Erosion of Respect for Palestinian Authority

At the beachfront headquarters of the Al-Bahar company, lush gardens, colorful cabanas and a bar boasting Gaza’s first belly dancers provide an oasis for this city’s moneyed elite.

But critics say the powerful enterprise, owned by Yasser Arafat’s Palestinian Authority, is a symbol of corruption, a firm that has ballooned by sweeping competitors aside and benefiting unfairly from top-level connections. Now officially public, Al-Bahar was registered until recently as a private business owned by the directors-general of Arafat’s office and of his finance ministry.

Nearby, in Gaza City’s best district, an armed sentry keeps watch outside a stately villa built by Mahmoud Abbas, Arafat’s deputy and likely heir. The lavishly decorated home features semicircular stone balconies and wood trim, which are luxuries in impoverished Gaza--but not for top Palestinian officials, many of whom are putting up grand dwellings citywide.

On Gaza’s dusty, pitted streets, trucks of the authority’s monopolies carry imported gasoline, cement and flour to consumers who must now pay more for such basics. But revenue from the items does not appear in the Palestinian budget, where it could be reviewed by lawmakers and international aid agencies; it is, instead, diverted to accounts outside the control of the authority’s own finance ministry.

Marwan Barghouti, a Ramallah lawmaker who is close to Arafat and who heads his Fatah faction in the West Bank, does not hesitate as to what to call such problems: “We have corruption. I have full confidence in Mr. Arafat and that he is not personally involved. But why does he allow this?”

Other Palestinians are less charitable. “Ali Baba and the 40 thieves,” a prominent Nablus resident scoffed of Arafat and aides. “In other countries, people who work this way go to prison. In ours, we put their pictures on the wall.”

Across the Palestinian-controlled territories, there is growing concern and angry cynicism about conflicts of interest, monopolies and brazen displays of wealth in the Palestinian Authority. Three years after the self-rule government assumed power in Gaza and parts of the West Bank, Palestinians are increasingly critical of their own leadership.

Most stop well short, however, of accusing Arafat--whom one refugee camp resident described as a national symbol, “like the Palestinian flag”--of complicity. The Palestinian leader is renowned for a relatively modest lifestyle and is seen as having little desire to enrich himself.

But that view does not hold true for the cadre of Palestine Liberation Organization officials who accompanied Arafat to Beirut and Tunis, Tunisia, and returned with him from exile in 1994.

“We have our own economic mafia that is trying to become rich by exploiting the authority’s weakness,” said Hatem Abdel Qader, a Fatah member and outspoken Jerusalem legislator who terms the situation a “catastrophe.”

“We are not afraid of Israel as much as we fear our own internal situation,” he said. “This is destroying our economy and establishing two classes: one that is very poor and one that benefits.”

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There is reason for concern. An internal audit, announced May 23, showed that the Palestinian government, through its ministries and official institutions, squandered or lost $326 million--a sum equal to about 40% of its 1997 budget.

The audit, of which only an outline has been made public, was praised by Western diplomats and Palestinian leaders as a laudable effort by a fledgling democracy still learning to police itself and its money. But it was criticized, too, for errors and misstatements that several said magnified the scope of the problems.

A relatively small percentage--$10 million to $15 million--was unaccounted for, according to a diplomat who works closely with the Palestinian Authority. Much of the rest involved revenues forgone in the hope of encouraging development or taxes the authority chose not to collect, including import duties on cars owned by returning Palestinians. “It didn’t mean money stolen from the budget,” he said.

Still, the audit, commissioned by Arafat and overseen by Jarar Kudwah, who is related to the Palestinian leader by marriage, overlooked serious irregularities in the Palestinian budget and economy, according to legislators, Western diplomats and international agencies that assist the young government.

Those interviewed said the most problematic areas include: authority bank accounts outside the control of the finance ministry; the involvement of top Palestinian officials or their relatives in companies that receive hefty government contracts; and authority-run monopolies that stifle competition, driving prices of many commodities higher and higher.

