State of Israel

Measures Taken by Israel in Support

of Developing the Palestinian

Economy and Socio-Economic

Structure

Report of the Government of Israel to the Ad Hoc Liaison

Committee (AHLC)

New York, September 23, 2012

2

Acronyms

AHLC – Ad Hoc Liaison Committee

BoI – Bank of Israel

COGAT – Coordinator of Government Activities in the Territories

DFID - UK Department for International Development

EU – European Union

GDP – Gross Domestic Product

GoI – Government of Israel

ICBS – Israel Central Bureau of Statistics

ICD – Israel Customs Directorate

IMF – International Monetary Fund

JWC – The Joint Water Committee

MCM – Million Cubic Meters

MOF – Ministry of Finance

NIS – New Israeli Shekels

PA – Palestinian Authority

PCBS – Palestinian Central Bureau of Statistics

PACE – Palestinian Authority Customs and Excise

PMA – Palestinian Monetary Authority

USAID – United States Agency for International Development

USD – United States Dollars

UNDP – United Nations Development Program

UNRWA – United Nations Relief and Works Agency for Palestinian Refugees

VAT – Value Added Tax

WFP – World Food Programme

3

Executive Summary

The Government of Israel continues to view the bilateral track with the

Palestinians as the only way forward to a sustainable solution, based on two

states for two peoples. Israel calls once again for the renewal of bilateral

dialogue in order to achieve this goal.

As of September 2012, the PA faces a severe fiscal crisis, with substantial

arrears owed to the private sector and suppliers, NIS 617 million in debt to the

Israel Electric Corporation, and difficulty meeting salary payments. The

economic slowdown in the West Bank (5.4% growth rate) poses a major

challenge to continued PA financial and institutional stability.

While the present Palestinian fiscal crisis was caused by a shortfall in donor

aid, there was also overspending in the implementation of the 2011 budget,

as demonstrated by the PA's disbursement for development expenses, for

which no funds were available, at the expense of recurrent expenditure. In

the first half of 2012, budgetary goals, which from the outset were projecting

financing gaps of more than USD 150 million, were not met. The public

finance management system's role in the current crisis may undermine its

track record as a system that meets the requirements of a well-functioning

state.1

Israel has twice taken upon itself to transfer advance payments to the PA in

order to facilitate the timely payment of salaries to PA employees. These

Israeli measures reflect the common interest to support PA economic stability

and help the PA manage the fiscal crisis successfully. They are part of the

following significant measures taken by Israel since the beginning of 2012:

o Following the last AHLC meeting in March 2012, Israel appealed to the

IMF to support Prime Minister Fayyad's call for special IMF assistance.

Thus far, the IMF has not managed to find a way to make IMF resources

available to the PA.

o Development of the Gaza Marine gas field will generate revenues that

could contribute dramatically to Palestinian fiscal sustainability. After

discussions between PM Netanyahu and Mr. Blair, following an

approach by the Palestinian Authority, Israel confirmed its intention to

engage in a meaningful discussion with the aim of developing the

Gaza Marine gas field. In this context, official letters were submitted

and meetings took place between Israeli representatives and the

Palestinian leadership. These were followed by initial negotiations

1 For further information, see Chapter One, below.

4

between the relevant parties regarding the development of the Gaza

Marine gas field.

o On July 31, 2012, Israeli Minister of Finance, Dr. Yuval Steinitz, and PA

Prime Minister, Dr. Salam Fayyad, concluded arrangements for the

transfer of goods between Israel and the Palestinian territories and

related tax procedures. These arrangements introduce mechanisms

that better facilitate the movement of goods between Israel and the

Palestinian Authority, and support efforts by both parties to reduce

illegal trade and tax evasion. They will enhance the Palestinian tax

system, thereby helping to strengthen the economic base of the

Palestinian Authority.

o On September 4, 2012, an agreement was signed between Malam2

and the Palestinian Authority Customs and Excise to lay down the

technological interface needed to share computerized customs

information.

o In order to assist the PA in the timely payment of salaries on the eve of

Ramadan, in July Israel transferred an advance payment of NIS 180

million to the PA.

o On September 11, 2012, due to the Palestinian financial crisis, Israel's

PM decided to transfer NIS 250 million as advance payment of PA tax

revenues collected by Israel.

In order to help the PA reduce the level of unemployment, since February

2011 Israel has increased the number of working permits for Palestinian

employees in Israel by 40%, reaching 41,450 permits. At present, almost 32,000

Palestinians earn their living in Israel and 27,750 Palestinians work for Israeli

employers in the West Bank. This Israeli measure contributes directly to

improving the economic reality for thousands of households in the West Bank.

In order to facilitate trade, Israel continues to improve the commercial

crossings – upgrading the infrastructures, streamlining procedures, shortening

passage time and reducing the cost of transporting goods from the West

Bank into Israel and to Israeli ports. Israel continues to cooperate with the PA,

increasing the number of permits for businessmen who travel frequently in and

out of the West Bank, to and via Israel. Israel has also adopted special

procedures to ease the transfer of goods. An upgraded passenger terminal at

the Allenby Bridge commenced operations in September 2012, aiming to

improve services offered to Palestinians and visitors to the West Bank.

2 An Israeli company.

5

Trade between Israel and the PA declined by about 7% compared to the first

half of 2011, totaling USD 2.2 billion compared to USD 2.38 billion in the first half

of 2011. Palestinian purchases from Israel accounted for approximately 65% of

total Palestinian purchases in the first half of 2012, a drop of approximately 2%

compared to the previous year.3

Tax revenues transferred by Israel to the PA4 increased by 12.55%, totaling NIS

2.75 billion5. A higher volume of commercial goods was shipped from the

West Bank to Israel via the land crossings. In the first half of 2012, there was a

34% increase in the movement of commercial goods via the Allenby Bridge.6

Israel, for its part, continues to cooperate with the PA and the international

community in order to provide the necessary conditions for economic and

financial stability.

Israel continues to reduce the number of checkpoints, which are normally

open, to ensure that traffic flows relatively smoothly. During the month of

Ramadan more than one million Palestinian worshipers visited the Al-Aqsa

mosque in Jerusalem, due to the issuance of a record number of permits to

visit Israel.

On February 27, 2012, an agreement was signed between the Israel Electric

Corporation and the Palestinian Energy Authority for the construction of four

electricity substations (one of them in Area C). When completed in 2014,

these substations will supply approximately 200 additional megawatts of

electricity.

Since 2011, reflecting its wish to respond to the needs of the local population,

Israel has approved 328 projects in Area C. These projects are submitted by

the PA, some are sponsored by the international community and some are

initiated by the Civil Administration. Among these projects, 97 have been

implemented, 99 are in the planning stages and 25 were declined. In

addition, the implementation of 53 projects has been suspended due to lack

of funding. Israel welcomes the international community’s support for

approved projects in Area C and calls for a coordinated application process

through the legal procedures and the Planning Committee. Israel encourages

donors to sponsor and fund 16 projects which have already been approved

by the Planning Committee but have not been implemented due to a lack of

funding.

Over the last few months, Israel has made considerable progress in drafting

new master plans for Area C. This has been done with the involvement and

3 PCBS 4 During the first half of 2012. 5 Israel Ministry of Finance 6 Israel Airports Authority. Excluding the import of vehicles

6

cooperation of the Palestinian side. These master plans, once approved, will

accelerate planning procedures for further economic development. Israel

maintains its coordinated cooperation with the international community on

project development in this area, responding to the needs of the local

population and implementing fast-track approval wherever possible.

The Gaza Strip, which has been under illegitimate Hamas control since June

2007, is outside of the PA's reach. Despite this, the Gaza Strip places a

significant financial burden on the PA, accounting for more than 50% of the

PA's total expenditures. Since June 20, 2010, and despite ongoing attempts

by Hamas and the Islamic Jihad to terrorize Israeli cities and the crossings

between Israel and the Gaza Strip, Israel continues to implement a policy that

contributes to economic and social well-being of the Gazan population. The

years 2010-2011 marked a period of significant economic recovery in Gaza

following this policy, yet in the first quarter of 2012 growth declined to 6%, and

unemployment rose from 28% to 30% compared to the same period last

year.7

Israel has approved 219 projects led by the international community in the

Gaza Strip and has upgraded the infrastructure and capacity of the Kerem

Shalom crossing to 450 trucks per day, far beyond actual use. In July 2012,

Israel installed a new container scanner at the crossing in order to facilitate

export from Gaza. During the first half of 2012, 24,506 people exited Gaza for

humanitarian and business purposes, a 23% increase compared to the

parallel period in 2011. Agricultural and textile exports to international markets

have been expanded and the export of furniture and date bars to the West

Bank has been approved and implemented.

Since the beginning of 2012, 650,000 tons of aggregates for international

projects and private sector pilot projects have been shipped into Gaza, in

addition to 120,000 tons of cement and 25 tons of iron. Israel provided the

necessary permits for a UNDP project to upgrade the production capacity of

the electricity power plant in the Gaza Strip, and it now reaches 100

megawatts. From June 7 to August 6, 2012, in cooperation with Egypt and the

PA, Israel facilitated the daily transfer of approximately 7 million liters of diesel

fuel to the Gaza Strip, within the implementation of a 30 million liter donation

by Qatar, transmitted from Egypt via Israel into the Gaza Strip. The transfer

was suspended following the terrorist attack on August 5, and has not yet

been resumed.

