Palestine's quest for greenfield FDI

Palestine has not recorded a single greenfield FDI project since 2013, according to investment monitor fDi Markets. Despite this, foreign money is flowing into Palestine – mostly through locally based investment funds and foreign government programmes.

Since the 2014 Gaza war, Palestine has demonstrated signs of economic recovery. GDP growth has increased to 4.1% in 2016, from -0.18% in 2015, according to the World Bank. However, the World Bank’s October 2017 economic outlook report noted that GDP growth in the Palestinian territories slipped to 0.7% in the first quarter of 2017, as a result of high unemployment and declining foreign aid.

Meanwhile, despite the lack of greenfield activity, headline FDI stocks have increased from $609m in 1995 to nearly $2.6bn in 2016 and FDI inflows rose from $103m in 2015 to $269m in 2016, according to data from Unctad. The World Bank and Unctad’s definition of the Palestinian territories both include the West Bank, Gaza and East Jerusalem.

Wealth fund involvement

One of the most prominent leaders on behalf of Palestine's foreign investment campaign is Mohammed Mustafa, CEO of the Palestine Investment Fund (PIF), which operates as a de facto sovereign wealth fund.

The fund, whose goal is to mobilise domestic and foreign private investment to foster economic development into Palestine, was identified in the ‘Panama Papers’ for its connection to an offshore investment company based in the British Virgin Islands with the sole purpose of attracting investment from the Arab world into Palestine.

According to the PIF’s website, the fund’s governing structure features an internal general assembly, which includes both public and private representatives of Palestine. While the fund is not operated directly by the Palestinian National Authority, the PIF’s website says: “Members of the General Assembly are appointed to three-year terms by the Palestinian president.”

Mr Mustafa, who previously served as Palestine's deputy prime minister from 2013 to 2015, describes the PIF as a platform for co-investment opportunities between local and international investors. “We bring investments to a point where foreign investors will find the risk profile reasonable, acceptable and comparable with other places,” he says. “We do that by first being part of any future investments, so we are putting our own money at stake as well.”

The fund reported $1.02bn of assets under management at the end of 2017, up from $856m and $799m in 2016 and 2015, respectively, according to company figures.

Getting mobile

Most notably, the PIF owns a majority stake of 35% in Palestine’s recently established 3G mobile network, Wataniya Mobile. Wataniya, which is owned and operated by Qatari telecom company Ooredoo Group, became available in January after nearly a decade of preparation. “Although [Ooredoo Group] had to wait 10 years, it is really happy to see it happen. It is probably learning that it pays to stick around,” says Mr Mustafa.

Despite the network’s protracted development, Mr Mustafa sees the PIF's “preparation in these efforts as addressing the [concerns] of gutsy or opportunistic investors”. Other partners include the World Bank’s International Finance Corporation and the US Overseas Private Investment Corporation. The fund posted a 4.1% return on assets in 2017, and has returned $800m in dividends to the Palestinian National Authority since 2003, according to its website.

Whereas the PIF relies upon strong coordination with the Palestinian National Authority, other funds operate with independent governing structures. One such fund is the Palestinian Fund Management Company (SFMC), a private equity fund manager headquartered in Rwabi.

SME boost

SFMC was founded in 2003 by Massar International, a Ramallah-based holding company, with the intention of creating growth for local Palestinian SMEs and expanding economic opportunities in key sectors for local Palestinians.

Abdallah Sabbat, SMFC’s managing partner, identifies internal Palestinian demand and export potential as the main components behind the fund’s investment strategy. “The sectors that we have identified as key sectors for our investments are sectors that are driven by the internal growth in GDP or they are exporting to regional or Israeli markets. These are the two things that we are targeting,” he says.

Recently, SMFC launched the Siraj Palestine Fund II (SPF II), a $100m successor fund to the $90m SPF I, which was launched in 2011. According to the fund’s fact sheet, SPF II outlines a “target portfolio of 12 to 15 investments” over a five-year investment period.

As with the PIF, SMFC offers foreign investors opportunities to channel their investments through an intermediary. “We have the US government, which invested in our first fund and hopefully in our second fund. We [also] have investors that are driven by social impact,” says Mr Sabbat. In particular, US religious organisations, including the United Church of Christ and United Methodist Church, have provided financial support. “These churches are driven by the hope of peace in the Middle East,” adds Mr Sabbat.

Targeting ICT

In addition, Palestine maintains direct partnerships with international development agencies and national governments to generate interest among foreign investors. “There are a number of international agencies that have invested in various levels of developing Palestinian civil society,” says Majdi Haj Khalil, the Palestinian commercial trade representative to the UK.

“The UK government [has provided] funding for a number of projects throughout the region,” he adds. “The Department for International Development [DfID] has provided about £21m [$28.5m] in the past five years” to improve “capacity building” in key industries, especially within Palestine’s emerging ICT sector.

Foreign aid inflows into Palestine have declined in recent years, especially over the course of 2017. In particular, the World Bank’s October 2017 report on Palestine’s Economic Outlook found that “aid to the Palestinian treasury declined by 19% [over the course of 2017] resulting in a $167m financing gap”. However, foreign aid totalled nearly $2bn in 2008, with the World Bank predicting total foreign aid to the Palestinian territories in 2017 of about $666m.

