Nasty Piece of Mideast Business

Flush with optimism after the signing of the Oslo peace agreement, Bashar Masri returned to his homeland to found the Palestinian daily Al Ayyam, never imagining that as chief executive of a $7-million company he might one day have to deliver the newspapers himself.

Hossam Sharkawi came back and helped set up Arabcare Medical Services, the Palestinians’ first HMO, in a spot where armed clashes and Israeli military closures have presented him with problems that “didn’t come up” in management classes at the Harvard School of Public Health.

Tareq Maayah left his job at a Silicon Valley semiconductor firm to start a telecommunications company in Ramallah, not anticipating that the growth of his Hi-Tek Engineering would be limited because Israeli dealers refuse to set foot in Palestinian-ruled areas, while Israel restricts his access to Jerusalem and Tel Aviv.

“I had always wanted to come back to my country and thought this would be a good opportunity for business,” Maayah said. “The reality is, we’re not as close to peace as we thought, and a lot of the obstacles that existed during the occupation are still here.”

Masri, Sharkawi and Maayah belong to a small group of Palestinian entrepreneurs and professionals who returned from the diaspora at the time of or after the 1993 peace accord to help build their country and blaze a new trail for Palestinian private enterprise.

While most of their counterparts have judged the political situation to be too unstable for investment, these thirtysomething optimists bucked conventional wisdom to take some risks.

And risky it has been.

Masri invested in the newspaper and printing company, believing that the success of the peace process depended on the growth of the Palestinian economy. But the reverse also turned out to be true. The near-collapse of the peace process has strangled the economy, causing investments and credit to dry up and limiting the cash Palestinians have to spend on food, let alone a newspaper.

He and the others have built cutting edge businesses that, along with new Internet companies, restaurants, caterers and other enterprises, provide hundreds of desperately needed jobs for Palestinians. But while their efforts are key to the future development of a Palestinian state, they are not nearly enough to salvage the economy from decades of Israeli occupation and siege. Palestinian opponents of the peace process continue to attack Israel with bombs, and Israel has responded with almost continuous military closures around the West Bank and Gaza Strip, resulting in supply shortages, personnel problems, construction delays and other hidden costs that have set business projections back by more than a year.

Residency restrictions imposed by Israel force the returning Palestinian entrepreneurs to enter the country on their foreign passports and leave every three months for a new visa, or to enter as West Bank residents and seek a permit every time they wish to cross a military checkpoint into Israel.

The Palestinian Authority, meanwhile, has been more bureaucratic and less efficient than anyone expected. Infrastructure lags. The promised free-market economy is still highly managed and is driven by mushrooming public-sector companies.

For Maayah, the situation has become a Catch-22 that could put him out of business. The peace agreement prohibits Palestinians from importing foreign communications equipment, requiring them to buy Israeli products. But the Palestinian Authority has responded to the latest military closures with a boycott of Israeli goods, including the telephone systems in which Maayah trades.

All of this leaves Maayah--who grew up in Chicago--wondering if he made the right decision to return here. Some of his colleagues have quit and gone abroad again. He is sticking it out.

“Once you start a business, it is difficult to take it apart. Do I regret it? I can’t make up my mind,” he said. “I am still making money, but soon I may not be.”

Paper Woes

Masri had thought that he was going into the newspaper and printing business with his eyes open to the difficulties of working in a pseudo-state carved into islands and surrounded by Israeli soldiers. He thought that the peace accord was bad for Palestinians, hammered out after their leaders backed the wrong side in the 1991 Persian Gulf War and just as the six-year intifada, or Palestinian uprising, was losing steam.

“When you are the losers, you get a losers’ agreement. But it was an opportunity to show who we are and to build a nation on the ground,” he said.

Masri was born to a prominent Nablus family six years before Israel captured the West Bank from Jordan in the 1967 Mideast War, and he grew up under the occupation until moving to the United States while in high school. He returned to the West Bank in early 1995, surprised to discover that he was one of only a handful of investors coming back.

While figures are hard to come by, economists and Palestinian officials agree that Palestinian investment from overseas has been disappointingly low. Private investment in Palestinian autonomous areas in the three years after the signing of the peace accord totaled about $1.2 billion, of which perhaps only tens of millions came from abroad. Most outside investors who put money into the West Bank and Gaza did not come back.

The largest post-Oslo enterprise is the Palestine Investment & Development Co., a $200-million holding company with real estate, tourism and industrial projects. Most of its major shareholders are Palestinians from the West Bank and Gaza.