During the first half of 2012, security in southern Israel along the border with

the Gaza Strip remained under constant threat. A brutal assault of rockets

7 IMF - Staff Report Prepared for the Meeting of the Ad Hoc Liaison Committee, September 23,

2012.

7

and mortar shells from Gaza continued to terrorize a million Israeli civilians,

paralyzing their daily lives. Since the beginning of 2012, 530 rockets have

been fired into Israeli territory. This fire is deliberately aimed at heavily

populated areas in Israel, including Beersheba, Ashdod, Ashkelon and

surrounding areas, forcing a million Israeli citizens to take refuge in shelters.

The terrorist attack on August 5, 2012, in the area of the Kerem Shalom

crossing and the Israel-Egypt border, which targeted civilians living in the

vicinity, underlines the severity of the increased security threat in this area,

posed by possible cooperation between terrorists in Gaza and the Sinai

Peninsula. This unbearable security reality is an alarming reminder of the

proliferation of terrorist military capacity in the Gaza Strip, which jeopardizes

prospects for peace and regional stability.

Through the Implementation of its policy, Israel supports economic

development in the West Bank and humanitarian sustainability in the Gaza

Strip, while commending the international community for its crucial financial

support, and calling upon the Palestinian leadership to return to the

negotiating table to revive the bilateral track, which is the only way to reach

a sustainable solution, based on two states for two peoples.

8

Chapter One

The Economic Situation in the West Bank8

A. General Analysis

In the first quarter of 2012, real GDP in the West Bank amounted to USD 1,115

million, constituting a 5.4% growth rate, in comparison to the parallel quarter

in 2011. This growth rate was similar to the rate recorded in the previous year.

Economic growth was led by the services sector, as well as the wholesale and

retail trade sector, both of which grew by approximately 12%. However, most

of the growth in the services sector stemmed from the continued expansion

of publicly-funded services, particularly education, health and social services.

Additionally, the contribution of the telecommunications and information

sector was pronounced, with a growth rate of approximately 8.5%. In

contrast, there has been a decline in activity in construction, agriculture and

industry (at rates of approximately 9%, 7% and 4%, respectively).

The decline in business activity is reflected in the scope of investments in the

economy, which is vital for long-term growth. Thus, in the first quarter of the

year, investments in non-real estate capital dropped by 22% compared to

the parallel quarter in 2011, totaling approximately 4% of the GDP.

Increasing debts by the PA to suppliers and other private sector parties have

also contributed to the erosion of public confidence in the PA private sector

and economy, and have helped dampen spirits among the Palestinian

public. Unemployment has increased, reaching approximately 17.1% in the

second quarter of 2012, compared to 15.4% in the parallel quarter the

previous year. Unemployment rates are particularly high among the young.

Despite the economic slowdown, the standard of living in the West Bank

continues to rise. Thus, the real GDP per capita in the first quarter of 2012 grew

at a rate of approximately 2.4%, compared to the first quarter of 2011.

In conclusion, although the West Bank economy maintains a stable growth

rate, it is clear that most of this growth stems from industries based on

government funding, while productive sectors continue to decline. The small

scale of local and foreign investments hinders private sector development,

particularly tradable sectors with a high added value. This is critical for the

development of a sustainable economy that will meet the population's

growing needs and supply the income needed by the government. Another

8 Unless stated otherwise, all data is from PCBS.

9

issue posing a challenge is high unemployment rates, particularly among the

young.

B. The PA Fiscal Crisis

The PA has faced financial difficulties due to a shortfall in international

financial support and the inability to tap the local banking system to finance

this shortfall, after having reached its upper credit limit (approximately USD 1.2

billion). These financial difficulties loomed heavily as an obstacle to the

stability of the Palestinian economy and the PA administration.

The fiscal crisis is especially acute because much of the West Bank economy

still depends on the public sector and on construction projects, both still

heavily financed by foreign aid. It also serves as an alarming warning sign for

the stability of the Palestinian economy.

While the present fiscal crisis was caused by a shortfall in donor aid, there was

also overspending in the implementation of the 2011 budget, as

demonstrated by the PA's disbursement for development expenses, for which

no funds were available, at the expense of recurrent expenditure. In the first

half of 2012, budgetary goals were not met, which from the outset were built

upon financing gaps of more than USD 150 million. The public finance

management system's role in the current crisis may undermine its track record

as a system that meets the requirements of a well-functioning state.

The following figures from the first half of 2012 reflect the impact of the fiscal

crisis9:

A. Total revenues were approximately USD one billion, about USD 100

million less than projections. This resulted primarily from non-realization

of an expected change in the payment system, as well as low

revenues from local collection, due to the economic downturn.

B. Non-wage expenditures totaled approximately USD 1.65 billion, almost

USD 100 million more than planned. This gap can be attributed mostly

to social transfer expenditures - demonstrating the increasing difficulty

in controlling these expenses- and subsidies for local authority

electricity payments (net lending), chiefly due to an increase in

electricity prices and the difficulties experienced by the Palestinian

Electric Company in collecting payment from consumers.

C. Development expenditures reached almost USD 120 million, about two

thirds more than planned. It should be noted that the scope of

incoming aid for development was just USD 50 million, and therefore it

9 Unless stated otherwise, all data is from the Palestinian MOF.

01

would appear that the government continued to channel funds from

the recurrent budget to development.

In addition, the substantial gap between PA expenses in the Gaza Strip

(almost half of the government's expenditure) and income there from (just

approximately 2% of government income), remains pronounced.

Furthermore, the relative proportion of expenses related to Gaza exceeds the

proportion of Gazans within the general Palestinian population

(approximately 38%), as well as Gaza's share of Palestinian GDP

(approximately 27%). In this context it is important to emphasize that the PA

does not have effective control over Gaza, which is governed illegitimately

by Hamas.

In total, the recurrent deficit amounted to approximately USD 630 million,

exceeding a planned six month deficit of approximately USD 500 million.

Including development expenses, the overall deficit totaled approximately

USD 750 million. The deficit was funded through the following channels:

A. External aid for the recurrent budget, at a rate of approximately USD

400 million, accounting for approximately 80% of the planned six month

deficit.

B. External aid for development, which amounted, as stated above, to

approximately USD 50 million.

C. Continued arrears to suppliers and contractors, totaling approximately

USD 260 million, despite the resultant damage to the private sector and

the increase in public dissatisfaction towards the PA stemming from

non-payment.

D. Bank funding at a scope of approximately USD 40 million – a

substantially lower figure than previous years, since as stated above

the PA has reached the limit of lending capabilities from the banking

system (estimated at USD one billion, based on the scope of equity in

the bank balance sheet).

Exhaustion of the above credit outlets led the government to a cash flow crisis

approaching Ramadan. As a result, the government was forced to delay and

stagger salaries to employees, on the eve of the holiday. After receiving an

advance payment of about NIS 180 million from Israel the PA was able to pay

most salaries before the holiday. During the same period, the PA received aid

from Saudi Arabia and Iraq, in the amounts of USD 100 million and USD 25

million, respectively.10

10 Figures relating to Saudi aid are based on news reports, while figures relating to Iraqi aid are

based on information from the Palestinian Ministry of Finance.

00

In addition, on September 11, 2012, Prime Minister Benjamin Netanyahu

ordered the transfer of an additional advance payment to the PA, in the

amount of NIS 250 million.

In any case, while the above solutions helped the PA address immediate

needs, they will not solve long-term needs. In order to enable the PA to

continue paying salaries in the coming months, while reducing debt to

suppliers and the private sector, there is a need for continued aid from the

international community, particularly from Arab states as well as additional

Palestinian reforms.

In an effort to assist the PA in increasing its budget revenues, in 2011 and the

first half of 2012, discussions were held between the ministries of finance of

Israel and the PA, paving the way for new arrangements for the transfer of

goods and related tax procedures, which were agreed on July 31, 2012. For

further information on these arrangements, see Chapter Two Fiscal

Cooperation, below.

Development of the Gaza Marine gas field will generate revenues that could

contribute dramatically to Palestinian fiscal sustainability. After discussions

between PM Netanyahu and Mr. Blair, following an approach by the

Palestinian Authority, Israel confirmed its intention to engage in a meaningful

discussion with the aim of developing the Gaza Marine gas field. In this

context, official letters were submitted and meetings took place between

Israeli representatives and the Palestinian leadership. These were followed by

initial negotiations between the relevant parties regarding the development

of the Gaza Marine gas field.

The above underlines the shortcomings of the PA's current fiscal management

framework, which helped contribute to the present fiscal crisis. This

demonstrates the need for further reform in order for the PA to meet the

standards of a well-functioning state. It also emphasizes the need to intensify

investment in developing private sector activity. Israel strives to support this

effort.

