Attachment_J_5_-_OQ_report_AHLC_2017.pdf

OFFICE OF THE QUARTET (OQ)

Report for the meeting of the Ad-Hoc Liaison Committee

2 LIST OF ACRONYMS

LIST OF ACRONYMS

DFID – Department for International Development (UK)

DISCOs – Distribution Companies

G4G – Gas for Gaza (initiative)

GCDP – Gaza Central Desalination Plant

GEDCO – Gaza Electricity Distribution Company

GoI – Government of Israel

GPP – Gaza Power Plant

IDF – Israel Defense Forces

ICA – Israeli Civil Administration

IEC – Israel Electric Corporation

IMF – International Monetary Fund

JPP – Jenin Power Plant

JWC – Joint Technical Committee

JWC – Joint Water Committee

MoF – Ministry of Finance

NGEST—Northern Gaza Emergency Sewage Treatment

NWC – National Water Company

OQ - Office of the Quartet

PA - Palestinian Authority

PASF – Palestinian Authority Security Forces

PDMP – Palestinian Market Development Programme (joint DFID/EU program)

PENRA - Palestinian Energy and Natural Resources Authority

PERC - Palestinian Electricity Regulatory Council

PETL - Palestinian Electricity Transmission Company Ltd.

PPA - Power Purchase Agreement

PPGC – Palestinian Power Generation Company

PSA - Power Sales Agreement

PV - Photovoltaics

PWA - Palestinian Water Authority

RSDS - Red Sea – Dead Sea Project

SDI – Spatial Data Infrastructure initiative

USAID - United States Agency for International Development

USG – United States Government

USSC – United States Security Coordinator

VAT – Value-added Tax (goods and services tax)

3 LIST OF ACRONYMS

TABLE OF CONTENTS

LIST OF ACRONYMS

EXECUTIVE SUMMARY

INTRODUCTION

ENERGY

A. Control and commercial viability of the sector

B. Expansion of power supply and enabling infrastructure

WATER

A. Red Sea – Dead Sea project

B. Discussions of the JWC and its JTC

C. Commercially viable water services in Gaza

D. Gaza Central Desalination Plant

TELECOM

MOVEMENT AND TRADE

RULE OF LAW

MoF-to-MoF DIALOGUE

ECONOMIC MAPPING

4 EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

A negotiated final status agreement is the only way to end the conflict between Israelis and Palestinians.

Realizing progress on the ground now will benefit Palestinians (and Israelis), and carries with it the potential to support (but never supplant) final status negotiations which aim to achieve an enduring two-state solution.

While the situation on the ground has remained challenging, some areas have seen progress. As with the

Office of the Quartet’s (OQ) two previous reports to the Ad Hoc Liaison Committee, the focus of this report remains largely on energy and water, both of which are central to improving the lives of those most in need and to creating the conditions under which economic growth can be realized. Progress in these sectors (and indeed telecommunications, movement and trade as well as the rule of law) therefore has a multiplier effect in that the outcome would extend beyond the narrow output of any single policy or project. The OQ report therefore complements that of the United Nations which focuses on the situation on the ground and context, as well as the macroeconomically focused reports of the International

Monetary Fund (IMF) and the World Bank.

Achieving improvements in the energy sector requires a holistic approach that includes short, medium and long-term measures. These measures should ensure the commercial viability of the sector, develop enabling infrastructure, expand power supply and electricity generation and help move towards a unified, sustainable sector.

The full implementation of the electricity agreement reached by the parties in September 2016 is paving the way for the establishment of a new Palestinian electricity market. This has the potential to reduce reliance on the donor community, improve commercial viability, and increase Palestinian Authority (PA) control over the sector, by addressing cost-recovery challenges, ensuring the predictability and reliability of electricity supply, and making cost-efficient power generation possible. The parties have already made progress towards this goal, including reaching a mini Power Purchase Agreement (PPA) which resulted in the Jenin substation being energized. This has facilitated negotiations on the full PPA. A recent meeting convened by the US Government with the parties, and hosted by the OQ, demonstrates further positive momentum. The parties are encouraged to conclude a sustainable PPA in a timely manner. Donors are encouraged to support the PA to implement the electricity agreement in full by providing the remaining financing required to meet costs. Implementation of longer-term initiatives is essential for the energy sector’s development, and key milestones should be met in the run up to their completion. This includes the 161 kV line, upgrade and expansion of electricity networks, and increasing the electricity generating capacity in the West Bank and Gaza, through connection to natural gas.

A holistic approach is also required in the water sector. The Palestinian Water Authority (PWA) estimates that 97 percent of the groundwater in Gaza is not potable. The energy shortfall exacerbates the water crisis there, limiting the treatment of sewage with the result that raw sewage is leaked into the environment including the Mediterranean Sea. Though less acute than in Gaza, the West Bank faces serious water challenges as well, with an estimated supply gap in potable water of minimum 20 MCM by

2022 and with increasing amounts of wastewater polluting the environment. Further effort is required in

5 EXECUTIVE SUMMARY

three interrelated areas: increasing water supply, developing water and wastewater infrastructure, and advancing regulatory reform in a manner that will ensure the sector is commercially viable.

