Potential of the Palestinian Private Sector in Crisis

Mr. Sam Bahour and Mr. Bashar Masri are two symbols of the resilience and potential of the Palestinian economy which continues to exist in perpetual crisis.

Bashar Masri runs Massar International – a private sector holding company based in Ramallah, Palestine. It includes an advertising agency, a management consulting and technology services firm, real estate ventures and financial services firms.

Its subsidiary, Sahem Trading & Investments is the largest brokerage house serving the small yet growing Palestinain capital markets and recently introduced the first ever e-trade operation allowing local and international investors to buy and sell Palestinian stocks online.

Meanwhile Massar also has brokerage houses and real estate interests in Jordan, Egypt, Morocco and Serbia.

Similarly, Sam Bahour is another Palestinian private sector stalwart who first participated in the establishment of the Palestine Telecommunications Company (PalTel), which is today the largest business enterprise in Palestine.  Mr. Bahour, who is also a prolific writer on the Palestinian plight, now runs Ramallah based Applied Information Management which provides Information Technology consulting services in a growing IT services sector.

The fact that such new economy ventures are being managed by people subjected to a crushing occupation of their lands is a tribute to the Palestinians spirit of survival with dignity.

Both Mr. Bahour and Masri are part of the professional, globally experienced Palestinian diaspora, which post the Oslo Peace Accords in 1993, moved to Palestine to contribute and build businesses in the hope that the Israeli military occupation will end. They were able to invigorate the Palestinian private sector and leverage the qualified workforce (93% literacy rate) in building and supporting a new Palestinian economy which today includes, a stock market, a banking industry, an ICT industry, an olive oil industry, a furniture industry, and a pharmaceutical industry, among others.

Resilience in adversity

Since the occupation began, the economy of the occupied lands (the Gaza Strip and the West Bank including East Jerusalem ) have been systematically tied to that of Israel .  In 2003, this wounded economy was sent reeling with  Israel ‘s decision to unilaterally ‘disengage’ with the Palestinians.  Thousands of workers allowed into Israel for work were stopped–causing a sudden spike in unemployment, and the Separation Wall’s cut farmers from their lands causing major strain to the agricultural sector.  Compounding the crisis had been the lack of free movement within the occupied territories and very limited market access.

The list of adversities is endless, but the recent situation in Gaza where Hamas militants have taken over resulting in further Israeli restrictions has deepened the abyss.  It is amidst such continual crisis which Mr. Bahour calls “hyper resilent” that the private sector has been able to keep its head above water, backed by a quality workforce and fundamental market potential.

Many governments and businesses support the Palestinians through massive humanitarian programs.  However, as is true with any economy, the real sustainable engine of development and survival has to be its entrepreneurial private sector.  Especially, given the endurance of this private sector and the market potential even in crisis, the World Bank and many professionals such as Mr. Bahour are asking donors to not only provide near term humanitarian aid but invest in real opportunities that support long-term sustainable development.

Problems choking the private sector

A March 2007 assessment by the World Bank on West Bank and Gaza Investment Climate revealed that shrinking market access and the lack of free movement are the main constraints to growth for Palestinian enterprises.

The report concluded that relative to other countries in the region, the Palestinian investment climate is actually good: petty corruption is low, the bureaucracy is relatively efficient and financial markets are well developed.   Unfortunately, the growing settlements and movement restrictions imposed by Israeli authorities for security reasons overshadow all other elements of the investment climate. The restrictions close off markets, raise transaction costs and prevent producers from guaranteeing delivery dates.

Gisha, an Israeli Legal Center for Freedom of Movement, just released shocking data about Gaza ‘s economy, post-Hamas overrun. They state that:  “75% of Gaza ‘s factories have shut down because of the closure of the borders. 85% of Gaza residents are already dependent on food aid and the number is growing. There is a serious shortage of raw materials, including flour and sugar for household and industrial  consumption, and prices of raw materials have risen between 15% and 34%.

In addition, since the Palestinian economy is tied to Israel, it has a higher cost structure than other countries producing labor intensive products. The average wage of a production worker in the West Bank and Gaza  is about twice that of a Jordanian worker and almost three times an Egyptian’s. According to the World Bank report, if the Palestinian private sector is going to grow and provide jobs for the rapidly expanding population, Palestinian entrepreneurs will have to invest and move to high value goods that can compensate for the high costs of production.