C. Trade11

In the first half of 2012, trade between Israel and the PA declined by about 7%

in comparison to the first half of 2011, totaling UDS 2.2 billion (compared to

USD 2.38 in the first half of 2011). Israeli purchases of goods from the PA

totaled USD 258 million, and declined by about 12%, as the Israeli economy

slowed down following the European debt crisis. Israeli purchases of services

11 Unless stated otherwise, all data is from PCBS.

02

from the PA also declined by 12% and totaled USD 180 million, compared to

USD 204 million in the first half of 2011. Similarly, Palestinian purchases of goods

from Israel in the first half of 2012 declined by about 6% compared to the first

half of 2011, totaling USD 1.67 billion compared to USD 1.77 billion in the first

half of 2011. Palestinian purchases of services from Israel declined by 11%,

totaling USD 100.4 million compared to USD 112.8 million in the first half of

2011.12 Purchases from Israel accounted for approximately 65% of Palestinian

purchases from Israel and the world in the first half of 2012, a drop of

approximately 2% compared to the previous year.13

D. Employment14

The economic slowdown is also reflected by the labor market. Unemployment

increased, reaching approximately 17.1% in the second quarter of 2012,

compared to 15.4% in the parallel quarter the previous year. (It should be

noted however, that unemployment dropped by 3% compared to the first

quarter of 2012.) Despite this, there has been a slight increase in the rate of

participation in the work force, which reached approximately 45.4%

(compared to 45.3% in the parallel quarter in the previous year), while this

figure remains low among women at approximately 19% versus 71% among

men. In total, during the past year, the percentage of the employed within

the general population dropped by approximately 0.7% (from approximately

38.3% to approximately 37.6%). Therefore, it appears that an additional drop

in the economy's growth rate will continue to limit its ability to supply

employment for those entering the labor market.

Within this context, there has also been an increase in the unemployment rate

among the young, which remains higher than the rate among the general

population. Thus, the percentage of unemployed between ages 15 and 29

increased from approximately 24% in the second quarter of 2011, to

approximately 26% in the second quarter of this year.

Employment in Israel continues to serve as a major source of income for

salaried employees in the West Bank. The percentage of employees working

in Israel and the settlements, from among all employees, remained similar to

the previous year, amounting to approximately 13% (about 59,540

employees: 31,800 in Israel and 27,750 in the West Bank).

Average wages of Palestinians working in Israel are approximately double

those of workers in the PA (the average daily wage in Israel and for Israeli

12 ICBS 13 PCBS 14Unless stated otherwise, all data is from PCBS.

03

employers in the West Bank stands at approximately NIS 163, versus NIS 87 in

the PA(. As a result of this difference in wages, income from work in Israel and

for Israeli employers in the West Bank accounts for approximately 23% of total

wages in the West Bank. As a basis of comparison, it should be noted that

employment in the public sector accounts for approximately 17% of wages.

As of August 2012, the total number of working permits available for

Palestinian laborers in Israel amounted to 41,450 (of which 31,800 are

utilized).15

E. The Banking System16

The banking system continues to maintain a stable pace of development,

although slightly slower than previously, due to the downturn in the economy.

Thus, in 2011 there was an approximately 17% increase in credit to the private

sector in the West Bank, alongside an approximately 4% increase in deposits.

As a basis of comparison, in 2010 the aforementioned figures amounted to

30% and 7%, respectively. Additionally, banks are maintaining limited

exposure to the PA, as demonstrated by stress tests carried out by the

Palestinian Monetary Authority. This limited exposure led, inter alia, to a

substantial limitation in loans given to the government. As of June 2012, the

total scope of government debt to the banking system remained close to

USD 1.2 billion.

In conclusion, the PA is facing increasing economic uncertainty, jeopardizing

its ability to supply basic services and threatening its stability. At this sensitive

juncture, and in the absence of substantial external aid to the Palestinians, it is

vital for the PA to continue implementing institutional and fiscal reforms, as

well as for donors to continue the constant flow of aid, and even to increase

the scope of such aid, particularly from Arab donors. In parallel, Israel

continues to serve as a stable support for the PA, taking the necessary steps

to facilitate economic stability, including inter alia in the areas of trade,

employment and finance, as outlined throughout this Report.

15 COGAT 16 Palestinian Monetary Authority

04

Chapter Two

Fiscal Cooperation17

A. Arrangements regarding Transfer of Goods and Related Tax Procedures

On July 31, 2012, Israeli Minister of Finance, Dr. Yuval Steinitz, and PA Prime

Minister, Dr. Salam Fayyad, concluded arrangements for the transfer of goods

between Israel and the Palestinian Authority and related tax procedures. The

arrangements are the result of professional consultations conducted between

the parties over the past few months, and are intended to facilitate the

implementation of previous agreements in the economic sphere, particularly

the "Paris Protocol".

The objective of the arrangements is to introduce mechanisms that better

facilitate the movement of goods between Israel and the Palestinian

Authority, and support efforts by both parties to reduce illegal trade and tax

evasion. The arrangements will help enhance the Palestinian tax system,

thereby helping to strengthen the economic base of the Palestinian Authority.

According to the arrangements, the tax clearance mechanism for Value

Added Tax (VAT), purchase tax and import tax will be based on actual

transfer of goods between Israel and the Palestinian Authority, replacing the

current practice of calculating such tax clearances based on the reported

transfer of goods. To support these efforts, the Israeli and Palestinian tax

authorities will enhance the exchange of information regarding the actual

transfer of goods. Furthermore, in order to improve monitoring and ensure

efficient movement of goods, advanced technologies will be employed,

Palestinian storage facilities will be established, and the transfer of goods will

generally be conducted via designated Israeli crossings. In addition, pipelines

for the safe and exclusive transfer of petroleum products from Israel to the

Palestinian Authority will be constructed.

The implementation of the new arrangements will commence on January 1,

2013, and will be monitored by a joint team of experts, comprising

representatives from both parties.

As mentioned by Israeli Finance Minister Dr. Yuval Steinitz, this is an important

step in strengthening the economic ties between Israel and the Palestinian

Authority. This cooperation between the two tax authorities will assist in

fighting tax evasion, increasing Palestinian Authority revenues from the proper

collection of taxes, and reducing illegal trade.

17 Ministry of Finance

05

As further mentioned by Palestinian Prime Minister Dr. Salam Fayyad, the

arrangements concluded will help to strengthen the economic base of the

Palestinian Authority, by bolstering the tax system and increasing revenue

from the proper collection of taxes. He also believes that these arrangements

will improve the economic relations between the Palestinian Authority and

Israel.

Israeli Prime Minister, Mr. Benjamin Netanyahu, welcomed the conclusion of

the new arrangements and added that they represent another component

of his overall policy to support Palestinian society and strengthen the

Palestinian economy. He expressed hope that the conclusion of the

arrangements will help to further the relations between the parties in other

areas as well.

In order to accelerate implementation, on September 4, 2012, an agreement

was signed between Malam (an Israeli company) and PACE to build the

technological interface for sharing computerized customs information. This is

an important step towards upgrading the professional capacity of PACE,

within the process of building an improved tax collection system. The

computer interface will enable the daily electronic transmission of information

stored in the import entries of Palestinian importers. This will provide PACE with

a wide database for its customs control work and for the establishment of an

infrastructure for macro-economic data.

B. Monthly Transfer of Clearance Revenues

Cooperation between the ministries of finance of Israel and the Palestinian

Authority includes, inter alia, the regular transfer of tax clearance revenues to

the Palestinian Ministry of Finance by the Israeli Ministry of Finance, meetings

of the joint bilateral MOF professional team, and training for Palestinian

professionals on customs and tax systems. In accordance with the Paris

Protocol, Israel collects customs and other taxes on behalf of the PA, and at

the beginning of each month transfers the previous month's tax revenues to

the PA. Tax revenue transfers have been made on a monthly basis. Revenues

transferred constitute one of the PA’s primary sources of income, and are

indispensable, together with budget support provided by donors and local

tax collection, in enabling the PA to sustain operations including payment of

public sector salaries and private sector contracts.

In the first half of 2012, total taxes collected for the PA amounted to NIS 2.75

billion (indirect taxes: NIS 2,749,500,000).

Due to the PA's budget crisis, and in order to assist the PA in the timely

payment of salaries on the eve of Ramadan, on July 27, 2012 Israel

transferred an advance payment of NIS 180 million to the PA.

06

In addition, on September 11, 2012, Prime Minister Benjamin Netanyahu

ordered the transfer of another advance payment to the PA, in the amount of

NIS 250 million.

In September 2012, PA debt to the Israel Electric Corporation reached an all-

time high, totaling NIS 617 million. Despite extensive efforts by the Israel

Electric Corporation, it has encountered grave difficulties collecting the debt

from the PA. This situation, in which the PA does not repay its electricity debt,

yet continues to consume electricity normally, places a heavy financial

burden upon Israel Electric Corporation, which effectively subsidizes electricity

consumption in the PA.

The following table illustrates indirect tax transfers since 2007:

Figure 1 :Transfer of Indirect Tax Clearance Revenues

2007-2012

(Millions of NIS)

Total

(Indirect

Taxes) Purchase Tax

Fuel

Excise VAT

Import

Taxes Year

1,850 0 532 737 581 Half I 2007

2,097 23 690 702 682 Half II 2007

1,865 7 602 675 581 Half I 2008

2,053 6 625 690 732 Half II 2008

2,029 7 665 640 717 Half I 2009

2,343 8 793 737 805 Half II 2009

2,299 8 788 736 767 Half I 2010

2,488 6 852 767 863 Half II 2010

2,443 3 793 782 865 Half I 2011

2,629.6 3.8 844 840 938 Half II 2011

2,749.5 2.75 870.7 936 940 Half I 2012

12.55% -8.3% 9.8% 19.7% 8.6%

% Increase Half I

2012/Half I 2011

07

C. Joint Ministry of Finance Team

At the beginning of 2011, the Israeli Ministry of Finance and the PA Ministry of

Finance decided to establish a joint team (MOF to MOF) headed by the

Director General of the Israel Customs Directorate (who was later appointed

as DG of the Israel Tax Authority) and the Palestinian Accountant General

(who was later appointed as Head of the PA Revenue Administration). The

Joint Team held several meetings throughout the first half of 2012, agreed on

an agenda and addressed issues such as updating existing economic

arrangements, increasing transparency, and mutual information sharing. The

team discussed principles for cooperation on several issues.

