Net Lending: When Public Revenue Becomes Public Debt in Palestine

Net lending can be described as a hole, and here it is not a hole in the ozone layer, but a hole in the folds of clearance revenues, leading to permanent seepage on the surfaces of the annual general budget in Palestine..!

When you review the items of the Palestinian general budget through the statistics of the Ministry of Finance and Planning in Ramallah, you see on the expenditure side — whether annual or monthly public spending — an item called "net lending"...its value averages 1 billion sheqel annually (equivalent to 285 million dollars annually), and at a rate averaging 90 million sheqel monthly (equivalent to 25 million dollars monthly)..

The ratio of the value of "net lending" to the total value of annual net public expenditures ranged from 6% to 22% over the years from 2003 until mid-2020, where it reached in 2006 a ratio of 22% amounting to 376 million dollars, and a ratio of 19% amounting to 535 million dollars in 2007..Overall, the general average rate of net lending to total annual net public expenditures in the general budget was about 11%, a rate considered high and troubling for government financial planning, given that the amounts deducted as net lending have been continuously increasing, despite repeated government commitments to reduce the value of "net lending" in its estimates when preparing the annual general budget..

The funds actually deducted (cash basis) from the clearance revenues by the Israeli side, according to the statistics of the Ministry of Finance and Planning, under the item net lending from 2003 until 31-7-2020, amount to 19,149 billion sheqel, equivalent to 5.400 billion dollars (five billion and four hundred million dollars), and such a large sum over 18 years, which should have remained revenue within the clearance revenues, has had a significant effect and negative repercussions on the national economy in Palestine, including: increasing the indebtedness of the Palestinian National Authority, forcing other budget items of the Palestinian National Authority to increase domestic borrowing, in addition to increasing requests for additional international financial grants and external loans to finance the growing deficit in the budget, and widening the financing gap as a result of revenue shortfalls due to the increased balances of net lending deducted from the clearance revenues, as noted above...in addition to reducing development projects in many Palestinian cities and villages due to the withholding of project allocations and allocations of property, transport and fee taxes by the Ministry of Finance and Planning in Ramallah from municipalities that do not pay, to pressure them to comply with instructions and directives regarding the repayment of their debts and accumulations at their due dates. Such large net lending amounts will affect the financial performance of the Authority and the likelihood of insufficient funds to operate public projects and cover public expenditures, which rise with increased amounts of net lending..and its inability to cover the costs of purchasing goods and services for the public sector from the private sector, which will increase arrears owed to the private sector, whose accumulations reached more than 2.5 billion dollars by mid-2020. These amounts will significantly limit economic development and severely affect private sector activities in developing various economic sectors, due to large outstanding debts owed to it by the Palestinian Authority, which will strike at the core of the economy and its sectors and slow the growth of gross domestic income..!

The clearance revenues shown in the Ministry of Finance and Planning statistics are estimated annually, under ordinary conditions, at about 8 billion sheqel, equivalent to 2.285 billion dollars (two billion two hundred and eighty-five million dollars annually), or at a monthly rate of 750 million sheqel, equivalent to 200 million dollars monthly..The proportion of revenues resulting from the clearance revenues to total net public revenues ranges between 50%–65% and the Palestinian National Authority is currently refraining from receiving any clearance revenues from which Israel deducts or withholds amounts equivalent to allowances for the families of martyrs, prisoners and the wounded..!

- In light of the foregoing, "net lending" represents the total amounts deducted from clearance revenues by the Israeli side to cover debts due to Israeli companies supplying electricity, water and sewage to municipalities, distribution companies, and other Palestinian distribution entities, and other items..(Coalition for Integrity and Accountability (AMAN) report 2017...)

Responsibility and some of the blame this time do not lie with the government alone; rather a large degree of blame rests with some local government units (municipalities and local councils), Palestinian distribution companies, and individual merchants who make direct purchases of goods and services such as electricity, water and sewerage services primarily from Israeli companies and other institutions and organizations, and who do not pay the invoices issued by the Israeli selling companies at their due dates. Israel exploits this failure to pay on time and automatically deducts the value of invoices from selling companies from the principal amount of the clearance revenues, and deducts the value of these invoices monthly in the clearance sessions held between the Palestinian and Israeli sides before delivering the net clearance revenues.

