41042 In This Issue 1. Doing More / 1 2. The Role and Performance of Palestinian NGOs In Health, Education and Agriculture / 2 3. Public Expenditure Review / 8 4. Investment Climate Assessment / 12 5. Olive and the Olive Oil Sector in Palestinian Territories / 14 6. Recent Economic Developments / 17 8. Program Portfolio Update / 25 9. Emergency Services Support Program / 26 10. World Bank New Projects / 28 11. Announcement: Energy and Transport New Reports / 29 March 2007 Doing More Contact Numbers West Bank Office Numbers: Country Director Water and Energy Switchboard 02- 2366500 A.David Craig KhairyAl-Jamal Fax:02- 2366543 02- 2366506 08-2823422 Deputy to Country Director Infrastructure Development Faris Hadad-Zervos Ibrahim Dajani 02- 2366549 02- 2366500 Economics & Private Sector Financial Management John Nasir Siaka Bakayoko jnasir@worldbank.org 02- 2366541 Civil Society Donor Coordination Mesky Brhane NabilaAssaf 02-2366500 02-2366535 Legal Reform Public Information Paul Prettitore Mary Koussa 02-2366534 02-2366529 Gaza Office: Coordinator HusamAbu Dagga 08- 2823422/2824746 Fax:08­ 2824296 International Finance Corporation: Investment Officer Youssef Habesch 02- 2366517 Fax:02- 2366521 Free Subscription mkoussa@worldbank.org Newsletter at Internet http://www.worldbank.org/ps Editorial: Doing More In the previous editorial of September 2006,theWorld Bank stressed with pride our continuous presence in,and sup- port to,theWest Bank and Gaza since 1993.Over this period,the Bank has used over US$510 million of its resources to finance projects in the Palestinian Territories.These projects have created hundreds of employment opportunities, supported over 3,500 infrastructure projects, constructed 1,700 classrooms, rehabilitated or constructed 600 medical facilities, built over 750 kilometers of water and sewage lines, rehabilitated 1,300 kilometers of roads, and during the intifada helped 700,000 children to attend school and assisted 220,000 children to graduate from high school. However,the challenge for us has been and continues to be to do more,not only in helping deliver economic and so- cial services to the Palestinian people,but in supporting viable institutions that will propel Palestinian development and self-sufficiency. During his recent visit to the Palestinian Territories, Mr. Juan José Daboub,World Bank Managing Director, fulfilled our commitment to do more by signing three new project agreements worth US$25 million.These projects are: the Emergency Municipal Services Rehabilitation Project II;the Palestinian NGO Project III;andAdditional Financing for the Bank's existing Integrated Community Development Project. These projects seek to support access to basic social and economic services in poor and marginalized communities in the West Bank and Gaza,including solid waste collection,street lighting,wastewater and electricity services,health services. They will also provide temporary job opportunities to unemployed Palestinians, and help sustain reliable mechanisms for delivery of emergency social services.At the same time,the projects are structured in such a way so as to build the capacity of local communities through job creation,and initiatives that will provide the basis for long term sustainability of these services. These three new projects now raise the number of activeWorld Bank programs to eleven,consisting of approximately US$117 million inWorld Bank grants. In addition to this, our Managing Director also announced during his visit the decision of theWorld Bank's Board of Directors to extend an additional US$50 million grant for future projects to assist the Palestinian people. The way ahead is a critical one,where theWorld Bank and other institutions must continue to do their utmost to ensure that the Palestinian people do not suffer through periods of uncertainty and conflict. More importantly,we must keep our eyes on the prize- the goal of building permanent and sustainable Palestinian structures to provide services to the people,and to manage a much needed economic development program.Such a program will only succeed if it is built AZ on clear and transparent governance,the free movement and access of people and goods,and an open economy able to A G D trade with all its neighbors and the world. N A K N A B TSE W 33 3 The Role and Performance of Palestinian NGOs In Health,Education andAgriculture World Bank Bisan Center for Research & Development English full report: "www.worldbank.org/ps" The World Bank's recent study investigates the role and and opportunities that PNGOs will face under almost any performance of Palestinian NGOs (PNGOs) as service imaginable scenario.At a time of near paralysis of the PA's providers in three sectors ­ health, education and service delivery systems, assumptions about the extent to agriculture. It provides systematic information on the whichNGOscanreplacethePAabound,andtheresultsof work of PNGOs,identifies areas of strength and weakness thisstudywillhopefullymoderateunrealisticexpectations. and suggests how their contribution to service delivery The study also aims to offer NGOs the opportunity to and the socio-economic development process might be reflect on their achievements and constraints,and to assess improved. howtheycanbestadapttochangingcircumstances.Finally, the study offers guidance to the PA and donors on how The work on this study was initiated in late 2004/early they might aim to develop more systematic approaches to 2005, a time when Palestinians were facing a number of supporting service delivery. difficult challenges, including a faltering peace process and political instability, a deeply depressed economy, The study data was for the most part gathered through reduced levels of per capita income and great financial two surveys: i) an NGO Survey, encompassing 78 scarcity.Dependency on donor funding had also escalated independently registered PNGOs and a selected number making Palestinians the recipients of one of the highest of their service delivery facilities; and ii) a Household levels of per-capita Official Development Assistance Survey covering 3000 households. The findings from (ODA). Nevertheless, the period was also characterized the NGO Survey should be treated as indicative, given by a degree of hope associated with the Israel's impending the relatively limited size of the sample. The surveyed `disengagement' from Gaza and parts of the West Bank parameters include (WB), and the prospect of enhanced levels of donor and private investor contributions to a process of economic The review of the role and performance of PNGOs is reconstruction. In this context the Palestinian Authority focused on an analysis of their delivery function which (PA)wasleadingtheconsultativepreparationofaMedium specifically looks at: (a) patterns of utilization; (b) Term Development Plan (MTDP). accountability and management practices; (c) targeting and participation practices; and (d) quality standards and Today, following Hamas' victory in the PLC elections of their monitoring.The study also reviews the constraints January 2006 and the international response to this, the faced by PNGOs in accessing donor funding, as well as 2007 political and economic outlook is far worse,at least in the their level of cooperation with the PA and other local char short term.Nevertheless,the findings of the study remain partners. relevant since they provide insights into the constraints M 4 Main Findings The Role of PNGOs Relative to Other In agriculture, PNGOs account for up about 53% of Service Providers services, compared with the PA's 30% and the private sector's 18%.The limited role of the PA in agricultural The study shows that the role of PNGO vis-à-vis other services is consistent with a sector policy that stresses PA service providers varies considerably across and within the regulation rather than service provision. three sectors reviewed. The demand for NGO services is, as one would expect, influenced by the availability and The Beneficiaries of PNGO Services relative cost of alternative channels of service delivery. PNGO services are most frequently used when the PA The study shows that services offered by PNGOs are not has a limited role or weak capacity, and where the cost equally accessible to the poor in the three sectors. PNGOs of acquiring services from the private sector is high.The have to charge a fee for the services they deliver, and scale of PNGO service provision is largest in agriculture, therefore when they have the option of receiving the followed by vocational training and pre-school education; same service,but for a lower price,the poor will generally it is less significant in the health sector.Within sectors, not choose to utilize PNGO services. Therefore, the however, PNGOs seem to deliver specific services that study confirms that in many instances,the beneficiaries of are otherwise unavailable or inaccessible,and have thereby PNGO services are largely from households with higher developed specific niches of specialization. income levels. However, as mentioned, the profile of PNGO beneficiaries varies considerably across the sectors In the health sector, according to data from the Ministry reviewed. of Health (MoH) and the Palestinian Central Bureau for Statistics(PCBS),PNGOsaccountfor29%and32%ofthe In the health sector,poor households with incomes below total number of primary health care centers and hospital NIS 1,400/month3 amount to 40% of the beneficiaries of beds respectively, and for 26% of the human resources PNGOservices---butto60%and65%ofthebeneficiaries employed by the sector.1 PNGOs also reportedly account ofpublicandUNRWAhealthservicesrespectively.PNGO for up to 20% of donor funding in this sector. But at the health service beneficiaries are divided equally between same time, and according to the results of this survey, urban and rural inhabitants Utilization of PNGO health PNGOs only account for 11.7% of the total household services,however,seems to be consistent across urban and utilization of health services. The MoH, UNRWA and rural areas. private providers, respectively, account for 46%, 24% and 16% of the total.2 In Gaza, where UNRWA accounts Household participation in pre-school education is slightly for up to 46% of health service utilization, the share of correlated with income levels: the rate of participation PNGOs drops to as little as 8% of the total. However, was lowest (at 20%) amongst families with income levels a much higher rate of utilization of NGO services is below NIS 750/month, but increased to 28% amongst reported for specialized services, including rehabilitation, thosereportinganincomeofmorethanNIS2000/month. psychological counseling and health awareness and PNGOs provide almost a quarter of pre-school education training where NGOs account for 19%,25% and 21% of in rural areas, but only some 13% in urban centers. 50% services utilized,respectively. of families using PNGO pre-school services came from families with incomes below NIS 1400/month, as did The low utilization of NGO health services is explained 47% of those accessing private sector providers. by the availability of public health insurance and (in UNRWA's case) free services.The PNGOs'high share of Overall, households belonging to the income bracket of facilities, staff and resources spent in the sector, though less than NIS 1400/month accounted for 50% and 60% suggest considerable inefficiencies in resource allocation. respectively of all beneficiaries of vocational training and agricultural services---and of PNGO services in these In education,where the role of the Ministry of Education and Higher Education (MOEHE) is focused on formal 1 See MOH/Health Management Information System (HMIS) for PHC and Hospital bed data (2004), and PCBS Survey for Human Resources data basic and secondary education,PNGOs account for 21% (2005). AZ A G of pre-school services and the private sector another 71%. 