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An Innovative Step to Support Palestinian Trade

Khader Khader

SOURCE: AP/Majdi Mohammed

Palestinian farmer Khader Khader, 31, picks olives on his land in Nisf Jubeil, near the West Bank city of Nablus, October 22, 2012. Palestinian farmers have recently started turning the rocky hills of the West Bank into organic olive groves, selling their oil to high-end grocers in the United States and Europe.

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Statement from John Podesta

I applaud the efforts of the Middle East Investment Initiative, National Insurance Co. Ltd, and the U.S. Overseas Private Corporation to launch the Palestinian Political Risk Insurance, or PPRI, project later this month. The project, conceived by President Bill Clinton at the Clinton Global Initiative and developed by the Center for American Progress and Middle East Investment Initiative, demonstrates that public-private partnerships can help forge win-win solutions for Israelis and Palestinians even during challenging political periods.

The idea behind Palestinian Political Risk Insurance is both simple—increased economic opportunities for Palestinians, particularly those that incentivize best business practices,  benefits Palestinians and Israelis—and proactive—society should not wait for a peace agreement to begin addressing critical day-to-day problems. This insurance is not intended to resolve the conflict or all the economic problems affecting the Palestinian economy; instead, it focuses on finding a piece for one small but key part of the puzzle by mitigating risks to international trade for Palestinian businesses. In addressing this problem, Palestinian Political Risk Insurance can make an immediate impact on the ground and can show that progress is achievable even on the most difficult issues, such as those that relate to security challenges.

I am proud to have been part of an effort where so many individuals and organizations came together to turn President Clinton’s vision into a reality. Whether it was international law firms and insurance experts, dedicated Palestinian companies, leading private-sector businessmen, or senior Israeli security experts, there was always a group of people committed to help move the project forward. I hope the project will serve as a model for similar efforts in the future.

— John Podesta, Chair of the Center for American Progress

Column: An Innovative Step to Support Palestinian Trade

This column is part of a series based on seven days of meetings in Jerusalem, Ramallah, and Tel Aviv, Israel, with top officials and experts from the Israeli government, Palestinian Authority, and other international organizations.

This month’s expected launch of the Palestinian Political Risk Insurance, or PPRI, project comes at a critical period for the Palestinian economy and Israeli-Palestinian relations. Palestinian economic conditions have deteriorated in recent years, which have led to general protests and increased tensions between the two sides. These conditions threaten both Palestinian and Israeli security.

While a political solution is the only way to resolve these problems over the long term, there are interim practical steps that the private sector can take, which can make a small but immediate and lasting impact on people’s day-to-day lives. The Palestinian Political Risk Insurance project is such a step. It addresses a market gap in the Palestinian insurance sector with the goal of encouraging local investment and economic development. Although efforts such as the Palestinian Political Risk Insurance project are not a substitute for a political process to end the conflict, they are necessary for improving daily life on the ground regardless of how the political process unfolds.

What is Palestinian Political Risk Insurance and how does it help?

Palestinian Political Risk Insurance is a new and innovative insurance product that will be sold to Palestinian businesses that ship goods out of the West Bank. Currently, the local insurance market does not cover trade losses resulting from certain risks of movement and access, political violence, and trade disruption. These risks arise out of the unique security environment in which the businesses operate.

As a result of Israeli security concerns, for instance, nearly all shipments sent out of the West Bank must go through a crossing point where they are offloaded from a Palestinian truck by forklift and reloaded onto another truck on the other side of the barrier that runs between Israel and the West Bank. In some cases, the forklifts drop the shipments or damage the products. In other cases, delays at the crossing points prevent goods from reaching the buyers on time. As one example, from February through March in 2010, a Palestinian multilock door and metal closet company lost approximately $4,500 from damages during the forklift transfer process.

Since insurance companies do not cover these losses, this business has had to self-insure against the risk of loss—that is, setting aside funds to pay for losses in case they occur. Reserving capital for losses has prevented this business from reinvesting that capital in its own company, which has in turn made it more difficult for the business to expand, create jobs, and seek new markets.

