Public Disclosure Authorized Office of the ... - World Bank...THE WORLD BANK Washington, DC 20433 May 27,2010 Proposed Replenishment of the Trust Fund for Gaza and West Bank Introduction

Office of the President

THE WORLD BANK Washington, DC 20433

May 27,2010

Proposed Replenishment of the Trust Fund for Gaza and West Bank

Introduction

1 I submit for your approval a proposal to replenish the Trust Fund for Gaza and West Bank (TFGWB) in the amount ofUS$55 million to be transferred from IBRD surplus.

2 The IBRD currently has a balance of $257 million in the surplus account, which is the account that the Bank uses to set aside funds for making such desired transfers. IBRD has the financial capacity to make this transfer of $55 million, and after the transfer, the balance in IBRD surplus will stand at $202 million. This potential use of surplus was noted in the Medium Term Financial and Strategy paper and was reflected in the projections there.

3 Since the West Bank and Gaza is not a sovereign state, it cannot apply for membership of the IMF or the World Bank Group institutions, and is, therefore, not eligible for the sources of financing normally available to member countries. To overcome these legal and practical obstacles, on October 19, 1993, by the terms of Resolution No. 93-11 and IDA 93-7, the Executive Directors of the International Bank for Reconstruction and Development (Bank) and the International Development Association (Association) approved the establishment of the Trust Fund for Gaza. On November 11, 1993, the Bank's Board of Governors approved a US$50 million grant to be transferred from surplus into a Trust Fund/or Gaza (TFG). Subsequently, in 1995, the TFG was renamed Trust Fund/or Gaza and West Bank (TFGWB), and it was increased in permissible territorial scope as the area under the jurisdiction of the Palestinian Authority (P A) was enlarged.

4 To date, the TFGWB has been replenished eight times for a total allocation of US$620 million, most recently in July 2009. An additional US$1 08.28 million has been received in the TFGWB from investment income, from service charges and 'commitment fees on outstanding credits. US$12 million were transferred to the Holst Fund in 20001

1 The Holst Fund was established by the Bank in 1994 with the objective of financing start up and recurrent costs of the P A (26 donors contributed). From 1994 to 2001 it disbursed a total US$286 million. The US$12 million Bank contribution to the Holst Fund (from the TFGWB) was approved by the Board in December 15, 2000 in order to finance an Emergency Response Program.

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for an Emergency Response Program, bringing the total TFGWB resources to US$716.28 million. As of April 30,2010, US$608 million has been disbursed on the West Bank and Gaza portfolio, and US$ 81.24 million is committed and undisbursed (including US$ 2.24 million of repayments due to IDA). The total uncommitted fund balance therefore corresponds to US$27.04 million. This amount has been partially earmarked for the following operations: Capacity Building for Palestinian Economic and Regulatory Institutions Technical Assistance (US$3.7 million), North Gaza Emergency Sewage Treatment Project - Second Additional Financing (US$7 million), Palestinian NGO IV (US$2 million), Land Administration Project II (US3 million), Teacher Education Improvement Project (US$5 million). Up until 2002, all WB&G funding was provided on IDA Credit terms, however, projects have since been approved on grant terms.

5 As per the Interim Strategy for WB&G for the Period of FY08-FYI 0, endorsed on April 22, 2008, the Bank Group aligned its strategy with the P A's Palestinian Reform and

Development Plan (PRDP) 2008-2010 and shifted from an emergency and stabilization focus to a more development-oriented agenda where the overarching objective is Palestinian economic recovery. Although the Interim Strategy for WB&G for FY08-FYlO remains valid, it is based on the current PRDP which will be replaced with the new National Plan during the first quarter of FYI 1. It is likely that the new National Plan will not deviate fundamentally from the current PRDP.

6 As of the start of FY09, the Palestinian Liberation Organization's (PLO) total debt to IDA, as Administrator of the TFGWB,was US$308.2 million, defined as amounts disbursed under all existing Trust Fund Credits. The PLO's outstanding debt and projected debt service obligations are presented in Annex I.

7 Under the resolutions governing the TFGWB2 (Annex 2) the Board of Executive Directors (Board) recommends the terms of assistance to the Board of Governors on a case-by- case basis. Since 2002, all projects were approved on grant terms. Given the continuing crisis in the West Bank and Gaza, the Bank continues to process all projects financed out of the TFGWB on grant terms. .

8 In response to the parlous fiscal situation of the P A, the Board recommended a moratorium on TFGWB service charges on August 6, 2002, subsequently approved, extended and amended to include commitment fees, and effective until June 30, 2008. The accrued service charges and commitment fees over the period of the moratorium equaled USS12.96 million. The PA did not request a further extension of the Moratorium and resumed regular service charges and commitment fees payments as of July 1, 2008. However, the PA had asked payment of the accrued amount to be deferred until January 1,2009 and then repaid jointly with the regularly scheduled payments as they

2 Resolution Nos. 93-1 I and IDA 93-7 as amended by Resolutions Nos. 95-6 and 96-1 I, and IDA 95-3 and 96-7, and as further amended by Resolution No. 99-3 and IDA 99-2 and Resolution No. 03-193 and IDA 03-208 of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association.

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fall due. The P A request was accepted. The P A has remained current on their principal payments since repayments for past Credits commenced in August 2004.

Recommendation

9 In view of the foregoing, I recommend that the Executive Directors propose to the Board of Governors a further replenishment of the Trust Fund for Gaza and West Bank ofUS$55 million by way of grant, to be transferred from IBRD surplus (see

Annex III).

Washington, D.C. May 27,2010

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Managing Director

ANNEX I

REP A YMENT PROFILE OF THE PLO'S DEBT TO IDA, AS ADMINISTRATOR OF THETFGWB

WEST BANK AND GAlA - TABLE OF REPAYMENT PROFILE

CY 2009 - CY 2042 (amts in USD mn)

CY Disbursed Undisburse Princieal Outstandin Service Commitme Total

2009 0.7 0.0 5.2 308.2 15.2 0.0 20.4

2010 0.0 0.0 5.7 302.5 2.3 0.0 8.6

2011 0.0 0.0 6.0 296.5 2.3 0.0 8.2

2012 0.0 0.0 6.3 290.2 2.2 0.0 8.5

2013 0.0 0.0 6.6 283.6 2.2 0.0 8.8

2014 0.0 0.0 6.8 276.7 2.1 0.0 8.9

2015 0.0 0.0 7.3 269.5 2.1 0.0 9.3

2016 0.0 0.0 8.4 261.1 2.0 0.0 10.4

2017 0.0 0.0 9.7 251.4 1.9 0.0 11.7

2018 0.0 0.0 10.5 240.8 1.9 0.0 12.4

2019 0.0 0.0 11.2 229.6 1.8 0.0 13.0

2020 0.0 0.0 12.0 217.6 1.7 0.0 13.7

2021 0.0 0.0 12.2 205.4 1.6 0.0 13.8

2022 0.0 0.0 12.6 192.8 1.5 0.0 14.1

2023 0.0 0.0 12.9 179.9 1.4 0.0 14.3

2024 0.0 0.0 12.9 167.0 1.3 0.0 14.2

2025 0.0 0.0 12.9 154.1 1.2 0.0 14.1

2026 0.0 0.0 12.9 141.2 1.2 0.0 14.0

2027 0.0 0.0 12.9 128.3 1.0 0.0 13.9

2028 0.0 0.0 12.9 115.4 0.9 0.0 13.8

2029 0.0 0.0 12.9 102.4 0.8 0.0 13.7

2030 0.0 0.0 12.9 89.5 0.7 0.0 13.6

2031 0.0 0.0 12.9 76.6 0.6 0.0 13.5

2032 0.0 0.0 12.9 63.7 0.6 0.0 13.4

2033 0.0 0.0 12.9 50.8 0.5 0.0 13.3

2034 0.0 0.0 12.3 38.5 0.4 0.0 12.6

2035 0.0 0.0 11.3 27.2 0.3 0.0 11.5

2036 0.0 0.0 9.1 18.1 0.2 0.0 9.3

2037 0.0 0.0 6.3 11.8 0.1 0.0 6.4

2038 0.0 0.0 4.7 7.1 0.1 0.0 4.8

2039 0.0 0.0 3.3 3.7 0.0 0.0 3.4

2040 0.0 0.0 1.8 1.9 0.0 0.0 1.8

2041 0.0 0.0 1.3 0.6 0.0 0.0 1.3

2042 0.0 0.0 0.6 0.0 0.0 0.0 0.6

Assumptions: 1) The above amounts are based on disbursed and outstanding balances as of December 31, 2009; 2) The calcultions assume that the borrower pays promptly and no service charge is applied on overdue principal; 3) Balances for TF53784 have been added effective CY2010 as repayments commence from this year; 4) The amounts for CY 2009 are actuals

Interpretation of Headers: Disbursed Amount - Amounts disbursed during the year; Undisbursed balance: Undisbursed balance of credits as at the end of the calendar year; Principal repayments - Principal repaid/due during the calendar year; Outstanding Principal- Disbursed and outstanding balance of credits as at the end of the year; Service charges - Service charges paid/due during the year. Current rate - 0.75% p.a.; Commitment fees - Commitment fees paid/due duri ng the year. Current net rate - 0% p.a.; Total repayment: Sum of pri nci pal, service charges and commitment fees repaid/due during the year.

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ANNEX II

Page 1 of2

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

(DRAFT)

REPORT OF THE EXECUTIVE DIRECTORS

Transfer from Surplus to Replenish Trust Fund for Gaza and West Bank

On October 19,1993, by the terms of Resolution No. 93-11 and IDA 93-7, the Executive Directors of the International Bank for Reconstruction and Development (Bank) and the International Development Association (Association) approved the establishment of the Trust Fund for Gaza. On November 11, 1993, by the terms of Resolution No. 483, the Board of Governors of the Bank approved the transfer from surplus, by way of grant, of US$50 million to the Trust Fund for Gaza. On August 1, 1995, by the terms of Resolution No. 95-6 and IDA 95-3, the Executive Directors of the Bank and the Association amended Resolution No. 93-11 and IDA 93-7 by (a) expanding the territorial scope of the activities to be financed out of the Trust Fund for Gaza to include such areas, sectors and activities in the West Bank which are or will be under the jurisdiction of the Palestinian Authority pursuant to the relevant Israeli-Palestinian agreements; and (b) changing the name of the "Trust Fund for Gaza" to "Trust Fund for Gaza and West Bank". On October 12, 1995, by the terms of Resolution No. 500, the Board of Governors approved the transfer to the Trust Fund for Gaza and West Bank, by way of grant out of the Bank's FY95 net income, ofUS$90 million. On December 19,1996, by the terms of Resolution No. 96-11 and No. IDA 96-7, the Executive Directors of the Bank and the Association further amended Resolution No. 93-11 and IDA 93-7 by (a) introducing flexibility to the terms under which resources may be provided out of the

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ANNEX II

Page 2 of2

Trust Fund for Gaza and West Bank; and (b) requiring that the repayment of trust fund credits made out of the Trust Fund for Gaza and West Bank accrue to the Association as part of its resources. Additional funding was provided by transfers from surplus or net income approved by the Bank's Board of Governors on February 3, 1997 (US$90 million, Resolution 511), July 13, 1998 (US$90 million, Resolution No. 519), September 30, 1999 ($60 million, Resolution No. 529), February 4, 2004 (US$80 million, Resolution No. 556), January 31, 2007 (US$50 million, Resolution No. 584), June 17, 2008 (US$55 million, Resolution No. 589), and July 10, 2009 (US$55 million, Resolution No. 599).

