Memorandum submitted by the Portland Trust

 

14 March 2008

 

Summary

 

1. The Portland Trust believes that there are a number of deliverable initiatives to boost the private sector in the Palestinian Territory despite the current political and economic crisis. Our three priorities are to promote a $1 billion Affordable Housing Scheme In the West Bank, identify approximately 40 private sector projects to be presented at the Palestine Investment Conference in May 2008 and develop a political risk insurance product to cover private sector investment in the Palestinian Territory. The UK Government can play a vital role in these projects and we ask the Committee to use its report to encourage HMG to take an active role. We also wish to recommend to the committee that it calls for a full breakdown and disbursement of donor pledges made in Paris and supports the new EC funding mechanism PEGASE.

 

Introduction to the Portland Trust

 

2. The Portland Trust is a private not-for-profit British foundation that was founded in 2003 by Sir Ronald Cohen (Chairman) and Sir Harry Solomon (vice-Chairman). Our CEO is David Freud, former Vice Chairman of Investment Banking for UBS and is the third trustee. Sir Martin Gilbert, the historian, is the fourth trustee. The Portland Trust has offices in London, Ramallah (headed by Samir Hulileh, former Palestinian Cabinet Secretary) and Tel Aviv (headed by Brig. Sen. (res.) Elval Gilady).

 

3. The Portland Trust works with local and international partners to promote private sector initiatives in Israel and the Palestinian Territory. Our projects focus on the following areas: physical and financial infrastructure, entrepreneurship and trade facilitation. Additionally, we publish a monthly Palestinian Economic Bulletin. This and other publications are available to download on our website: www.portlandtrust.org

 

The role of economics in the peace process

 

4. The Portland Trust believes that economics can play an essential role, alongside the political process, in promoting peace and stability between Palestinians and Israelis. The private sector is crucial in carrying out this role. We have developed a framework

of initiatives to boost the activities of the Palestinian private sector. A detailed list of our activities is found in the annex at the end of this submission.

 

5. Last year we published a study "Economics in Peace Making: Lessons from Northern Ireland" which provides a compelling case for how economics can help to resolve seemingly intractable political problems.

 

 

 

Context for activities in 2008

 

6. The ongoing political situation has created an economic crisis for Palestinians. Since 1999 Palestinians have seen a 40 per cent reduction in income.[1] Almost 30 per cent[2] of the Palestinian population are unemployed and over 56 per cent[3] of the Palestinian population are living in poverty. In Gaza almost 80 per cent4[4] of the population are now living in poverty.

 

7. Our November 2007 Palestinian Economic Bulletin reported that the private sector in Gaza is at an all time low. The closure policy was introduced in June following the takeover by Hamas and the Israeli and international refusal to deal with Hamas until it recognised the three Quartet conditions. 95 per cent of factories are now closed and the production of garment and textiles, furniture, metal and engineering, soft drinks and paper has stopped. Our December Bulletin included a feature on the Gazan private sector based on interviews with various representatives. It reported bare shelves, inflation of 200 per cent for some products and a belief that the situation has caused lasting damage to the private sector. With the closure of the borders investors have lost confidence, exporters have lost hard-won market shares and many manufacturers have relocated to Egypt, Jordan or the West Bank. Employment figures show that the public sector now accounts for over 40 per cent of employment in Gaza.

 

8. Statistics suggest that the outlook in the West Bank is more optimistic. The private sector accounts for over 70 per cent of all employment.[5] Our March Bulletin reported that over 53 per cent of all business owners and managers expect a medium-term improvement in the situation. Pre-tax profits improved in 2007. While recent events may dampen this optimism one recent media report highlighted the improving atmosphere in RamalIah and details some substantial investments by successful Palestinian firms.[6]

 

Progress since Paris

 

9. The Portland Trust was encouraged by the level of pledges at the Paris donors conference and the prominence given to investment and the private sector in the Palestinian Reform and Development Plan (PRDP). Both these factors seem to have been a contributing factor to the increased business confidence in the West Bank.

 

10. We need to make the most of the opportunity offered from the internationally endorsed PRDP. We feel that the committee could helpfully use their report to call for the full breakdown and disbursement of pledges at the AHLC meeting in London in May.

 

 

11. The design of the new EC PEGASE mechanism allows for monies pledged for investment to be channelled to the private sector. We ask the committee to use their report to highlight the potential offered by the new mechanism.

 

Palestine Investment Conference

 

12. A key part of the follow-up to Paris donor conference is the Palestine Investment Conference scheduled for mid-May. The Portland Trust is supporting the work of the Palestinian Prime Minister and the conference Chief Executive by preparing a portfolio of investment projects to present at the conference.

