mécanisme palestino européen de gestion et d'aide socio ... file1 european commission...

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EUROPEAN COMMISSION EuropeAid Co-operation Office

Mécanisme "Palestino Européen de Gestion et d'Aide Socio -Economique" PEGASE

Brussels, Monday 21 January 2008

INTRODUCTION : Following Commissioner Ferrero -Waldner's decision, PEGASE will be the new European Mechanism which will support, from 2008, the 3 year Palestinian Reform and Development Plan (PRDP), approved by the IMF and the World Bank, which was presented by the Palestinian Authority's Prime Minister Salam Fayyad at the Paris Donor Conference of December 17 th. PEGASE is fully in line with the "EU Strategy on Statebuilding for peace in the Middle East" and is coherent with the goals of Statebuilding, Support to PA finances and Support to the Palestinian Reform and Development Plan.

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WHY PEGASE ? At the end of June 2006, the European Commission and Member States established the Temporary International Mechanism (TIM) to support directly the Palestinian population and bypass the Hamas Government as it had not respected the Quartet condi tions. The TIM, renewed every 3 months since then by the Council of the European Union and the Quartet, addresses basic social needs of the Palestinian population and focuses on delivering aid to the poorest Palestinians. Following the establishment of Salam Fayyad's interim government, TIM implementation support has been progressively modified to work more directly with the new Palestinian administration. Nevertheless, despite the real success of TIM in delivering essential social services and financi al support, its scope is much too limited to support the Palestinian economic recovery. In the next three years, the Palestinian Authority must meet the difficult challenges which have been set out in the PRDP of: - financing an average annual deficit of $1.3 billion in order to cover essential recurrent budgetary expenditures; - implementing a public investment programme with an average annual need of $500 million; To help the PA administration to face this critical situation, the European Union, fully aware of its responsibility of lead donor for Palestine , will put in place a new mechanism incorporating the flexibility and diversified instruments required to support efficiently the PRDP. TIM will be consequently phased out during the first 3 months o f 2008 and PEGASE will replace it progressively from the beginning of February 2008. All parties are aware that, to achieve a real recovery of the Palestinian economy, movement and access are key. Obstacles, preventing free movement of agricultural and in dustrial products as well as of manpower and services, must be removed, following Israeli and Palestinian negotiations, as agreed during the Annapolis Conference. It is clear that without substantial progress in this field, any results achieved will remai n insufficient, superficial and provisional. No real economic recovery will occur unless controls on movement and access are progressively lifted in line with the AMA (Agreement on Movement and Access). Any mechanism put into place by the International C ommunity will not by itself alleviate the lack of free movement and access between the occupied Palestinian Territory and the rest of the world. However, given the right conditions, PEGASE should be able to facilitate and support progress in reforms and economic recovery.

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If the AMA is gradually implemented following negotiations post -Annapolis, PEGASE can be a powerful instrument at the disposal of the PA government, of Europe and of the International Community, to mobilise resources thereby contributi ng to the successful recovery of the Palestinian economy and the construction of a Palestinian State based on peace and prosperity. PEGASE is the French acronym for: Mécanisme, " Palestino - Européen de Gestion et d'Aide Socio -Economique" (Palestinian-European, Socio-Economic Management and Assistance Mechanism) chosen by Commissioner Ferrero -Waldner as an acknowledgment of the Paris Donors Conference results. PEGASE, PEGASUS in English, is the Greek mythological, winged horse which flew to the firmament and was transformed by Zeus in a constellation of stars. It is a symbol of hope and progress towards the creation of an independent Palestinian State, living in peace and security with Israel and all his neighbours. PEGASE logo represents a flying horse wi th the Palestinian flag colours (white, black, red and green) on a background of sky and stars coloured in blue and yellow like the European flag. OBJECTIVES AND CONTENT: PEGASE will support the Reform and Development Agenda of the Palestinian Authority. It will be fully aligned with the 4 main axes of the PRDP: - Governance including, for example, Security and Rule of Law, Justice, Fiscal Reform, Accountability and Transparency, Administrative Central and Local Reform. PEGASE will put at the disposal of ministries, agencies and administrative departments, technical assistance support and international expertise as required. (Cf. Annex I). - Social Development with a specific focus on Social Protection, Education and Health sectors as well as on Employment schemes and fuel supply to the poorest part of the population. PEGASE will, for instance, address recurrent social expenditures, essential running costs and basic supplies which the PA must cover with its monthly budget. (Cf. Annex II). - Economic and Private sector Development is a priority so as to reverse the ongoing economic decline with programmes and development projects that support the private sector such as, for example, those dedicated to Trade Facilitation, support to the Palestinian Shipp ers Council, SMEs guarantee and financing, Industrial parks and Business Centres, Private Sector arrears payment and quick impact projects, as proposed by Quartet Special Representative Tony Blair. PEGASE will finance investment expenditures and sustain SM Es, agro and industrial business in order to preserve existing employment, to create new job opportunities and generate additional private investment and fiscal resources for the PA. (Cf. Annex III). - Public Infrastructure Development with programmes add ressing, for example, water, wastewater and solid waste infrastructure, electricity substations, network and metering energy, transport, school refurbishment, healthcare centre rehabilitation, local infrastructure (roads, bridges, electricity, etc). PEGASE will create or repair basic infrastructure necessary to improve the daily life of the population, to boost business environment and tourism and offer additional local jobs. Support to the electricity sector will also create the conditions of the reforms necessary to decrease net lending, reducing budget outlays. (Cf. Annex IV).

