sector. This tendency tated the growth of banking services by needs to be strengthened and the private allowing the creation of new Palestinian sector given a much more active and banks and the introduction of foreign vocal role in determining commercial banks in the West Bank and Gaza. policy. The Private Sector Institutions However, credit availability, particularly Coordinating Council was established in long-term credit, remains constrained. 2000 for this purpose. Member institu- Permitting a wider range of assets to be tions of the Council should be given used as collateral, making more exten- help in formulating policy positions on sive use of leasing arrangements and in- macroeconomic and sectoral issues. Pal- troducing flexible methods of assessing trade has begun a process of internal re- credit risk are all measures that would form to help it become the driving force increase investors’ access to formal in export promotion. credit markets. Particular attention needs to be given to registering land, Annex 1 Competitiveness Enhancement Measures at Sector and Firm Levels

Industry Competitiveness Enhancement Measures Stone and marble - restore value chain between quarries and processing facilities - ensure timely supply of spare parts - improve finishing operations and strengthen design capabilities for finished goods - improve quality control and standards at firm level - strengthen marketing and promotion actions especially for smaller enterprises - develop a sector design and quality training centre - obtain ISO and product certifications - introduce environmental protection measures Agriculture - improve harvesting practices - develop market and distribution channels - improve packaging and storage facilities - develop/improve infrastructures - develop proper data recording system Olive oil - improve harvesting, olive collection & storage and press maintenance practices to ensure needed quality in target markets - develop bottling facilities and branding - obtain organic certification and develop quality control structures - develop market and distribution channels targeting higher quality segments also through joint ventures Furniture - develop design skills and product mix - increase productivity - develop quality control - diversify supply sources - develop market channels and marketing strategies especially for Arab countries Pharmaceuticals - strengthen ongoing penetration strategies in Central/Eastern Europe - obtain foreign product registration and GNP certification Processed food - develop product mix and technology innovation - improve packaging technology and systems - improve production management and maintenance - obtain ISO and product certification - establish a food processing and quality training centre Textile and gar- - diversify raw material and fabric supply sources ments - develop sound marketing and promotion strategies - develop market channels especially in Arab countries - upgrade machinery and production processes - further develop sub-contracting arrangements with Israelis and other foreign organizations Metal processing - improve quality and upgrade technology for more value added operations - organize training for mechanics and specialized workers - promote local clusters and partnerships with other sectors needing mechani- cal engineering and metal processing services - restructure workshops and develop product (service) mix - introduce environmental protection measures - strengthen business relations with Israeli clients for sub-contracting arrangements

7 8 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Industry Competitiveness Enhancement Measures Shoes and leather - increase productivity manufactures - develop design skills and improve quality control - develop market channels Handicraft - develop design and quality control skills - develop market and distribution channels Information tech- - expand ICT diffusion in other sector especially in education and national nology initiatives such as e-Government - strengthen marketing strategy and develop market channels especially for Arab countries - establish technical cooperation agreements with Israelis and other international specialized companies for third countries. Source: European Commission and Paltrade. Annex 2 Measures to Enhance the Competitiveness of Palestinian Exports

Key Intervention Short-term Measures (2004-7) Medium- to Long-term Measures (2007-) Areas Trade and fiscal pol- Establish joint Palestinian-Israeli trade and private sector commit- Finalize and fully implement a revised trade regime with Israel and icy tees to: review obstacles, ensure full implementation of the Paris transit agreements with Jordan and Egypt. Consolidate agreements Protocol and trade agreements with third countries, and define especially with key target regions (MEDA region, Arab countries, EU future final trade arrangements, also through the re-establishment etc.). of the Joint Economic Committee. Establish a Palestinian Shippers Council to cooperate with Israeli Consolidate the role of the Palestinian Shippers Council and develop counterparts on improvement of transport, logistic and clearance relations with other international Shippers Council. Promote joint practices, to disseminate information and to train private sector ventures in transport logistics between Palestinian, Israeli and third operators in international trade best practices. country organizations. Lift internal closures, facilitate the movement of businessmen, Further consolidate the process. standard clearance and security procedures at ports and airport. Finalize cooperation agreement on standards. Negotiate new and larger quotas for agricultural produce and de- Finalize revised and new trade agreements with key trade partner velop an Agricultural Information System. countries and regions. Continue and accelerate tax refunds and train Palestinian customs Establish independent Palestinian tax collection and inspection ser- officials. vices at the port and airport. Competitiveness at Prepare a plan for the possible implementation of a Palestinian Implement a phased and modular Palestinian Industrial Moderniza- the sector/firm level Industrial Modernization Program, also through pilot initiatives. tion Program addressing the revitalization and development of the entire private sector. Enhance the competitiveness of key export sectors and firms Continue and expand the competitiveness enhancement process at (stone and marble, agriculture, furniture, handicraft, etc.). sector and firm levels. Foster Palestinian-Israeli cooperation in tourism and prepare sec- Promote investments, establish a tourism development fund and tor revitalization plans and promotional materials. promote networking with foreign tour operators.

9 10 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Key Intervention Short-term Measures (2004-7) Medium- to Long-term Measures (2007-) Areas Business enabling Establish a joint Palestinian-Israeli work group on the revitaliza- Promote and establish Israeli-Palestinian joint ventures in manufac- environment tion of business relations in manufacturing and trade. turing, trade and services, targeting also third country markets. Streamline priority private sector legislation and the regulatory Complete and fully adopt the legislative and regulatory framework. framework, completing and reviewing texts, preparing implementation rules, setting up enforcement agencies and improving the legislative management process. Strengthen key private sector institutions (PSCC, Paltrade, PFI, Strengthen sector institutions. Sustain and foster trade promotion Chambers of Commerce, etc.), develop industrial policies and de- initiatives. Promote twinning arrangements with third country private velop necessary networking infrastructures for international mar- sector institutions. ket access. Develop a National Export Strategy and comprehensive sec- Establish trade representations in key target markets. tor/firm surveys, diagnosis and restructuring plans. Strengthen the Palestinian Standards Institute for establishing Develop necessary systems and procedures and implement relevant necessary testing and inspection capabilities and tools. agreements with Israelis. Analyze and define necessary financial services to foster exports Introduce necessary financial tools and services, including the estab- and establish a pilot export support fund with proper guarantee lishment of a Palestinian export credit guarantee agency. schemes. Foster the Euro-Mediterranean partnership process on regional Foster Palestinian participation to the establishment of a Free Trade cooperation in trade and private sector development. Area in MEDA region). Source: European Commission. Annex 3 Palestinian Trade Agreements

Arrangement Preferences Granted Constraints Title

US- PLO x Duty free access for US products to the West lack of capacity by Palestinian Free Trade Bank and Gaza Strip market. firms: Arrangement x Duty Free Access for West Bank Gaza Strip x marketing, products to the US market. x production standards x packaging

EURO - x Duty free access for European Union indus- x Israeli non-recognition of Mediterranean trial products to the West Bank and Gaza Strip the Agreement as it per- Interim x Duty free access fro West Bank and Gaza tains to the West Bank Association Strip products to the European Union market and Gaza Agreement on x Duty free or reduced tariff quotas for some x Complicated and inappli- Trade and agricultural exports from the West Bank and cable rules of origin (espe- Cooperation Gaza Strip to the European Union’s market cially for textiles and garments) x Lack of knowledge by exporters of market entry requirements x Non-compliance with EUREPGAP26

EFTA - PLO x Duty free access for EFTA industrial products x Israeli non-recognition of Interim Free to the West Bank and Gaza Strip market the Agreement for the Trade x Duty free access for West Bank and Gaza West Bank and Gaza Agreement Strip Products to the EFTA market x Complicated and inappli- cable rules of origin (especially for textiles and garments) x Lack of knowledge by exporters of market entry requirements

EFTA - PLO Norway, Iceland and Switzerland have granted x Lack of knowledge by Protocols on specific Palestinian agricultural exports reduced or exporters of market entry Trade in duty free access to their markets, up to specific requirements Agricultural quantities (quotas) -- or, in some cases, for all item x Non-compliance with Products exports regardless of the quantity. However, pref- EUROGAP erences granted by these states to the West Bank and Gaza differ, and reference to the agreements should be made for further details.

11 12 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Arrangement Preferences Granted Constraints Title Arab Free Trade x Gradual Reduction of Duties by 10% per year x Palestinian integration Area to reach 0% by end of 2007 with the Israeli trade re- x Ongoing negotiations for agricultural products gime prevents compliance, x Ongoing negotiations to harmonize rules of due to inability to reduce origin with Euro-Med/pan Europe rules of tariff rates to AFTA origin members x The West Bank and Gaza is a member in tran- x Some Arab states have not sition, until the establishment of an independ- implemented the Arab ent Palestinian state League commitment to duty free entry for Pales- tinian products Technical Paper III – Export Possibilities Under a Reformed Border Regime 13

Endnotes

1 This paper was prepared by the European Commission and the World Bank, December 2004. 2 See Long-Term Policy Options for the Palestinian Economy, World Bank, July 2002. 3 Private Sector Needs Assessment: Industrial Sector Survey, Palestinian Federation of Industries and Palestinian Trade Cen- ter, September 2002. 4 See Technical Paper I. 5 Such as fear of expropriation, breach of contract or asset damage due to war. 6 See the Overview Paper. 7 GOI has proposed establishing market areas in Israel adjacent to the border crossings, in order to facilitate the sale of Palestinian produce in Israel (Israel’s Disengagement Plan – Dialogue with the World Bank, Israeli National Security Council, August 29, 2004, PowerPoint). Palestinian traders would be issued permits, enabling them to bring their goods through the crossings and to operate in special marketing areas. These traders would be required to comply with Israeli tax regulations. Agricultural goods are most likely to benefit from this initiative. 8 These also include restrictions on business travel, which have hampered trade between Gaza and the West Bank and Israel as well as intra-Palestinian trade. GOI has indicated that it will allow a greater number of Palestinian traders and business people, with appropriate permits, to enter Israel and to move between the West Bank and Gaza (Israel’s Disengagement Plan – Dialogue with the World Bank, op. cit.). This would help facilitate trade, but only if administered transparently and consistently. See also Technical Paper I. 9 The West Bank and Gaza has been largely excluded from the substantial intra- and inter-regional trade and investment flows in the Middle East of the last few years. 10 The establishment of a joint Palestinian-Israeli private sector committee was agreed recently. Paltrade and the Palestinian Shippers Council, which is being established, have started to collect information on impediments to trade. The Palestinian Shippers Council also plans to engage in formal dialogue with the Israeli Shippers Council. 11 Such as seeking exemption from labeling in Hebrew and direct testing by PSI for certain products destined for the West Bank and Gaza. 12 The agriculture sector, for example, suffers from poorly developed post-harvest practices and the lack of extension services, while the furniture sector is constrained by deficiencies in quality control, poor management methods and low product standards. 13 GOI has, however, indicated that it intends to abrogate the qCU in Gaza after withdrawal from Philadelphi; see the Overview Paper. 14 Which could take the form of a non-discriminatory trade regime, or a Free Trade Area arrangement with Israel. For a detailed discussion, see Long-Term Policy Options for the Palestinian Economy, op. cit. and Economic Road Map – An Israeli-Palestinian Perspective on Permanent Status, the Aix Group, January 2004. 15 For a more detailed discussion, see Technical Paper on Export Possibilities Under a Reformed Trade Regime, Paltrade, 2004. 16 See Long-Term Policy Options for the Palestinian Economy, op. cit. With the opening of international gateways under Palestinian control, a similar problem would emerge in relation to indirect imports into Israel. 17 The only quotas that are close to being fully utilized are those on agricultural exports to the European Union. The EC has, however, been flexible in renegotiating and expanding access for Palestinian produce. 18 Private Sector Needs Assessment: Industrial Sector Survey, op. cit. 19 The reduction in the number of Palestinian workers in Israel (excluding Israeli-identity card holders, mostly from East Jerusalem) from around 116,000 in the third quarter of 2000 to 37,700 in 2004, coupled with high unemployment rates (23% in the West Bank and 35% in Gaza in 2004), should have helped drive down Palestinian wages – but this has not happened to the extent one might anticipate. While real wages have declined by more than 8%, nominal wages have increased slightly (2%). The travel restrictions associated with internal closures – resulting in mismatches between the supply of and demand for various types of labor in local markets – have contributed to this “stickiness” in nominal wages. Source: World Bank staff calculations based on PCBS data. 20 See Disengagement, the Palestinian Economy and the Settlements, the World Bank, June 23, 2004. 21 Long-Term Policy Options for the Palestinian Economy, World Bank, July 2002. 22 The Palestinian IT sector has entered high-end production, such as circuit boards, control systems and the monitoring of software applications. 23 For example, between agriculture and processed foods, between handicrafts and textiles, between upholstered furniture and textiles, and between furniture and handicrafts. 24 The enactment of the Judicial Authority Law (2002) and of the amended Basic Law (2003), as well as the inclusion of the judicial sector as a priority area in the PA reform plan. 25 Palestinian enterprises have also cited the lack of trade finance (export credit guarantees) as an important factor hindering them from gaining access to new markets. 26 EUREP – Euro-Retailer Produce Working Group, GAP – Good Agricultural Practices. 4UBHOBUJPOPS3FWJWBM *TSBFMJ%JTFOHBHFNFOUBOE1BMFTUJOJBO&DPOPNJD1SPTQFDUT *7

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ѪF8PSME#BOL December 2004 Technical Paper IV – Settlements1

Summary

It is critical that the transfer, management and disposal (TMD) of settlement assets be well- planned. No firm decision has yet been taken by the Government of Israel (GOI) on which assets it will transfer, or by the Palestinian Authority (PA) on how the assets will be used. GOI is prepared to coordinate the asset transfer process with the PA, both from a security perspective and at a technical level. While advocating a position on settlements based on international law, the PA is planning for the use of the settlement assets in the context of the Medium-Term De- velopment Plan 2005-7. The PA has indicated that settlement assets that do not fit into the regional plans for Gaza and the West Bank should be dismantled.

The Bank recommends the establishment of a dedicated administrative body for the disposal of land, using fast-track procedures. In order to ensure the transparency and efficiency of the TMD process, clear rules and procedures should be formalized and agreed upon in advance. The involvement of the general public in the entire process is essential. Building on international experience, a three-tiered institutional approach is proposed – to include the Palestinian Legislative Council, a multi-stakeholder Supervisory Board under PA leadership, and an existing or new PA body for implementation. In the Bank’s opinion, a small, light special agency structure – without independent budget authority, reporting to the Supervisory Board, and provided with dedicated technical assistance – would be the preferred set-up.

1. It is critical that the transfer, 1 summarizes salient information on the set- management and disposal (TMD) of settlements in Gaza4. Several types of settle- tlement assets be well-planned. Data on ment assets can be distinguished: settlements remain scarce, and no firm decision has yet been taken by the Government ¾ public infrastructure5: electricity, water, of Israel (GOI) on which assets it will trans- telecommunications, roads, gas; fer, or by the Palestinian Authority (PA) on ¾ public buildings: schools, health and com- how the assets will be used. Building on ear- munity centers; lier work2, this paper discusses potential uses ¾ private houses; of settlement assets, reviews TMD proce- ¾ productive assets: agricultural businesses, dures, and discusses possible institutional manufacturing and industrial enter- and implementation alternatives, including prises6; the pros and cons of a dedicated PA body. ¾ military installations; and TMD is a dynamic subject in the Palestin- ¾ land. ian/Israeli context, and the recommenda- tions in this note have evolved from those 3. The ownership structure of the presented in the Bank’s June 23 report. assets varies. Most public infrastructure is owned by Israeli service providers – the Is- I – Settlement Assets and Their raeli Electric Company, Mekoroth (water), 3 Cellcom and Orange (mobile phone infra- Potential Uses structure). Houses and productive assets (intensive agriculture, small-scale manufac- 2. GOI intends to transfer 17 settle- turing) are either owned or leased privately ments in Gaza, 4 in the northern West or collectively. In order to leave these vari- Bank and all military instillations. Annex ous assets intact, GOI intends to enter into