D. Israel Tax Authority Training Activities for the PA Tax Administration

The Israel Tax Authority supports international efforts to provide technical

assistance to the PA in the area of taxation. It plays a major role in the

implementation of a comprehensive reform of tax administration with

technical assistance from the IMF, DFID and USAID.

E. Cooperation between the Israeli and Palestinian Customs Authorities

The Israel Customs Directorate (ICD) continues to support capacity building

for the development of PACE, and views it as an important element both for

PACE and for strengthening cooperation between the customs

administrations of both sides. ICD is an active partner and as such is willing to

assist in the professional capacity building of PACE.

In the first half of 2012, Israel Customs continued to make efforts to strengthen

its relations with PACE, and to contribute to PACE capacity building, as

follows:

F. Working Meetings between Officials of ICD and PACE

In the first half of 2012, a number of meetings were held between senior

customs officials of ICD and PACE in order to discuss and clarify certain issues,

receive updates, exchange information and forward requests. Within the

framework of the ongoing cooperation between the two administrations,

meetings at the level of the Director General as well as the senior professional

level are held periodically between the two sides. As mentioned above, on

September 5, 2012, an agreement was signed between Malam (an Israeli

company) and PACE to build the technological interface for sharing

computerized customs information.

08

G. Meetings with Palestinian Importers

Meetings were held between ICD officials and Palestinian importers as per the

importers' request. In February 2012, a meeting was held between the

Director General of the Israel Tax Authority and a group of key Palestinian

traders including importers and exporters. The meeting aimed to discuss

various problems and matters of interest, and to examine solutions. In

February 2012, a visit of Palestinian traders, importers and exporters, was held

at Ashdod Port. The visit program included a lecture by a customs official and

a guided tour of the Ashdod container scanner x-ray site.

H. Training Activities

o In January 2012, within efforts to assist PACE capacity building, ICD

responded to a PACE request to hold a meeting with a Jordanian

expert in the field of vehicle valuation. The meeting was held at the

Allenby Bridge Border Crossing, and senior Israeli and Palestinian

customs officials participated.

o In February 2012, a course on customs related issues started under the

auspices of the Israeli Chamber of Commerce. The course, which

ended in July 2012, was intended for Palestinian businessmen, and

focused primarily on issues of classification, valuation, legality of

importation, international shipping and other issues. In this course, a

variety of ICD officials gave lectures. In addition, the course included

study visits to the Nitzana Border Crossing between Israel and Egypt,

the Gilboa land crossing between Israel and the PA, the Na'aman

warehouse which is under customs control and where seized goods

are stored prior to their sale or destruction, the Haifa and Ashdod

container scanner x-ray sites, and the Regional Customs Office at the

Ben-Gurion International Airport. During all these study visits senior ICD

officials explained working procedures at the location and answered

questions posed by the Palestinian businessmen. The participants

expressed their satisfaction from the course, its content and the topics

discussed.

o In April 2012, in a meeting on classification, 2012 updates of the EU tariff

were discussed. ICD and PACE officials, a Jordanian consultant and a

representative of USAID participated in this meeting.

o Joint working procedures have been formulated by the customs

authorities to enable the clearing of goods from customs control under

the various conditions of conditional exemption, for coordination and

cooperation between them.

09

o Additional training programs are planned for the future, including a

training course on the topic of investigations, a seminar for PACE

officials on Israel's free trade agreements, and a meeting on the topic

of risk assessment between representatives of ICD, PACE and

Jordanian customs.

I. Other Cooperation between PACE and ICD

o In 2010, a procedure that allowed Palestinian importers to take cars

out of bonded warehouses in Israel, in order to display them in stores in

the PA, was approved. This procedure continued into the first half of

2012.

o Establishment of a new site for the inspection of vehicles- in the course

of the upcoming year, construction will begin on a new site for the

inspection of vehicles at the Allenby Bridge Land Border Crossing. An

advanced device for the inspection of vehicles will be installed at the

site, and will help optimize both the quality and time-span of the

inspection process.

o A project is underway for the construction of a fixed x-ray site for the

scanning of containers and trucks at the Allenby Bridge Land Border

Crossing. This project was initiated for the facilitation of trade and

assistance to the PA, as part of capacity building. The scanner will be

imported from Holland as it will be financed partially by the Dutch

government.

J. Cooperation with the Private Sector

The Israeli Chamber of Commerce arranged a six month long course for

Palestinian businessmen on customs and international freight forwarding. The

course was found to be useful and comprehensive, and was regarded as a

success.

K. Transfer of Deficits Collected from PA Importers and Electronic Transmission

of the Details of the Deficits for Collection by PACE

According to an arrangement pursuant to the Interim Agreement, ICD

transfers to the PA taxes collected for imports destined for the Palestinian

territories. In cases where inaccuracies are uncovered, based on post-

clearance audits, deficits are collected from the importers. ICD and PACE

representatives meet on a monthly basis to determine the amounts to be

transferred. In these meetings, each side raises issues it would like to discuss. In

addition, in the middle of each month, pre-clearance preparatory meetings

are held on a regular basis between the sides.

21

Since May 2008, ICD has transferred the deficits collected from Palestinian

importers to PACE on a monthly basis. In the first half of 2012, ICD transferred

to PACE approximately NIS 16.8 million in deficits collected from PA importers.

Concurrently, ICD transfers information on deficits of Palestinian importers that

it was unable to collect due to lack of accessibility to the PA territories. This

process and the information forwarded gives PACE the necessary tools to

deal with the importers within its territories, an essential stage in the

professional capacity building of PACE.

In the first half of 2012, ICD continued a pilot that began in February 2010,

giving PACE full responsibility for handling deficits resulting from the

importation of vehicles into the PA territories.

L. Clearance of Donations to the PA:

In the first half of 2012, 135 donations intended for the PA were cleared by the

Israel Customs Directorate. The donations consisted of: 60% medicines and

medical equipment; 12.6% vehicles including cars, ambulances and trucks;

3% food donations; and 6.7% water and electricity infrastructure. The volume

of donations in the first half of 2012 decreased by 23.7% compared to the first

half of 2011.

The distribution of donations between the West Bank and Gaza In the first half

of 2012 differs from the first half of 2011. In the first half of 2012, 52% of

donations were destined for the West Bank, compared to 60% in the first half

of 2011. In the first half of 2012, 48% of donations were destined for Gaza

compared to 40% in the first half of 2011.

M. Cooperation between the Bank of Israel and the PMA18

The Bank of Israel (BoI) has been working with the Palestinian Monetary

Authority (PMA) to smooth banking relations between the respective

economies, subject to security concerns, Israeli anti-terror-financing legal

requirements, and international standards. These requirements, combined

with a low profitability of business relations with Palestinian banks, have

induced commercial banks to limit their commercial relations with Palestinian

banks. Specifically, they do not conduct business with branches located in

the territory controlled by Hamas (the Gaza Strip). BoI continues to exchange

damaged banknotes, in coordination with the GoI, the banking system in

Gaza, and subject to the approval of the GoI.

Due to risks related to the financing of terrorism, some Israeli banks are still

concerned about handling cash transfers from Palestinian banks. At the same

time, West Bank residents have begun to deposit increasing amounts of cash

18 Bank of Israel

20

in West Bank banks due to the improvement in the security situation. This has

generated large amounts of excess cash in the West Bank, although it cannot

account for the entire increase. The trend of increasing amounts of cash

deposits made by Palestinian banks in Israeli banks (including BoI as

described herein) continues and has even intensified. The BoI and the PMA

cooperate in transferring the excess cash to Israel. Specifically, since August

2009, the BoI, in coordination with the GoI, has arranged cash transfers from

the West Bank to Israel. The BoI and the GoI also cooperated with the PMA in

finding solutions for other problems that arose from time to time in Palestinian

banks, such as depositing cash surpluses and exchanging worn and unfit

bank notes.

22

Chapter Three

Economic Cooperation

A. Projects in Area C

Since 2011, reflecting its wish to respond to the needs of the local population,

Israel has approved 328 projects in Area C. These projects are submitted by

the PA, some are sponsored by the international community and some are

initiated by the Civil Administration. Among these projects, 97 have been

implemented, 99 are in the planning stages and 25 were declined. In

addition, the implementation of 53 projects has been suspended due to lack

of funding. Israel welcomes the international community’s support for

approved projects in Area C and calls for a coordinated application process

through the legal procedures and the Planning Committee. Israel encourages

donors to sponsor and fund 16 projects which have already been approved

by the Planning Committee but have not been implemented due to a lack of

international sponsor and funding.