 

13. It is important to recognise the vulnerability of these projects to political and security issues and the necessity of addressing risk factors. With this in mind, and in an attempt to encourage investment under current conditions, we are working with others to develop a political risk insurance programme. We believe that this is critical to secure the level of private sector investment required.

 

The UK Government

 

14. The Portland Trust is in regular contact with the UK government (DFID, FCO, Cabinet Office and HMT). The Prime Minister is a keen advocate of the role of economics in conflict resolution. The UK Government set out this approach in their September 2007 report "Economic aspects of peace In the Middle East".

 

15. As part of our work for the Palestine Investment Conference we have had initial discussions with the Export Credit Guarantee Department (ECGD), DFID and HMT on the provision of risk insurance for specific projects in the Palestinian Territory. At present, ECGD does not have a mandate to operate in the Palestinian Territory. We ask the committee to consider a potential role for HMG in this area.

 

18. We have been in discussions with DFID, FCO and Cabinet Office about a $1bn Affordable Housing Programme in the Palestinian Territory. The scheme has been endorsed by the PA and the international community and can begin to be implemented in 2008. But there needs to be an immediate injection of donor funds to provide the infrastructure and public services. We feel that the UK, as a leading donor to the Palestinian people, has an important role to play in this area. We ask the committee to support the Affordable Housing Programme.

 

 

 

 

 

 

 

A Annex: Framework and recommended interventions

 

Al. Economic interventions have a positive impact in the Palestinian Territory even in the current circumstances. We have developed a framework of private sector projects that cover: a) physical infrastructure b) financial infrastructure c) entrepreneurship d) trade facilitation.

 

A2. We are aware that the political and security situation impacts on the viability and delivery of certain projects but our experience so far shows that the private sector can deliver value-added projects despite the political tensions. The private sector is the only long-term source of employment and economic development for the Palestinian population.

 

Physical infrastructure

 

A3. Affordable Housing: This is a key area where immediate action is recommended. The Portland Trust is facilitating a private-sector led housing boom through the Affordable Housing Programme. Our approach is guided by the following principles:

 

There is an urgent need for new housing;

There is a severe lack of affordable housing available in the Palestinian Territory;

The scheme will generate large-scale employment in construction and generate real economic growth;

It will have a positive effect on the local construction-related sectors, such as manufacturing, trade and finance;

It will attract investment from private investors in both residential property and commercial real estate, such as retail shops and other small businesses;

Existing institutions and mechanisms currently in place to support the sector should be strengthened; and

Early commencement of construction will demonstrate progress on the ground to the Palestinian population.

 

A4. The Affordable Housing Programme aims to develop up to 15,000 housing units by 2013 within new communities spread across the West Bank for a total investment of

$1 billion. Estimates of the cost of construction and analysis of Palestinian income

levels have shown that there is a 15% funding gap to make the units affordable to

our target market of monthly household income between $850 - $1700.

 

AS. The Portland Trust is coordinating with the local housing sector to identify and remove existing impediments to the development of good quality housing; in sustainable communities; for affordable prices. We have formalised our collaboration with the developers in an agreed MOU.

 

A6. Funding of approximately $150 million is required for the infrastructure and public services of 15,000 units. This funding plays a critical role in the overall financing package of the housing programme - not only does it make the units affordable but it also reduces the overall risk carried by the banking sector and lays the ground for private sector investment. There is a window of opportunity to secure the donor funding and private sector investment for the programme. This would allow construction on two sites in 2008.

 

A7. Operation Kickstart: In partnership with the Palestinian Federation of Industries, we are looking at ways of ensuring that the economic benefit of the housing scheme is maximised by mobilising the local manufacturing industries to supply the necessary materials required in construction. We hope to present this project at the Palestine Investment Conference to secure investment.

 

A8. Regional Infrastructure Trunk Council (RITC): Given the geography of the Palestinian Territory, infrastructure must be planned with neighbouring countries. The Portland Trust has developed a structure for coordinating the development of regional infrastructure between Israel, Egypt, Jordan and the Palestinian Territory - the RITC. As soon as the situation allows, we believe RITC will provide an effective means of planning the infrastructure required. We know from other conflict zones that it takes a number of years to plan infrastructure yet donor funds are sudden and time-limited once a political solution is reached.

