Palestinian Transparency & Accountability Project

Project Description

The Council’s groundbreaking work in the Palestinian Authority was first made public during the annual conference of the World Economic Forum in Davos, Switzerland and received widespread support from around the world, including accolades by organizations such as Transparency International and the World Bank, the U.S. Department of State. In 2006 letter of support, prominent Members of Congress such as House Foreign Affairs Committee Chairman Tom Lantos wrote “[A]s you may know, the Democracy Council previously founded the Palestinian transparency & Accountability Project and the Palestine Investment Fund to promote financial and governance reform. The group’s work was largely credited with revealing a $900 million gap in the PA budget.

Table of Contents
Project Summary
Background
Transparency Methodology
Selected Transparency Findings
Selected Project Milestones
    1999
    October 2000
    August 2002
    January 2003
    February 2003
    March 2003
    April 2003
    March 2004
    April 2004
PIF Articles of Association
Policies & Procedures Manual

Project Summary

The Palestinian Transparency & Accountability Project (PTAP) is widely viewed as one of the most successful financial and governance reform projects in the Arab World.

The Democracy Council work on PTAP can be broken down into five stages:

1999-2002: Project Development including negotiating access and scope.
 

2002: Assisting with the legal and operational mandate and structure of the Palestine Investment Fund (PIF), as the new vehicle to own and manage financial assets for the Palestinian Authority (PA).  This was achieved by drafting a detailed Articles of Association and Policies & Procedures manual for the PIF.  The Articles and Operating Manual represent a system of oversight, and checks and balances that encourage the PA and its agents to undertake commercial activities in a transparent and responsible manner. The system provides, for the first time, a full accounting of all commercial assets owned by the PA.
 

2002-2003: Identifying and evaluating each asset through a Transparency Diagnostic, followed by a valuation performed by Standard & Poor’s.
 

2003: Assistance in reforming and restructuring specific assets and government involvement in business sectors, e.g. electricity, petroleum, and border logistics management operations.
 

2004: Providing assistance on issues of governance and operations of the PIF as a public investment fund.

Follow on work included providing advice and assistance in implementing privatization and governance reforms of specific sectors identified in previous stages.

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Background

By the late 1990’s, the Palestinian Authority (PA) and the international donor community faced concerns relating to the lack of comprehensive information about commercial assets owned or controlled by the PA or its representatives.   The multilevel PTAP was developed to establish transparent financial practices, institute new standards of accountability and public administration of commercial revenue generating assets, and to provide specific financial data to the PA and the Palestinian public for budgetary or policymaking purposes.

The concept of consolidating management and control over the commercial assets of the Palestinian Authority, and the resulting establishment of the Palestine Investment Fund (PIF), is a breakthrough reform effort designed to enhance transparency, accountability, and financial responsibility and good governance.  The PIF was formed as a separate legal entity that aspires to acquire/invest, and to sell/dispose of Portfolio Investments, Liquid Investments, and Temporary Investments that promote economic growth and infrastructure development in Palestine. PIF also seeks to stimulate private sector investment, both domestic and foreign, to achieve sustainable long-term economic prosperity for Palestine.

This project formed a base from which the PA could promote a more transparent financial and investment management system, and thus, improve the quality of life of the Palestinian people. Throughout the project, the Democracy Council worked in partnership with the PA Minister of Finance, management of the Palestine Investment Fund, and the Palestinian private sector to conceptualize and implement a new system of owning, investing, reporting, and managing public commercial assets.

From a technical point of view, the actual research and logistics involved with gathering information in the Palestinian territories presented many challenges.  The unstable political, security, and economic environment, combined with a lack of accounting, corporate financial standards, as well as infrequent compliance with public reporting and auditing requirements, forced us to rely more heavily on on-site primary research for each asset.

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Transparency Methodology

The Transparency Diagnostic developed by the Democracy Council, provides the Palestinian Authority and the Palestinian people with relevant information about its current investments in the Palestinian Investment Fund (PIF), which ensures compliance with the basic international standards of transparent public reporting and investment-related risk management (as required by the PIF Articles of Association). This Transparency Diagnostic does not address any individual investment’s performance or future viability, nor does it outline the strategic motivation for maintaining or altering the terms of a given investment. Rather, the Transparency Diagnostic’s objective is to enable the PIF to publicly disclose, and thereby make transparent, reported details concerning current portfolio investments.

In order to obtain and analyze relevant information, the Democracy Council conducted on-site in-person interviews with principals, business owners, board members, clients, and others, in addition to conducting secondary research. The primary operations and existence of each business enterprise or asset were also physically verified. Bank accounts and other liquid assets were confirmed by research on primary documents through contact with the financial institution or examination of the available account/financial information.