Figure 2

Summary of Projects in Area C19

Type Approved Completed Lacking

Funds

In

Planning

Denied

Clinics 6 4 - 1 2

Schools 20 8 7 16 4

Roads 69 27 36 21 7

WWTP 12 1 7 8 -

Industrial Zones 3 2 - - 2

Waste Sites 12 8 1 2 -

Land Rehabilitation 15 11 1 - 10

Agriculture 18 17 - - -

Water 75 11 - 9 -

Electricity 29 7 1 14 -

Quarries 10 - - - -

Master Plans - - - 28 -

Telecommunications 59 1 - - -

Total 328 97 53 99 25

19 COGAT

23

Over the last few months, Israel has made considerable progress in drafting

new master plans for Area C. This has been done with the involvement and

cooperation of the Palestinian side. These master plans, once approved,

will accelerate planning procedures for further economic development.

Israel maintains its coordinated cooperation with the international community

on project development in this area, responding to the needs of the local

population, and implementing fast track approval wherever possible.

B. Developing Industrial Zones

Bethlehem Industrial Area - In this project, initiated with the support of the

French Government, a number of companies have already commenced

operations, or plan to commence operations, including a number of training

centers, a car dealership, a dairy manufacturer and others. Israel's Ministry for

Regional Cooperation assists coordination between the entrepreneurs behind

the project and French and Palestinian parties involved. The Ministry is

currently working together with the Land Crossings Authority to execute a

series of arrangements to facilitate the smooth flow of goods and raw

materials to and from the Area, through the Tarkumiya Crossing.20

Jericho Agro-Industrial Park – This project is sponsored by the government of

Japan. On April 29, 2012 a four way meeting (Japan, Israel, Jordan and the

PA) convened in Jordan, to discuss relevant issues for the project's

development and implementation, including the issues of water supply,

electricity and an access route. Additional local meetings have been held to

further discuss the different issues and produce a feasible working plan for the

project.

Israel supports these projects and considers them crucial for further Palestinian

economic growth, by improving the level and volume of Palestinian trade, as

well as providing new jobs.

C. Cooperation in Water Supply

Israel continues to cooperate with the Palestinians in the area of water

relations, and to fulfill its obligations under the Water Agreement, part of the

1995 Interim Agreement, which remains in force. The Agreement contains

clear provisions, particularly with regard to amounts of water, relating to a

timeframe even beyond the interim period.

Unfortunately, despite this cooperation on Israel's part, the Palestinians have

been reluctant to reciprocate and in some cases have even ignored or

20 The Ministry for Regional Cooperation

24

violated the agreement, primarily in the critical areas of drilling wells not

agreed upon in the agreement, and failing to treat wastewater that flows

into Israel. Without proper monitoring and Palestinian cooperation, the

Mountain Aquifer shared by Israel and the Palestinians will be destroyed, as

the Gaza aquifer has been.

During the past year, the Israel Water Authority and COGAT have responded

to requests by the Minister and Head of the Palestinian Water Authority, and

have made efforts to promote a series of steps and projects to increase water

supply to Palestinians in the West Bank. Accordingly, they have acted over

the past six months to push ahead projects that were approved by the Joint

Water Committee (hereinafter: JWC), yet encountered difficulties in

implementation for different reasons.

Israel has demonstrated good will and flexibility with regard to the issue of

water prices, in order to enable the supply of additional amounts of water the

Palestinians have requested in Bethlehem and Hebron, as well as in the Gaza

Strip. However, the Palestinians have refused to sign the protocol on this issue,

due to internal Palestinian disputes and political considerations.

Israel's efforts to assist the Palestinians in improving the water and sewage

system in the West Bank and Gaza have been met with refusal by the

Palestinians. Over the past year, they have refused to approve Israeli projects

within the JWC, including sewage projects, causing damage to their own

environment. This undermines the role of the JWC and the ability to approve

new projects by both sides under the Water Agreement from 1995.

Nevertheless, one recent example of fruitful cooperation between Israel and

the Palestinians is a sewage treatment project in the Hebron area. Thanks to

this project, in which the Israeli and Palestinian water authorities, COGAT, the

Civil Administration, USAID, the European Union and the international

community all participate and cooperate, the level of sewage pollution in

Hebron has been reduced.

Israel and the Palestinians continue to cooperate in regional frameworks, by

participating in meetings and workshops as well as joint courses on

wastewater and desalination, among the most advanced in the world in this

field. In January 2012, Palestinians and Jordanians participated in a course

held at the Dan Region Reclamation Project for treating wastewater. In June

2012, Palestinians and Jordanians participated in a special course, the first of

its kind in the world, on desalination and use of solar energy. The courses,

which were held in Israel, were sponsored by the organization MEDRC. In

addition, a workshop for Palestinians, Jordanians and Israelis was held in Israel

in July 2012, funded by the European Union through the programs "SWIM",

and Horizon 2020.

25

Israel considers implementation of the Water Agreement to be an important

tool for promoting bilateral cooperation and serving the needs of the local

population, and commends the role of regional frameworks supporting

cooperation between the parties on this issue.

D. Marketing Dairy and Meat Products to Jerusalem – Capacity Building

Marketing Palestinian meat and dairy products and capacity building has

been discussed between the parties in several bilateral meetings over the last

two years. The Israeli authorities, the Office of the Quartet, the US, the EU and

other international organizations have joined forces in a project intended to

help Palestinian food manufacturers meet the veterinary standards required

to sell their goods to Jerusalem and the rest of the world. The project will help

develop veterinary capabilities in the PA, and adherence to international

standards. Temporary authorization to market these goods to East Jerusalem

has been granted until the end of 2012.21

E. Upgrading Electricity Infrastructure

In the West Bank, electricity supply is based on several sources, including

conduction cables and distribution cables of the Israel Electric Corporation

and distribution cables of the Jerusalem District Electricity Company. In

addition, electricity can be produced independently through photo-voltaic

technology. In total, the Israel Electric Corporation provides 435 million volt-

amperes, the Jerusalem District Electricity Company supplies 280 million volt-

amperes, a line from Jordan supplies 30 megawatts and another 30

megawatts are produced independently, amounting to approximately 775

megawatts. Since electricity needs amount to 810 megawatts, there is an

inherent supply gap of approximately 35 megawatts.22

In February 2012, an agreement was signed between the Israel Electric

Corporation and the Palestinian Energy Authority to build four electricity sub-

stations throughout the West Bank, and connect them to high voltage lines.

The substations will be built in Jenin, Nablus, Atarot and Tarkumiya. The

substations will substantially increase capacity to supply electricity throughout

the West Bank, and will increase the potential for economic development.

Construction on the project commenced in January 2012, and is expected to

supply the Palestinians with an additional 200 megawatts upon completion at

the end of 2014.23

21 COGAT, Ministry for Regional Cooperation 22 COGAT 23 COGAT. This agreement was made possible due to support offered by the European

Investment Bank (EIB).

26

Furthermore, increased electricity connection capacity is underway in

Tulkarem (100 amperes) and Jenin (7 megawatts). Project completion is

projected in the upcoming months.24

F. Developing Potential in the Tourism Sector

In the first half of 2012, there was a slight increase in the number of tourists

entering the West Bank, numbering 1,207,760, compared to 1,202,346 in the

first half of 2011.

The Office of the Quartet, together with Israel's Ministry for Regional

Cooperation and the private sector in the PA, cooperated on a project to

mark out tourist routes through the West Bank, with the objective of offering

joint tourism packages together with the Palestinian Ministry of Tourism. Within

this project, with the help of the Civil Administration, procedures were

formulated to enable the passage of tourists through the Jalame/Gilboa

Crossing, and continuous travel through the West Bank. Tourists have already

begun benefiting from these new procedures. 25

In addition, thanks to the introduction of new technology, and authorization

for tourists to pass through the Minharot Crossing, long lines have been

eliminated for tourists at the Rachel and Bethlehem Crossings.26

Furthermore, ten new hotels are currently under construction in the Bethlehem

area.

G. Agricultural Cooperation and Capacity Building27

During 2011 and the first half of 2012, there was extensive Israeli Palestinian

cooperation in the agricultural field, including with the Palestinian Ministry of

Agriculture, Palestinian farmers and agricultural unions. The following is a short

overview of some of the joint cooperation efforts in this area:

Pest Extermination- a number of projects were conducted in this field,

including:

o Continuation of a project which began in February 2010, to stamp out

Mediterranean fruit flies. The transfer of shipments (2 million flies a

week) began on June 27, 2012.

o A joint project in the Jordan Valley to exterminate the red palm weevil

"Rhynchophorus Ferrugineus", a pest which damages date palm trees,

24 COGAT 25 Ministry for Regional Cooperation 26 Ministry for Regional Cooperation 27 All data the Civil Administration.

27

was implemented. Within this project, date palm territory in the Jordan

Valley was mapped out and the maps were transferred to the

Palestinian Ministry of Agriculture. Joint meetings were held to map out

the laying of traps. The Civil Administration funded the purchase of 300

traps, which were provided to the Palestinian Ministry of Agriculture in

July 2012.

o Representatives from the Palestinian Ministry of Agriculture participated

in a joint study day in the Negev with the Plant Protection and

Inspection Services, regarding the peach fruit fly, "Bactrocera Zonata".

o Several study tours were held with experts from Israel's Ministry of

Agriculture to find solutions for parasitic broom-rape (Orobanche)

plants.