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PEGASE support of the PRDP will be complemented by the EU programmes devoted to Palestinian refugees through UNRWA and Non State Actors including International NGOs (Cf. Annex V) as well as by the humanitarian and food aid programmes of ECHO. TIMING AND DURATION: PEGASE will start on 1 February 2008. Its different programmes and projects will be progressively implemented subject to budget availability. PEGASE runs for a 3 year period in line with the PRDP and will cover the financial years of 2008, 2009 and 2010. GEOGRAPHICAL SCOPE : PEGASE will concern the entire occupied Palestinian territory: West Bank (including East Jerusalem) and the Gaza strip. CONTRIBUTORS : PEGASE will be the main instrument used by the European Commission to deliver the EC support to the Palestinian Authority and to the Palestinian population. It will be put at the disposal of EU Member States' bilateral aid. PEGASE will also be open to international donors wishing to use this mechanism to channel their bilateral aid to Palestine. PEGASE will seek to facilitate the maximum level of donor support. INTERFACE WITH THE PA ADMINISTRATION : A process of consultation with the Palestinian Authority has taken place prior to the public launch of the mechanism. PEGASE will be implemented in close cooperation and full partnership with the Prime Minister's Office, the Ministry of Finance and the technical Ministries and other Departments and Agencies of the PA. It will follow PRDP objectives and indicators and apply the priorities decided by the PA to develop the different programmes, reforms, projects and actions financed under the four main axes previously described. COLLABORATION WITH INTERNATIONAL INSTITUTIONS: PEGASE projects and actions will be included in the permanent macro economic and public financial management oversight coordinated by the IMF and the World Bank in collaboration with the PA government. Like all international assistance programmes, it will benefit from regular IMF and World Bank reporting and fiscal supervision. PEGASE will also be fully coordinated with UN Agencies and International Institution 's programmes through the existing local donor coordination structures.