 

Financial Infrastructure

 

A9. Pensions: Despite the recent reform of the public sector pension system there remains limited access to pension funds for the Palestinian private sector. The establishment of a private sector pension fund would help secure the financial future of retirees, inject long-term capital into the market and stimulate economic growth. We commissioned Levant Consulting to draw possible outlines for a modern Palestinian private pensions system. Following the publication of its consultation paper in August 2007, we worked with public and private stakeholders to formulate draft legislation to allow for the establishment of a new private pension system in the Palestinian Territory. The draft legislation was submitted to the Palestinian Prime Minister in January 2008. We are now consulting closely with the private sector, banks, insurance companies and unions to finalise the details of the legislation. A hard copy of the Pensions consultation document will be provided to the committee.

 

A10. Mortgage finance: In close consultation with the local banking sector and the Palestinian Mortgage and Housing Council, we developed a proposal for an affordable mortgage structure in support of the Affordable Housing Programme. Two commercial structures were designed and presented to the banking sector in Autumn 2007. The banks are now in direct discussions with the property developers on the provision of affordable mortgage finance for new housing.

 

A11. Political Risk Insurance: We are working with the Center for American Progress and others to develop a political risk insurance product. AIG and OPIC are interested in creating a re-insurance entity. We are in discussions with the Export Credit Guarantee Agency to see if there are specific projects they could support at the Palestine Investment Conference.

 

Entrepreneurship

 

A12. Loan Guarantee Scheme: The Portland Trust worked closely with The Aspen

Institute, Overseas Private Investment Corporation (OPIC) and the Palestinian

Investment Fund (PIF) to develop a loan guarantee scheme for the Palestinian

Territory. The OPIC/PIF scheme was launched in July 2007 with $160 million of

funds to guarantee loans up to a total of $228 million. Loans from $10,000 to $500,000 are backed by a 70% guarantee. The scheme targets a range of businesses and plans to establish a technical assistance programme to help banks market their financial products more successfully. The Portland Trust is contributing financially to its running costs.

 

A13. The Portland Trust also engaged European finances for loan guarantees through a combination of lobbying and analytical work that demonstrated the potential demand. The European Investment Bank and European Commission jointly provided an additional 24m for loan guarantees which was combined with 5m of funding from the German Development Bank, KfW. The 29m European-Palestinian Credit Guarantee Fund was launched in 2006. The Portland Trust developed a structure to ensure coordination between the two schemes.

 

A14. Training: In partnership with GTZ, we developed a comprehensive three year training programme for small and microentrepreneurs. The training programme is based on international standards but tailored to Palestinian needs. The Sharek Youth Forum will provide the enterprise training and business development courses by CEFE certified Palestinian trainers. A pilot project, with 120 microentrepreneurs, was launched in February 2008.

 

A15. Microfinance: We secured a grant from the EU of 750,000 to develop a three year action plan to build capacity in the microfinance sector. Together with PlaNet Finance we are providing an additional 550,000 in support of the Palestinian Network for Small and Microfinance Institutions.

 

Trade facilitation

 

A16. Export Support: We commissioned a competitive assessment tool to rate Palestinian companies' viability to export. The tool gives a comprehensive diagnosis of the companies and areas of intervention needed. We believe this allows donors to target their support to the most promising companies. Three companies were assessed during the pilot phase. The tool was launched in February 2008.

 

A17. Upgrading handicraft industry: We conducted a market study to try and identify the handicraft products that have a competitive edge and international appeal. This follows on from inquiries from large US retailers about stocking Palestinian handicrafts. We will conduct a full feasibility study on the creation of a centre that will act as a middle ground between local artisans and international buyers. Our aim is to develop a sustainable business that provides packing and packaging, product development, branding and other business oriented elements.

 

A18. Chambers of Commerce: We developed a framework for an Israeli-Palestinian Chamber of Commerce. Its constitution has been approved by the bilateral Chambers of Commerce in Israel in March. We anticipate its establishment in the coming months.

 

 

 

 

 

 



[1] World Bank estimates real GDP per capita in 2006 is 40 % lower than in 1999, December 2007.

[2] PCBS Labour Force Survey November 2007. Figures are for Q3 2007, relaxed definition.

[3] PCBS, Poverty in the oPt in 2006, August 2007 http://www.pcbs.gov.ps/Portals/_PCBS/Downloads/bookl382.pdf (Page 34 for English version). Figures are for 2006, income basis.

[4] PCBS, Poverty in the oPt in 2006, August 2007 http://www.pcbs.gov.ps/Portals/_PCBS/Downloads/bookl382.pdf (Page 34 for English version). Figures are for 2006, income basis.

[5] Derived from figures in PCBS Labour Force Survey November 2007

[6] http://imeu.net/news/article008003.shtml