The challenge is also exasperated by growing poverty amongst the populace.   Kevin Kennedy, the UN’s Jerusalem-based Humanitarian Coordinator recently said, “Two-thirds of Palestinians in the West Bank and the Gaza Strip are now living in poverty. Growing numbers of people are unable to cover their daily food needs and agencies report that basic services such as health care and education are deteriorating and set to worsen much further.”

There is certainly a steady stream of state donation to counter this.  Mr. Sam Bahour in one of his recent writings pointed out that on average, donors annually injected $650 million into the Palestinian Authority from 2001-2007. This amounts to over $7 billion, more per capita than anyplace in the world except for Israel, which is heavily subsidized by the U.S.

However he laments that of those funds, less than 5% were invested in private sector development.  The result he said is that, “state donor’s role in funding Palestinians’ ‘development’ turned into an international underwriting of the Israeli occupation, reducing, and many times removing, the financial costs of military occupation from Israel. In short, knowingly or not, donor funding had an accomplice-type role in allowing the situation to reach where it is today.”

What’s Needed

Mr. Sam Bahour’s plea is clear — an integral part of every donor intervention should include support to the Palestinian private sector which is the only place where sustainable development can be realized.  “Even with meager donor support, the private sector has proved its stamina and resilience in the face of crisis. Productive economic sectors have been organized, firms are now experts in crisis management, and a greater understanding of the limitations of economic growth while yet under Israeli occupation has been internalized” said Mr. Bahour.

The World Bank report supports Mr. Bahour’s assertion and offers specific recommendations both on political and investment fronts.

Politically it recommends that free movement and access must be re-established, while maintaining Israeli security.   At the same time investments should focus on building enterprise capabilities.  In this unstable situation, Palestinian enterprises are highly risk averse and the level of investment is below what is socially optimal. Palestinian enterprises need support to help lower the cost of developing learning mechanisms and to offset some of the risk of investing in new capabilities.

The report suggests that focusing investments on creating a few world class “made in Palestine ” brands that will offset some of the negative perceptions about the ability of Palestinians to reliably supply goods.  It also suggested a matching grant challenge fund or some other type of program that directly supports individual Palestinian enterprises upgrade their internal capabilities.  Such support however must target specific market failures and should focus on helping find and adopt new technologies and opening new markets.

Investment Opportunities

With a total of approximately 4 million Palestinians living in Gaza and the West Bank, the potential of investment opportunities to serve even the domestic market is certainly there.

Take the Fast-Moving Consumer Goods (FMCG) sector which includes processed food, beverages, personal care and household consumables.   According to a 2007 report by an initiative named Intajuna to enhance the local FMCG sector, the estimated market size in the Palestinian territories is $1.7 billion.

What’s to be noted is that 34% of this market is being served by local manufacturers while 50% is served by Israeli products and 16% by other foreign products.  There is certainly an opportunity for the existing competing local Palestinian players to gain a larger market share here.

Intajuna is an initiative to help identify and raise the competitiveness and profile of 10-15 such local company products.  The project is supported by the Swiss Agency for Development and Cooperation and is being executed by a local consulting firm Solutions for Development Consulting Co.

Similarly, Palestine ‘s pharmaceutical industry is a unique opportunity and a symbol of innovation within its private sector.  According to the Palestinian Investment Promotion Agency, the total value of the annual pharmaceutical’s supply is $65 million in the Palestinian territories.  Currently there are six major Palestinian pharmaceutical companies, with revenues of $25 million.  The balance of $40 million in sales is covered by Israeli and Foreign manufacturers.  Even besides the export potential, the local players have an opportunity to expand their domestic market share.

Beyond the above two examples, a quick look at company listings on the Palestinian Stock Exchange also gives a good view of the diversity of the Palestinian corporate sector.  The stock exchange which just completed its tenth year in existence has 35 companies listed with a total market capitalization of $2.1 billion (as of Aug 2007.)   The market has certainly suffered in the last two years but has showcased a steady mix of profitable business enterprises from the services, investment, banking, manufacturing and insurance sector.

