January 7, 1999 Inquiry & Analysis Series No. 10

The PA Economy (I)

January 7, 1999 | By Yigal Carmon and S. Lakind*
Palestinians | Inquiry & Analysis Series No. 10

Two of the primary assumptions underpinning the Western approach toward the Middle East peace process are that economic well-being leads to peace, democracy, and stability and that the Palestinian Authority (PA) - if granted Western financial aid - would create a free market economy. Thus, foreign aid to the PA has become a vital component of the peace process.

Since its establishment in 1994, the PA has received $1.8 billion in foreign aid and enjoyed political as well as economic self-rule. After receiving foreign aid for several years, it is appropriate to assess the PA's economic policies and their consequences. This study examines the economy emerging under PA rule. Part I focuses on the system of monopolies created by the PA and on the role assumed by Arafat's economic advisor, Muhammad Rashid, as Czar of the PA economy. Part II investigates the PA's deficit and corrupt financial management practices.

The PA's failure to establish a free market economy in the territories under its rule reflects the emergence of a non-democratic rule. This development bears implications beyond the issue of US foreign aid. It concerns the American attitude towards the peace process as well as the foreign policy and values of the United States.[1]

The System of Monopolies

Ownership of the industrial enterprises in the pre-Oslo Palestinian economy was to some extent, decentralized. The post-Oslo Palestinian economy, on the other hand, is characterized by an opposite trend. Control of the Palestinian economy is now being centralized under a few large corporations connected to the PA administration.

Since the establishment of the PA, scores of monopolies have been created by Arafat and are being operated by individuals and organizations close to Arafat.[2] These monopolies control and subvert almost every potentially profitable aspect of daily Palestinian life. Monopolies are sometimes granted to people who are not as close to Arafat, but these are generally less profitable enterprises. For example, 40% of the monopoly for sand was granted to the 'Veteran Warriors Association', an organization comprised of Arafat loyalists.[3]

The PA itself is directly involved with several economic sectors in which it does not allow private enterprises to operate.[4] This centralization and control of major sectors of the economy has caused foreign and Palestinian Diaspora investors to avoid the territories under PA control. The main players in the PA's system of monopolies are PADICO and Arafat's economic advisor, Muhammad Rashid.

PADICO - The Arch-Monopoly

The prime example of this combination of monopolistic practices and government involvement in them is The Palestine Development and Investment Company (PADICO), a private company registered in Liberia. PADICO has eight affiliated subsidiaries and continues to systematically obtain dominance over key strategic sectors in PA economy. Operating with official PA backing, PADICO dominates the PA economy through a network of confidants who are appointed as members of interlocking Boards of Directors of both PADICO and its different subsidiaries.

PADICO's commercial activity includes primary ownership and control of its subsidiaries. It owns more than 49% of the shares in four of its eight subsidiaries, a violation of its own by-laws[5]. In the industrial development sector, PADICO owns 93% of The Palestine Industrial Investment Company (PIIC). In the tourism industry, PADICO owns 85% of The Jerusalem Tourism Investment Company (JTI) and 57% of the Palestine Tourism and Investment Company (PTIC), in October 1997, JTI and PTIC were merged.[6] In the finance sector, PADICO owns 80% of the Palestine Investment and Economic Development Market (PIEDMC), and 70% of the Palestine Security Exchange Market (PSEM).

PADICO does not yet own the majority of shares in its other four subsidiaries: PADICO owns 49% of The Palestine Real Estate and Investment Co. (AqariA); 30% of the Palestine Information and Technology Co.; 23% of the Palestine Telecommunications Co; and has a $1 million investment in the Palestine Electric Co. PADICO is acquiring control over its subsidiaries gradually. Last year, PADICO has acquired primary ownership over the PIIC and merged JTI and PTIC thereby setting precedence for future mergers and acquisitions of controlling shares.[7]

The strength of the PADICO-PA relationship became evident in April 1996, when the PA passed the telecommunications law that, among other things, required competition in the Palestinian telecommunications market and protected previous agreements. This bill protected agreements signed in October 1994 with International Technologies Integration (ITI) and American Telephone and Telegraph (AT&T), that awarded them rights to operate in the Palestinian telecommunications market. In November 1996, the PA awarded The Palestine Telecommunications Corporation (PALTEL), the exclusive rights for telecommunications services in the Palestinian territories. ITI has sued the PA for $18 million in US Federal Courts and has already been awarded the full sum. However, the PA is contesting the award on the grounds, according to Arafat's economic advisor, Muhammad Rashid, that Arafat did not know what he was signing when ITI was granted the contract because of his poor English skills.[8]

