Memorandum submitted by the Portland Trust
This paper is structured as follows:
— Introduction to The Portland
Trust.
The bulk of our material is focussed in the
Recommendations section, which outlines our key work streams together
with the reasoning underlying them. The Portland Trust stands
ready to respond to any follow-up questions the Committee may
have.
EXECUTIVE SUMMARY
1. The Portland Trust believes in promoting
peace and stability between Israelis and Palestinians through
economic means. More specifically our aim is for an expanding
private sector, distributing wealth and opportunity such that
it spurs political moderation.
2. Beyond the intrinsic logic of the role
economics can play in peace making—that jobs and opportunity
provide a natural impetus—we believe an examination of the
Northern Ireland peace process provides us with a specific and
solid intellectual base, and we are publishing a detailed paper
on this imminently.
3. Our work focuses on generating and implementing
specific, practical projects in the Palestinian Territories and
Israel, and, given their integral relationship to a functioning
Palestinian economy, Egypt and Jordan. Our projects range from
promoting entrepreneurship to infrastructure development and improving
the supply-side.
4. Each of these points are laid out in
more detail below, but the key conclusions we would like to highlight
to the Committee are as follows:
(a) Political steps on all sides will be
vital in ending the conflict between Palestinians and Israelis.
(b) However, economics can enable, incentivise
and solidify political progress. It can create an environment
more conducive to peace and provide an alternative channel through
which to resolve problems.
(c) Central to this is the creation of a
prosperous private sector. However, achieving this requires carefully
formulated, minimally distorting measures. The Portland Trust
has developed a package of initiatives tailored to this end, which
we set out in our Recommendations.
(d) The British government has proven one
of the leading advocates and exponents of using economics in the
peace process—we welcome this.
(e) We would encourage the Foreign Affairs
Committee to use its report to further the principle and practice
of economics in peace making in the Middle East.
INTRODUCTION TO
THE PORTLAND
TRUST
5. The Portland Trust is a private not-for-profit
British foundation with the mission of promoting peace and stability
between Palestinians and Israelis through economic development.
The Portland Trust was founded in 2003 by Sir Ronald Cohen (who
is the Chairman) and Sir Harry Solomon (the vice-Chairman). Sir
Ronald co-founded Apax Partners, one of the world's leading private
equity investment groups. Sir Harry co-founded Hillsdown Holdings,
one of the largest food groups in Europe. Our CEO is David Freud,
former Vice Chairman of Investment Banking for UBS. Sir Martin
Gilbert, the historian, is the fourth trustee. The Portland Trust
has offices in London, Ramallah (headed by Samir Hulileh, former
Cabinet Secretary in the PA) and Tel Aviv (headed by former Brig
Gen Eival Gilady).
KEY EVIDENCE
6. Our study—"Economics in Peace
Making: Lessons from Northern Ireland"—will be published
shortly. We will send to you a full copy of this. The Portland
Trust believes it provides a compelling case for how economics
can help to resolve seemingly intractable political problems.
To give you examples of some of the key messages:
(a) Economic disparity was a principal aggravating
factor in touching off and sustaining violence. Together with
a series of legislative changes, improved economic conditions
helped reduce the gap between Catholic and Protestant unemployment
rates from as high as 14% in 1985 to 3.5% in 2004;
(b) Public sector financial support by the
British government underpinned the economy through the most difficult
periods of the Troubles, although a side effect of subsidies was
to reduce productivity;
(c) Private sector growth supported by substantial
foreign direct investment, from the US in particular, was a key
driver of increased employment and improved living standards.
Business organisations became a key lobby for peace (the Irish
Group of 7, Northern Ireland Business Alliance, CBI-NI);
(d) International mediation began around
economic issues. Senator George Mitchell, who eventually chaired
the talks that led to the 1998 Agreement, first went to Northern
Ireland as a special economic adviser. Economic discussions became
a platform for political settlement.
7. Other key resources for you to examine
for economic perspectives include the World Bank Investment Climate
Assessment for the Palestinian Territories, World Bank Public
Expenditure Review of Palestinian Authority and World Bank—IMF
Economic Developments 2006. All can be found on the World Bank
website, and have been summarised in our monthly Palestinian economic
bulletin, to be found on our website www.portlandtrust.org
RECOMMENDATIONS
8. The following outlines the key initiatives
we are pursuing in the region. This is intended to provide the
Committee with a framework of interventions that can have positive
economic impact in the Palestinian Territories. Our method of
implementation involves close partnership with institutions on
the ground, facilitated by our offices in Ramallah and Tel Aviv.
