Identifier
Created
Classification
Origin
10JERUSALEM185
2010-01-29 20:17:00
CONFIDENTIAL
Consulate Jerusalem
Cable title:  

PALESTINIAN AUTHORITY PRESSES GAZA ELECTRIC

Tags:  ECON EAID EFIN PREF ENRG GZ IS 
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VZCZCXYZ0427
PP RUEHWEB

DE RUEHJM #0185/01 0292017
ZNY CCCCC ZZH
P 292017Z JAN 10
FM AMCONSUL JERUSALEM
TO RUEHC/SECSTATE WASHDC PRIORITY 7431
INFO RUEHAM/AMEMBASSY AMMAN 8785
RUEHSW/AMEMBASSY BERN 0176
RUEHEG/AMEMBASSY CAIRO 0018
RUEHTV/AMEMBASSY TEL AVIV 5155
RUEHBS/USEU BRUSSELS
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L JERUSALEM 000185 

SIPDIS

NEA FOR FRONT OFFICE AND NEA/IPA; PRM FOR FRONT OFFICE AND
PRM/ANE; NSC FOR SHAPIRO/KUMAR; DEPT PLEASE PASS TO USAID
FOR ANE/MEA:MCCLOUD/BORODIN

E.O. 12958: DECL: 01/28/2020
TAGS: ECON EAID EFIN PREF ENRG GZ IS
SUBJECT: PALESTINIAN AUTHORITY PRESSES GAZA ELECTRIC
COMPANY TO END ITS DEPENDENCE ON SUBSIDIES

Classified By: Consul General Daniel Rubinstein for reasons 1.4 b, d

C O N F I D E N T I A L JERUSALEM 000185

SIPDIS

NEA FOR FRONT OFFICE AND NEA/IPA; PRM FOR FRONT OFFICE AND
PRM/ANE; NSC FOR SHAPIRO/KUMAR; DEPT PLEASE PASS TO USAID
FOR ANE/MEA:MCCLOUD/BORODIN

E.O. 12958: DECL: 01/28/2020
TAGS: ECON EAID EFIN PREF ENRG GZ IS
SUBJECT: PALESTINIAN AUTHORITY PRESSES GAZA ELECTRIC
COMPANY TO END ITS DEPENDENCE ON SUBSIDIES

Classified By: Consul General Daniel Rubinstein for reasons 1.4 b, d


1. (C) Summary. In a calculated move to decrease its
financial burdens and increase the fiscal sustainability of
the Gaza Strip's only electrical power plant, the Palestinian
Authority (PA) is cutting back its payments for the plant's
industrial fuel. The PA's goal is to press the Gaza
Electricity Distribution Company (GEDCO) to increase revenue
collection and contribute to its operational costs. The
ensuing shortage of fuel forced GEDCO to shut down one of its
two turbines on January 23, resulting in daily blackouts of 8
to 16 hours. Additional fuel was sent into Gaza on January
28 after GEDCO contributed NIS 5 million toward fuel costs.
This is expected to keep the one currently functioning
turbine running through the end of January. End summary.

PA Steps In After EC Subsidies End
--------------


2. (C) The PA began making direct payments GEDCO's
industrial fuel after the European Commission (EC) ceased
payments in November 2009 and redirected its assistance to
other PA needs. The EC had paid for the maximum amount of
industrial fuel allowed by the GOI into Gaza since it began
its subsidy program in 2006, around 9 million liters per
month at a monthly cost of approximately USD 12 to 14 million
(depending on the oil price). According to Roy Dickinson, EC
Head of Coordination, the EC had always planned to phase out
the fuel program, as it did with other direct subsidies in
Gaza, but two factors significantly influenced the timing of
their decision.


3. (C) First, Dickinson said, European auditors issued a
report in late 2008 stating that paying VAT and excise on the
fuel transfers was problematic. The EC attempted to
negotiate with the GOI for a tax exemption without success.
Second, in October 2009, when the PA asked GEDCO to
contribute to the fuel cost, Dickinson claimed that Hamas

prohibited GEDCO from doing so. Shortly thereafter, the EC
decided to stop fuel subsidies because they possibly
benefited Hamas, according to Dickinson. He added that it
was also difficult to promote reforms in net lending as long
as the PA was protected from the real costs of the fuel
transfers.

PA Fiscal Retrenchment Holds GEDCO Accountable
-------------- -


4. (C) In the two months following the end of the EC program
(December 2009 and January 2010),the PA paid USD 10 million
per month, approximately USD 2 million below the EC's
funding, according to PA officials. Dr. Omar Kittaneh,
Chairman of the Palestinian Energy Authority, said that the
PA expects GEDCO to pay the difference between PA
contributions and the monthly cost of the GOI cap for
industrial fuel.


