Select Committee on International Development Minutes of Evidence

Examination of Witness (Questions 60-78)



  Q60  Alistair Burt: EC financial assistance to Palestinians has reduced from 2002 to 2003 by some 80 million euros, what is behind that and is it as obvious as considering that with enlargement the Union simply has many more projects to support? Would this betray a long-term sense of moving money away from the Middle East to other areas?

  Mr Seatter: It is not the latter. This is not part of any strategy to switch expenditure priorities. There are two factors behind this. The first is that in 2002 the figure that you have in your tables here is 50 million euros higher than originally planned. And the reason for that is that towards the end of 2002, in the light of the severe damage and dislocation that there had been during the course of the year, we asked the European Parliament and Member States to approve an additional package of 50 million for emergency aid. So if you like 2002 was higher than it should have been because we brought forward expenditure under the emergency aid package. The second element in this is that you will see some of the humanitarian aid and the food aid, food security aid, is shown in the tables slightly lower than last year, and that is simply because this aid is given several times throughout the year and my colleagues who are dealing with that are currently looking to see whether they can allocate additional resources for humanitarian aid later this year. So the expenditure will roughly even out. At the end of the day when you smooth out the effect of this 50 million being brought forward the level of the aid will remain roughly the same.

  Q61  Alistair Burt: How does it look for 2004?

  Mr Seatter: That is one of our problems. Because we tried to keep a margin for flexibly responding to new situations, we do not plan more than one year ahead. Usually we have a three year rolling programme but in the case of the West Bank and Gaza we decided that it would not be appropriate to do that. So we come forward each year with proposals for the following year and we consult Member States and other donors about this but we do not yet have any plans for 2004.

  Q62  Alistair Burt: Despite the flexibility which one can understand, that must make it terribly difficult for grassroots recipients on the ground?

  Mr Seatter: Yes, it does. I think they have many more problems than the level of the aid they get from the European Union actually, but what we do try to do is discuss when people are making their budget plans, which is from about now onwards, what might be available for the following year. So the Palestinian Authority is working with the World Bank and other donors on an emergency recovery strategy, and we are talking to them at the moment about this to see how our contribution might support that. Obviously it is extremely difficult to look very far ahead at all in this region.

  Q63  Alistair Burt: Of course. Could I move on to a slightly different tack and that is the budget support to the Palestinian Authority. How do you ensure that that money is properly spent? How do you track it and ensure transparency?

  Mr Seatter: There are three levels to this. The first one is that we implement this under the control of the International Monetary Fund, so that the IMF controls the broad aggregates of expenditure by the Palestinian Authority, in particular the total level of expenditure, the level of expenditure in health, education and social services, which we are trying to protect, and thirdly the total size of the payroll. These aggregates are supervised by the IMF. The second level is we are trying to create conditions for the Palestinian Ministry of Finance itself to control the funds in a better way, so strengthening the internal financial control capacity of the Ministry of Finance. We have a programme to do that and there are now 54 internal auditors in place as a result of our programme to make sure this expenditure is subject to proper control. The third way in which we do it is the following—and this year we have introduced a targeting of the support on meeting the arrears owed to private sector firms and arrears to the social security system operated by the Palestinian Authority—we make payments conditional on checking the bills which are presented to us in terms of arrears owed to private sector firms. Once those have been checked we then continue with our payments. So that provides some additional security as to the control of this expenditure, although I have to say it does impose quite a heavy administrative burden on the Commission as well as on the Palestinian Authority.

  Q64  Alistair Burt: You will be aware during the course of the year there was significant criticism of the expenditure in Palestine raised by a number of Members of the European Parliament and by outside sources as well. Firstly, is the Commission now completely satisfied as to the security of expenditure for Palestine? Secondly, was any inquiry actually instigated and, if so, what is the current status of any inquiry into previous expenditure?