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COORDINATION WI TH THE INTERNATIONAL DONOR COMMUNITY : PEGASE will be coordinated locally with the EU Member States, other international donors and International Organisations. In order to do so, full use will be made of the existing local coordination groups already in place in liaison with the PA administration and the Office of the Quartet Special Representative like the Local Development Forum, the AHLC structures, the coordination meeting between Member States and the EC Delegation etc. CONTRACTUAL AND LEGAL FRAMEWORK: EC contributions will be, following EU regulations, implemented through financing agreements signed by the PA Ministry of Finance and the EC Commission. EU Member States or other donors deciding to participate to PEGASE programmes will also sign a legal agreement with the PA and a Memorandum of understanding with the EC Commission setting out the operational arrangements regarding the implementation of the donor’s contribution and specifying the conditions that they wish to be respected to deliver th eir bilateral aid (purpose of the grants, conditions of payment, monitoring of actions, controls, reporting, etc.) cf. Annex VI. PEGASE STAFFING: PEGASE will be implemented locally by an international team of EC officials (ECTAO and TIM resources) and Member States officials supported by European and local experts and agents. EU Member States and International donors contributing to PEGASE will be welcome to second officials or experts to join the PEGASE team and to participate in the implementation and control of the different projects and actions. PEGASE will be managed by this team, following the usual procedures and financial circuits applicable in case of devolution, taking into account the specific importance and sensitivity of the Palestinian pro gramme. FINANCIAL AND PAYMENT SYSTEMS: Following the re-establishment of the Single Treasury Account (STA) and of transparent procedures and controls in the Ministry of Finance and other government departments under Salam Fayyad's instructions, PEGASE wi ll work in full partnership with the PA and will use to the maximum extent possible the PA financial and budgetary system to deliver PEGASE grants and contributions. Nevertheless, to respond in a flexible way to varied project specificities and particular implementation requirements of the different donors, PEGASE will offer a whole range of financial and payment systems. In order to do so, PEGASE will put at the disposal of donors five main financial channels: 1. Direct budget support to the STA withou t identification of specific expenditures. This system may be used by those donors that do not n eed to use their contribution for earmarked expenditures. Direct Budget Support may be, in this case, linked to specific benchmarks and conditionalities related to the PRDP or delivered without any special conditionality after the Policy Dialogue with the PA.

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2. Direct payments to a specific sub -account of the STA with identification of earmarked expendit ures and double signature of PEGASE or of the Donor and of the PA Administration. This system may be used if a donor wants to target specific sectors with its bilateral aid like, for instance, education or health, private sector arrears, infrastructure, social expenditures etc. 3. Coordinated and phased payme nts in parallel with PA's budget payments for specific expenditures. This is similar to the payment system currently used by the TIM for the payment of social allowances. 4. Ex-post reimbursements of identified expenditures on a specific sub -account of the STA with double signature of PEGASE or of the Donor and of the PA Administration. This system may be used, for instance, for the payment of ministry non -salary running costs, infrastructure, supplies etc. 5. Direct payments of expenditures to beneficia ries or suppliers. This system may be used, for instance, in the case of technical assistance contracts or for fuel and supplies payments. See more details in Annex VII. MONITORING , CONTROL AND AUDIT SYSTEMS : PEGASE will offer to donors a comprehensiv e monitoring, verification and control system to provide reassurance over the use of their funds, and the efficient and effective provision of support to the Palestinian administration and population while fully protecting donor interests. Payments will be executed in accordance with international regulations. A sophisticated and uniform financial reporting system will be implemented, giving detailed information on all operations processed. Individual beneficiaries will be uniformly checked against inter national sanctions lists. Depending of the type of project and programme financed, of the characteristics of the sector of activity concerned, of the geographical location, of the payment system used and of donors requests, specific ex-ante, real-time and/or ex-post monitoring and control procedures will be put in place. Financial experts and qualified auditors, already working within the TIM Management Unit, will be made available to PEGASE which will be complemented by EC and Member States specialists and international or local experts. Apart regular monitoring, control and audit systems and operations specific to each programme or project, regular financial system audits of the global mechanism will be implemented each year. Reports will be publishe d. A mid-term evaluation will be undertaken in mid -2009 and a comprehensive final evaluation report will be undertaken end of 2010 and made publicly available. See more details in Annex VIII.

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REPORTING AND INFORMATION SYSTEMS : All relevant informatio n on the different projects and programmes financed by PEGASE will be fed into a specific PEGASE database and will also be included into the PAMS data base created by the EC in collaboration with the PA Ministry of Planning to collect all data on donors as sistance. Regular reporting will be made to the donors, to the European Parliament and to the relevant budgetary and control authorities. All existing coordination fora and groups will be periodically informed and briefed on PEGASE implementation both locally and internationally. An information bulletin summing -up PEGASE activities will be produced on a weekly basis and comprehensive operational and financial reports will be published every six months. See more details in Annex IX. BUDGET: PRDP needs in relation with PEGASE activities and EC resources already available at this stage for 2008 are specified in Annex X. Figures are mentioned both in Euros and US Dollars. The rate of exchange used is 1 EUR = 1.45 USD.