1 2 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects agreements with the owners and to enforce and health facilities) or municipality (for these up to the moment that the Israeli De- community centers). fense Forces (IDF) withdraw from the settlement sites7. 8. Private houses do not generally fit Palestinian settlement patterns in 4. The Medium-Term Development densely populated Gaza; nor would their Plan (MTDP) 2005-7 of the PA is the satisfactory disposal be at all easy9. Al- appropriate framework for determining though the Modified Disengagement Plan Palestinian use of relinquished settle- of June 6 notes that settler houses will in ment assets. The MTDP approach is based general not be left behind10, GOI may con- on two principles – first, it is necessary to sider transferring some houses intact if the look at whether the settlement assets are of PA proposed uses not seen as contrary to relevance to the needs of the populations Israeli interests. Indications received so far around them, and to consider whether they indicate that the PA does not wish to re- can be integrated into the local economy; ceive the houses, though no formal state- and second, the natural resource base needs to ment on the subject has been made. be protected for the long-term benefit of the Palestinian people. Since the settlements ¾ The Gush Katif settlements are situated were established for a very different pur- in an environmentally fragile area, on pose, it is inevitable that some assets will not top of the Gaza aquifer. Urban devel- fit in with Palestinian developmental needs; opment in this area would risk destroy- these assets should be dismantled, and the ing this critical resource11. With the ex- debris cleared away (see paragraph 26). ception of some recreational and tourism facilities, these settlements should 5. In reviewing available informa- probably be dismantled. tion, the Bank has assessed the most appropriate uses of settlement assets. ¾ Netzarim and the settlements in north- Bearing current data limitations in mind, the ern Gaza could be incorporated into lo- following uses can be suggested for consid- cal urban planning, but due considera- eration by the PA. tion would need to be given to protecting the shoreline from erosion and pol- 6. Public infrastructure should be lution. transferred to the relevant Palestinian entities8 and integrated into the Palestin- ¾ The other settlements do not appear to ian systems. This would allow for better lend themselves to any immediate local coverage with public services; Palestinian purpose, and could be converted to uni- providers have amply demonstrated their versity, conference or recreational facili- capacity to provide these services. Short- ties, or returned to agricultural use. This term investments may be required to up- would imply the partial or complete grade, adapt and/or expand the settlement dismantling of private houses and other systems to connect them to the Palestinian infrastructure in these sites. grids. 9. Productive assets include indus- 7. Public buildings should be re- trial and agricultural businesses. Ideally, tained, to the extent that local popula- these should be handed over as going tion density and the demand for services concerns; this is also the preferred option so justify. Public buildings in remote set- of GOI. However, there are both technical tlement sites where houses will be razed and legal reasons why this may not be feasi- should be dismantled. Those that do fit into ble. First, since it will probably be impossi- local development plans should be trans- ble to establish the ownership status of the ferred to the respective ministry (for schools land in question prior to Israeli withdrawal, Technical Paper IV – Settlements 3 any investor would face the risk of expro- withdrawal17. Since land is likely to con- priation12. Second, the PA is likely to declare tribute more to the Palestinian economy the purchase of such assets illegal, since it than all other remaining assets combined, its considers the settlements to have been built proper use is key. in violation of international law (see also paragraph 24). Current Situation Regarding Land Ad- ministration ¾ The only industrial zone other than the Erez Industrial Estate is Neveh Dekalim 12. According to GOI and to donor in Gush Katif. It contains less than 20 research, most of the Gaza settlements small enterprises employing only 210 are located on public land. By contrast, people, of whom 120 are Palestinians13. PA data indicate that three of the four Because of its location and limited eco- West Bank settlements are located nomic impact, continued industrial use mainly on private land. Some of the pub- of the site may not make sense. The fu- lic land, however, appears to have been used ture of the Erez Industrial Estate is dis- for agricultural purposes prior to its requisi- cussed in Technical Paper II. tion after 1967 by GOI, and such usage could be considered to have conferred own- ¾ Prospects for agricultural production on ership rights18. In addition, there are small land vacated by Israel (settlement sites, areas within some Gaza settlements that are cleared areas and military installations) registered to known private owners. Re- are more promising. The development cently-cleared areas around the settlements19 of Palestinian agriculture in these areas are also thought to be privately owned (or to is envisaged by the PA14. Even in Gaza’s be public land with historical private use). water-constrained environment it would appear to make good sense in the short- 13. For private land with ownership term to use a portion of the Gush Katif already documented, the procedures for area for export-oriented agriculture15, land disposal should be relatively provided that the deficiencies in the straightforward. In cases where private border regime can be addressed. In a land is unregistered, or where public land more benign political climate, moreover, was privately used, distribution is likely to be Palestinians could once again capitalize more complicated. Furthermore, the land on on relationships with Israeli business as which West Bank settlements are located is well as benefit from GOI’s stated will- classified as Area C under the Oslo Accords. ingness to transfer technology and mar- As such, the PA has no legal competence keting know-how16. for land registration or administration, or for planning and zoning. In order for the 10. Military installations could be PA to have jurisdiction the land would need adapted for use by Palestinian security to be re-classified as Area A or B. services, depending on their location; alter- natively, they could be restored to their 14. Until its disposal, all land vacated original state and/or used for agricultural by Israel would be administered by the production. The sites would first need to be PA. An assessment of options for public or examined for possible environmental con- private use of the land, including settlement tamination and for any residual ordinance. areas, feeder roads, cleared areas and military zones, is being carried out as part of the MTDP process. The decisions made may in II – Potential Uses for Land turn require the conversion of private land to public land using the appropriate legal 11. A significant amount of land will procedures for expropriation of private become available to the Palestinians in property, or the sale of private land. Agricul- Gaza and the West Bank upon Israeli 4 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects tural land cleared around settlements would GOI. Funds would obviously be needed to need rehabilitation if it were to be cultivated pay compensation in any situation where once again. land is expropriated or compensation is paid; these might be generated (in part) 15. Efforts to improve land admini- from the sale of public land or productive stration in the West Bank and Gaza are assets (see paragraph 43). underway, and a comprehensive land survey has already been conducted by 17. A judicial or an administrative the Palestinian Land Authority (PLA) in body? The number of possible ownership Gaza20. The bulk of land in Gaza has now claims, based either on prior ownership or been officially surveyed, though not regis- usage of land, is not yet known and should tered. Further required steps include build- be further investigated. The number of po- ing the capacity of the PLA in order to ad- tential claims will affect the decision as to vance the registration process, and adopting whether judicial or administrative proce- clear procedures for the administration and dures would be the most efficient way to management of public land. Any mecha- resolve claims. One possible option for a nisms devised to improve the management judicial procedure would be the establish- of public lands in light of the Israeli with- ment of a special lands settlement tribunal drawal of settlements, and the subsequent under the authority of the Higher Judicial transfer of the land to the PA as public land, Council. However, even a small number of could serve as a basis for overall reform of claims could well overburden the slow- the land administration system as it relates moving PA court system or any specialized to public land. judicial body. Judicial procedures may also prove more costly and time-consuming for Key Issues for Consideration claimants. This argues for the establishment of a separate administrative process for re- 16. Restitution or compensation? The solving ownership claims (such as was done PA needs to make two clear policy decisions in the former Yugoslavia). An administrative related to land. Firstly, the PA needs to de- body would need to be established by law, cide whether land will be returned to indi- and its powers and relationship to the courts viduals that can prove private ownership of system clearly delineated. The administrative the land. In this case, the PA needs to estab- body would report to a central PA body to lish clear policies to help determine whether ensure criteria are applied uniformly land should be restored to its owners, or throughout the West Bank and Gaza. whether they should be compensated and the land used for the public benefit. An im- 18. Existing or fast-track procedures? portant consideration in determining Given the current problems associated with whether restitution or compensation should land administration, it would be more effec- take place is whether new structures, such as tive to fast-track procedures for land use a public buildings or infrastructure, are lo- planning and land claims administration. cated on the land. In such cases, it may be Since there is a need to dispose of settle- preferable to expropriate the land and pro- ment assets quickly in order to realize their vide compensation to the owners. Secondly, economic benefits, and since land claims the PA needs to make a decision as to the may be the most time-consuming element in extent land ownership will be recognized the TMD process, it would be advisable to based on prior usage of land for agricultural separate land claims and dispute adjudica- purposes. The PA might also chose to pro- tion from the disposal of other assets vide compensation to individuals who were (unless these assets are situated on disputed eligible to register ownership based on land land). usage, but who were prevented from doing so because the land was requisitioned by Technical Paper IV – Settlements 5

19. Community involvement? Com- ¾ GOI is willing to find ways to facilitate the munity acceptance is essential for any land transfer of businesses and agribusinesses in administration system. While consultation working order (see paragraph 9). with the public on many facets of the proposed TMD approach will be needed, there ¾ Immoveable parts of military installations will be particular interest in how land is would be left in the evacuated areas if their fu- handled. Land ownership information ture use does not pose a potential risk to should be made widely available through a Israeli security. variety of media – such newspapers, TV and radio, postings at municipal offices, the ¾ Israeli utility companies will continue to provide internet, and public meetings. electricity, water, gas, fuel, and telecommunications to Gaza and the West Bank under cur- 20. Public or municipal land? The rent agreements – and would provide ser- Gaza settlement areas generally do not fall vices to the settlement sites if proper ar- within current municipal boundaries in rangements could be put into place, to Gaza21. Once the settlement areas are evacu- include payment guarantees. ated, these boundaries will need to be ad- justed, not least to accommodate expanding ¾ GOI is ready to increase the supply of electricity urbanization. The PA needs to determine and water to Gaza, at Israeli commercial rates. whether public land will transfer to the PA Arrangements would need to be worked as public land, or to municipalities as mu- out between the respective entities on nicipal public land. both sides; once again, Israel would need assurance that its utility companies III – Emerging GOI Position on would be paid. Settlement Assets ¾ GOI is investigating options for the environmentally sound disposal, in Gaza and the West 21. GOI is prepared to coordinate the Bank, of the debris from dismantled infrastruc- asset transfer process with the PA, both ture or buildings. from a security perspective and at a technical level. Areas of coordination men- 23. In order to move the process for- tioned to the Bank/donor team include ward and to give the PA adequate time planning the disposition of debris, strength- for advance planning, GOI now needs ening contacts between Palestinian and Is- to: raeli entrepreneurs, strengthening contacts between Palestinian and Israeli utility pro- ¾ decide which assets will be handed over, and in viders to ensure the continuation of service what condition, and to communicate delivery, and securing the settlement sites this; during and after withdrawal. ¾ provide the PA with detailed information on these assets and on the sites and military 22. GOI has also clarified a number instillations; of issues related to the transfer of settle- ¾ determine and communicate a precise with- ment assets – including the following: drawal calendar. ¾ GOI would not object to the development of a manual of procedures, for use by both parties, IV – Emerging PA Position on explaining the TMD process in detail. This Settlement Assets manual could be prepared with the assistance of a third party. 24. The PA believes that under international law decisions about which assets should be left behind intact are 6 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects theirs to make. The PA has indicated that expected to refrain from promoting any if it requests that certain structures be left projects related to the settlement sites that behind, the value of these assets could be do not take account of the MTDP and the taken account of in final status negotiations. PA’s TMD procedures. If the PA decides that certain structures should be removed, it believes that GOI 28. Planning an effective TMD proc- should be responsible for dismantling the ess takes time, and an early start is im- structures, removing the debris outside Pal- portant. While the settlement sites need to estinian territory22, and ensuring that the be inspected and inventoried before the PA land is returned in same the state as it was will be in a position to decide on their pre- upon confiscation. cise uses, the PA has other immediate priorities, such as: 25. Preparing for the acquisition of settlement assets is being handled as a ¾ the finalization of the two regional plans; part of the PA’s Medium-Term Devel- ¾ developing an interim PA position on the opment Plan. This plan incorporates the TMD process; strategies and priorities of the different sec- ¾ the initiation of a process of consultation across tor ministries and entities, although the con- the broad spectrum of Palestinian society on tribution of governorates and municipalities the disposal of the settlement assets and has been less pronounced. Other prepara- on the TMD process; tory activities for the handover of assets in- ¾ a review of existing laws and regulations perti- clude joint work by the Ministry of Planning nent to the TMD process, and the drafting (MOP) and the PLA to develop a land own- of new legal instruments that will ensure ership registry for land in the settlements, a that the TMD process is fully sanctioned plan by the Ministry of Agriculture on the under law; use of agricultural assets, and a post- ¾ the establishment of a working group to assess withdrawal plan by the Municipality of institutional options (see paragraphs Gaza. 45ff.) and to propose a preferred structure; 26. The PA has indicated that uses of ¾ deciding whether Palestinians will be permitted the assets will be guided by the regional to buy Israeli businesses; and plans for Gaza and the West Bank. As ¾ an assessment of how to integrate public infra- part of the MTDP process, these are being structure into existing systems. This will in- 23 updated to reflect an Israeli withdrawal . clude the drafting of commercial agree- Through this process, the PA is seeking to ments between Israeli and Palestinian balance the possible integration of settle- providers. ment assets with the Palestinians’ need for additional urban or agricultural land, the protection of natural resources (particularly V – Administering the Settlement water) and the provision of transport Assets modes. The updated plans will provide a comprehensive planning framework for spa- 29. In order to ensure the transpar- tial development in Gaza and the entire ency and efficiency of the TMD process, West Bank, and will serve as a key building clear rules and procedures need to be block for the MTDP. The PA’s position is formalized and agreed upon in ad- that settlement assets that do not fit into the vance24. An ad hoc process with ambiguous regional plans should be dismantled. responsibilities and unclear rules and procedures could be very damaging – both to the 27. All PA entities and municipali- reputation of the PA and in terms of missed ties, it is stressed, must heed the MTDP economic opportunities. and the regional plans, and donors will be Technical Paper IV – Settlements 7

Procedures for Asset Transfer (T) upon withdrawal, legislation would need to be promulgated in advance30. Steps 1 and 9- 30. GOI does not currently intend to 12 could be replaced by a joint Israeli- hand over assets directly to the PA, Palestinian inspection of the site during step though this position may change. At the 331, possibly with the inclusion of a third same time, an acceptable third party to party as observer. which GOI could transfer the assets as a ‘custodian’ is unlikely to emerge25. Under 32. The asset protocols would serve such circumstances, the following handover several purposes. They would contain ac- sequence could be envisaged for each set- curate information on the assets left behind, tlement site: and would facilitate the interim management and subsequent disposal of the assets. If 1. GOI would prepare an Israeli asset pro- made public, the protocols would dispel tocol (see paragraphs 32f.)26; rumors about the physical state of the sites 2. the IDF would continue to secure the at the moment of transfer. site once the settlers have left; 3. the IDF would coordinate their with- 33. The form and content of the Is- drawal with the Palestinian security ser- raeli and Palestinian site protocols vices27, as well as the body designated by should be the same32. The protocols the PA to handle the TMD process (see should be prepared in English (plus He- paragraphs 52ff.); brew/Arabic) and should contain: 4. the IDF would then withdraw from the site; ¾ an inventory of all assets left behind, to in- 5. the PA would declare the site a closed clude an assessment of their working security zone, to avoid any trespassing; order (including foundations, water and 6. PA security personnel would promptly sewage tanks, dumping sites, generators, arrive and secure the site; other moveable equipment, etc.); 7. the PA body handling the TMD process ¾ an assessment of all damage to remaining as- would arrive at the site; sets; 8. PA security personnel would search the ¾ an assessment of the environmental condition of site (buildings, cleared areas, etc.) and the site, and the identification of any con- remove anything of a harmful nature; tamination of land (solid waste) or water 9. the PA body would prepare a PA asset (wastewater); and protocol covering the assets left behind ¾ maps of the site, maps of public utility networks at the site28; and plans of standing buildings. 10. meanwhile, GOI would hand over a copy of the Israeli asset protocol for the Procedures for Asset Management (M) site to a third party; 11. once completed, the PA would hand 34. Assets should be disposed of as over a copy of the Palestinian asset pro- quickly as possible to reduce the risk of tocol to a third party; damage or misuse. However, experience 12. the third party would forward the PA elsewhere shows that disposal can be time- asset protocol to GOI, and vice-versa. consuming. It is, therefore, critical to prepare to manage the sites/assets ad interim, 31. If settlements are evacuated in pending final disposal. groups29, the demands on PA implementation capacity will be significant. In ¾ The sites will need continuous security protec- principle, steps 4-7 could take place within tion. The municipalities and governorates one day, and steps 8-12 could technically be should be consulted on security ar- concluded in no more than one week. In rangements, and should be asked to co- order for step 5 to take effect immediately operate actively. Site protection meas- 8 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

ures should be reviewed periodically to 37. The procedures for the disposal reflect changes in the security environ- of assets should vary by type of asset. ment and/or the decreasing quantity of assets still managed by the PA body. ¾ In the case of public infrastructure, assets could be transferred to the appropriate ¾ Environmental damage needs to be addressed, PA entity or municipality using a simple and this will require active intervention. handover protocol, and following a joint inspection that would be made once the ¾ Any remaining rubble or other debris would sites have been relinquished by GOI and need to be cleared and properly disposed of, and declared safe by the PA security services. the sites should then be prepared for fu- The receiving entity would be responsi- ture uses. ble for maintenance and for further development and, if appropriate, for con- ¾ Valuable assets should be protected using tinued contact with the relevant Israeli suitable measures (weather-proofing, re- supplier. Further protection of these as- pairs, regular maintenance, cleaning)33. sets should not be necessary. ¾ A similar process could apply to public ¾ The market value of the assets should be buildings, should a decision be made to estimated. This would help determine transfer these facilities to the public sec- whether particular assets should be sold tor. at once, upgraded to realize a higher ¾ If it is decided to use any cleared housing sales price, transferred to the public sec- sites for new Palestinian housing, a ten- tor or dismantled. der should be issued for the development of the site following due consulta- 35. The management process should tion between the Ministry of Public be handled by the private sector. It would Works and Housing, the relevant mu- be advisable to contract private (preferably nicipality, MOP and the PA implement- local) companies to carry out all functions ing body. related to the interim management of the ¾ Productive assets with income-generating settlement assets (other than security) – un- potential (agricultural land and facilities, der the supervision of the designated PA manufacturing plants, tourism facilities) body, and in close coordination with the PA which are not required for public pur- security services. poses should be sold or leased to the private sector – not managed by a public Procedures for Asset Disposal (D) entity.

36. Irrespective of the institutional 38. Asset sales need to be well- arrangements selected34, the disposal of prepared and methodically imple- the assets and the use of land should be mented. Managing the sale process would guided by the MTDP. Once disposal deci- be a primary task for the PA implementing sions have been made, the PA implementing body. An asset may first need to be repaired, body should dispose of the assets in coop- upgraded or even partly demolished to eration with relevant PA entities. If new in- achieve a favorable market price. Potential formation becomes available during the buyers (firms, cooperatives, individuals) process that makes it advisable to alter should be identified and a marketing strat- planned uses, MOP – in consultation with egy developed accordingly. The bidding relevant PA entities and the municipalities – process should be explained in advance to should be the authority to revise disposal the public, and should be subjected to inde- decisions. pendent audit. Once a successful bidder has been selected, the asset(s) should be transferred without further delay. Post-sales as- Technical Paper IV – Settlements 9 sistance, such as help in acquiring the requi- 1. the establishment of a PA implementing site licenses and permits, should also be body, or making other institutional ar- provided as part of the TMD process. rangements to carry out the TMD process; Involving the General Public 2. environmental protection/the clearing of any debris left behind; 39. The involvement of the general 3. the protection and maintenance of as- public in planning how the received assets pending their disposal; sets will be disposed of and to whom, 4. the improvement or demolition of cer- and subsequent public participation in tain assets prior to their disposal; the TMD process, is essential. A broad 5. complementary investments to integrate public consensus on intended asset use and public infrastructure assets into existing on the TMD process is likely to generate a Palestinian systems; better sense of public participation and to 6. managing the sale of productive assets; reduce the risk of looting, demolition or and squatting. Assets will contribute more to 7. public consultations and outreach. local development priorities if the views, needs and preferences of the local popula- 43. Revenues generated from the sale tion are duly considered. of assets may be substantial, especially if the PA decided to auction or lease part of 40. The finalization of the regional the vacated land36. The need for transpar- plans – determining the uses of assets – ency in such transactions is therefore essen- as well as the actual planning of TMD – tial. determining the process – should explicitly include consultations with local 44. Particularly in view of the stakeholders. Standard methods of com- achievements in Palestinian public fi- munity participation should be employed to nancial management37, all income and this end35. Such information would also be expenditure transactions related to TMD critical for establishing the baseline against should be handled through the normal which the social and economic impact of treasury process. All estimated expendi- the asset TMD process can be measured. tures should be transparently budgeted for and resourced, and all revenues from sales 41. The public should be regularly should be deposited in a sub-account of the informed of implementation progress. Ministry of Finance’s Single Treasury Ac- Various channels should be used, including count. updates through different media, meetings organized by municipalities, local leaders and associations and the publication of VI – Institutional Arrangements regular progress reports. Importantly, civil society should also be represented at the 45. The PA is advised to establish a proposed Supervisory Board (see paragraph dedicated institutional structure to plan 50). and implement the TMD process. An ad hoc, “business as usual” approach is defi- Fiscal Implications nitely not recommended – for two reasons. Firstly, this is not business as usual; the 42. The TMD process will have sig- handover of settlement assets is unprece- nificant cost implications for the PA. dented and will be the subject of high levels These costs are mostly unrelated to normal of local and international interest. The repu- PA operations, and would need to provide tational opportunities and risks for the PA for: are thereby considerable. Secondly, there is the question of precedent. Not only is good PA performance in the TMD process im- 10 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects portant as a barometer for the future – the the establishment of a Supervisory Board approach taken should also be one that with broad representation. Membership builds up experience and can be adapted as could include: and when other settlements in the West Bank are handed over. ¾ Relevant PA ministries, including Planning, Local Government, Agriculture, Indus- 46. Decisions on the structure to be try, Public Works and Housing, Finance, adopted need to be taken soon – and well National Economy, Interior and Justice; in advance of actual disengagement, since ¾ Relevant PA security services; establishing any structure will take time. ¾ Relevant PA entities, including the Water, Energy and Land Authorities; 47. Building on international experi- ¾ Non-PA representation, including affected ence, a three-tiered approach is recom- municipalities, civil society and the pri- mended: vate sector38.