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Nabil abu Rudaineh, Arafat’s spokesman, said he could not comment on specifics of the audit report or the broader allegations of corruption. He noted that the audit had been ordered by Arafat, who has asked a panel of Palestinian academics and judges to study its findings and return with recommendations this month.

But Abu Rudaineh said reporters, particularly the Israeli media, were using the report to “smear” the Palestinian Authority and distract attention from what he termed more serious problems, including Israel’s expansion of Jewish settlements on occupied land and the 4-month-old crisis in the peace process. “If there is any wrongdoing found, nobody will keep silent,” he said. “We will follow it up and take action.”

As for the Al-Bahar company, it would be tough to ignore.

Critics describe the multifaceted firm as the most egregious--and most visible--example of the Palestinian Authority’s unhealthy tendency to blend government and business. Al-Bahar (“The Sea” in Arabic) gobbles up smaller companies, takes over buildings--like the city’s Shawa Cultural Center--and never seems to submit a public bid, they say.

At the company’s pleasant beach club, Hashem abu Nada--Al-Bahar’s former co-owner and now its general director and board member--seats himself under a colorful striped awning, faces the glittering Mediterranean and orders a round of lemonade. Yes, said Abu Nada, director-general of the Palestinian finance ministry, he knows of the public clamor about the company, which has interests in real estate, a medical center, an advertising agency, a gravel factory, a hotel and a horse-racing club.

He knows that legislators have invented a scathing label for it, claiming that it should be viewed not as the “sea,” but as an ocean that has engulfed the narrow strip, washing away all competitors. “They are jealous because we grow so big, so fast,” he said, noting that the company now employs about 400 people. “We are working 18 hours every day--like donkeys--to build this country, to bring the dollars here from outside, every way we can.”

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Abu Nada, former controller of the PLO, glossed over the criticism, dismissing some aspects, ignoring others. “The company is implementing the policies of the government,” he said. “We are trying to change the mentality of the people, and some people don’t like that.”

Until mid-June, he confirmed, the company was registered in two names: his own and that of Ramzi Khouri, director-general of Arafat’s office. Even then, all profits--of which there have been few, he said--went to the Palestinian Authority, although not to accounts under the control of his ministry.

But now, increasing complaints have forced it to go public, officially. Re-registered in the name of the government, the company’s profits will now go into the Palestinian budget, he said.

Abu Nada said he saw no conflict between his role in the once-private company and as a top official in the Palestinian government. “I wear two hats,” he said.

Others do, too. Either personally or through relatives, many top-ranking officials are involved in private companies that do business with the Palestinian Authority. For example, Nabil Shaath, the authority’s planning minister, has several private businesses; his son heads Team International, which signed a contract with the authority to install its first computer network, the Israeli Haaretz daily reported recently.

“These are clear cases of conflict of interest,” said Hisham Awartani, a leading Palestinian economist. “This should be addressed in a civilized way: The Palestinian Authority should say, ‘Thank you,’ to these gentlemen and ask them to leave their public sector roles.”

Awartani, who heads the economics department at the Nablus-based Center for Palestine Research and Studies, recently oversaw a study of the Palestinian Authority’s cement monopoly. That enterprise is headed by Mohammed Rashid, Arafat’s senior financial advisor. Created in 1995, the monopoly has kept the price of cement artificially high, the center’s report concludes, “on account of the dire need of the Palestinian National Authority for cash revenue.”

The Palestinians also created many other monopolies--in collaboration with firms in Israel--to import gasoline, paint, steel, meat, flour and other basics, which have sent prices soaring. Most are controlled by senior Palestinian political or security officials.

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Diplomats and others with knowledge of the authority’s finances said the reason is easy to see: a pressing need for money to support Arafat’s vast security apparatus of more than 30,000 police and his rapidly expanding bureaucracy, without raising taxes.