5. (C) PA Prime Minister Salam Fayyad told the Consul
General on January 26 that a graduated decrease of PA
payments for GEDCO's fuel is part of a plan of fiscal
retrenchment by the PA. He emphasized that the cost of
subsidizing the plant was exorbitant and accused GEDCO of
doing little to collect revenue from consumers. It was
imperative, Fayyad said, that the power plant put its books
in order and make a genuine effort to collect electricity
payments and contribute to the cost of fuel. In order to
force GEDCO to increase its accountability, Fayyad said that
the PA would reduce monthly payments by USD one million per
month, "down to zero."


6. (SBU) Recent PA press statements struck a more nuanced
note, attributing the difficulty of the situation to the EC's
decision to end its fuel subsidies, while stressing the PA's
current role in paying for fuel and GEDCO's responsibility to
provide collection revenues to contribute to its operational
costs. Note: A cover note to the PA's draft 2010 budget,
provided in confidence to Econoffs, states that the PA is
expecting net lending to decline by USD 80 million from the
2009 level, due partially to "greater collection efforts by
GEDCO." End note.


7. (C) In response to the decrease in fuel payments and
subsequent electricity cutoffs, GEDCO transferred NIS 5
million to the PA on January 27. As a result, the power
plant was expected to receive 500,000 liters on January 28,
allowing one of its two turbines (generating 30 MW) to keep
running at least until January 31, according to Dr. Rafiq Al
Malihi, director general of the plant. With the PA's
payments for February, Gaza should receive enough industrial
fuel during the week of February 1 to run both turbines
(generating 60MW). Both GEDCO Director General Suhail Skeik
and Kittaneh expect financing problems in the second half of
February, resulting in fuel shortages again.


8. (C) In addition to the power plant, the Gaza Strip
receives electricity through feeder lines: 120MW from Israel
(paid by the PA through deductions in clearance revenues) and
17MW from Egypt ("sometimes" donated by the Egyptian
government, according to Skeik). The demand for electricity
in Gaza is approximately 270 MW per day.

Increasing Collection Rates, Accountability to Cover the Gap
-------------- --------------


9. (C) Mazen Jadallah, Director General of the Ministry of
Finance (MoF),said that the MoF is prepared to finance any
measures that will increase the collection rate for
electricity usage in Gaza. Kittaneh suggested that the PA
invest in 100,000 prepaid meters and train GEDCO employees in
their use. However, Skeik warned of the difficult operating
environment in Gaza, with considerable poverty and a
likelihood that pre-paid meters may be destroyed if
installed. Skeik estimated that GEDCO's 160,000 subscribers
consume NIS 50 million worth of electricity monthly. He
claimed that GEDCO collected approximately NIS 20 million in
revenue in January, of which NIS 3 million went to pay for
salaries, spare parts, and other overhead expenses. Skeik
calculated NIS 2.2 billion in unpaid electricity bills since
GEDCO's founding in 1998. (The establishment of GEDCO
preceded the construction of the power plant, which went into
operation in 2003.)


10. (C) While acknowledging GEDCO's overhead expenses,
Kittaneh also noted that no auditing is done of GEDCO's
expenditures and that there is no transparency as to how it
is spent. To illustrate this, Jadallah said that as of late
October 2009, GEDCO held NIS 26 million in the bank. In the
same month, the PA MoF asked GEDCO to use these funds to
support fuel costs. Two days later, Jadallah claimed, the
GEDCO account showed a zero balance.


11. (C) In addition to the cost of fuel, Kittaneh mentioned
GEDCO's obligation to make "capacity" payments -- dues paid
to the investors in the power plant, amounting to
approximately USD 3 to 3.5 million per month, including
arrears. "Otherwise, the power plant could not operate,"
said Kittaneh. He also noted that the amount of arrears was
reduced from tens of millions of dollars to the current
amount of five or six million dollars. A well-connected Gaza
businessman, Maamoun Abu Shahla, suggested that GEDCO makes
these payments on an annual basis; Jadallah confirmed that
the MoF is not involved.


12. (SBU) As the issue remains politically sensitive, the
details of "capacity" payments remain unclear, though they
may explain where some of GEDCO's collected revenues go. The
investors in the plant include Consolidated Contractors
Company (CCC),Palestinian Development and Investment Company
(PADICO),Arab Bank, Arab Palestinian Investment Company
(APIC) and Palestine Investment Fund (PIF).

Shortfall Could be Covered by Donors
--------------


13. (C) Despite the cuts made to fuel subsidies, the EC's
overall assistance allocation to the PA has not dropped
substantially. The EC has kept their staff in place at the
Kerem Shalom crossing point between Gaza and Israel and the
power plant, so as to monitor invoicing and delivery of fuel
payments and to help build PA capacity to oversee the
transfers. Dickinson also pointed out that the program
mechanism (PEGASE) is still open to other donors, meaning

that EU member countries could still earmark aid to support
fuel purchases, with the funding channeled through PEGASE.
The Swiss government has already committed approximately USD
1.9 million, and Dickinson said that there was a second
(unnamed) donor considering making a USD 20 million
contribution.


RUBINSTEIN