VZCZCXYZ0427
PP RUEHWEB

DE RUEHJM #0185/01 0292017
ZNY CCCCC ZZH
P 292017Z JAN 10
FM AMCONSUL JERUSALEM
TO RUEHC/SECSTATE WASHDC PRIORITY 7431
INFO RUEHAM/AMEMBASSY AMMAN 8785
RUEHSW/AMEMBASSY BERN 0176
RUEHEG/AMEMBASSY CAIRO 0018
RUEHTV/AMEMBASSY TEL AVIV 5155
RUEHBS/USEU BRUSSELS
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L JERUSALEM 000185 
 
SIPDIS 
 
NEA FOR FRONT OFFICE AND NEA/IPA; PRM FOR FRONT OFFICE AND 
PRM/ANE; NSC FOR SHAPIRO/KUMAR; DEPT PLEASE PASS TO USAID 
FOR ANE/MEA:MCCLOUD/BORODIN 
 
E.O. 12958: DECL: 01/28/2020 
TAGS: ECON EAID EFIN PREF ENRG GZ IS
SUBJECT: PALESTINIAN AUTHORITY PRESSES GAZA ELECTRIC 
COMPANY TO END ITS DEPENDENCE ON SUBSIDIES 
 
Classified By: Consul General Daniel Rubinstein for reasons 1.4 b, d 
 
¶1.  (C)  Summary.  In a calculated move to decrease its 
financial burdens and increase the fiscal sustainability of 
the Gaza Strip's only electrical power plant, the Palestinian 
Authority (PA) is cutting back its payments for the plant's 
industrial fuel.  The PA's goal is to press the Gaza 
Electricity Distribution Company (GEDCO) to increase revenue 
collection and contribute to its operational costs.  The 
ensuing shortage of fuel forced GEDCO to shut down one of its 
two turbines on January 23, resulting in daily blackouts of 8 
to 16 hours.  Additional fuel was sent into Gaza on January 
28 after GEDCO contributed NIS 5 million toward fuel costs. 
This is expected to keep the one currently functioning 
turbine running through the end of January.  End summary. 
 
PA Steps In After EC Subsidies End 
----------------------------------- 
 
¶2.  (C)  The PA began making direct payments GEDCO's 
industrial fuel after the European Commission (EC) ceased 
payments in November 2009 and redirected its assistance to 
other PA needs.  The EC had paid for the maximum amount of 
industrial fuel allowed by the GOI into Gaza since it began 
its subsidy program in 2006, around 9 million liters per 
month at a monthly cost of approximately USD 12 to 14 million 
(depending on the oil price).  According to Roy Dickinson, EC 
Head of Coordination, the EC had always planned to phase out 
the fuel program, as it did with other direct subsidies in 
Gaza, but two factors significantly influenced the timing of 
their decision. 
 
¶3.  (C) First, Dickinson said, European auditors issued a 
report in late 2008 stating that paying VAT and excise on the 
fuel transfers was problematic.  The EC attempted to 
negotiate with the GOI for a tax exemption without success. 
Second, in October 2009, when the PA asked GEDCO to 
contribute to the fuel cost, Dickinson claimed that Hamas 
prohibited GEDCO from doing so.  Shortly thereafter, the EC 
decided to stop fuel subsidies because they possibly 
benefited Hamas, according to Dickinson.  He added that it 
was also difficult to promote reforms in net lending as long 
as the PA was protected from the real costs of the fuel 
transfers. 
 
PA Fiscal Retrenchment Holds GEDCO Accountable 
--------------------------------------------- - 
 
¶4.  (C) In the two months following the end of the EC program 
(December 2009 and January 2010), the PA paid USD 10 million 
per month, approximately USD 2 million below the EC's 
funding, according to PA officials.  Dr. Omar Kittaneh, 
Chairman of the Palestinian Energy Authority, said that the 
PA expects GEDCO to pay the difference between PA 
contributions and the monthly cost of the GOI cap for 
industrial fuel. 
 
¶5.  (C) PA Prime Minister Salam Fayyad told the Consul 
General on January 26 that a graduated decrease of PA 
payments for GEDCO's fuel is part of a plan of fiscal 
retrenchment by the PA.  He emphasized that the cost of 
subsidizing the plant was exorbitant and accused GEDCO of 
doing little to collect revenue from consumers.  It was 
imperative, Fayyad said, that the power plant put its books 
in order and make a genuine effort to collect electricity 
payments and contribute to the cost of fuel.  In order to 
force GEDCO to increase its accountability, Fayyad said that 
the PA would reduce monthly payments by USD one million per 
month, "down to zero." 
 