It is of note that there has been some progress since the convening of the AHLC meeting in May 2017.

This includes: advancing the implementation of the 2013 MoU on the Red Sea–Dead Sea project (RSDS);

setting the priority agenda items for the Joint Technical Committee (JTC) of the Joint Water Committee

(JWC); and progress in the preparations for Gaza Central Desalination Plant (GCDP). As is the case in energy, ensuring the commercial viability of the sector is essential.

To ensure continued and accelerated progress on these files, the two parties are encouraged to advance their discussions in the JWC and its JTC. Donors are encouraged to provide technical and financial support for the water sector overall. The PWA is encouraged to advance its regulatory reform, and the

Government of Israel (GoI) is encouraged to provide the approvals needed for construction in Area C and for entry of materials to Gaza.

The annex to this report provides a brief update on other key sectors and areas. The section on telecommunications outlines progress made up to date and the remaining challenges leading up to the launch of commercial operations for 2G in Gaza and 3G in the West Bank. This includes the need to release the remaining 3G equipment from the ports as well as the need to conclude the required commercial agreements before the end of September 2017. This is essential for enabling the 3G commercial launch by the end of the year, and concluding the building of the 2G network in Gaza in order to launch in the fourth quarter of 2017.

The rule of law section focuses on three inter-related challenges of strengthening the institutions of the justice and security sectors, including the improved implementation of the trade arrangements between the Palestinian territory and the GoI, and supporting the discussion on Customs Transfer. The following

Ministry of Finance to Ministry of Finance (MoF-to-MoF) section covers the ongoing engagement which has the potential to improve robustness, sustainability and predictability of the PA’s fiscal situation.

The section on movement and trade focuses on four areas, including further enhancing the crossings between the West Bank and Israel; door-to-door and trade facilitation; the Allenby/King Hussein Bridge

(A/KHB); and identifying new export markets. The expanded operating hours at A/KHB during the summer of 2017, and plans to put this in place permanently next summer are welcome steps to minimize travel delays. Additional measures to streamline passenger processing are needed. The parties are encouraged to pursue the recommendations identified in order to meet the ever-increasing demands placed upon the crossing. Finally, the report presents the economic mapping tool currently being developed by the OQ, in close collaboration with several PA partners.

The OQ’s work is supported by a core group of donors which have been able to align behind shared strategic goals. These include the United States of America and the Kingdom of the Netherlands, in addition to contributions from the United Kingdom and the European Union.

6 INTRODUCTION

INTRODUCTION

As with the Office of the Quartet’s (OQ) two previous reports to the Ad Hoc Liaison Committee (AHLC), the focus of this report remains largely on energy and water both of which are central to improving the lives of those most in need and creating the conditions under which economic growth can be realized.

Progress in these sectors (and indeed telecommunications, movement and trade as well as the rule of law) therefore has a multiplier effect in that the outcome extends beyond the narrow output of any single policy or project.

The report highlights challenges in implementing key initiatives and sectoral solutions and identifies required key next steps. It adopts a holistic approach that takes into account the need to combine short-term measures with medium to long-term solutions. As such, the report complements other reports being produced ahead of the AHLC, including those of the World Bank, the IMF and the United Nations. The report covers the period up to September 14, 2017.

The OQ’s work is supported by a core group of donors which have been able to align behind shared strategic goals. These include the United States of America and the Kingdom of the Netherlands, in addition to contributions from the United Kingdom and the European Union.

ENERGY

1. Access to reliable, affordable energy is essential for the provision of basic humanitarian needs such as healthcare and water, business operations, and broader development and stability. With energy demand in the Palestinian territory set to grow over the coming decades at an average rate of 3.5 percent per year, a priority is to ensure that this demand for power is met both today and in the future.

2. The Palestinian territory faces significant energy security challenges, which are especially severe in

Gaza. While demand for power has risen in Gaza over the past decade to approximately 450 MW total supply has remained largely static since 2006, at around 210 MW capacity,1 falling to around ~135

MW in recent months. This shortfall in supply is exacerbated by inadequate infrastructure, limited cost recovery, an insufficient legal and regulatory framework, and the overarching political context.

3. In April 2017, a dispute between the de-facto authority and the PA over the taxation of fuel led to the temporary closure of the Gaza Power Plant (GPP), resulting in a reduction in the power supply to Gaza to four hours a day. The situation deteriorated further in June 2017, when the GoI was asked to reduce

1 At times, the supply has been slightly higher due to increased availability of fuel at the GPP; and it has been lower during periods of hostilities and, most recently, following the temporary closure of the GPP and reduction in imports over existing feeder lines.

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PA payments for electricity supply to Gaza.2 Power imports to Gaza from the Israel Electric Company

(IEC) were subsequently reduced from 120 MW to 70 MW. Following a temporary arrangement, through which the Gaza Electricity Distribution Company (GEDCO) purchased fuel from Egypt, the GPP resumed partial operations in June 2017, but the electricity supply to Gaza remains limited. The consequences of this power shortage in Gaza is crippling: hospitals have become reliant upon costly back-up generators, the water supply is limited to just 12 hours per week, and the reduced level of wastewater treatment has led to the increased risk of the spread of waterborne diseases and extensive pollution along the coasts of both Gaza and Israel.