¾ the PLC would exercise parliamentary 51. Guided by the appropriate ena- oversight, bling legislation, the Supervisory Board ¾ a multi-stakeholder Supervisory Board would determine the TMD policy to under PA leadership would exercise ex- which all PA entities would be expected ecutive oversight, and to adhere. The Board should also advise ¾ an existing or new PA body should han- the PLC and PA on all TMD matters, as dle day-to-day TMD implementation. well as trouble-shoot the TMD process, monitor and guide the work of the dedi- The Palestinian Legislative Council cated PA body and of other PA/NGO/international agency contribu- 48. Enabling legislation needs to be tors to TMD, and ensure accountability. As passed to avoid a legal vacuum on the the author of the MTDP, MOP may be best date of withdrawal. The legislation would suited to chair the Supervisory Board and to need to detail the procedures for managing report to Cabinet on its behalf. abandoned property ad interim, the accelerated land claims process and the structure A Dedicated PA Implementation Body and powers of the Supervisory Board and any special implementation body. In addi- 52. The Bank’s June 23 report rec- tion, any budget related to the handover, ommended the establishment of a PA management and disposal of the assets special agency to manage the TMD would require PLC approval. process. It was noted that “practical considerations point to the creation of a special 49. The importance of the TMD agency” for receiving, administering and process also argues for PLC involve- disposing of the settlement assets. “The ment. PLC involvement should ensure [TMD] task involves a multitude of transac- healthy public debate on the planned use tions across PA institutional boundaries, and and on the process for disposing of the as- will be very laborious. The existence of a sets. This could include regular reporting on single responsible agency would clarify ac- the TMD process to the PLC by the Super- countability, simplify monitoring and pro- visory Board, thereby increasing transpar- vide a single point of focus.” The report ency and credibility. also recommended that a third party act as a “technical partner” to the PA39. Since then it The Supervisory Board has become clear that private houses are likely to be demolished, significantly reduc- 50. The importance of the TMD ing the difficulty of the TMD task. How- process and its high visibility argue for ever, the complexity and reputational issues Technical Paper IV – Settlements 11 associated with the TMD process still de- ¾ Centralizing all TMD tasks in one mand a very careful approach. agency would increase operational efficiency and reduce costs. 53. The PA implementing body ¾ TMD policy would be applied consis- should be charged with operationalizing tently and much more transparently. the TMD policy. Core functions could in- ¾ The security forces would have one clear clude coordinating the individual compo- counterpart. nents of the TMD process in accordance with MTDP and TMD principles, supervis- In contrast, decentralized implementation of ing the activities of other PA entities, mu- the TMD process could well lead to unsyn- nicipalities, NGOs or international agencies chronized schedules, confusing messages, an involved in TMD implementation, oversee- impression of chaotic management and pub- ing the administration of the land claims lic suspicion. procedures, administering revenues and expenditures, and handling local outreach. The 56. Any such structure must not be body would need a physical presence both seen as an alternative power center in in Gaza and in the northern West Bank. Gaza, as this would run contrary to the need to strengthen the PA. Nor can it be 54. In deciding the most appropriate allowed to evolve into a bureaucratic implementation arrangements, several monstrosity. The proposed option is not important factors should be taken into the only one feasible40. The administration account: of settlement assets by an international agency under international custodianship, ¾ the need for public legitimacy, oversight, however, is strongly discouraged. Its estab- and accountability, given the sensitivity lishment would be lengthy and expensive. and complexity of the process; Accountability vis-à-vis the PLC or PA ¾ the need to involve and coordinate would be limited, and a legal vacuum would closely with PA entities and municipali- likely be created (in relation to appeals, for ties; example). TMD implementation by an in- ¾ the need for expedited TMD procedures ternational agency would also delegitimize and the consistent application of these the PA: the message conveyed would be procedures; that the PA is not up to such a task. ¾ the range of technical expertise required; and 57. In defining the role of the im- ¾ the need to establish an approach that plementation body, clear account needs could be used in other parts of the West to be taken of the part that other PA en- Bank. tities must play in the TMD process. As indicated above, MOP should have over- 55. In the Bank’s opinion, this com- arching responsibility for planning the dis- bination of factors argues for a small, posal of assets. Site security should be as- light special agency structure. The sured by PA security personnel. Relevant agency would report to the Supervisory PA entities and municipalities should as- Board, and will need dedicated technical sume responsibility for public and municipal assistance. It would not need special budg- infrastructure, respectively, with as little de- etary authority. It could be formed de novo or lay as possible. The Ministries of Agriculture by adapting an existing structure. Compared and Public Works and Housing should be to a decentralized (“business as usual”) ap- involved in determining the best uses of ag- proach under which PA entities assume re- ricultural businesses and settlement sites. To sponsibility for the assets under their par- succeed, the PA implementation body will ticular sphere of responsibility, this would need to balance the implementation of its have a number of advantages. own assigned tasks with careful coordina- 12 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects tion and facilitation. This in turn will require drafting of commercial agreements be- significant leadership and political skills. tween Israeli and Palestinian providers. ¾ The PA needs to decide which assets it wishes 58. Presuming that the PA is com- to receive intact, and whether Palestinians mitted to creating a transparent TMD will be permitted to buy Israeli busi- process and an appropriate implementa- nesses. tion structure, the international commu- ¾ The PA needs to initiate public consultations nity should provide the PA with the nec- across the broad spectrum of Palestinian society essary technical and financial support. It on the proposed disposal of the settle- is further proposed that the PA periodically ment assets, and on the TMD process. brief the Local Aid Coordination Commit- ¾ The PA should review pertinent laws and regu- tee (LACC) and the Ad Hoc Liaison Com- lations and draft the new legal instruments mittee (AHLC) on TMD progress. needed to ensure that the TMD process is fully sanctioned under law. A special focus VII – Next Steps should be given to practical ways of handling potential land claims. ¾ The PA needs to make a firm decision on the 59. A number of steps need to be institutional and implementation arrangements taken soon to prepare for the effective that will underpin the TMD process. transfer, management and disposal of settlement assets. The closer the coordina- 60. There is no time to lose. To allow tion between the PA and GOI, the more sufficient time to pass the requisite legisla- effective the process is likely to be. tion and establish the agreed structures, the process of internal Palestinian deliberation ¾ GOI needs to provide detailed data on the needs to be concluded by the end of Febru- settlements and the assets to be left be- ary 2005 at the latest. hind. ¾ The PA and GOI need to discuss how settlement public infrastructure can be integrated into existing systems. This would include the Annex 1 Israeli Settlements in Gaza

Settlement Population1 Number Type of set- Industry and agri- Green- Organic Total Water source Consump- Water con- cluster of built tlement culture houses crops (in greenhouse tion type sumption housing (regular) dunums) and organic (thousand cubic units (in (in dunums) meters p.a.) dunums) Northern 1,412 370 and Residential Self-employed; fish - - Yad Mordechay Home, in- 420 settlements2 caravans farm; services (res- water company dustry taurants, photo- and temporary copying, lawyer) - drill Isolated set- 880 150 Residential Greenhouse agricul- 1384 - 138 Netzarim drill, Home, agri- 453 tlements3 and agriculture; organic vege- Kfar Darom culture tural tables; spices. drill, Morag drill Katif bloc 5,062 1,531 Agricultural Greenhouse agricul- 2,7297 446 3,175 Aquifer drills Home, in- 6,354 settlements5 and indus- ture; poultry farms; dustry, agri- trial6 dairy farms; orna- culture mental plant nurser- ies; flowers; light industry (textiles, canned produce).

Total 7,354 2,051 2,867 446 3,313 7,227 Source: Feasibility Study: Relocating settlements from Gaza Strip area, Israel National Security Council, April 2004.

1 Population figures are according to Central Bureau of Statistics figures from December 31, 2003. 2 Nisanit, Dugit, Alei Sinai. 3 Netzarim, Kfar Darom, Morag. 4 This figure refers to Morag, which is the only agricultural settlement within this cluster. 5 Bdolah, Bnei Atzmon, Gadid, Gan Or, Ganei Tal, Neveh Dekalim, Netzer Hazani, Pe’at Sadeh, Katif, Rafiah Yam. 6 Neveh Dekalim has a small industrial zone comprising factories for printing, carpentry, metal-work, garages and food processing. 7 This figure refers to the 7 agricultural settlements in the Katif bloc cluster: Bdolah, Gadid, Gan Or, Ganei Tal, Netzer Hazani, Katif, Atzmona.

13 14 Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects

Endnotes

1 This paper was prepared by the World Bank with assistance from UNSCO and DFID, December 2004. 2 Disengagement, the Palestinian Economy and the Settlements, World Bank, June 23, 2004. Section IV of the report provides an initial overview of Israeli settlements in Gaza and the northern West Bank. It identifies the settlements and their productive potential, discusses the role of the international community, makes suggestions for the handover and disposal of the settlements and their security, and reviews claims on land. 3 Given its preponderance as the most important asset for development, land is discussed in a separate section. The PA also sees the land that will be vacated as by far the most valuable element. 4 The four West Bank settlements are small dormitory communities without appreciable productive output. 5 Includes infrastructure to access/serve settlements emanating from Israel, as well as located purely within the settlements. 6 The Erez Industrial Estate is discussed in Technical Paper II. 7 Legislation for compensating Israelis for the assets that would be left behind (Law for the Implementation of the Disengagement Plan, 2004) has passed the first reading in the Knesset, including for owners of houses and businesses, as well as for utility providers for the infrastructure servicing the settlements. 8 For example, the Palestinian Water Authority, the Gaza Electricity Distribution Company, the Ministry of Public Works and Housing (for main roads), and the municipalities. 9 Options for the disposal of private houses, should it turn out that they are not demolished, are outlined in paragraph 79 of Disengagement, the Palestinian Economy and the Settlements, op. cit. 10 GOI’s original position is detailed in the Modified Disengagement Plan of June 6. Section VIII of the Plan states that “[I]n general, houses belonging to the settlers, and other sensitive structures such as synagogues will not be left behind. The State of Israel will aspire to transfer other structures, such as industrial and agricultural facilities, to an international third party that will use them for the benefit of the Palestinian population that is not engaged in terrorism.” Furthermore, Section IX notes “[t]he water, electricity, sewage and communications infrastructures will be left in place. As a rule, Israel will enable the continued supply of electricity, water, gas and fuel to the Palestinians, under the existing arrangements and full compensation”. See Annex 1 of Disengagement, the Palestinian Economy and the Settle- ments, op. cit., for the full text. 11 The soil is sandy and the aquifer is shallow and vulnerable to pollution. The sand dunes therefore need to be preserved. 12 Either by a private owner – or by the PA should the land be deemed public land, and the investment contrary to the PA regional plan. 13 Feasibility Study: Relocating Settlements from Gaza Strip Area, Israeli National Security Council, April 2004. 14 With a particular emphasis on protecting the aquifers through less water-intensive farming methods. 15 The question of how much land should be dedicated to agriculture and for how long needs further examination. Among the policy variables would be the size of parcels allocated and whether they should be sold or leased; among the objectives to be balanced would be productivity, sustainable management, flexibility over time, and equity. In its June 23 paper, the Bank estimated that only some 3.3 square kilometers of the 32 sq. km. allocated to agriculture in the Gaza settlements is under cultivation, and calculated that a tripling of land devoted to irrigated agriculture could yield perhaps US$50 million in annual income – equivalent to 5% of Gaza’s 2003 Gross Domestic Product. Disen- gagement, the Palestinian Economy and the Settlements, op. cit. 16 There exists ample experience of Israeli-Palestinian cooperation, such as through extension and training programs prior to the intifada. Also, Palestinian agricultural produce for export is currently marketed solely through Israel’s Agrexco. A diversification of marketing channels may be preferable, however. 17 In Disengagement, the Palestinian Economy and the Settlements, op. cit., the Bank estimated that 15-20% of the land in Gaza is either used by settlements or is located in their immediate vicinity and not currently inhabited by Palestini- ans. Similarly, the PA Ministry of Planning assesses the total area under Israeli control as around 20% of Gaza. 18 Under Ottoman law, which together with British, Egyptian (Gaza) and Jordanian (West Bank) law, is still applicable after IDF withdrawal, if private individuals cultivated public land for a period of ten years, they would develop a lifetime right on usage of the property. 19 During the intifada, the IDF have cleared ‘security belts’ around the settlements or access routes to them. 20 Current problems in land administration are significant. The inter-ministerial committee established by presidential decree has met only infrequently, and clear policies for administering and allocating public lands have never been established. Prices for the lease and sale of public land vary widely within the same area and transparency for the overall process is lacking. 21 However, some land falls within what is considered the natural expansion area of municipalities. 22 The rubble from houses demolished by the IDF in Gaza is of great environmental concern today. (From the beginning of the intifada through October 2004, the IDF have demolished some 2,540 housing units, in which 23,900 Palestinians lived. Source: B’tselem Report: Through No Fault of Their Own: Punitive House Demolitions during the al-Aqsa Intifada, November 2004.) Rubble is currently treated as solid waste and randomly disposed of around the munici- Technical Paper IV – Settlements 15

palities; in some cases it has been buried in situ by the IDF. Rubble risks polluting the site where it is buried. This is particularly true of sand dunes, which are important infiltration areas for the Gaza aquifer. 23 Both regional plans were initially prepared in 1998. 24 The Oslo accords do not deal with the transfer of settlements. International law could be used to help determine the responsibilities of the parties involved in the transfer. 25 The Bank has indicated it would not be willing to play such a role, and the PA is not supportive of the concept. A third party would in practice find it very difficult to protect the assets, since it would be loath to employ force to do so – for fear of losing its perceived legitimacy among Palestinians, and out of concern for its own security. 26 The protocol could be prepared at any time before the IDF withdraw from the site. 27 Willingness on GOI’s part to synchronize withdrawal with the PA would significantly enhance the ability of the PA security personnel to secure the sites, and thereby avoid looting or unauthorized asset take-over. 28 Representatives of relevant PA entities (in particular, the Ministry of Planning, the water and electricity authorities and the Ministry of Public Works and Housing) and of concerned municipalities should accompany the designated PA body – in order to assess possible immediate uses of public infrastructure, and to determine any immediate maintenance/repair requirements. 29 According to Israel’s Modified Disengagement Plan, op. cit., the settlements to be handed over are divided into four groups. Implicitly the four groups are to be evacuated sequentially. 30 According to the amended Basic Law, a presidential decree can only be issued in emergency circumstances when the PLC is not in session. Such a decree would then need to be approved by the PLC at its next session – if not approved it is deemed that the decree never went into effect legally. A presidential decree can also be re- scinded/amended rather easily. Legislation would provide a more stable legal basis for the process and is therefore preferable. 31 Draft inventories can be prepared by both parties independently early on, using existing databases in conjunction with satellite/aerial imagery. Joint site visits after the evacuation of settlers could then be used to clarify and confirm these data. The Sinai Agreement between Israel and Egypt could be used as a basis for such cooperation. 32 Or one inventory per site, if a joint inspection were carried out. 33 International experience suggests that temporary use of any kind, while it may facilitate the maintenance of certain assets, can be very difficult to reverse. It should generally be avoided. 34 See paragraphs 45ff. 35 Such as stakeholder workshops, focal group interviews and community meetings. 36 The price of land in Gaza varies by location. By way of example, urban land may reach US$1 million per dunum in the center of Gaza city, but generally ranges from US$100,000 to US$400,000 per dunum. Land in rural areas sells between US$10,000 and US$60,000 per dunum. 37 See Country Financial Accountability Assessment, World Bank, June 2004. 38 Each selected stakeholder group should nominate its representative(s) to the Board. 39 “In this capacity, [the third party] could assist with, and monitor, the asset transfer and disposal process, and could interface between the PA and GOI as necessary. Third party involvement of this kind would help create public confidence that settlement assets would not be misappropriated. By leaving a light footprint, the international community would strengthen, not displace the PA.” Disengagement, the Palestinian Economy and the Settlements, op. cit. 40 See Asset Transfer, Management and Disposal: Options for an Institutional Structure, World Bank, September 2004. %JTFOHBHFNFOU UIF1BMFTUJOJBO&DPOPNZ BOEUIF4FUUMFNFOUT

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3UMMARY ANDAGROWTH ORIENTED PROCESS UNDERWAY THE GEOMETRY CHANGES 4HIS IS A SITUATION MUCH 4HE KEY TO RESTORING 0ALESTINIAN MOREATTRACTIVETODONORSnONEINWHICHTHEY ECONOMIC VITALITY IS FOR )SRAEL TO DRAMATICALLY CAN ALLEVIATE THE IMPACTS OF HIGH TRANSITIONAL EASEINTERNALCLOSURESANDRESTORETHEPREDICTABLE UNEMPLOYMENT WHILE INVESTING IN GROWTH FLOWOFGOODSACROSSBORDERS !RESOLUTIONOFTHE ORIENTED INFRASTRUCTURE PROJECTS &INANCIAL ECONOMIC CRISIS OFTHE LAST MONTHS REQUIRES ASSISTANCE ALONE CANNOT SOLVE TODAYS ECONOMIC THATITBEADDRESSEDATSOURCE CRISIS BUT IT CAN MAKE A DECISIVE CONTRIBUTION UNDERTHERIGHTCIRCUMSTANCES #LOSURES HOWEVER CANNOTBEVIEWEDIN ISOLATIONFROMSECURITY INPARTICULARTHETHREATS )SRAEL SHOULD AT THE LEAST MAINTAIN POSED BY MILITANTS SEEKING TO ENTER )SRAEL CURRENTFLOWSOF0ALESTINIANWORKERSFORSEVERAL 3ECURITYPERSEEISBEYONDTHESCOPEOFTHISPAPER YEARS TO COME!LTHOUGHTHE SCENARIOS USED BUTAMAXIMUM0!EFFORTTOFULFILLITSSECURITY BELOW ONCE AGAIN ASSUME A DECLINE IN LABOR OBLIGATIONSUNDERTHE2OAD-APISNEEDEDIFTHE FLOWS SUCHREDUCTIONSWOULDGREATLYCOMPLICATE DONORCOMMUNITYISTOARGUEFORAMAJOREASING AND DAMPEN ANY RECOVERYY -ANY ECONOMISTS OFTODAYSCLOSUREREGIME BELIEVE THAT THE 0ALESTINIAN ECONOMY MUST IN TIMEABANDONITSRELIANCEONEXPORTSOFLABORTO %VEN TODAY THOUGH IT SHOULD BE )SRAELINFAVOROFEXPORTSOFGOODSANDSERVICES POSSIBLE TO RE ESTABLISH A REGULAR PREDICTABLE TO )SRAEL AND THIRD COUNTRIES n BUT CREATING IMPORTEXPORT REGIME WITHOUT COMPROMISING COMPETITIVENESS WILL NOT HAPPEN OVERNIGHT )SRAELI SECURITY4ECHNOLOGIES EXIST THAT CAN !N ORDERLY ECONOMIC ADJUSTMENT PROCESS IS RAPIDLY NORMALIZE BORDER TRADE AND THEREBY VITALTOTHEMAINTENANCEOFPOLITICALANDSOCIAL REMOVE A CRITICALIMPEDIMENT TO COMPETITIVE STABILITY EXPORTnASWELLASENDTHEFREQUENTCOMPLICATIONS ASSOCIATEDWITHHUMANITARIANSHIPMENTS !2EASONABLE%CONOMIC&UTUREIS0OSSIBLE