The Palestinian economy is also characterized by nepotistic tendencies. The Al-Masri family dominates the boards of PADICO and its subsidiaries. This prominent family, originally from Nablus, has branches in Jordan, Saudi Arabia and Egypt, as well as Europe and the US. The PA's Minister of Commerce, Maher Al-Masri, and the primary owners of PADICO, Sabih and Munib Al-Masri, are cousins. Munib Al-Masri, the Chairman of PADICO, is on the Board of Directors of the Arab Bank, an investor in PADICO. The Arab Bank is on the board of PADICO subsidiaries PTIC, AqariA, and PALTEL. Sabih Al-Masri, a member of PADICO's Board of Directors is also on the board of the Cairo Amman Bank and is part owner of Al Massira Investments, two of PADICO's owners. In addition, he is on the board of PADICO's subsidiary PSEM. The Cairo Amman Bank is on the Board of PADICO subsidiaries JTI, PTIC, AqariA, PIIC, and PALTEL. Al-Massira Investments has a seat on the Board of JTI. Munib Al-Masir's children also are on the Boards of PADICO subsidiaries; Rabih Al-Masri has a seat on the Boards of JTI and PTIC and Dina Al-Masri has a seat on PIIC.[9]

In the U.S., Hani Al- Masri, is Arafat's confidant in Washington, D.C. The Al-Masri family owns many other economic projects in the PA, outside of PADICO, such as the Palestinian newspaper, Al-Ayyam[10], which is scheduled to receive a $1.8 million loan from the World Bank.[11]

The Czar of PA Economy - Muhammad Rashid

Muhammad Rashid (aka Khalid Salam), guides the PA's economic policies. In his capacity as Arafat's top economic executive and advisor, he takes part in all international economic negotiations, and concurrently retains sole control of The Palestinian Commercial Services Company (PCSC), which is claimed to be government owned, but has been operating for years without a board of directors and without ever having been registered. Through this company, Rashid operates monopolies on the import of at least four primary commodities: cement, flour, oil and cigarettes.[12] Rashid is said to own 30% of the newly established casino in the PA controlled area in Jericho. The Authority is to receive 25% or more of the casino profits in tax revenue after it returns on its initial investment. Rashid has refused to comment on his role in the venture.[13] In addition, he controls Sky, an advertising company that operates as a monopoly,[14] and a private company called Al-Bahr.

Very little is known about the details of Rashid's economic activity due to the secretive manner in which he operates. When asked about his involvement in these monopolistic practices in an interview with the Palestinian newspaper Al-Quds, he gave inconsistent responses. At one point he said, "What we are doing is done by most governments in the world. (They) place such commodities under governmental control for economic reasons." At another he said, " I defy anyone individual, corporation or investor to say that I, or anyone else have forced these conditions [business practices within the PA] on them."[15] But as early as February, 1996, it had been reported that no venture or large business transaction could be executed or approved without Rashid's consent.[16]

Rashid is not always the beneficiary of the monopolies under his control. For example, the primary beneficiary of the cement import monopoly is Yasser Arafat's wife, Suha Arafat.[17] Apparently, she receives a percentage per ton import of cement and justifies this practice by claiming that the money benefits her charity for children. The primary beneficiaries of the oil imports are the 'Preventive Security' apparatuses and their heads, Colonels Muhammad Dahlan in Gaza and Jibril Rjoub in the West Bank. The oil imported to the PA from Israel has come under investigation for fraud by the Israeli police, Israel's revenue service and the Israeli Customs Department. In addition, the three oil companies that supplied the territories prior to the PLO's arrival - Paz, Delek and Sonol - and were replaced in 1994 by the PA favored fourth Israeli company, Dor, have filed a civil suit against the PA in Israeli courts.[18]

The practical implications of these monopolistic practices, coupled with the familial connections of PADICO, are a deterrent for anyone who wishes to invest in the PA. If, despite these obstacles, one obtains a license to operate in the PA: one must still go to PADICO for space in the industrial zone; pay rent to PIIC/PADICO; pay telephone charges to PALTEL/PADICO; pay electric charges to Palestine Electric Co./PADICO; pay development taxes to AquariA/PADICO; and eventually operate via the stock market owned by PSEM/PADICO etc.