It is worth noting that the amounts deducted from the clearance revenues that pertain to municipalities and Palestinian distribution companies, although they are not the only amounts deducted by the Israeli side, are amounts that should be paid on their due dates by municipalities and other Palestinian distribution companies to the Israeli selling and supplying companies, and payment should be made from collections of consumption bill payments from the beneficiaries of the services and goods purchased from the Israeli side. It is unacceptable to allow the Israeli side to retain the freedom to deduct at the source from the clearance revenues, which are considered the largest revenue source for the Palestinian National Authority in its annual budgets..., for reasons we partly create ourselves by failing to pay consumption invoices for services provided by the municipalities....! However, it is noticeable that municipalities and distribution companies have lagged in paying their due invoices, justifying this by citizens and institutions not paying their consumption bills...but there is clearly laxity in the seriousness of collecting consumption amounts from beneficiaries, and these councils and companies have no clear policy with adopted arrangements in case of nonpayment by citizens, noting that there is a spectrum of a culture in which some citizens and some local government units feel the government should pay out of its pocket and bear the burden....!!. This is a negative spirit that conflicts with the need to cultivate true citizenship and assume responsibility toward society, especially given the Israeli occupation has been imposed on the Palestinian land for long decades... Annual reports of the State Audit and Administrative Control Bureau (SAACB), most recently the annual report for 2018, indicate that local government units — municipalities, local and joint councils — received the largest share of SAACB reports, as they amounted to 71 reports out of 131 reports in all SAACB reports issued for 2018, at 51% of total annual reports. Some observations recurred in successive years of reports, noting laxity by many local bodies in managing public money and the absence of effective measures by local bodies to collect accumulated debts from citizens. The government, in cooperation with the Ministry of Local Government, the Ministry of Finance and Planning and the Ministry of Energy, established some programs and projects to reduce nonpayment by citizens and to regulate the collection process from citizens, such as prepaid payment systems and the creation of electricity distribution companies..Nevertheless, some municipalities, despite all that, collect some dues from citizens but do not settle their debts to Israeli companies, instead implementing some development projects in the town..Accordingly, the government has also requested that municipalities open a public account to pay electricity invoices, to be supervised by the General Controller ..

-        Despite all that, the amounts of net lending increase continuously over the years, and net lending has become a container for all deductions from the clearance revenues, such as remittance medical bills, invoices of fuel distribution companies, and invoices for the prices of fuel to Gaza, even invoices paid by the Egyptian government to the Egyptian fuel company to settle the prices of fuel sent to the Gaza power plant. The Palestinian National Authority settles such invoices from its account in the Palestine Fund at the Arab League. The net lending amounts also include the value of the 3% of total clearance revenues deducted from the clearance revenues in favor of the Israeli side, which represent administrative costs for collecting import taxes and other indirect taxes, and tax refunds from fuel and others, which in some of their amounts reach more than 150-200 million shekels annually, most of the refunds relating to fuel. Israel also deducts the value of other invoices related to treatments and health services provided to Palestinian citizens who hold medical transfer orders, in addition to amounts of court settlements in Israel for individuals and institutions that obtained favorable rulings from the courts regarding their claims against Palestinian persons. And differences in invoices P (the Palestinian clearance revenues), and differences in invoices A (the Israeli clearance revenues), and deduction of late payment interest at a rate of 11%, which are charged to the water bill for municipalities and Palestinian individuals who defaulted on payment. This interest amounted, for example, during 2013 to 982,397 shekels, in addition to deducting 8,267,906 shekels which represent salaries of Civil Administration employees working in the West Bank Water Department during 2013, from the clearance revenues (reported in the observations of the State Audit and Administrative Control Bureau (SAACB)). In addition to what is happening now and since past months, relating to freezing amounts of the Palestinian clearance revenues equivalent to amounts allocated by the Palestinian side to pay the families of martyrs, injured and Palestinian prisoners in Israeli prisons, the Palestinian National Authority rejects such blackmail and refuses to receive any amount of the clearance revenues in light of such a procedure by the occupation authorities that try to impose the spending headings of those clearance revenues according to their categorization of spending from their point of view.... We add to these deductions the funds paid by donor countries to some fuel distribution companies in Israel, as they fall under the item "net lending", because what these countries pay in this regard will be deducted and subtracted from the amounts allocated by the donor countries to support the Palestinian general budgets to cover the deficits and financing gaps in those budgets annually..