¶6.  (SBU) Recent PA press statements struck a more nuanced 
note, attributing the difficulty of the situation to the EC's 
decision to end its fuel subsidies, while stressing the PA's 
current role in paying for fuel and GEDCO's responsibility to 
provide collection revenues to contribute to its operational 
costs.  Note:  A cover note to the PA's draft 2010 budget, 
provided in confidence to Econoffs, states that the PA is 
expecting net lending to decline by USD 80 million from the 
2009 level, due partially to "greater collection efforts by 
GEDCO."  End note. 
 
¶7.  (C) In response to the decrease in fuel payments and 
subsequent electricity cutoffs, GEDCO transferred NIS 5 
million to the PA on January 27.  As a result, the power 
plant was expected to receive 500,000 liters on January 28, 
allowing one of its two turbines (generating 30 MW) to keep 
running at least until January 31, according to Dr. Rafiq Al 
Malihi, director general of the plant.  With the PA's 
payments for February, Gaza should receive enough industrial 
fuel during the week of February 1 to run both turbines 
(generating 60MW).  Both GEDCO Director General Suhail Skeik 
and Kittaneh expect financing problems in the second half of 
February, resulting in fuel shortages again. 
 
¶8.  (C)  In addition to the power plant, the Gaza Strip 
receives electricity through feeder lines:  120MW from Israel 
(paid by the PA through deductions in clearance revenues) and 
17MW from Egypt ("sometimes" donated by the Egyptian 
government, according to Skeik).  The demand for electricity 
in Gaza is approximately 270 MW per day. 
 
Increasing Collection Rates, Accountability to Cover the Gap 
--------------------------------------------- --------------- 
 
¶9.  (C)  Mazen Jadallah, Director General of the Ministry of 
Finance (MoF), said that the MoF is prepared to finance any 
measures that will increase the collection rate for 
electricity usage in Gaza.  Kittaneh suggested that the PA 
invest in 100,000 prepaid meters and train GEDCO employees in 
their use.  However, Skeik warned of the difficult operating 
environment in Gaza, with considerable poverty and a 
likelihood that pre-paid meters may be destroyed if 
installed.  Skeik estimated that GEDCO's 160,000 subscribers 
consume NIS 50 million worth of electricity monthly.  He 
claimed that GEDCO collected approximately NIS 20 million in 
revenue in January, of which NIS 3 million went to pay for 
salaries, spare parts, and other overhead expenses.  Skeik 
calculated NIS 2.2 billion in unpaid electricity bills since 
GEDCO's founding in 1998.  (The establishment of GEDCO 
preceded the construction of the power plant, which went into 
operation in 2003.) 
 
¶10.  (C) While acknowledging GEDCO's overhead expenses, 
Kittaneh also noted that no auditing is done of GEDCO's 
expenditures and that there is no transparency as to how it 
is spent.  To illustrate this, Jadallah said that as of late 
October 2009, GEDCO held NIS 26 million in the bank.  In the 
same month, the PA MoF asked GEDCO to use these funds to 
support fuel costs.  Two days later, Jadallah claimed, the 
GEDCO account showed a zero balance. 
 
¶11.  (C)  In addition to the cost of fuel, Kittaneh mentioned 
GEDCO's obligation to make "capacity" payments -- dues paid 
to the investors in the power plant, amounting to 
approximately USD 3 to 3.5 million per month, including 
arrears.   "Otherwise, the power plant could not operate," 
said Kittaneh.  He also noted that the amount of arrears was 
reduced from tens of millions of dollars to the current 
amount of five or six million dollars.  A well-connected Gaza 
businessman, Maamoun Abu Shahla, suggested that GEDCO makes 
these payments on an annual basis; Jadallah confirmed that 
the MoF is not involved. 
 
¶12.  (SBU) As the issue remains politically sensitive, the 
details of "capacity" payments remain unclear, though they 
may explain where some of GEDCO's collected revenues go.  The 
investors in the plant include Consolidated Contractors 
Company (CCC), Palestinian Development and Investment Company 
(PADICO), Arab Bank, Arab Palestinian Investment Company 
(APIC) and Palestine Investment Fund (PIF). 
 
Shortfall Could be Covered by Donors 
------------------------------------ 
 
¶13. (C)  Despite the cuts made to fuel subsidies, the EC's 
overall assistance allocation to the PA has not dropped 
substantially.  The EC has kept their staff in place at the 
Kerem Shalom crossing point between Gaza and Israel and the 
power plant, so as to monitor invoicing and delivery of fuel 
payments and to help build PA capacity to oversee the 
transfers.  Dickinson also pointed out that the program 
mechanism (PEGASE) is still open to other donors, meaning 
 
that EU member countries could still earmark aid to support 
fuel purchases, with the funding channeled through PEGASE. 
The Swiss government has already committed approximately USD 
1.9 million, and Dickinson said that there was a second 
(unnamed) donor considering making a USD 20 million 
contribution. 
 
 
RUBINSTEIN