Turning "Gaza-Jericho-First" Into Jobs and Projects

By Colin MacKinnon

The Palestinian National Authority has contracted with Morgan Stanley Asset Management, the fund-management subsidiary of the Morgan Stanley Group, to manage its cash assets, including the cash portion of the $2.4 billion in aid that 40 international donors have pledged to provide the PNA over the next five years. The PLO made the announcement on May 26 in Tunis.

One well-informed source describes the arrangement as a "classic assignment that an investment manager would get." Typically, asset managers who advise governments suggest to their clients where to place cash, what sort of investments to make, how to handle loans, how to hedge currency futures and the like. This kind of thing is what Morgan Stanley will be doing for the PNA.

Worldwide, Morgan Stanley handles some $50 billion in governmental and private assets, including funds of a number of Middle East governments and well-heeled individuals in the region, though the firm will not comment on specific clients. It is known, however—and it's one of the current ironies of Middle East politics—that Morgan Stanley has also been advising the government of Israel on how to handle the U.S.-guaranteed loans that Israel is arranging.

At the moment, of course, the PNA, unlike Israel, has few assets to manage. And for that matter nobody seems to know what portion of the $2.4 billion in aid, when and if it arrives, will be cash. Much of the pledging is in the form of credits and guarantees.

According to informed sources, Morgan Stanley will be compensated the way investment managers ordinarily are compensated, that is, by being paid a set percentage of the funds managed.

A PLO press release in Tunis said that Morgan Stanley was retained "to help assure contributing nations and agencies that funds provided directly to the PNA for the administration and development of the West Bank and Gaza Strip would be managed with total transparency."

The appointment may do just that. If it does, it's a good and necessary thing to reassure the international donors, who were swift to pledge but slow to come forward with actual aid.

First World Bank Project Approved

At the end of May, the World Bank Board approved its first project for the West Bank and Gaza, the Emergency Rehabilitation Project. The project—actually a host of relatively small projects—will cost $128 million and aim at improving water supply, sewage, roads, and schools in the territories.

The bank says improvements should be visible within a year. That seems slow for a program that's supposed to get quick relief to a sadly deteriorated place, but it's probably a realistic estimate.

Of the project's $128 million cost, Arab donors contributed $70 million. Of the $70 million, the Saudi Fund for Development donated $30 million; the Arab Fund for Economic and Social Development, an autonomous Kuwait-based organization, gave $30 million; and the Kuwait Fund for Arab Economic Development, a Kuwait state agency, gave $10 million. Other donors are Denmark, $20 million; Switzerland, $8 million; and the World Bank itself, $30 million. The World Bank donation is part of its Trust Fund for Gaza, a special $50 million fund created in September of last year from Bank profits. The fund is to help priority rehabilitation projects in the Gaza Strip.

The biggest chunk of the funding, $41 million, will go for improvements in roads, both rural and urban. Water and sanitation will get $32 million, other infrastructure will get $17 million, power $8.3 million.

The World Banks Three-Year Plan

The Emergency Rehabilitation Project is actually part of a larger aid plan that the bank announced on May 3. It calls the plan the Emergency Assistance Plan for the Occupied Territories. EAP is a fat, two volume guide for spending $1.2 billion— half the $2.4 billion pledged by international donors—over the next three years on a wide range of development projects.

The plan calls for committing $393 million in the first year, $379 million in the second, and $428 million in the last year. Gaza is to receive $492 million in the first three years, the West Bank $708 million. The remaining $ 1.2 billion in pledges is to be committed in the fourth and fifth years.

Major donors are the European Union ($600 million), the United States ($500 million), Japan ($200 million), Norway ($150 million), Saudi Arabia ($100 million in the first year), Italy ($80 million), and Israel ($75 million).

The EAP puts annual aid at 15 percent of what bank economists say the Palestinian GDP will be. This level of aid is a bit higher than Bank officials have been saying is optimal—10 percent is usually considered the rough upper limit of what developing nations can realistically absorb—but Gaza and the West Bank are probably exceptional in that they need to absorb a lot of assistance and absorb it fast.

The EAP, it should be noted, consists of recommendations, not legislation. Most aid will be bilateral and will not be administered by the Bank. Still, the Bank is coordinating international efforts and the EAP, a sophisticated and detailed study, is the only guide the donor community has. It was an earlier Bank assessment, after all, that donor nations used to estimate how much to pledge.

Sectoral Investment

The EAP would spend $600 million on investment in transportation, water, solid waste, power, agriculture, telecommunications, housing, education and health. Of this, the West Bank would get $366 million, Gaza $234 million.

The plan estimates that start-up expenses—funds for the central administration and additional support for non-governmental organizations already operating in Gaza and the West Bank—will total $225 million over the three years.

The Bank proposes spending $300 million in support for private sector investments in telecommunications, housing, agriculture, and industry.

About $76 million will go for technical assistance in building institutions, in policy and feasibility studies, and project preparation and implementation.

Aid Moving Slowly

Development aid for Gaza and the West Bank is moving, but only very slowly. Though everyone—donors, Bank officials, the PLO—is aware of the need to get projects moving quickly (saying so is almost a mantra at the Bank), so far aid just hasn't been forthcoming.

Donors perceive Palestinian institutions as weak, unresponsive, and lacking in accountability. Donors are, therefore, still reluctant to transfer funds to the PNA, PECDAR or other entities, and projects are not moving forward.

The situation could be explosive. The International Labor Organization, a U.N. agency, estimates that the Palestinian labor force in Gaza and the West Bank, now 310,000 people, will rise to 470,000 by the year 2000. And this figure doesn't take into account return migration from Palestinians living overseas. Where will the jobs come from?

Overall current unemployment in the present and former occupied territories, says the ILO, is 25 percent. In Gaza, it's 41 percent. Half the population of Gaza and the West Bank is fifteen years old or younger. Per capita annual income is $1,715.

The territories still are bound economically to Israel. Until the recent border closing, says the World Bank, one-third of the labor force worked in Israel. Their earnings were one-fourth the GNP of the territories. Now much of that is cut off. The slow pace of assistance, therefore, is the fuse that could trigger the explosion.