2. In view of the material contribution that the Bank's financial assistance makes to Palestinian economic welfare, the Executive Directors consider that the Trust Fund for Gaza and West Bank should be replenished. They recommend that the Board of Governors authorize the transfer from surplus of the amount of US$55 million to the Trust Fund for Gaza and West Bank.

3. Accordingly, the Executive Directors recommend that the Board of Governors adopt the draft Resolution attached hereto.

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ANNEX III

Page 1 of 1

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

BOARD OF GOVERNORS

(DRAFT)

Resolution No. '

Transfer from Surplus to Replenish the Trust Fund for Gaza and West Bank

RESOLVED:

THAT the Bank transfers immediately from surplus, by way of grant, US$55,OOO,OOO to the Trust Fund for Gaza and West Bank, such transfer to be drawn down by the International Development Association as needed; provided, however, that the amount of such grant may at any time be changed by the International Development Association into an equivalent amount in other currencies.

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CURRENCY EQUIVALENTS (Exchange Rate Effective May 3, 2010)

Currency Unit = New Israeli Shekel (NIS) US$1.00 = 3.72900 NIS

ABBREVIATIONS AND ACRONYMS AAA Analytic and Advisory Activities AHLC Ad-Hoc Liaison Committee CB/TA Capacity Building/Technical Assistance CDD Community Driven Development CMWU Coastal Municipalities Water Utility DFID UK Department for International

Development DPG Development Policy Grant EC European Commission ESSP Emergency Services Support Program EU European Union GDP Gross Domestic Product GNP Gross National Product GoI Government of Israel ICA Investment Climate Assessment IDA International Development Association IFMIS Integrated Financial Management

Information System IS Interim Strategy IMF International Monetary Fund JSC Joint Service Council LACS Local Aid Coordination Secretariat LAPII Land Administration Project II LDF Local Development Forum LGCBP Local Capacity Building Project MDTF Multi Donor Trust Fund MENA Middle East and North Africa MOEHE Ministry of Education and Higher Education MOF Ministry of Finance MOH Ministry of Health MOLG Ministry of Local Government MOP Ministry of Planning MOSA Ministry of Social Affairs MTEF Medium-Term Expenditure Framework

MTIT Ministry of Telecommunications and NEDCO Northern Electric Distribution Company NGEST North Gaza Emergency Sewage Treatment

Project NGO Non-Governmental Organization NWWTP Northern Wastewater Treatment Plan OCs Oversight Consultants ODA Official Development Assistance OQR Office of the Quartet Representative PA Palestinian Authority PCBS Palestinian Central Bureau of Statistics PCU Project Coordination Unit PER Public Expenditure Review PIU Project Implementation Unit PLC Palestinian Legislative Council PMA Palestinian Monetary Authority PNCTP Palestinian National Cash Transfer Program

PNGO IV Palestinian Non-Governmental Organizations IV Project

PRDP Palestinian Reform and Development Plan PWA Palestinian Water Authority QIF Quality Improvement Fund OQR Office of the Quartet Representative STA Single Treasury Account SWG Sector Working Group TA TEIP

Technical Assistance Tertiary Education Improvement Project

TFGA Trust Fund Grant Agreement TFGWB Trust Fund for Gaza and West Bank TPAT Technical, Planning & Advisory Team

UNRWA United Nations Relief and Works Agency WB&G West Bank and Gaza

IBRD/IDA Vice President: Shamshad Akhtar

Country Director: Mariam Sherman Country Program Coordinator: Elena Kastlerova

Country Economist: John L. Nasir Senior Country Officer: Fabrizio Zarcone

TABLE OF CONTENTS I. INTRODUCTION .................................................................................................................... 1

II. BACKGROUND AND CONTEXT .............................................................................................. 2

III. STATUS OF IMPLEMENTATION OF THE JULY 2009 REPLENISHMENT AND REQUEST FOR THE

2010 REPLENISHMENT ......................................................................................................... 4

A. The Trust Fund for Gaza and West Bank .........................................................................4 B. The 2009 Replenishment and the Proposed 2010 Replenishment ....................................5 C. Portfolio Assessment and Results ...................................................................................10 D. Risks and Mitigation Measures .......................................................................................12 E. Lessons Learned ..............................................................................................................12

Annex 1: Summary of WB&G Portfolio, As of April 1, 2010 ...............................................14 Annex 2: AAA in FY10 ..........................................................................................................15 Annex 3: Summary of Current Portfolio and Outcomes ........................................................17 Annex 4. Repayment Profile of PA Debt to the World Bank .................................................28 Annex 5: West Bank and Gaza: Risk Identification Worksheet .............................................29 Annex 6: WB&G At-a-Glance ................................................................................................33 Annex 7: Map of WB&G ........................................................................................................35

List of Tables

Table 1: Support to the PRDP: 2008-2010 AAA and Projects .....................................................6

Table 2: World Bank- Administered Trust Funds ........................................................................8

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I. INTRODUCTION 1. This document submits a proposal to the Executive Directors for a replenishment of the Trust Fund for Gaza and West Bank (TFGWB). The Management proposes that the Executive Directors advise the Board of Governors to authorize the transfer from IBRD surplus of the amount of US$55 million to TFGWB. The proposed replenishment remains aligned with the endorsed Interim Strategy (IS) for FY08-10 and, together with the current uncommitted funds available in the TFGWB (in an amount of US$27.04 million), will finance the following operations:

Capacity Building for Palestinian Economic and Regulatory Institutions Project (US$3.7 million; scheduled for Board approval on June 24, 2010);

Northern Gaza Emergency Sewage Treatment (NGEST) Project – Second Additional Financing (US$7 million; scheduled for Board approval on June 24, 2010);

Palestinian Non Governmental Organizations (PNGO) IV (US$2 million; scheduled for approval on June 24, 2010);

Land Administration Project II - LAP II (US$3 million; scheduled for Board approval on September 20, 2010);

Teachers Education Improvement Project – TEIP (US$5 million; scheduled for Board approval on June 24, 2010).

Capacity Building to the Palestinian Water Authority (US$3 million; scheduled for Board approval on December 15, 2010).

Third Palestinian Reform and Development Plan (PRDP) Development Policy Grant (US$40 million; scheduled for Board approval on September 16, 2010);

West Bank Wastewater Management Project (US$15 million; scheduled for Board approval on March 24, 2011);

Social Safety Net Program (US$10 million; scheduled for Board approval on April 11, 2011).

2. Implementation of the projects financed from the previous eight replenishments of the TFGWB remains satisfactory, and with the last replenishment (May 2009), the following operations have been financed from the TFGWB and previous uncommitted amounts:

Second Palestinian Reform and Development Plan (PRDP) Development Policy Grant (US$40 million, approved on May 28, 2009);

Gaza Emergency Response Additional Financing Program (US$22.5, approved on July 17, 2009);

Municipal Development Program (US$10 million, approved on October 22, 2009); and

Southern West Bank Solid Waste Management Project (US$12 million, approved on November 30, 2009).

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II. BACKGROUND AND CONTEXT

Current Context

3. The volatility of the political and security situation in the West Bank and Gaza (WB&G) continues. The potential for progress on the political agenda remains tenuous. The recent agreement to move forward on proximity talks, as a precursor to direct negotiations, is a positive sign but previous experience also demonstrates the fragility of the situation which can become easily derailed. Within the West Bank and Gaza, reconciliation talks between Fatah and Hamas, mediated by Egypt, seem to be at a standstill. Gaza is still isolated from the rest of the world.

4. Although some easing of restrictions by Israel in the West Bank has been beneficial and contributed to promoting growth, overall, the ongoing restrictions on movement and access continue to constrain Palestinian economic space. The blockade on Gaza following the Hamas takeover in June 2007 continues to create a humanitarian crisis which has been compounded by military operations. Flow of goods and raw materials to Gaza is very limited, though some goods designated for humanitarian assistance are now being imported.

5. In contrast to the difficulties experienced on the political front, the Ad Hoc Liaison Committee (AHLC) Meeting in Madrid on April 12-13, welcomed the considerable progress by the Palestinian Authority. Palestinians are experiencing their third consecutive year of positive Gross Domestic Product (GDP) growth resulting from solid reform efforts by the Palestinian Authority (PA) advancing the fiscal and state building agenda, donor support, and some easing of restrictions by Israel. With a need for external budget support in 2010 in the order of $1.2 billion, the AHLC encouraged the donors to provide strong and predictable support to the PA.

6. The Program of the 13th Government currently provides direction on the creation of strong state institutions, with the support of the international community, including the Office of the Quartet Representative (OQR)1. In addition, all Palestinian Authority (PA) ministries, in an effort led by the Ministry of Planning and Administrative Development, are working on the “National Plan” 2011-2013, which is a follow-up to the current 2008-2010 Palestinian Reform and Development Plan (PRDP). The plan is expected to be finalized by June 2010 and guide the preparation of the 2011 budget.

7. On the economic front, growth in WB&G accelerated in 2009: initial estimates suggest real growth of 6.8 percent, well above the 5.5 percent projected in the PA’s 2009 budget. Most of the growth was in the West Bank, where the International Monetary Fund (IMF) and Palestinian Central Bureau of Statistics (PCBS) estimate that real GDP growth was 8.5 percent. In addition, and despite the continued

1 The Quartet, set up in 2002 following the commencement of the 2nd Palestinian Intifada, comprises the United Nations, the European Union, the United States and Russia. Its mandate is to help mediate Middle East peace negotiations and to assist in the development of the Palestinian economy in the West Bank and the Gaza Strip

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closure of Gaza, growth there was estimated to be positive at about 1 percent2. Although such growth may signal that the West Bank economy is beginning to recover after years of decline, nonetheless, it should be noticed that not only is the growth rate lower than might be expected from an economy recovering from such a low base, where per capita GDP has fallen by nearly a third since 1999, but it is also precarious.

8. The high level of external assistance over the past two to three years is probably the most important factor contributing to growth, which to be sustainable, will require significant additional loosening of restrictions on movement and access to Area C3 and other natural resources. In 2009, the PA received nearly US$1.4 billion in budget support, US$1.8 billion in 2008 and nearly US$1 billion in 2007 in official development assistance4. These large contributions have allowed the PA to maintain expansionary fiscal policies to support the implementation of the PRDP. Despite the revival of growth and the extensive reform program, the PA’s fiscal position deteriorated in 2009, mostly as a result of emergency spending in Gaza in the aftermath of Israel’s military operation.

9. The PA’s reforms that have resulted in improved security and more efficient service delivery along with the Government of Israel’s (GoI’s) loosening of its security restrictions have significantly increased investor confidence: discussions with the private sector reveal the importance it places on these measures. Nonetheless, growth in important parts of the private sector has not been as robust. Between 1999 and 2009, manufacturing output was flat and its share in GDP fell from 12.5 to 11 percent. Output in agriculture fell by 47 percent during the same period, with its share in GDP declining from 10.4 to 4.8 percent. However, there is yet no sign of a large-scale revival of private investment in the productive sectors of the economy.