2 It should be noted that according to the 2004 data of the Ministry of Planning's D Aid Coordination Department, 20% of total ODA to theWest Bank and Gaza N A In vocational training,the private sector and PNGOs each is channeled through PNGOs. K N account for 25% of total services,and the PA 37%. A 3 Using a poverty line income of US$2.1 per day, an average family of 6 needs B to be earning NIS 1,700 per month to be "over the poverty line". TSE W 5 sectors as well.The participation of women in vocational On the other hand, the study evidenced a fairly rigorous training programs offered by NGOs was notably higher level of monitoring and reporting on grant-financed than in the case of Government and private sector projects--albeit at the behest of donors. PNGO capacity providers. to investigate the broader impact of their services outside specific project frameworks was generally much less In terms of targeting policies, only in the agricultural developed,with the level of participation by beneficiaries sector did PNGOs confirm that they targeted their in the design and assessment of service delivery programs services to marginalized areas or poor households (43% also very low. of respondents, as opposed to 10% in health and 11% in education). However, all PNGOs identified individual Leadership and Management Practices income level as an important criterion for beneficiary selection. Furthermore, PNGO targeting of vulnerable While PNGOs are led by highly professional staff, groups, e.g. the disabled, youth, children/women, was selection processes used for recruiting PNGO directors frequently reported. are generally non-competitive and lack transparency--- reinforcing the perception that PNGOs are governed by a NGOAccountability `small elite'. Furthermore, and despite recent reporting on further PNGO decentralization, authority on key By and large, PNGOs appeared to be more concerned with matters continues to be very centralized amongst the `vertical accountability' to their boards of directors, to the PA majority of PNGOs surveyed.This is somewhat offset by and to donors than with `horizontal accountability' to their the flexibility that local branches and facilities appear to broader constituencies and the communities they served.The enjoy in introducing new lines of service delivery, which reported rate of dissemination and disclosure of annual enhances PNGOs' responsiveness to local needs. It was and financial reports to GeneralAssembly members,local also noted that the staff of PNGOs are in general afforded community groups and partners was very limited. The few opportunities for training and skills development. reported regularity of Board meetings and the range of responsibilities held at that level suggested that PNGO Quality of Service Delivery Boards are actively engaged in governing and overseeing the work of their organizations.There seemed to be some The study confirmed that PNGO's monitoring of quality ambiguity,however,about who in the PNGO hierarchies and impact was weak largely on account of the absence approved financial reports and the selection of auditors, harmonized quality standards. Thus, while NGOs had 2007 raising some concern about the adequacy of PNGO adequate operating procedures for tracking patient health char financial control and oversight. status and student achievement, or following up on M 6 referrals,only the larger ones monitored impact according PNGOs of varying sizes.This may in part be attributed to clearly identified benchmarks.When asked about the to the fact that smaller PNGOs receive financial support results/impact of their work, PNGOs were generally from the Ministry of Labor and Social Affairs (MoLSA), much better able to report on processes and outputs rather and are also sub-contracted by PA institutions to deliver than outcomes. The monitoring of service standards by specific services to marginalized communities. PA specialized agencies was also noted to be weak. The study confirms that the work of PNGOs is heavily The overall rate of beneficiary satisfaction with PNGO constrained by the unpredictability and lack of transparency services was very high, a judgment largely based on the in the provision of donor funding. Donor grant funding perceived competence and professionalism of PNGO staff and and reporting policies are generally perceived as overly the quality of PNGO resources and facilities, in particular complex, and funding is seen as provided in general for in health.This positive overall assessment varied by sector,excessively short periods of time, a factor which hinders though. In the vocational training sector, beneficiaries the ability of PNGOs to plan ahead and to focus on were more satisfied with services provided by PA and improving quality and sustainability. private sector providers, with 25% of the beneficiaries of PA programs reporting that the training had helped Cooperation with the PA and other Local them to find a job,compared to only 14% amongst those Partners trained under PNGO programs. The study confirms that there is considerable cooperation Similarly,althoughthebeneficiariesofPNGOagricultural betweenPNGOsandthePA,withtheroleofthePAgenerally services rated them in general more positively than those perceived as positive. However, cooperation between the two provided by the Government, this was not so in relation doesnotextendtothelevelofpartnershiporactivecollaboration to starting new activities or increasing their income in policy and sector planning. This could be explained by levels. This is likely explained by the fact that the PA a combination of the limited capacity of the PA to lead and the private sector facilitate/provide credit and access sector planning processes as well as a lack of coordination to markets, while PNGOs concentrate more on the amongst PNGOs in pursuit of a systematic dialogue with provision of training, subsidized agricultural inputs and the PA.The study also reveals limited involvement on the land reclamation. part of those NGOs surveyed in advocacy work aimed at influencing PA sector policies. Furthermore, amongst Funding Patterns those who reported having an advocacy role, their focus was on meetings,the distribution of educational materials The study confirmed that the capacity of PNGOs to generate and coalition building,as opposed to meetings with PLC local revenues is limited to the larger organizations, in members or preparing policy documents. More recently, particular to hospitals and NGOs working at the national however, the PA (in particular the Ministry of Planning) level. Service fees and income generating projects was seen as more interested in consulting with PNGOs account for the largest share of revenues generated by (for example, in the context of the preparation of the. these organizations. Islamist NGOs also reported high MTDP). At the level of line ministries, the evidence is levels of local community contributions, an that consultations remain ad hoc. avenue not yet fully explored by other surveyed organizations. International funding for PNGOs is reported as biased towards larger PNGOs, and to those working in the health sector. This can be explained in part by the greater institutional capacity that larger NGOs tend to possess, in addition to long-established relationships AZ with international NGOs and donor A G D organizations. Funding from the PA N A K and from other local sources seems N A B to be more evenly distributed across TSE W 7 Cooperation between PNGOs, local government and the From an institutional perspective, PNGOs have some private sector remains very limited.This could be attributed way to go in terms of objective monitoring and impact to the lack of legitimacy that local governments have evaluation, as well as internal management and staff enjoyed until the recent municipal elections, and the development. NGO senior executives are customarily inability of local government to provide an enabling recruited without open competition. environment for community development. Lack of cooperationwiththeprivatesectoralsopointstountapped potential to promote corporate contributions to PNGO Recommendations programs and activities. The following recommendations arise from the study's Conclusions analysis: The Palestinian population is increasing rapidly; the In summary,the surveys indicate that economy,beset by conflict and closure,is currently unable to sustain adequate levels of public welfare (let along ThelevelofbeneficiarysatisfactionwithPNGOservices improve them). In such a context the need for PNGOs is high, and in many cases higher than for comparable as service providers is likely to increase with time, and PA services. donors should recognize this through appropriately The relationship between PNGOs and the PA is enhanced levels of support.To improve the effectiveness generally constructive, albeit with limited involvement of PNGO support, though, donors need to develop a by PNGOs in sector policy and planning. In contrast, better awareness of capacity and demand within the entire PNGO partnerships with local authorities are weak. service delivery system. PNGOs have carved out niches in areas and/or sectors The PA and PNGOs should collaborate on developing where PA service provision is not available or is limited, simple, transparent quality and performance standards and where private sector fees are relatively steep. for service delivery. In parallel, efforts to strengthen the monitoring function of the specialized ministries should PNGOs are not as a matter of course reaching out to be intensified. poor and the marginalized communities. That said, most NGOs make efforts to give priority to poor and PNGOs should be supported and encouraged to target disadvantagedindividualsinthegroupstheyhaveelected their services more explicitly towards the poor. Given to work with.The fact that PNGOs need to charge fees the particularly high rates of poverty in Gaza, PNGOs for their services goes some way to explaining the lack should be encouraged to expand their presence there, of systematic focus on the poor. complementing the role of the PA and UNRWA. Donors tend to favor the larger PNGOs, due in large part to their capacity to comply with complex donor procedural requirements; donors also tend to fund for relatively short periods, which is inconsistent with the creation of long-term capacity and, ultimately, PNGO sustainability PNGOs are not in most cases accountable to beneficiaries and local communities,but rather to their own boards,donors and the PA.This lack of"horizontal" accountabilitycanbecorrelatedwithlimitedbeneficiary involvement at all stages of the service process. 