The bulk of the primary data was gathered directly from representatives of the listed investments and PIF officers. Interviews were also conducted with PA officials, competitors, customers, investors, and outside stakeholders.

The process of collecting data to complete the transparency diagnostic and subsequent valuation process, has been more arduous and costly than originally predicted due to violence, closures, political interference, and related measures occurring in the region.

The most labor-intensive and time consuming aspect of our evaluation was data collection, which included conducting interviews and primary, real-time research – a process uncommon in the West Bank and Gaza.

Generally, the Palestinian community was open and welcoming, with a near unanimous recognition that greater transparency, with regard to PA assets, would benefit the Palestinian economy as well as the general populace.  Businesses generally welcomed us into their offices and workspaces, with only a few exhibiting caution about our purpose and motives.  In a few cases, some representatives of the assets hesitated and stalled for many months, particularly those formerly held directly by the PA through the Ministries. The lack of financial data, up to date statements, infrequent budgets and other pro-forma results of operations, also hindered the evaluation process of some assets.

Investments in foreign countries were significantly more transparent, and documentation and public records were more accessible.  Assets managed by the Palestinian Commercial Services Corporation and other investment funds, for example, generally had significantly more defined operations, complete files, accessible information, and professional management than most private sector enterprises in the region.  The management and staff of the PIF extended considerable assistance throughout the process.

In contrast, the majority of the assets controlled through the Ministries lacked consistent demarcation of operations, professionally prepared financial information, and clearly articulated objectives, as well as a general consensus of legal mandates.  As a result, the identification, gathering, and analyzing of information was exponentially more time consuming.  Some of these companies are the subjects of on-going work.

In order to facilitate the collecting and collating of data on individual investments and their relationship to the PA, the Democracy Council developed a primary data input form for each investment.  Following collection of the primary and secondary data, and provided that the asset then met the general criteria of the PIF without need for rectification, the asset would then be valued by Standard & Poor’s, followed by the necessary legal claim for the PIF as the owner. The final step was adding the new asset to the PIF portfolio.   We worked with the management of PA assets and the PIF to streamline the investment portfolio, and consolidate many of the indirect investments into more transparent direct equity interests.

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Selected Transparency Findings

The investments in Palestinian companies and projects cover the full spectrum of asset classes, including public securities, direct investment in operating companies, and investment in private equity and real estate funds.  Compared to the operating companies, the Palestinian holding companies were generally professionally managed (e.g. APIC, PADICO, Peace Technology Fund). For their respective subsidiaries, research was generally conducted in collaboration with the management of the holding companies.

Obtaining information and clarification on specific issues from the management was more difficult for many of the stand-alone companies. In many cases, it was necessary to contact management numerous times, repeating and restating our requests in order to speed up the process of data collection.

By design, the findings of the “Transparency” process were more qualitative than quantitative.  The primary purpose of the diagnostic process was to provide the Palestinian Authority and the Palestinian citizenry critical information regarding the placement and use of their investments.  However, for the objectives of this report, we categorized our findings into a summary calculation of whether for the PIF each asset was “Accepted,” Not Accepted,” or “Accepted with Qualifications” (e.g. Pending Privatization or Liquidation).

With few exceptions, the existing assets met the “Accepted standards of transparency and governance” required by the Fund, following: 1. Acceptance of the transparency Diagnostic by the Board of Directors, 2. Valuation by an independent firm, 3. Public dissemination of the Diagnostic and Valuation reports by the PIF, through their website.

Some investments met the basic standards of transparency and governance necessary to be transferred into the PIF, provided that some corrective actions would be implemented in order to reach generally accepted standards for public investments.  For example, one asset was accepted pending resolution of legal matters, including disposition of allegations of fraud perpetrated by previous officers, and a realignment of the Board of Directors.  Other indirect investments were transferred and/or consolidated into publicly reported direct investments by the PIF.

Investments that did not meet the minimum standards of transparency or governance were deemed “ Not Accepts.”  For instance, one example of a “Not Accepted” holding was the Transparency Diagnostic for the General Petroleum Corporation.

The Democracy Council Transparency Diagnostic showed a lack of transparency and accountability and noted various aspects of internal corruption and lack of accountability within the General Petroleum Company (GPC) – the government controlled monopoly of the petroleum sector in the Palestinian areas.