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ANNEX I

Governance This covers the broad range of government activity in the PA, from the legislative process, to appropriate fiscal policies and public financial management, to wider transparency and accountability at executive level, to the enforcement of laws, and the holding of the government and President to account through normal democratic processes. Better governance and ins titutions are critical for economic recovery, democratic development and for building the foundations of a future Palestinian state, as envisaged under the Road Map. Effective and accountable governance is also important in terms of enhancing the day -to-day quality of life for Palestinian people. Without improved budget, planning and human resources systems and processes, for example, the PA will have difficulty to deliver better health, education and social services over the coming period. State-building rests on several main pillars: the capacity of state structures to perform core functions; their legitimacy and accountability; and their ability to provide an enabling environment for strong economic performance to generate incomes, employment and domest ic revenues. Demand for good governance from civil society is a vital component of a healthy state.

The international community should maintain a focus on improving capacity and governance in the most basic security, justice, economic and service delive ry functions. PEGASE will act in these different fields.

The European Commission is the Chair of the Governance Strategy Group and provides technical assistance through the Governance Coordinator based in the Ministry of Planning. The Governance Strategy Group's supports improvements in the areas of:

• Immediate and sustained improvements in the rule of law • Progress on basic public administration and civil service reform to enhance functions across

all core areas • Ensuring transparency and accountability • Reforming intergovernmental relations between the central and local levels

The PRDP proposes an extensive and far reaching governance agenda which requires the support of donors. The PA aims to restore the rule of law, and improve governance in the West Ba nk and in Gaza.

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The PA seeks to upgrade all Palestinian institutions of government through the implementation of an extensive reform agenda which will facilitate social and economic development. Progress has been made, including the passing of appropr iate laws in many key sectors, but the main challenge remains the implementation of reforms. 2006 was a difficult year and many of the earlier reform efforts were lost, but efforts are now underway to rebuild. The Ministry of Finance has been working t o restore the public financial management system to improve expenditure and cash controls and management. Structural problems have emerged in the public finances, largely because of the use of the PA budget to provide a social safety net in the face of a deteriorating socio-economic and humanitarian situation. The improvement of the public financial management system will constitute a high priority among the governance project s financed by PEGASE. See attached project fiche 1 : public financial management

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ANNEX I fiche 1

Public financial management

A) Scope and objectives

The objective of this activity is to help the sustainability of the Palestinian Authority through enhanced revenue collection capabilities, management of public finances and the creation of a Palestinian state built on respect for the rule of law. PEGASE will support the PA in addressing the ke y reform issues of wage bill reduction, net lending, tax administration reforms, and the payment of arrears. PEGASE will do this by providing technical and financial assistance for the payment of PA arrears to the private sector by the EC and other donors (see also annex III fiches 1 and 2 pages 25 and 27 ). Support to the computerisation of the PA tax system (PATACS) will continue as well as work to support the reduction in net lending through the existing portfolio of projects in the energy sector (see also annex II fiche 3 page 17 and annex IV page 29). Work will also continue with IFIs to provide necessary assistance in wage bill reduction . The EC has been supporting public financial management reforms for several years, in particular in the areas of internal and external audit, and financial control. PEGASE will continue to work with in these key areas in particular, with the new Accountant General and the new Accounting System, including capacity building in the areas of treasury supervisions, cash and debt management, budget execution, payroll and financial reporting , in line with the 'Open and Accountable Government' (OAG) programme. PEGASE will also build on the existing EC portfolio and continue to enhance the PA's own revenue generating capacity, through improvements to the Ministry of Finance's tax administration and Customs departments, and for the latter improved supervision of customs transactions and crossings. PEGASE will support the ‘Efficient and Effective Government’ (EEG) programme b y building upon the EC's extensive past and current experience including, for example, through the public sector legislative framework, through support to the Central Elections Commission (CEC) and the Palestinian Monetary Authority (PMA). The reform strategy for the justice sector being taken forward under the ‘Justice Now’ (JN) programme has been extensively supported by the EC with institution and capacity -building support to the High Judicial Council, the Attorney General and the Ministry of Justice.