4. In the West Bank, while there is generally electricity supply for 24 hours per day, energy security is limited. Palestinian consumers rely on Israeli imports to meet nearly 90 percent of its electricity demand and the PA has had limited control over the sector, preventing it from addressing energy security challenges. In addition, power shortages have become a growing issue during peak summer/winter months. The September 2016 agreement between the Palestinian Authority and the

Government of Israel, ‘Principles of Financial Clearance, Resolution of the Palestinian Electricity Debts and Establishment of a New Market in the Palestinian Sector’ (hereafter the Electricity Agreement) is an important step in addressing these challenges. This Electricity Agreement is examined further below.

5. Achieving substantial improvements to energy security, equity and sustainability in the West Bank and Gaza requires creating a unified and economically viable sector. A holistic solution for both the

West Bank and Gaza, comprising short and medium-term measures and long-term solutions, must address the binding constraints in the generation-transmission-distribution cycle through improvements to the legal and regulatory framework, institutional capacity, fuel supply, and fiscal sustainability. A range of measures that target the key bottlenecks and challenges in the sector are outlined below: these relate to improvements in control and commercial viability, the enabling infrastructure, expansion of power supply and electricity generation and taking steps towards a unified sector.

A. Control and commercial viability of the sector

6. Substantial improvement is needed in the credit worthiness and commercial viability of key PA energy institutions. These improvements are closely tied to enhancing the PA’s control over the sector. With greater control over the sector comes increased responsibility: the PA will be able and expected to enforce payments for electricity at the consumer and municipal level. Enhanced commercial viability will also enable the PA to reduce its reliance on donor funding. Steps to increase control of the sector must therefore be accompanied by improved commercial viability.

2 The PA requested that the GoI reduce deductions from NIS ~42 million to ~25 million –approximately equivalent to the monthly payment transferred from GEDCO to the PA to cover fuel costs.

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West Bank – the September 2016 Electricity Agreement

7. In the West Bank, limited PA control over generation and transmission undermines its institutional, legal and regulatory authority, and ultimately its economic viability. The 2016 Electricity Agreement, if implemented in full, will transfer significant control over the Palestinian electricity sector from the

GoI to the PA. It paves the way for the establishment of a new Palestinian electricity market, with the potential to reduce reliance on the donor community through increased commercial viability, as outlined below.

8. The implementation of the agreement requires the PA to assume significant additional responsibilities for the sector, for which technical, financial and institutional capacity-building is necessary. The OQ supported the development of a detailed implementation plan for the agreement for a two-year

‘transitional phase’.3 At the request of the PA, the OQ is developing an ‘electricity agreement tracker’ to monitor progress, identify financing and capacity gaps, and flag risks on an ongoing basis.

9. Although implementation has been slower than expected, the first major step was taken on July 10, 2017, when the interim Power Purchase Agreement (PPA) for the Al-Jalama substation in Jenin was signed and the substation energized. This will help meet the growing demand for power in the area by initially increasing supply capacity to northern parts of the West Bank from 27 MW to 60 MW.

10. The conclusion of the interim PPA facilitated the negotiations of the main PPA for the sale of electricity from the Israel Electric Corporation (IEC) to the Palestinian Electricity Transmission Company (PETL).

Finalizing this agreement is a critical next step: high-level engagement of the United States

Government (USG), in support of the parties in reaching this goal, has been welcomed by both parties.

The PPA will be a key milestone that will enable the PA to increase its control over the electricity network, facilitating the energizing of three additional substations4 and the transfer of connection points and medium voltage feeder lines from the IEC to PETL. A new tariff is being negotiated between

PETL and the IEC as part of the PPA. This is expected to have a positive financial impact for the PA, as well as for consumers and the private sector. A meeting was held at the OQ on August 29, in the presence and with the support of US Special Representative for International Negotiations Jason

Greenblatt. During this meeting, the parties stressed their commitment to concluding a sustainable

PPA in a timely manner. The parties are encouraged to build on this positive momentum to achieve this goal.

11. PETL is set to become the sole bulk buyer of electricity for the West Bank upon conclusion of the PPA.

This will require it to make timely payments to the IEC for the electricity supplied and, as such, PETL needs to be both fully commercially viable and empowered to enforce payment. A proper payment cycle needs to be established from end-consumers through the Distribution Companies (DISCOs) to

PETL. Escrow accounts, that are monitored by the Palestinian Electricity Regulatory Council (PERC), 3 See the OQ’s May 2017 AHLC report.

4 Nablus and Tarqumia will be energized upon the signing of the PPA. The Ramallah substation is scheduled to be energized in August 2018, once construction is completed.

http://www.quartetoffice.org/files/flash/Office%20of%20the%20Quartet%20Report%20to%20Ad-Hoc%20Liaison%20Committee%20-%20May%202017.pdf

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between the municipalities and West Bank DISCOs5 with PETL, and between PETL and the IEC, could improve transparency and help ensure that collected funds are transferred to PETL and ultimately to the IEC. 6 USAID is undertaking important work in this regard, supporting PETL in rolling out appropriate billing and electricity network monitoring systems.