*Stacey Lakind is a Research Associate with MEMRI. Yigal Carmon is the President of MEMRI.

[1] Any study of PA economy is hampered by the lack of credible and accurate information. The PA does not provide public financial records, or ownership and registration data, etc. The Palestinian media is not a credible source for economic information and sometimes it provides contradictory facts. This lack of information is due to Arafat's refusal to allow economic transparency. Since the signing of the Oslo Accords, donor countries and international financial organizations have failed to commit the PA to transparency in its finances. Arafat offered a substitute in the form of an 'independent' American committee that would operate under the auspices of the Council of Foreign Relations. However, this committee was merely a political figleaf to circumvent the demands for transparency. It was comprised primarily of Arafat's friends in the US, including Hani Al-Masri, who is personally involved in transferring American aid to the PA and, therefore, should be subject to such oversight. In November 1997, the Overseas Private Investments Corporation (OPIC) chose Hani Al-Masri and his private company, Capital Investment Management Corporation (CIMC) to manage a $60 Million loan for the PA and Jordan. Forward, December 11, 1998; "OPIC Signs Protocol for $60 Million Private Equity Fund in Gaza, West Bank and Jordan Projects", OPIC Press Release, November 17, 1997 and "OPIC's Politically Connected Investors Can't Lose as U.S. Taxpayers Shoulder the Risks", Center for Responsive Politics,, January 15, 1998.

[2] According to a thorough investigative report on the PA economy in the leading Israeli newspaper, Ha'aretz, US State Department sources believed in 1997 that there were 27 monopolies in the PA. Ronen Bergman and David Ratner, Ha'aretz, "The Man Who Swallowed Gaza," April 3, 1996.

[3] Al-Quds, September 30, 1998.

[4] A thorough discussion of this issue can be found in Fadhl Al-Naqib's book, "The Palestinian Economy in the West Bank and Gaza," Center for Palestinian Studies, Jerusalem, April 1997.

[5] PADICO Budget Report 1996-1997.

[6] PADICO Budget Report 1996-1997.

[7] PADICO Budget Report 1996-1997.

[8] Newsweek, November 2, 1998. Other articles making reference to these monopolistic practices by Mark Dennis and Christopher Dickey in Newsweek are: "It's All Tribes Now" and "Giving Him the Business" January 28, 1996 and February 5, 1996, respectively.

[9] Other overlapping directorships are: Shukri Bishara (PADICO, AqariA, PALTEL); Munir Khouri (PADICO, AqariA); Hatem Al Halawani (PADICO, PTIC, AqariA, PALTEL, JTI); Zahi Khouri (PADICO, PALTEL); Ramzi Dalloul (PADICO, JTI, PTIC); Nidal Sukhtian (PADICO, PIIC); Nabil Sarraf (PADICO, AqariA); Mahdi Saifi (PADICO, JTI, PTIC); Farouk Toukan (PADICO, PIEDMC); and Khalil Talhouni, (PADICO, JTI, PTIC.)

[10] Al-Ayyam's major shareholders are the Al-Masri family and the Cairo-Amman Bank, which is principally owned by the Al-Masri family.

[11] The Forward, "World Bank Set to Bankroll Paper that Calls U.S. 'Satan'", p.1.

[12] David Hirst, The Guardian, "Shameless in Gaza," April 27, 1997, p. T8.

[13] The Washington Post, October 1, 1998. A30; See also Al-Hayat, September 9, 1998.

[14] The Financial Times, December 2, 1998.

[15] Al-Quds, June 28, 1997, pp. 20-21.

[16] "Playing Monopoly," by Peter Hirschberg, The Jerusalem Report, February 22, 1996, pp. 14-15.

[17] According to the testimony of the Chairman of the Board of Directors of Nesher, the Israeli Cement Industry, as well as high officials in the Israeli Finance Ministry to the Israeli Parliamentary Foreign Affairs and Defense Committee.

[18] Ronen Bergman and David Ratner, Ha'aretz, "The Man Who Swallowed Gaza," April 3, 1998.

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