!N ENHANCED SECURITY ENVIRONMENT !REDUCTIONINVIOLENCE AMAJOREASING AND )SRAELI IMPORTEXPORT REFORM NEED TO BE OF INTERNAL CLOSURES AND THE REVIVAL OF TRADE ACCOMPANIED BY A SERIOUS 0! EFFORT TO CREATE ACROSSBORDERSCOULDHOLDTODAYSSTABILIZATIONIN CONDITIONS ATTRACTIVE TO PRIVATE INVESTORS PLACE DEPENDINGONTHENUMBEROF0ALESTINIAN )NVESTORS ARE LIKELY TO PERCEIVE THE 7EST "ANK WORKERS ALLOWED INTO )SRAEL -ODELING THE AND 'AZA AS HIGH RISK FOR SOME TIME TO COME IMPACT OF THESE DEVELOPMENTS UNDER THE SAME ANDTHE0!MUSTDOEVERYTHINGITCANTOASSURE LABORASSUMPTIONSASWEREUSEDEARLIER REAL'$0 ANINVESTOR FRIENDLYCLIMATE PER CAPITA WOULD GROW BY ABOUT OVER THE PERIOD BUTREAL'$)PERCAPITAWOULD '/) AND 0! COMMITMENTS OFTHIS STILL DECLINE BY SOME 5NEMPLOYMENT KIND WOULD JUSTIFY AN ADDITIONAL MAJOR WOULDGRADUALLYFALLTO BUTPOVERTYWOULD FINANCIALEFFORT BYTHE DONORS 4HE PREVIOUS PERSISTATHIGHLEVELS nSEE4ABLEh TWO SECTIONS DESCRIBE AN ECONOMIC SITUATION BILLIONvSCENARIO WITHOUT PROSPECTS IN WHICH SUBSTANTIAL DONOR ASSISTANCESERVESMAINLYASABRAKEONTHESPEED 7ERE DONORS TO PROVIDE GENEROUS OFDESCENT7ITHOPENBORDERS AREFORMIST0! ADDITIONALASSISTANCE HOWEVER THE0ALESTINIAN 3TAGNATIONOR2EVIVAL )SRAELI$ISENGAGEMENTAND0ALESTINIAN%CONOMIC0ROSPECTS

ECONOMYCOULDTURNTHECORNER7EHAVEONCE CARGO MANAGEMENT &OR EXPORTS EXTENSIVE USE AGAIN ASSUMED ADDITIONAL DONOR DISBURSEMENTS CANBEMADEOFADVANCEDELECTRONICEQUIPMENT OF53BILLIONOVERTHE PERIOD WITH ATCHECKPOINTS WITHLARGE TRUCK SIZESCANNERSAT ABOUT HALF OF THIS AS DEVELOPMENT ORIENTED BORDERCROSSINGSSUCHAS+ARNIAND%REZIN'AZA EXPENDITURE SEE ALSO PARAGRAPH BELOW AND ALONG THE 'REEN ,INE IN THE 7EST "ANK GIVING A TOTAL OF 53 BILLION OVER THREE !LONGWITHINSPECTIONFACILITIESSIZEDTOHANDLE YEARS OR ABOUT 53 PER PERSON PER YEAR CONTAINERS THIS SHOULD CONSIDERABLY REDUCE SEE4ABLE h BILLIONv SCENARIO 7ITH AN ANDINSOMECASESELIMINATETHENEEDFORBACK ADDITIONALDONOREFFORTOFTHISMAGNITUDE REAL TO BACKUNLOADINGANDRELOADING PROCEDURES '$0 PER CAPITA WOULD GROW BY )NADDITION SIMPLEBUTMEANINGFULFACILITATION AND REAL '$) PER CAPITA !T THE SAME MEASURESCANBEINTRODUCEDnSUCHASEXTENDING TIME UNEMPLOYMENT WOULD FALL TO ONLY BORDEROPERATINGHOURSANDENSURINGPERISHABLE n CLOSE TO PRE INTIFADAA LEVELS n THOUGH POVERTY CARGOES ARE GIVEN PRIORITY&OR IMPORTSSFROM WOULD REMAIN WORRYINGLY HIGH AT ABOUT CERTAIN COUNTRIES PRE SHIPMENT INSPECTIONS BY UNDERLININGTHENEEDFORASUSTAINED LONG TERM THIRD PARTIES AND TRANSPORT IN SPECIALLY SEALED POVERTYALLEVIATIONSTRATEGYEVENUNDERASCENARIO CONTAINERSSHOULDALLOWSOMERELAXATIONOFTHE OFGENERALECONOMICRECOVERY4HESEENCOURAGING CURRENT REQUIREMENT THAT ALL CARGOES DESTINED GROWTHRATESWOULDINCREASESIGNIFICANTLYIF'/) FOR'AZAANDTHE7EST"ANKMUSTBEINSPECTED WERE TO MAINTAIN CURRENT LEVELS OF 0ALESTINIAN UPONENTRYAT)SRAELIPORTS"ONDEDWAREHOUSES WORKERSIN)SRAEL OR LOGISTIC FACILITIES FOR CARGO MOVING TO AND FROM 'AZA ANDTHE 7EST "ANKCOULDALSO BE !SITISMOSTUNLIKELYTHATTHESELEVELS INTRODUCEDAT(AIFAAND!SHDOD OF DONOR ASSISTANCE WOULD BE SUSTAINED FOR LONG ITISIMPERATIVETHATTHE0!USEANYSUCH )NTERNATIONAL GATEWAYS FOR THE WINDFALLTOCREATEINFRASTRUCTURE SKILLSANDAN 0ALESTINIANECONOMY ANDALINKBETWEEN'AZA ENVIRONMENT ATTRACTIVE TO PRIVATE INVESTORS)F ANDTHE7EST"ANK SHOULDALSOBEDEVELOPED THEOPPORTUNITYWERELOST GROWTHWOULDFALTER 4HEEXPORTROUTESRUNNINGTHROUGH)SRAELTOTHE AND UNEMPLOYMENT AND POVERTY WOULD ONCE SEAPORTSOF!SHDODAND(AIFAANDTO"EN'URION AGAIN SOAR n EVEN WITH A MAJOR RELAXATION OF AIRPORT HAVEBEENUNRELIABLEANDCOSTLY DUETO CLOSURE INCONSISTENTSECURITYPROCEDURESANDTHENEEDTO USE)SRAELILOGISTICSERVICEPROVIDERS3IMILARISSUES "ORDERSAND4RADE ARISEINRELATIONTOCARGOMOVEDTHROUGH*ORDAN AND%GYPT )FF A SATISFACTORY SECURITY PROTOCOL #REATING AN EXPORT BASED ECONOMY CANBEESTABLISHED ASEAPORTIN'AZA PROVIDED DEPENDS ABOVE ALL ON EFFICIENT UNIMPEDED IT IS ACCESSIBLE TO 7EST "ANK BUSINESSMEN AND ACCESS TO )SRAELI ANDTHIRD COUNTRY MARKETS EFFICIENTLY RUN BY A PRIVATE OPERATOR IS LIKELY 4HE CURRENT SECURITY ORIENTED BORDER REGIME TO BE COMPETITIVE n PARTICULARLY IF INITIATED AS nANDACCESSTHROUGHTHE7EST"ANKOR'AZATO A @2OLL /N 2OLL /FF FACILITY WHICH COULD BE THEBORDERSnINVOLVESUNPREDICTABLEDELAYS AND BUILTINARELATIVELYSHORTTIMEANDFORASLITTLEAS USESINEFFICIENTMETHODSWHICHADDCONSIDERABLY 53 MILLION!NNEXFURTHERDISCUSSESTHE TO TRANSACTION COSTS AND MAKE IT IMPOSSIBLE TO POSSIBLEDEVELOPMENTOFINTERNATIONALGATEWAYS FULFILLEXPORTORDERSONTIME INCLUDINGTHENOW DEFUNCT'AZA!IRPORT ASWELL ASTHEhSAFEPASSAGEvBETWEEN'AZAANDTHE7EST )NRECENTTIMES OVER OF0ALESTINIAN "ANK EXPORTS HAVE GONE TO OR THROUGH )SRAEL 0RIMARY ATTENTION SHOULD THEREFORE BE GIVEN )TISIMPORTANTTONOTETHATALLOFTHESE TO REGULARIZING CROSS BORDER TRADE WITH )SRAEL MEASURES ARE COMPATIBLE WITHTHE ECONOMIC AGREEMENTS STILL IN EFFECT BETWEEN )SRAELAND 4HEREAREANUMBEROFSTEPSWHICHCAN THE0ALESTINIANS 4HEYALSOCONFORMTOWHATTHE BE TAKEN TOMAINTAIN OR EVEN ENHANCE)SRAELI !IX'ROUPCALLSAhRESCUEPHASEv CONSISTENTWITH SECURITY WHILE GREATLY IMPROVING CROSS BORDER 0HASE)OFTHE2OAD-AP)F)SRAELINDICATESA $ISENGAGEMENT THE0ALESTINIAN%CONOMYANDTHE3ETTLEMENTS

WILLINGNESSTOADJUSTTHEBORDERTRADEREGIME A AND THE EXPANSION OF TOURISM ORIENTED CRAFTS NUMBEROFOTHERINITIATIVESAREWORTHEXPLORING EMBROIDERY OLIVE WOOD PRODUCTS CERAMICS nINPARTICULARTHEPOSSIBLECREATIONOFDUTYAND ETC OLIVE OIL ANDAGRICULTURALPRODUCTS FOR TAX FREE %XPORT 0ROCESSING :ONES IN 'AZA AND DIRECT EXPORT TO THE 53 AND THE %5 UNDER THE7EST"ANK ANDONTHEBORDERWITH%GYPT PREFERENTIAL TRADE ARRANGEMENTS AND HIGH PARTICULARLY IFAGREEMENT CAN BE REACHED WITH VALUE ADDED GARMENTS AND APPAREL FOR NICHE %GYPTONTHEUNIMPEDEDMOVEMENTOFGOODSIN MARKETS 3IGNIFICANT RETOOLING AND ADJUSTMENT BONDTO%GYPTIANPORTS ISNEEDED THOUGH ANDDONORSSHOULDINTENSIFY PROGRAMSAIMEDATBUILDINGCOMPETITIVENESSAT $EVELOPING0ALESTINIAN%XPORTS THEFIRMANDTHEINDUSTRYLEVELS

0ALESTINIAN ECONOMIC RECOVERY WILL #REATINGA'ROWTH /RIENTED%CONOMIC DEPENDONRE BUILDINGCOMMERCIALCOOPERATION %NVIRONMENT WITH)SRAEL )SRAEL WILL REMAIN THE PRIMARY 0ALESTINIAN TRADING PARTNER FOR SOME TIME )FDONORFUNDSARETOBEPUTTOEFFECTIVE TO COME )SRAEL THE 0! AND DONORS SHOULD USE THE 0! NEEDS TO BUILD AN ENVIRONMENT ACCORDINGLYFOCUSONWHATCANBEDONETOREPAIR ATTRACTIVE TO INVESTORS!LTHOUGHTHE IMPACT SUCH LINKAGES TO INCLUDE LAUNCHING AN URGENT OF 0! EFFORTS WILL REMAIN LIMITEDUNLESS '/) REVIEW OF THE FEASIBILITY OF CURRENT AND FUTURE ADDRESSESTHERESTRICTIONSONINTERNALMOVEMENT INDUSTRIALZONES AND EXTERNAL TRADE THIS IS NO REASON TO DELAY IMPORTANTREFORMMEASURES 4HEBESTWAYTOACCESSTHIRDCOUNTRIES APPEARS TO LIE IN PARTNERSHIPS WITH )SRAELI )NVESTORSWILLCONTINUETOBEDETERRED COMPANIES 4HE BUSINESS MODELTHAT CARRIES AS LONG AS THE CURRENT CONFLICT PERSISTS4HIS THE MOST LOGIC TODAY AND WHICH BENEFITS BOTH PAPER IS NOT THE PLACE TO DISCUSS THE SPECIFICS 0ALESTINIAN AND )SRAELI ECONOMIES IS ONE IN OF 0ALESTINIAN SECURITY BUT IT IS CLEAR THAT THE WHICH )SRAELI COMPANIES SECURE MARKET ACCESS 0! NEEDS TO ESTABLISH CONTROLOFTHE DOMESTIC FORHIGH ENDPRODUCTSWHOLLYORPARTLYPRODUCED SECURITYENVIRONMENTASAPRECURSORTOECONOMIC BY 0ALESTINIAN ENTERPRISES %XAMPLES OF ACTUAL RECOVERY OR POTENTIAL COOPERATION INCLUDE PERISHABLE AGRICULTURAL PRODUCTS EXPORTED THROUGH )SRAELI 4HE HOLDING OF NATIONAL AND LOCAL OUTLETS FLOWERS STRAWBERRIES AND )SRAELI ELECTIONSWOULDRE LEGITIMIZETHE0!ANDRENEW OUTSOURCINGOF MANUFACTURING PROCESSES AND INVESTOR CONFIDENCE IN 0ALESTINIAN GOVERNANCE SERVICES IN ORDER TO MAINTAIN COMPETITIVENESS !LL PARTIES HAVE INSISTED FOR THE PAST TWO YEARS nFOREXAMPLEINTEXTILES SOFTWAREANDHIGH TECH THATDEMOCRACYLIESATTHEHEARTOFTHE0ALESTINIAN MANUFACTURING ORBACK OFFICEOPERATIONS REFORMPROCESS3OFAR THOUGH NEITHERLOCALNOR NATIONALELECTIONSHAVEBEENHELD ALTHOUGHBOTH !FUTURE0ALESTINIANSTATESHOULDASPIRE ARELONGOVERDUE4HERECENT0!DECISIONTOPRESS TO BUILD ITS OWN EXPORT BASE BUT IT WILL TAKE FORWARDWITHEARLYLOCALELECTIONSISAWELCOME TIMEBEFORESUCHEXPORTSMAKEANAPPRECIABLE STEP4HE 0! WITH DONORS IN SUPPORT SHOULD CONTRIBUTION TO LIVING STANDARDS 0ALESTINIAN SPEED UP EFFORTS TO DEVELOP THE REQUISITE LEGAL PRODUCTS TODAY HAVE LITTLE INDEPENDENT AND INSTITUTIONAL FRAMEWORKS AND TO COMPLETE PENETRATION IN INTERNATIONAL MARKETS #OST VOTERREGISTRATION&ORITSPART )SRAELWILLNEEDTO STRUCTURES n BOTH LABOR AND OTHER INPUTS FACILITATECAMPAIGNINGANDVOTINGSOTHATAVALID nAREHIGH COMPARED WITHTHOSE OF*ORDAN DEMOCRATICPROCESSISFEASIBLE AND %GYPT WHILE PRODUCTIVITY IS STILL POOR )T IS ALWAYS DANGEROUS TO SPECULATE ON WHERE -AINTAINING 0! FISCAL STABILITY IS ENTREPRENEURS WILL DISCOVER NEW OPPORTUNITIES ESSENTIAL 4HE 0!S DIFFICULT FISCAL SITUATION nBUTPOTENTIALSOURCESOFCOMPETITIVEADVANTAGE WASDESCRIBEDINPARAGRAPH ANDDONORSWILL INCLUDE TOURISM WITHAPOSSIBLE RE LAUNCHOF NEEDTOSTEPUPTHEIRBUDGETCONTRIBUTIONSLATER *ERICHO THE DEVELOPMENT OFTHE 'AZA COAST THIS YEAR TO ENSURE THAT SHORT TERM STABILITY IS 3TAGNATIONOR2EVIVAL )SRAELI$ISENGAGEMENTAND0ALESTINIAN%CONOMIC0ROSPECTS

