US embassy cable - 05TELAVIV531

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 000531 
 
SIPDIS 
 
E.O. 12958: DECL: 01/27/2014 
TAGS: EFIN, EAID, ECON, KWBG, IS, GAZA DISENGAGEMENT, ECONOMY AND FINANCE, ISRAELI-PALESTINIAN AFFAIRS 
SUBJECT: PALESTINIAN INVESTMENT FUND EARNINGS MAY SEED GAZA 
FUND 
 
 
Classified By: Economic Counselor Bill Weinstein for reasons 1.4 (b) an 
d (d) 
 
This cable has been cleared by ConGen Jerusalem 
 
1.  (C) Summary: The Palestinian Investment Fund (PIF) will 
vote February 10-12 on whether to cash out on over USD 300 
million of capital gains made on worldwide investments. 
Board members are split over the vote, reportedly fearing 
that PA MinFin Salaam Fayyad will appropriate earnings for 
his operating budget.  At PIF invitation, the U.S.-based 
Democracy Council (DC) is currently drawing up a plan for a 
separate Gaza-specific investment fund into which it hopes 
the PIF will place USD 100-150 million, and which it says 
will attract up to USD two billion in additional venture 
capital from the World Bank and multinational corporations. 
Gaza-based PIF board member Jawdat Al-Khoudry told Emboffs he 
and others will push the seed fund, highlighting 
construction, medical services, IT, and agriculture as key 
areas for investment.  USAID supports potential overlap with 
projects under consideration for funding with possible FY05 
supplemental assistance.  End summary. 
 
--------------------------------- 
PIF May Cash Out on Capital Gains: 
What to Do With the Windfall? 
---------------------------------- 
 
2.  (C) Palestinian Investment Fund (PIF) board members will 
meet February 10-12 to vote on whether to cash out on a 
reported USD 340 million of capital gains made on close to 
USD one billion worth of investments worldwide, mainly in the 
PIF,s lucrative Orascom Telecoms holdings (please protect). 
Phil Colgan, a contractor for the Democracy Council (DC), the 
consulting group that has advised the PIF since its 
inception, told Emboffs January 26 that the board is 
considering setting aside USD 100-150 million as a new seed 
fund for Gaza-specific investments.  Such a fund would target 
three or four large-scale and several smaller-scale 
commercially-viable enterprises, Colgan explained, ranging 
from infrastructure development to micro-credit and low-tech 
industrial manufacturing to a possible natural gas pipeline 
link to Egypt.  The Democracy Council is currently drawing up 
a governance structure and a portfolio of suggested 
investments for the fund, which would be separate from the 
PIF and would seek to attract up to USD two billion in 
additional capital from entities like the World Bank and 
multinational private companies. 
 
---------------------------- 
Board Split Over Cashing Out 
---------------------------- 
 
3.  (C) Colgan conceded that PIF board members may vote 
against cashing out in order to prevent PIF Chairman and PA 
Minister of Finance Dr. Salaam Fayyad from appropriating all 
or most of the money for the PA operating budget.  Gaza-based 
PIF board Jawdat al-Khoudry confirmed to Econoff January 26 
that he and other members are at odds with Fayyad over the 
approximately USD 150 million the PIF has given the Finance 
Minister over the past two years that has "evaporated" within 
a budget that has barely managed to cover its wage bill. 
"The PIF is a trust to benefit the Palestinian people, not 
Fayyad," he said, adding that Palestinians would be angry if 
they understood that the PIF had more than doubled its 
investment and the public had seen none of this money through 
infrastructure projects or social services.  He said he is 
working with fellow PIF board member Samir Khoury and former 
PIF CEO and Managing Director Mohammed Rashid to convince the 
board it is worthwhile to "go with their instincts" by voting 
to cash out, while fighting to put all of the profits into 
the Gaza fund.  "I believe this motion will pass," Khoudry 
said.  "Otherwise I will make their lives very difficult." 
 
------------------------------ 
Gaza's Primary Economic Needs 
------------------------------ 
 
4.  (C) In Khoudry's view, quick labor-intensive projects 
should be the fund's first target area, in particular the 
construction of high-rise apartment buildings on settlement 
lands once settler homes have been demolished following 
disengagement.  (Note: Khoudry claimed that the PA favors GOI 
demolition of homes, but GOI interlocutors now indicate the 
government may decide to leave houses intact due to time 
constraints.  End note.)  In addition, Khoudry argued for 
investment in medical services, the information technology 
sector, and the agriculture sector, the latter of which he 
believes has the potential to dramatically increase its 
exports following disengagement.  Finally, he said the border 
crossings must be privatized in order to ensure efficiency of 
operations. 
 
5.  (C) USAID would not contribute to the Gaza fund, but 
supports the idea of overlap with AID projects under 
consideration for funding with possible FY05 supplemental 
assistance.  In particular, AID's West Bank/Gaza Private 
Enterprise office would consider collaboration in the 
following areas: 
-- A venture capital fund focused on employment-generating 
enterprises 
-- State of the art border warehouse facilities for 
agricultural and non-agricultural goods. 
-- Investments in outsourcing mechanisms, for instance 
customer service call centers for the Gulf region. 
 
----------------------------- 
Private Enterprise Conference 
----------------------------- 
 
6.  (C) Khoudry said he is planning a March 2 conference in 
Cairo that will include Gazan businessmen and will focus on 
strengthening the Gazan private sector post-disengagement. 
The PIF, UNDP, Bank of Palestine, and the U.S.-based Aspen 
Institute have already agreed to participate, he explained. 
While Khoudry would like to invite representatives of Israeli 
private enterprise to attend in order to discuss 
opportunities for agribusiness and other cooperation 
post-disengagement, the possible participation of the Islamic 
Development Bank may make this impossible.  USAID and 
Embassy/ConGen representatives will be invited as well, 
Khoudry said. 
 
7.  (C) Comment: Some contacts expressed doubt that PIF will 
vote to cash out at all, or that the Gaza fund will attract 
significant venture capital.  The DC's proposal, however, 
highlights a growing number of non-governmental sources of 
support for Gaza development -- notably, the Aspen and 
EastWest Institutes -- and the increasingly urgent need for 
coordination between them and with the World Bank process. 
End comment. 
 
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