Agricultural Projects in the Jordan Valley – throughout 2011 experts from

Israel's Ministry of Agriculture provided professional assistance, including

providing fertilizers, marketing produce, sampling water and soil. The following

are the main projects:

o A project to grow 100 dunams of cherry tomatoes and peppers for

export, in the Jordan Valley.

o A project in Jiftalik, encompassing 200 dunams of greenhouses and net

houses distributed into 80 dunams of spices, 30 dunams of cherry

tomatoes, and 90 dunams of multi-colored peppers.

o A project encompassing 120 dunams of net houses for multi-colored

peppers, in the Fadail area.

o A project in Ujja, encompassing 200 dunams of spices and 100 dunams

of greenhouses for growing vegetables.

Agricultural Exhibitions in Tel Aviv - In 2011, a large delegation of 360 leading

Palestinian farmers, businesspeople and Ministry of Agriculture representatives

participated in the Agro Mashov Exhibition in Tel Aviv, and for the first time a

special 80 meter booth was allocated for presentations by Palestinians from

the West Bank. In 2012, 301 Palestinians participated in the Agro Mashov

exhibition.

In May 2012, 169 Palestinians participated in the global Agri-tech Exhibition in

Tel Aviv, which included a booth for Palestinian presentations. This was a

unique opportunity for Palestinian presenters to gain exposure to the tens of

thousands of visitors from throughout the world who attended the exhibition.

Sampling of Pre-harvest Produce - Together with the Palestinian Ministry of

Agriculture, samples are conducted of fresh pre-harvest produce

(microbiological tests and tests for traces of pesticides) in order to guarantee

that produce reaching Palestinian and Israeli consumers is clean. In 2011 a

total of 1853 samples were conducted (959 in the first half of 2011). In the first

half of 2012, 821 samples were conducted.

28

Cooperation to Treat Diseases – There was cooperation to address two

outbreaks of the Avian Flu disease in the Gush Etzion area, as well as an

outbreak of Foot and Mouth Disease in the PA (Nablus, Hebron, Dora and

Tulkarem).

Supply of Vaccines – In 2011, Israel provided 616,700 vaccines to the PA, at a

cost of NIS 2,198,200 (in the first half of 2011 172,500 vaccines were provided).

In the first half of 2012, the number of vaccines provided reached 355,500.

Palestinian Agricultural Trade

Imports - In 2011, agricultural imports from throughout the world amounted to

7,725,623 Euro plus USD 85,933,295. The number of import licenses issued

reached 814 (393 in the first half of 2011), an increase compared to 2010,

when 725 licenses were issued (332 in the first half of 2010). In the first half of

2012, 380 licenses were issued.

Exports and Sales to Israel and Gaza – the Israeli Ministry of Agriculture made

efforts to promote Palestinian export of spices and other produce. Spices

provide about 1000 tons of export-bound produce, primarily to the United

States. In addition, in the first half of 2012, 40 tons of leather, 155 tons of frozen

meat, and 23,500 plants/seedlings were exported.

In addition, in 2011, 7 export licenses were issued for olive oil, frozen poultry,

leather, and fresh vegetables and spices, at a total value of 3,125 tons or USD

6,050,000.

During 2011, West Bank growers sold 66,250 tons of produce to Israel (38,540 in

the first half of 2011). In the first half of 2012, West Bank growers sold 37,852

tons of produce to Israel.

In 2011, a total of 24,334 tons of agricultural produce was sold by West Bank

growers to Gaza.

Study Sessions - In 2011, over 800 Palestinians participated in a total of 21 joint

professional training sessions, meetings, agricultural exhibits, study days and

tours, which were conducted for representatives of the Palestinian Ministry of

Agriculture and Palestinian growers, in the fields of: plant protection,

veterinary medicine, afforestation, pasture, and export in the olive sector.

In the first half of 2012, over 750 Palestinians participated in 12 such joint study

sessions.

29

Chapter Four

Facilitation of Access and Movement

A. Upgrading of Commercial Crossings28

During the first half of 2012, Israel continued to upgrade the infrastructure of

the commercial crossings between Israel and the West Bank. The volume of

commercial activity at the crossings continued to grow, with an average of

1,431 trucks passing through the crossings each day in the first half of 2012

(compared to 1,332 in 2011 and 1,270 in 2010). In total, 93,354 trucks entered

the West Bank through commercial crossings in the second quarter of 2012,

compared to 84,708 in the similar period in 2011, which represents a 10% raise

in volume activity.

Figure 3

Back to Back Trade29

Number of Trucks entering the West Bank (including empty trucks) through

Crossings 30

B. Pedestrian and Vehicle Crossings31

In the first half of 2012, an average of 19,256 pedestrians passed through the

main West Bank terminals each day, a 20% increase compared to 2011, when

a daily average of 16,076 pedestrians passed through the main West Bank

terminals each day (the 2011 figure represented a 12% increase compared to

28 Ministry of Defense, Land Crossings Authority 29 Ministry of Defense, Land Crossings Authority 30 Except Reihan 31 Ministry of Defense, Land Crossings Authority

+2%

+10%

+22%

31

2010, when the daily average numbered 14,375 pedestrians). In June 2012, an

average of 11,000 vehicles passed through the crossings each day.32 Several

projects are underway for the upgrading of pedestrian crossings.

C. Crossings in Area Surrounding Jerusalem33

The following data reflects movement at the crossings surrounding Jerusalem,

during the first half of 2012:

o The number of pedestrians passing through the crossings surrounding

Jerusalem (Rachel, Zeitim and Atarot) in the first half of 2012 numbered

6,491,160.

o The number of vehicles passing through the crossings (Rachel,

Kalandiya and Beituniya) during the first half of 2012 totaled 1,225,513.

o Shipments passing through Beituniya Crossing numbered 18,374.

o Significant steps have been taken to ease movement at the Kalandiya

Crossing. The crossing is now opened early, from 4:00 AM, all five lanes

are open, and assistance is given to those with special needs (medical

teams, humanitarian cases, school children).34

In 2011 and the first half of 2012, the Civil Administration invested a total of NIS

214,000 in the upgrade of infrastructure at the crossings: Kalandiya, Beituniya

Sawahra, and Sheikh Saad. The IDF and the Government of Israel invested NIS

31,270,000 in the upgrade of the pedestrian and vehicle crossings: Shuafat,

Rachel, Sheikh Saad, Sawahra, Zeitim, and Kalandiya.

A number of additional measures were taken in order to improve service at

the crossings, including:

o Special authorization for medical staff and ambulances to pass

quickly through the crossings.

o Changes in operating procedures at the crossings improved service

for the Palestinian population and cut waiting times.

The crossings are unfortunately still targeted by terrorists, and violent attacks

are perpetrated regularly at the crossings. At the Kalandiya Crossing alone,

there were 60 stone-throwing attacks and 12 Molotov cocktail attacks. In

addition, four explosive devices were confiscated, and one was thrown into

the crossing. Four knives were also confiscated. At the Shuafat Crossing, there

were 25 stone-throwing attacks, 25 Molotov cocktail attacks, two knives were

confiscated, and there was one stabbing and one attempted stabbing.

32 Crossings Authority 33 Israeli Police 34 COGAT

30

D. Allenby Bridge

The Allenby Bridge serves Palestinian trade with international markets35 as well

as the passage of pedestrians and vehicles. The volume of traffic passing

through the Allenby Crossing in the first half of 2012 was as follows36:

o The volume of shipments in the first half of 2012 numbered 12,242,

(8,271 imports and 3,971 exports), a 34.09% increase compared to the

parallel period in the previous year, when the number of shipments

passing through the crossing was 9,130.

o The volume of passengers at the Allenby Bridge numbered 809,565 in

the first half of 2012 (421,035 entries and 388,530 exits). This constituted

a 9.60% increase compared to the parallel period in the previous year,

when 738,660 passengers passed through the Crossing. A renovated

passenger terminal opened in the beginning of September.

o The volume of vehicles passing through the Allenby Bridge in the first

half of 2012 numbered 5,239 (3,050 entries and 2,189 exits), a 13.87%

increase compared to the parallel period in the previous year, when

4,601 vehicles passed through the Crossing.

For the past few years, the hours of operation of the Allenby Bridge have

been extended, and the bridge is now open from Sunday through Thursday

until midnight (8:00 – 24:00) for passengers and for commercial traffic. On

weekends (Friday and Saturday), the bridge is open until late afternoon (8:00

– 15:00).

At the beginning of Ramadan the Bridge was kept open for 48 hours straight,

in order to enable the passage of more than 25,000 visitors.

A joint project by COGAT and the Israel Airports Authority, at a cost of USD 2.5

million, aims to upgrade the Allenby Bridge.37 In addition, Israel is cooperating

with the Quartet and the Dutch government in order to facilitate the

installation of a security scanning system at the Allenby Bridge, donated by

the Dutch government. The Dutch Government is sponsoring the project by

financing the scanner, at a total cost of USD 3 million. Israel will invest USD 9

million over and above the Dutch donation, and is currently funding the

preparation of the architectural plan for the project. Use of the scanner is

expected to improve trade conditions and increase the competitive

capabilities of Palestinian manufacturers, enabling Palestinian output for

35 Palestinian international trade is also transported through Israeli ports and airports. 36 Israel Airports Authority 37 COGAT

32

export to increase by 30% (based on a survey conducted among Palestinian

merchants).38 The Israeli investment in upgrading facilities of the Allenby

Bridge totals USD 11.5 million.