12. For the PPA to be sustainable, it must also address the cost recovery challenges at the consumer level.

The negotiation of Power Sales Agreements (PSA) between PETL and municipalities/West Bank

DISCOs will determine the tariff that end users will pay for electricity. This should be supported by ongoing improvements to the collection of electricity revenues, which can be achieved through various measures, including the rollout of pre-paid and smart meters.

13. Implementation in the transitional phase (2017-18) will cost approximately USD 40 million, and around a quarter of this has been pledged to date. This leaves a significant financing gap. Without donors providing the remaining funding in a timely manner, it will be extremely difficult for the PA to meet implementation costs during the transitional phase and, thereby, to support the sector’s sustainability.

Gaza

14. The divide between the West Bank and Gaza remains an impediment to the sector’s development in

Gaza. For a unified sector to be established, it is important that the key outcomes of the Electricity

Agreement also apply to Gaza. Central energy institutions are needed to ensure sufficient supply, enforcement of payment, control, and the management of the network. This would contribute to significant cost savings in Gaza, in line with those currently under negotiation in the West Bank. In turn, these improvements would also help unlock investment in the sector in Gaza.

15. Limited commercial viability is an acute issue in Gaza. While some improvement has been made to the operational performance of GEDCO, further measures are required to improve the collection rates for electricity, which are currently around 50 percent.7 This results from technical and non-technical losses over the distribution network,8 the fact that not all end-users are billed, and the lack of enforcement mechanisms for meeting electricity payments, linked to the current governance structure.

16. Immediate measures to improve the situation in Gaza and to restore effective engagement between the PA and GEDCO are needed. A schedule by which GEDCO realizes improvements to collection rates and the transfer of funds to the PA would be an important immediate step. The schedule would allow the PA to increase the proportion of funds allocated to the payment of electricity over the ten IEC feeder lines, and to advance longer term measures for Gaza (e g, the 161 kV line and G4G outlined below). Commissioning an independent audit of GEDCO could inform measures to streamline and reform the organization on a commercial basis. The establishment of an escrow account between

5 Escrow accounts will also be established by the local municipalities and councils responsible for power distribution, as well as sizeable private customers. These escrow accounts will be monitored by the Ministry of Local Government.

6 Indeed, these arrangements will be important for arrangements with other electricity suppliers such as the Jenin Power Plant.

7 World Bank, June 2017, Securing Energy for Development in the West Bank and Gaza.

8 Technical and non-technical losses over the distribution network are 26 percent in Gaza and 22 percent in the West Bank.

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GEDCO and PETL would improve transparency and accountability, and help to achieve consistency across the Palestinian DISCOs, further establishing sectoral unity. For this to be achieved some form of understanding would be needed between Ramallah and Gaza.

17. The deployment of prepaid and smart meters in Gaza will help improve collections for power consumption and enable improved monitoring of electricity consumption. Around 50,000 customers are currently on a prepaid meter system and donors, such as the World Bank, are in the process of procuring additional meters for Gaza. The release and rollout of already procured systems must be facilitated, and additional systems should be procured to support improvements to collections by

GEDCO. The additional revenue generated by the rollout of these meters can serve as a step towards increasing supply in Gaza.

18. Furthermore, adjusting electricity tariffs, expanding the paying customer base, and improving collections is necessary for consumers to bear the actual cost of power in Gaza. Though PERC has made efforts to address these issues, it is insufficiently empowered to implement such measures. This illustrates the need for central energy institutions to become fully operational throughout the

Palestinian territory. Given the poverty rate in Gaza, 9 the PA, with the support of the donor community, could provide targeted subsidies to vulnerable communities to ensure that basic energy needs are met.

B. Expansion of power supply and enabling infrastructure

19. To meet the growing demand for power in Gaza and the West Bank, immediate and short-term measures need to be taken to expand the power supply and, in the longer term, to invest in diverse domestic generation capacity.

20. The construction of a reliable and interconnected Palestinian transmission and distribution network

(for both electricity and natural gas) is essential for the provision of increased electricity supply (from both domestic and imported sources). It will enable the development of conventional and non-conventional generating capacity, lower tariffs, reduce technical losses, and – through PA control of the network – facilitate enforcement of revenue collection.

21. There are high capital costs10 associated with the construction and improvement of this transmission and distribution infrastructure. Such investment will however have a multiplier effect for the

Palestinian economy by unlocking investment in the sector. The international community is encouraged to provide technical and financial support to the PA to ensure that the necessary infrastructure is put in place.

9 According to the World Bank (Securing Energy for Development, 2017) poverty rates are 39 percent in Gaza and 16 percent in the West Bank.