2007 char M 8 Given their important role as representatives of civil Opportunities for forming PNGO partnerships, in society, PNGOs should broaden their constituency particular with local government, should be more base with both civil society and grassroots based actively explored---possibly through joint funding organizations.This process should be accompanied by mechanisms. Such partnerships are very important to increased advocacy of more equitable and inclusive the long-term sustainability of PNGOs. social policies. Donors should take a more systematic approach to PNGO networks and umbrella organizations should PNGO funding,placing less emphasis on ad hoc project intensify efforts to enhance accountability through financing and more on sub-sectoral programs. Donors the development and adoption of a PNGO Code of should also be prepared to support PNGO activities Conduct (which should include measures designed to on a more sustained basis in order to allow for fuller increase transparency in hiring, policy formulation and institutional maturation to take place. Donors should financial management). For its part, the PA can assist also place more emphasis on supporting the professional the development of the PNGO sector by activating the evolution of PNGOs.This should help develop PNGO PNGO Law's By-Laws which were approved by the transparency, and thereby legitimacy vis-à-vis the Cabinet and which clarify ambiguities in the existing public and beneficiaries. The PA and donors could also Law.This would help promote greater transparency and consider NGO representation in their aid-coordination improved performance in the sector. structures to help create greater harmonization with donor-financed developmental/institutional building programs delivered through the PA. AZ A G D N A K N A B TSE W 9 Public Expenditure Review From Crisis to Greater Fiscal Independence Full Report: www.worldbank.org/ps The dynamics behind the PA's increasingly precarious financial position--and the failure to curb the rapid expansion in the wage bill--have been understood for a decade or more. More than seven years ago, civil service employment stood at 48,000, and staffing in the security The Palestinian Authority (PA) is services at 41,000.As of 2006, these figures stood at over confronting a fiscal crisis that could 81,000 for the civil service and 77,000 for the security threaten its very existence. During the first services. Even in the midst of acute financial crisis in the six months of the Hamas-led government,tax first quarter of 2006,the PA has added 1,300 into the civil revenues amounted to $17 million per month, service and 6,800 into the security services. compared to $104 million during the same period the year before. Expenditures for the same period in Employment in the public sector is driven by a host of 2005 stood at $172 million per month;by 2006,they had complex dynamics. Some are understandable,such as the fallen by more than half. By December 2005, the wage relatively high levels of unemployment and demographic bill alone was running at around $93 million per month. pressure to create jobs for new entrants into the labor The proximate causes are Israel's withholding of clearance force; the collapse in remittances from workers in Israel; revenues and U.S regulations against banks engaged in a highly constrained private sector's inability to absorb financial transactions with the PA. The structural roots of surplus labor; and the pressure to incorporate irregular the crisis run deeper. By late 2005, the PA position was militia into the security forces in Gaza. Others are less so, already fiscally unsustainable,with assets being liquidated such as the use of employment within the PA for political or mortgaged to meet current expenditure needs. patronage. Certaindonorapproacheshavealsocontributed to the fiscal situation and, in some cases, contributed to The current crisis provides an opportunity to take a the erosion of reforms in areas such as public financial longer term and more strategic view of Palestinian management. finances. Throughout 2005, the PA was running an average monthly deficit in excess of $60 million, nearly PlacingthePAbackuponasustainablefiscaltrajectorywill 60 percent above the average monthly revenues it was require coordinated effort on the part of all relevant parties receiving. With unchanged policies, the fiscal deficit for around a shared strategic approach. It will also require 2006 would in all probability have exceeded $900 million a significant change in PA financial and administrative and perhaps gone over $1 billion. This is almost three practices. 2007 times the amount secured in external budget support in char 2005. M 10 Macro and Fiscal Challenges Civil Service Reform Besetbyclosures,violenceandafiscalcrisis,thePalestinian The civil service reform agenda is one of the most economy is declining from its already low level. In the important challenges confronting the PA. Any near-term short term, continued donor assistance would be critical effortshouldinvolveacomprehensivepayrollaudit,theuse for sustaining the Palestinian economy. A solid foundation of biometric systems;the development of human resource for future growth depends on two factors: a radical information systems capable of sharing information improvement in Palestinian movement and access, and between the MOF, General Personnel Council (GPC) stabilization of the PA's fiscal situation.This would require and Ministry of Interior (MOI);consolidation of security both resumption in the transfer of clearance revenue and service payrolls under the MOF; and clarifying the roles significant fiscal adjustment on the part of the PA. of the GPC and the MOF under the new civil service legislation. TheGovernmentofIsrael'sdecisiontosuspendthetransfer Other important reforms include strengthening the of clearance revenue,which accounts for over 60 percent institutionsandlegalframeworkforcombatingcorruption. of the PA's revenues, has made it virtually impossible to The PA must develop an anticorruption strategy that achieve sustainable fiscal management. However, the focuses on prosecution,prevention and public awareness, PA's past spending policies have exacerbated the current as well as conduct empirical work on the nature and crisis. Despite a revenue crunch during the intifada, the causes of corruption. The general inefficiency of the PA's wage bill continued to increase by 11% per annum court system hampers investigations of cases of corrupt between 1999 and 2005. Moreover, since 2003 the PA practices in the civil service. In the medium term, has increasingly been the"financier of last resort"to cover strengthening of the court system and the office of the unmet obligations for other public entities. In 2005,such attorney general should be a priority. payments drained the public resource envelope by $344 million,ormorethan5percentofGDP. Newsocialbenefit Intergovernmental Fiscal Relations and programs were launched and pension laws adopted which Municipalities have also increased the PA's burden.The increase in the deficit was mostly covered through domestic financing Palestine has one of the more vibrant local government (including the Palestine Investment Fund and bank loans), sectors in the region. Municipalities and villages within but this source of financing has reached its limits. theWest Bank & Gaza are among the most autonomous. Central government transfers are modest by regional Public Financial Management standards, and local governments have a great deal of control over their own revenues. From 2000 to 2004, the PA implemented several public financial management (PFM) reforms that have Yet the second intifada has heralded the problem of significantly improved transparency. These include spiraling municipal financial arrears, heavy reliance on setting up a CentralTreasuryAccount (CTA);formulating utility service surcharges for revenues, and a larger share an annual budget that is approved by the Palestinian of local expenditures for administration and wages. Over Legislative Council (PLC);creating an accounting system the past few years, capital expenditures have declined. for orderly budget appropriations and execution; placing This raises important questions about service delivery Ministry of Finance (MOF) financial controllers in every and coverage, and whether municipalities will be able line ministry; transferring payroll responsibilities to the to maintain and expand infrastructure services. There MOF and paying public sector salaries through bank is a need to consolidate the legal framework, to ensure accounts;establishing the Palestine Investment Fund (PIF); greater coordination among national and local agencies, and enhancing fiscal transparency by posting the Budget to rationalize the rising number of local governments, Speech and expenditure reports on the MOF's website. and to review the incentive frameworks such as the use of pre-paid metering to prevent municipalities from Unfortunately, these reforms are now at risk. By 2005, defaulting on their utility payments. momentum for PFM reforms was slowing,and a number of initiatives--particularly those involving financial reporting and internal audit--were experiencing delays. AZ A G More importantly, the CTA has been a casualty of the D N A recent political standoff between donors and the Hamas K N A B government. TSE W 11 Health and Education The health and education systems have seen significant who are being asked to fund the program. A step would accomplishments over the years. The expansion and be to strengthen the capacity of the GPIC (Gaza Pension equitable access achieved in the education sector is Investment Corporation), and to review the Unified comparable with most middle-income countries. Pension Law to ensure long term sustainability. Similar Enrolment in basic education is universal, and the reform is needed for the 2003 Social Security Law for enrolment rate for secondary education is above 80%. In private sector workers. And the 2005 pension law for 2004, the infant mortality rate was 22 deaths per 1,000 security services is simply unaffordable. live births, well below the regional average of 44. Total life expectancy at birth was 73 years, on average 4 years Towards a SustainableWage Bill longer than the typical person in the MENA region. The under 5 mortality rate of 24 deaths per 1,000 under 5,it is Since March 2006,the government has been unable to pay less than half of the regional average of 56. most of its salary commitments owed to PA employees. The totals vary between categories of employees, but on However, there is scope for savings across these sectors. average employees have received around 40% of their Shifting demographic trends imply the need to recruit normal incomes. Around 71% of government employees fewerteachersinthefuture. Savingscanalsoberealizedby fall below the poverty line defined as income level of less changing the mix of staff. A comparison with UNRWA, than $460 per month for an average household of six as for example, reveals that the PA employs over twice as compared to 35 percent in June 2005.1 many support personnel. The PA's practice of procuring new textbooks annually results in unnecessary spending. While it is impossible for the PA to cover its costs under Most importantly, the PA can reorient its expenditure current circumstances, analysis reveals that the wage bill from recruiting more teachers and building more schools was already unsustainable before the current fiscal crisis todevelopingpedagogicalmethods,improvingthequality (Figure 1). No realistic amount of donor funding or of teacher training, and enhancing capacity to monitor increase in tax and clearance revenues could be expected performance. to bridge the gap. In health, total spending (including direct household A sustainable plan would involve a comprehensive payroll spending) is about 13% of GDP, among the highest in audit, followed by the termination of all ghost workers, the region. PA expenditure on health services has been double dippers and staff serving past retirement. The PA driven by increasing public employment, with almost can also restrict overtime payments to only those working no funding for capital expenditures and a diminishing share for operating costs. The PA's expansive wage bill in front-line service delivery in the Ministry of Health. and expenditure for contracted services with NGOs has left little fiscal space for pharmaceuticals,medical supplies Figure 1- Public Sector Hiring and Wage Bill Growth, 1999-2005 and operations and maintenance. Social Services Despite current financial difficulties, the PA providers of social services have pressed on with their tasks. Some social programs are still operating, albeit in a limited form. Food rations from theWorld Food Program (WFP) continue to be distributed,the UNRWA Social Hardship Caseprogramandotherservicesarefunctioning,andfood rations for newly poor families in Gaza are being issued. The Ministry of Social Affairs is currently working with Source:World Bank Staff Calculations,2006 theWorld Bank to improve the targeting of benefits. 