10. Despite the ongoing blockade, the IMF estimates that real GDP growth in Gaza was 1 percent in 2009, implying a continued decline in per capita GDP. Since the vast majority of the Gaza private sector remains moribund, the economy is sustained by government spending and humanitarian assistance. In Gaza, the PA regularly pays its more than 63,000 employees and maintains its large system of social transfers to needy households. In addition to this regular spending, the PA has also undertaken substantial emergency spending to offset some of the effects of the recent conflict. In 2009, the PA detailed US$142 million in emergency spending to help families who lost their homes, make emergency repairs to utilities, and for other emergency requirements. In addition, the international community continues to provide humanitarian aid for Gaza, led by the

2 PCBS has not yet published GDP estimates for West Bank and Gaza separately. These figures are based on IMF estimates. 3 The 1995 Oslo interim agreement split the West Bank into three Areas A, B, and C, with different security and administrative arrangements and authorities. The land area controlled by the Palestinians (Area A corresponding to all major population centers and Area B encompassing most rural centers) is fragmented into a multitude of enclaves, with a regime of movement restrictions between them. These enclaves are surrounded by Area C, which covers the entire remaining area and is the only contiguous area of the West Bank. Area C is under full control of the Israeli military for both security and civilian affairs related to territory, including land administration and planning. It is sparsely populated and underutilized (except by Israeli settlements and reserves), and holds the majority of the land (approximately 59%). 4 These figures do not take into account hundreds of millions more in aid that have flowed into the economy through the UN and from other bilateral assistance programs.

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United Nations Relief and Works Agency (UNRWA) which provides services for the more than 950,000 registered refugees. Thus, while the Gaza private sector is making an effort to survive, it is only the donor funded government spending and direct donor assistance that is averting a humanitarian crisis.

11. Unemployment rates in the WB&G reflect the recent economic growth. In the West Bank, unemployment in the fourth quarter of 2009 fell to 18 percent from 20 percent in the same quarter of 2008. At the same time, the labor force participation rate rose from 43 to 44 percent. Unemployment also dropped in Gaza, falling from 45 percent in the fourth quarter of 2008 to 39 percent in the last quarter of 2009. However, part of this can be explained by the fact that the labor force participation rate also dropped from 39 to 37 percent. Unemployment in Gaza has also been ameliorated by job creation schemes funded by donors. For example, in October 2009 UNRWA announced that it was doubling its program to create 14,000 job opportunities a month.

12. Official estimates for poverty from the Palestine Bureau of Statistics (PCBS) suggest that poverty did rise in Gaza between 2004 and 2007 - more recent estimates are not yet available. However, according to a joint FAO -WFP report published in August 2009 for West Bank and November 2009 for Gaza, while food security has remained quite stable in the West Bank since 2003, it appears to have worsened in the Gaza strip since the closure in 2007

III. STATUS OF IMPLEMENTATION OF THE JULY 2009 REPLENISHMENT AND

REQUEST FOR THE 2010 REPLENISHMENT

A. The Trust Fund for Gaza and West Bank

13. The TFGWB was established in 1993 to enable the Bank to finance projects in WB&G. Since WB&G is not a sovereign state, it cannot apply for membership to the IMF or the World Bank Group institutions and is, therefore, not eligible for the sources of financing normally available to member countries.

14. To overcome these legal and practical obstacles, on October 19, 1993, by the terms of resolution No. 93-11 and IDA 93-7, the Executive Directors of the Bank and the Association approved the establishment of the Trust Fund for Gaza (TFG, subsequently renamed the Trust Fund for Gaza and West Bank, TFGWB). In addition, on November 11, 1993, the Executive Directors of the Bank proposed the adoption of a Resolution to the Board of Governors. Such resolution requested the transfer, by way of grant, of US$50 million to the TFG from the US$375 million surplus that the Board of Governors authorized to be transferred to the IDA’s 10th replenishment. The Board of Governors approved such proposal and, on August 1, 1995, increased the TFG permissible territorial scope as the area under the jurisdiction of the Palestinian Authority was enlarged.

15. To date, the TFGWB has been replenished eight times for a total allocation of US$620 million, most recently in July 2009. An additional US$108.28 million has been received in the TFGWB from investment income, from service charges and commitment fees on outstanding credits. US$12 million were transferred to the Holst

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Fund in 20005 for an Emergency Response Program, bringing the total TFGWB resources to US$716.28 million. As of April 30, 2010, US$608 million has been disbursed on the West Bank and Gaza portfolio, and US$ 81.24 million are committed or undisbursed (including US$ 2.24 million of repayments due to IDA). The total uncommitted fund balance therefore corresponds to US$27.04 million. This amount has been partially earmarked for the following operations: Capacity Building for Palestinian Economic and Regulatory Institutions Technical Assistance (US$3.7 million), NGEST – Second Additional Financing (US$7 million), PNGO IV (US$2 million), LAP II (US3 million), TEIP (US$5 million). Up until 2002, all WB&G funding was provided on International Development Association (IDA) Credit terms, however, projects have since been approved on grant terms.

16. The criteria applicable to the administration of the TFGWB continue to be met. TFGWB activities are seen as corresponding to the interests of the Bank’s member countries, evidenced by the strong support the Board of Executive Directors has consistently accorded to activities financed by the TFGWB. The Bank continues to apply its normal procedures and safeguards to administering the proceeds of the TFGWB.

17. Reflecting the fluctuating environment in WB&G and the necessary flexibility to adequately meet the needs of the Palestinian population, the Bank’s engagement in WB&G has been characterized by a need to adapt. In order to fulfill the twin objectives of balancing medium-term development activities and providing emergency assistance, the Bank has developed a wide variety of flexible instruments - from budget support through cash transfers to vulnerable groups and funding non-salary recurrent expenditures in the social sectors, and emergency municipal assistance, to rehabilitation and construction of basic infrastructure. As one of several examples, this approach was applied in the aftermath of the Israeli military operation in Gaza through the Gaza Emergency Response Additional Financing Program. The $21.5 million program, under Operational Policy 8.00, reallocated resources within on-going operations and scaled up selected operations.

B. The 2009 Replenishment and the Proposed 2010 Replenishment

18. The 2008-2010 World Bank Interim Strategy (IS) for WB&G was discussed by the Board of Executive Directors, together with a request for TFGWB replenishment (US$55 million), on April 22, 2008. The goal of the strategy and assistance program, both financial and policy-oriented, is to support the PA’s PRDP. The PRDP’s overarching objective is Palestinian economic recovery. The Bank Group’s work program is organized into four pillars in support of the PA’s efforts: (i) improve governance and support fiscal reform; (ii) support human development in health, education, and social safety nets; (iii) support economic and private sector development; and (iv) support public infrastructure development.

5 The Holst Fund was established by the Bank in 1994 with the objective of financing start up and recurrent costs of bilateral the PA (26 donors contributed). From 1994 to 2001 it disbursed a total US$286 million. The US$12 million Bank contribution to the Holst Fund (from the TFGWB) was approved by the Board in December 15, 2000 in order to finance an Emergency Response Program.

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19. The Bank has been emphasizing policy reform and institutional development in all four areas. Project financing has allowed the Bank to increase our commitments with a portfolio of projects geographically balanced between the West Bank and Gaza (despite the difficult situation, almost 50% of the funds are committed in Gaza). The project portfolio is implementing well and projects at risk have decreased during the past year. We have scaled up a number of successful projects (Electric Utility Management, Third Emergency Support, Emergency Municipal Service Rehabilitation, Gaza Emergency Water, 3rd Palestinian NGO, Tertiary Education, and Social Safety Net Reform). In line with the strategy, the Bank has also carried out a number of Analytic and Advisory Activities (AAAs) which have supported the PA’s reform agenda.

20. Although the IS for WB&G for FY08-FY10 remains valid, it is based on the current PRDP which will be replaced with the new National Plan during the first quarter of FY2011. As part of that planning process, sectoral strategies from almost all Ministries were recently submitted to the Ministry of Planning, who are producing the comprehensive strategic plan. It is likely that the new National Plan will not deviate fundamentally from the current PRDP. The Bank is planning to produce a new Interim Strategy to respond to the PA’s new National Plan and to coincide with the next replenishment request anticipated for submission to the Board in the 4th quarter of FY11.

Table 1: Support to the PRDP: 2008-2010 AAA and Projects

Overarching Objective: Palestinian Economic Recovery

Economic & Private Sector Development

Governance/Fiscal Reforms

Social Development Infrastructure

Projects Several IFC investments in the private sector (Two trade facilities, Affordable Mortgage Finance Facility and Advisory Services.) Joint Financing and Support with DfID on Enterprise Learning Fund; Capacity Building for Palestinian and Economiv Institutions (Board June 24, 2010); MIGA Guarantee Restructuring

Projects Multi Donor Trust Fund for Budget Support (PRDP-TF) Budget Support for Economic Recovery (PRDP-DPG I and II) Land Administration II Project Local Government Capacity Building

Projects Village and Neighborhood Development Project Social Safety Net Reform Project (Additional Financing I and II) Emergency Municipal Services Rehabilitation Project, Additional Financing Emergency Service Support Program Municipal Development Program Teacher Education Improvement Program(Board June 24, 2010) Tertiary Education Project, Additional Financing

Projects North Gaza Sewage Treatment Project (Additional Financing; Board June 24, 2010) Electric Utility Management Project Gaza Water Emergency Project (Additional Financing) Southern West Bank Solid Waste Management Project

7

Overarching Objective: Palestinian Economic Recovery

Economic & Private Sector Development

Governance/Fiscal Reforms

Social Development Infrastructure

Policy and Technical Assistance

Trade Facilitation Movement & Access Secondment/Support to the Blair Team Housing TA Advisory services to PIF Telecoms Reform and Institutional Strengthening


Electricity Net Lending Pension Reform TA Payment Systems TA Public Sector Mgmt Country Procurement Assessment follow-up Financial Sector Review Economic Impact of Access to Land Municipal Finance Policy Note Governance Study Energy TA


Social Inclusion and Gender Health Financing, Pharmaceutical Reform and Equity Studies Higher Education Student Loan Scheme


Transport Sector TA Water Resource Management TA Water Restrictions Study

21. At the Board Meeting of the Executive Directors on June 24, 2010 the Bank intends to propose to the Executive Directors a replenishment of the TFGWB. The Bank would therefore request them to recommend that the Board of Governors authorize the transfer from IBRD surplus of the amount of US$55 million to the TFGWB. The objective of the 2010 replenishment is to support the Bank’s strategy and assistance program, both through projects and non-lending advisory services in line with the PA’s PRDP.