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This work will continue under PEGASE in the future to deliver further training, upgrading of facilities and court automation such as a judicial training institute, court facilities, modernization of the criminal justice apparatus, by computerising c ourt documentation and criminal records and by establishing forensic laboratories. EU POL COPPS with 30 staff is well placed to accompany the security sector plan in close coordination with the USSC General Dayton. EU POL COPPS h as resumed training of p olice in the Jericho training centre. Deployment of police is limited by the lack of adequate resources such as police stations, vehicles, communication networks and uniforms. PEGASE will support the EU POL COPPS mission through the supply of civilian eq uipment and to rebuild local 'Muqataa' (police stations), which is a priority of the PA. B) Operating modalities and financial system

This activity is centrally managed by PEGASE and coordinated with the Ministry of Finance and other Ministries. Financing Agreements will be signed with the Palestinian Authority Ministry of Finance, notably with the Ministry of Finance or the Prime Minister. Contracts for long and short term, international and local experts are signed directly by PEGASE in coordination with relevant Ministries. Payments are made directly to suppliers.

C) Monitoring, control and audit PEGASE activities will be subject to the standard monitoring, control and audit provisions of EC programmes. PEGASE will arrange for Steering Committees f or project activities, regular performance monitoring is assured by PEGASE and the EC's usual external monitoring programme. All projects are subject to external audits/inspections by the various control and oversight entities. D) Financial needs

The total estimated PRDP needs Development Projects for the Governance sector i n 2008, including security, amount to $108 million ( €75 million). Excluding security issues needs total $53 million ( €37 million).

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ANNEX II

Social Development

The social ministries account for the majority of PA expenditure and have been the beneficiaries of significant donor assistance for both non -recurrent and recurrent costs over recent years. The first priority of the PRDP is to secure sufficient donor funding to ensure that service delivery can continue in the areas of health, education and social services (e.g water, fuel and energy) , whilst recognising the needs for partnership and better coordination w ith private sector service providers and NGOs. The PRDP targets quality improvements in these services whether they are governmental or non -governmental. PEGASE supports these programmes building upon the existing EC portfolio. The PA is conscious of th e need to ensure that adequate social protection mechanisms are available to vulnerable citizens and a key emphasis of the PRDP is to ensure a s ocial safety net system which is efficient, targeted and affordable. This work it intends to take forward in a coordinated way with all other service providers in the private and nongovernmental sectors. UNRWA will continue to be a key partner in this regard, which, as donors are aware faces the same challenges. Given the difficult humanitarian and socio -economic situation over recent years, the burden on all social assistance systems has increased significantly Education is the largest expenditure item for the PA accounting for more than 30% of requested donor support for recurrent expenditures and approximatel y 20% of donor support requested for the public investment program in the PRDP. The PA intends to build upon achievements to date in the education sector and guarantee a modernised and comprehensive education system at all levels, including vocational training and higher education. This is in -line with its vision for a knowledge -based, private sector-led economy. Key challenges are the growing young population which will require significant investment in the education sector, ensuring financial support t o public universities, while at the same time improving the quality and efficiency and effectiveness of the system through teaching training, equipment and curriculum development for example. Health indicators have deteriorated in recent years due to the ongoing conflict, restrictions and the unstable budgetary situation, while demand continues to increase. The PRDP sets out key priorities for the sector which arise from the National Health Strategic Plan. These include improving management capacity and reforming health financing with the aim of increasing the quality and affordability of public health care.

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Improving quality will be achieved by addressing infrastructure, equipment, training and other capacity-building needs, while focussing on prev entative medicine and primary care. Medicine procurement and strengthened financial management are also key issues to ensure cost -effective provision. PEGASE can also support the PA employment generation initiative which will focus on small and medium-sized labour-intensive infrastructure projects. TIM has been providing social allowances to teachers and verification and control services for other donors to also contribute to this important area. PEGASE will conti nue to offer these services and will also contribute to the recurrent costs of key social ministries of the PA which are estimated in 2008 to amount to $108 million ( €75 million). In addition to actions implemented under PEGASE, the European Commission will continue to provide substantial assistance to UNRWA in line with its commitments, whether it is support to the general budget, support for specific target projects or for the UNRWA reform programme, including through the work on performance indicators (see Annex V). The substantial humanitarian, food aid and food security assistance, delivered by ECHO, will also continue, in line with PRDP objectives for the social protection system. Support to initiatives in East Jerusalem will also continue to be supported, in particular, for the improvement of community and social services. Attached project fiche(s):

1. Supporting Palestinian public administration and services 2. Supporting the Palestinian social protection system – aid to vulnerable Palestinian families 3. Provision of essential public services 4. Education projects 5. Health : supporting the Programme for Improving Health

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ANNEX II – Fiche 1 Supporting Palestinian public administration and services

A) Scope and objectives

The Palestinian Authority ensures the delivery of key public services, such as health, education and social protection. Government expenditure on wages accounts for almost half of the yearly public expenditure. The vast majority of civil servants work in the education and health secto rs, as teachers, doctors and nurses. The PRDP calls for a significant share of donors’ funds to be devoted to help the PA alleviate its budget deficit and avert a fiscal crisis.