By protecting against certain losses that other insurance policies do not cover, fewer companies will experience unexpected losses that hurt their bottom lines. Therefore, the insurance increases trade predictability for companies that purchase the coverage, which encourages private-sector investment and job creation—the pillars of sustainable economic growth. The insurance is also intended to improve Palestinian and Israeli security and economic sectors by complementing a U.S. Agency for International Development, or USAID, secure supply chain logistics program that increases incentives for traders to improve management and security practices.

The insurance is a practical step—one that is supported by all parties—that can make a meaningful difference in people’s daily lives. The insurance project does not overlook the importance of working toward a political solution; instead, it addresses one problem that that needs to be resolved regardless of the political situation.

How does Palestinian Political Risk Insurance work?

A local Palestinian insurance company will sell and operate Palestinian Political Risk Insurance akin to other business insurance products. Businesses such as stone and marble producers, wood and metallic furniture companies, and textile firms, for example, will have options for what type of coverage to purchase and how much coverage is necessary, and will pay premiums and file claims directly with the insurer.

Since the insurance provides benefits to those who purchase it, project partners envision Palestinian Political Risk Insurance being a sustainable product backed exclusively by the private insurance and reinsurance markets. To that end, Palestinian Political Risk Insurance will first be launched as a limited pilot program, during which time partners will test the product and gather data in order to determine whether and how to expand the coverage. Partners will also provide technical assistance to the local insurance company during the pilot program in order to build capacity in the Palestinian insurance industry and reduce reliance on foreign aid over the long term.

Palestinian Political Risk Insurance’s role in the Palestinian economy

What we really need to do in order to have sustainable economic development is possibilities for exports, for sure. In order for the economy to be able to grow in excess of six or seven percent minimally; for it to be able to absorb new entrants into the labor force, not to mention the need for us to actually reduce the high unemployment rates that exist right now; that I believe must be the most important objective of any rational economic policy.
Palestinian Prime Minister Salam Fayyad, September 21, 2010

Prime Minister Fayyad’s statement that opportunities for exports are important for sustainable economic growth is espoused by others such as the World Bank. The Palestinian territories are a small area scarce in natural resources; there are approximately 4 million people living in the West Bank and Gaza Strip, which combined is nearly the size of Delaware. The West Bank is also landlocked. As such, international trade can play a major role in helping sustain long-term economic growth in the Palestinian territories.

Despite the importance of external trade to the local economy, companies that ship goods outside the Palestinian market face many obstacles. In response to the second Intifada, a Palestinian uprising that began in 2000, Israel started building a barrier along parts of the 1949 Armistice Line, or “Green Line,” and within the West Bank. Israel’s objective for the barrier is to limit the instances of terrorist attacks across the Green Line, inside Israel. These attacks declined following its construction. As part of the barrier’s creation, most unofficial passages between the West Bank and Israel were closed and people and goods were required to transit only at designated crossing points. Congestion and certain security practices at the crossing points created a new set of challenges. Conditions at the crossing points have improved in recent years but basic challenges still remain.

Appreciating Israeli security concerns, the barrier, crossing points, and other movement and challenges related to access have had a significant impact on Palestinian trade. Exports decreased from $763 million in 1999 to $306 million in 2002. They have slowly increased since then, reaching approximately $720 million in 2011. During this period, businesses in Gaza largely lost their ability to ship their goods from this coastal strip except in limited cases, following Hamas’s takeover of the security apparatus in Gaza. The Israeli market has long served as the main destination for Gaza and West Bank goods shipped outside the local market; 85 percent of those goods went to Israel in 2011.*

In order for there to be a substantial increase in Palestinian goods shipped outside the local market, a series of steps would need to occur, such as an Israeli-Palestinian peace agreement and the removal of additional movement and access restrictions. Even if those other steps occur, however, businesses will still need risk-management tools because certain challenges to trade will likely always remain, such as borders and designated crossings points into Israel—the destination for the majority of goods shipped outside the Palestinian market.