2007 Yet reforms are needed in this sector,particularly with the 1 Source: Near East Consulting Monthly Bulletin on Palestinian Perceptions char pensions schemes that are among the most generous in Towards Political, Economic, and Social Conditions, Bulletin No. 11, November the world--more generous than those in donor countries 8, 2006. M 12 These measures should be combined with improvements induced to leave. Such efforts would need to be carefully in control (particularly placing the MoF in charge of developed and coordinated with ongoing efforts to reduce security service payroll) and a hiring freeze for the next the number of security services from 13 to 3.The chances two years. If the wage containment plan goes well, the of success of security sector reform (SSR) are greater hiring freeze could be relaxed to allow replacement if such a strategy is part of a comprehensive political recruitment for front line staff in the Ministries of Health framework that includes reconciliation, the rebuilding of and Education. institutions, support to disarmament, demobilization and reintegration, and measures to improve the rule of law. Beyond these steps,the PA could pursue options for long- SSR and demobilization operations need to be timed term wage sustainability, including to roll-back the 2005 carefully in order to complement each other and support salary increases in some form. Bank calculations indicate the overall peace process. that this could save the PA around $317 million annually over the first two years and a net present value of $1.2 Conclusion billion over five years. Since public sector wage rates are now around 15% greater than those in the private sector, For a decade or more,the PA has been able to avoid hard the justification for this is strong. choices with regard to its public employment policies. While the temptation is to view overstaffing as a long- A second approach would be to offer voluntary retirement term problem to be tackled once the private sector is packages to civil and security servants. The design and able to absorb the additional labor, the reality is that the composition of such programs could vary,and preliminary status quo is not tenable. One way or the other, salary calculations indicate that potential savings could be rationing will take place. The question is whether it will in the range of $417 to $718 million over a five year take place in a coherent and equitable fashion leading period. A third approach would involve a wage bill cap towards a desirable medium-term goal, or in a series of allocated over a fixed number of employees according uncoordinated, ad-hoc adjustments punctuated by weak to an agreed formula. A target could be $80 million per performance, unfulfilled expectations, employee hardship month--approximately the level prior to the major salary and labor unrest. increases in July 2005. This sum would represent a savings of roughly $240 million per year. Should the PA make Sadly, lost within this broader story are some important progress in retiring staff and/or reducing the number of successes by the PA in public financial management, employees,higher salaries would be paid to the remaining municipal governance, education, health and the social employees. services. Even in civil service reform, the PA has passed a law applying stricter recruitment rules and measures for Moving forward, the key is to revise the incentive system non-compliance,has strengthened the role of the General between the PA and donor community. Current donor Personnel Council (GPC), and has improved MOF practices have subsidized both wage and non-wage control over the payroll. spending, allowing the PA to shift resources away from non-wage expenditures towards salaries. Donor efforts to All of this progress is at risk unless the PA, the donor contain the wage bill through vehicles such as the Public community and the Government of Israel can come Financial Management Reform Trust Fund made the up with a collective plan for restoring PA finances. For mistake of linking specific wage bill targets to a percentage the PA to be viable, it needs to receive the clearance of revenue, which allowed the PA to expand recruitment revenues it is entitled to from Israel under the 1994 Paris as revenues went up. Protocol of Economic Relations. The Central Treasury The challenge of reducing the wage expenditures for the Account must be re-established and the practice of security services will be particularly difficult. First steps routing aid flows through the Office of the President shut would include a transparent accounting of their numbers; down. Arab donors need to continue their high levels AZ A a reduction of the "non-compliant" officers recently of support, and mechanisms such as the Economic and G D N identified by the MoI;and other measures. Many officers Governance Strategy Groups need to play an important A K N are nearing or past retirement age and could also be role in coordinating donor assistance. A B TSE W 13 World Bank Investment Climate Assessment Findings and Recommendations indings Recently theWorld Bank has undertaken an Investment very small ­ average size is five workers ­ and average Climate Assessment (ICA) for the West Bank and Gaza capacity utilization for manufacturing enterprises is only (WBG). An ICA is a standard World Bank study that about 50 percent. Few firms invest. Most machinery is has been completed in many countries around the world. over 10 years old, less than 26 percent of the surveyed Its purpose is to link the business environment, or what enterprises did any worker training and only a small share is termed the Investment Climate, directly to firm level had international quality standards. In addition,since the performance and make specific policy recommendations WBG economies are tied to Israel,they have a higher cost tohelptheprivatesector.TheICAisbasedonallavailable structure than other countries producing labor intensive information but is underpinned by an enterprise survey products. Industry's share of GDP inWBG has fallen to conducted in face to face interviews of more than 400 less than 15 percent. If it is going to grow and provide enterprises throughout WBG by the Palestine Central jobs for the rapidly expanding population, Palestinian Bureau of Statistics. Since it is a standard survey it allows entrepreneurs will have to invest and move to high for a comparison between the investment climate in value goods that can compensate for the high costs of WBG and other countries. production. They will also have to look beyond the Israel and develop new markets in other parts of the world. The ICA reveals that shrinking market access and the lack of free movement are the main constraints to growth for InrecentyearsthePalestinianAuthority(PA)hasattempted Palestinian enterprises. Relative to other countries the to provide the investment climate to support the needed Palestinian investment climate is good: petty corruption investment. The financial sector is highly liquid and is low,the bureaucracy is relatively efficient and financial less than 15 percent of the survey sample is financially markets are well developed. Despite this,Palestinian firms constrained. Most enterprises do not have a bank loan. have not invested enough to maintain their international But that is because they don't want one given the few competitiveness. Managers know they need to invest and profitable investment opportunities and not because the have access to the necessary resources. However, they banks will not lend to them or the required collateral is are unwilling to do so unless they are assured secure and too high. Corruption and government regulations do predictable access to both domestic and international not appear to be a major constraint to investment. Most markets. managers reported not having to pay any bribes and for those who did,they paid less than in other countries. The Palestinian industry developed to produce low value, average time it took to obtain a business license was only labor intensive goods for highly protected local and 30 days,which is half the time reported inTurkey. Senior Israeli markets. However, as Israel has moved toward managers in Palestine also reported spending on average higher value goods and opened its markets to free trade, less than 7 percent of their time dealing with government Palestinian producers have suffered. Most Palestinian regulations,compared to over 8 and 12 percent inTurkey 2007 enterprises are no longer internationally competitive in and Lebanon respectively. The Palestinian Authority is the low value goods they specialize in. Enterprises are char new and just beginning to develop its institutions but they appear to be emerging in an efficient manner. M 14 olicy Recommendations Unfortunately, the movement restrictions The ICA identifies three major areas that need to be addressed to imposed by the Israeli authorities,which prevent help the Palestinian private sector: restore movement and access, Palestinian firms from accessing markets and develop private enterprise capabilities and continue to measure and create high levels of uncertainty, overshadow improve the investment climate. other elements of the investment climate. The percentage of West Bank and Gaza enterprises Without free internal movement and dependable access to the selling into the other territory has fallen by world market there can be no viable Palestinian economy. Major half since 2000. More importantly, markets in issues include restoring free movement within the West Bank, the West Bank appear to be shrinking because including the Jordan valley; resuming trade between West Bank of movement restrictions imposed to protect and Gaza; opening the Rafah crossing to movement of goods Israeli settlements. In 2000 nearly 60 percent and restoring access to East Jerusalem and the Israeli market for of firms made a significant share of their sales Palestinian producers. It is also necessary to improve the access for outside of their home city; by 2005 this had Palestinian goods to the rest of the world through Jordan. fallen to around 40 percent. The most difficult issue to overcome is the uncertainty caused by Palestinian firms have very few sources of enterprise learning and the movement restrictions. For example, the find it hard to find and adopt new technologies required to increase survey reveals that on average it takes around 22 productivity and move up the value chain. They have been cutoff days to clear imports for