Masri and his partners invested about $7 million in modern printing equipment and a new plant. The idea was to sustain the newspaper through its inevitable difficult years with the printing business.

In fact, the newspaper is growing more quickly than expected and the printing operation--the bulk of his business--has suffered.

“I thought it would be bad, but I never thought it would be this bad,” he said.

Masri’s first battle was with the Palestinian Authority to get back hundreds of thousands of dollars in value-added taxes that are supposed to be returned on capital investments. He and his partners spent nearly $5 million in 1995 to build a plant and import their equipment, and they needed cash to continue.

“I know I was a naive businessman coming from the United States. The law says we are to get the money in 45 days. But 45 days passed, then 90 and 100, and we had to stop construction,” he said.

Finally, the Finance Ministry admitted that it did not have the cash and, instead, gave the company credit against future VAT payments. To keep the business alive, Masri had to take in half a dozen new partners.

The paper printed its first edition on Christmas 1995. Two months later, Islamic extremists sent a wave of suicide bombers into Israel, and the Labor Party-led government that had signed the landmark peace agreements responded by sealing off Palestinian cities and villages.

Suddenly, Masri could not get his newspapers out of Ramallah unless he took them himself, using his U.S. passport to get through Israeli army checkpoints.

“I had bought this yuppie Land Rover that I never thought would be useful, I just liked it. But I would come in at about 3 a.m., pack up the car and head north to deliver the paper to Janin and Nablus. . . . Here I was, the CEO of a company with 100 employees and all its problems, and I had to leave work to deliver the paper. I didn’t think it was demeaning, but it wasn’t practical.”

Supplies Held Up

The closure also kept most of Masri’s employees from getting to work and held up supplies at military checkpoints. At the same time, the company was operating on generators--there was no electricity for the first seven months. And the newspaper had no fixed telephone lines, relying on the uncertain reception of cellular phones.

Just when he overcame those problems, the riots of September 1996 broke out. There were armed clashes on the streets of Ramallah between Palestinian police and Israeli soldiers, scores of dead and another military closure.

Masri realized closures were going to be a big, if not permanent, part of his business. To deliver papers, he developed a relay system of drivers, handing off bundles from checkpoint to checkpoint. In some cases, his drivers learned the back roads to circumvent military posts.

He rented some apartments and built others above his plant to house employees during the closures. And he bought a huge supply of newsprint to see the paper through the blockades.

While all of this has meant unexpected costs, Masri estimates that he has reduced the financial damage from closures from about $100,000 a pop in 1996 to less than half that now.

In the first month of the latest closure--which began after the July 30 Jerusalem market bombing, Masri lost about $30,000 in advertising, mostly from Palestinian businesses that cannot afford to pay. But a few companies, such as Philip Morris, increased the size of their ads, aware that circulation rises when Palestinians are stuck at home, prevented from working in Israel.

Masri’s personal problems have taken longer to resolve. He returned here alone in 1995, leaving his American wife and two children in suburban Washington. Their decision to join him was postponed once by the wave of suicide bombings and again by the gun battles last September.

Masri and his wife had just agreed that the family would move here this Christmas when the July Jerusalem market attack occurred. He called home nervously and asked: “Well, what now?” This time, Masri said, his wife answered: “I don’t care if all hell breaks loose, we’re coming.”

So Masri feels buoyed in business and at home. On a recent morning, his presses whipped out textbooks for the Palestinian Authority--his company’s $1.6-million part of a $5-million bid, most of which went to a Jordanian company. His is now the second largest among Palestinian papers. And he rejects pessimistic predictions of the peace process’ collapse into armed combat with Israel.

“I am guessing this will not happen. The risks for both sides are way too high,” he said.

Plenty of Ills

Sharkawi is somewhat less sanguine in the middle of the latest crisis, which has left him paying the salaries of 25 doctors, nurses, receptionists and other personnel for a 23-bed hospital that has yet to open.

“It is really depressing,” he said.

Born in Kuwait, where his Palestinian parents then worked, Sharkawi was raised in Canada on Palestinian songs and national aspirations. As president of the Arab Student Assn. in college, he believed that the Israeli occupation “was a wrong that had to be corrected.”

During the intifada, he quit chemistry research to work for a Canadian charity, Medical Aid for Palestine. So when the newly formed Palestinian Authority asked him to help set up a health ministry, he did not think twice.

He spent a year and a half at the ministry, coordinating international cooperation and trying to upgrade Palestinian health facilities. But frustration with bureaucracy, the lack of a trained technical class and politics pushed him to private enterprise.

“There was not a hospital in the West Bank that I would trust to take my own family,” he said.

