Friday, February 14, 2014

Part 10: Palestine Investment Fund--Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them.  This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal.  In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF.  Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This Post considers the Palestine Investment Fund.

The Palestine Investment Fund (PIF) is a small strategic development sovereign wealth fund created through the transfer of assets managed by the Palestinian National Authority.   (Sovereign Wealth Fund Institute, Palestine).  It has also been described as a "private equity and venture capital firm specializing in investments in start-ups, early stage, growth capital, spin-off, and capital raising or business development investments." (Company Overview of Palestine Investment Fund PLC, Bloomberg, Business Week, updated 2-14-2014). 
The fund's rules of procedure state that the PIF is as a limited public company, is owned by the Palestinian people and is independent both financially and administratively. The fund has a board of directors and is an independent public body. The fund manages a number of investment portfolios and specialized companies, which in turn invest in a range of vital projects.
Since 2012, the fund is administered by an 11-member council. There used to be seven members before that. The fund also has a general assembly of 30 members. The fund’s council is headed by Mustafa, who is also the fund’s general director and Abbas’ economic adviser.  (Omar Shaban, Palestinian Investment Fund Needs Reform, Palestinian Pulse, Al-Monitor, May 14, 2013).
Currently Dr. Mohammad Mustafa is the Chairman of the PIF and joined the PIF in 2005. Members of the Board serve 3 year terms and are appointed by the President. " Mr. Mustafa is said to be a trusted aide to Mr. Abbas, and replaced Salam Fayyad in mid 2013 in this role.  (Roger Cohen, Fayyad Steps Down, Not Out, New York Times, May 3, 2013). At the end of 2011, PIF’s Board of Directors was expanded by a Presidential decree to include four new members: Dr. Jihad Al-Wazir, Mr. Maher Al-Masri, Dr. Mohammad Nasr and Mrs. Lana Abu Hijleh." (PIF, About PIF, Board of Directors; (PIF Annual Report 2012, p. 12-13).  The General Assembly of PIF is composed of 30 people. "The general assembly is composed of 30 independent reputable members representing the business community, regulatory agencies and civil society appointed by the president for three years term. The general assembly represents PIF’s ultimate shareholder, the people of Palestine." (PIF Annual Report 2012, p. 10, 14-15).

PIF originated in 2000 and became operational in 2003. "At present, PIF is well-prepared to maximize the assets’ value for its shareholders. Toward this end, PIF is intensifying its efforts to support the transformation of promising investment portfolios in order to restructure itself as a dynamic organization with high institutional standards" (Palestine Investment Promotion Agency, The Palestine Investment Fund).  As of December 31, 2012, PIF controlled roughly $800 million for its activities, making it a small fund. (PIF Annual Report 2012, p. 50). It might appear that the PIF holdings were reported in 2013 as somewhere closer to $600 million by Salam Fayyad, its then director.  ( Maher Abukhater, Palestinian Authority Reveals $600 Million Investments, Democracy Council 2013 ("Revealing the results of a 345-page report prepared by the Los Angeles, California-based Standard & Poor’s (S&P) consultants and the Democracy Council, Fayyad stressed that publication of the report “is a major step forward” on the road toward full financial reforms."Ibid)).

"PIF’s mission is to promote a strong, sustainable and independent Palestinian economy, that will be a cornerstone of the independent Palestinian State with Jerusalem as its capital." (PIF Annual Report 2012, p. 9).  Its vision is to promote sustainable growth in Palestine through in-country investment. (Ibid). Both mission  and vision are complicated by the issues relating to the Palestinian Israeli wars and the shifting objectives of the parties.  "At the same time, Palestine has been experiencing serious financial and economic challenges, predominantly caused by Israeli occupation that has been and remains to be the single largest obstacle inhibiting sustained economic growth, and forcing its reliance on foreign aid."(PIF Annual Report 2012, p. 10).