We also seek to establish strong relationships in Jordan and Egypt
given their integral relationship to a well-functioning Palestinian
economy.
9. We are keenly aware that the political
situation impacts the viability and scale of our projects' implementation.
This can change very quickly—potentially within the time
period of our submission to you and your subsequent report. Hence,
we should emphasise that this section outlines a structure of
interventions, rather than a recommendation for immediate action.
We are, of course, happy to remain in touch with the Committee
on developments. The Portland Trust's projects range across (a)
promoting entrepreneurship (b) infrastructure development and
(c) improving the supply-side.
Entrepreneurship
10. Our projects provide a path from unemployment
and poverty to successful entrepreneurship, flowing as follows:
business training to enable market entry, microfinance to enable
start-up and initial expansion, loan guarantees to enable access
to finance in the banking sector, export support to enable market
access and international competitiveness. The ultimate goal is
to create a business alliance for peace; we have developed the
framework for a joint Israeli—Palestinian Chamber of Commerce.
The status of each project is as follows.
11. Training—we are working with GTZ
(a German NGO) to develop a syllabus by end summer based on international
standards and using the CEFE (Competency based Economies through
Formation of Enterprise) methodology. We will tailor the syllabus
to the needs of Palestinians with small and micro enterprises,
and we are currently about to implement phase one of the programme
to train the trainers in the West Bank and Gaza.
12. Microfinance—we support The Palestinian
Network for Small and Micro Finance (the consortium of the 10
microfinance institutions in West Bank and Gaza Strip that currently
finance and support 30,000 microentrepreneurs). We have partnered
with Planet Finance (a French NGO specialising in microfinance)
and have secured a grant from the EU of 750 000 Euros to develop
a three-year action plan to build the capacity of the microfinance
sector. With more than 60% of Palestinians currently living below
the poverty line and limited access to finance, microfinance provides
a "hand-up" to those most in need. This "bottom
up" solution gives Palestinians the tools they need to lift
themselves and their families out of poverty.
13. Loan Guarantee Schemes—The Portland
Trust worked with the EU and EIB (European Investment Bank) to
put in place a loan guarantee fund for banks lending to Palestinian
SMEs of approximately $40 million. This is now operational.
14. We have also worked with The Aspen Institute,
Overseas Private Investment Corporation (OPIC) and the Palestinian
Investment Fund (PIF) to develop a loan guarantee scheme (LGS).
OPIC and PIF have committed to a $160 million 10-year facility
to provide partial guarantees of 70% to banks lending to SMEs.
The total program size, including the leveraged 30% bank participation,
will be over $200 million. The scheme will launch in May 2007,
and The Portland Trust is contributing financially to the running
costs of its Coordination Agency.
15. We believe it is important to launch
the LGSs now, despite likely low initial demand in the current
political circumstances. It has taken a number of years to assemble
all the components of the LGS and putting it in place now enables
it to play a key role in reflating the Palestinian economy. Further,
as the funds derive from Palestinian, European and American institutions,
there is important symbolic value in this partnership.
16. We now are working to ensure the different
schemes work together in a coordinated way and learn from one
another through our Ramallah office.
17. To provide some of the underlying background
on the need for the loan guarantee schemes:
(a) SMEs are a core foundation of the Palestinian
economy:
(i) Average firm size is 4.9 employees.
(ii) 90% of GDP is generated by SMEs.
(iii) The Portland Trust's 2004 Study, Beyond
Conflict, outlines considerable evidence that SMEs are both
more resilient (shedding proportionately less labour through 1999-2004)
and quicker to expand (predicting higher growth in employment
in the event of a peace settlement) than larger scale firms.
(b) But SMEs face barriers to access finance:
(i) Banks typically operate with credit ratios
of around 25%. Deposits are running at 75% of GDP but receive
low rates of interest, consequently banks have limited incentive
to pursue a large lending business.