-        All these deductions and subtractions from the clearance revenues by the Israeli side certainly reduce the value of the net amounts received from the clearance revenues, which are in their essence Palestinian funds as is known, yet the Palestinians have no control over them at all...!

-        The deduction from the clearance revenues by the Israeli side began after the Ministry of Finance and Planning in Ramallah in 1997-1998 authorized the Israeli Minister of Finance to deduct amounts of outstanding electricity bills on the Gaza Strip in 1997, and to deduct outstanding water bills in the West Bank and Gaza, by authorization from the Water Authority and the Ministry of Finance and Planning... in Ramallah in 1998. (Report of the Integrity and Accountability Coalition (AMAN) 2017)

-        Israel is not a donor country, so it should not be subject to accountability and auditing for its deductions from the Palestinian clearance revenues!!

-        Examining and auditing the invoices deducted under the item "net lending" from the clearance revenues is a national and professional requirement to protect the public funds of the Palestinian people..!

-        When one scrutinizes the reports of the State Audit and Administrative Control Bureau (SAACB), especially the observations and recommendations that focus on topics related to revenues and expenditures in the annual general budget in Palestine, one finds repeated warnings by the Bureau in many of its reports and observations, constantly, to some centers of responsibility for the clear shortcomings in following up and auditing all deductions and invoices related to the clearance revenues that Israel deducts in the monthly clearance meetings between the Palestinian side and the Israeli side, to deliver the net funds from the clearance revenues, which are entirely Palestinian funds. As for the deductions—which are our subject in this article—which are deducted from the clearance revenues under the item "net lending" that we wrote about in a previous article - part one - we observe, based on the auditing and examination by SAACB auditors of the joint clearance meeting sessions, that the Palestinian side receives the net amounts of the clearance revenues without acceptable verification or review to reconcile some Palestinian figures and Israeli figures regarding the values of some deducted invoices, even though the Israelis do not provide the Palestinians with details of the deduction items and accounts such as the value of remittance medical bills, and the prices of electricity, water and fuel, etc., yet the Palestinian side accepts these invoices, or some of them, as if they are not subject to inquiry and audit, and one asks oneself, do we view Israel as a donor country...!, such that there should be no discussion about the data and deductions it presents from the money of the Palestinian people..!!.... Someone in centers of responsibility might fabricate an excuse that he does not have a representative in the joint clearance sessions..., as appeared in one of the observations of the SAACB, but this is not an acceptable excuse in dealing with accounts belonging to the Palestinian people held by an occupying state, which does not pay money out of its pocket but rather takes our money into its pocket, while we Palestinians finance our lives and economic sectors ourselves under occupation.. However, Israel tries and still tries to impose the spending headings of Palestinian funds in their homeland, and this led the Palestinian National Authority to boycott receiving the clearance amounts according to the occupation's odious concepts, yet reconciling and auditing the invoices related to net lending is a matter that specialists must work on, for auditing is necessary even in any mutual accounts between any two parties.!..