22. The new replenishment would finance one Development Policy Grant and two new investment operations: Capacity Building to the Palestinian Water Authority (PWA), in the amount of US$3 million, and Social Safety Net Program, in the amount of US$10 million:

Third Palestinian Reform and Development Plan (PRDP) Development Policy Grant (US$40 million; scheduled for Board approval on September 16, 2010).The PA has again requested that a substantial portion of the 2010 replenishment be allocated in the form of budget support through the Central Treasury Account. Disbursement of the DPG III is linked to progress on implementation of the PRDP; specifically in the areas of fiscal strengthening and improving public financial management, which are central to the policy dialogue between the PA, IMF and the World Bank. The Bank’s use of the Central Treasury Account is an important factor in encouraging other donors to use the PA’s financial management systems and to also provide critical budget support.

Capacity Building to the PWA (US$3 million; scheduled for Board approval

on December 15, 2010). The project will address strategic capacity building and technical assistance (CB/TA) needs of the WB&G water sector. It will focus on the PWA capacity to plan, support and regulate the development of the water sector. With a 2010-12 implementation outlook, the project sets out to: 1)

8

Support PWA's 2009 Water Governance Program, with the creation of a Technical and Planning Advisory Team (TPAT) aimed at building PWA capacity to plan and implement optimized Water Supply and Sanitation and Water Resources Management strategies; 2) Support other CB/TA actions identified under Water Governance Program, including for the development of reform/reorganization action plans, and for selected management, operational and technical capacity building needs; and 3) Promote alignment of donor initiatives under a unified CB/TA framework, with potential donor co-financing of CB/TA projects.

Social Safety Net Program. The project is being designed as a follow-up to the

SSNRP to enable the PA to consolidate reforms and promote an enabling environment for the future Palestinian National Cash Transfer Program (PNCTP) to be the PA’s flagship instrument that can be scaled up during crisis situations. It has three main objectives: (i) to support the PA in managing and operating the PNCTP; (ii) to mitigate the impact of the continued socio-economic crisis on a sub-set of the poorest and most vulnerable households; (iii) to strengthen the supply of nutrition and micro-nutrient promotion interventions in areas with high malnutrition rates.

23. The resources provided to the TFGWB allow the Bank to leverage resources from other donors. The Bank has administered more than US$1.5 billion of funds provided by other donors through co-financing: almost US$3 of donor resources for every US$1 committed from the TFGWB. The ratio is even higher (US$4 for every US$1 from the TFGWB) when one includes parallel financing of World Bank projects.

Table 2: World Bank- Administered Trust Funds

TRUST FUNDS CONTRIBUTIONS (US$m)

Bilateral Donor TFs

Danish Ministry of Foreign Affairs(DANIDA) 10.00

EU-Commission of the European Communities 16.73

Germany - Bundesministerium fürWirtschaftliche Zusammenarbeit 0.77

Italy - Ministry of Foreign Affairs 1.68

Japan - Ministry of Finance 0.50

Netherlands Minister for Development Cooperation 0.48

Norway - Ministry of Foreign Affairs 2.50

Swedish International Development Cooperation Agency (SIDA) 13.32 United Kingdom - Department for International Development (DFID) 3.00

Multi-Donor TFs

PRDP-TF 448.90

ESSP-MDTF 80.79

Other Multi - Donor TF (MDTFs) 23.08

Total Ongoing Donor Funded TF 601.74 Total Closed Trust Funds 924.25 Total Ongoing & Closed Trust Funds - TF 1,525.99

9

24. The Emergency Services Support Program (ESSP) Multi-Donor Trust Fund and the Palestinian Reform and Development Plan (PRDP) Multi-Donor Trust Fund for budget support are the largest funds set up by the Bank with the generous contributions of the donor community (see Annex 1). The ESSP MDTF co-finances the ongoing US$15m Bank-financed ESSP III project and has served as a vehicle for donors to fund non-salary recurrent expenditures for the PA budget, mainly in the social sectors (Ministries of Education & Higher Education, Health, and Social Affairs). As of April 30, 2010, the ESSP has received US$ 80.6 million in contributions from Australia, Austria, Belgium, the European Commission (EC), France, Italy, Norway, Spain, Sweden, and Switzerland.

25. The PRDP TF, established in April 2008, is linked to the implementation of key reforms of the PRDP as they relate to budget execution within an overall macroeconomic framework. To date, Australia, Canada, Finland, France, Kuwait, Norway, Poland and the UK have contributed with US$449 million (of which US$139.1 as of April 30, 2010) to support the PA’s recurrent expenditures.

26. The IFC is increasing its activities in the West Bank and Gaza, and currently has a committed investment portfolio of US$61 million. In FY08, the International Finance Corporation (IFC) committed US$17 million in a trade-finance and student loans projects, and in FY09 committed a total of US$46 million in the financial and telecom sectors (including the landmark Wataniya telecom project). In FY10, IFC has already provided US$3.7 million in two trade finance facilities, and expects to commit US$76 million for the Affordable Mortgage Finance Facility in the next few months. IFC also has a strong Advisory Services program in the West Bank and Gaza. IFC's advisory services interventions include: (i) developing the legal and regulatory environment for leasing in cooperation with the Capital Markets Authority (CMA); (ii) assisting bottling companies in the olive oil sector focusing on supply chain development, product quality, and access to export markets; IFC is currently working on having a new project in the olive oil sector that will complement the first one; (iii) assessing the potential demand and current supply of microfinance services in an effort to increase access to finance; and (iv) assisting Al-Rafah Microfinance Bank in rolling out its microfinance activities. IFC is expected to provide additional advisory services in the field of housing finance training.

27. MIGA established a Guarantee Fund in 1997 to cover political risks, with contributions from the PA, Japan and the European Investment Bank. With a current underwriting capacity of up to $30 million, the Fund has not been utilized by investors due to the restrictions on movement and access that continue to hinder both foreign and internal investments. In response to this, MIGA has restructured the fund to cover other forms of risk and for larger amounts. Presently, MIGA is reviewing three new investment potentials in the manufacturing, and financial sectors, and is working on increasing its visibility to the local investor community by hiring a full-time local staff member to market the program.

28. To ensure both continued alignment of Bank-supported projects with Palestinian priorities as defined in the PRDP, and continued harmonization of its

10

portfolio with other donor initiatives, the Bank plays an active role in the local aid coordination structure, the Local Development Forum (LDF), and its associated strategy and sector working groups. In addition to acting as a co-chair of the LDF, the Bank is co-chair of the Economic Strategy Group, and the Private Sector Development and Trade Sector Working Group. It is also a member of each of the Infrastructure, Social & Humanitarian Assistance, Governance Strategy Groups, the Fiscal Sector Working Group, and of the Task Force on Project Implementation which liaises with the Government of Israel. These joint Palestinian-donor groups represent forums to discuss strategy and priorities with the PA and other donors, identify obstacles and critical issues and participate in updates on ongoing programs and projects. The World Bank will continue to play a leading role in local aid coordination and continue to allocate the necessary resources for this purpose.

29. Thanks to these harmonization mechanisms, the Bank is able to focus on the sectors where it has demonstrated a comparative advantage. It has, therefore, centered its portfolio on public finance and management, governance, water and sanitation, municipal development, basic social service delivery, education, community development, and electricity. Other sectors, such as transportation or health, have been covered by analytical work which has laid the foundations for the intervention of other international partners.

30. In addition to working with aid coordination groups, the World Bank team continues to work closely with Tony Blair, Quartet Representative. The Office of the Quartet (OQR), set up in 2002 following the commencement of the 2nd Palestinian Intifada, comprises the United Nations, the European Union, the United States and Russia. Its mandate is to help mediate Middle East peace negotiations and to assist in the development of the Palestinian economy in the West Bank and the Gaza Strip. Since November 2008, one Bank staff has been seconded on a full time basis to the OQR team as the economic advisor based in the OQR office in Jerusalem. A short-term consultant was posted in Gaza to support the work undertaken in the Strip. The Bank is currently working closely with the OQR on a number of issues including securing the entry and exit of cash and project materials into Gaza; facilitating large-scale investment in the telecommunication sector; and improving trade facilitation.

C. Portfolio Assessment and Results

31. Portfolio performance remains satisfactory thanks to the combined efforts of the PA and Bank staff. As of April 1, 2010 project commitments were higher than the previous year (US$179 million versus US$151 million in FY09) and the level of commitments at risk has slightly decreased (from US$68.4 million to US$66.2 million). As of April 26, 2010, the level of disbursements (excluding the Development Policy Grant for budget support) was US$23.1 million, similar to US$26 million for the whole of FY09. Forty seven percent of the commitments were in Gaza and 53% in the West Bank, while 52% of the disbursements were in Gaza and the remaining 48% in the West Bank.

11

32. Since the last replenishment in 2009, the portfolio has slightly increased its size to 11 active projects (see Annex 1), focusing on social safety net, education, water and sanitation, solid waste, municipal finance, electricity, and the NGO sector with a net commitment amount of US$ 179 million (as of April 1, 2010). Two new projects were approved: Southern West Bank Solid Waste Management (on May 14, 2009) and Municipal Development Program (on July 17, 2009). In addition, the Social Safety Net Reform project received a second Food Crisis additional financing (on March 26, 2010).

33. Since its inception in April 2008, the Bank-managed Palestinian Reform and Development Plan Multi-Donor Trust Fund has provided the PA with US$448 million. This contribution helps alleviate the PA’s fiscal pressure by providing reliable disbursements on a regular basis and supports implementation of the PRDP. The policy reforms supported by the PRDP TF also complement the Bank’s Development Policy Grants. Combined, the DPGs and PRDP TF have supported the PA’s reform efforts particularly in: a) strengthening the PA fiscal position through control of public wages, improved collection and payments of electricity bills, and better targeting of social safety nets, and b) increasing government transparency and accountability through improved public financial management. The PRDP TF disbursement mechanism is also linked to the DPG monitoring framework, therefore providing additional transparency to the budget support process.

34. The Bank has also delivered a strong AAA program. The Bank’s analytical and policy work has, from the outset, laid the basis for our role in WB&G. In FY10, we have been supporting the housing finance sector (in collaboration with IFC), telecoms, pension reform, anticorruption, municipal finance, and higher education (in collaboration with IFC), through Technical Assistance programs (see Annex 2). Three critical reports produced in the last year include:

a) Checkpoints and Barriers: Searching for Livelihoods in the West Bank and Gaza. Gender Dimensions of Economic Collapse. The Report analyzes an important, but as yet largely unexplored, dimension of this issue -- the long term impact of the system of movement and access restrictions on relations between women and men. Based on data covering the years 2000 to 2007, the report examines how Palestinian women have coped with the impact of a dramatic retreat of males from the labor market. The authors stress that lifting of the closure regime is the most effective way to ease the hardship faced by Palestinian women. Additionally, they recommend that in order to mitigate long-term deterioration of the social fabric, the Palestinian Authority take immediate action in four areas: 1) Enable employment for women that is perceived as “dignified”; 2) Support and expand opportunities for youth employment; 3) Facilitate social cohesion; 4) Collect better data on gender-disaggregated economic participation.

b) Reforming Prudently Under Pressure: Health Financing Reform and the Rationalization of Public Sector Health Expenditures. While economic growth and fiscal revenues contracted during the post-2000 period due to continued Israeli-imposed economic closures, public sector health spending ballooned, particularly during 2003-2005. This expansion in expenditures was driven by an increase in Ministry of Health (MOH) employment, an increase in

12

average salary levels, greater spending on pharmaceuticals and specialty care referrals for treatment to private and overseas providers. The Bank’s report provide advice in reforming four key areas of the health sector: 1) insurance; 2) financial management; 3) MoH human resources; and, 4) public sector expenditures on contracted specialty care services.

c) Assessment of Restrictions in Water Sector Development. Noting the complete dependence of WB&G on scarce water resources shared and largely controlled by Israel, a number of World Bank reports have found that the joint governance rules and water allocations established under the 1995 Oslo interim agreement, still in effect today, fall short of the needs of the Palestinian people. Because of the imbalance in power, capacity, and information between parties, interim governance rules and practices have resulted in systematic and severe constraints on Palestinian development of water resources, water uses, and wastewater management. To begin ameliorating the situation, the studies recommend the adoption of an agenda that clearly addresses identified shortcomings in water resource development and management, a low and declining investment rate, and weak management of water services.