MAINTAINED&ORITSPART THOUGH THE0!MUST USEDASCOLLATERAL EXPANDINGLEASINGANDADOPTING TAKEDECISIVESTEPSTOCONTAINTHEESCALATINGWAGE MORE CREATIVE METHODS FOR ASSESSING CREDIT RISK BILL -UCH HINGES ON THE 3ALARY #ONTAINMENT WOULDALLHELPEXPANDCREDITOPPORTUNITIES4HE 0LAN WHICHTHE #OUNCILOF -INISTERS IS 0ALESTINIAN -ONETARY !UTHORITY 0-! SHOULD COMMITTED TO PREPARING THIS MONTH /NCE AVOID SETTING ARBITRARY TARGETS FOR COMMERCIAL THE EMPLOYMENT MARKET RECOVERS MOREOVER A BANK LENDING ANDSHOULD GIVE BANKS GREATER MAJOR PROGRAM OFPUBLIC SECTOR RETRENCHMENT FLEXIBILITYTOOFFERNEWSERVICES WILLBEUNAVOIDABLE4HISINTURNREQUIRESTHAT THE 'ENERAL 0ERSONNEL#OUNCIL BE RESTRUCTURED 0! TRANSPARENCY HAS IMPROVED SOITCANPLAYACONSTRUCTIVEROLEINCIVILSERVICE CONSIDERABLY DURING THE LAST TWO YEARS REFORM NONETHELESS FURTHER MEASURES ARE NEEDED TO CREATECONFIDENCEAMONGINVESTORS THEPUBLIC ! RELATED AND WORRYING ISSUE IS THE AND DONORS /NE KEY OMISSION IS THE LACK OF NON VIABILITY OF THE 0!S CURRENT PENSIONS AN INDEPENDENT AUDIT FUNCTION .EW DRAFT SYSTEMS 7ITHOUT COMPREHENSIVE REFORM THE LEGISLATION PAVES THE WAY FOR ROOT AND BRANCH SYSTEMWILLGOBANKRUPTWITHINTWOYEARS4HE REFORMOFTHE'ENERAL#ONTROL)NSTITUTE BUTTHIS 0!ISNOWTACKLINGTHEPROBLEMWITHPURPOSE WILLTAKE YEARSTOBRINGRESULTSUNTILTHEN ANDA.ATIONAL0ENSION#OMMITTEEWILLSHORTLY THE0!SHOULDCONTRACTINTERNATIONALAUDITORSTO COMPLETE A DRAFT OF AN APPROPRIATE NEW LAWW FILLTHEGAP)NTHEINTERESTOFMINIMIZINGANTI !MAJORDONORCONTRIBUTIONWILLBENEEDEDTO COMPETITIVE BIAS THE 0! SHOULD MOVE AHEAD FINANCETHETRANSITIONALCOSTSOFTHENEWSYSTEM WITHLIQUIDATINGEQUITYHOLDINGSANDPRIVATIZING HOWEVERnPOSSIBLYUPWARDSOF53MILLION MOST PUBLIC ENTERPRISES 0UBLIC PROCUREMENT THROUGH ALSO DESERVES ATTENTION SINCE EXISTING LAWS ARE ONLYPARTIALLYOBSERVEDBY0!AGENCIES/THER ,EGAL JUDICIAL AND REGULATORY REFORM MEASURESTHATWOULDHELPDEEPENTRANSPARENCY HAS SLOWED CONSIDERABLY ! NUMBER OF LAWS ARE THE PUBLICATION OF THE TERMS OF EXCLUSIVE IMPORTANTTOTHEORDERLYCONDUCTOFCOMMERCIAL LICENSES ANDTHEADOPTIONOFCONFLICTOFINTEREST ACTIVITY HAVE BEEN PENDING FOR A CONSIDERABLE AND FINANCIAL DISCLOSURE PROVISIONS FOR SENIOR TIME THEY NEED FINALIZING AND PROVIDING GOVERNMENTOFFICIALS WITH ENABLING REGULATIONS/THER LAWS NEED REVISING4HESHORTCOMINGSOFTHE0ALESTINIAN $EVELOPING THE )NFRASTRUCTURE OF 'AZA AND COURTSSYSTEMAREWIDELYACKNOWLEDGEDANDHAVE THE7EST"ANK INPARTBEENCORRECTED BUTTHEREISANURGENT NEEDTOIMPROVETHEINFRASTRUCTUREOFTHECOURT ! WELL FUNCTIONING INFRASTRUCTURE SYSTEMANDGIVEPRIORITYTOTRAININGJUDGESAND IS IMPORTANT FROM A NUMBER OF PERSPECTIVES LAWYERSnASWELLASTOENSURETHEIMPLEMENTATION n TO IMPROVE THE QUALITY OF LIFE AND POPULAR OFCOURTDECISIONS4HESLOWPROGRESSINTHISVITAL CONFIDENCEINTHEFUTURE ANDTOBUILDASTABLE SECTORCANINPARTBEATTRIBUTEDTOLONG STANDING PLATFORM FOR PRIVATE ECONOMIC ACTIVITY !N COMPETITION BETWEEN THE 3UPREME *UDICIAL ADDEDBENEFITISTHESHORT TERMIMPACTOFPUBLIC #OUNCILANDTHE-INISTRYOF*USTICE ANDTHE0! WORKS PROGRAMS ON THE LOCAL CONSTRUCTION ISURGEDTORESOLVETHISISSUE INDUSTRYANDONEMPLOYMENT

-ORE LIBERAL ACCESS TO CREDIT WILL BE )F VIOLENCE IN 'AZA AND THE NEEDEDTOFUELANYRECOVERY#OMMERCIALBANK .ORTHERN 7EST "ANKABATES DONOR FINANCED LENDINGISCONSTRAINEDBYCOLLATERALREQUIREMENTS REHABILITATION AND DEVELOPMENT WORK WILL THAT RELY EXCESSIVELY ON LAND TITLES n SCARCE ACCELERATE SOMEWHAT n AS IT DID DURING THE COMMODITIESINTHE7EST"ANKAND'AZA WHERE COMPARATIVE CALM IN MID ! CEASE FIRE LESS THAN HALFTHE LAND IN THE 'AZA 3TRIPAND IN'AZAWOULDENCOURAGEDONORSTOREPAIRKEY ONLYABOUTOFTHELANDINTHE7EST"ANK COMPONENTS OF THE INFRASTRUCTURE NETWORK FOR IS REGISTERED !PART FROM A MAJOR LAND TITLING INSTANCE THE MAIN NORTH SOUTH HIGHWAY AND PROGRAM ALLOWINGAWIDERRANGEOFASSETSTOBE A NUMBER OF INTERNALURBAN ROADS AS WELLAS $ISENGAGEMENT THE0ALESTINIAN%CONOMYANDTHE3ETTLEMENTS

PRESSAHEADWITHBASICNEEDSPROJECTSDELAYEDBY AND DEVELOPMENT PRIORITIES )T IS APPROPRIATE INSECURITYnTHESCHOOLSREQUIREDTOABSORBNEW THATANYFURTHERRECONSTRUCTIONPLANNINGRELATED SCHOOLENTRANTS NEWHEALTHCLINICS THEEXTENSION TO THE $ISENGAGEMENT 0LAN SHOULD MESH WITH OFTHE WATER ANDELECTRICITY DISTRIBUTION WORKBEINGDONEBY-/0ONTHE0!-EDIUM NETWORKS ADESALINATIONPLANT PRIORITYSEWERAGE 4ERM0LAN ANDSOLID WASTE PROJECTS4HE RESTORATION OF FREER MOVEMENT IN THE NORTHERN 7EST "ANK '/)&ACILITATIONOF(UMANITARIANAND WOULD ENCOURAGE REHABILITATION OF DEGRADED $EVELOPMENT!SSISTANCE LOCALROADS*ENIN .ABLUS INTER MUNICIPALROADS INTHENORTHERNGOVERNORATES ASWELLASDELAYED 4HE $ISENGAGEMENT 0LAN RECOGNIZES SCHOOLANDHEALTHINFRASTRUCTUREPROJECTS THE IMPORTANCE OF SUSTAINEDFLOWS OF DONOR ASSISTANCE TO 'AZA AND THE 7EST "ANK 4HE 5NLESS DONORS PERCEIVE A FUNDAMENTAL 0LAN INDICATES THAT )SRAEL hVIEWS VERY FAVORABLY CHANGE IN 0ALESTINIAN ECONOMIC PROSPECTS CONTINUED ACTIVITY OF THE INTERNATIONAL THOUGH THEREISUNLIKELYTOBEMUCHhADDITIONAL HUMANITARIAN ORGANIZATIONS ANDTHOSE THAT MONEYv 4HEREISNOSHORTAGEOFVIABLEPROJECTS DEAL WITH CIVIL DEVELOPMENT WHICH AID THE AND MANY HAVE LONG SINCE BEEN IDENTIFIED AND 0ALESTINIAN POPULATION4HE 3TATE OF )SRAELWILL DESIGNED(OWEVER DONORSMAYNOTFEELINCLINED COORDINATEWITHTHEINTERNATIONALORGANIZATIONS TOSTEPUPFUNDINGLEVELSONTHEBASISOFREDUCED THE ARRANGEMENTS THAT WILL MAKE THIS ACTIVITY VIOLENCEALONE4HEYAREMORELIKELYTOREALLOCATE EASIERv 3UCH ASSURANCES HAVE HOWEVER BEEN FROMWITHINANANNUALAIDENVELOPEREMAINING GIVENBEFORE INTHE53MILLIONn53BILLIONRANGE $ONOR FRUSTRATION WITHOPERATIONAL 4HE RATIONALE FOR A MAJOR ADDITIONAL POLICY OF THE )SRAELI $EFENSE &ORCE )$& IS DONOR EFFORT IS A SCENARIO PROMISINGTRUE CONSIDERABLE /N .OVEMBER THE ECONOMICREVIVAL 5NDER SUCH A SCENARIO THE DONOR 4ASK &ORCE ON 0ROJECT )MPLEMENTATION MAIN CONSTRAINTS TO PUBLIC INVESTMENT WOULD 4&0) SENT TO THE 'OVERNMENT #OORDINATOR BE THE AVAILABILITY OF DONOR FINANCE AND0! FOR THE 4ERRITORIES A NOTE ASKING '/) TO TAKE IMPLEMENTATION CAPACITY 7E HAVE ESTIMATED STEPS TO IMPROVE THE OPERATING ENVIRONMENT THATAhMAJORNEWEFFORTvMIGHTBRINGINANOTHER WHICHhHASNOWDETERIORATEDTOADEGREEWHICH 53 BILLION OVER THE PERIOD FOR A MANY DONORS CONSIDER BOTH UNMANAGEABLE TOTALOF53BILLION )FSUCHATARGETCOULD AND UNACCEPTABLEx'/) HAS GIVEN MULTIPLE BEACHIEVED ONLYPARTOFTHESEFUNDSCOULDBE ASSURANCES FROM THE HIGHEST LEVELS THAT MADE AVAILABLE FOR INFRASTRUCTURE %VEN WITH DONOR ACTIVITY AND HUMANITARIAN AID WILL BE A RECOVERING ECONOMY UP TO 53 BILLION PER FULLY FACILITATED 4HESE ASSURANCES CONTRAST YEARWOULDNEEDTOBEDEVOTEDTOACOMBINATION DRAMATICALLYWITHTHEFACTSONTHEGROUNDv"Y OFBUDGETSUPPORT HUMANITARIANASSISTANCEAND ANDLARGE THISREMAINSTHECASETODAY THETRANSITIONTOANEWPUBLICPENSIONSSYSTEM 4HIS WOULD LEAVE ABOUT 53 MILLION EACH 4HE DESTRUCTION OF DONOR FINANCED YEAR FOR THE REHABILITATION AND DEVELOPMENT OF INFRASTRUCTUREASSETSISASERIOUSISSUEFORDONORS INFRASTRUCTURE AND FOR THE CREATION OF PUBLIC 7HILETHESCALEOFTHISISNOWSIGNIFICANTLYLESS ANDPRIVATECAPACITY THANIN DURING-AYAPPRECIABLE DAMAGE WAS DONE TO ECONOMIC INFRASTRUCTURE !NYDETAILEDASSESSMENTOF0ALESTINIAN IN'AZAROADSURFACES ELECTRICITYTRANSFORMERS RECONSTRUCTION AND DEVELOPMENT NEEDS WILL WATERMAINS THEENVIRONSOFTHE'AZA)NDUSTRIAL REQUIRE CAREFUL PRIORITIZATION 4HE PRECEDENT %STATE -UCHOFTHISHADBEENBUILTORREPAIRED FORTHISISTHE0!S3OCIO %CONOMIC3TABILIZATION WITH DONOR FUNDS $ONORS HAVE EXPRESSED 0LAN IN WHICHTHE -INISTRYOF RELUCTANCETOINVESTINMAJORNEWINFRASTRUCTURE 0LANNING-/0 DEMONSTRATEDACOMMENDABLE ASSETSASLONGASTHEYPERCEIVEARISKOFDAMAGE ABILITYTOTAILORPROGRAMSTOAVAILABLERESOURCES OR DESTRUCTION ANDTHIS CONTINUES TO INHIBIT AND TO BALANCE BUDGET SUPPORT HUMANITARIAN PRODUCTIVEINVESTMENT 4HE3ETTLEMENTS 4RANSFERRINGTHE!SSETS

4HE 1UARTET STATEMENT OF -AY 'AZA AND TODAYS BORDER MANAGEMENT REGIME NOTED THE IMPORTANCE OF DETERMINING MEANTHATCAREFULPLANNINGWILLBENEEDED 4HE hEQUITABLE AND TRANSPARENT ARRANGEMENTSv FOR 'AZAAQUIFER WHICHLIESBELOWTHE+ATIF"LOCK THEDISPOSALOFSETTLEMENTASSETS4HISSECTION ISTHEONLYWATERSOURCEIN'AZAANDISALREADY SUGGESTSHOWTHISMIGHTBEDONE OVER ABSTRACTED 4HE AQUIFER HAS A SUSTAINABLE YIELDOFABOUTMILLIONCUBICMETERSPERYEAR 4HE 3ETTLEMENTS AND4HEIR 0RODUCTIVE BUT SOME MILLION CUBIC METERS WAS USED 0OTENTIAL INWITHTHESETTLEMENTSCONSUMING MILLIONCUBICMETERSOFTHIS 4OAVOIDFURTHER ! TOTAL OF SETTLEMENTS ARE AT ISSUE OVER EXPLOITATIONOFTHEAQUIFER THE0!SHOULD INTHE$ISENGAGEMENT0LANnIN'AZAAND EXPLOREPURCHASINGIRRIGATIONWATERFROM)SRAEL INTHE7EST"ANKn SEE-APS &ORILLUSTRATIVEPURPOSES THOUGH ONECANPREDICT THAT TRIPLINGTHE AREA UNDER IRRIGATION WOULD 4HE SETTLEMENTS IN 'AZA OCCUPY YIELD GROSS OUTPUT OF SOME 53 MILLION OFTHE LAND AND BY $ECEMBER EQUIVALENT TO ABOUT OF 'AZAS '$0 CONTAINED A POPULATION OF IN 4HISWOULDNOTBEREALIZEDATONCE ANDASSUMES APPROXIMATELY TO HOUSES 3OME THAT THE AGRICULTURAL CAPITAL WOULD BE HANDED SQUARE KILOMETERS HAVE BEEN ALLOCATED OVER INTACT GREENHOUSES PUMPS IRRIGATION TO AGRICULTURE AND SQUARE METERS SYSTEMS TREES ETC THATTHELANDCANBEPUTINTO ARE OCCUPIED BY BUILDINGS4HEREIS A SMALL PRODUCTIONWITHOUTUNDUEDELAY THATTHEBORDER INDUSTRIAL ZONE INSIDE THE +ATIF 3ETTLEMENT CARGOREGIMEISALTEREDnANDTHATMARKETSCANBE "LOCKn.EVEH$EKALIM WHERE ENTERPRISES FOUNDFORTHEPRODUCE PROVIDE EMPLOYMENT FOR )SRAELIS AND 0ALESTINIANS 4HE $ISENGAGEMENT 0LAN ALSO CALLS FOR THE EVACUATION OF FOUR SMALL SETTLEMENTS !LTHOUGH SITUATED ON SOME OF THE INTHENORTHERN7EST"ANK 4HESESETTLEMENTS BEST WATEREDANDRICHEST ARABLE LAND IN 'AZA HOUSEAROUNDPEOPLE ANDAREhDORMITORY THE SETTLEMENTS USE LITTLE OF IT AND PRODUCE COMMUNITIESv 4HEY DO NOT CONTAIN ANY AT WELL BELOW THE AREAS POTENTIAL $ATA ON AGRICULTURAL OR INDUSTRIAL ENTERPRISES AND THEIR THE ECONOMIC OUTPUT OFTHE SETTLEMENTS NEEDS PRODUCTIVEPOTENTIALISNEGLIGIBLEnPARTICULARLY FURTHERANALYSIS"YONEACCOUNT THOUGH THE IFTHEHOUSESWERETOBEDISMANTLEDBY'/) 'AZASETTLEMENTSPRODUCEC53MILLIONIN GROSSOUTPUTPERANNUM EQUIVALENTTOONLY (ANDOVERANDTHE2OLEOFTHE)NTERNATIONAL OFTHE'$0OFTHERESTOFTHE'AZA3TRIP #OMMUNITY -OST OF THIS 53 MILLION IS DERIVED FROM AGRICULTURE n WITHONLY OFTHE SQUARE '/) BELIEVES THAT THE 0! MAY BE KILOMETERS OFAGRICULTURAL LAND IN USE OF UNWILLINGORUNABLETOSECURETHESETTLEMENTS FARMING LOTS APPROVED ARE IDLE THE 'AZA LEADINGTOLOOTINGANDDESTRUCTION ORTOSEIZURE SETTLERSALSOFARMSQUAREKILOMETERSOFLAND OF HOUSES ANDOTHER ASSETS BYMILITANTS 4HE LEASEDFROMTHE)SRAEL,ANDS!UTHORITY $ISENGAGEMENT0LANACCORDINGLYSTATESTHAThIN GENERAL HOUSESBELONGINGTO SETTLERSAND OTHER %XPANSIONOFTHEAREAUNDERIRRIGATION SENSITIVESTRUCTURESSUCHASSYNAGOGUESWILLNOT SEEMS ATTRACTIVE BUT THE SCARCITY OF WATER IN BELEFTBEHINDvnBUTTHATTHEhWATER ELECTRICITY $ISENGAGEMENT THE0ALESTINIAN%CONOMYANDTHE3ETTLEMENTS