F. Measures to Ease Movement and Access

Despite the continued security challenges, a number of steps were taken to

ease movement and access in the West Bank. As of August 21, 2012, seven

checkpoints and roadblocks had been removed39:

o Hashomronim Checkpoint near Nablus was removed in December

2011.

o Roadblocks in Beit Dajan and Ariel – Salfit, were removed.

o Checkpoints were removed in Zawta, Izbet Shufa, Highway 60, and

Beit Anoun East interchange.

There are 13 checkpoints remaining, which operate as "normally open",

enabling the smooth transit of vehicles and pedestrians.

West Bank IDs for Gazans Residing in West Bank - the GOI has agreed to

authorize 5,000 West Bank residents who currently hold Gaza IDs to change

their address for ID purposes to the West Bank. Thus far, 3,857 residents have

submitted requests. 2,993 requests have been approved.40

Measures to Facilitate Religious Worship - A number of steps were taken to

facilitate religious worship, particularly during holidays. The number of

entrance permits granted to Palestinians to visit Israel during the month of

Ramadan reached its highest level since August 2000. 121,000 multi-use

permits were granted to visit Israel during the Ramadan period. These permits

enable the holder to enter Israel with his family multiple times throughout all

five weeks of the Ramadan holiday.

Approximately one million Palestinians visited and prayed at the Al-Aqsa

mosque during Friday prayers throughout the month. Permit holders are also

able to tour Israel, and many of them visit shopping and recreational centers

in Jerusalem, Jaffa and many other cities in Israel.41

38 Ministry for Regional Cooperation 39 COGAT 40 COGAT 41 Civil Administration

33

Measures to Encourage Trade- Additional measures have been taken to

encourage trade:

o The number of permits for traders has been increased by 500 and is

currently 16,500.42

o A growing number of Israelis are now entering Area A in order to

procure goods and services. They provide a significant contribution to

the Palestinian economy in the West Bank.

o The number of Business Person Certificates (BMC), which ease the

movement of key Palestinian business people, was increased to 900.43

o The number of permits for trips to Israel was increased. 44

G. Access to Health Services in Israel45

Thousands of Palestinian patients receive medical treatment in Israel each

year. Between January 1, 2012 and August 21, 2012, 138,884 permits were

granted for patients and accompanying individuals to enter Israel for medical

treatment. Figure 4 below demonstrates the numbers of patients from the

West Bank who received medical care in Israel from 2008 to August 2012.

Figure 4: Palestinian Patients from the West Bank Treated in Israel46

2008 – August 2011

In addition, Israel is participating in an NIS 38.5 million project to construct

three clinics for emergency medical care, which will serve Palestinians in the

vicinity of the clinics (Hebron, Nablus, Bethlehem, and surrounding villages).

These centers are expected to make quick medical care available to

Palestinian patients in emergency situations.47

42 COGAT 43 COGAT 44 COGAT 45 COGAT 46 COGAT 47 Ministry for Regional Cooperation

050,000

100,000150,000200,000250,000

2118 2119 2101 2100 January -August2012

Palestinian Patients from West Bank

Treated in Israel

34

Chapter Five

Israel's Policy towards the Gaza Strip

A. Introduction

The Gaza Strip, which has been under illegitimate Hamas control since June

2007, is outside of the PA's reach. Despite this, the Gaza Strip places a

significant financial burden on the PA, accounting for more than 50% of the

PA's total expenditures48. The PA does not benefit from the tax collection

system operated by Hamas in Gaza. An extensive network of more than 1000

tunnels serves for the smuggling of all kinds of commercial goods from Sinai

into the Gaza Strip, including fuel, cars, cement and other construction

materials. This network is also used to smuggle a highly dangerous volume of

weapons into Gaza, weapons that target Israel's civilian population.

Since June 20, 2010, and despite ongoing attempts by Hamas and the Islamic

Jihad to terrorize Israeli cities and the crossings between Israel and the Gaza

Strip, Israel continues to implement a policy that contributes to economic and

social recovery in Gaza. Israel enables the free flow of commercial goods

and raw materials49 into Gaza. Thus far, Israel has approved 219 infrastructure

and humanitarian projects implemented by the international community, the

passage of businesspeople has been extended, Kerem Shalom crossing has

been upgraded, and the there is an ongoing supply of electricity and fuel.

The years 2010-2011 marked a period of significant economic recovery in

Gaza following this policy, yet in the first quarter of 2012 growth declined to

6%, and unemployment rose from 28% to 30% compared to the same period

last year.50

A brutal assault of rockets and mortar shells from Gaza continues to terrorize a

million Israeli civilians, paralyzing their daily lives. Since the beginning of 2012,

530 rockets have been fired into Israeli territory. This fire is deliberately aimed

at heavily populated areas in Israel, including Beersheba, Ashdod, Ashkelon,

and surrounding areas, forcing a million Israeli citizens to take refuge in

shelters.

48 Payment for salaries as well as electricity and water supplied from Israel. 49 With the exception of dual use materials. 50 IMF - Staff Report Prepared for the Meeting of the Ad Hoc Liaison Committee, September 23,

2012.

35

Figure 5 - Rockets Fired into Israeli Territory51

Figure 6: Gaza Strip Rocket Ranges52

Israel calls on the international community to condemn these attacks. As

stated by UN Secretary General Ban Ki-Moon:

"For many years I have been fully condemning those rocket attacks on

civilians. This is totally unacceptable and against the fundamental principles

of human rights."53

Despite this, the State of Israel has kept the land crossings to Gaza open. Erez

crossing has remained open for passengers (businesspeople and

humanitarian cases) and international organization employees. Kerem

Shalom has remained open for the daily delivery of commercial goods from

Israel to Gaza.

51 http://www.terrorism-info.org.il/en/article/20388 As of August 28, 2012. 52 http://www.terrorism-info.org.il/en/article/17947 53 http://www.haaretz.com/print-edition/news/un-chief-to-haaretz-palestinians-will-only-get-a-

state-through-negotiations-1.410687

36

B. Projects Implemented by the International Community54

Israel works with the international community and the Palestinian Authority to

advance and streamline procedures for the approval of internationally

funded projects. To this end, a coordination and monitoring mechanism has

been set up for the implementation of internationally funded, monitored and

implemented projects.

Thus far, 219 internationally funded projects have been approved, in a wide

variety of fields. Seventy-eight projects were approved in 2010, 98 in 2011,

and 43 thus far in 2012. Of these 219 projects, 53 (24%) have been completed,

82 (37%) are in progress, 74 (33%) have not yet commenced implementation,

and 9 (4%) have been cancelled.55

The projects are in the following areas: 88 in the field of education; 40

infrastructure projects, 29 projects for sports, recreational and other activities;

17 agriculture projects; 17 health projects; 15 housing projects and 13 road

projects.

The projects are funded by the following international donors: 92 projects by

UNRWA, 61 projects by USAID, 40 projects by UNDP, 3 World Bank projects, 3

Red Cross projects, 2 French projects, 14 German projects, one Egyptian

project, one Belgian project, one Dutch project and one Swedish project.

Turkey and Qatar have each promised to promote projects with a scope of

approximately USD 300 million a year.56

As of July 1, 2012, 19,920 trucks have entered the Gaza Strip for projects:

15,436 trucks carrying aggregates; 2,856 trucks carrying cement; 987 trucks

carrying equipment and other miscellaneous items and 641 trucks carrying

steel.

C. Trade

In 2011, there was a substantial increase in trade from the Gaza Strip through

the crossings with Israel, as measured primarily by the number of trucks

passing through them. Thus, in the last year there was an approximately 13%

increase in the number of shipments entering the Strip, and an approximately

47% increase in the number of shipments exiting the Strip. In the first half of

54 COGAT 55 COGAT 56 These projects are promoted in coordination with the Hamas regime, and have not been

coordinated with Israel.

37

2012, 26,877 trucks shipped goods into the Gaza Strip through Kerem Shalom

(723 tons), compared to 25,579 last year (664 tons). 57

According to different reports in the Palestinian media, most foreign trade

(more than 50%), continues to be smuggled through the tunnels along the

Egyptian border.

D. Increased Exports58

On December 8, 2010, Israel’s Security Cabinet adopted a decision on

additional measures to expedite increased exports from the Gaza Strip,

thereby boosting the Gaza economy.59 In order to support the private sector

in Gaza, GoI authorized export of agricultural produce, furniture and textiles.

A scanner was recently installed at Kerem Shalom, to make the infrastructure

suitable for export needs in Gaza.

Agricultural produce has been exported in accordance with the decision.

During the agricultural season from November 2011 – May 2012, the volume

of agricultural exports was: 436.4 tons of strawberries, 9,000,000 flowers, 57.2

tons of peppers, 57 tons of cherry tomatoes and 158 tons of regular tomatoes.

In addition, in the beginning of August 2012, 39 tons of tomatoes were

exported to Jordan in three trucks.

In May and July 2012, 4,000 sweaters were exported to Britain, in two

shipments. Two trucks carrying furniture exited the Strip to participate in an

exhibition in Jordan, one in January 2012 and one in June 2012, totaling 45

shipments. Approval was also granted for the sale of Gazan furniture to the

Ministry of Education in the West Bank.