PEGASE will make available a monthly contribution to the payment of salaries a nd pensions to the PA civil servants in the West Bank and Gaza. The objective of this activity is to help the PA meet its financial obligations towards civil employees and pensioners. The contribution to the funding of the wage expenditure for civil servan ts reinforces the PA’s public finance management and public finance reform implementation. At the same time, it allows the administration to function and therefore to provide services to the Palestinians in the West Bank and Gaza. B) Operating modalities and financial system This activity is centrally managed by PEGASE and implemented through a PEGASE -Ministry of Finance (MoF) parallel funding mechanism. Under this mechanism, PEGASE disburses, from a bank account opened locally at the same bank and branch as the PA-Single Treasury Account, a monthly contribution to the payment of salaries and pensions to civil servants identified as eligible by a team of auditors. The number of beneficiaries eligible is in the order of 75,000. The disbursement of funds is fully coordinated with the disbursement of MoF funds and made on the same day the MoF executes the monthly payment of salaries/pensions, thus allowing all civil servants and pensioners to receive a single payment, regardless of the source of funds (PEGASE , MoF or both).

In accordance with the MoF system for the payment of salaries, the PEGASE and MoF contributions are disbursed directly to the bank account of the beneficiaries by a network of around twenty local banks where the beneficiaries hold their ba nk accounts. The list of beneficiaries is updated each month based on the latest payroll provided by MoF. The PEGASE contribution to the payment of each beneficiary salary/pension is initially established at three different levels (ILS 1,000, ILS 1,500 and ILS 2,500) depending on the net salary/pension each beneficiary is entitled to receive.

This activity will be adapted to reflect the implementation of reforms of the civil service and of the pension system envisaged in the PRDP.

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C) Monitoring, control and audit An audit team is in charge of identifying the eligible beneficiaries on the basis of the eligibility criteria defined by PEGASE in an audit plan. An ex -ante agreed upon procedure audit report is produced by the audit team prior to each payment. The employees and pensioners identified as eligible to receive a contribution to the payment of their salary/pension are screened by PEGASE’s audit team against sanctions lists and other ad -hoc lists. D) Financial needs

In 2008, the PRDP budget needed to support the payment of salaries to civil serv ants amounts to $ 734 million (€ 506 million).

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ANNEX II - Fiche 2

Supporting the Palestinian Social Protection System Aid to vulnerable Palestinian families

A) Scope and objectives PEGASE will make available at regular intervals direct financial support to vulnerable families in the West Bank and Gaza. The objective of thi s activity is to ensure the continued assistance to poor and vulnerable Palestinian families dependent on financial aid from the PA administration. This activity reinforces the social protection system and improves PA public finance s by granting the PA bud get a reduction of expenditure through the coverage of allowances due to the beneficiaries of the Ministry of Social Affairs’ (MoSA) cash support programme.

B) Operating modalities and financial system This activity is centrally managed by PEGASE. At regul ar intervals, such as on a quarterly basis, PEGASE pays through a network of Palestinian banks the financial aid to be disbursed over -the-counter by the local banks to a list of beneficiaries, identified as eligible by a team of auditors. The population of beneficiaries ranges between 42,000 and 45,000. The eligibility criteria are established by PEGASE on the basis of the list of recipients of cash support provided by MoSA. The list of beneficiaries is updated regularly. Different levels of individual cont ributions might be adopted to reflect the beneficiaries’ family size. PEGASE closely follows progress in the gradual implementation of the “Social Protection Reform and Integration” programme, as set out in the PRDP, and will adapt this activity to allow for better harmonisation with other social protection projects and programmes.

In this framework, the implementation of the programme is closely coordinated with MoSA and MoF and might progressively move to a parallel funding mechanism resulting in the fi nal beneficiaries receiving a single payment with funds made available by the PA and PEGASE.