We add to what we noted earlier that Israeli claims regarding all deducted amounts are submitted by the Israeli side without details and without clear items for auditing, classifying and reconciling the amounts with Palestinian figures; yet, regrettably—and here also there is blame on some public institutions and ministries—neither the Ministry of Finance, nor the Ministry of Health, nor the Palestinian Water Authority perform audits of any Israeli claims submitted for deduction, whether clearance invoices or Israeli claims concerning due and accumulated electricity charges. There are no official supporting documents for the deduction operations from the clearance revenues..For example, such deductions reached the amount of 1,026,275,360 sheqel (one billion and twenty-six million and two hundred seventy-five thousand and three hundred sixty sheqel) as electricity charges, as it appeared in the current account for 2015, which was included in the opinion report issued by the State Audit and Administrative Control Bureau (SAACB) on the consolidated financial statements, the "final account" for fiscal year 2015, issued by the Ministry of Finance and Planning dated October 2019...according to confirmations of the Energy Authority and the National Electricity Transmission Company..Nor is there auditing regarding the costs of medical treatment for Palestinians referred by the Authority to Israeli hospitals, which amounted, for example, during 2013 to 240,659,835 sheqel (two hundred forty million six hundred fifty-nine thousand eight hundred thirty-five sheqel), for which there were no financial claims from the Ministry of Health, and without any review and audit procedures of the treatment invoices by any Palestinian party..!! In addition to the absence of follow-up by the West Bank Water Department and the Ministry of Finance on the indebtedness of local bodies and individual subscribers for water purchases, whose balance amounted to 571,785,176 sheqel (five hundred seventy-one million seven hundred eighty-five thousand one hundred seventy-six sheqel), according to the records of the West Bank Water Department up to 31-12-2013, which led to depriving the State Treasury of its financial resources resulting from collecting water sales from local bodies and individual subscribers (repeated). Or even Israeli claims concerning wastewater treatment expenses in the West Bank, which include sewage treatment expenses for settlements established on lands in the West Bank in the total claims, which amounted to 67,706,623 sheqel (sixty-seven million seven hundred six thousand six hundred twenty-three sheqel), due to the lack of any clear basis for calculating clearance deductions for sewage treatment charges, and the lack of follow-up of these deductions by the Water Authority and the Ministry of Finance; SAACB pointed this out in its observations and recommendations in its annual reports, most recently the annual report for 2018..in addition to SAACB reviews and recommendations on the Ministry of Finance final accounts, the latest being in the report and SAACB's observations on the current accounts for 2014 and 2015 which were issued in October 2019....

The failure to have the Israelis review and examine their claims and reconcile them with Palestinian records and data, and to form committees or experts for such monthly reviews in the clearance sessions or during the annual periods, and the failure to insist on the necessary and appropriate auditing of these claims...increases the wastage of public money from the clearance revenues...which constitute the largest part of the Palestinian National Authority's annual revenues (their average share is 50%–60% of total net revenues).

Citizens' failure to pay their due bills to municipalities, municipalities' failure to follow up to ensure payment, the absence of appropriate measures to eliminate such negative phenomena, and the failure of some local government units to pay their accumulated debts according to the system and directives of the Ministry of Local Government, disrupts the use of public money....Therefore, the amounts of net lending continue and increase in some years, and the balance of net lending will remain the primary obstacle for the Palestinian National Authority in raising funds for public expenditure, which we are surprised to see increasing numbers for....The laxity of some local bodies in collecting their debts, whether previously accumulated or current and due from citizens, by appropriate means, and in taking decisive measures to collect these rights, addressing ongoing loss and wastage in electricity and water consumption by some citizens...and the weakness in following up, auditing and reconciling net lending deductions and the invoice values the Israeli side presents from the clearance revenues to the Palestinian side, constitutes a clear shortcoming in the performance and duties of some local and public bodies to preserve public money...

A reader may say that I am writing about past data, and it is possible that what we wrote about does not exist in current years, and I genuinely hope that is the case, but what we have written is a repetition of these observations and recommendations by our sole oversight body over dozens of previous years, which means there is still a recurrence of all the observations...! I also note here that the submission of final accounts by the Ministry of Finance and Planning, and government receipts and expenditures data to the State Audit and Administrative Control Bureau (SAACB), is delayed beyond the statutory submission deadline, sometimes by several subsequent years, and likewise the annual general budgets...for example, the Ministry of Finance and Planning submitted its final accounts for 2014 and 2015 in October 2019 to SAACB, which we were able to review in the current year 2020...!

- The continued failure to reduce the net lending balance in the annual general budgets leads to worsening the Authority’s financial crisis and increasing the state’s indebtedness, which will be reflected in many possibilities, including the possibility of raising taxes to finance public expenditures, in light of the rising public debt figures in Palestine and in light of the political and health situation in the region....

Sources: The Coalition for Integrity and Accountability – AMAN 2017, item net lending and its impact on budget deficit and waste of public money; statistics of the Ministry of Finance and Planning – Ramallah; statistics of the Palestine Monetary Authority; reports of the State Audit and Administrative Control Bureau (SAACB) for 2018; SAACB reports on the current accounts for 2014 and 2015; World Bank report 2016.

- Date: 7-10-2020