PALESTINIAN INVESTMENT FUND EARNINGS MAY SEED GAZA

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 000531

SIPDIS

E.O. 12958: DECL: 01/27/2014
TAGS: EFIN EAID ECON KWBG IS GAZA DISENGAGEMENT ECONOMY AND FINANCE ISRAELI PALESTINIAN AFFAIRS
SUBJECT: PALESTINIAN INVESTMENT FUND EARNINGS MAY SEED GAZA
FUND


Classified By: Economic Counselor Bill Weinstein for reasons 1.4 (b) an
d (d)

This cable has been cleared by ConGen Jerusalem


1. (C) Summary: The Palestinian Investment Fund (PIF) will
vote February 10-12 on whether to cash out on over USD 300
million of capital gains made on worldwide investments.
Board members are split over the vote, reportedly fearing
that PA MinFin Salaam Fayyad will appropriate earnings for
his operating budget. At PIF invitation, the U.S.-based
Democracy Council (DC) is currently drawing up a plan for a
separate Gaza-specific investment fund into which it hopes
the PIF will place USD 100-150 million, and which it says
will attract up to USD two billion in additional venture
capital from the World Bank and multinational corporations.
Gaza-based PIF board member Jawdat Al-Khoudry told Emboffs he
and others will push the seed fund, highlighting
construction, medical services, IT, and agriculture as key
areas for investment. USAID supports potential overlap with
projects under consideration for funding with possible FY05
supplemental assistance. End summary.

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PIF May Cash Out on Capital Gains:
What to Do With the Windfall?
--------------


2. (C) Palestinian Investment Fund (PIF) board members will
meet February 10-12 to vote on whether to cash out on a
reported USD 340 million of capital gains made on close to
USD one billion worth of investments worldwide, mainly in the
PIF,s lucrative Orascom Telecoms holdings (please protect).
Phil Colgan, a contractor for the Democracy Council (DC),the
consulting group that has advised the PIF since its
inception, told Emboffs January 26 that the board is
considering setting aside USD 100-150 million as a new seed
fund for Gaza-specific investments. Such a fund would target
three or four large-scale and several smaller-scale
commercially-viable enterprises, Colgan explained, ranging
from infrastructure development to micro-credit and low-tech
industrial manufacturing to a possible natural gas pipeline
link to Egypt. The Democracy Council is currently drawing up
a governance structure and a portfolio of suggested
investments for the fund, which would be separate from the
PIF and would seek to attract up to USD two billion in
additional capital from entities like the World Bank and
multinational private companies.

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Board Split Over Cashing Out
--------------


3. (C) Colgan conceded that PIF board members may vote
against cashing out in order to prevent PIF Chairman and PA
Minister of Finance Dr. Salaam Fayyad from appropriating all
or most of the money for the PA operating budget. Gaza-based
PIF board Jawdat al-Khoudry confirmed to Econoff January 26
that he and other members are at odds with Fayyad over the
approximately USD 150 million the PIF has given the Finance
Minister over the past two years that has "evaporated" within
a budget that has barely managed to cover its wage bill.
"The PIF is a trust to benefit the Palestinian people, not
Fayyad," he said, adding that Palestinians would be angry if
they understood that the PIF had more than doubled its
investment and the public had seen none of this money through
infrastructure projects or social services. He said he is
working with fellow PIF board member Samir Khoury and former
PIF CEO and Managing Director Mohammed Rashid to convince the
board it is worthwhile to "go with their instincts" by voting
to cash out, while fighting to put all of the profits into
the Gaza fund. "I believe this motion will pass," Khoudry
said. "Otherwise I will make their lives very difficult."

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Gaza's Primary Economic Needs
--------------


4. (C) In Khoudry's view, quick labor-intensive projects
should be the fund's first target area, in particular the
construction of high-rise apartment buildings on settlement
lands once settler homes have been demolished following
disengagement. (Note: Khoudry claimed that the PA favors GOI
demolition of homes, but GOI interlocutors now indicate the
government may decide to leave houses intact due to time
constraints. End note.) In addition, Khoudry argued for
investment in medical services, the information technology
sector, and the agriculture sector, the latter of which he
believes has the potential to dramatically increase its
exports following disengagement. Finally, he said the border
crossings must be privatized in order to ensure efficiency of
operations.


5. (C) USAID would not contribute to the Gaza fund, but
supports the idea of overlap with AID projects under
consideration for funding with possible FY05 supplemental
assistance. In particular, AID's West Bank/Gaza Private
Enterprise office would consider collaboration in the
following areas:
-- A venture capital fund focused on employment-generating
enterprises
-- State of the art border warehouse facilities for
agricultural and non-agricultural goods.
-- Investments in outsourcing mechanisms, for instance
customer service call centers for the Gulf region.

--------------
Private Enterprise Conference
--------------


6. (C) Khoudry said he is planning a March 2 conference in
Cairo that will include Gazan businessmen and will focus on
strengthening the Gazan private sector post-disengagement.
The PIF, UNDP, Bank of Palestine, and the U.S.-based Aspen
Institute have already agreed to participate, he explained.
While Khoudry would like to invite representatives of Israeli
private enterprise to attend in order to discuss
opportunities for agribusiness and other cooperation
post-disengagement, the possible participation of the Islamic
Development Bank may make this impossible. USAID and
Embassy/ConGen representatives will be invited as well,
Khoudry said.


7. (C) Comment: Some contacts expressed doubt that PIF will
vote to cash out at all, or that the Gaza fund will attract
significant venture capital. The DC's proposal, however,
highlights a growing number of non-governmental sources of
support for Gaza development -- notably, the Aspen and
EastWest Institutes -- and the increasingly urgent need for
coordination between them and with the World Bank process.
End comment.

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