The funds are also used for political reasons, they said, including keeping potential rivals inside the fold and for support payments to families of dead fighters--the Palestinian equivalent of a widows’ and orphans’ fund.

The monopolies’ earnings are placed into five accounts outside the purview of the finance ministry--four in Palestinian banks in Gaza and one, controlled by Arafat and Finance Minister Mohammed Zuhdi Nashashibi, at an Israeli bank in Tel Aviv.

The Israeli account, originally authorized by slain Prime Minister Yitzhak Rabin, Arafat’s partner in the peace process, receives millions of shekels each year in tax revenues that Israel collects and refunds to the Palestinians under terms of their peace agreements. The existence of the account was detailed last year by the Israeli newspaper Haaretz, and promptly criticized by Israeli Prime Minister Benjamin Netanyahu.

But several diplomats said Netanyahu’s comments were unfair, assuming that he knew of the state’s involvement in approving the account. “The conclusion is inescapable that all this was set up and encouraged by Israel, and that it has served to hurt the Palestinian Authority by distorting its economy,” a senior Western official said.

A recent International Monetary Fund report stated that up to a quarter of the Palestinian Authority’s domestic revenues is diverted into the accounts, a practice that the authority had promised to stop by last March. “There is a delay now, but our perception is that the authority will do this soon,” said Salam Fayyad, the IMF’s representative in the West Bank and Gaza. “We recognize the challenges the authority faces.”

Western diplomats said the existence of such accounts--and the difficulty in tracking them--makes it difficult for the Palestinian Authority to have much credibility when it asks the United States and other donor nations for help in resolving its budget deficit, as it recently did in Washington. It was turned down.

“This situation is not good or laudable, but it’s understandable,” said one diplomat with knowledge of the accounts. “This is a government that very recently was a revolutionary organization. It may be some years to come before it can operate as a normal government. . . .”

The Palestinian legislature, which appointed a committee to investigate the recent audit and the broader corruption allegations, is scheduled to debate the issue, maybe as early as next week. Qader, a committee member, said legislators are likely to call for economic reforms, which, he admits, will almost certainly not be implemented.

Arafat has ignored virtually all the laws and resolutions the legislature has sent to him since its formation.

Qader and other members of the increasingly feisty legislature, which recently challenged several top ministers on their spending habits, said the audit was intended to deflect growing concern on the street about misuse of public money.

In fact, it may have heightened public unease.

A recent poll of Palestinian residents of the West Bank and Gaza Strip showed that nearly two-thirds believe that corruption exists within the Palestinian Authority. Most worrisome for the Palestinian leadership, almost 52% of those surveyed said they would support a legislative vote to bring down the government, based on the audit’s findings.

Public disillusionment is particularly strong in Gaza, an underdeveloped 140-square-mile sliver that Arafat in 1994 promised to transform into a “new Singapore.”

With nothing remotely similar in sight, Gazans blame Israel for the deadlocked peace process and for the economic damage wrought by frequent border closures that disrupt trade and keep thousands of Palestinians from jobs in Israel.

Unemployment across Gaza and the West Bank stands at more than 20%, while per capita income levels have plummeted almost 40% in the past four years, a recent United Nations report said.

But many Gazans blame the Palestinian Authority because few here, either the native-born elite or the refugees who make up most of the population, have benefited economically from the arrival of the Palestinian leadership.

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In the Shati refugee camp, several men sat in a dilapidated courtyard one recent afternoon. Over a glass of sweet orange drink, an elderly man launched a verbal assault.

The Palestinians’ economic problems are the fault of the United Nations, he raged. Or the U.S. Congress. Or Israel. But the youngest man, a 37-year-old engineer, held up his hand.

“It’s our Palestinian Authority,” he said slowly. “We are very angry about corruption in the authority, and we cannot blame Israel for this, or the Security Council. It’s our own internal issue.”

Saida Hamad and Fayed Abu Shammalah of The Times’ Jerusalem Bureau contributed to this report from Ramallah and Gaza City.