PIF is organized as an enterprise rather than as a fund account held by a central or national bank. "PIF was established as a public shareholding company, owned by the Palestinian people. It is financially and administratively independent and is governed by an independent General Assembly and Board of Directors." (Palestine Investment Fund, About PIF).  Its operations however, may be conducted either directly or through operating subsidiaries or investment partners. (Ibid). The independence and functioning of PIF has been subject to some controversy, especially within the United States, as a donor nation.  This from a report in 2011:
Yesterday the House Foreign Affairs Committee held a hearing to re-examine U.S. aid to the Palestinian Authority in light of its plan to go to the UN rather than negotiate with Israel. In his testimony, Jonathan Schanzer of the Foundation for Defense of Democracies cited the PIF as an “egregious example” of the abuse of power by PA President Mahmoud Abbas — currently in the 81st month of his 48-month term, ruling by decree since the PA has no functioning legislature:
The PIF’s operating procedures call for the Fund to operate as an independent vehicle for economic stimulus for the benefit of the Palestinian people. In recent years, however, Abbas changed the charter, installed his own choices for board members, placed the PIF under his full control, and neglected to have the PIF audited by outsiders. Today, Prime Minister Fayyad has zero oversight of the PIF, despite his celebrated mandate for transparency.
Schanzer reported Abbas has been borrowing money from the PIF for PA salaries, “repaying the PIF with land that will be used for additional businesses that enrich his inner circle.” A former PA official told Schanzer that if Congress demanded an accounting of the PIF, it would cause an “explosion” — showing corruption at the highest levels of the PA. Schanzer told the Committee that Hamas has taken control of the PIF’s assets and offices in Gaza, and he described how the PA secretly funds Hamas through an electricity scam:
Electricity in Gaza is produced by a power plant that is guaranteed by the Palestinian Authority, but the bills are collected by Hamas. As one former advisor to the PA confides, “the Hamas authorities collect their bills from customers in Gaza, but never send the funds back to the West Bank. And the PA continues to foot the bill.”
Elliott Abrams, in his testimony, expressed the highest regard for Fayyad and said he believes he is a completely honest official, but observed that:
[H]e is surrounded by a Fatah/PLO crew that was thoroughly corrupt when Arafat was alive and I do not believe they have eliminated corruption since. In fact, since 2006 the very large Palestine Investment Fund or PIF has been out of Fayyad’s control, and there are plenty of allegations about corruption in its activities and about self-dealing by its board. You don’t have to spend much time in Ramallah to hear more allegations about growing corruption at the highest levels.
Abrams suggested Congress might demand an investigation of the PIF and require “far more U.S. government pressure to stop the corruption U.S. officials will privately acknowledge exists.” He said it would be a “good way of telling the PLO officials that their caper in New York [at the UN] was a serious mistake and that they will pay a price for it.” (Rick Richman, Who Owns the Palestine Investment Fund, Commentary, Sept. 15, 2011).
While a bit of this posturing before the U.S. Congress is certainly strategically driven within the context of the Palestinian Israeli Wars and the renewed pressures for negotiation of settlement originating in the United States, the issue of corruption and of the autonomy of the PIF, remains one that will likely trouble the SWF. More concrete proposals for reform, some of them quite  reasonable, include:
Without minimizing the fund’s achievements, there is a need for further reforms, both in the administration and investment spheres:
--Mustafa occupies three positions at the same time, thus placing the fund’s transparency and management in doubt, especially given that he also heads the board of several subsidiary companies owned by the fund.
--The fund’s general assembly includes a number of people who have ministerial positions in the Palestinian government or the PLO. Some members in the council and general assembly own large companies with a working relationship and partnership with the fund. That may represent a conflict of interest, especially since the fund operates in the same areas as those of the companies.
--It is not clear how the general assembly members are appointed. Even though the fund is a public company, the fund’s board of directors is appointed by the president and approved by the Legislative Council. The fund’s legal status is also unclear. Is it a sovereign institution affiliated with the presidency or a public company governed by Palestine’s corporate law?
--Some members of the board of directors and the general assembly own large companies with monopolistic contracts in the sectors of telecommunications, insurance, banking, construction and import-export. So the fund may be promoting monopolistic practices, which the Palestinians blame the high poverty and unemployment on. This kind of mixing of political power and wealth has characterized the Arab despotic regimes, against which the people revolted two years ago.
--The fund’s investments include construction, tourism, small- and medium-sized loans, telecommunications and others. The fund invests heavily in construction, especially in high-end residential neighborhoods. Some consider those investments to be laudable attempts by the fund to ease the housing crisis in the Palestinian territories in the face of the spreading Israeli settlements in the West Bank, but think the fund also constitutes unfair competition with private sector companies, especially those working in construction. Moreover, high-end housing projects do not match the incomes of most Palestinians. (Omar Shaban, Palestinian Investment Fund Needs Reform, Palestinian Pulse, Al-Monitor, May 14, 2013).