companies in theWest from the export market, they receive no foreign direct investment Bank. But the longest time averages nearly 43 and have little access to international consultants. Any policies or days. On time delivery is a requirement in the programs that assist individual Palestinian enterprises in finding modernexportmarket,butPalestinianproducers new technologies or reduce the considerable risk of investing in can never be sure when their cargo will move. the current conditions will benefit the economy as a whole. Consequently, to a large degree, they are frozen out of the high value export market. Finally, the investment climate must be constantly measured and improved. Before the recent turmoil,the PA was making progress in creating a strong enabling environment. But the work was far from finished, and there remains much to be done to create institutions that will allow business to prosper.The land registration system, courts, Palestinian Standards Institute, Customs and a host of other agencies all need to continue to develop to enable the private sector. AZ A G D N A K N A B TSE W 15 O Olive and the Olive Oil Sector in Palestinian Territories 2007 char M 16 How important are olives to il the Palestinian economy? Today, there are approximately 900,000 dunums planted with 10 million olive trees,constituting45percentofcultivated land in Palestine and contributing as much as 15 ­ 19 percent of agriculture output.1 Moreover, there are about 100,000 families depend on olive harvest for their livelihoods. In 2006, olive oil a 40 percent increase since 2005. Farmers are often production is estimated to reach 33,000 ­ 35,000 tons;of prevented from accessing their trees making it difficult to which around 12,000 tons are estimated to be consumed prune the trees, plow and control weeds, which reduces yields. To produce the necessary high quality olive oil, locally and the rest will be available for export or storage. Palestinian farmers should be granted access to their fields and presses, and kept safe from settler attacks. Unlike What are the main privileges previous years, the Israeli army and ministry of defense of the Palestinian olive oil? made some effort to ensure farmers' access to their lands to pick olives. First,ThePalestinianclimateandsoilenabletheproduction of some of the highest quality olive oil in the world.To What are the main illustrate,theuniquetasteandaromaofPalestinianoliveoil challenges that are facing the has been recognized in taste tests conducted by certified testers in Europe. Second is the unintentional low use Palestinian olive oil industry? of chemical fertilizers, herbicides, or pesticides that have allowed many Palestinian producers to enter the high Palestinian olive oil industry faces tremendous challenges value organic market.According to a 1998 survey by the that can be divided to two main categories:technical and Palestinian Central Bureau of Statistics, about 21 percent logistical. First, many trees are found on steep terraced of the total area under cultivation received chemical hillsides which necessitate farmers to carry on plowing, fertilization and less than 15 percent used pesticides or weed control,harvesting,and other activities manually or fungicides.Moreover,the Palestinian olive oil has unique by using animals.This in turn contributes to the high cost marketing options.It can be branded as oil from the"holy of picking which amounts to $1.5 per kg of olive oil. land", and in some Arab and ethnic markets it will draw There are other technical problems facing this industry support to assist Palestinian labor. including,but not limited to,lack of manual machineries for plowing, picking, and harvesting, lack of ventilated How time is significant boxes and stainless steel storage facilities, as well as ThubabetAl-Zaytoun (olive fly) that negatively affects both during harvesting and the quality and quantity of the harvest. pressing? Second, the limited access to water supplies is hindering the ability of many farmers to provide partial irrigation To produce the best oil, olives must be harvested at the when the fruits are blossoming and the rains have stopped correcttimeandmovedtothepressesasquicklyaspossible. early.The full access to water supplies and the removal Delays in harvesting or in moving harvested olives to the of any Israeli restrictions from digging new wells or presses reduce the yield and quality of oil produced. developing new irrigation projects is vital in terms of AZ A G substantially increasing yields. D N A Palestinian farmers in the West Bank now face over 500 K N A physical obstacles and closures restricting their movement; 1 Agriculture accounts for nearly 25 percent of GDP. B TSE W 17 What are the main What can Palestinian challenges that restrain producers do to be Palestinian producers from competitive in the export entering the export market? market? Theexportmarketisprimarilyconstrainedbytherelatively To compensate for the high costs of production and to high cost of production resulting from a combination increase the value added from olive oil, producers will of factors including nature of the terrain, movement have to capitalize on the superior quality and special restrictions, as well as the cost structure inherited from marketing niche of Palestinian oil and move toward the Israeli economy. First, many trees are found on steep the high end, extra virgin or organic bottled market. terraced hillsides which necessitate farmers to carry on Palestinian producers must establish a"made in Palestine" plowing, weed control, harvesting, and other activities brand name with a reputation for quality that compensates manually or by using animals.As a result and despite the for its higher price. To do this, producers will have to use of unpaid family labor,labor accounts for over half of significantly increase quality, raise productivity, and lower the total cost of olive oil production. costs.Local producers estimate that small bottles earn 15- 20 percent more than bulk exports and organic oil can Second, the movement restrictions raise transport costs earn as much as 40 percent more. and prevent Palestinian exporters from committing to specific delivery schedules.According to one Palestinian Producing high quality oil that is suitable for the export exporter, the cost of moving a 20-foot container to marketrequireslargeinvestmentstobuildstoragefacilities, the port has doubled since the beginning of the most modern presses, and to teach farmers proper harvesting recent Intifada, and internal transportation constitutes methods.Yet,if producers are unsure that they will be able approximately 20 percent of total shipping cost. Besides, to access external markets they will be unwilling to make Palestinian producers have to pay a $200 per container the investment, and will continue the low risk strategy security fee that Israeli shippers do not face. Moreover, of producing low quality bulk oil. Hence, Israel must creating predictability for Palestinian producers is the protect its security while also ensuring that legitimate most critical aspect.Their inability to plan shipments and businesspersons can easily travel and export without commit to specific delivery dates, Palestinian producers unnecessary delays. will be unable to substantially expand exports. Furthermore, most of the current production is classified Third, the Palestinian economy is essentially a part of as ordinary virgin due to the lack demand of local market the Israeli economy and has a similar cost structure. for high quality oil. In addition to targeting farmers Consequently, production costs are higher than in and producers, raising consumers' awareness is critical neighboring countries or in major producing countries. in improving quality. With some effort and support at Informal estimates suggest that production costs in the different levels,it is possible to produce large quantities of West Bank are 20-30 percent higher than in Jordan,10-15 extra virgin oil in theWest Bank. percent higher than Syria, and 35-40 percent above the cost inTurkey. Finally, the support of the Palestinian Authority and organizations like Palestinian Olive Oil Council is Finallyyetimportantly,enteringtheworldmarketrequires essentialintermsofcreatingandmonitoringstandardsand Palestinian producers to develop the necessary contacts providing agriculture extension services for the farmers. and marketing skills.As in all aspects of the industry, the closures have an adverse effect on marketing.It is difficult and expensive for Palestinian entrepreneurs to travel abroad to make market contacts.Foreign buyers often will not enter the Palestinian territories and Palestinians are often not allowed into Jerusalem to meet them. Sending samples, attending trade fairs, and the other basic acts 2007 of establishing presences in new markets are all much char harder and more expensive for Palestinians. M 18 Overview of Recent Economic Developments1 Prepared jointly by theWorld Bank and IMF Economic activity ThePalestinianeconomyisonceagaindeclining. Quarterly GDP data recently released by the Real GDP,Q3-2000=100 PalestinianCentralBureauofStatisticsshowthat GDP (in real terms) declined steadily during the first three quarters of 20062. Calculated as an average over the year,the decline is equal to 5-6 percent--adding population growth of 3-4 percent,the decline in per capita GDP amount to 8-10 percent. This is a sharp reversal of economic trends the past three years, in which the Palestinian economy recovered from its precipitous decline during the first three years of the intifada. A decline of this magnitude would leave GDP per capita around US$1,000 and real GDP per capita some 32 percent lower than in 1999. 1 A more detailed description of fiscal and financial developments from April to September 2006 can be found in "West Bank and Gaza: Recent Fiscal and Financial AZ Developments", October 2006, www.imf.org/wbg . A G 2 The Quarterly National Accounts date is only preliminary, and may be revised later. Due to the difficulties on the ground, the quality of the underlying data is D N A deteriorating. PCBS estimates of indirect taxes--which determine the difference between GDP at factor costs and GDP at market prices--is subject to particularly K uncertainties as the clearance revenue is not being transferred. N A B TSE W 19 Budget support,US$ mill./month Closures remain tight, to the detriment of Palestinian export. Movement restrictions and border closures continue to stifle the normal conduct of commercial activities. In interviews for the Bank's forthcoming WB&G Investment Climate Assessment more than 60 percent of Palestinian businesses reported instability and transportation issues are the most important impediments to Palestinian private sector activity. The Bank's ongoing monitoring of Palestinian movement and access shows that the number of trucks carrying exports from Gaza have dropped 40 percent from the already low level at the beginning of 2005,and remain far from the targets set in the November 15,2005 Agreement on Movement andAccess. In their monthly business survey, the Palestinian Central Stepped-up donor support has played a major role Bureau of Statistics reports that conditions continue to in sustaining the economy and household incomes. worsen for business owners. For the most part,over 2005 Following the inauguration of the Hamas'government in (wheneconomicgrowthwasrelativelystrong),perceptions March 2006,donors terminated or were unable to provide leaned toward the positive,with,on average,only 