  Mr Seatter: When these allegations were made, they were made in various different forms and there was no direct allegation against the European Commission itself, it was a general allegation against all donors to the Palestinian Authority. We have done a number of things in response to this. If I can say what the nature of the allegation amounted to, it amounted to documents which were shown to us which were claimed to be payments that went to terrorists or terrorist organisations. We have looked at every one of the documents presented to us and we have looked at it from basically three points of view. First of all, was the cheque actually signed by anybody? Secondly, who was the beneficiary of this cheque, was it actually ever paid? Thirdly, what was it paid for? We have examined each of the documents presented to us. Many of them were not signed, none of them but four were actually paid, and for the ones which were paid there was no evidence as to what the expenditure went on, but we do not believe there is any foundation to the cases which were put to us of misuse. We have pursued this also with the Israeli Defence Forces and we have had meetings with them to go over these precise points, and we have not found yet—I have to say "yet" because we are continuing to look at these things—a case of money being diverted to terrorist purposes. There is an investigation by the European Anti-Fraud Office under way but I can give you no results from that yet. There is also a Committee of the European Parliament which is looking into this, which meets every month, and they have not yet produced their report, but we are obviously co-operating with all these inquiries as well as the ones we have launched ourselves.

  Q65  Chairman: I think I must be slightly slow, I do not think I fully understood that, so could we go through that once more?

  Mr Seatter: Yes.

  Q66  Chairman: Prima facie suggestions were made to you there had been effectively improper payments. Had there been payments? You said there had been cheques drawn but not signed. Why would cheques be drawn and not signed? I do not understand.

  Mr Seatter: What I am talking about is the evidence presented to us as evidence of misuse of funds. In some cases they were cheques—

  Q67  Chairman: Do you mean "checks" or "cheques"?

  Mr Seatter: "Cheques"—issued with the name of Yasser Arafat or somebody else in the Palestinian Authority.

  Q68  Chairman: Who would issue those cheques?

  Mr Seatter: The Palestinian Authority. In a number of cases these cheques were not even signed so the evidence presented to us, in other words, showed nothing. In the other cases, where the cheques were signed—

  Q69  Chairman: I do not understand, I am sorry, I am being very stupid. Why should anyone want to issue a cheque and not sign it? Who is it suggesting in those circumstances issue a cheque and not sign it? Who has possession of the cheque books, to begin with?

  Mr Seatter: These are documents recovered by the Israeli Defence Forces and the Israelis are presenting them to us as evidence of misuse of funds.

  Q70  Chairman: These are documents presented to you by the Israeli Defence Forces, cheques purporting to be made but where no one has ever signed them?

  Mr Seatter: That is correct. There are some cases where cheques were never signed. With the ones which were signed, we tried to check whether they were actually paid, and we have gone through all the records to check this, and in most cases they were never paid; there is no evidence of any payment. In the cases where we did find evidence of payment, and there were a very small number of these, there was no evidence of what the payments were for. So we conclude from that that the evidence which was presented to us was not substantive at all in support of the claim that there were funds diverted for terrorist purposes.

  Chairman: I understand. Thank you for that clarification.

  Q71  John Barrett: You mentioned on a few occasions the Palestinian Authority's reform programme and audit trails, financial controls, legal reforms and so on. What I want to ask is about the impact these reforms have had both on the Palestinian people and whether this has increased the Palestinian Authority's legitimacy and, also, has it altered the Government of Israel's position? Has their confidence, if possible, increased in the Authority?

  Mr Seatter: To take the second question first, the Israeli Government have told us, because we do discuss these things regularly with them, that they believe these reforms have been beneficial. The evidence for that is that they are making payments of the arrears and payments of the tax revenue into what we call the single treasury account, the account we set up with the Palestinian Ministry of Finance. So we conclude that if they are making these payments, they obviously believe there is sufficient confidence in the system for them to make payments without diversion of funds. As to the evidence of whether there is Palestinian support for these, there is anecdotal evidence that people are beginning to have greater confidence in the financial capacity of the Palestinian Authority. For example, all these documents are now published on the website of the Palestinian Authority Ministry of Finance, the budget is there in great detail and every quarter there is a budget execution report presented by the Minister of Finance. There is some evidence that people are beginning to have greater confidence that public money cannot just disappear within the system of the Palestinian Authority.

  Q72  John Barrett: Do you think the people's view of the Palestinian Authority is also influenced by their perception of the Authority's service delivery and dealing with emergency aid?

  Mr Seatter: There have been many criticisms of the Palestinian Authority's ability to deliver services. I think it is fair to say their capacity to deliver services has been very severely affected by the closures and the destruction of projects which has occurred over the last three years. But there is, for example, an initiative of the Palestinian Ministry of Social Affairs, to target the very, very poorest parts of the population, and they have put this in place with the World Bank, and the initial evidence is that this programme seems to be working quite effectively and we are considering whether we might contribute towards this programme for next year.