He met a group of investors who also wanted to create decent medical services and needed someone to run them.

“It was a chance to realize a dream. We could actually provide first-class facilities that are 100% Palestinian. We could provide a model for how it is done,” he said.

Arabcare opened its doors as an outpatient clinic two years ago in downtown Ramallah. The clinic--the only self-insured HMO available to Palestinians--has 40 doctors on contract, the only nuclear scanner in the West Bank and one of only two MRIs. It does hormone tests, cancer markers and other lab work that no other Palestinian medical facility handles.

Arabcare plans to open a surgical center and 23-bed hospital on the top floor of its Ramallah facility and open another clinic in Nablus this year. Property has been purchased north of Ramallah for a 150-bed hospital that should open in three years.

But the health business is more than a year behind schedule.

“We have had problems with everything. Phones, electricity, sewage, water, garbage collection. We had to dig our own ditches for telephone cables from the main lines to get our connections,” Sharkawi said.

“There is a general lack of confidence of investors. Two years ago, banks were chasing us to make loans. Now when we want money, they say, ‘Well, we need to study this.’ Credit is scarce because of the peace process.”

Riots Delay Opening

Last September’s riots set back the opening of the small hospital once, and the latest regional closure has delayed it again.

“All work on it stopped completely for two weeks when the closure started,” he said. “Now we are stuck paying the staff that had given notice elsewhere to come here. We are paying 25 people who will not even work until late September.”

Hiring has been complicated by a shortage of qualified personnel, as well as the closure. “I was interviewing a candidate for head nurse, and we were down to two candidates. We took the one who does not have to go through a checkpoint to get to work. That was a key factor. I had to ask, can I afford to have an operating room nurse who cannot come in during a closure?”

Like many health providers, Arabcare does not try to compete in all services. It farms some work out to Israel. But because of the political conditions, Israel does not reciprocate.

Israeli patients will not come to Ramallah for X-rays and lab work, even though it is less expensive. Israeli insurance companies will not pay for services rendered by Palestinians in the West Bank.

No one has calculated how many professionals like Sharkawi have come back to work here. Economists say the number is probably in the hundreds. The United Nations Development Program has brought 93 Palestinians into the country through its “transfer of knowledge program,” 18 of whom have found jobs with international organizations and stayed. The rest left again.

At 33, Sharkawi believes that he has more responsibility and fulfillment than he might have doing similar work in Canada. He also has more frustration.

“I feel I am building the state of Palestine and doing something constructive,” he said. “But my moods swing depending on the time of day and when you catch me.”

Missed Connections

When Maayah set up his communications firm in late 1993, Israel still controlled Palestinian cities in the West Bank and Palestinians had relatively free access to Jerusalem. He began tapping into the market in traditionally Arab East Jerusalem.

Suicide bombings and closures put an end to that.

Since Maayah lives in the West Bank as a local resident, using his Palestinian identification number rather than a foreign passport, he is expected to formally request a permit every time he wants to travel the few miles from Ramallah to Jerusalem. Often the permission is denied, as it is to most Palestinian men in the West Bank.

Maayah quickly discovered that neither he nor his employees could serve customers in Jerusalem.

Seeing his suppliers in Tel Aviv or other cities proved almost as difficult. They are afraid to travel to Palestinian cities, which most Israelis have not visited since the intifada began in 1987. If Maayah wants to go to see them legally, he must get a permit.

There is an alternative. He can leave his car, with an identifying blue license plate, at home and hire a yellow-plated Israeli taxi to get him through the military checkpoints, pulling out his U.S. passport if necessary. But that is illegal--a problem if he is caught--and it adds $200 a day to his costs.

Born in Jerusalem, Maayah attended university in Santa Clara, where he earned a master’s degree in electrical engineering. He then went to work in a semiconductor company. Buoyed by the Madrid peace talks that began in 1991, he returned just before the signing of the first peace agreement two years later.

“Initially, things went very well,” he said. “Since September of last year, however, things have gone down.”

In July, nearly a year behind schedule, Maayah sent five of his engineers to a multinational company near Haifa in Israel for training in data communications design. A few days later, the bombs exploded in Jerusalem’s Mahane Yehuda market and all Palestinians were ordered home. A month later, they were still there.

Now, on top of the closure, Maayah faces the Palestinian boycott of Israeli products.

“There is a lot of competition. Everyone is trying to make a living. I am trying to find a niche in the market where high-end systems are required,” the 30-year-old entrepreneur said. “I am not depressed yet, but I could be in the near future.”