10% of direct financial flows to the PA government. At the same firmsindicatingonamonthtomonthbasisthatconditions time, however, donors significantly increased the flow of had deteriorated. Over 2006, however, that proportion rapid-disbursing assistance flowing to theWest Bank and had more than tripled to 34%. Palestinian export to Israel, Gaza, through channels outside of the government. The the main market for Palestinian exporters,declined by 15 IMF estimates that a total of more than US$700 million percent in nominal terms during the first half of 2006 have been provided in what can be considered equivalent compared to the previous 6-months period4. to budget support during 2006, compared to US$349 million during 2005. This has been an exceptionally Workers in Israel high level of assistance, provided to help cover the PA's recurrent budget expenditures. Data for other donor support (emergency/humanitarian assistance, mainly through UNRWA and NGOs and development aid) are notoriously difficult to measure. However, indications are that disbursements of emergency/humanitarian assistance have increased in 20063, while disbursements of development aid have declined. The Bank estimates that US$100 million in additional donor support increase Palestinian GDP by 2-3 percent ­ the increase in budget support alone could thus have prevented a further fall in GDP of c.8-10 percent. MovementrestrictionsreducedthenumberofPalestinians working in Israel. An average of 35,000 Palestinians worked in Israel and Israeli settlements during the first Export to Israel,USD six months of 2006,compared to 40,000 in the year 2005 ­ equivalent to a decline of 12 percent5. The decline was especially large for workers without permit, indicating increasingdifficultiesforclandestineworkerstocircumvent 3 For example, as of September 30, 2006, the UN's Refugee and Works Agency (UNRWA) had received pledges worth US$129 million against their emergency appeal; an increase of 15 percent compared to the pledges for the full year in 2005. 4 While this is a large decline, and an indication of a further tightening of the closure regime, it should be noted that it is still smaller than assumed in the 2007 March 15 "Worst Case" Scenario. 5 The number exclude an estimated 24,000 Palestinians residing East Jerusalem char who can unhindered work in Israel. M 20 Israeli checkpoints and other restrictions, including the Second, a stabilization of the PA's fiscal situation, which Separation Barrier. The number of Palestinian workers would require resumption of the transfer of clearance with permit declined 7 percent. Virtually no Palestinians revenue,and a significant fiscal adjustment by the PA. from Gaza work in Israel anymore. Employment declined in Gaza, but continued to rise in Fiscal developments theWest Bank. During the first nine months of 2006 the number of jobs in Gaza declined 11.2 percent compared Resources to fund recurrent government expenditures to the same period a year before. Between Q3-2005 remained severely constrained in the last quarter of 2006. and Q3-2006 almost 20,000 jobs were lost in Gaza. At Externalsupportwasrelativelystrong,butwasnotenough 166,924, the number of jobs in Gaza has fallen close to offset the drop in tax revenues--largely because Israel to its level 6 years ago, at the eve of the intifada. The continued to withhold indirect taxes (so-called clearance unemployment rate (ILO definition) in Gaza reached revenues) it collects on behalf of the PA--and banks being 36.3 percent. By contrast,in theWest Bank,employment a drain on resources, instead of a source of financing, levels during the first 9 months of 2006 have increased as they continued to reduce their exposure to the moderately compared to the same period a year ago,partly government.7 In the last quarter, about $136 million in as a result of increased employment in the service sector, external support had been disbursed by mid-December, although the manufacturing and transport sectors have of which some $104 million was channeled through the also registered higher employment. The unemployment Temporary International Mechanism (TIM) and $32 rate in theWest Bank was 19.1 percent in Q3-2006. million received from Arab donors via the accounts of the Presidency.This brought the total amount of external Share of under-employed in total employment support received in 2006 to over $700 million.All three windows of theTIM are now fully operational.The scope of its allowances has been expanded and now reaches over 140,000 beneficiaries.Together with theArab donors,the TIM has been instrumental in cushioning the adverse impact of the diplomatic and financial isolation of the government on the Palestinian population. The limited financial resources available in the last quarter of 2006 were used largely for payments to government employees and social hardship cases,and,to a lesser extent, to ensure the continued supply of fuel and utilities. By Increased scarcity of jobs has led to more part-time mid-December, an additional $110 million in payments workers. Also indicative of the increasing scarcity of jobs to government employees had been made, which meant is that the share of workers reporting that they work less that,since the Hamas-led government took office at end- than full time has increased steadily the past year. In Q3- March,they received on average some 40 percent of their 2006 the share reached 11.6 percent,up from 7.3 percent normal incomes,but with considerable differences in this of Q4-20046. Employment data for the fourth quarter ratio between various categories of employees. of 2006 is scheduled to be released in February 2007. A continuation of the current situation would likely result The disintegration of the public financial management in further job-losses being reported by then,although the systemcontinued.Sizableamountsofcashwerereportedly olive-harvest reportedly was exceptionally good this year, brought in from abroad in 2006, without adequate and would be expected to have led to some temporary recording of the amounts or their uses. More generally, job creation. reporting on fiscal operations has weakened further. The economic outlook is highly precarious. In the short term, continued high levels of donor assistance would be critical for sustaining the Palestinian economy. A solid 6 The number of hours worked by those reporting being "under-employed" is not AZ foundation for future growth,however,would depend on known. Assuming that they work half-time, the increase in the share of under- A G D two factors: First, a radical improvement in Palestinian employed has resulted in a 2.2 percent decline in the total number man-hours. N 7 For comparison, total resources available to finance recurrent government A K movement and access; under the current set of restrictive expendituresinthelastquarterof2005,includingtaxrevenues,externalsupport, N A B measures the Palestinian economy will remain moribund. and domestic financing, amounted to almost $525 million. TSE W 21 Fiscal developments obviously depend heavily on the strongArab support of $40­50 million per month,sizable politicalsituation.DespitetherecentagreementonaUnity TIM disbursements of some $30­40 million per month Government (the Mecca Accord), the political outlook now that it is fully operational,and $15 million per month continues to be uncertain. There is thus a continued in domestic revenues,this would still cover only about half prospect that the political impasse witnessed during 2006 to at most two-thirds of monthly recurrent expenditures, will continue, both domestically and internationally, for and less if banks continue to reduce their exposure to the at least several more months. Consequently, financial government.In this case,fiscal policy will remain limited resources--and thus spending--can be expected to to carefully selecting which payments to make using remain severely constrained. Even assuming continued available funds. Financial sector developments ThePalestineMonetaryAuthority(PMA)hasbeenactively Also,the PMA has been working closely with the Bank of addressing the fall-out of the political difficulties on the Israel (BoI) to ensure continued relations between Israeli financial sector.So far,the situation has been manageable banks and those inWBG. Measures agreed with the BoI and banks inWest Bank and Gaza (WBG) remain liquid. focus mostly on improved disclosure by both sides on Deposits have continued to grow--non-government bank transactions, in line with international practice, and depositsincreasedbyalmost6percentinthetwelvemonths prohibiting check endorsements. The new Anti-Money to November 2006--apparently reflecting strong inflows Laundering/Combating Financing of Terrorism (AML/ from abroad. Banks have also continued to extend credit CFT) implementing regulations adopted recently in to the private sector,although this has slowed considerably Israel--whichincludetougheridentificationandreporting in recent months;credit to the private sector increased by requirements for transactions with banks in WBG and 7 percent in the twelve months to November. Banks do which are to be implemented within one year--together have a sizable exposure to the Palestinian Authority (PA) with similar regulations issued in October by the PMA to and to PA employees.They have been able to significantly banks inWBG--which are to be implemented within six reduce their exposure to the PA,while a large part of the months--should enable banks on both sides to continue remaining loans to the PA are collateralized by the assets doing business with each other. of the Palestine Investment Fund.Debt service obligations due by PA employees have been relatively small, in part because loans were rescheduled.Banks have also started to deduct small amounts from allowances and partial wage payments paid to government employees to help cover interest due. But as loans to PA employees have little or no collateral, other than wages and personal guarantees, these loans will become a concern if normal payments of PA salaries do not resume in the near future. In this case,banks will need to start provisioning for them.Loans to PA employees are spread across several banks, but the risks are mainly concentrated in a few domestic banks that have a narrower capital base.The PMA is working with these banks to develop remedial plans aimed at reducing the size of loans to PA employees relative to their capital, including by retaining all profits. 