  Q73  John Barrett: On a slightly different issue, DfID have highlighted the need for institutional reform of the UN Relief and Works Agency. What is the EU view on this?

  Mr Seatter: We think all donors should work together, that no donor is isolated. We have regular meetings and in fact there is a meeting next week in Amman of all the donors. We are very grateful for the support DfID has given to this. We have not been happy about some aspects of UNRWA's management and we carried out some audits in 1999 and 2002, and earlier this year we did a follow-up audit. The sorts of problems there were, were the lack of a central budget reporting system, the lack of job descriptions for the staff, no internal audit capacity that was regularly done and effectively done. We think the reforms which have been put in place address these issues and we are happy to the extent we are continuing to make our payments, and we keep in very close touch with DfID on this, and we share their view the reforms are becoming effective now.

  Q74  Chairman: Can I just ask two questions about trade. As I understand it, there are two mechanisms whereby the European Union has been seeking to help the Palestinian economy. One is the Association Agreement on Trade and Co-operation, originally signed in 1997. Is that working? Is it doing anything? Is it achieving anything? Or is the situation of the Occupied Territories such that effectively it is incapable of doing anything?

  Mr Seatter: Let us say that it was pretty dormant but we are trying to revive it. The last meeting of the Joint Committee (of the Association Agreement), where we come with Member States to discuss with the Palestinian Authority, took place in Ramallah on 26 June. We have two measures relating to trade which resulted from that. One of them is some work which is going on in the Ministry of Economy and Trade about the future trading relations of the Palestinian Authority, in other words, should they have a free trade agreement or a customs union with Israel, and this kind of work we are supporting and that is of a longer term nature. More immediately, we have offered to look at the question of liberalising agricultural trade. We believe it is very important that the European Union is more generous in freeing agricultural trade, imports from the Palestinian Territories into the European Union, and though the impact would be limited it would nevertheless be important to increase the quotas which are allowed for their products and generally open a greater liberalisation. So we have offered to seek a mandate from Member States to conduct a negotiation to liberalise agricultural trade. That is another specific measure of that meeting.

  Q75  Chairman: On that last point, it would be useful to have some further and better particulars, because if you are a strawberry producer in Gaza or somewhere else that may well be of some significance. Although I have to say for those of us who were at Cancun, the idea of the European Union liberalising agricultural trade for anyone at the moment we will take with a pinch of salt. You heard officials from DfID talking about MEDA which I think stands for a Euro-Med free trade area. Just how does that work? What, if any, impact do you see that having on trade with the Occupied Territories?

  Mr Seatter: What the European Union agreed to at Barcelona six years ago was to set the objective of having a free trade area between the European Union and all our Mediterranean partners by the year 2010. That objective guides a lot of our financial assistance to all our partner countries in the region, including the Palestinian Authority in the way I have just described, but also with neighbouring countries. We are discussing with Jordan and Israel measures to facilitate trade between Israel, Jordan, including the Palestinian Territories, and the European Union. The United States has several arrangements in industrial zones in Jordan involving Israeli products, and we are looking at the possibility of applying this system to the European Union trade rules and incorporating the Palestinian Authority in those talks. So we have had some initial talks with Israel and Jordan already and we hope to include the Palestinians in that later this year, and we will see how far we can go with that.

  Q76  Hugh Bayley: To what extent is it possible to quantify the value to Israel of the MEDA arrangements? Are there any other special relationships which exist between the State of Israel and the European Union? Given that we do not see eye-to-eye on the destruction of infrastructure, for instance, is that special relationship the EU has with Israel something which can be brought into play in relation to our claims against the State of Israel for the destruction of infrastructure? Or is that something the EU would want to avoid, perhaps because of economic development benefits following the Jordanian model? How does the EU look at it?

