The Palestinian Territories: In Financial and Legal Limbo

By Colin MacKinnon

It's going on a year now since the PLO and Israel signed the Declaration of Principles. But the Palestinian territories—Gaza and Jericho—along with the rest of the West Bank are still in a kind of financial and legal limbo, a state that has held back investment and development and which threatens to go on indefinitely. How come?

One problem is that the international donor community, which pledged $2.4 billion in aid last October, hasn't seen fit to donate much. The donors, individual countries and larger collectives like the European Union and the World Bank, have been demanding assurances of accounting "transparency" from the PLO and profess not to be satisfied with what they've seen so far. Only a few million dollars in development funds have trickled in. So the accountancy dispute is a problem.

Development specialists who know the occupied territories, however, will tell you there's another one: the hobbling of the Palestinian private sector, whose activity will in the end be as important for the development of Gaza and the West Bank as foreign aid.

Two critical requirements for private sector development just aren't there right now: a banking and financial structure and a clear, credible legal regime.

The West Bank and Gaza are woefully underbanked. According to the World Bank, there are some 3,700 small and medium-sized enterprises in the occupied territories and perhaps 40 companies that could be called large. None of them has had any access to term funding for the last 27 years. There are simply no investment institutions in Gaza and the West Bank.

This lack—basically thanks to historic Israeli resistance to developing the Palestinian economy—has been a major stumbling block to development and is going to stay one until financial institutions come into being.

Investment Institutions

A couple of Palestinian investment funds are being created now and seem promising:

* The Palestine Development and Investment Company. PDIC is registered as an off-shore holding company in Liberia and has a paid-in capital of $200 million. The head office is in Amman. PDIC has already conducted feasibility studies that have identified such areas as tourism, financial services and investment banking, light industry, agriculture, and construction.

* The Arab Investment and Development Company, to be established by the London-based Capital Trust Group. AIDC itself will be headquartered in Cyprus. Planned capitalization is $100 million, which is expected to be raised by the end of this year.

Both PDIC and AIDC are connected to well-heeled Palestinian families of the diaspora. AIDC also has Saudi backing.

An investment bank—not a fund—is also in the works. Called the Arab Palestine Investment Bank, it will be sponsored partly by the International Finance Corporation, a small agency within the World Bank Group that fosters private sector development. The new bank, says the IFC, will be "the first comprehensive commercial and investment banking institution in the Occupied Territories."

The Arab Bank Group of Amman will hold 51 percent of equity, the IFC will subscribe up to 25 percent, the German government will probably hold 15 percent, and the rest will be held by European and Palestinian investors. The IFC will extend credit of $15 million to the new institution for on-lending to small and medium-sized enterprises.

The bank will focus on trade finance, project lending, corporate advisory services, and the mobilization of funding from the local market and overseas.

APIB will be supervised by the as-yet-nonexistent Palestine Monetary Authority, which, under the Cairo Agreement signed in May, is supposed to regulate and implement monetary policy in the Palestinian territories.

When any of these institutions will actually get rolling is anyone's guess, partly because of the legal regime, or lack of it, in the Palestinian territories.

Uncertain Legal Regime

Gaza is basically under law dating from the British Mandate; the West Bank is basically under Jordanian law. Both areas, though, are governed by an Israeli military authority that rules as it sees fit by issuing Military Orders. These up to now have served as law in Gaza and the West Bank.

The Palestinian Authority is responsible for civil administration and legislation in the Palestinian territories, but its authority is severely limited.

Under the Cairo Agreement, Israel has the right to kill any legislation the Palestinian Authority suggests if Israel finds the legislation outside the jurisdiction of the Palestine Authority or inconsistent with the Cairo Agreement.

As an involved lawyer describes it, the mechanism works like this: If the Palestinian Authority wants to pass a new law or change an old one, it has to refer the legislation to a joint body called the Legislative Subcommittee, which has 30 days to agree to the legislation. If the Israeli side objects, the legislation is referred to a two-man board of review, with an Israeli and Palestinian member. If the board doesn't agree, the legislation is then referred to the Liaison Committee, which also has equal Israeli and Palestinian membership and whose authority is final. Thus Israel has the ultimate say over all Palestinian legislation.

The Palestine Authority, of course, has no jurisdiction over Israeli settlements or security within the Palestinian territories.

Israel has the right to kill any legislation the Palestinian Authority suggests.

In the Palestinian territory all the old laws of the occupied territories, including all the military orders handed down by the Israelis, currently remain in effect.

What laws will Palestinians try to pass? And which ones will the Israelis allow to go through? No one knows. It's all very unclear and this is just the recipe to discourage private investment.

As one lawyer puts it, "No stable, predictable or transparent policy or process has yet emerged to provide the business community with the minimum degree of certainty needed for reasonable business planning."

In the rest of the West Bank, the Israelis continue to be a military occupying power ruling by military decree. As before, the Palestinians have no right to initiate legislation. Here the legal picture is, if anything, muddier than in Gaza and Jericho, since no one knows which parts will end up as Palestinian territories.

Some mess.

New Investment Code?

The Israelis have promulgated an investment code in the West Bank that encourages investments of over $100,000. It's basically an Israeli law dating from the mid-1970s and attorneys will tell you it's not really all that bad. Palestinians understandably don't like it, however, because it was introduced and administered by Israelis.

Should the Palestinian Authority simply take over and continue the Israeli code? Some observers say yes, arguing that the law is basically a good one and has the virtue of being in place.

The Palestinian Authority probably won't buy that argument, though. The large and prestigious U.S. law firm White & Case is working on a pro-bono basis with the Palestinian Authority to draft a new investment code. But how long it will take White & Case's lawyers to do that isn't known. Whether the Israelis will agree to the end product isn't known either. Again, some mess.

What's needed now is action. Palestinians have to challenge Israeli military orders and have to get about the onerous business of seeing their own laws promulgated. Doing so won't be fun or easy, but it has to be done.

A good start would be to form a technical legal committee to accelerate drafting and regularizing legislation for the Palestinian territories. The World Bank has $750,000 to help in doing just that.

Until the legal picture becomes clearer, substantial private investment just won't happen.

Colin MacKinnon is chief editor of the Washington-based Middle East Executive Reports.