Besides financial support, DfID also advises British businesses on the landscape of the Palestinian economy. In January, for example, alongside the Palestinian British Business Council, DfID held a closed door meeting in London with British business leaders “to get the British private sector to generate an interest in working with the ICT sector in Palestine”, according to Mr Khalil. He says the meeting was largely successful, as “the Palestinian British Business Council pledged to start directly contacting the top 20 UK ICT companies and presenting Palestine as an option”.

A commercial creation

Elsewhere, foreign governments have served as primary financial guarantors for civil development projects in Palestine. In particular, Qatari Diam, a sovereign wealth fund operated by the Qatari government, contributed nearly two-thirds of the estimated $800m budget for the creation of Rawabi, Palestine’s first ever planned commercial city.

The city’s developer, Bashar Masri, describes the Qatari investment as the luckiest day of his professional career. Mr Masri, who managed Rawabi’s funding campaign as chairman of Massar International, says: “We identified a number of people [and investors] whose heart is in Palestine. [We told them] ‘it is highly unlikely that you will make good returns on this investment’.”

Besides foreign governments, international financial institutions have contributed funds aimed at strengthening the Palestinian economy. Most recently, the European Bank for Reconstruction and Development (EBRD) announced its first ever investment into Palestine, following EBRD president Suma Chakrabarti’s official visit to capital city Ramallah in March 2018. The EBRD provided $5m to the Cairo Amman Bank Palestine to improve opportunities for Palestinian SMEs and expand local development of the Palestinian economy.

In an official EBRD press release, Mr Chakrabarti said: “[The EBRD] is delighted to begin our operations in the West Bank and Gaza. Supporting small businesses through our first investment is highly symbolic.”

The EBRD board of governors initially agreed on the investment in May 2017. The release stated that Azzam Shawwa, the governor of the Palestinian Monetary Authority, said the investment “creates further job opportunities, advances the development process, and enhances financial inclusion in Palestine”.

Israel is a founding member of the EBRD.

The simpler option

Despite support for foreign investors in the form of funds and government support, the question still remains: can Palestine attract future greenfield investments? In terms of sectors, some argue that ICT is its best opportunity. “We are exporting about $100m-worth of ICT products [a year]. Whether it’s software development, loan processing or initial public offerings, it’s a flourishing industry,” says Mr Khalil. He adds that Palestinian ICT developers’ wages are “almost 50% less” than their nearby Israeli counterparts.

Another sector with potential is agriculture and food. Palestine currently exports nearly £4m in agricultural products to the UK each year, with dates and olive oil being key products. Unlike other investments, agriculture is seen as a relatively hassle-free choice in Palestine, as “you don’t need to build anything, you don’t need a licence, you just need land”, says Mr Khalil.

Rawabi, Jenin and Jericho are all considered potential destination cities for foreign investment. In particular, the Jericho Agro-Industrial Park, a 57,000-square-metres mixed-use site, included 39 signed tenets and six planned factories, as of 2017. The site has received funding support from the PIF, as well as the Japan International Cooperation Agency. Mr Mustafa says the site’s proximity to the Jordan River could be ideal for a future “logistical centre” for trade along the waterway.  

Meanwhile, Jenin, a city in the northern West Bank, is also considered to have particular FDI potential. The city is home to the Arab American University, as well as the 93-hectare Jenin Industrial Free Zone, which has a specific emphasis on agro-food and hi-tech companies. “There is lots of traffic from north Israel,” says Mr Mustafa. “Israelis and Arabs come [to Jenin] not only for shopping, but also as students to the university. There is a hub there.”

Other opportunities

There is a school of thought that increased collaboration with Israel would benefit Palestine’s quest for greenfield investments, especially in the ICT sector. Israel, which attracted record levels of greenfield investments in 2017, according to fDi Markets, could provide Palestine with increased opportunities.

Israeli companies have used Palestinian software developers, such as ASAL Technologies, as outsourcing units for their operations, according to Mr Khalil. “There are joint ICT projects that are won by Israel for the international market [but] are actually implemented by Palestinian and Israeli companies,” he says.

While there are mentorship and internship programmes for young Palestinians in Israel, they are very limited “in terms of exposing [Palestinian] engineers”, says Mr Mustafa. “One of our objectives has been to convince Israeli executives [and] companies to extend their operations into Palestine,” he adds.

Foreign greenfield investments are not new to Palestine. Between 2006 and 2013, fDi Markets reports that the West Bank and Gaza attracted 15 greenfield investments with a total capital investment of $1.21bn and 3174 jobs created. Notable past greenfield investments include French media company Havas ($6.5 m in 2007) and Jordanian IT company Web Tech ($5.8m in 2013).

However, Palestine has struggled to add to or maintain investments. For example, Royal Dutch Shell relinquished its 55% share in the Gaza Marine, an offshore Mediterranean Sea oil field, according to Reuters. Since Shell’s departure, PIF is now the sole stakeholder in the Gaza Marine project, which sits 37 kilometres off the coast of the Gaza Strip. According to the PIF, the estimated $1.2bn project would “enable Palestine to become a natural gas exporter” and contribute an estimated $2bn in proceeds to the economy.

Despite Shell’s departure and the recent investment drought, Palestinians are resolute in their quest for FDI. “We think that we have a greenfield economy with lots of opportunities,” says Mr Mustafa. “There are good opportunities here, but you just have to work hard on them to make things happen.”