SEWAGE AND COMMUNICATIONS INFRASTRUCTURES 4HE !D (OC ,IAISON #OMMITTEE WILLBELEFTINPLACEv)NRELATIONTOPRODUCTIVE !(,# COULDACTAShSPONSORvFORTHEHANDOVER ASSETS THE0LANINDICATESTHAThTHE3TATEOF)SRAEL PROCESS4HE!(,#ISATECHNICALFORUMOFKEY WILL ASPIRE TO TRANSFER OTHER STRUCTURES SUCH DONORS THE MEMBERSHIP OF WHICH INCLUDES ALL AS INDUSTRIAL AND AGRICULTURAL FACILITIES TO AN THE1UARTETPARTIES)TISCHAIREDBY.ORWAY AND INTERNATIONALTHIRDPARTYTHATWILLUSETHEMFOR THE7ORLD"ANK SERVES AS ITS 3ECRETARIAT4HE THEBENEFITOFTHE0ALESTINIANPOPULATIONv hTECHNICALPARTNERvTOTHE0! ALONGWITHTHE0! ITSELF COULDPROVIDEREGULARREPORTSTOTHISBODY '/) HAS INDICATED THAT IT WILL NOT NEGOTIATETHEWITHDRAWALPROCESSWITHTHE0! 0REPARINGFOR(ANDOVER BUTHASSIGNALEDAWILLINGNESSTOCOORDINATETHE PROCESS AT A TECHNICAL LEVEL EITHER DIRECTLY OR 7ITHOUT DETAILED INFORMATION ON THE THROUGHATHIRDPARTY4HEREAREOBVIOUSBENEFITS SETTLEMENT ASSETS THEIR TRANSFER AND DISPOSAL TOCOORDINATION WHICHWOULDGIVEACCESSTOTHE CANNOT BE PROPERLY PLANNED '/) SHOULD INFORMATIONNEEDEDTOPLANTHEORDERLYTRANSFER MAKE RELEVANT INFORMATION AVAILABLE TO THE 0! ADMINISTRATIONANDDISPOSALOFTHEASSETS OR THE THIRD PARTY WELL IN ADVANCE OF THE FIRST EVACUATIONS 3UCHINFORMATION SHOULD INCLUDE 4HE $ISENGAGEMENT 0LAN PROPOSES DETAILEDDATAONPUBLICANDPRIVATEINFRASTRUCTURE THAT SETTLEMENT ASSETS BE HANDED OVER TO ANDLANDUSE ATHIRD PARTY BUT CUSTODIANSHIPOFTHIS TYPE RAISES MANY QUESTIONS &IRST IT IS UNCLEAR THAT '/) SHOULD ENSURE THAT DEPARTING ATHIRDPARTYHASTHELEGALAUTHORITYTORECEIVE SETTLERS PRESERVE ANY ASSETS INTENDED FOR ADMINISTERANDDISPOSEOFTHESEASSETS!MORE HANDOVER TO THE 0ALESTINIANS 4HIS MIGHT BE PRESSING QUESTION IS HOW A CUSTODIAN COULDIN DONEBYCONDITIONINGGOVERNMENTCOMPENSATION REALITY SECURE THE ASSETS AGAINST DESTRUCTION ONDELIVERINGTHEASSETSTO'/)INTACT LOOTINGORSQUATTINGINTHEEVENTOFABREAKDOWN OF0ALESTINIAN AUTHORITY 4HIRD A CUSTODIAN 4HE0! INITSTURN NEEDSTOMOBILIZE WOULDHAVETOACCEPTASIGNIFICANTREPUTATIONAL WITHOUTDELAY!DEQUATEPREPARATIONWILLINVOLVE RISK n EVEN A TOKEN PASS THROUGHROLE WOULD A CONSIDERABLE NUMBER OF STEPS n CREATING A NOT ABSOLVE THE CUSTODIAN OF BLAME FOR ANY MECHANISMTOOVERSEETHEPROCESS DETERMINING SUBSEQUENTMISUSEOFTHEASSETS THE LEGAL STATUS OF THE LANDS AND ORGANIZINGA TRANSPARENT CLAIMS PROCEDURE AGREEING ON THE ! MORE PRACTICALALTERNATIVE TO USEOFTHESETTLEMENTAREASANDASSETS ARRANGING CUSTODIANSHIP IS FOR A THIRD PARTY TO ACT IN FOR ANY INTERIM USE PENDING DISPOSAL AND CLOSE SUPPORT OF THE 0! 4HIS WOULD BE MORE CONDUCTING A PUBLIC INFORMATION CAMPAIGN COMPATIBLEWITHTHEVIEWSOFTHE0! WHICHSEES 4HISPREPARATORYPERIODWOULDTAKEATLEASTT SIX ITSELFASTHERIGHTFULCUSTODIANOFTHERELINQUISHED MONTHS ASSETS)NORDERTOENSUREASMOOTHTRANSITION A THIRDPARTYCOULDSERVEASAhTECHNICALPARTNERvTO 2ECEIVING ADMINISTERINGANDDISPOSING THE0!)NTHISCAPACITY ITCOULDASSISTWITH AND OF THE SETTLEMENT ASSETSIS A TASK WHICH THE MONITOR THEASSETTRANSFERANDDISPOSALPROCESS 0! IS IN PRINCIPLE CAPABLE OF HANDLING )T AND COULD INTERFACE BETWEEN THE 0! AND '/) SHOULD BE REMEMBEREDTHAT THE 0! ASSUMED A AS NECESSARY 4HIRD PARTY INVOLVEMENT OF THIS BROADER RANGE OF FUNCTIONS OVER A MUCH LARGER KIND WOULD HELP CREATE PUBLIC CONFIDENCE THAT AREA IN AT A TIME WHEN IT HAD ALMOST SETTLEMENTASSETSWOULDNOTBEMISAPPROPRIATED NO CAPACITY .ONETHELESS THE UNPRECEDENTED "Y LEAVINGALIGHT FOOTPRINT RATHER THAN NATUREOFTHISCHALLENGEANDITSVISIBILITYMEAN ASSUMINGDIRECTRESPONSIBILITY THEINTERNATIONAL THAT HIGH QUALITY 0! PERFORMANCE IS ESSENTIAL COMMUNITYWOULDSTRENGTHEN NOTDISPLACETHE 4HE PRINCIPAL QUESTION FOR THE 0! IS WHETHER 0! THIS IS BEST ASSURED USING EXISTING INSTITUTIONAL STRUCTURES ORWHETHERITMAKESSENSETOESTABLISH ASPECIALIZEDAGENCYTOMANAGETHEPROCESS 3TAGNATIONOR2EVIVAL )SRAELI$ISENGAGEMENTAND0ALESTINIAN%CONOMIC0ROSPECTS

0RACTICAL CONSIDERATIONS POINT TO THE RESTITUTION REQUIRES A RETURN OF PROPERTY OR CREATIONOFASPECIALAGENCY 4HETASKINVOLVESA WHETHER THE 0! HAS THE OPTION OF PAYING MULTITUDEOFTRANSACTIONSACROSS0!INSTITUTIONAL COMPENSATION !PUBLICINFORMATIONCAMPAIGN BOUNDARIES AND WILL BE VERY LABORIOUS 4HE WILL BE PARTICULARLY IMPORTANT TO ENSURE EXISTENCE OF A SINGLE RESPONSIBLE AGENCY WOULD CONFIDENCEINTHELANDCLAIMSPROCESS CLARIFY ACCOUNTABILITY SIMPLIFY MONITORINGAND PROVIDEASINGLEPOINTOFFOCUSFORTHEWORKOF 4HE STATUS OF SETTLEMENT LANDS IS THETHIRD PARTYhTECHNICALPARTNERv COMPLICATED !CCORDINGTOTHE0ALESTINIAN,AND !UTHORITY ABOUT OFTHELANDONWHICH 4HE LEGAL FRAMEWORK ESTABLISHING THESETTLEMENTSAREBUILTINTHE'AZA3TRIPWAS THESPECIALAGENCYNEEDSTOBEINPLACEBEFORE DECLARED @PUBLIC LAND DURING THE /TTOMAN THE EVACUATION OF THE FIRST SETTLEMENT 3UCH PERIOD (OWEVER SOME INDIVIDUALS CULTIVATED AN AGENCY IS BEST CREATED BY THE 0ALESTINIAN SOME OF THIS LAND 0URSUANT TO THE /TTOMAN ,EGISLATIVE#OUNCILANDSHOULDPROVIDEITWITH ,AND #ODE WHICH REMAINED IN EFFECT DURING REGULARREPORTS)TSHOULDBESTRICTLYTEMPORARYIN THE "RITISHAND%GYPTIAN ADMINISTRATIONS NATUREINOTHERWORDS ITSMANDATESHOULDEXPIRE THESE INDIVIDUALS COULD ASSERT OWNERSHIP AFTER ON A PRE DETERMINED DATE )TS RESPONSIBILITIES TEN YEARS OFCULTIVATION ANDTHEIR DESCENDANTS SHOULD INCLUDE ENSURING AN EFFICIENT CLAIMS MAY NOW COME FORWARD )N THE 7EST "ANK PROCESS RECEIVING AND MANAGING SETTLEMENT LAND REGISTRATION HAS BEEN RESTRICTED AND ASSETS PENDING THEIR DISPOSAL COORDINATING '/) HAS DECLARED A CONSIDERABLE QUANTITY OF PREPARATIONS FOR DISPOSALAND IMPLEMENTING LAND PRIVATELY HELDBUT UNREGISTERED TO BE THE DISPOSAL PROCESS !FTER THE DISPOSAL OF THE @PUBLIC nSUBSEQUENTLY USING IT TO CREATE )SRAELI ASSETSOFAPARTICULARSETTLEMENTISCOMPLETE THE SETTLEMENTS!SIGNIFICANTNUMBEROFINDIVIDUAL AGENCYWOULDHAVENOFURTHERROLEORAUTHORITY LANDCLAIMS SHOULD BE ANTICIPATEDAGAINST THERE AND THE REGULAR MUNICIPAL AND 0! EVACUATEDPROPERTIESINTHE7EST"ANK STRUCTURESWOULDASSUMEJURISDICTION!DEQUATE COORDINATIONANDCOOPERATIONWITH0!MINISTRIES $ISPOSINGOFTHE3ETTLEMENT!SSETS ANDMUNICIPALITIESWOULDNEEDTOBESTRUCTURED INTOTHEMODUSOPERANDII OFTHEAGENCY 4HERE IS SERIOUS CONCERN AMONG 0ALESTINIANS INTERNATIONALOBSERVERSAND'/) !N IMPORTANT ASPECT OF THE 0!S THATSETTLEMENTASSETSMAYFINDTHEIRWAYTOTHOSE RESPONSESHOULDBECAREFULINVOLVEMENTOFTHE WITHPOWERORCONNECTIONS 4HISWOULDSERIOUSLY MUNICIPALITIES 4HOSEAREASWHICHTHE0!DOES DAMAGETHE0!SREPUTATION!WELL PREPAREDAND NOT DECIDE TO RETAIN AS @PUBLIC LAND WOULD IN WELL PUBLICIZEDPOLICYBASEDONCLEARECONOMIC TIME COME UNDER MUNICIPAL JURISDICTION )N ANDSOCIALGOALSANDONRATIONALPHYSICALPLANS THE +ATIF"LOCK IN PARTICULAR THIS GIVES RISE WILLDOMUCHTOAVOIDSUCHANEMBARRASSMENT TO A NEED FOR TECHNICAL AND FISCAL SUPPORT TO THE MUNICIPALITIES CONCERNED n TO ENSURE THAT )NDECIDINGTHEBESTUSEOFSETTLEMENT SETTLEMENTINFRASTRUCTUREROADS ELECTRICITYGRIDS ASSETS THE 0! MAY WISH TO TAKE FIVE FACTORS ANDSEWAGESYSTEMS ISWELL INTEGRATED ANDTHAT INTO ACCOUNT FIRST PRIVATE CLAIMS ON THE THEAQUIFERISPROPERLYPROTECTED RELINQUISHED LAND SECOND THE TRADE OFF BETWEEN PRODUCTIVE AND SOCIAL USES OF SPACE #LAIMSON,AND THIRD ENVIRONMENTAL CONSTRAINTS FOURTH THE USEFULNESS OF THE INFRASTRUCTURE LEFT !TRANSPARENTLANDCLAIMSADJUDICATION BEHIND FOR 0ALESTINIAN NEEDS AND FINALLY PROCESS WILL BE ESSENTIAL )T IS RECOMMENDED PLANNING FOR THE LONGER TERM WITH PARTICULAR THAT THE SPECIAL AGENCY SHOULD RECEIVE AND ATTENTION TO ENVIRONMENTAL CONSIDERATIONS ADJUDICATE PROPERTY CLAIMS !CCORDINGLY THE LAW ESTABLISHING THE AGENCY SHOULD DETAIL THE !SSETSCANUSEFULLYBEBROKENINTOTHREE PROCEDURES TO BE USED ANDSHOULD DEFINE THE CATEGORIES PUBLIC INFRASTRUCTURE PRODUCTIVE RIGHTS OF FORMER OWNERS INCLUDINGWHETHER ASSETS AND HOUSES 0UBLIC INFRASTRUCTUREE ROADS $ISENGAGEMENT THE0ALESTINIAN%CONOMYANDTHE3ETTLEMENTS

ELECTRICITYANDWATERINSTALLATIONS ISINPRINCIPLE SHOULDBEAVOIDED%VENWITHADVANCEPLANNING BEST HANDED OVER TO THE RESPONSIBLE 0! THERE WILL BE LAGS BETWEEN EVACUATION AND MUNICIPAL AUTHORITIES 0RODUCTIVE ASSETSS LAND ASSET DISPOSAL AND THIS WILL CREATE PRESSURE TO INDUSTRIAL INFRASTRUCTURE AND EQUIPMENT CAN ALLOWTEMPORARYUSEOFVACANTHOUSESANDLAND BE SOLD TO INVESTORS USING TRANSPARENT AUCTION n NOT LEAST TO PREVENT SQUATTINGAND LOOTING METHODS UNLESS THE LAND IS NEEDED FOR PUBLIC )NTERNATIONAL EXPERIENCE FROM THE "ALKANS IN PROJECTSORFORGREENAREASTOURISM(OUSESS AREA PARTICULAR SHOWS THAT TEMPORARY OCCUPATION MOREDIFFICULTPROPOSITION MAYBEIMPOSSIBLETOREVERSEPEACEFULLY)NSTEAD OF THIS A MAXIMUM EFFORT SHOULD BE MADE TO )F THE HOUSES ARE LEFT STANDING THEIR DISPOSEOFTHEASSETSQUICKLY DISPOSAL NEEDS CAREFULTHOUGHT )T IS WORTH NOTING THE MANY POTENTIAL CONTROVERSIES 3ECURINGTHE3ETTLEMENTS ASSOCIATEDWITHDISPOSINGOFSETTLEMENTHOUSES ANDTHE CONSEQUENT NEED FOR OPEN DISCUSSION 7HETHER THE SETTLEMENT ASSETS CAN BE ANDACLEARADVANCEPLAN PROTECTEDAFTERTHEIREVACUATIONDEPENDSONTHE GENERAL SECURITY SITUATION 0UT ANOTHER WAY IF ¾ )FTHEHOUSESWERE GIVENAWAY THEREWOULD CURRENT POLITICALSOCIAL PROCESSES BREAK DOWN BE MANY MORE CLAIMANTS THAN PROPERTIES THERE IS LITTLE THAT CAN BE DONE TO SECURE THE AND INTENSE PRESSURES ON THE DISTRIBUTING SETTLEMENTS)FTHEOVERALLSECURITYENVIRONMENT PARTYCOULDBEGUARANTEED IS POSITIVE THE INTEGRITY OFTHE SETTLEMENTS IS LIKELY TO BE RESPECTED AND PROBLEMS WOULD ¾ )F THE HOUSES WERE RENTED AT FULL ECONOMIC HOPEFULLYBELIMITEDTOISOLATEDINCIDENTSOFTHEFT COST THISWOULDRESTRICTPOTENTIALTENANTSTO ORSQUATTING)TSHOULDBENOTEDTHATTHEREARE THE BETTER OFF n DOUBTLESS CAUSING POPULAR MANYEMPTYHOUSINGUNITSIN'AZA#ITYDESPITE RESENTMENT GIVEN THE LARGE NUMBER OF THE SCALE OF HOUSE DEMOLITIONS AND INTERNAL FAMILIESTHATHAVELOSTTHEIRHOMESIN'AZA DISPLACEMENT THEY HAVE NOT BEEN SUBJECT TO TAKEOVERBYSQUATTERS ¾ !LTERNATIVELY HOUSES COULD BE RENTED AT SUBSIDIZED COST BUT THIS WOULD AGAIN CAUSE 4HE BEST FORM OF PROTECTION OFTHE ALLOCATION PROBLEMS AS WELL AS RISKING SETTLEMENTS IS AN OPEN PROCESS OF PUBLIC DILAPIDATION AND BURDENING THE 0! WITH CONSULTATION RESULTING IN CLEAR PLANS AND MAINTENANCE COSTS BOTH RENTAL OPTIONS PROCEDURES !S POINTED OUT ALREADY THOUGH IT WOULDINVOLVETHEVEXINGBUSINESSOFPUBLIC WILLBEIMPORTANTTOMINIMIZETHETIMEBETWEEN HOUSINGADMINISTRATION THETRANSFERANDTHEDISPOSALOFTHEASSETS

¾ !CLEANERSOLUTIONMIGHTBETO SELLTHEHOUSES 0UBLICCONSULTATIONANDTHEPROVISION /NE OPTION HERE IS SALE AT SUBSIDIZED COSTT OFINFORMATIONAREALSOESSENTIALTOTHESUCCESS WITHELIGIBILITYRESTRICTEDTOSPECIFICGROUPS OFTHETRANSFERANDDISPOSITIONPROCESS &ORTHIS THE POOR OR THOSE WHO HAVE LOST THEIR PROCESSTOSUCCEED THE0!MUSTNOTBERELUCTANT HOUSES ORREFUGEES (EREAGAIN ALLOCATION TOENGAGEWITHTHEPUBLICINSTEAD ITSHOULDSEE ANDDILAPIDATIONISSUESCOULDARISE!NOTHER THIS AS A CHANCE TO RE ASSERT LEADERSHIP SHOW OPTIONWOULDBETOSELLTHEHOUSESONTHEOPEN SENSITIVITY TO PUBLIC CONCERNS AND DEMONSTRATE MARKET 4HIS WOULD FAVOR THE WEALTHIER TECHNICAL COMPETENCE #IVIL SOCIETY MUNICIPAL BUTSALEPROCEEDSCOULDBEPUTINTOAFUND GOVERNMENTS ANDTHE0,#ALLHAVEESSENTIALROLES TO BENEFIT THE POOR AND DISADVANTAGED TOPLAY)TWILLALSOBEIMPORTANTTODISABUSETHE ! VARIANT OF THIS WOULD BE USE OF THE SALE PUBLICOFSOMEOFTHEMOREFANCIFULEXPECTATIONS PROCEEDS TO SIMULTANEOUSLY hDENSIFYv THE THATEVACUATIONOFTHESETTLEMENTSMAYGIVERISE HOUSINGBLOCKSWITHLOW COSTUNITS TO ,OCAL COMMUNITIES IN PARTICULAR NEED TO BESEENASKEYPARTNERSTHEIRSUPPORTCANHELP !LLOWINGTEMPORARYOCCUPATIONOFVACATED ENSURETHATLOCALLEADERSHELPPROTECTTHEASSETS HOUSES AND LAND IS A TEMPTING OPTION BUT AGAINSTMISAPPROPRIATIONORDESTRUCTION .EXT3TEPS