D. Risks and Mitigation Measures

35. The West Bank and Gaza is a fragile territory with important political and economic uncertainties and a high level of risk in project implementation. In order to reduce and mitigate the risk of operating in this volatile environment, a combination of strategic, fiduciary, and technical measures has been put in place (see Annex 5).

E. Lessons Learned

36. Regularly scheduled Country Performance Reviews (most recently undertaken in April 2010) and close supervision of projects have enabled the project teams to keep abreast of critical implementation issues.

37. The World Bank portfolio is performing well. Despite the difficulties inherent to the West Bank and Gaza, project implementation proceeds without major delays due to considered project design and preparation, and good capacity within the implementing agencies. Communication between team leaders and project implementation units is smooth and relationships are collaborative.

38. Appropriate fiduciary arrangements are in place and some of the limitations of the local procurement teams are balanced by the Bank’s interventions and support. Turnover of Project Implementation Unit (PIU) fiduciary staff, however, remains high, mainly due to the strong competition from other agencies. Certain fiduciary procedures would benefit from additional simplification, for example a more flexible use of procurement thresholds.

39. Operations in Gaza remain complex but the Bank continues to coordinate with the Israeli authorities and keeps exploring further options for ensuring that goods and materials critical for project implementation are allowed into Gaza.

13

40. In light of these experiences the West Bank and Gaza country team has generated a number of lessons learned for working in such an environment:

The Bank has been able to support the PA in maintaining the momentum on their ambitious reform agenda. While many institutional reforms have been accomplished following the announcement of the PRDP, many difficult issues lie ahead and Bank support, through analytical work, policy advice and financing, can continue to play a valuable role.

In all projects, flexible, simple and realistic design is the key for smooth implementation and results on the ground. A strong focus on the preparation phase greatly reduces implementation risks and increases project performance.

The Bank’s resources are limited and, in light of the upcoming National Plan, our strategy needs to keep its focus on selectivity while working closely with partners. A focus on the PA’s priorities and building its absorptive capacity, and considering the Bank’s comparative advantage , will continue to ensure a performing portfolio that fulfills the needs of the Palestinian people.

14

Annex 1: Summary of WB&G Portfolio, As of April 1, 2010

Committed Disbursed Undisbursed Disbursed Committed Disbursed Undisbursed DisbursedOngoing Projects Percent 448.9 408.5 40.3 91%

Electric Utility Management Project 14.5 3.1 11.4 21% 10.0 5.8 4.3 58%Emergency Municipal Services Rehabilitation Project II 13.0 11.4 1.6 88% 3.0 2.6 0.4 87% North Gaza Emergency Sewage Treatment Project 19.8 11.6 8.2 59% 81.0 80.5 0.5 99%Tertiary Education Project 15.0 8.8 6.2 59% 542.9 497.4 45.5 92%

Gaza Emergency Water Project 28.0 23.0 5.0 82% 721.9 594.5 127.4 82%

Palestinian NGO Project III 13.0 9.3 3.7 72%

Social Safety Net Project 28.4 18.0 10.4 63%Emergency Services Support Program III 15.0 9.8 5.2 65% FY Grant Amt

Village and Neighborhood Dvlop. Proj. 10.3 1.3 9.0 13% 2010 10

Southern West Bank Solid Waste Mgt. 12.0 0.8 11.2 7% 2010 10Municipal Development Program 10.0 0.0 10.0 0% 2010 3.7Total On-going Projects 179.0 97.1 81.9 54% 2010 3.4Total Completed Projects (1993-2010) 640.9 597.4 43.5 93% 2010 5TOTAL (On-going & Completed Projects) 819.9 694.5 125.4 85% 32.1

2011 32011 32011 72011 402011 10

2011 152011 2

80

Contributions10.00

16.73

0.77

1.68

0.50

0.48

2.50

13.32

3.00

448.9080.7923.08

601.74924.25

1,525.99*Total closed trust funds include all single and MDTF

Completed Projects by Sector (1993-2010)

Oongoing Trust Funds by Donor (US$m)Danish Ministry of Foreign Affairs(DANIDA)

EU-Commission of the EuropeanCommunities Germany - Bundesministerium fürWirtschaftliche Zusammenarbeit

Avian Influenza Prevention and ControlEmergency Services Support ProgramTotal RETotal On-Going Projects and RE

Project Pipeline FY-2010/ FY2011

Project name

Teachers Education Improvement Project

Second Land Administration Project

Additional Financing Food Crisis II

Total Projects Pipeline FY-2011

National Safety Net ProjectWest Bank Wastewater Management ProjectGaza Emergency Water II - Additional Financing

North Gaza emergency Sewage Treatment Project

Municipal Development Program

PRDP - DPG III

Trust Fund for the Gaza and West Bank Ongoing Recipient Executed Products (US$m) RE:Trust Funds/Grants

US$ Million PRDP- TF

Palestinian NGO III Additional Financing II

Capacity Building to Palestinian Authority Water

Local Government Capacity

Italy - Ministry of Foreign Affairs

Econ/regulatory Institution capacity Building

Total Projects Pipeline FY-2010

Japan - Ministry of Finance

Netherlands Minister forDevelopment Cooperation

Norway - Ministry of ForeignAffairs

Swedish International DevelopmentCooperation Agency (SIDA)

PRDP- TF by Donor (As of April, 2010)

Total closed Trust Funds*Total On-going & Closed Trust Funds-TF

United Kingdom - Department forInternational Development (DFID)

PRDP-TF (RE Products)ESSP-TF (RE Products)Other Mulridonors MDTFsTotal On-going Donor Funded TF

32.83%

31.48%

9.21%

0.87% 1.22%

0.11%

6.45%

17.82%

Norway

UK (DFID)

Australia

Finland

France

Poland

Canada

Kuwait

Total Received:US$448.89m

Education

Energy

Finc. and Priv Sect Devlp.

Health and Population

Public Sec. Govern

Social Protection

Transport

Urban Develp

Water

4.6%

5.0%

3.2%

1.3%

25.1%

20.2%

1.7%

28.4%

10.5%

% Investment in Projects by Sector

Sectors

15

Annex 2: AAA in FY10

Technical Assistance on Housing Finance (ongoing and in cooperation with the IFC). The aim of this TA is to develop housing finance in West Bank and Gaza. The TA comprises two main components: first phase: (i) improving the legal infrastructure; (ii) rationalizing and complementing the regulatory framework; (iii) improving supply-related regulation; and (iv) initiating the expansion of access to housing finance. During the second phase, the TA is: (i) helping to reform PMHC's products and business models; (ii) supporting an overhaul of the rental laws; and (iii) supporting the development of a housing policy, with particular assistance to lower income groups. Municipal Finance Policy Note (delivered: February 2010). This economic and sector work (ESW) analyzed the sources of funds and expenditures of 132 municipalities in West Bank and Gaza to provide policy recommendations for better municipal management and service delivery. In particular, it assessed the extent to which municipalities rely on utility services (electricity and water) to fund their operating costs. Telecommunications Reform and Institutional Building (delivered: March 2010). The aim of this Technical Assistance was to strengthen the Ministry of Telecommunications and Information Technologies (MTIT) to achieve its main telecommunications policy reform objectives which were to: (i) increase the level of effective competition in Palestine's telecommunications market; and (ii) strengthen the regulatory capacity by creating and equipping an internal unit within MTIT to deal with sector regulation. The unit may be the core for a future independent regulator. In addition, the TA assisted the PA to deepen the reform of the telecommunications sector, successfully implement the provisions of the new sector law, and build credible, independent, competent institutions for the sector. Technical Assistance: Anti-Corruption (expected delivery date: August 13, 2010). This assistance is undertaking a comprehensive analytical assessment of the prevalence of and manifestations of corruption in the PA public sector. This study could directly contribute to the PA's programs to enable "efficient and effective government" and "open and accountable government by helping to develop a comprehensive anti-corruption strategy. Moreover, to the extent that perceptions of corruption are significantly worse than actual practices, the findings of the study can provide the PA with the necessary information to mount an effective governance campaign and address public misperceptions in this area. This study will also complement the Bank's broader anti-corruption initiative in the MENA region which seeks to undertake a comparative assessment of anti-corruption systems in selected MENA countries. Municipal Finance II (expected delivery date: June 2010). This TA will provide guidance to the Ministry of Local Government to assist municipalities in transferring electricity provision to utilities. It would also assist the Ministry of Local Government in ensuring that these services are fully transferred by June 2010.

16

Higher Education Student Loan Scheme (expected delivery date: June 2010). This TA will assist the Ministry of Education and Higher Education (MOEHE) in setting up a financing scheme for higher education students that will complement the IFC Student Loans Program. It will also develop the capacity of MOEHE to design and implement a student revolving fund.

Second Pension Reform Funding (delivery date: February 18, 2010). This TA task has been implemented in parallel with the on-going Development Policy Grant. As such, the primary intent of this task has been to produce pension reform options that would enable the Palestinian Authority to implement pension reforms and strengthen the capacity of the Palestinian Pension Authority to implement these reforms.

17

Annex 3: Summary of Current Portfolio and Outcomes

Project Amount [US$ m]

Objective Status to date and Outcome Disbursed (%)

Gaza II Emergency

Water Project

(GEWP)

28.0 The project is working to improve the provision of adequate water and wastewater services in Gaza as well as establish and build the capacity of the Coastal Municipalities Water Utility (CMWU) as an autonomous well-run modern utility, and strengthen PWA's capacity to assume sector regulatory functions.

After an initial commitment of US$20 million, a first additional Financing of US$ 5.0 million was provided in early 2008 to supplement the project overrun expenses. A second additional financing of US$3.0 million was approved in 2009 to finance recovery from the effects of the December 2008 conflict with Israel. A third additional financing of US$ 7.0 million and extension of the project through 2012 to continue financing the operating and capacity building efforts for the CMWU has been requested by the Palestinian Authority.

The CMWU is now well established and progressively incorporating and consolidating the 25 municipally owned and managed water utilities. CMWU is now a South Gaza regional office managing water services for three municipalities and significantly improving service quality and tariff collections. However, the CMWU is still some distance away from achieving financial sustainability in the absence of external funding.