2007 char M 22 TheWorld Bank's Operations inWest Bank and Gaza On-going Bank Group Operations Project Name & Details Description SolidWaste and Environmental The Project is financing interventions in solid waste collection, Management Project (SWEMP). transfer, and disposal of waste for the District of Jenin. The Project is World Bank: US$9.5 million managed by the Joint Services Council for Solid Waste Management Approval Date: October 10, 2000. (JSU). The Project is assisting in strengthening capacity building of the Closing Date: December 31, 2007. Task Team Leader: Andrew Mokakha Environmental Quality Authority. The EC is financing the supply of collection vehicles and transfer stations relation set-ups. Electric Sector Investment and TheobjectivesofthisUS$91millionProjectaretorehabilitatethepower Management Project (ESIMP). distribution systems in the central and southern West Bank, and to World Bank: US$15 million. address the institutional structure for longer-term sector management. EIB: US$38 million. Italy: US$35 million. PA: US$3 million. Approval Date: August 31, 1999. Closing Date: December 31, 2006. Task Team Leader: Somin Mukherji EmergencyWater Project (EWP). The main objective of the project is to support investments that would World Bank: US$12.5 million help alleviate the chronic shortages of safe water supplies; reduce water Approval Date: February 2004 costs and health risks; and conserve scarce water resources by reducing Closing Date: June 30, 2007 system losses. The Project includes the following components: (a) Task Team Leader: Sana Al Nimer emergency water supply repair and rehabilitation in remote rural areas of the southern West Bank; (b) repair and rehabilitation necessary to maintain water and sanitation service levels in the Gaza Strip at the high levels achieved under the Gaza Water and Sanitation Project despite the deteriorating economic and security conditions; and (c) Technical Assistance and Capacity Building provided to the Palestinian Water Authority and the recently established Coastal Municipal Water Utility in the Gaza Strip and to form pilot joint services councils for smaller towns in the southern West Bank. Social Safety Net The objectives of the Project are to mitigate the impact of the present Reform Project (SSNRP). social and economic crisis on the most vulnerable, and to protect the World Bank: US$10.0 million humancapitalofpoorchildrenintheWestBankandGaza.Thisobjective Approval Date: July 19, 2004 is achieved through enhancing and modifying the existing Special Closing Date: December 31, 2008 Task Team Leader: David Steel Hardship Case (SHC) program of MOSA to include a component that will make eligible households' receipt of assistance conditional upon their compliance with a set of pre-determined criteria related to school attendance, attendance at scheduled health check-ups, and attendance at awareness session on pertinent social issues. The Project also aims to strengthen the institutional capacity of PA agencies involved in the AZ A G implementation of the proposed project, in particular in Ministry of D N A Social Affairs. K N A B TSE W 23 The Integrated Community The Project seeks to improve the quality and availability of basic social Development Project (ICDP). and economic services in poor and marginalized communities of World Bank: US$10 million plus US$5 West Bank and Gaza. It succeeds previous community development million supplemental financing approvedoperations financed through the Bank under Community Development in December 2006.. Approval Date: May 23, 2002. Projects I & II. The project finances the rehabilitation of roads, water Closing Date: December 31, 2006. supply and sanitation systems, schools, clinics, thereby preserving and Task Team Leader: Husam Abu Dagga extending the capital stock of villages and small municipalities. It also finances agricultural activities, including the rehabilitation of wells, roads, and terraces. Lastly, the project is piloting new Information and Communication Technology (ICT) initiatives by funding the creation of Multipurpose Tele-centers, thereby improving access to information and training for the poor and marginalized. North Gaza Emergency Sewage The North Gaza Emergency Sewage Treatment project is the fourth in Treatment Project. a series of Bank-funded water and sanitation projects since 1994. The World Bank: US$7.5 million Projectisaddressingtheimmediateandimpendinghealth,environmental Approval Date: September 9, 2004 andsafetyhazardstothecommunitiesnearthepoorly-treatedandrapidly Closing Date: June 30, 2010 growing sewage lake in the Beit Lahia area of North Gaza. The project is Task Team Leader: Sana Al Nimer. also part of a long-term solution for the adequate treatment and disposal of wastewater in North Gaza, which entails the construction of a new wastewater treatment plant expected to be financed by various donors. Approximately 300,000 people living in North Gaza will benefit from this project. GazaWater and Sanitation This Project is a follow-up to the previous GWSSP. The development Services Project (GWSSP II). objectives of this Project are: (a) to develop a sustainable institutional World Bank: US$25 million structure of the water and wastewater sector in Gaza by supporting the Approval Date: June 7, 2005 functional establishment of a Coastal Municipalities Water Utility, as Closing Date: January 31, 2009 Task Team Leader: Khairy Al-Jamal well as by enhancing and deepening the involvement of the private sector through an eight-year operating contract and strengthening the regulatory and institutional capacity of the Palestinian Water Authority; and (b) to continue improving the water and sanitation services by rehabilitation,upgradingandexpansionofexistingsystemsandfacilities. Like the GWSSP, this Project is part of a larger parallel capital program to improve water and sanitation services in Gaza. The Project includes substantial investments in the establishment of a bulk water supply network connecting the various municipalities in Gaza, in the sewerage 2007 network,andinwastewatertreatmentplants.Theseinvestments,totaling char about US$340 million for 2000-2005, will be financed by soft loans and grants from EIB, USAID, and KfW. M 24 Tertiary Education Project The project development objectives are: 1) to improve the regulatory World Bank: US$10 million environment for tertiary education management, relevance and quality Approval Date: April 26, 2005 assurance; 2) increase internal and external efficiency of the tertiary Closing Date: December 31, 2009 Task Team Leader: Adriana Jaramillo education system, as a first step towards seeking sustainability; and 3) to create incentives and provide the basis for improvements in efficiency, quality and relevance of tertiary education institutions in order to meet the socioeconomic needs of the Palestinian population. The project provides technical assistance on defining policies consistent with increasing the financial sustainability of the sector and improving the capacity to respond to labor market needs. It also provides incentive mechanismstoimprovequalityandrelevanceoftheprogramsoffered.On a competitive basis, iInstitutions will apply for quality and management grants, administered by a Fund mechanism. In addition the project will provide technical assistance to improve the management of the current student loans program managed by the MOEHE, and will set the basis for expansion of the financial resources available for funding the student aid programs. The EC is providing co-financing in the amount of 6 million. LandAdministration Project The objective of this project is to assess/learn the extent of commitment World Bank: US$3 million and readiness of the PA to reforming land administration by introducing Approval Date: January 26, 2005 policy, legal and institutional changes to achieve efficient procedures for Closing Date: December 31, 2007 the issuance of land titles and registration of property transactions, and Task Team Leader: Ibrahim Dajani transparent processes for the management and disposal of public land. Theprojectisthefirstphaseofalong-termLandAdministrationProgram, which aims at enhancing economic growth by improving land tenure security and facilitating the development of efficient land and property markets in rural and urban areas through the development of an efficient system of land titling and registration based on clear, transparent and coherent policies and laws and supported by an appropriate institutional structure. Third NGO Project The objective of the project is to provide social services to those who World Bank: US$10 million are poor, vulnerable or affected by the deteriorating socioeconomic AFD: 6 million conditionsbyestablishinganeffectivemechanismtoimprovethequality Approval Date: December 19, 2006 and sustainability of NGO social service delivery. The project has also Task Team Leader: Meskerem Brhane been designed to contribute towards institutional development of the AZ A G NGO sector and contribute to equity in access to social services for the D N A poor and marginalized. K N A B TSE W 25 Second Emergency Municipal Aprolongedperiodofeconomiccontractionhashadseriousconsequences Services and Rehabilitation for municipal revenues and the ability of local governments to continue Project providing basic services. This has translated into sharply increased World Bank: US$10 million health and sanitation risks for the Palestinian population resulting from Approval Date: December 19, mounting solid waste, and deteriorating streets, water and wastewater 2006 networks, particularly in heavily populated urban areas. The objectives Task Team Leader: Steve Karam of EMSRP II are to (a) provide funding for infrastructure rehabilitation and maintenance to help mitigate further deterioration in the delivery of essential municipal services, and (b) create temporary job opportunities at the local level through the launching of labor-intensive employment generation schemes. In addition, through the Municipal Development Lending Fund (MDLF), the Project would pilot innovative initiatives to improve municipal service cost recovery (through the introduction of pre-paid electric metering systems) and leverage partnerships with local NGOs to deliver services more effectively. The total cost of the project is currently estimated at US$40.2 million with financing of US$10 million from the Trust Fund for Gaza and West Bank (TFGWB), and further commitments from Netherlands and Agence Française de Développement. On-goingdiscussionswithKFWandSwedenarelikely to cover the balance with commitments expected by March 2007. Avian Influenza Prevention and West Bank and Gaza has been considered at high risk for AI due to Control Project the large number of migratory birds crossing the territories and the World Bank: US$10 million high risk of spreading the infection among domestic poultry. In April, Global Fund for Avian Influenza: FAO/WHO confirmed AI H5N1 presence in 8 locations in Gaza and US$3 million preventive culling was concluded in the infected areas. The project Approval Date: September 7, aims to strengthen the public and veterinary heath sectors to respond to 2006 possible future outbreaks and will be implemented jointly with UNDP. Task Team Leader: Husam Abu The overall responsibility for overseeing and coordinating institutional Dagga and implementation arrangements will be vested with the National Emergency Committee for Avian Influenza Control (NCAIC) which is chaired by the Minister of Health. Multi-DonorTrust Fund Name of Fund Description Emergency Services Support The development objective of the Emergency Services Support Program Program is to mitigate the deterioration of service delivery brought about by the Approval Date: August 2006 inability of the Palestinian Authority to meet its non-salary recurrent Closing Date: June 30, 2008 costs. The ESSP finances the non-salary expenditures of the key social Task Team Leader: David Steel ministriesandbasedonthePA'srecurrentexpenditureprogramforthese ministries. Total donor commitments to date equal US$55 62 million. The ESSP budget is based on the PA's annual recurrent expenditure program. Eligibility of expenditures is assessed by the Bank, taking into accounttheemergencynatureoftheprojectandtheBank'sprocurement and fiduciary requirements. Financing of expenditures in other sectors 2007 may become possible if donors are willing to provide the necessary char financing. M 26 West Bank and Gaza Portfolio January 1,2007 (in US$ Million) Trust Fund for Gaza Co-financing and the West Bank CURRENT PROJECTS Committed Disbursed Committed