10 See details in sections below.

11 ENERGY

West Bank

22. While the supply of power in the West Bank is generally sufficient, the growing energy demand means that additional sources of supply need to be brought online. In the short-term, additional imports from the IEC are necessary, and will be facilitated by energizing the four substations through the

Electricity Agreement. This is an important step towards establishing a Palestinian transmission network in the West Bank, but in the longer term, a high-voltage transmission backbone needs to be put in place to enable the full interconnection of the electricity network. This will be particularly important once domestic Palestinian electricity generation comes online (for instance, from the Jenin

Power Plant (JPP), outlined below), and to avoid costly ‘wheeling charges’11 that would otherwise be required. Upgrades to the distribution network are also needed in order to reduce technical losses. It is recommended that a mechanism is put in place to expedite the approvals required by the PA from the GoI to carry out its plan for the full development of the West Bank electricity network.

23. The Jenin Power Plant is the first planned large-scale power plant in the West Bank. It is designed to run on natural gas and have a 400 MW capacity. The plant is planned to be operational by 2020 and will be connected to the Israeli natural gas network via a 15-kilometer gas transmission line. The

Palestine Power Generation Company (PPGC) is leading the development of the JPP, as well as its connection to natural gas. The planning process for this pipeline is currently underway and negotiations have commenced for the gas sales arrangements.

24. Efforts should also be focused towards diversifying supply to improve Palestinian energy security.

Additional imports from Jordan could compliment the IEC supply. In addition, the development of renewables, particularly solar photovoltaics (PV), with the appropriate legal and regulatory structures and incentives by the PA, should be prioritized, given that they are the only truly independent power source currently available, have a large generation potential, and are increasingly cost competitive with imports from the IEC.

Gaza

25. Urgent measures are required to increase electricity supply in Gaza, where current power shortages reach 18-20 hours per day, and demand for power continues to grow. Import of the IEC’s full 120 MW to Gaza, over the existing lines, should be resumed as soon as possible, given that this is currently the most affordable and readily available form of bulk power. Notwithstanding the obligations of the GoI, GEDCO and the PA are encouraged to agree on a schedule by which to expand energy imports to Gaza, based on increasing payment transfers from Gaza to Ramallah. This agreement should also cover fuel for the power plant, so that it can operate at its current potential capacity. This could be supported by measures to improve cost recovery in the sector, as outlined above.

11 The movement of power from sources of generation to demand could initially be managed by ‘wheeling’ power back into the Israeli transmission grid and then bringing it back into the Palestinian distribution network at a different location. This is a costly and inefficient process.

12 ENERGY

26. The existing distribution lines from Egypt to Gaza have a capacity of ~27 MW; however, this supply is currently intermittent and unreliable. Ensuring the continued, uninterrupted supply of 27 MW from

Egypt remains a priority, and consideration should be given to the provision of additional electricity imports. A high voltage connection between Egypt and Gaza could, according to initial estimates, deliver 150 MW in three-to-four years.

27. The deployment of rooftop solar photovoltaics (PV) in Gaza could also help establish a more resilient energy system by providing households with a backup power supply during blackouts.

28. Power is distributed in Gaza over a fragmented, low-voltage network which has suffered damage from conflicts, network component overloading and limited maintenance. For additional generation capacity and imports to be brought online in Gaza, the electricity network must be upgraded and expanded. In 2016, PENRA produced a high-level plan for the upgrade of the network. This outlined a two-phase approach over five years, costing an estimated USD 155 million. An up-to-date study is needed building on the PA’s plan to establish the technical requirements, costs and timeline for the upgrade and expansion of the grid in Gaza. The upgrade of the electricity network is necessary for the full benefits of longer-term initiatives to increase electricity supply in Gaza, to be realized.

The 161 kV line:

29. The 161 kV line will establish a high-voltage connection between Gaza and the IEC grid, allowing additional electricity import to Gaza. The line is an important medium-long term measure that can serve to bridge Gaza’s needs until it is connected to natural gas, which is the central long-term solution for meeting energy demand. The GoI approval of the 161 kV line is a welcome and very important step. According to the IEC, in its first phase (of one year), the 161 kV line could deliver an additional

40 MW; in the longer term (around three-to-four years), it will deliver a total of approximately 100

MW to Gaza. It is expected to cost NIS ~70-80 million on the Israeli side. A feasibility study is needed to provide an up-to-date assessment of the infrastructure costs in Gaza. The 161 kV line is expected to reduce the cost of power, since the electricity provided over this line should be subject to a lower tariff due to the bulk volume being purchased. For the full potential of the 161 kV line to be realized, the creditworthiness of the Palestinian buyer must be demonstrated. Progress towards implementation has been slow to date: this is linked to payment issues and the challenge of ensuring the viability of the sector as a whole. A positive consideration by the PA for this project could be built on to address the present challenges and start the 161 kV project’s development as soon as possible.

Gas for Gaza (G4G):

30. The supply of natural gas to Gaza is the central and indispensable component of the solution to develop the Palestinian energy sector. 12 The G4G initiative 13 brings together all relevant parties

12 Natural gas is approximately half of the cost of diesel (per MWh generated) and it is a more efficient and cleaner fuel for generating electricity. The availability of a reliable and cost-efficient supply of natural gas in the West Bank and Gaza will facilitate a significant expansion in generating capacity and reduction in generating costs. Gas can also be used directly by heavy industry and for transportation.