The Democracy Council report advised the PIF and Minister of Finance on general restructuring and reform of the petroleum sector.  Resulting action included placing the petroleum monopoly under the control of the Ministry of Finance, which eliminated its ability to undertake quasi-fiscal operations, and following a pricing strategy that, by seeking to eliminate the Corporation’s profit margin, has led to a sharp curtailment of smuggling. As a result, officially sanctioned sales of petroleum products rose substantially (by more than 300% for some categories), leading to an increase in oil tax revenues that has considerably exceeded the loss of monopoly profits enjoyed prior to reform.

Previously the Petroleum Corporation took fees on each container of lubricant oil (30 percent in the West Bank and 20 percent in Gaza); these fees were cancelled and the Corporation’s authority revoked regarding this sector.  This resulted in many positive developments, including: eliminating the monopoly on engine lubricants; eliminating the corruption, conflict of interests, and related activities within the sector lowering the retail price of petroleum products; divesting of non-related assets, such as the Universal Computer Company, that were previously housed within the GPC; streamlining operations; instituting basic accounting financial controls while working towards issuing a comprehensive consolidated audit report; significantly reducing smuggled and tampered products; etc. The resulting boost in volume translated into a significant increase in revenue going to the Ministry of Finance, and an increase in the quality of petroleum products in the market, while minimizing the widespread smuggling operations.

Following a decision by the Board of Directors, the Ministry of Finance also assumed control over the Tobacco Authority. The restructuring moved the PNA from commercial activities into a primary regulatory role, thus not qualifying the Tobacco Authority for entry into the PIF portfolio.

In March 2003, the newly appointed Minister of Energy & natural Resources facilitated access to basic information, enabling a basic diagnostic to be completed on the Gaza Electricity and Marketing Company (GEDCo) after the previous minister denied the Democracy Council access.  The Diagnostic for GEDCo identified a lack of controls, policies and procedures, and poor administration, as well as a conflict of interests within the management, and an opaque ownership and governance structure.  Our findings also concurred with other reports, identifying noncompliance with Palestinian Law and regulations.  There, we recommended that the enterprise undergo significant restructuring and not qualify, at that time, for entry into the PIF.  When GEDCo is successfully restructured and relationship to the PA/ownership clarified, acceptance into the PIF should be revisited.

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Selected Project Milestones

1999

The Palestinian Authority (PA) announces that an independent special purpose company would be established to identify and manage all commercial assets controlled by the PA.  Outside governance and financial consultants, led by the Democracy Council president, are retained to provide independent assistance and counsel regarding the structure, mandate, and operations of the special purpose company.
 

The consulting team begins drafting operating documents, based upon international standards of transparency, accountability, governance, and risk management, to be codified in an Articles of Association and Policies & Procedures Manual that will set the mandate and operational guidelines for the new company.

October 2000

Palestinian Presidential decree establishes the formation of the Palestine Investment Fund (PIF), as a separate special purpose legal entity, to own and manage all PA commercial investments and assets.  In addition to serving as a vehicle to promote transparency and accountability, the PIF will also seek to stimulate private sector investment (both domestic and foreign) to achieve sustainable long-term economic prosperity for Palestine.

August 2002

Consultants present a draft Articles of Association and a Policies & Procedures manual to PA representatives.
 

Presidential decree approves the Articles of Association, as drafted by the Democracy Council.
 

A Board of Directors of the PIF is named, the majority of whom are representatives from the private sector. Salam Fayyad is approved as the Chairman.
 

The Directors convene and approve the amended Articles of Association and Policies & Procedures manual drafted by the consultants.
 

The Democracy Council-led consulting team works with the management of the PIF to begin compiling the first comprehensive list of all the PA financial assets.
 

The Democracy Council initiates the Transparency Diagnostic evaluation process by conducting on-site visits and secondary research on each asset deemed appropriate under the Articles of Association.
 

Standard & Poor’s begins a process of valuating each asset following submission of the transparency diagnostic.

January 2003

Details of the PIF and the financial reform project are released at the World Economic Forum's Annual Meeting.  These include the agenda of the reform effort, including the legal foundation, assets, and operating guidelines and regulations for the Palestine Investment Fund.
 

Salam Fayyad, the Minister of Finance and Chairman of the PIF announces that the ‘The Fund, and its strict operating regulations, constitute a major milestone in the financial reform process. "We have agreed to adhere to, and are already implementing, the highest levels of internationally supervised accounting and transparency standards as laid out in the Articles of Association,”

February 2003

• The Board of Directors of the Palestine Investment Fund (PIF) releases financial and corporate details about the PNA’s commercial activities. The 345-page report (http://www.palestineinvestmentfund.com/lasse.asp), presented to the Board of Directors by the consultants, includes:
   
  
• • A list of assets owned or controlled by the PNA, consisting of 79 commercial investments.
     