4HIS PAPER SHOWS THAT WITHOUT A ¾ !DETAILEDREVIEWOFTHESETTLEMENTASSETSAND COMMITTED'/)EFFORTTOFACILITATEMOVEMENT THEIRPOTENTIALUSES TOINCLUDEAREVIEWOFTHE AND TRADE THE 0ALESTINIAN ECONOMYWILLNOT LEGALSTATUSOFTHELANDINTHESETTLEMENTS RECOVER 4HIS HAS AN IMPORTANT BEARINGON THE PROPOSED 1UARTET WORK PROGRAM IN THE ¾ $ESIGN WORK ON THE STRUCTURE FUNCTIONS ECONOMIC SPHERE7ITHOUT PREJUDICE TO THE STAFFINGAND SUPPORT NEEDS OF A SPECIAL0! CRITICAL NEED FOR 0ALESTINIAN SECURITY REFORM AGENCYY TO BE CHARGED WITH MANAGING THE WE WOULD PROPOSE THAT THE 1UARTET FOCUS ON TRANSFER AND DISPOSAL OF SETTLEMENT ASSETS A DIALOGUE ON WHAT CAN BE DONE TO ADDRESS ANDTHEREVIEWANDADJUDICATIONOFCLAIMS CLOSUREANDKICK STARTTHE0ALESTINIANECONOMY TO INCLUDE FRAMING THE NECESSARY ENABLING 4HIS PAPER ARGUES THAT IMPORTANT STEPS CAN BE LEGISLATION TAKENTHATWILLMAKEASERIOUSDIFFERENCE WITHOUT RISKING)SRAELSSECURITY 4HESE PREPARATORY STUDIES SHOULD BE ACCOMPANIED BY A JOINT 0! DONOR EFFORT TO 4HERE ARE A NUMBER OF DISCRETE TASKS DEFINE A TIME BOUND MONITORABLE AGENDA OF WHICH CAN USEFULLY BE LAUNCHED AT ONCE AND TOP PRIORITY 0ALESTINIAN REFORMS 4HISMERITS WHICHWILLFEEDINTOANYSUCHDIALOGUE4HESECAN AHIGHERLEVELOFENERGYBYBOTHTHE0!ANDTHE BEHANDLEDUNDERTHEUMBRELLAOFTHE!(,#AND DONORSTOTHISIMPORTANTTOPIC COULDBEFACILITATEDBYTHE7ORLD"ANKINITSROLEAS 3ECRETARIAT IFSOREQUESTED INCLOSECOLLABORATION )T IS SUGGESTEDTHAT !(,# MEMBERS WITH '/) THE 0! ANDTHE DONOR COMMUNITY CONVENE AROUNDTHIS INITIAL ASSESSMENT SHORTLY IN ORDER TO AGREE ON NEXT STEPS AND ¾ !N IN DEPTH REVIEW OF WAYS TO FACILITATE RESPONSIBILITIES !MONG THE AGENDA ITEMS AT BORDER CARGO MANAGEMENT TO INCLUDE AN SUCHAMEETINGMIGHTBETHEFOLLOWING APPRAISALOFINFRASTRUCTURE AND TECHNOLOGY REQUIREMENTS ¾ 4HE ESTABLISHMENT OF A WORK PROGRAM FOR THECOMINGMONTHS WITHAGREEDASSIGNMENTS ¾ ! RAPID REVIEW OF THE FEASIBILITY OF ANDEXPECTATIONS INDUSTRIAL ESTATESEXPORT PROCESSING ZONES UNDER AN IMPROVED BORDER MANAGEMENT ¾ ! REVIEW OFPROGRESS UNDER THE NEW7ORLD REGIME !MONGTHE ESTATES AND ZONES THAT "ANK ADMINISTERED2EFORM4RUST&UND AND MERIT CONSIDERATION ARE THE EXISTING ESTATES ADISCUSSIONOFADDITIONAL0!BUDGETSUPPORT AT%REZAND+ARNI THOSEPROPOSEDNEAR*ENIN NEEDSFORTHEREMAINDEROF4HISCOULD AND4ULKAREMINTHE7EST"ANK ANDONEON USEFULLY INCLUDE A REVIEW OF THE STATUS OF THE%GYPTIANBORDER THE0ALESTINIANPENSIONREFORMPROCESSAND DONORFINANCINGREQUIREMENTS ¾ ! STUDY OF 0ALESTINIAN EXPORT POSSIBILITIES UNDERAREFORMEDBORDERREGIME TOINCLUDE )F COMMITMENT BYTHE '/) 0! AND ATIME BOUNDPROGRAMOF0ALESTINIANPOLICY THE 1UARTET TO CREATING A PROPER ENABLING MEASURESNEEDEDTOFACILITATEEXPORTGROWTH ENVIRONMENT FOR ECONOMIC DEVELOPMENT IS ASWELLASADISCUSSIONOFTHEADEQUACYAND FORTHCOMING A FULL RECONSTRUCTION ASSESSMENT UPTAKEOFCURRENT0ALESTINIANSEXPORTQUOTAS OFTHETYPEMENTIONEDINTHE-AY1UARTET ANDOFOTHERPOTENTIALEXPORTINCENTIVES !CTION0LANWOULDBEVERYUSEFUL4HE!CTION $ISENGAGEMENT THE0ALESTINIAN%CONOMYANDTHE3ETTLEMENTS

0LAN PROPOSES THAT 5.3#/ AND THE 7ORLD "ANK SUPPORT THE 0! IN CARRYING OUT SUCH AN ASSESSMENT /NE WAY TO PROCEED WOULD BE FOR THEDONORSTOSUPPORTTHEEFFORTSOFTHE-INISTRY OF0LANNING AS PART OF OR AS A SUPPLEMENT TO ONGOING WORK ON A 0ALESTINIAN -EDIUM 4ERM 0LAN4HISCOULDTHENLEADTOADONORFUNDING CONFERENCE ATWHICHITWOULDBEIMPORTANTTO DEFINEAhQUICK HITTINGvPROGRAMOFINVESTMENTS .EITHERAGENERALASSESSMENTNORAHIGH PROFILE DONORMEETINGHAVEMUCHADDEDVALUEINTODAYS STAGNANT ECONOMIC ENVIRONMENT HOWEVER $ONORS ARE ALREADY PROVIDING HIGH LEVELS OF EMERGENCY HUMANITARIAN AND RECONSTRUCTION ASSISTANCE AND APPEAR DISINCLINED TO DO MUCH MORE WITHOUT A QUANTUM SHIFT IN 0ALESTINIAN ECONOMICPROSPECTS !NNEX *UNE#ABINET$ECISION ON$ISENGAGEMENT

%XCERPTFROM3TATEMENTBY#ABINET3ECRETARY )MMEDIATELY AFTER THE ENDOFTHE PREPARATION 9ISRAEL-AIMON *UNE WORK THE 'OVERNMENT WILL CONVENE TO MAKE DECISIONSABOUTTHECONTINUEDEXECUTIONOFTHE 4HE #ABINET HAS CONTINUED TO DISCUSS THE PLAN4HE0RIME-INISTERSTRESSEDTHATONCETHE $ISENGAGEMENT0LANANDHASDECIDEDASFOLLOWS DECISIONISTAKENALLOFTHEMINISTERSHAVETOSTAND BEHINDIT4HE0RIME-INISTERTHANKED-INISTER 4HE #ABINET APPROVEDA-ODIFIED 4ZIPPI,IVNI HIS"UREAU#HIEF$UBI7EISSGLASS $ISENGAGEMENT 0LAN !PPENDIX ! BUT THIS #ABINET 3ECRETARY 9ISRAEL -AIMON $IRECTOR DECISION DOES NOT AMOUNT TO AN EVACUATION OF 'ENERALOFTHE -INISTRYOF *USTICE !HARON SETTLEMENTS !BRAMOWITZ #HAIRMANOFTHE.ATIONAL3ECURITY #OUNCIL 'IORA %ILAND AND THE MINISTERS WHO 4HE#ABINETHASAPPROVEDTHEPREPARATORY SPENTDAYSANDNIGHTSTOFINDANAGREEDFORMULA WORKDETAILEDIN!PPENDIX# FORTHEAPPROVALOFTHEPLAN

!FTER THE ENDOFTHE PREPARATION WORK !PPENDIX! THE #ABINET WILL RECONVENE TO HOLD A SEPARATE -ODIFIED$ISENGAGEMENT0LAN +EY0RINCIPLES DISCUSSIONANDDECIDEWHETHERORNOTSETTLEMENTS SHOULDBEEVACUATED WHICHSETTLEMENTSANDAT ) "ACKGROUND $IPLOMATICAND3ECURITY WHATPACE CONSIDERINGTHECIRCUMSTANCESATTHAT 3IGNIFICANCE TIME 4HE 3TATE OF )SRAEL IS COMMITTED TO THE PEACE 4HE-ODIFIED$ISENGAGEMENT0LANAPPROVED PROCESS ANDENDEAVORS TO REACH AN AGREED ASPERABOVEWASPRECEDEDBYANEXCHANGEOF ARRANGEMENT BASED ON THE VISION PRESENTED BY LETTERSBETWEEN530RESIDENT'EORGE7"USH 530RESIDENT'EORGE7"USH AND0RIME-INISTER!RIEL3HARONON!PRIL 4HE LETTER FROM THE 53 0RESIDENT IS 4HE3TATEOF)SRAELBELIEVESITMUSTTAKEACTION PRESENTEDHEREIN TO IMPROVE THE CURRENT SITUATION 4HE 3TATE OF )SRAEL HAS REACHEDTHE CONCLUSION THAT THERE IS !TTACHEDARE!PPENDICES!AND#!PPENDIX!n CURRENTLYNOPARTNERONTHE0ALESTINIANSIDEWITH -ODIFIED$ISENGAGEMENT0LAN +EY0RINCIPLES WHOMPROGRESSCANBEMADEONABILATERALPEACE !PPENDIX # n &ORMAT OF 0REPARATIONS FOR THE PROCESS 'IVEN THIS A MODIFIED DISENGAGEMENT -ODIFIED$ISENGAGEMENT0LAN PLANHASBEENDRAWNUP BASEDONTHEFOLLOWING CONSIDERATIONS !TTHECONCLUSIONOFTHEDISCUSSIONONTHEMATTER THE 0RIME -INISTER NOTED THAT IN TWO SESSIONS 4HE STALEMATE EMBODIED IN THE CURRENT THE#ABINETDISCUSSEDTHEAFOREMENTIONEDISSUE SITUATION IS DAMAGING IN ORDER TO BREAKTHE FORHOURSITWASADEEPANDCOMPREHENSIVE STALEMATE THE 3TATE OF )SRAEL MUST INITIATE A DISCUSSION ONE OF THE MOST IMPORTANT THE PROCESS THAT IS NOT DEPENDENT ON COOPERATION #ABINET HAS HAD IN RECENT YEARS 4HE 0RIME WITHTHE0ALESTINIANS -INISTERADDEDTHATTHEINTENTIONISTOCOMPLETE THE IMPLEMENTATION OF THE 0LAN BY THE END OF 4HEAIMOFTHEPLANISTOBRINGABOUTABETTER ,IKEWISE HE INTENDS TO COMPLETE THE SECURITY DIPLOMATICECONOMICANDDEMOGRAPHIC NECESSARYPREPARATIONWORKBY-ARCH REALITY $ISENGAGEMENT THE0ALESTINIAN%CONOMYANDTHE3ETTLEMENTS

)N ANY FUTURE PERMANENT ARRANGEMENT )MMEDIATELY AFTER THE COMPLETION OF THIS THERE WILL BE NO )SRAELI PRESENCE IN THE 'AZA PREPARATION WORK THERE WILL BE A 'OVERNMENT 3TRIP/NTHEOTHERHAND ITISCLEARTHATSOME DISCUSSION TO DECIDE ON THE EVACUATION OF PARTS OF *UDEA AND 3AMARIA INCLUDING KEY SETTLEMENTSINCONSIDERATIONOFTHECIRCUMSTANCES CONCENTRATIONS OF *EWISH SETTLEMENTS CIVILIAN ATTHATTIMEnWHETHERTOEVACUATEORNOT AND COMMUNITIES SECURITYZONESANDAREASINWHICH WHICHSETTLEMENTS )SRAELHASAVESTEDINTEREST WILLREMAINPARTOF THE3TATEOF)SRAEL 4HESETTLEMENTSWILLBESPLITINTOTHEFOLLOWING FOURGROUPS 4HE 3TATE OF )SRAEL SUPPORTS THE EFFORTS OF THE 5NITED 3TATES WHICH IS WORKING ALONG 'ROUP! -ORAG .ETZARIM +FAR$AROM WITHTHEINTERNATIONALCOMMUNITY TOPROMOTE 'ROUP" 4HEFOURSETTLEMENTSINNORTHERN THE PROCESS OF REFORM THE ESTABLISHMENT OF 3AMARIA'ANIM +ADIM 3A .URAND(OMESH INSTITUTIONS AND IMPROVING THE ECONOMIC AND 'ROUP # 4HE 'USH +ATIF BLOCK OF WELFARE CONDITIONS OFTHE 0ALESTINIAN PEOPLE SETTLEMENTS SO THAT A NEW 0ALESTINIAN LEADERSHIP CAN ARISE 'ROUP$ 4HESETTLEMENTSINTHENORTHERN PROVINGITSELFCAPABLEOFFULFILLINGITSOBLIGATIONS 'AZA3TRIP!LEI3INAI $UGITAND.ISANIT UNDERTHE2OAD-AP )T IS NOTED THAT AFTER THE END OF THE 4HE WITHDRAWAL FROM THE 'AZA 3TRIPAND AFOREMENTIONED PREPARATIONS THE 'OVERNMENT FROM THE NORTHERN PART OF 3AMARIA WILLREDUCE WILL CONVENE PERIODICALLY TO DECIDE ON THE FRICTIONWITHTHE0ALESTINIANPOPULATION QUESTIONOFWHETHERTHEREWILLBEANYEVACUATION ORNOT REGARDINGEACHOFTHEGROUPSSEPARATELY #OMPLETION OFTHE PLAN WILLNEGATE THE VALIDITYOFANYCLAIMSAGAINST)SRAELREGARDINGITS 4HE CONTINUATION OF THE PROCESS AS RESPONSIBILITYFORTHE0ALESTINIANPOPULATIONOF DESCRIBED ABOVE AND BELOW WILL BE SUBJECT THE'AZA3TRIP TO THE DECISIONS THE 'OVERNMENT MAKES AS STATED IN SECTION ABOVE AND CARRIED OUT IN 4HE PROCESS IN THIS PLAN DOES NOT DETRACT ACCORDANCE WITHTHE CONTENTS OFTHE DECISIONS FROM RELEVANT EXISTINGAGREEMENTS BETWEEN )SRAELANDTHE0ALESTINIANS4HERELEVANTSECURITY 4HE'AZA3TRIP ARRANGEMENTSWILLREMAININFORCE 4HE 3TATE OF )SRAELWILL WITHDRAW FROM )NTERNATIONAL SUPPORT FOR THIS PROCESS IS THE 'AZA 3TRIP INCLUDING )SRAELI SETTLEMENTS WIDESPREAD AND IMPORTANT 4HIS SUPPORT IS ANDWILLREDEPLOYOUTSIDETHEAREAOFTHE3TRIP VITAL IN ENSURINGTHAT THE 0ALESTINIANS FULFILL 4HE METHODOFTHE WITHDRAWAL WITHTHE THEIROBLIGATIONSINTERMSOFFIGHTINGTERRORAND EXCEPTION OF A MILITARY PRESENCE IN THE AREA IMPLEMENTING REFORMS IN ACCORDANCE WITHTHE ADJACENTTOTHEBORDERBETWEEN'AZAAND%GYPT ROAD MAP /NLY THEN WILLTHE SIDES BE ABLE TO THE 0HILADELPHI 2OUTE IS DETAILED BELOW RESUMENEGOTIATIONS /NCE THE MOVE HAS BEEN COMPLETED THERE )) +EY0OINTSOFTHE0LAN WILLBENOPERMANENT)SRAELIMILITARYPRESENCEIN THEEVACUATEDTERRITORIALAREAOFTHE'AZA3TRIP !4HE0ROCESS *UDEAAND3AMARIA 4HE NECESSARY PREPARATIONS WILL BE UNDERTAKENFORTHEIMPLEMENTATIONOFTHEPLAN 4HE 3TATE OF )SRAEL WILL WITHDRAW FROM INCLUDINGADMINISTRATIVEWORKTODETERMINETHE NORTHERN 3AMARIA FOUR SETTLEMENTS 'ANIM CRITERIA DEFINITIONS ESTIMATESANDPREPARATIONOF +ADIM 3A .UR AND (OMESH AS WELL AS ALL NECESSARYLEGISLATION PERMANENT MILITARY INSTALLATIONS IN THE AREA ANDWILLREDEPLOY OUTSIDE THE EVACUATED AREA 3TAGNATIONOR2EVIVAL )SRAELI$ISENGAGEMENTAND0ALESTINIAN%CONOMIC0ROSPECTS

/NCETHEMOVEHASBEENCOMPLETED THERE "4HE7EST"ANK WILLBENOPERMANENT)SRAELIMILITARYPRESENCEIN THEAREA !FTERTHEEVACUATIONOFTHENORTHERN3AMARIA SETTLEMENTS THEREWILLBENOPERMANENTMILITARY 4HEMOVEWILLPROVIDE0ALESTINIANTERRITORIAL PRESENCEINTHATAREA CONTIGUITYINTHENORTHERNPARTSOF3AMARIA 4HE 3TATE OF )SRAEL RESERVES THE BASIC 4HE 3TATE OF )SRAEL ALONG WITHTHE RIGHT TO SELF DEFENSE WHICH INCLUDES TAKING INTERNATIONAL COMMUNITY WILL HELP IMPROVE PREVENTIVEMEASURESASWELLASTHEUSEOFFORCE THE TRANSPORTATION INFRASTRUCTURE IN *UDEA AND AGAINSTTHREATSORIGINATINGINTHEAREA 3AMARIA WITHTHEGOALOFPROVIDINGCONTINUOUS TRANSPORTFOR0ALESTINIANSIN*UDEAAND3AMARIA -ILITARY ACTIVITY WILL REMAIN IN ITS CURRENT FRAMEWORK IN THE REST OF THE 7EST "ANK 4HE 4HEMOVEWILLMAKEITEASIERFOR0ALESTINIANS 3TATE OF )SRAEL WILL IF CIRCUMSTANCES ALLOW TO LIVE A NORMAL LIFE IN *UDEA AND 3AMARIA CONSIDERREDUCINGITSACTIVITYIN0ALESTINIANCITIES AND WILL FACILITATE ECONOMIC AND COMMERCIAL ACTIVITY 4HE3TATEOF)SRAELWILLWORKTOREDUCETHE NUMBEROFC HECKPOINTSTHROUGHOUTTHE7EST"ANK 4HEWITHDRAWALPROCESSISSLATEDTOENDBY THEENDOF )6 -ILITARY)NFRASTRUCTUREAND)NSTALLATIONS INTHE'AZA3TRIPANDTHE.ORTHERN3AMARIA "4HE3ECURITY&ENCE 2EGION

4HE3TATEOF)SRAELWILLCONTINUETOCONSTRUCTTHE !LLWILLBEDISMANTLEDANDEVACUATED EXCEPTFOR SECURITY FENCE IN ACCORDANCE WITH THE RELEVANT THOSETHATTHE3TATEOF)SRAELDECIDESTOTRANSFER CABINETDECISIONS)NDECIDINGONTHEROUTEOFTHE TOANAUTHORIZEDBODY FENCE HUMANITARIANCONSIDERATIONSWILLBETAKEN INTOACCOUNT 6 4HE.ATUREOF3ECURITY!SSISTANCETOTHE 0ALESTINIANS ))) 4HE3ECURITY2EALITYAFTERTHE%VACUATION 4HE 3TATE OF )SRAEL AGREES THAT IN COORDINATION !4HE'AZA3TRIP WITHIT CONSULTING ASSISTANCEANDTRAININGWILL BEPROVIDEDTO0ALESTINIANSECURITYFORCESFORTHE 4HE 3TATE OF )SRAEL WILL MONITOR AND PURPOSEOFFIGHTINGTERRORANDMAINTAININGTHE SUPERVISETHEOUTERENVELOPEONLAND WILLHAVE PUBLIC ORDER 4HE ASSISTANCE WILL BE PROVIDED EXCLUSIVECONTROLOFTHE'AZAAIRSPACE ANDWILL BY !MERICAN "RITISH %GYPTIAN *ORDANIAN OR CONTINUE ITS MILITARY ACTIVITY ALONG THE 'AZA OTHEREXPERTS ASWILLBEAGREEDUPONWITH)SRAEL 3TRIPSCOASTLINE 4HE3TATEOF)SRAELSTRESSESTHATITWILLNOTAGREE TOANYFOREIGNSECURITYPRESENCEIN'AZAORTHE 4HE 'AZA 3TRIP WILL BE COMPLETELY 7EST"ANKWITHOUTITSCONSENT DEMILITARIZED OF ARMS BANNED BY CURRENT AGREEMENTSBETWEENTHESIDES 6) 4HE"ORDER!REABETWEENTHE3TRIPAND %GYPTTHE0HILADELPHI2OUTE 4HE 3TATE OF )SRAEL RESERVES THE BASIC RIGHT TO SELF DEFENSE WHICH INCLUDES TAKING 4HE 3TATE OF )SRAELWILL CONTINUE TO MAINTAIN PREVENTIVEMEASURESASWELLASTHEUSEOFFORCE MILITARY PRESENCE ALONG THE BORDER BETWEEN AGAINSTTHREATSORIGINATINGINTHE'AZA3TRIP THE 'AZA 3TRIP AND %GYPT THE 0HILADELPHI ROUTE 4HIS PRESENCE IS AN ESSENTIAL SECURITY REQUIREMENT4HEPHYSICALWIDENINGOFTHEROUTE WHERETHEMILITARYACTIVITYWILLTAKEPLACEMAYBE NECESSARYINCERTAINAREAS $ISENGAGEMENT THE0ALESTINIAN%CONOMYANDTHE3ETTLEMENTS