13 The OQ was mandated to establish a Task Force, through which it continues to convene the parties to implement the project.

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including, most importantly, the PA and the GoI to facilitate the agreement and construction of a gas pipeline connecting Gaza to the Israeli natural gas network.

31. Ongoing progress has been made with G4G during 2017, facilitated by the approval of the pipeline route by the GoI in December 2016. The official planning and permitting process within the Israeli system commenced in Q2 2017. The Task Force is currently mapping out the planning and permitting process in the Palestinian system, in order for this to synchronize with the Israeli process. In addition, various commercial and regulatory structures for the project and the necessary steps for their implementation have been identified.

32. It is essential that the entity responsible for gas purchases is identified, and that it commences negotiations on the gas sales agreement as soon as possible. The entity will need to be creditworthy and the path is time-critical. Progress here will give the private sector the level of comfort it requires to invest in the expansion of generation capacity in Gaza. Providing ongoing support is given to the project, Gaza could be connected to natural gas by mid-2021.

33. The gas for the GPP is expected to be supplied from both Israeli and Palestinian sources. The development of Gaza Marine – an indigenous Palestinian gas field – is a long-term priority. To date, progress has been slow with the field’s development, due to ongoing political and security challenges to date but prospects for development remain positive. Development of Gaza Marine would greatly enhance the Palestinian territory’s energy independence and could generate revenues for the PA of

USD 2.5 billion over its 25-year production lifetime.14

14 Brookings, February 2015, Gaza Marine: Natural Gas Extraction in Tumultuous Times.

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WATER

34. The humanitarian situation in Gaza is deteriorating rapidly. The Palestinian Water Authority (PWA) estimates that 97 percent of the groundwater there is not potable. In addition, with insufficient electricity available to power the wastewater treatment plants, the PWA is increasingly unable to meet demand for treatment. This has resulted in raw, or partially raw sewage being disposed of into the surrounding environment, including directly into the Mediterranean Sea. Though the problems are somewhat less acute in the West Bank, it also faces major challenges, including a growing shortage of water. The average consumption was registered at 79 liters per capita per day (l/c/d) in 2015 which is 21l/c/d less than the international standards. The supply-demand gap is projected to reach 20 MCM by 2022. As in Gaza, the pollution resulting from the outflow of untreated wastewater has worsened significantly in recent years and has negatively affected the environment in Gaza, Israel, and the

Mediterranean Sea. In order to make progress in the sector as a whole, advances are required in three interdependent areas: increasing the supply of potable water; developing adequate water and wastewater infrastructure; advancing regulatory reform. The latter is an essential step that will help to place the water and wastewater services on a commercially viable footing.

35. It is of note that there has been some progress since the convening of the AHLC meeting in May 2017.

This includes; advancing the implementation of the 2013 MoU on the Red Sea–Dead Sea project

(RSDS), setting the priority agenda items for the JTC of the JWC and some advancement on the preparations for Gaza Central Desalination Plant (GCDP). This section first focuses on the RSDS developments, then elaborates on the three agreed agenda items for the JTC before also looking at the development of the commercially viable water services in Gaza and the status of the GCDP.

A. Red Sea – Dead Sea project

36. Several special joint technical meetings took place in June and July 2017 to address the issues facing the RSDS project. At the meeting of July 12, 2017, a verbal agreement was achieved regarding the implementation of the MoU. This progress is welcome, although a number of outstanding issues remain. The parties were able to agree on the price, 15 quantity, points of supply, and general timeframe16 for the supply of the RSDS water and are moving forward on that basis. The parties are encouraged to finalize the remaining elements of a written agreement: this includes finalizing a number of technical details such as the water quality of supplied water, developing measures to ensure the reliability of supply and ensuring the smooth construction of infrastructure in Area C.

37. Supply to the West Bank will be delivered at three main connection points: Jenin in the north, Ramallah (Aboud) in the center, and Dair Sha’ar in the south. There is currently an agreed tentative

15 The price agreed was NIS 3.3/CM for the 22 MCM to be supplied to the West Bank, and NIS 3.2/CM for the 10 MCM to be supplied to Gaza.

16 It was agreed that 5-6MCM will be supplied to Gaza in 2017 and 4-5 MCM in 2018; 22 MCM will be supplied to the West Bank in the period 2017-22.

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timeline for the supply schedule since it is subject to timely completion of the infrastructure upgrades required on the Israeli side and on the Palestinian Side. The upgrade of the Dair Sha’ar connection point has been completed with the support of USAID funding and initial RSDS water flows have begun in that connection point. USAID has now extended its commitment to fund the development of the water systems in Ramallah and Jenin in order to help the Palestinian territory to receive the full amount of RSDS water. Constructions of these systems are expected to start in October 2018 if ICA

(Israeli Civil Administration) approvals are provided according to the planned timeline.