82%

Electric Utility Management

(EUMP)

14.5 The project development objective is to reduce the fiscal burden of the electricity sector on the PA’s budget through lower deductions from clearance revenues for arrears owed to Israeli Electric Corporation. This will be possible through adoption of 1) appropriate sectoral efficiency enhancement measures taken and 2) key performance indicators of the electricity distribution utilities to include: (a) improved collection performance; (b) lower technical/non-technical losses; (c) reduction in payables to IEC on account of electricity purchase; and (d) consolidation and increase in number of consumers. The project will also ensure that NEDCO is fully operational

Progress has been made in implementing the project. Several procurement packages have been issued and contracts signed for the supply of tools and vehicles for the electricity utilities. In addition, Palestinian Energy Authority has signed contracts for the supply of equipment and materials financed under EUMP Additional Financing for the rehabilitation of damaged electricity networks in Gaza. About $3.0 million has been disbursed (from EUMP and EUMP AF). Progress has also been made in implementing measures to reduce losses and improve collections including wide scale installations of pre-paid meters. Progress

21%

18



through financing necessary capacity building measures. however has been slower in implementation of the Electricity Law especially the establishment of a distribution company, NEDCO, and the transfer of the electricity assets and services to the distribution companies

Village and Neighborhood Development

(VNDP)

10.3 Within a fragile context, the project promotes a coordinated development approach which builds the capacity of communities to plan for and manage development resources. The key indicators for project success include:

a) percentage of activities identified through the Area Development Plans that receive funding from other sources;

b) percentage of projects with economically and/or socially marginalized groups as main beneficiaries

Subproject implementation has been slow, primarily due to the lengthy process of identification of Community Driven Development activities. However, community mobilization, a key aspect of the project, is progressing smoothly. The project is ensuring active participation of marginalized groups, including women and youth, a key indicator for the project’s success. Community assessments and capacity building plans have been developed by the Oversight Consultants (OCs). After delays, project preparation activities in Gaza have successfully resumed. The Implementing Agency- Ministry of Local Government (MOLG) - is in the process of reviewing and approving joint sub-project proposals submitted by Joint Service Councils (JSC) in the West Bank and by neighborhood groups in Gaza. Five Grant Implementation Agreements have already been signed between MOLG and JSCs, thus marking the beginning of the sub project implementation stage at the community level.

Recently, the OCs have also shown improvements in meeting their obligations of capacity building and knowledge transfer to the MOLG and community.

13%

19



North Gaza Emergency

Sewage Treatment

Project

(NGEST)

19.8 This critical infrastructure project is working to mitigate immediate, serious health and environmental safety threats to the communities surrounding the effluent lake at Beit Lahia Wastewater Treatment Plant and the underlying freshwater aquifer. Part B of the project will provide a satisfactory long-term solution to the treatment of wastewater for the Northern Governorate in Gaza. Part A has constructed a pipeline from Beit Lahia to a new site and constructed infiltration ponds for managing treated wastewater. Part B will construct a new, higher capacity wastewater treatment plant, monitor groundwater impacts, and develop a wastewater recovery and reuse program.

Implementation is being severely impacted by continuous lack of access to the site and problems in getting goods and materials into Gaza. As a result of coordination with Israel, a number of critical goods are now in place and part A of the project (activation of an interim substitute to the Beit Lahia effluent lake) was completed in January 2010. Infiltration basins at a new site intended for the proposed new Northern Gaza Wastewater Treatment Plant - to be constructed under Part B of the project - are now receiving most of the partially treated waste from the old wastewater treatment plant at Beit Lahia. However, the basins are not designed to manage partially treated wastewater on a sustained basis and will rapidly deteriorate if Part B is not completed within the next 2-4 years.

An additional financing of $12 million was approved in April 2008 to finance risk management measures to avoid a potential long-term irreversible impact to the groundwater beneath the infiltration basins and surrounding areas at the new Northern Wastewater Treatment Plant (NWWTP). Bilateral contributions from the EC, Sweden, Belgium, and France have been committed to cofinance the construction of the NWWTP. A second additional financing of $7 million has been requested to cover the current financing gap for Part B and is proposed for Board presentation in June 2010. Bids for construction of the NWWTP have been received and evaluation and contracting is expected to be completed by the end of June 2010. Part B is expected to be completed by late 2013.

59%

20



Social Safety Net Reform Project

and Supplemental

financing

(SSNRP)

28.4 The project is designed to mitigate the impact of the continued socio-economic crisis on a subset of the poorest and most vulnerable households. In tandem, the project will strengthen the Ministry of Social Affairs (MOSA) capacity to manage cash assistance programs, which should trigger a gradual merger of the various on-going cash assistance programs into a PA administered cash assistance program, using a state-of-the-art poverty targeting system to select program beneficiaries in a transparent manner.

The project’s main accomplishment is that it triggered some key reforms of the social safety net, including the merger of the two main on-going cash assistance programs (WB and EU) into a PA-administered cash assistance program, entitled the Palestinian National Cash Transfer Program (PNCTP). Through these reforms, the PNCTP will leverage $40 million per year of EU funding. Given the prevailing social, economic and political environment in West Bank and Gaza, the PNCTP already has a proven track record of its ability to be scaled up, and to provide quick support to over 25,000 poor households that were negatively affected by the recent financial and food crisis. The MOSA poverty targeting database (proxy means test household selection methodology) was recently updated using data from the PCBS 2007 household budget and expenditure survey and comprises over 55,000 poor households.

63%

Tertiary Education

Project

(TEP)

15.0

The project is working to (i) improve the regulatory environment for tertiary education management, governance and quality assurance; (ii) increase internal and external efficiency of the tertiary education system as a first step towards achieving sustainability; and (iii) create incentives and provide the basis for improvements in efficiency, quality and relevance of tertiary education institutions in order to meet the socioeconomic needs of the Palestinian people.

The objective of the $5.0 million Additional Financing is to support the MOEHE’s Teacher Education Strategy through the Quality Improvement Fund (QIF). A total of $4.2 million has been earmarked to support one additional

All funds under the on-going project have been fully committed. Forty-five QIF projects were funded of which 18 have already been completed. Progress on the on-going 27 QIF projects is proceeding satisfactorily and it is envisaged that all these projects will be completed by October 2010. It is important to notice that not only have quantitative targets under QIF doubled but most importantly, the quality of the projects and the sound implementation of QIF grants are having an important positive impact on the institutions and on the higher education system as a

whole.

A first draft of the National Tertiary Education

59%

21



QIF cycle to provide funding for Teacher Education Institutions who design innovative programs to improve the quality of pre-service teacher education, through intensive capacity-building for education faculties, reform of existing teacher education programs and, where necessary, developing new programs.

Strategy was prepared and discussed with stakeholders. However, due to changes in the Government, this has yet to be approved. It is now expected that this strategy will be completed before the project closing date (December 31, 2012).

The PCU is becoming even more integrated within the MOEHE. This has had a further positive effect on project implementation and, more importantly, contributes to the long-term capacity-building of staff.

In relation to the AF, a concept note detailing the methodology, calls for proposals, evaluation criteria, implementation modalities, and action plan for the new round of QIF was approved by the QIF Board and reviewed by the Bank Team. The call for proposals was launched in March 2010 and was targeted towards 11 universities and 7 colleges respectively that offer educational programs.

Palestinian NGO Project III

(PNGO III)

13.0 The project provides social services to those who are poor, vulnerable or affected by the deteriorating socioeconomic conditions by establishing an effective mechanism to improve the quality and sustainability of Non-governmental Organizations (NGOs) social service delivery.

The long-term engagement in the NGO sector has brought significant institutional transformation – for instance, over 500 NGOs have signed the Palestinian Code of Conduct that outlines principles of governance, accountability and transparency specifically for NGOs – the only one of its kind in the MNA Region. Service delivery through NGOs is reaching marginalized and underserved populations: 88% of those served through the NGO Development Center (NDC’s) grants are from marginalized groups. It also reaches communities in East Jerusalem and Gaza where the PA has difficulty operating. With financing from the Agence Francaise de Developpement and the Bank, NDC was able to effectively and quickly respond to the recovery efforts

72%

22



following the 2009 conflict in Gaza.

Implementation of PNGOIII is progressing smoothly. To allow proper completion of project activities, the closing date has been extended to March 31, 2011. The Additional Financing for Gaza is also on target and is expected to close on September 30, 2011. A repeater project is being prepared for Board submission on June 24, 2010. In Gaza, movement restrictions continue to affect the implementation of the Specialized health projects. However, the Bank, in cooperation with WHO, the Quartet and other donors, was finally able to get the bed elevator for AlAwada Hospital into Gaza, after 12 months of storage. Another breakthrough was marked by getting a highly experienced neurosurgeon into Al Wafa Hospital in Gaza with the aim of enhancing capacity of the medical team and conducting a few complex surgeries. One of the planned researches has recently been published and disseminated, namely: Tracking Donor Funding to Palestinian NGOs.

Emergency Municipal

Service Rehabilitation

Project II

(EMSRP II)

13.0 The objectives of EMSRP II are to (i) provide funding for infrastructure rehabilitation and maintenance to help mitigate further deterioration in the delivery of essential municipal services, and (ii) create temporary job opportunities at the local level through the launching of labor-intensive employment generation schemes. In addition, through the Municipal Development Lending Fund, the Project is piloting innovative initiatives to improve municipal service cost recovery (through the introduction of pre-paid electric metering systems) and leverage partnerships with local NGOs to deliver services

The Original project was successfully completed by the closing date of Dec 31, 2009. The Additional Financing of US$3 million to support the Gaza recovery efforts became effective on August 3, 2009. The AF was designed to support continuation of service provision and prevent further deterioration. All 99 subprojects covering all municipalities in Gaza are currently under implementation and provide funds for incremental operating costs, infrastructure rehabilitation and goods for service delivery. Implementation progress has been impressive:

88%

23



more effectively. subprojects worth about US$1 million have been completed. All planned activities are expected to be completed well before the closing date of June 30, 2011. Disbursements have been fairly smooth since most of the activities do not require construction materials and use locally available goods. In addition, the governments of Denmark (approximately US$5.2) and Sweden (approximately US$ 8.4 million) have provided co-financing of subprojects in Gaza. The Swedish grant is also expected to be completed prior to the closing date. The Danish grant will soon be effective. Both are expected to close by June 30, 2011.

Emergency Services Support Project III and $5 million AF

(ESSP III)

15.0 The objectives of the ESSP III are to mitigate the current fiscal crisis by supporting services in Education & Higher Education, Health and Social Affairs by financing a portion of the Ministries non salary recurrent costs. The ESSP also serves as an instrument to leverage donor funding through the Bank Administered Multi-Donor Trust Fund.

As of the end of March 2010, all funds have been committed for the original project and for the $5.0 million AF, approved by the Board in May 2009 to respond to the Gaza crisis. The project is doing well, taking into account the Gaza situation as education, health, and social services continue to operate around the same levels as the 2007 baselines. The ESSP mechanism, which has been on-going for close to a decade has developed a track record in providing support to ensure that social and other key services (e.g., water and sanitation) remain operational during a crisis situation. A case in point is the fact that hospitals were able to operate during the Gaza crisis as a result of the fuel supplies being funded and delivered through the ESSP. The ESSP mechanism has also managed to leverage over $300 million from other donors through a Bank-administered multi-donor TF (see below).

