West Bank and Gaza: Strengthening Public Institutions for Service Delivery

Challenge

In recent years there has been little progress on the Palestinian-Israeli political dialogue. The Government of Israel (GOI) continues to control Area C ^[1], which covers about 60 percent of the West Bank, and access to Gaza.  Most consumer goods and many intermediate inputs are allowed entry into Gaza, but most construction material is restricted.  Differences within Palestinian polity are not yet resolved.

Against a backdrop of declining donor support and the associated fiscal difficulties, the Palestinian economy has recently slowed down significantly after growing at an annual rate of 11 percent during 2010-2011, to 5.9 percent in 2012. This has been due mainly to the ongoing  Israeli restrictions ^[2] and the fiscal retrenchment caused by a decline in donor funding and increased political uncertainty. Civil servants’ salaries were delayed several times during 2012. The Palestinian Authority’s (PA) current fiscal situation is challenging in view of the projected fiscal deficit for 2013 (estimated at US$1.05bn).

Solution

The Bank has maintained an active program in the West Bank and Gaza (WB&G). Its analytical and advisory activities provide policy advice in sectors prioritized by the PA’s own National Development Plan (NDP). It reports to the donors of the PA on economic development issues. The Bank has a two-pronged approach of budget support and investment operations.  Development Policy Grants support the PA’s reform program in fiscal management and public financial management and provide budget support while investment projects support water, urban and social protection sectors, among others. The Bank’s portfolio leverages 3.5 times its size from donor contributions.  Additionally, approximately US$200 million is disbursed annually through donor contributions to the Palestinian Reform and Development Plan Multi-Donor Trust Fund (PRDP MDTF).  

The World Bank Palestinian portfolio has maintained a high level of adaptability in order to be able to respond to the fragile environment.  In addition to the PA at the apex level, the Bank supports municipalities and Non-Governmental Organizations (NGOs) to strengthen institutions and improve service delivery. 

Results

Public financial management and fiscal management have improved through a reform program supported by the Bank’s Development Policy Grant (DPG) series. Progress has been made on controlling the public sector wage bill (a reduction from 22% in 2009 to 17% in 2012) and taking steps to reduce net lending.  A computerized financial management system was introduced in all line ministries to make financing reporting more transparent. The internal audit process has been strengthened, and a new legal framework for public procurement was introduced. The targeting of social assistance programs has been improved to ensure the funding reaches the extremely poor and vulnerable.  The cash transfer program is now a regional example of good targeting and outreach to poor populations, skills training of social workers, and maintenance of an up-to-date poverty database.

In the urban sector, the PA established the Municipal Development and Lending Fund (MDLF) in 2005 to address financing and capacity building of municipalities and for channeling development assistance to municipalities. The MDLF implemented several municipal reforms with the support of donor financed projects, to strengthen local government through greater fiscal and administrative autonomy. The MDP1 reached all 134 municipalities in the West Bank and Gaza, thereby indirectly benefitting approximately 3 million in total population (49% females) by March 2013.

The Cash Transfer Program, supported by the World Bank, replaced an earlier complex web of social protection initiatives implemented by different players and more than doubled the number of beneficiaries reached from 2010 to 2012.  In 2012, it reached over 100,000 poor households covering more than half of the poorest quintile and devoting two thirds of its resources to the extremely poor. An assessment conducted in 2012 found that the cash transfer program’s proxy means targeting correctly identified more than 70 percent of all cases, limiting the exclusion and inclusion errors to acceptable levels of around 20 percent. The program represents international good practice in terms of its impact – with measurable reductions in inequality and poverty -- as well as coverage and targeting.

Bank Group Contribution

The Trust Fund for Gaza and the West Bank (TFGWB), established in 1993, provides financial assistance to WB&G. Not being a member of either the IMF or of the World Bank makes the West Bank and Gaza ineligible for the sources of financing normally available to member countries. TFGWB has been replenished 11 times since its inception in the amount of US$805 million.  The investment operations portfolio is financed from the TFGWB, the Institutional Development Fund and the State-Building Peace Fund (SPF).  The portfolio size was US$154m as of March 31, 2013, with the undisbursed balance of US$58.5m.  Projects in the portfolio cover a range of sectors, from urban development and water, to social protection and education.  Most projects in the portfolio leverage donor funding, along with the TFGWB contributions – on average 3.5 times the size of World Bank funding.

The World Bank administers the PRDP MDTF.  Since its establishment in 2008, the PRDP MDTF has disbursed nearly US$1.0bn against implementation of key aspects of the NDP relating to budget execution and the maintenance of a sound macroeconomic framework.  The donors currently supporting the PRDP MDTF are: Australia, France, Japan, Kuwait, Norway, and the United Kingdom (UK).

The International Finance Corporation (IFC) maintains an active investment and advisory program in the West Bank and Gaza and its total commitment is US$163.4m.  The IFC focuses mostly on the finance and insurance, information and education services sectors, which account for 99 percent of the total commitment.  The Multilateral Investment Guarantee Agency has five active projects with a total exposure of US$14.7m.