4HE POSSIBILITY OF EVACUATING THE AREA WILL BE )8 4HE!CTIVITYOFTHE)NTERNATIONAL#IVILIAN CONSIDERED LATER ON 4HIS EVACUATION WOULD /RGANIZATIONS BE CONDITIONED AMONGOTHER FACTORS ON THE SECURITYREALITYANDONTHELEVELOFCOOPERATION 4HE 3TATE OF )SRAEL VIEWS VERY FAVORABLY BY %GYPT IN CREATING AN ALTERNATIVE CREDIBLE CONTINUED ACTIVITY OF THE INTERNATIONAL ARRANGEMENT HUMANITARIANORGANIZATIONSANDTHOSETHATDEAL WILLCIVILDEVELOPMENT WHICHAIDTHE0ALESTINIAN )FANDWHEN THE CONDITIONS PERMIT THE POPULATION EVACUATION OFTHE AREA THE 3TATE OF )SRAELWILL BEWILLINGTOCONSIDERTHEPOSSIBILITYOFSETTING 4HE 3TATE OF )SRAEL WILL COORDINATE WITH THE UPANAIRPORTANDASEAPORTINTHE'AZA3TRIP INTERNATIONAL ORGANIZATIONS THE ARRANGEMENTS SUBJECT TO ARRANGEMENTS AGREED UPON WITHTHE THATWILLMAKETHISACTIVITYEASIER 3TATEOF)SRAEL 4HE3TATEOF)SRAELSUGGESTSTHATANINTERNATIONAL 6)) 2EAL%STATE MECHANISM SUCH AS THE !(,# BE SET UP IN COORDINATION WITH )SRAEL AND INTERNATIONAL )NGENERAL HOUSESBELONGINGTOTHESETTLERS AND BODIES THATWILLWORKTODEVELOPTHE0ALESTINIAN OTHERSENSITIVESTRUCTURESSUCHASSYNAGOGUESWILL ECONOMY NOTBELEFTBEHIND4HE3TATEOF)SRAELWILLASPIRE TO TRANSFER OTHER STRUCTURES SUCH AS INDUSTRIAL 8 %CONOMIC!RRANGEMENTS ANDAGRICULTURAL FACILITIES TO AN INTERNATIONAL THIRDPARTYTHATWILLUSETHEMFORTHEBENEFITOF )N GENERAL THE ECONOMIC ARRANGEMENTS THAT THE0ALESTINIANPOPULATIONTHATISNOTENGAGEDIN ARE CURRENTLY IN EFFECT BETWEEN )SRAELAND TERRORISM THE 0ALESTINIANS WILL REMAIN VALID 4HESE ARRANGEMENTSINCLUDE AMONGOTHERTHINGS 4HE%REZINDUSTRIALZONEWILLBETRANSFERREDTOAN AGREED UPON0ALESTINIANORINTERNATIONALBODY ! 4HEMOVEMENTOFGOODSBETWEENTHE'AZA 3TRIP *UDEAAND3AMARIA )SRAELANDFOREIGN 4HE3TATEOF)SRAELALONGWITH%GYPTWILLEXAMINE COUNTRIES THE POSSIBILITY OF SETTING UP A JOINT INDUSTRIAL ZONE ON THE BORDER BETWEEN )SRAEL %GYPT AND " 4HEMONETARYREGIME THE'AZA3TRIP # 4HETAXATIONARRANGEMENTSANDTHECUSTOMS ENVELOPE 6))) )NFRASTRUCTUREAND#IVILIAN !RRANGEMENTS $ 0OSTALAND COMMUNICATIONS ARRANGEMENTS

4HE WATER ELECTRICITY SEWAGE AND % 4HE ENTRYOF WORKERS INTO )SRAELIN COMMUNICATIONS INFRASTRUCTURES WILL BE LEFT IN ACCORDANCEWITHTHEEXISTINGCRITERIA PLACE )NTHELONGRUN ANDINACCORDANCEWITHTHE)SRAELI !S A RULE )SRAELWILL ENABLE THE CONTINUED INTEREST IN ENCOURAGING0ALESTINIAN ECONOMIC SUPPLYOFELECTRICITY WATER GASANDFUELTOTHE INDEPENDENCE THE 3TATE OF )SRAEL ASPIRES TO 0ALESTINIANS UNDER THE EXISTING ARRANGEMENTS REDUCE THE NUMBER OF 0ALESTINIAN WORKERS ANDFULLCOMPENSATION ENTERING)SRAEL ANDEVENTUALLYTOCOMPLETELYSTOP THEIRENTRANCE4HE3TATEOF)SRAELWILLSUPPORT 4HE EXISTING ARRANGEMENTS INCLUDING THE THEDEVELOPMENTOFEMPLOYMENTSOURCESINTHE ARRANGEMENTS WITHREGARD TO WATER ANDTHE 'AZA 3TRIP AND IN THE 0ALESTINIAN AREAS IN THE ELECTROMAGNETICAREA WILLREMAINVALID 7EST"ANK BYINTERNATIONALBODIES 3TAGNATIONOR2EVIVAL )SRAELI$ISENGAGEMENTAND0ALESTINIAN%CONOMIC0ROSPECTS

8) 4HE)NTERNATIONAL#ROSSING0OINTS

! 4HE INTERNATIONAL #ROSSING 0OINT BETWEEN THE'AZA3TRIPAND%GYPT

4HEEXISTINGARRANGEMENTSWILLREMAININFORCE

)SRAEL IS INTERESTED IN TRANSFERRING THE CROSSING POINT TO THE hBORDER TRIANGLE v SOUTH OF ITS CURRENT LOCATION 4HIS WILL BE DONE IN COORDINATION WITH THE %GYPTIAN 'OVERNMENT4HISWILLALLOWTHEEXPANSION OFTHEHOURSOFACTIVITYATTHECROSSINGPOINT

"4HE)NTERNATIONAL#ROSSING0OINTSBETWEEN *UDEAAND3AMARIAAND*ORDAN

4HEEXISTINGARRANGEMENTSWILLREMAININFORCE

8)) 4HE%REZ#ROSSING0OINT

4HE %REZ CROSSING POINT WILL BE MOVED INTO THETERRITORYOFTHE3TATEOF)SRAELACCORDINGTOA TIMETABLETHATWILLBEDETERMINEDSEPARATELY

8))) 3UMMARY

4HEGOALISFORTHEIMPLEMENTATIONOFTHEPLAN TOBRINGABOUTANIMPROVEMENTINTHESITUATION ANDABREAK FROM THE CURRENT STAGNATION )F AND WHEN THE 0ALESTINIAN SIDE SHOWS EVIDENCE OF ITS WILLINGNESS AND ABILITY TO ACTUALLY TAKE ACTION TO FIGHT TERRORISM A FULL CESSATION OF TERROR AND VIOLENCE AND THE CARRYING OUT OF REFORMSACCORDINGTOTHE2OAD-AP ITWILLBE POSSIBLETORETURNTOTHETRACKOFDISCUSSIONSAND NEGOTIATIONS !NNEX 'ATEWAYS

4HE$ISENGAGEMENT0LANINDICATESACONDITIONAL 'AZA 7EST"ANK WILLINGNESSTOSETUPASEAPORTANDAIRPORTIN'AZA &OR)SRAEL SECURITYISOFPRIMECONCERN3ECURITY 4HE hSAFE PASSAGEv HAS BEEN INOPERATIVE SINCE CAN BE ASSUREDIF FUNDS ARE MADE AVAILABLE FOR /CTOBER 4HEREINSTATEMENTOFSECURED APPROPRIATE TECHNOLOGY AND INFRASTRUCTURE AND CONVOYSWOULDAPPEARTOBETHEBESTAPPROACH IFRIGOROUSINSPECTIONnIFNECESSARY USINGTHIRD #ONVOYSCOULDCONSISTOFTRACTOR TRAILERSCARRYING PARTIESnISASSURED SEALED CONTAINERS FOLLOWING APPROPRIATE PRE SHIPMENT INSPECTION AND SCANNING %VENTUALLY #URRENT)NTERNATIONAL'ATEWAYS ITMIGHTBEPOSSIBLETORELAXTHEUSEOFCONVOYS !LTERNATIVESTO)SRAELIPORTSAND RELYINGINSTEADONELECTRONICMEANSTOMONITOR "EN'URION!IRPORT CONTAINER MOVEMENTS EG '30 LINKED TRANSMITTERS OR TRANSPONDERS WITHOBLIGATORY 5NDERCURRENTRESTRICTIONS THEONLYINTERNATIONAL REPORTINGSTATIONSALONGTHEROUTE GATEWAY AVAILABLE FOR 'AZA AS AN ALTERNATIVE TO EXITING THROUGH +ARNI TO !SHDOD OR "EN !'AZA3EA0ORT 'URION IS THE LAND ROUTE THROUGH2AFAH4HIS WOULD PROVIDE ACCESS TO 0ORT 3AID %GYPT FOR #ONSTRUCTION OF A FULL SCALE 3EA 0ORT IN 'AZA TRANS SHIPMENTS TO AND FROM %UROPE &OR THIS FINANCED BY SEVERAL %UROPEAN DONORS BEGAN ROUTE TO BE FEASIBLE SECURE ANDEFFICIENT CARGO IN!UGUSTBUTWASSUSPENDEDIN/CTOBER CLEARANCEFACILITIESANDPROCESSESWOULDHAVETO 0HASEWASEXPECTEDTOCOSTAROUND BE DEVELOPED AT 2AFAH AND A PROTOCOL AGREED MILLION 4HE SITE WAS NOT OPTIMALLY LOCATED WITH%GYPT FOR THE UNIMPEDED MOVEMENT OF DUETOLIMITEDOPTIONS ANDTHEREWASEXTENSIVE GOODSINBONDDIRECTTOFROMTHETHREE%GYPTIAN DEBATEABOUTITSAPPROPRIATESIZE PORTS ALONGWITHFAVORABLETREATMENTFORTRANSIT CARGOMOVINGTHROUGHTHEIRFACILITIES !NOTHERPOSSIBILITYWOULDBETODEVELOPA2OLL /N 2OLL /FF 2O2O FACILITY TO CONNECT WITH !PRINCIPALALTERNATIVETOTRANSITTHROUGH)SRAEL THENEW3UEZ#ANAL#ONTAINER4ERMINALAT0ORT FOR THE 7EST "ANK IS BY LANDTHROUGH*ORDAN 3AIDFORTRANS SHIPMENTTOALLDESTINATIONS4HE WITHCONNECTIONSTOTHE'ULFAND!SIATHROUGH PROPOSED SERVICE TO 0ORT 3AID WOULD INITIALLY THE PORT OF!QABA FOR SEA FREIGHT AND 1UEEN INVOLVE SMALL 2O2O VESSELS LANE !LIAAIRPORTFORAIRFREIGHT4HELANDCONNECTIONS METERS 4HREEVESSELSOPERATINGATALOADED TO TO !QABA WOULD RUN THROUGH +ING (USSEIN EMPTYRATIOOFWOULDPROVIDEANANNUAL !LLENBY "RIDGE OR 0RINCE -OHAMMED!DAM EFFECTIVE CAPACITY OF LOADED 4%5S "RIDGE)MPORTERSCURRENTLYUSETHEFIRSTBRIDGE !2O2OFACILITYWOULDFUNCTION INEFFECT LIKEA WHILETHESECONDISUSEDFOREXPORTS PRINCIPALLY LANDCROSSINGFORCONTAINERSMOVINGINANDOUT CITRUS AND FRESH PRODUCTS #URRENTLY ONLY A OF'AZA4HE2O2OFACILITYSHOULDBEPRIVATELY SMALLVOLUMEOF0ALESTINIANEXTERNALTRADEPASSES OPERATED AND COULDPROVIDE FOR THE TRANSPORT THROUGH*ORDAN&ORTHISGATEWAYTOBEAVIABLE OF ALL NON BULK SHIPMENTS IN CONTAINERS USING ALTERNATIVE TO EXPORT VIAA THE )SRAELI PORTS THE LOWBOY TRAILERS BUT THIS ARRANGEMENT WOULD BORDER CROSSING PROCEDURES NEED CONSIDERABLE MEANTHATESSENTIALCOMMODITIESSUCHASGRAINS IMPROVEMENT AND TRANSIT AGREEMENTS AND NEW FERTILIZERS ANDCEMENTWOULDHAVETOBESHIPPED HANDLING ARRANGEMENTS FOR 0ALESTINIAN CARGO INBAGGEDFORM NEEDTOBEWORKEDOUTWITH*ORDAN 3TAGNATIONOR2EVIVAL )SRAELI$ISENGAGEMENTAND0ALESTINIAN%CONOMIC0ROSPECTS

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THECLAIMSAFTERWHICHTHE,AND!UTHORITYWOULDREGISTERASUCCESSFULCLAIMANTASANOWNER nTHOUGHFOCUSANDSPEEDAREMORELIKELYTOBEACHIEVEDIFTHISCAPACITYISEMBEDDEDINTHESPECIAL AGENCY /WNERSHIPSHOULDHAVEBEENREGISTEREDINTHE,AND2EGISTRY BUTTHE"RITISHDIDNOTCARRY OUTCOMPREHENSIVELANDREGISTRATION ANDMANYLANDUSERSDIDNOTREGISTER%GYPTIANEFFORTSAT LANDREGISTRATIONWEREPREEMPTEDBYTHEWAROF-ANYOFTHEDESCENDENTSOFTHESEUSERSARE UNDERSTOODTOBEINPOSSESSIONOFDOCUMENTSMOSTLYTAXRECORDS THATPROVECULTIVATIONOFTHE LANDFORTHEREQUIREDPERIOD)NTHESECASESTHE0!MAYCONSIDERTHELANDTOBEPRIVATELYOWNED ENTITLINGTHEFORMERUSERSHEIRSTOOBTAINOWNERSHIPRIGHTSONCETHEPROPERTYISVACATED /NLYABOUTPERCENTOFTHELANDINTHE7EST"ANKISREGISTERED !CCORDINGTO5.27!S0RESS2ELEASEOF-AYSEEWWWUNORGUNRWANEWS IN 2AFAHALONE HOUSESHOUSING PEOPLE HAVEBEENDEMOLISHEDORDAMAGEDBEYOND REPAIRSINCE3EPTEMBERnINCLUDINGBETWEEN-AY PEOPLE &OR'AZA ASAWHOLE THETOTALNUMBEROFHOUSESDESTROYEDDAMAGEDBEYONDREPAIRASOF-AY IS HOUSING PEOPLE ANDFORTHE7EST"ANK OVERDURINGTHEFIRSTTHREEYEARSOF THE INTIFADAA 5.27!DATA )NLIGHTOFRECENT)$&OPERATIONSIN2AFAH ITHASBEENSUGGESTEDTHAT)NTERNALLY$ISPLACED 0ERSONSMANYOFWHOMAREREFUGEES SHOULDBEGIVENPREFERENTIALACCESSTOTHEHOUSINGUNITS &ROMANINTERNATIONALLEGALPERSPECTIVE ANYMOVEMENTOF)$0SORREFUGEESWOULDNEEDTOBE CARRIEDOUTONAVOLUNTARYBASIS THEREBYAVOIDINGTHEISSUEOFFORCEDRESETTLEMENT4HEPOLITICSOF PROVIDINGREGISTEREDREFUGEESWITHHOUSINGINANEVACUATEDSETTLEMENTAREALSOHIGHLYCOMPLEX 4HE1UARTETS'AZA$ISENGAGEMENT!CTION0LAN OF-AYPROPOSESTHATBY*ULYh7ORLD"ANK 5.3#/ INCOOPERATIONWITHTHEDONORCOMMUNITY ASSESSRECONSTRUCTIONANDDEVELOPMENT NEEDSFOR'AZAANDPARTOF7EST"ANKASSESSTHEVALUEOFRESOURCESTOBELEFTBEHINDBYDEPARTING SETTLERS AND POSSIBLE USES INCLUDING A MECHANISM TO RULE ON POSSIBLE 0ALESTINIAN CLAIMS OF OWNERSHIP ANDASSESSOVERALLRECONSTRUCTIONNEEDSIN'AZA INCLUDINGAIRPORTSEAPORT INDUSTRIAL ESTATES OTHERINFRASTRUCTUREvnWITHTHEASSESSMENTTOBEFOLLOWEDUPBYAh-INISTERIAL LEVEL !(,##ONSULTATIVE'ROUPMEETINGOFALLDONORSTOGENERATENEEDEDASSISTANCEANDCOORDINATE PROJECTPRIORITIESvIN3EPTEMBER Stagnation or Revival? Israeli Disengagement and The Palestinian Economic Prospects

Map 1a Gaza Strip: Settlement Evacuation - Groups A, C and D

Map 1b Northern West Bank Settlement Evacuation - Groups B

Map 2 West Bank: Road rehabilitation projects proposed to the international community to assist Palestinian transportation contiguity

Map 3a North West Bank: Road rehabilitation projects proposed to the international community to assist Palestinian transportation contiguity

Map 3b Middle West Bank: Road rehabilitation projects proposed to the international community to assist Palestinian transportation contiguity

Map 3c South West Bank: Road rehabilitation projects proposed to the international community to assist Palestinian transportation contiguity

Map 4 West Bank and Gaza: Pre 2000 Checkpoints and Planned Safe Passage

Map 5a Gaza Closures

Map 5b West Bank Closures

MAP 1a MAP 1b MAP 2 MAP 3a MAP 3b MAP 3c MAP 4 MAP 5a MAP 5b