Following discussions under the UK presidency, the European Investment Bank (EIB) and the European Commission are working together to support economic regeneration in the West Bank and Gaza Strip in line with the Action Plan presented by the Quartet envoy Jim Wolfensohn. We can announce work underway on two new initiatives:

Loan Guarantees

  • To increase availability of affordable loan finance to small and medium sized businesses, the EU is putting together a package of around EUR 30m to provide loan guarantees in the West Bank and Gaza Strip.
  • As the scheme progresses and if political and economic circumstances on the ground permit, the EU will look at the opportunities for expanding loan guarantee funding in response to demand.

Taken together with other international proposals this could meet growing demand as the Palestinian economy develops for several hundred million euros of loans.

Electricity Network Upgrading

  • The EIB is working to make EUR 45 million available for schemes to improve the quality and reliability of the electricity supply across the Palestinian Territories.
  • This should bring down the costs for consumers and support the growth of industrial and economic activity.

EIB operations in the region take place through its Facility for Euro-Mediterranean Investment and Partnership (FEMIP). This facility is a rare example of a forum that brings together Israel, the Palestinian Territories, and most other countries from the Mediterranean region. The UK will seek options for strengthening the role of the FEMIP in supporting the Middle East Peace Process during next year's review of the EIB's external lending operations.

A revival of the Palestinian economy will in the first instance depend on an improvement of the security situation and a significant easing of movement restrictions for people, goods and services in both the West Bank and the Gaza Strip. But this will need to be complemented by the creation of an environment conducive to investment.

The SME sector will be key. SMEs dominate the Palestinian private sector - some 90% of all firms have 5 employees or less. These firms have survived through the Intifada period, and are well placed to exploit an improvement in business conditions, provided that they have access to finance for investment, particularly bank lending.

The purpose of the Loan Guarantee Scheme is to increase access to affordable finance for SMEs. This has been recognised as a particular problem in the West Bank and Gaza Strip, where lending is not constrained by a lack of available funds but by the risky environment. This means there is a reluctance to lend or, when lending does happen, banks require high levels of collateral. A recent study (1) found that around 70 percent of loan applications rejected were due to insufficient collateral.

International Loan Guarantees will address this by sharing the risk of SME lending between local banks and various different international guarantors. Potential demand for SME finance could run into several hundreds of millions of US dollars over the coming few years assuming further positive developments. International loan guarantees will help ensure affordable loans are available to meet this demand, boosting jobs and growth. International loan guarantees should also help to strengthen the local banking sector.

The EUR 30m European package includes EUR 10m of risk capital and EUR 2m of technical assistance from the EIB. The European Commission is also working on an initial contribution. As the scheme progresses and if political and economic circumstances on the ground permit, the EU will look at opportunities for expanding loan guarantee funding, depending on the overall resources available in the EU budget and progress with the Middle East Peace Process.

The Portland Trust is also working on an international loan guarantee proposal. Taken together, the international effort could respond to the estimated need of several hundred million dollars of loans over the next five years depending on demand and assuming sustained contributions reflecting continued positive developments.

Supporting investment in infrastructure is also important for economic regeneration in the West Bank and Gaza Strip.

The European Commission recently decided to allocate EUR 40.55 million (nearly $50 million) to a Facility to support the rebuilding of public infrastructure in Gaza. Priority will be given to labour intensive, fast disbursing projects aimed at restoring the provision of essential services. The main sectors concerned are transport, water supply and sanitation, energy, and public buildings. This Facility could also provide interest rate subsidies for EIB infrastructure projects.

The EIB is working on an infrastructure project to provide a loan of EUR 45 million over 20 years to support the upgrading of the electricity network. The project will support infrastructure to meet growing electricity demand, reduced technical and commercial losses in the network and facilitate rural electrification. It is expected to include power transmission systems, substations, and the installation of metering systems across the Palestinian territories.

FEMIP, along with all the EIB's lending outside the EU, will be reviewed during 2006 as part of the new Financing Perspectives.

(1) Palestine Economic Policy Research Institute Report: Financing Palestinian SMEs, September 2005