Disbursed Total Disbursed 01 SolidWaste and Environmental Management Project 9.5 7.3 7.3 02 Integrated Community Development Project 15.0 8.5 8.5 04 EmergencyWater Project 12.5 7.0 7.0 04 Social Safety Net Project 10.0 1.0 1.0 05 North Gaza Emergency SewageTreatment Project 7.8 4.3 14.0 0.0 4.3 05 LandAdministration Project 3.0 0.5 1.5 0.5 1.0 05 Tertiary Education Project 10.0 1.8 5.9 0.3 2.1 05 Gaza II EmergencyWater Project 20.0 7.2 7.2 07 Avian Influenza Project 10.0 0.0 0.0 07 Palestinian NGO Project III 10.0 0.0 0.0 07 Emergency Municipal Services Rehabilitation Project II 10.0 0.0 0.0 Total 117.8 37.6 21.4 0.8 38.4 COMPLETED PROJECTS Committed Disbursed Committed Disbursed Total Disbursed 00 Electricity Sector Management Project 15.0 14.8 14.8 03 Emergency Services Support Project II 40.0 40.0 71.6 71.6 111.6 97 Palestinian Expatriate Professional Program 2.3 2.3 0.3 0.3 2.6 02 Emergency Services Support Project 20.0 20.0 29.2 29.2 49.2 04 Public Financial Management Reform SAO 20.0 20.0 20.0 97 Legal Development Program 2.8 2.5 2.5 96 Municipal Infrastructure and Development Project 40.0 40.0 5.4 5.4 45.4 97 Microenterprise Project 2.2 2.2 2.2 95 Emergency Rehabilitation Project 30.0 30.0 63.9 63.9 93.9 97 MIGA Fund 10.0 10.0 10.0 96 Emergency Rehabilitation Project II 20.0 20.0 3.5 3.5 23.5 97 Community Development Project 10.0 10.0 2.8 2.8 12.8 01 Emergency Response Program 12.0 12.0 12.0 95 Education and Health Rehabilitation Project 20.0 20.0 29.1 29.1 49.1 99 Community Development Project II 8.0 8.0 8.0 97 GazaWater and Sanitation Project 31.0 31.0 31.0 98 Palestinian NGO Project 10.0 10.0 4.6 4.6 14.6 99 Bethlehem 2000 25.0 25.0 3.6 3.6 28.6 97 Palestinian Housing Project 17.4 17.4 17.4 98 Gaza Industrial Estate 7.2 6.9 6.9 99 SouthernAreaWater and Sanitation Project 21.0 21.0 21.0 00 Health System Development Project 7.9 7.9 7.9 01 EducationAction Project 7.0 7.0 7.0 03 Emergency Municipal Services Rehabilitation Project 20.0 20.0 20.0 01 Palestinian NGO II Project 8.0 8.0 11.6 11.6 19.6 00 Municipal Infrastructure and Development Project II 7.5 7.5 7.5 Total Completed 414.2 413.5 225.7 225.7 639.2 TOTAL (Current & Completed) 532.0 451.1 247.1 214.1 665.1 DONOR FUNDEDTRUST FUNDS 0.0 The Holst Fund** 273.4 273.4 273.4 TechnicalAssistanceTrust Fund** 23.6 23.6 23.6 PEACE Facility** 25.0 25.0 25.0 AZ Public Financial Management ReformTrust Fund** 273.4 273.4 273.4 A G Emergency Services Support Program 62.0 9.0 9.0 D N A TOTAL DONOR FUNDEDTRUST FUNDS 657.4 604.4 604.4 K N A GRANDTOTAL 532.0 451.1 904.5 818.5 1,269.5 B * For some cofinancing,investment income is added to the principal and disbursed,causing disbursements to go above 100% TSE W ** Closed 2/Year approved byWorld Bank Board of Executive Directors 27 Emergency Services Support Program (ESSP) The Emergency Services Support Project (ESSP) In health, 9 packages for drugs estimated at was launched in 2002 to mitigate the effects of US$3.3 million will be signed in January, with economic crises by financing non-salary recurrent delivery in February and March 2007. An ICB expenditures of the ministries of health,education package about $7.9 million is expected to be and higher education and social affairs, and by signed in February 2007, with delivery in March providing financial support to municipalities. 2007. In addition,$6 million have been allocated Between March 2002 and June 2005, ESSPI and for contracting of specialized health services with II financed to a total of US$176 million from 42 NGO health care providers,and $5 million for Bank and donor resources. incremental operating costs. In Education, $5.7 million has been paid for university staff fees.Out In response to the recent fiscal crisis,the Bank has of 41 procurement packages,25 are in an advanced re-launched the ESSP. As of today, $62 million stage of the procurement, and the remaining 16 have been pledged by nine donors (Austria, will be under procurement in January 2007. In Belgium, DFID, EC, Norway, Spain, France, Social Affairs, there are 14 procurement packages Switzerland and Sweden). The Bank has signed with an estimated value of $600,000. Of these,11 Administration Agreements (AAs) with the nine contracts were signed in December 2006,and the donors for a total of US$ 62 million, of which remaining 3 contracts are planned for signing by $58 million have been transferred to the Bank (see end of January 2007. Most goods procured under Table 1). these contracts (e.g., food) will be delivered on a monthly basis. A total of $23 million has been committed to date (40% of available budget). It is projected that a Upon the request of DfID,the Bank has widened total of $51.5 million, representing 92% of the the scope of the ESSP to include operation and budget available from donor commitments,would maintenance costs in power and water/sanitation. be fully committed by March 31, 2007 (seeTable DfID and the Bank have signed a revisedAA for an 2). A total of $10 million has been disbursed additional US$5.5 million towards these sectors. to date, including direct payments made through Priority expenditures have been identified by the the Bank and payments made through the Special utilities,and the first disbursements are underway. AccountheldbytheOfficeofthePresident(OoP). TheOoPwillsuperviseandmakepayments,while The ESSP relies on implementation by the line the daily implementation will be carried out by ministries, with supervision, financial control and the Palestinian Energy Authority (PEA),the local disbursements by the OoP.The ESSP involves 113 Power Utilities, the Palestinian Water Authority procurement packages, and a substantial amount (PWA) and the Coastal Municipal Water Utility of incremental operating expenditures. (CMWU). 2007 char M 28 ESSP Facts and Figures Estimated Budget Requirement (one year) $111.5 mn Education: $37.9 mm Health: $57.7 mn SocialAffairs: $2.0 mn WatSan/Power: $12.0 mn OoP Project Management: $ 0.8 mn Donor Commitments: $62.0 mn Eligible Expenditures Allministries:Rent(buildings,schools,healthclinics,shelters),transportation, fuel,insurance,licensing,utilities,office supplies,maintenance. Health: essential drugs, vaccines, lab/blood bank materials, medical consumables; maintenance and rental of facilities, hospital cleaning/ foodcontracts,contractswithnon-governmentalinstitutionsproviding services. Education: examination costs (materials/stationary/monitoring), school supplies, vocational training materials, minor school rehab, recurrent expenses for universities, including some staff salaries. Social Assistance: basic furniture, equipment for shelters and rehab centers, minor rehab works on shelters/ centers,and food for residents of shelters/centers. Water and Sanitation/Power: basic goods and services directly related to the operation & maintenance of the networks. AZ A G D N A K N A B TSE W 29 "Doing More" World Bank New Projects NGO Project III: Emergency Municipal Services and Supplemental Financing for Rehabilitation Project II: the Integrated Community The objective of the project is to Development Project (ICDP): provide social services to those who The impact of prolonged economic are poor, vulnerable or affected by contraction and fiscal compression The ICDP is a follow-on project to the deteriorating socioeconomic has been felt across all segments the previous CDPI & II, aimed at conditions by establishing an effectiveof Palestinian society and at every improving the quality and availability mechanism to improve the quality institutional level. Due to lack of of basic social and economic services and sustainability of NGO social fiscal transfers, municipalities have in poor and marginalized communities service delivery. The project has also been unable to sustain municipal through financing investments in been designed to contribute towards services. The main objectives of local infrastructure and institutions. institutional development of the NGO EMSRP II are to: (a) help mitigate ICDP prioritizes investments to sector and contribute to equity in further deterioration in the delivery preserve and extend the capital stock access to social services for the poor of essential municipal services (ii) of infrastructure owned by villages and marginalized. The total project create temporary job opportunities at and small municipalities in regions costs have been estimated at US$17.60 the local level through the launching with the highest incidence of poverty. million,withfinancingofUS$10million of labor-intensive employment The proposed additional financing of from theTrust Fund for Gaza andWest generation schemes, and (iii) pilot US$5 million from the Trust Fund Bank (TFGWB) and 6 million by the innovative initiatives that foster Local for Gaza and West Bank (TFGWB) Agence Française de Développement Government-NGO collaboration in would increase investments in local (the French DevelopmentAgency). response to urgent community needs infrastructure and institutions to and assist municipalities in recovering improve the quality and availability costs for the provision of services. of basic social and economic services, The total cost of the proposed project promoting local economic growth and is currently estimated to be about employment, and supporting human US$40.2 million out of which US$10 development and poverty reduction. million with financing of US$10 Priority will be given to projects million from the Trust Fund for Gaza with the highest labor content (above andWest Bank (TFGWB),and further 30 %) and which reach the most commitments of 5 million from the communities. Government of the Netherlands and 12 million from Agence Française de Développement. Otherdonorfunding 2007 commitments are pending. char M 30 Announcement World Bank Energy Report The West Bank and Gaza (WBG) Energy Sector Review will examine how the energy sector can make an effective contribution toWBG's recovery and long-term growth. It will therefore generally deal with activities and issues relevant to the medium to long term outlook, but it will also include an assessment of more immediate issues for the energy sector. It will assess options for achieving objectives for energy service delivery under the current constraints on budget allocation and investment attraction. It will also develop scenarios that analyze options for expanding and diversifying sources of energy supply in order to guide discussions about long-term priorities and strategy in the sector. The draft Review is scheduled to be discussed with the Palestinian EnergyAuthority in late-March 2007. World Bank Transport Report In November 2006, theWorld Bank transport team began the preparation of aTransport Sector Review and Strategy for the West Bank and Gaza.This work was in response to a request from the Ministry of Transport to assist in formulating a strategy for the development of the sector and to enable it to contribute more effectively to the Palestinian economic development.The final report will present the strategy covering an interim period (2007-2009) and a medium term (2010-2012) will focus on issues such as: a) transport issues within the West Bank as well as the linkage with Gaza, and other transport infrastructure and facilities such as the airport,seaport,and the Rafah border crossing;b) institutional and regulatory framework; and c) identification of a priority investment program that would provide the international donor community a coherent framework to coordinate its financial support.The planned completion of this work is May 25, 2007. AZ A G D N A K N A B TSE W 31 March 2007