Western Donors Weigh Billions for Palestinians

Times Staff Writer

Top U.S. and European officials will meet with the new Palestinian leadership in London today to consider $4.5 billion or more in new aid that they hope will bolster the Palestinian government, boost the economy and strengthen the drive toward peace in the Middle East.

Pledging money may prove to be the easy part. The larger challenge will be avoiding the corruption that drained the life out of aid programs during the long tenure of Yasser Arafat, who died in November.

Newly elected Palestinian Authority President Mahmoud Abbas and others have begun cleaning house. Reformers in parliament last week forced a purge of nearly all corruption-tainted officials from the new Cabinet.

“But things haven’t changed as much as they need to change, and it is going to be very difficult,” said Danielle Pletka of the conservative American Enterprise Institute, who monitored Palestinian aid programs during a decade as a senior staff member of the Senate Foreign Relations Committee.


Government officials and financial experts in the United States and other donor countries agree. They predict that the struggle over corruption and spending will set off political battles that could last for years.

Many officials also fear that cracking down hard could strain the fragile Palestinian leadership and endanger the whole peace process. Time after time, the officials say, such concerns have led donors to turn a blind eye to corruption.

The Palestinian Authority has received billions of dollars for schools, hospitals, roads and other basic needs in the last decade, one of the most expensive development programs ever on a per-capita basis. But millions of dollars disappeared and the Israeli-Palestinian conflict raged for much of that time, leaving little to show for the money.

As they try to push the peace process ahead, U.S. officials and outside experts say donors are likely to focus on how much to give and how to avoid past problems. One option is to tie funds to specific programs such as building housing in the Gaza Strip to help alleviate overcrowding and create jobs.

Donors could also make funding contingent on reforms such as improving financial accountability. The United States is considering dispatching a special envoy to help ensure that the money is well spent, officials say.

The State and Treasury departments have sent experts to the region, with limited success. Last year, when Congress approved $20 million in direct funding to the Palestinian Authority -- in addition to $127 million sent through the United Nations and private aid groups -- it stipulated that outside auditors must be able to monitor how the money was used. But a few months ago, as Congress considered a request for another $20 million, aides said they learned that U.S. auditors were not permitted to enter the building where they thought the records were.

Secretary of State Condoleezza Rice recently told Congress that the Palestinian Authority urgently needed new aid, including $350 million proposed by the Bush administration in connection with the London conference. However, she added, “I will say that we have no intention of having this money disappear into the night.”

Rice, who will be among foreign ministers from more than 25 countries attending the summit, said it would provide an opportunity to press the Palestinian Authority for reforms. Most of the U.S. money would go toward specific projects that could be monitored closely, and Congress will be consulted, she said.


The Bush administration has asked the World Bank for a study of projects most likely to benefit from immediate infusions of aid. Administration officials also are working closely with Palestinian Finance Minister Salam Fayyad, a former International Monetary Fund official who is seen as a champion of reform. Fayyad will accompany Abbas to the conference.

In the past, U.S. and European officials often appeared more concerned about peace and security than the effects of corruption.

“Many of the violations were swept under the rug with the best of intentions, hoping that in the future, violations would not take place,” said U.S. Rep. Tom Lantos of San Mateo, the ranking Democrat on the House International Relations Committee. “And this eventually led to the total collapse of what at one point appeared like a promising peace process.”

Edward Abington, the senior State Department representative in Jerusalem and the occupied territories from 1993 to 1997, said that during the Clinton administration, “The message to Arafat was: ‘Take care of the terrorists. We don’t care what you do -- lock them up, throw away the key.’


“But very seldom did the president or the secretary of State have a very serious conversation with Mr. Arafat about building institutions, accountability and so forth,” said Abington, now a political consultant to the Palestinian Authority.

Administration officials regard Abbas, a longtime lieutenant who later broke with Arafat, as the best hope of achieving reform. However, most experts believe that Abbas, 69, is not strong enough to do it alone.

The Palestinian government includes “old guard” politicians such as Nabil Shaath who have long been accused of corruption or mismanagement. Shaath, formerly foreign minister, becomes deputy prime minister in the new government. Resistance to reform trickles down to contractors and businesspeople, according to U.S. and European officials.

Abbas needs the support of average Palestinians to push ahead on peace negotiations with Israel. But the economy is hobbled by corruption and mismanagement as well as Israeli border closures and crackdowns that have cost many Palestinians their jobs. Many poor Palestinians also pay high prices for goods and services because of monopolies and sweetheart deals set up by Arafat allies.


U.S.-based experts say Abbas must overhaul dysfunctional agencies and downsize a bloated government payroll of 120,000, which would aggravate the unemployment problem.

“This alone will cost hundreds of millions of dollars,” said Ziad Asali, president of the American Task Force on Palestine.

“He needs to rebuild the foundations of all aspects of his nation, top to bottom,” Asali said in recent congressional testimony. “Without effective external help, he is guaranteed to fail.”

Rice said the Palestinian Authority’s failure to meet basic needs had allowed Hamas to make inroads. The militant group, which the United States has designated a terrorist organization, scored huge victories in recent local elections on an anti-corruption campaign.


“In order to compete politically, the Palestinian Authority is going to have to be able to deliver services and projects that affect people’s lives, and that’s the kind of work that we would hope to do with them,” Rice said during a recent congressional appearance.

Corruption already was a concern soon after Arafat and top Palestine Liberation Organization aides returned to Gaza from exile in 1994 to create the Palestinian Authority. The House International Relations Committee ordered a classified report on Arafat and the PLO from the General Accounting Office’s National Security Division, with part of its focus on corruption. GAO investigators, citing British intelligence estimates, said the PLO had amassed $8 billion to $10 billion in assets by the mid-1980s and was taking in an additional $1.5 billion to $2 billion a year.

Investigators also reported that Arafat began diverting some of the $2.3 billion in start-up foreign aid almost immediately after returning from exile under the Oslo accords.

Arafat defended his use of hidden bank accounts as a means of ensuring that Israel couldn’t seize the funds as a pressure tactic. But U.S. investigators concluded that Arafat also was using aid money to subsidize PLO operations, including payments to the families of suicide bombers and other militants, according to the report. Investigators said Arafat refused to answer questions or allow access to the Palestinian Authority’s books.


The CIA, FBI and State Department wouldn’t cooperate with the investigators, saying that doing so could undermine the peace process and relations with allies, according to a 1995 memo by the GAO’s national security director, Joseph E. Kelley.

By 1997, the Palestinian Authority reported that $326 million, the equivalent of 43% of its annual budget, was missing. Legislators said some of Arafat’s ministers should be fired. Instead, Arafat ordered future audits to be kept confidential.

In 2002, the Israeli government had seized internal documents that it said proved Arafat was using public funds to pay for terrorist activities, usually through the many security forces he controlled. Arafat pledged reforms, including the hiring of Fayyad, who dispatched investigators around the world in search of hidden accounts. Fayyad seized about $900 million and placed it in a Palestinian Investment Fund, now considered a model of accountability.

Virtually none of Arafat’s other reform pledges ever materialized.