In March 2012, within a project by the WFP (World Food Programme), 140 tons

(4 truckloads) of date bars were marketed. A request for an additional 720

date bars has been approved, and is expected to commence in September

2012.

E. Upgrading Infrastructure in Kerem Shalom Crossing

Kerem Shalom serves for traffic in commercial and humanitarian goods, fuels,

aggregates and grains in bulk. The capacity of the crossing today far

exceeds actual use for the transfer of commercial goods, construction

material, aggregates and grains in bulk.

57 COGAT 58 COGAT 59 The full text of the Decision can be found at:

http://www.pmo.gov.il/PMOEng/Communication/Spokesman/2010/12/spokedes081210.htm

http://www.mfa.gov.il/MFA/HumanitarianAid/Palestinians/Security-Cabinet-Decision-on-Gaza-

Strip-Exports+-8-Dec-2010.htm

38

Thus far, Israel Land Crossings Management Authority has invested

approximately NIS 80 million in the development of the crossing.

Improvements completed include the expansion of the crossing area from

120 dunams to 600 dunams, in order to enable the intake of additional trucks

and increase the crossing's daily capacity to 450 trucks. As mentioned above,

the installation of a scanner was recently completed, to be used for exports.

At present, the crossing's capacity is 450 trucks a day, although as of August

21, 2012, the average number of trucks at the crossing was just 280 trucks a

day.60

In addition, hours of operation at the crossing have been extended and the

number of workers at both the Israeli and Palestinian sides has increased.

Efforts to expand the transfer of fuel through the crossing are currently

underway. The aim is to increase the level of diesel fuel transferred from

540,000 liters to 1,170,000 liters; and the level of gas from 180 tons to 230 tons.

The level of benzene is expected to remain at 400,000 liters.61

F. Movement of People62

Israel enables the passage of businesspeople and passengers who seek

medical treatment in Israel or elsewhere. In the first half of 2012, there was a

23% increase in the number of entries and exits at Erez Crossing, from 19,251

in the first half of 2011, to 24,506 in the first half of 2012. The number of

foreigners entering the Strip remained relatively stable, at 4,392 entries in the

first half of 2011, and 4,399 entries in the first half of 2012.

In the first half of 2012, a total of 8,538 Gazans left the Strip to receive medical

treatment in Israel (including accompanying family members), compared to

9,736 during the parallel period in 2011. In addition, 274 ambulance

evacuations from Gaza were recorded in the first six months of 2012,

compared to 210 in the first six months of 2011.

Moreover, in the first half of 2012, 2,545 businessmen and merchant passes

were issued, enabling businessmen to leave Gaza for Israel and/or the West

Bank. Consequently, 11,772 exits by businessmen from Gaza were recorded

in the first six months of 2012, compared to 6,864 during the parallel period in

2011.

In addition to humanitarian cases, businessmen and merchant passes, high

level PA officials and Gazans with a range of circumstances, such as

60 COGAT; Ministry of Defense, Land Crossings Authority 61 Ministry of Defense, Land Crossings Authority 62 COGAT

39

participation in local or international conferences, internships in Israel, or study

abroad etc., have also exited Gaza during the first half of 2012. 4,196 such

exits were recorded in the first half of 2012, compared to 2,651 in the parallel

period in 2011.63

G. Transfer of Cash64

Throughout 2011 and 2012 (January through August), monthly cash transfers in

the amount of USD 13.5 million were transferred to UNRWA, to cover ongoing

expenses and salaries. In addition, new banknotes were transferred to the

Gaza Strip to replace worn-out banknotes as follows: on 15.1.12 NIS 13 million;

on 13.6.12 NIS 20 million. On May 10 2012, NIS 75 million was transferred to the

Strip to cover urgent obligations of local banks.

H. The Energy Crisis in Gaza

Electricity is supplied to Gaza from three primary sources: 10 feeding lines from

Israel, which supply approximately 124 megawatts; 2 feeding lines from Egypt,

which supply approximately 22 megawatts, and electricity from the power

station in the Gaza Strip. Until recently, the power station's capacity was

approximately 50 megawatts (depending on the supply of fuel), but a newly

completed UNDP project to upgrade the power station's capacity has

increased capacity to 100 megawatts. Thus, the total capacity available is

now approximately 246 megawatts, although consumption requires

approximately 300 megawatts, causing a supply gap of approximately 54

megawatts (which is expected to grow when the desalination plant is built).

Additionally, recent operational difficulties at the Gaza Power Station have

exacerbated the gap.65

During the first months of 2012, there was a substantial decrease in the

volume of fuel smuggled from Egypt through the tunnels, leading to a severe

shortage and difficulties in the daily lives of residents. In particular, this was

reflected by a shutdown of the Gaza Power plant, due to a shortage in fuel

to power the plant, thereby leading to power outages of up to 16 hours a

day. Israel continued to provide the regular supply of fuel it transfers to Gaza.

The Hamas government (like the PA) refrained from purchasing Israeli fuel at

market prices, until increased public criticism regarding the crisis forced them

to do so. Furthermore, a complete shutdown of the electricity network was

prevented primarily because of the continued regular supply from Israel,

which amounts to approximately 120 megawatts, out of total consumption of

approximately 300 megawatts.

63 COGAT 64 COGAT 65 COGAT

41

In April 2012, the situation improved significantly, following a Palestinian

decision to purchase fuel from Israel to operate the power plant, which

consumes approximately 500,000 liters a day. In the first half of 2012,

approximately 19.4 million liters of diesel fuel were transferred into the Gaza

Strip.

On June 7, 2012, the transfer of 30 million liters of Qatari diesel fuel donated

by Qatar commenced. The fuel was transferred from Egypt via the Nitzana

and Kerem Shalom crossings, into Gaza. Accordingly, 6.9 million liters of diesel

fuel were transferred, until August 6, 2012, when, following the terror attack on

the Sinai border, the transfer of the diesel was suspended.66

I. Cooperation on Water Supply67

Israel has expressed its willingness to assist the Palestinians in rehabilitating

Gaza’s water supply system, which was destroyed due to Palestinian

mismanagement, mainly over-pumping. In this context, Israel continues to

support the establishment of a desalination plant in the Gaza Strip, and

remains willing to assist the Palestinians in this regard. Accordingly, Israel holds

desalination training courses for the Palestinians and Jordanians, as

mentioned above in Chapter Three. Palestinian officials from the PA Water

Authority in Gaza were given a professional guided tour of the desalination

plant in Ashkelon, and Israel has provided professional consultations on this

matter.

Water consumption in Gaza is approximately 170 MCM, of which 90 MCM are

for household consumption and 80 MCM for agricultural use. This entire

amount is pumped from the aquifer, which has a natural capacity of just 55

MCM68, causing severe overuse, and the aquifer has fallen below the black

mark, and become contaminated. The aquifer may be completely destroyed

by 2020 if the Palestinians do not begin repairing it soon.

At present, 5 MCM are supplied per annum by Israel via the Kisufim water

pipe. Israel has expressed its agreement in principle to transfer a water

increase of up to 5 MCM per annum to the Palestinians via Nachal Oz, but

the Palestinians’ continued unwillingness to sign a protocol on the price (as

mentioned above in Chapter Three) is preventing this increase from being

implemented. Despite this, Israel has decided to embark on the infrastructure

work required for transferring this water increase so that when the price is

66 COGAT 67 COGAT, Israel Water Authority 68 Based on Palestinian figures.

40

agreed upon it will be possible to make the transfer without further delay.

Work on a pipe Israel is laying in this context is in its final stages.

Water and sewage projects in Gaza are continuing according to plan, with

emphasis on large wastewater projects in Beit Lahiya in the Northern Gaza

Strip, sponsored by the World Bank and Sheikh Ajleen in Central Gaza,

sponsored by the German government. A budgeting gap is delaying the UN

project in Khan Yunis in the Southern Gaza Strip.69

J. Fiscal Developments

As stated in Chapter One, the Palestinian government continues to channel a

substantial portion of its budget to employees in the Strip, as well as the

payment of allowances to eligible population groups, and funding for public

services and infrastructure. These payments continue to flow while the PA has

no tax collection capabilities in Gaza. This situation, whereby the PA does not

take in revenue from Gaza, exacerbates the PA's budget crisis, while in

parallel the illegitimate Hamas regime continues to develop its tax collection

system and to increase its revenues from economic activity in the Gaza the

Strip.

Furthermore, for the first time the de facto legislative council in the Gaza Strip,

controlled by Hamas, has published budgetary figures regarding Hamas

government operations in the Strip. These figures reflect a substantial increase

in local collection, in light of economic growth. Thus, total local revenues in

2011 reached approximately USD 190 million, versus approximately USD 80

million in 2010.

Moreover, the Hamas government budget reflects a substantial increase in

expenditures, totaling approximately USD 390 million. This can be explained,

inter alia, by an increase in the number of Hamas government employees, to

approximately 40,000 in 2011 (versus 35,000 in 2010). The distribution of

expenditures demonstrates that most expenditure (approximately 80%) is

directed towards salary payments, especially to the Ministry of Interior and

social service ministries.

The Hamas government in Gaza is the primary beneficiary of growth in the

economy, enabling it to continue to establish itself and increase its local

income. In contrast, it appears that the PA's status, despite its role in the

economic sphere, is deteriorating.

69 COGAT