To facilitate investments, the Palestinian Authority in 2005 launched a one-stop-shop, The Palestinian Investment Promotion Agency (PIPA),   which simplifies the registration and facilitation of new private sector investment.  Indeed, credible structures now exist to support investments as evidenced by a positive Doing Business Report on the Palestinian territories as well as endorsement by the World Bank of a competitive business process.  A 1998 Investment law even guarantees investors the right to repatriate all financial resources, including capital, profits, dividends, wages and salaries

Foreign Investment

Foreign Investment in the Palestinian economy isn’t completely an unchartered affair and shouldn’t deter first time investors.  In September 2006, Kuwait based Wataniya International won the bid ($356 million worth) to build and operate a second mobile network in Palestine and in December 2006, Wataniya International signed a partnership agreement with the Palestine Investment Fund (PIF) to form Wataniya Telecom in Palestine .  Wataniya expects mobile penetration in Palestine is to grow by 70% in the next 10 years and it hopes to be the driver behind that growth.

According to a 2005 FDI report by the Euro-Mediterranean Network of Investment Promotion Agencies (ANIMA) other recent investments have included, Kuwait based Global Investment House’s 5% take over of the Al-Quds Development & Investment Bank.  Similarly, the largest MENA region logistical and overnight delivery services company Aramex bought Al Khazen Distribution in Palestine  in 2005 expanding the number of point-of-sale outlets to 150 compared to the earlier 40.  Also, the emerging global real-estate developoer Emaar Properties has setup Emaar Palestine.

Major infrastructure related investments have also been undertaken.  A $500 million infrastructure investment by  CCC Consolidated Contractors Company ( Saudi Arabia ) aims to rehabilitate and construction strategic Palestinian projects.   It also planned on constructing of a 800 to 1000 MW electric power station at Gaza using natural gas.  The electricity produced would be transported by the Israeli network on the West Bank .  Any eventual surplus would be sold on the Israeli market.

An Export oriented private sector

The Palestinian economy has also strategically been setup as an export oriented industry.  In 2003, the total estimated private sector output from the Palestinian territories was a little over $3 billion (PCBS economic statistics).

Stone/ Marble and Agricultural produce were Palestinian territories largest export categories (see below).  However, a healthy set of value added product categories also exist and are key growth sectors.

According to the Palestinian Investment Promotion Agency, Information Technology is the fastest growing sector of the Palestinian economy.   Mr. Sam Bahour’s company, Applied Information Management, is part of this sector which is benefiting from a sophisticated telecom infrastructure, the existence of an educated labor pool and adoption of international quality standards such as CMM and ISO and supportive international trade agreements.

The Palestinian Information Technology Association (PITA) represents 56 companies in this sector and is a good place to start in engaging with qualified vendors.  In addition to serving local market needs, these IT service providers are poised to tap into the regional IT services boom specially using their English/Arabic proficiency as a regional advantage.

Mr. Sam Bahour however provides a sobering reminder of the challenges on the ground saying, “To remotely service clients many traditional services are required, access to enter and exit country to be able to visit clients, removal of Israeli occupation from the provisioning of basic services, like telecom, and a working postal system, among others.  So this sector remains to have more potential than it currently has impact on the ground.”

At the same time, as Mr. Bahour points out, the private sector has also built a unique crisis management capability.  “The ability for private sector firms to remain operational after so many decades of strife, and in specific the last 7 years of Israeli battering of our economy, is proof that our private sector is hyper resilient and this characteristic is one that can be utilized across the globe, especially in troubled areas.”

For those interested in engaging with Palestinian companies but didn’t know where to start, can either contact industry specific trade associations or utilize the services of the Palestine Trade   Center (PalTrade) which serves as a one-stop-shop for all trade related needs.  Its recently released Export Directory is also a great resource to identify vendor and partners from the Palestinian territories.

Foundation of future state

With all the promising private sector signs, the harsh reality is that the much of the Palestinian population is living in poverty and under a crushing occupation.  Short of a political solution, the responsibility of the global community, especially in the Muslim world, is to go beyond humanitarian aid and support the resilience of the Private sector to survive and build sustainable development.

Mr. Sam Bahour makes a pointed remark that, “The donor community has a historic responsibility to Palestinians, especially after so many years of observing the Israeli occupation from afar and a decade of footing the bill as Israeli actions continue unabated. The challenge to donors today is to convert assistance to the Palestinians to sustainable assistance, equal in priority to relief and humanitarian assistance, but sustainable in a way that creates an enabling environment allowing the private sector to assume its natural role of becoming the foundation of a future state.”