65%

Southern West 12.0 The objective of the Project is to improve solid waste The project was launched in December 2009. 7%

24



Bank Solid Waste

Management

disposal services for the communities and businesses of Palestinian municipalities and joint services councils in the Bethlehem and Hebron governorates through provision of an efficient socially acceptable and environmentally friendly mechanism, including (a) strengthening the joint services council administrative and technical capabilities for a cost-effective management of waste disposal services; (b) improving the waste disposal services through provision of a sanitary landfill facility and related infrastructure; and (c) carrying out a public awareness campaign for promoting waste minimization, resource recovery and cost recovery for financial viability.

Currently, preparation for bidding packages are being finalized for the rehabilitation and closure of the wild dumpsites, management of the Yatta regional dumpsite and the construction of the new sanitary landfill. The EC is finalizing bidding documents for the supply of the first lot of SWM equipment.

Municipal Development

Program

(MDP)

10.0 The objective of Phase I of the Municipal Development Program (MDP) is to improve municipal management practices for better transparency. This is the necessary condition for improving service delivery in subsequent phases. The key performance indicators at the end of Phase I are as follows: (a) percentage of municipalities that graduate up the performance category in which they are currently classified and; (b) Percentage of municipalities that apply at least 2 public disclosure methods (publicly available SDIPs, annual external audits, project related data, municipal budgets and performance rankings).

The MDP has been effective since January 26, 2010. In addition to the Bank, 5 other donors and the PA itself are financing the program. As such it is the first national program that fully ensures donor harmonization. Financing Agreements with nearly all donors have now been signed or are being finalized. The Municipal Development Lending Fund has carried out training activities for its own staff and municipalities to ensure smooth sub-project execution. Municipalities are currently finalizing their subprojects and subproject implementation is expected in the coming months.

The key constraint for the MDLF remains institutional as it continues to operate with vacancies in key positions (such as procurement) which need to be filled to ensure smooth implementation.

0%

Recipient Executed Activities

25



Emergency Services Support

Program – Multi-Donor Trust Fund

80.6 The program's objective is to mitigate the deterioration of basic services brought about by the inability of the Palestinian Authority to meet its budget requirements by providing financing for non-salary operating expenditures in key social and service delivery sectors (health, education, social assistance, water, sanitation and electricity).

Implementation performance remains satisfactory. To date, the trust fund has disbursed about 98% of funds. It is expected that it be extended beyond its closing date of June 30, 2010. The ESSP continues to create an enabling environment that draws in donor resources and helps focus those resources on areas that are essential for maintaining critical social services operational. The project continues to serve as a catalyst for donor funds, and has become an important instrument for the PA to channel such funds quickly to meet emergency needs in social and other critical services, including ones that can be expected to have a large impact on the general well-being of the population and on maintaining human capital development. The PA will continue to depend on donor support for the bulk of its recurrent expenditures for an extended period of time. The PA has requested an extension of the closing date of the trust fund by two years in order to accept a new contribution from the EC. The Bank is working with the donors to extend it.

99%

Local Government

Capacity Building

10.0 The objective of the Project is to improve local governance and accountability, and thereby foster the efficient and sustainable economic, social and physical development of the urban and rural areas in the parts of West Bank and Gaza under the jurisdiction of the Palestinian Authority, through the capacity building of the Ministry of Local Government (MOLG) and the Local Government Units.

After the slow start up, the Local Government Capacity Building Project (LGCBP) is now showing satisfactory results towards achieving its objectives. For example, the first of its kind municipal Chart of Accounts has been developed, approved by the Minister of Local Government, and put into action through wide range dissemination to the 132 municipalities. At the central level, one of the most significant accomplishments of the LGCBP has been the completion of the local government amalgamation strategy and a manual under the leadership of the Ministry of Local Government.

58%

26



At the local government level, the LGCBP has laid the foundations for improved municipal financial systems through the implementation of an (IFMIS) in 5 pilot municipalities in the West Bank and 3 in Gaza. The system is also being rolled out in 26 municipalities in the West Bank. Implementation in Gaza remains to be a challenge due to continued closures; however efforts are underway to finalize the implementation of the IFMIS in the three municipalities in Gaza. A recent review of the pilot stage has found it to be international best practice and that it exceeds municipal financial management practices in the region. The implementation of a modern financial management system at the MOLG which will be connected with the municipal financial management systems has also been supported under the LGCBP and is currently operational at the Ministry and training has been provided to staff of the Ministry’s budget department. The project is scheduled to close on December 31, 2010. However, given the initial implementation delays, a closing date extension may be required to enable completion of ongoing activities and a successful achievement of project objectives.

PRDP Multi-Donor Trust Fund

448.9 The purpose of the PRDP-TF is to help donors support the PA policy agenda expressed in the PRDP by channeling budget support for its implementation over the three year period of 2008 - 2010. The budgetary support is provided directly to the Central Treasury Account of the Ministry of Finance. Funds provided by donors are untied, un-earmarked funds linked to the execution of the policy agenda in the PRDP

As of April 30, 2010, the PRDP TF has provided the PA with US$448 million (US$ 139 million, in FY2010). This contribution helps alleviate the PA’s fiscal pressure by providing reliable disbursements on a regular basis and supports the PA implementation of the PRDP. Implementation is smooth and a recent informal review with the main donors will ensure better predictability of the quarterly disbursements.

91%

WBG Support for Fiscal

Sustainability and Public Financial

40.0 m This operation helps the PA to continue to implement the PRDP. Like the PRDP DPG I, the PRDP DPG II specifically supports efforts to improve the fiscal position and increase government transparency and accountability by focusing on two specific areas: (i) strengthening the

The DPG II was disbursed on July 17, 2009 and has been contributing to the reform process highlighted in the Policy Matrix. Specifically, it is focusing on the control of public sector wages, on the reduction of net lending, on the improvement of efficiency and

100%

27



Management PA's fiscal position; and (ii) improving public financial management to attract additional aid.

transparency of the budget preparation, and on the strengthening of PFM institutional and regulatory procedures and the relative infrastructure.

28

Annex 4. Repayment Profile of PA Debt to the World Bank

CY Disbursed Undisburse Principal Outstandin Service Commitme Total

2009 0.7 0.0 5.2 308.2 15.2 0.0 20.4

2010 0.0 0.0 5.7 302.5 2.3 0.0 8.6

2011 0.0 0.0 6.0 296.5 2.3 0.0 8.2

2012 0.0 0.0 6.3 290.2 2.2 0.0 8.5

2013 0.0 0.0 6.6 283.6 2.2 0.0 8.8

2014 0.0 0.0 6.8 276.7 2.1 0.0 8.9

2015 0.0 0.0 7.3 269.5 2.1 0.0 9.3

2016 0.0 0.0 8.4 261.1 2.0 0.0 10.4

2017 0.0 0.0 9.7 251.4 1.9 0.0 11.7

2018 0.0 0.0 10.5 240.8 1.9 0.0 12.4

2019 0.0 0.0 11.2 229.6 1.8 0.0 13.0

2020 0.0 0.0 12.0 217.6 1.7 0.0 13.7

2021 0.0 0.0 12.2 205.4 1.6 0.0 13.8

2022 0.0 0.0 12.6 192.8 1.5 0.0 14.1

2023 0.0 0.0 12.9 179.9 1.4 0.0 14.3

2024 0.0 0.0 12.9 167.0 1.3 0.0 14.2

2025 0.0 0.0 12.9 154.1 1.2 0.0 14.1

2026 0.0 0.0 12.9 141.2 1.2 0.0 14.0

2027 0.0 0.0 12.9 128.3 1.0 0.0 13.9

2028 0.0 0.0 12.9 115.4 0.9 0.0 13.8

2029 0.0 0.0 12.9 102.4 0.8 0.0 13.7

2030 0.0 0.0 12.9 89.5 0.7 0.0 13.6

2031 0.0 0.0 12.9 76.6 0.6 0.0 13.5

2032 0.0 0.0 12.9 63.7 0.6 0.0 13.4

2033 0.0 0.0 12.9 50.8 0.5 0.0 13.3

2034 0.0 0.0 12.3 38.5 0.4 0.0 12.6

2035 0.0 0.0 11.3 27.2 0.3 0.0 11.5

2036 0.0 0.0 9.1 18.1 0.2 0.0 9.3

2037 0.0 0.0 6.3 11.8 0.1 0.0 6.4

2038 0.0 0.0 4.7 7.1 0.1 0.0 4.8

2039 0.0 0.0 3.3 3.7 0.0 0.0 3.4

2040 0.0 0.0 1.8 1.9 0.0 0.0 1.8

2041 0.0 0.0 1.3 0.6 0.0 0.0 1.3

2042 0.0 0.0 0.6 0.0 0.0 0.0 0.6

WEST BANK AND GAZA ‐ TABLE OF REPAYMENT PROFILE

CY 2009 ‐ CY 2042 (amts in USD mn)

Assumptions: 1) The above amounts are based on disbursed and outstanding balances as of

December 31, 2009; 2) The calcultions assume that the borrower pays promptly and no service

charge is applied on overdue principal; 3) Balances for TF53784 have been added effective

CY2010 as repayments commence from this year; 4) The amounts for CY 2009 are actuals

Interpretation of Headers: Disbursed Amount ‐ Amounts disbursed during the year; Undisbursed

balance: Undisbursed balance of credits as at the end of the calendar year; Principal

repayments ‐ Principal repaid/due during the calendar year; Outstanding Principal ‐ Disbursed

and outstanding balance of credits as at the end of the year; Service charges ‐ Service charges

paid/due during the year. Current rate ‐ 0.75% p.a.; Commitment fees ‐ Commitment fees

paid/due during the year. Current net rate ‐ 0% p.a.; Total repayment: Sum of principal, service

charges and commitment fees repaid/due during the year.

29

Annex 5: West Bank and Gaza: Risk Identification Worksheet

West Bank and Gaza: Risk Identification Worksheet April 2010

Risk factors

Description of risk

Ratinga of risk

Mitigation measures

Ratinga of residual

risk I. Country and/or Sub-National Level Risks Macroeconomic framework

In 2009 the WB&G experienced a third consecutive year of economic growth and rising per capita GDP. Real growth was 6.8%, with 8.5% in the West Bank and, despite the continuing closure, about 1% in Gaza. Growth in the West Bank continued to be driven by large inflows of foreign assistance and a relatively stable security situation that supported increased government expenditures and consumption. The economy in Gaza remains devastated. However a regular flow of goods coming through tunnels from Egypt and via other sources have allowed a few private sector activities to resume. Despite the revival of growth and its extensive reform program, the PA’s fiscal position deteriorated in 2009. The recurrent budget deficit on a commitment basis was nearly $1.6 billion; up from $1.3 billion in 2008 and almost $143 million more than projected in the revised 2009 budget. Most of the growth in the deficit can be attributed to the emergency situation in Gaza, which forced the PA to add $300 million to the budget mid-year. In addition, there were large arrears brought forward from 2008 and incorporated into 2009 commitments. However, some of it was also due to increased spending on wages.

