Select Committee on Foreign Affairs Written Evidence

Memorandum submitted by the Portland Trust

  This paper is structured as follows:

    —    Executive Summary.

    —    Introduction to The Portland Trust.

    —    Key Evidence.

    —    Recommendations.

  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.


  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.


  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).


  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


  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.


  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.


  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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