38. There are three main connection points for the supply of water from Israel to Gaza: the northern connection point (Al-Mintar/Nahal Oz) and two southern connection points, which supplies the center and the south. The northern connection points are able to receive up to additional 5 MCM by the end of 2017. In order to optimize the utilization of this desalinated water, the PWA plans to mix it with ground water, thereby increasing the overall quantity available to 10 MCM. The southern connection points is currently under construction on the Israeli side: it is expected that construction will be concluded by the end of this year. On the Palestinian side, the PWA needs to upgrade its system17 to enable it to receive the second half of the RSDS quantity allocated to Gaza for 2018. The parties are encouraged to take the necessary measures identified above to enable the receipt and distribution of

RSDS water.

39. Israel’s commitment in August 2017 18 to facilitate the infrastructure development required to improve the water carrier system for RSDS in Gaza is welcome. This commitment includes the construction of new reservoirs and pipelines required within one year. It also enables approval of the entry of materials for the mixing of water in Sheikh Radwan and Al Difaa’ Al Madani mixing reservoirs.

The PWA submitted the list of required materials to the GoI in February 2017. The infrastructure on the Palestinian side required to supply Mekorot water to South Gaza will be covered by the

Government of Kuwait’s contribution of USD 8 million. A number of donors have expressed interest in supporting the infrastructure work required in north Gaza: the PWA is encouraged to provide detailed designs to donors in order to enable their financial support.

B. Discussions of the JWC and its JTC

40. Since the signing of the modified arrangements for convening the Joint Water Committee (JWC) in

January 2017, the JWC met once in May 2017 and its Joint Technical Committee (JTC) met several

17 The World Bank is developing a detailed design of the infrastructure required in Gaza in order to enable the bulk water and downstream infrastructure to receive additional supplies of water: which includes 10 MCM previously agreed from Mekorot (the Israeli national water company) and the additional 10 MCM allocated under the Red Sea–Dead Sea Agreement. The detailed design and the related tender documents will be finalized during September-October 2017. The World Bank infrastructure plan outlines the infrastructure needs in the south and the north of the Gaza Strip. In the south, the needs are: upgrade of works in the existing reservoirs, developing water distribution system, building two trunk-lines and building two reservoirs. In the north, there is a need for one reservoir and related main feeders to water distribution system, and two supply lines. The estimated investment required will be approximately USD 16.5 million.

18 MG Yoav Mordechai letter to OQ Acting Heading of Mission Mr. John Clark on August 1, 2017 regarding “international Assistance to Enable Gaza to receive Additional Water from Israel”.

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times. In the meeting of the JWC, the parties agreed on 4 main measures19 and in the meetings of the

JTC, the parties prioritized three agenda items to be pursued: increasing Palestinian abstraction of ground water; the purchase of additional bulk quantities of water from Mekorot;20 and advancing the wastewater treatment and reuse agenda. As the key forum for Israeli–Palestinian cooperation in the sector, the parties are encouraged to redouble their engagement through the JWC and the JTC to ensure further progress of the outstanding issues.

Ground water abstraction

41. The PA is pursuing agreement in the JWC to enable the abstraction of the agreed quantities of water.21

The PWA identified around 18 wells that they would like to drill (new and substitute wells) from the

Northern, Western and Eastern aquifers. The JWC identified water abstraction as a priority in their discussions and the parties are encouraged to accelerate discussing and finalizing the locations of the wells, relevant quantities and technical details. Considering the water shortage problems in the West

Bank, the parties are encouraged to work to enable Palestinian abstractions.

Additional bulk water from Mekorot

42. The PWA strategy highlights the need for it to diversify its sources of water supply. The strategy aims to increase access to alternative sources of water in addition to groundwater, including the reuse of treated wastewater, large-scale desalination, and the harvesting of rainwater, as well as seeking additional imports from Israel. According to the new strategy, the amount of water supplied from

Mekorot to the West Bank will increase by 25 MCM by the year 2022; above the 32 MCM allocation through the RSDS water that will be supplied to the West Bank and Gaza. With the full implementation of this diversification strategy, in 2022, the supply-demand gap will nonetheless be approximately 20

MCM in the West Bank and 67 MCM in Gaza. Until a longer-term solution is realized, increased import from Israel (Mekorot) offers a reliable transitional arrangement that can help bridge this supply gap.

The parties are encouraged to start discussions on additional water quantities from Mekorot including; the price, quantity, supply timeframe, and enabling infrastructure required to permit the additional import of bulk water from.

Wastewater treatment and reuse

43. The release of untreated wastewater remains a major source of pollution in both the West Bank and

Gaza. The problem is particularly acute in Gaza, where three million cubic meters of wastewater are being discharged monthly into the Mediterranean Sea through nine sewage outlets distributed along

19 The agreed four measures are: approval of drilling of al-Janzour well in the Jenin District; increasing Mekorot supply through Um Safa connection point in the Ramallah District; reviving the discussions on the wastewater protocol and; convening a joint water hydrology workshop regarding the joint water aquifers, 20 The Israeli national water company 21 Article 40 in Annex III of the Oslo Interim Agreement defines the interim arrangement and quantities for the Palestinian and the Israeli utilization of West Bank ground water resources among other issues.