High A Development Policy Grant and a multi-donor budget support trust fund, linked to progress on the PA’s reform agenda that provides untied budget support to the PA. This will encourage donors to convert their support from project aid to untied budget support, while the PA pursues its reform agenda.

Technical assistance to support the PA’s efforts to implement the government’s Palestinian Reform and Development Plan (PRDP). TA is focused on the key areas of public financial management and fiscal strengthening. This will help the PA deal with its fiscal crisis and also encourage donor support to the PA budget.

Substantial

30

Risk factors

Description of risk

Ratinga of risk

Mitigation measures

Ratinga of residual

risk Country Engagement with World Bank

The main risk is related to the future of the peace process and the policies adopted by the Israeli government. The continuous tensions in Gaza, the West Bank and East Jerusalem demonstrate the fragility of the situation and the risks of the Bank’s involvement. Another risk is related to the current political tensions between the West Bank and Gaza and the resulting impact on PA institutions. There is uncertainty in relation to the current negotiation process between Hamas and the Palestinian Authority on a unity government. The success of the PA reform program is linked to the Israeli removal of economic and movement restrictions in the WB&G. The Bank faces complex requirements in terms of the movement of their staff, counterpart staff and project-related goods within WB&G and through Israel. The situation is particularly acute in Gaza.

High Reliance on PA institutions, local communities, NGOs, semi-independent government utilities and public utilities.

Focus on projects with simple design, flexible in their implementation arrangements, and quickly adaptable to changing circumstances on the ground. Also, continue providing analytical support and non-lending advisory services.

Channeling additional funding to existing

projects that have proven they can operate under the current closure conditions.

Continue providing analytical support and

non-lending advisory services.

Substantial

Governance The current Caretaker Government is facing political, economic and institutional challenges and its capacity to address fundamental weaknesses in Palestinian institutions is circumscribed by the political impasse and the Gaza blockade.

Political instability leads to continued high turnover of technical staff at the implementing agencies and reducing the ownership of the strategies.

High Work is ongoing to address long-standing weaknesses in policy-making, planning, and budget processes. A development plan to guide resource allocation was prepared for 2008-10, and a new plan for the next three years is expected to be completed in 2010. Also, the Ministry of Finance is making progress in first restoring and then enhancing both the financial management and the procurement systems.

Substantial

31

Risk factors

Description of risk

Ratinga of risk

Mitigation measures

Ratinga of residual

risk Adjustments to project design need to be

made in order to accommodate changing circumstances in implementing agencies. Reliance on semi-independent institutions shields projects from instability and insures the much needed continuity.

Systemic corruption

The PA's public financial management systems are acceptable and rapidly improving as they benefit from an ongoing technical assistance from the World Bank, IMF and other donors. The PA has completed the 2008 accounts and the state audit bureau is auditing the accounts with the support of the Deloittes accounting firm and the Norwegian audit body. Most concerns with corruption relate to public procurement of high value contracts such as pharmaceuticals or text books. The PA is finalizing a new public procurement law that will address many of these issues. While the incidence of petty corruption remains low, there are still some concerns with low level nepotism and public hiring.

Substantial

The Bank’s reliance on established procedures with the PA Ministry of Finance, reinforced by transparent reporting practices and new anti-money laundering initiatives should mitigate corruption.

In addition, the Bank FM team has introduced a number of mitigating measures, including the hiring of a consultant to carry out semi-annual transaction reviews, and reinforcement of controls over expenditures. Where possible, the Bank has also been centralizing the disbursement process at the PIU/PMU level through direct payments on behalf of the third party recipient to contractors/suppliers in both the West Bank and Gaza.

Moderate

Other (for example security risks, political/election risks, country engagement with other

The ongoing security situation and the current isolation of Gaza continue to impact the scope of the Bank’s engagement. Parliamentary election should take place in the summer but without reconciliation between Fatah and Hamas they may take place only in the West Bank.

High The security manager advises on mission scheduling and matters related to entry to Gaza. A number of innovative security network systems (i.e. the Fleetlog vehicle tracking system) have been put in place to ensure the safety of staff.

The Bank works with the Office of the

Substantial

32

Risk factors

Description of risk

Ratinga of risk

Mitigation measures

Ratinga of residual

risk MDBs/donors, social and environmental risks at the country level)

Quartet Representative (OQR), Tony Blair, and the Israeli Defense Forces to coordinate the entrance of construction materials and cash to Gaza for implementation of Bank’s projects. A Bank staff member is assigned to the OQR.

Together with the international community the Bank will monitor the election results and act in accordance with the results.

II. Overall Risk (including Reputational Risks)

The West Bank and Gaza remains a very fragile territory with enormous political and economic uncertainties. Only a real advancement of the peace process will be able to dispel some of these uncertainties and reduce the risk of operating in this environment.

High A combination of strategic, fiduciary, and technical measures has been put in place to reduce the risk of operating in this volatile environment. This notwithstanding, such measures can only affect the level of risk moderately.

Substantial

Memo items: 1. CPIA ratings for IDA countries (overall and four clusters) 2. Internal Evaluation Group rating (% of projects rated satisfactory—HS, S, or MS—over last five years both for the country

portfolio and the sector) 3. Other governance and corruption indicators

a Rating of risks on a four-point scale – High, Substantial, Moderate, Low - according to the likelihood of occurrence and magnitude of potential adverse impact.

33

Annex 6: WB&G At-a-Glance

West Bank and Gaza at a glance 12/9/09

West M. East Lower-POVERT Y and SOCIAL Bank & North middle-

& Gaza Africa income2008Population, mid-year (millions) 3.9 325 3,702GNI per capita (Atlas method, US$) .. 3,242 2,078GNI (Atlas method, US$ billions) .. 1,053 7,692

Average annual growth, 2002-08

Population (%) 3.3 1.9 1.2Labor force (%) 4.9 3.0 1.6

Most recent estimate (latest year available, 2002-08)

Poverty (% of population below national poverty line) .. .. ..Urban population (% of total population) 72 57 41Life expectancy at birth (years) 73 70 68Infant mortality (per 1,000 live births) 24 32 46Child malnutrition (% of children under 5) 2 .. 26Access to an improved water source (% of population) 89 88 86Literacy (% of population age 15+) 94 73 83Gross primary enrollment (% of school-age populatio 80 106 109 Male 80 109 112 Female 80 104 106

KEY ECONOMIC RAT IOS and LONG-TERM T RENDS

1988 1998 2007 2008

GDP (US$ billions) .. 3.9 .. ..

Gross capital formation/GDP .. 36.0 .. ..Exports of goods and services/GDP .. 17.7 .. ..Gross domestic savings/GDP .. -18.5 .. ..Gross national savings/GDP .. 26.0 .. ..

Current account balance/GDP .. -27.3 .. ..Interest payments/GDP .. .. .. ..Total debt/GDP .. .. .. ..Total debt service/exports .. .. .. ..Present value of debt/GDP .. .. .. ..Present value of debt/exports .. .. .. ..

1988-98 1998-08 2007 2008 2008-12(average annual growth)GDP .. -2.5 .. .. ..GDP per capita .. -5.9 .. .. ..Exports of goods and services .. -5.0 .. .. ..

STRUCTURE of the ECONOMY

1988 1998 2007 2008(% of GDP)Agriculture .. .. .. ..Industry .. .. .. .. Manufacturing .. .. .. ..Services .. .. .. ..

Household final consumption expenditure .. 95.7 .. ..General gov't final consumption expenditur .. 22.8 .. ..Imports of goods and services .. 72.2 .. ..

1988-98 1998-08 2007 2008(average annual growth)Agriculture .. .. .. ..Industry .. .. .. .. Manufacturing .. .. .. ..Services .. .. .. ..

Household final consumption expenditure .. -2.7 .. ..General gov't final consumption expenditur .. 2.3 .. ..Gross capital formation .. -9.1 .. ..Imports of goods and services .. -4.6 .. ..

Note: 2008 data are preliminary estimates.This table was produced from the Development Economics LDB database.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

-20-15-10-505

1015

03 04 05 06 07 08

GCF GDP

Growth of capital and GDP (%)

-15

-10

-5

0

5

10

15

03 04 05 06 07 08

Exports Imports

Growth of exports and imports (%)

West Bank and Gaza

Lower-middle-income group

Development diamond*

Life

Access to improved water

GNIpercapita

Grossprimary

enrollment

West Bank and Gaza

Lower-middle-income group

Economic ratios*

Trade

Indebtedness

Domesticsavings

Capital formation

34

Millennium Development Goals West Bank and Gaza

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for $1 a day poverty and malnutrition 1990 1995 2000 2006 Poverty headcount ratio at $1 a day (PPP, % of population) .. .. .. .. Poverty headcount ratio at national poverty line (% of population) .. .. .. 30.8 Share of income or consumption to the poorest qunitile (%) .. .. .. .. Prevalence of malnutrition (% of children under 5) .. 4.1 ..

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) .. .. 96 85 Primary completion rate (% of relevant age group) .. .. 103 Secondary school enrollment (gross, %) .. .. 81 75 Youth literacy rate (% of people ages 15-24) .. 97 .. 99

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) .. .. 104 100 Women employed in the nonagricultural sector (% of nonagricultural employment) 10 12 14 Proportion of seats held by women in national parliament (%) .. .. .. 13

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 40 33 27 28 Infant mortality rate (per 1,000 live births) 34 28 24 25 Measles immunization (proportion of one-year olds immunized, %) .. 73 93 97

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. .. Births attended by skilled health staff (% of total) .. 95 97 ..

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) .. .. .. .. Contraceptive prevalence (% of women ages 15-49) .. 42 .. 50 Incidence of tuberculosis (per 100,000 people) 31 31 26 Tuberculosis cases detected under DOTS (%) .. .. 10

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) .. 92 92 88 Access to improved sanitation facilities (% of population) .. 73 73 50 Forest area (% of total land area) 1.5 .. 1.5 1.5 Nationally protected areas (% of total land area) .. .. .. .. CO2 emissions (metric tons per capita) .. .. .. .. GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) .. .. .. ..

Goal 8: develop a global partnership for development Fixed line and mobile phone subscribers (per 1,000 people) 34 42 151 290 Internet users (per 1,000 people) 0 .. 12 Personal computers (per 1,000 people) .. .. 39 Youth unemployment (% of total labor force ages 15-24) .. .. 34.8 24.0

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 9/28/07

Development Economics, Development Data Group (DECDG).

West Bank and Gaza

0

25

50

75

100

125

2000 2002 2005

Primary net enrollment ratio

Ratio of girls to boys in primary &secondary education

Education indicators (%)

0

100

200

300

400

500

2000 2002 2005

Fixed + mobile subscribers

Internet users

ICT indicators (per 1,000 people)

0

25

50

75

100

1990 1995 2000 2005

West Bank and Gaza

Middle East & North Africa

Measles immunization (% of 1-year olds)

35

Annex 7: Map of WB&G

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Documents

Public Disclosure Authorized Office of the ... - World Bank...THE WORLD BANK Washington, DC 20433 May 27,2010 Proposed Replenishment of the Trust Fund for Gaza and West Bank Introduction