  • Valuation and Transparency Diagnostic reports by the Democracy Council and Standard & Poor’s on the first group of ten assets.
     
  • A listing of current bank accounts formerly controlled by the Palestinian Commercial Services Company (PCSC).

March 2003

• The PIF Board of Directors asks the Democracy Council to assist in developing a new, more transparent and accountable (effective) logistics management program for the Gaza border sites.  The Karni crossing point is selected as a pilot site.  In response, the Democracy Council develops a draft Public Tender and general operating structure for the PA to “privatize” management of the operations.

April 2003

• The PIF begins to transfer legal ownership of the PA’s commercial assets to the PIF.
   
• Based upon reports by the Democracy Council, the PIF board of directors resolves to liquidate or privatize over 20 assets.
   
• The Democracy Council continues to provide the PIF with independent advice on issues relating to governance and conducts an initial training program for the PIF staff on complying with the Articles of Associations and Policies and Procedures Manual.

March 2004

• The Democracy Council asks to provide assistance on internal governance and transparency for the Palestine Investment Fund.
   
• The Democracy Council provides advice on identifying and filling internal PIF management positions, ensuring that operations are conducted in compliance with the new policies and procedures, such as signature authority, auditing, etc.
   
• Based on Democracy Council reports and advice, the PIF begins to eliminate areas of obfuscation regarding ownership/legal control over assets, thereby reducing offshore accounts and special purpose companies, in favor of more transparent direct investments or consolidated accounts where appropriate.
   
• The Palestine Investment Fund (PIF) Board reviews the final valuation and transparency reports prepared by the Democracy Council and Standard & Poors.  The Board and PIF management commits to publicly disclose all the reports by April 10th, 2004. [http://www.palestineinvestmentfund.com/download/Annual report 2003.pdf]
   
• The Board also adopts the Fund investment strategy, giving a priority for national (Palestinian) investments. The PIF Board begins to function as a fully independent entity.

April 2004

• The Democracy Council begins to develop the operating structure and legal mandate of a specialized fund, to provide relief for over leveraged businesses in Palestine, suffering from the economic downturn.

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PIF Articles of Association

(http://www.palestineinvestmentfund.com/articles.asp).  The Articles of Association, based on the best international practices, include detailed stipulations guiding corporate governance commitments, restricting conflicts of interest, instituting adequate oversight and staffing requirements, and a system of checks and balances, as well as such guidelines for managing the Palestinian Authority’s budget making investments, undertaking due diligence reports, and enforcing disclosure standards, and auditing. The PIF’s stated objective, as detailed in the approved Articles of Association, is to promote economic growth and infrastructure development in the Palestinian areas, by placing capital and expertise in strategically important and under serviced sectors.  The PIF management called for the Democracy Council to help implement internationally accepted standards of transparency, administration, and investment management within the PIF.

The Articles further specify the roles of management and members of the Board of Directors.  The PIF must be overseen by a minimum of seven and a maximum of nine Directors, a majority of whom must be from the private sector, in order to ensure that the will and interests of the Palestinian people are adequately represented.  In order to ensure appropriate codification of the Articles, the document was included in the Presidential decree of 14 August 2002. 

• This legal mandate included the Articles of Association, providing for the organization and establishment of the Palestine Investment Fund.  The Palestine Investment Fund was established under the laws of the Palestine National Authority, and as a separate legal entity, to begin operations as provided in these Articles of Association and to have such authority, powers, terms and conditions as are set forth in these Articles of Association.   The Articles also mandate:
   
  • A series of corporate governance regulations, including management of  conflict of interest, anti-corruption, operating policies, new investment qualifications, due diligence requirements, management, reporting, auditing, etc;
     
  • A fair value to each investment;
     
  • A transparency diagnostic be conducted on each investment;
     
  • The empowerment of an independent Board of Directors, a majority of whom must be from the private sector;
     
  • On-going reporting and auditing of the Fund;
     
  • A systematic evaluation methodology for investments;
     
  • Recommended strategies for public disclosure, transparency and accountability.

The Portfolio Investments, Liquid Investments, and Temporary Investments, under the mandate and control of the PIF, would henceforth be managed to promote economic growth and infrastructure development in Palestine.

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Policies & Procedures Manual

Operations of the PIF would be guided by the policies & procedures, as detailed in the operational manual drafted by the consultants based upon international standards of governance, transparency, and public financial management developed by the consultants and approved by the Board. (www.palestineinvestmentfund.com/download/PIFPoliciesandProcedures.pdf)

The manual also served as the basis for a training seminar for the management and senior staff of the PIF.

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