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the Gaza coastline. Following the start of the recent major power crisis in April, there has been a sharp rise in the levels of pollution measured as Biological Oxygen Demand (BOD), reaching a new peak of

299 mg/L. This is creating an unhealthy environment in which contagious pathogens can thrive.22

44. The main challenges facing wastewater treatment in Gaza include the major shortage of electricity supplies and restrictions on the entry of ‘dual use’ materials.23 The challenges in the West Bank include the limited access to funds for wastewater collection, treatment and reuse, and the need for

Israeli approval for work conducted in Area C.

45. Power cuts in Gaza forced the wastewater service providers to limit their utilization of electricity solely to operations that prevent sewage flooding in highly populated areas. All other wastewater treatment has ceased: this has resulted in the disposal of raw sewage directly into the surrounding environment, polluting the land in Gaza and Israel, groundwater and the Mediterranean Sea. Sufficient power needs to be made available to run the wastewater treatment plants at their full capacity. As stated in the energy section above, notwithstanding the obligations of the GoI, GEDCO and the PA are encouraged to agree on a schedule by which to expand energy imports to Gaza. The GoI is encouraged to enable the completion of the three wastewater treatment plants currently under construction in east of Al

Buraj (Gaza city and middle area), Khan Younis as per approved time schedules for both and in particular the North Gaza Emergency Sewage Treatment plant (NGEST) by the end of 2017.

46. In the West Bank, untreated sewage and treated wastewater is disposed of haphazardly due to the limited infrastructure for sewage collection, treatment and reuse. Only 33 percent of the West Bank’s population is connected to a sewage collection network; while around 66 percent of the collected wastewater is treated, only three percent of the treated wastewater is currently reused.24 The PA requires financial and technical support from donors, and cooperation from the GoI to enable construction of infrastructure in Area C in order to upgrade its wastewater infrastructure. In August

2017, the PWA identified 14 priority projects, two of which need immediate GoI approvals for construction in Area C and 12 require funding: major components of these 12 projects are in Area C and will also need GoI approval. The international community is encouraged to support the Palestinian agenda for improving its wastewater infrastructure. The GoI is encouraged to issue the approvals required for construction to commence25 and to set the agenda for processing approvals for the priority projects. The PA is encouraged to set clear guidelines for Private Public Partnerships (PPPs) in the reuse scheme, thereby enabling private sector involvement in this sector. The parties are also encouraged to revive the discussions on developing a wastewater transboundary protocol including the relevant payment mechanism.

22 WASH Cluster, Consequences of Electricity Crisis on WASH in Gaza Strip.

23 Materials and equipment that the GoI identified as ones that can be used for both military and civilian uses.

24 This percentage means that only 16% of the generated sewage gets treated.

25 The two projects that are pending final approval from the GoI to enable their construction are those of Betunian WWTP and the Nablus West Reuse Scheme.

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C. Commercially viable water services in Gaza

47. There are three main challenges in addressing the commercial viability of water services in Gaza: the weak tariff structure (currently, the price of water does not cover its cost), the low collection rate of the billed water consumption, and the high level of nonrevenue water.26 Many service providers do not pay for the bulk water and electricity they consume; accordingly, the cost of these commodities is not met in the current water price.27 This, in effect, is acting as a hidden subsidy. The low collection rate28 is compounded by overall dissatisfaction with the quality of the piped water: its poor quality encourages almost every household in Gaza to buy water from roadside tankers that are supplied by small, local, private desalination plants, even though this source of water is more expensive than that available from the main distribution network. 29 Moreover, the fragility of the water service’s commercial arrangements are compounded by the fact that the fees collected from the supply network are not necessarily spent within the water sector. This undermines attempts to mitigate the high rate of nonrevenue water. The underlying reasons for the high level of nonrevenue supply needs to be addressed comprehensively in order to enable the commercial sustainability of the services.

48. The solutions that have been identified for addressing the water crisis in Gaza depend on the supply of additional desalinated water. Desalinated water costs more than ground water.30 The expected future increase in the cost of the bulk water supply is likely to further undermine the commercial viability of the water services. In the short-term, subsidies are required to offset the increased cost.

In the long-term, the services should be provided in a manner that can ensure consumers are able to meet the full cost of the water they consume.

49. To date, the focus of the initiatives in the water sector have rightly been on developing the infrastructure and securing increased and diversified sources of potable water. While these priorities are essential, further parallel steps need to be taken to advance the regulatory reform necessary to support cost recovery and increase the efficiency of service provider operations. In the short-term, these steps should include: installation of prepaid meters to increase collection rates; establishing separate accounts for water in municipalities, along with a system of accountability designed to increase collections; the introduction of incentives for the payment of water bills and penalties for those who fail to comply; enforcing the use (of a percentage) of the fees collected from water sales for investment in water operations and infrastructure, thereby mitigating physical and financial losses

26 Nonrevenue water is water that has been produced and is ‘lost’ prior to it reaching the customer. Losses can be real losses (as the result of leaks, sometimes also referred to as physical losses) or apparent losses (for example, as the result of theft or metering…