For that reason, insurance tools such as Palestinian Political Risk Insurance that mitigate trade risks will remain important in both the short and long term. They are market-based solutions that decrease the risk of loss, increase trade predictability, and encourage investment, which is helpful to fostering and sustaining economic activity. An improved Palestinian economy has a beneficial economic, political, and security impact for Palestinians and Israelis.

Both the insurance and previously mentioned USAID logistics program are consistent with the overall Palestinian institution-building approach. They are programs that encourage the private sector to adopt international best practices, ones that private markets in other countries follow—sometimes incentivized by government programs—in order to improve stability and security and encourage growth in their local economies.

An international public-private effort

The Palestinian Political Risk Insurance effort is what the Clinton Global Initiative is about. We have Palestinians, Americans, Europeans, Israelis, insurance experts, business people, lawyers, financial sector specialists, regional specialists, all contributing their time, energy, and resources to meet this challenge and make a difference in this very important part of the world.
President Bill Clinton, May 22, 2008

The insurance product is an outcome of a long and consistent international cooperative effort. President Clinton initiated the concept for the insurance product at the inaugural Clinton Global Initiative Meeting in 2005, and the Center for American Progress, led by Chair John Podesta, directed the effort to turn President Clinton’s idea into an operational project. CAP formed a steering committee that grew to include Palestinian banking and insurance officials, U.S. business and insurance leaders, Israeli and international partners, and technical experts to develop the product. In addition, CAP initiated a series of market surveys with support from The Portland Trust, a British nonprofit with offices in Tel Aviv and Ramallah; ConnectME, a social enterprise focused on economic development in the Middle East and North Africa; and USAID to ensure the end product met the needs of the Palestinian business community.

In 2007 President Clinton spoke with President George W. Bush about Palestinian Political Risk Insurance, after which President Bush encouraged the U.S. Overseas Private Investment Corporation, the U.S. government’s development finance institution, to support the project. In 2008 the National Insurance Co. Ltd, or NIC, a Palestinian insurance company based in Ramallah, and the Middle East Investment Initiative, or MEII, a U.S.-based nonprofit with offices in the Middle East, also became project sponsors. The Middle East Investment Initiative and National Insurance Co. Ltd played critical roles in the project’s development, including designing and carrying out market surveys and creating the terms and conditions for the pilot program.

Throughout the seven-year process, many other organizations and individuals assisted in advancing the project, often on a pro bono basis. Leading business people offered key financial and technical support, senior insurance experts helped to ensure Palestinian Political Risk Insurance conformed to international best practices, international law firms provided strategic and technical assistance, and U.S., Israeli, and Palestinian officials provided critical support related to the project’s political and security angles.

Conclusion

While political risk insurance is just one small piece of the larger effort to support the Palestinian economy and local and regional stability, it should not be ignored. As one piece of the Palestinian institution-building effort, the Palestinian Political Risk Insurance project demonstrates that progress on this track is both possible and important, and has a direct impact on people’s daily lives. It also shows that international public-private partnerships can help forge win-win solutions for Israelis and Palestinians during challenging political periods, even on sensitive day-to-day issues such as those related to security restrictions.

Ian Bomberg is a project manager at the Middle East Investment Initiative. He previously managed the Palestinian Political Risk Insurance project’s development at the Center for American Progress. Rudy deLeon is the Senior Vice President of National Security and International Policy at the Center.

* The economic relationship between Israelis and Palestinians is governed by the 1994 Paris Protocol. The protocol holds that Israelis and Palestinians are part of a “customs envelope,” part of which means that goods sent from the West Bank to Israel are not considered to be Palestinian exports because Palestinian-controlled areas are not a separate country. But many entities such as the World Bank combine Palestinian goods sent to Israel with Palestinian goods sent abroad when calculating total Palestinian “exports.” The export data in this article cite figures that use those combined numbers.

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