  Mr Seatter: We have free trade with Israel and that has been going on for quite a number of years and there are further measures which have been taken. Recently we have concluded an agricultural agreement with Israel also to liberalise agricultural trade, which we believe is in the economic interest of the European Community more than the economic interest of Israel. The trade balance with Israel is very, very heavily in our favour. So when you say, "What is the benefit or impact on Israel of these arrangements", at the moment the European Union is doing quite well out of them both in terms of industrial trade and agricultural trade. Israel is certainly complaining to us about this. There are other agreements we have with them, like the science and technology co-operation, which is of benefit to Israel but is also of benefit to the European Union, and there are many projects that we have with Israeli scientists, researchers and businesses which are of mutual benefit. So I am not sure what would be the result of disrupting these or interrupting these. It may actually harm the European Union more than it harms Israel. There is one issue where we are in very clear dispute with Israel on trade, and that is the question of the products from Israeli settlements being imported into the European Union. The action we have taken jointly with Member States' customs administrations is to impose duties unilaterally on these products to prevent them from having preferential access to the market.

  Q77  Hugh Bayley: Generally I am a free trader, but if you have a free trade agreement there are obligations on both parties, are there not, not to interfere with trade? It does strike me as curious that we accept that Israel is a free trade partner and we seek to make the Palestinian Territories a free trade partner but we do not as part of that agreement insist that the barriers to trade—the barriers that either add to costs or create delays or make it impossible for goods from the Palestinian Territories to pass through the State of Israel and out to customers abroad—are lifted. Surely it is a contradiction in terms to say there is a free trade arrangement there when there is a very clear series of barriers to trade on one side of that three-way triangle?

  Mr Seatter: We have free trade with Israel and we have free trade, to the extent it is possible to talk sensibly about that, with the West Bank and Gaza Strip. The problem is between Israel and the West Bank and Gaza Strip because of the conflict. There is a conflict going on and this is completely disruptive of normal relations between Israel and the Palestinians. We have raised cases with Israel of Palestinian products which are being prevented from or delayed for export and we are pursuing that with the Israelis. We are also trying to draw the Palestinians into the talks we are having with Israel and Jordan about liberalising trade as well, so we are hopeful that might lead somewhere. More generally, the agreement we have with Israel, the Association Agreement, contains a number of clauses, including a very important one on human rights, and we keep this under review. I think if we felt the situation were to deteriorate to a very great extent we would come back to Member States with our analysis and ask them what they wish to do with the Association Agreement with Israel. I think there comes a point where one does have to make that assessment. We did raise this with Member States last year when the European Parliament voted a resolution on the Israeli Association Agreement, and the view of Member States at that time was they did not want to have suspension the Association Agreement, but I think we would come back to that issue if the situation deteriorated further and go back to Member States and seek their views as to what they wish to do.

  Q78  Hugh Bayley: I do not wish to penalise Israeli businesses which want to export to Europe, but I feel equally passionate about not wanting Palestinian businessmen and women who want to export to Europe having barriers put in the way of their businesses, because you cannot have development in the Palestinian Territories unless they are able to trade. Earlier on you said because of the destruction of the port and airport in Gaza the EU had taken a policy decision, following consultation with the Palestinians, not to rebuild that infrastructure because of the fear it would be destroyed once again, but is that not simply allowing Israel to dictate policy on the terms of trade for Palestinians in an area where we are committed to free trade? Should we not rebuild the infrastructure and try and build into our relationship with Israel some sort of payment from the Israelis, who are part of that three-way trading relationship, if they were to once again destroy or undermine—destroy in the case of the port's facilities—the ability of Palestinians to export? Otherwise we simply accept Israel de facto has the right to deny Palestinian businesses the rights which we in the EU believe they should have.

  Mr Seatter: On the question of the choice of infrastructure projects, we are guided by the Palestinians on this. We would not try to secondguess them. They are saying their priorities are for budget support, and we would very much like to support that, so I do not think we would want to override what they say. Having said that, there is an old project for the warehouse at Gaza Airport which is supposed to help refrigerate agricultural goods and make it easier to export. The funds for this are still available and we had planned to proceed with these works at the warehouse on the assumption that the Roadmap was going to go somewhere. Whether this is a realistic thing to do now, I do not know, but we are guided by the Palestinians on this and they do not want to proceed on this at the current stage. Even before you get to this stage there is the problem of the internal closures and the effect this has on the Palestinian economy before goods can get to market for export. There is a primary problem here as well and the analysis of the World Bank is that these closures have the effect of reducing the GDP of the Palestinian economy by 21 per cent, so that is a primary problem which is linked to the conflict.

  Chairman: Thank you very much and thank you for helping set the scene for us. We are very grateful.

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