Partners

The Bank attracts development partners’ complementary financing for investment projects that it funds -- in the form of co-financing or parallel financing. Funds from Australia, Belgium, Canada, Denmark, the European Union (EU), Finland, France, Kuwait, Luxembourg, the Netherlands, Norway, Sweden, Switzerland and the UK complement the current portfolio. The Islamic Development Bank has provided support for rehabilitating Gaza infrastructure. Furthermore, the water and urban sectors have received multiple donor contributions on top of World Bank resources: the Northern Gaza Emergency Sewage Treatment Project (US$26.8 million from the WB) has received funding from Agence Française de Developpement (AFD), Swedish International Development Cooperation Agency (Sida), Belgium, and the European Investment Bank (EIB), totaling about US$75 million.  The Municipal Development Program has received co-financing contributions from Denmark and Sweden, and parallel funding from Belgium, France and Germany. In 2012, a multi-donor trust fund was established to support infrastructure projects (focusing on water, energy, and solid waste) in the West Bank and Gaza.  The Trust Fund has received pledges totaling approximately US$18 million over three years from Sida.

The Bank has administered the PRDP MDTF since April 2008.  This continues to be one of the most important budget support mechanisms for the PA, as it provides budgetary support for implementation of their NDP.  Australia, Canada, Finland, France, Japan, Kuwait, Norway, Poland and the United Kingdom have contributed to this Trust fund, and it has received nearly US$1 billion since its inception.

Since 1993, the Bank has functioned as the secretariat to the Ad Hoc Liaison Committee (AHLC) of donors to the PA. Chaired by Norway, and with participation from the United Nations, International Monetary Fund, GOI and many development partners, the AHLC serves as the principal policy-level coordination mechanism for development assistance to the Palestinian people. The Bank’s reports on the progress of reforms, presented every six months to the AHLC, have helped the international community monitor developments in the Palestinian economy. 

Moving Forward

The program is guided by a joint World Bank and IFC Interim Strategy for FY12-14, which was discussed at the Board in April 2012. It is based on the following two pillars, supporting the 2011-2013 Palestinian NDP:

1. To strengthen the institutions of a future state to efficiently manage public finances and ensure services to citizens;
   
2. To support the creation of an enabling environment for private sector led growth.

The Bank’s program of knowledge products and grants is focused on municipal services, energy, water and solid waste management sectors, as well as social protection and education.  Along with offering a range of advisory services, the IFC continues to support both existing and new clients in the WB&G private sector.

Since the operating environment in the WB&G is fragile, the Bank employs an adaptable approach to ensure sustainability. To respond to uncertainty, flexibility--along with a balance between short and medium term needs--will continue to drive the Bank Group’s program. Both development policy and investment grants will support long term institution building. Project designs will be simple, with reliance on Additional Financing to scale up assistance to bolster successful components of interventions.  Experience during 2000-2004, and again during 2006 to 2008, when international assistance to WB&G stalled, teaches that having only one channel for providing assistance is risky.  Municipalities, some of which pre-date the creation of the Palestinian Authority, and NGOs have a historic role in delivering a range of services.  So, in addition to the PA at the apex level, the Bank will continue to support municipalities and NGOs in their efforts at institutional strengthening and improved service delivery.

The Bank’s program will continue to remain selective in deploying technical expertise in sectors where the Bank has a history of engagement and has carved out expertise vis-à-vis other donor partners.  Drawing upon the World Development Report 2013, the Bank will engage on the challenge of job creation. Referrals for medical treatment outside of the Palestinian Territories are the fastest growing item in the Health Ministry’s operating budget. The Bank is undertaking analytical work to increase the efficiency in health spending including wage bill and pharmaceuticals. The series of budget support operations is centered on fiscal strengthening and public financial management, while investment projects are in higher education, local government, energy, water and sanitation, and solid waste management. The development policy grants can help reduce volatility of aid and maintain a level of resilience to shocks. The program will likely continue to be concentrated in these areas.

Beneficiaries

 “I am the owner of some land that used to neighbor an informal dumpsite. As the  garbage accumulated,  the land’s  value steadily decreased. Following the closure of the dumpsite, I built a house and got married”, said Ahmad Musa Zakarneh, a 33 year-old resident of Qabatya.  The establishment of a sanitary landfill and the closure of 85 dumpsites improved waste collection and protected the environment in the northern part of the West Bank.

“I used to work as a street peddler. I have been unemployed since 2004 because of my disability. I felt hopeless in the face of life’s challenges with no other source of income. The situation had also affected my kids and their educational achievements. I’m currently a beneficiary of the Bank’s cash transfer project. While quite small, the cash benefit is a lifeline. It offers me significant support,” said 50 year-old Naser Abu Assi from Zaitoun neighborhood, an overcrowded area in Gaza city.

Nawal Idrees Al-Badawi from Nablus joined the educational courses provided by the Mothers School Society, one of the NGO projects funded by the World Bank. “I waited impatiently to join the study days and felt like a governmental-school student all over again. Even though I am a mother, I was still hoping to continue my education.  I liked very much the idea of raising the educational capacity here, and teaching mothers and young housewives, a project that is of a great benefit to our society”.

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[1] The West Bank is divided per Oslo Accords into 3 areas: 2 areas are under Palestinian control and correspond to all major population centers (Area A) and most rural communities (Area B).  The third area, Area C, is under Israeli control for both security and civilian affairs related to territory, including land administration and planning.

[2] Israel Defense Forces have barriers throughout the West Bank for the purpose of enhancing the security of Israel and Israeli settlements.