The focus of its activities are investment within Palestine. "The firm prefers to invest in Palestine region with a focus on Jerusalem, Jordan Valley, and Dead Sea. It also manages portfolio for its clients. The firm invests in the public equity and fixed income across the globe. It can take both direct majority and minority stakes in its portfolio companies."  (Company Overview of Palestine Investment Fund PLC, Bloomberg, Business Week, updated 2-14-2014).  The object is to provide through PIF a structure through which money received can be devoted to a core set of development missions.  "In 2012, PIF started implementing its three year corporate social plan which focus on supporting specific initiatives and programs with clear developmental impact and potential for sustainability. Programs to develop the Palestinian youth and to prepare them for the job market are in the core of PIF CSR strategy." (PIF, CSR). An interactive map of its current investments may be accessed HERE.
 PIF seeks to manage its investments with high competency toward generating real investment returns in the middle and long run within acceptable risk levels. PIF also seeks to create the basis for the construction of a strong national economy by investing in strategic projects that engender significant benefits for Palestinian citizens, most importantly employment generation. (Palestine Investment Promotion Agency, The Palestine Investment Fund).
That has translated into investments that focus on telecommunications, power, tourism, real-estate and hospitality, trade and industry, energy, manufacturing, services, infrastructure sector, capital markets sector, and financial services. (Company Overview of Palestine Investment Fund PLC, Bloomberg, Business Week, updated 2-14-2014).

One of the most interesting projects of PIF involves investment in  areas of Palestinian settlement within the region. 
With President Mahmoud Abbas’ guidance, and in partnership with the “Mahmoud Abbas Foundation”, PIF launched the Empowerment program, which aims to benefit Palestinian refugees in Lebanon. The program endeavors to improve the standard of living of Palestinian refugees by improving their economic and social conditions and by decreasing unemployment rates. (PIF Annual Report 2012, p. 46).
The program goals includes improving the living conditions of Palestinians in Lebanon; establishing Palestinian owned enterprises in those regions; creating new job opportunities; and securing greater economic independence for the target populations. (Ibid).  The object is to fund about 2,000 projects at the initial stage with micro-loans of $500 - $5,000 U.S. (Ibid).

As expected, because of the internal investment objectives of the PIF, it must be careful to maintain close relationships with sponsors, usually abroad.  In a sense this suggests an inversion of the usual arrangement of relationships between SWF home and host states. 
The leaders of Palestine’s Export and investment community are visiting London on 16 and 17 January 2014 to reinforce trade links between the UK and Palestine and attract investment to the nation’s flourishing stock market.
. . . .

The Road Show is part of a strategic drive to increase exports of the Palestinian services sector by promoting potential investment opportunities in the Palestinian economy and portraying success stories of listed companies. It also aims at attracting institutional investors to stocks listed on the Palestine Exchange (PEX), building long term relationships with UK companies, and demonstrating the promising trading environment that Palestine represents.
. . . .
It is noted that the road show is part of the Trade In Services Project, a 2011 year initiative funded by the European Union (EU) and implemented by the Palestine Trade Center (PalTrade) in partnership with the Palestinian Ministry of National Economy (MONE) under the Trade Diversification / Competitiveness Enhancement Program. The Project’s main objective is to support and empower the services sector within the Palestinian economy. This sector holds a great potential both domestically, in the context of economic diversification, and internationally, through regional integration with neighboring countries and third markets such as the EU. This project essentially supports the efforts by the government and private service sectors in realizing business potential and contributing to the development of the national services export strategies. (Senior Delegation To Visit London To Promote Palestine Investment Opportunity - National Export Body (PalTrade) And Palestine Stock Exchange To Lead Mission Dec. 23, 2013)
In a sense, then, the PIF begins to acquire the character more as a vehicle for the disbursement of foreign aid than as a means of channeling sovereign wealth.  The context may make this inevitable in this time in Palestinian history.  But in a sense, the PIF is most interesting for the possibilities it offers as a means of serving as a "reverse" SWF.  If the PIF is able to build string institutional structures, it might then well serve the state of Palestine as it seeks to arrange its economy and find a means of both internal development and avoid the corruption that sometimes attends to the inbound flow of aid funds.

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