(ii) This manifests itself in very high
requirements for collateral (often 130-200% of the loan) and extensive
credit records that many potential borrowers find prohibitive.
(iii) But there is strong evidence for potential
demand (with the resumption of more normal political circumstances).
2005 MAS survey: only 13% of SMEs applied for a loan in 2004,
though 60% wanted to expand their business in the next five years
and 66% said that they currently needed external financing. 70%
of SMEs said that their loans were rejected because of a lack
of collateral.
(c) The LGS scheme will combine financial
risk-sharing with technical assistance to the banks to try to
deliver a step change in lending procedures—for example
on risk assessment, use of credit histories, developing new products—hence
the LGS can have a longer term and wider impact. Accompanying
this, there will be an assessment of the needs of borrowers to
tailor technical assistance to their needs.
(d) To reinforce this, there are also strict
criteria on the terms banks can issue loans under the scheme;
and, of course, there are stringent procedures on terrorist financing.
18. Export Support: we are seeking here
to do two things: first to set up a demonstration project between
a US/EU retailer and Palestinian manufacturers; second to build
a broader scheme based on a detailed analysis we have carried
out of the needs of the Palestinian private sector.
19. Galilee Loan Guarantee Scheme: we are
partnering with Koret and the UJIA to provide $2 million in loan
guarantee funds to small businesses lacking sufficient access
to finance in northern Israel. This will facilitate $12 million
in loans and stimulate business development and employment generation
for those in the region, including for women and Arab Israelis.
20. Israeli—Palestinian Chambers of
Commerce: we have developed a framework for a joint chambers of
commerce which we anticipate to roll out when the political situation
allows.
Infrastructure
21. The Portland Trust believes this is
one of the work areas with most potential benefit. We believe
there is a need for a means to plan and deliver infrastructure
to the Palestinian Territories and broader region. Clearly, it
must be done in a way that provides for agreement whilst preserving
sovereignty; proper, coherent, long-term planning; effective private
sector involvement; and donor coordination and financial reassurance.
22. The underlying case for this is compelling:
(a) Economic Returns on infrastructure in
developing countries are strong: two key studies by Easterly and
Rebelo/Canning and Fay found that GDP registered a 63%/95% rate
of return on each unit of investment in transport/communications
infrastructure. The World Bank states: "Infrastructure represents,
if not the engine, then the wheels of economic activity."
Various studies have indicated very substantial needs for the
Palestinian Territories. Given a skilled, but under-employed,
construction workforce the gains for the local economy are enhanced
further.
(b) It takes a number of years to plan infrastructure,
yet it is likely (based on precedent conflict zones eg Balkans)
to be subject to very substantial, sudden and time restricted
donor funds.
(c) Given the geographic size of the Palestinian
Territories infrastructure must be planned in tandem with neighbouring
countries.
(d) A practical precedent for such an initiative
exists in the Balkans, where various infrastructure organisations
were established with similar goals to those outlined here. However,
they were set up after much of the aid money had been spent. In
the Middle East, this lesson should spur action on this issue
now.
23. Clearly, an initiative of this nature
takes a great deal of preparation, much of it behind the scenes.
24. The second strand of our infrastructure
work focuses on affordable housing. Besides the economic gains
of a construction boom, housing also offers the possibility of
building collateral for investment. We are conducting a study
with local partners to determine the appropriate role for donors.
Improving the Supply-Side
25. Our aim here is to improve public policy,
build up funds for investment and allow market forces to determine
financial decisions. We have developed a private sector pension
"green paper" with Fayyad and are currently working
on implementation; we are working with Clinton Global Initiative
and American Centre for Progress on political risk insurance to
allow investment decisions to be based on market forces; and the
OPIC loan guarantee scheme has a substantial focus on technical
assistance to banks to promote improved risk analysis for loans.
UK government
26. The Portland Trust is in regular contact
with the UK government, amongst a wide range of other organisations.
We have found each of HMT, FCO and DfID to be well seized of the
case for economics and private sector development in the Palestinian
Territories. The UK has proven an impressive advocate of this
in international forums. Specifically, the UK has been instrumental
in the development of the Loan Guarantee Schemes. Clearly, we
would recommend this approach to continue and expand its scope,
along the lines of the framework for action we have developed.
30 April 2007
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