C) Monitoring, control and audit

An audit team is in charge of identifying the eligible beneficiaries from the list of MoSA recipients of cash support. The eligib ility criteria are defined in an audit plan. An ex -ante agreed upon procedure audit report is produced by the audit team prior to each payment.

The execution of over -the-counter payments is closely monitored by PEGASE and its audit team, who also ensure that ex-post audits of the payments are executed. All eligible beneficiaries are individually screened against sanctions lists and other ad -hoc lists.

D) Financial needs The total estimated PRDP needs for budget expenditures for social protection schemes of the Ministry of Social Affairs in 2008 amount to $102 million ( €70 million).

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ANNEX II – Fiche 3

Provision of Essential Public Services

A) Scope and objectives The objective of this activity is to help the Palestinian Authority ensure the continued provision of essential public services for the benefit of ordinary Palestinians. It focuses on funding the fuel deliveries to the Gaza Power Generating Company (GPGC), expected to operate with three industrial diesel-powered gas turbines to generate one third of electricity available in the Gaza Strip. This ensures the continued provision of electricity to households, sch ools, hospitals and public services in the area. This activity also directly supports the PA’s public finance reform objectives by funding part of the net-lending stemming from the government subsidy of West Bank and Gaza citizens’ consumption of energy and utilities, which currently amounts to USD 50 million per month. This support will provide initial financial relief to the PA during the first phase of the implementation of the reform measures set out in the PRDP aimed to significantly reduce net lending from 10.6% of the GDP in 2007 to 7.8% in 2010. B) Operating modalities and financial system

On the operational side, the implementation of the fuel deliveries programme is managed by PEGASE in close coordination with the PA Ministry of Finance (MoF) and with the support of a team of auditors. In respect of other net lending, the PA deals with the operational aspects whereas PEGASE reimburses ex-post selected related costs for both the West Bank and Gaza, such as the burden on the PA budget for the purchase of electricity and water and for subsidies on energy goods and services.

With regard to the financial mechanism, applicable to both the payment of fuel deliveries and the reimbursement of other net lending related costs, PEGASE can pay supplies directly or periodically transfer funds to a sub -account of the Single Treasury Account (STA) opened specifically for this activity on the basis of a payment schedule defined in the relevant agreement between PEGASE and MoF. On a regular basis, PEGASE receives fro m MoF a request for payment (fuel deliveries) or reimbursement (other net lending).

In case of payment via the Palestinian Authority any disbursement from the project account has to be granted a double-signature from an authorized representative of PEGASE and of MoF.

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C) Monitoring, control and audit An audit team attends on a daily basis the fuel deliveries to the GPGC and prepares an ex-ante audit report on the eligibility of the requests for payment submitted by MoF. An ex-post audit of the payment is carried out after MoF releases the payments from the project account. Other net lending related costs are audited upon submission of requests for reimbursement from the MoF. D) Financial needs In 2008, the total estimated PRDP needs for budget expendit ures for the GPGC supplies amount to $154 million (€106 million).

With regard to other net lending, the total remaining estimated needs of the PA reach $312 million (€215 million), with total net lending at $466 million ( €321 million).

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ANNEX II - Fiche 4

Education Projects

A/ Scope and objectives

PEGASE, in addition to supporting recurrent and non -recurrent education expenditures, will also support the reform programme of the education sector along the lines of the policy defined by the Palestinian Authority. Much remains to be done in terms of quality and relevance of education including in vocational education and training. A national strategy needs to be implem ented and it is also necessary to develop pedagogic methods and practices for teachers, as well as tools for monitoring and evaluation. In June 2007 the MoEHE presented a first draft of the Second Five Year Plan for the period 2007 -2011 which has three main objectives: Ensuring education for all; Quality Education and Quality standards; developing the administrative and financial systems and improving performance. This document will be finalised by end of February 2008. The PRDP highlights four initiativ es:

- Access to education (ATE) - Quality Education for All (QEFA) - Education Performance and Efficiency (EPE) - Vocational Training Initiative (VTI)

PEGASE will support these initiatives by building upon the existing EC portfolio. Funds are available for the refurbishment of schools to support the Quick Impact Projects (QIP) of the Quartet Representative. Priority will also be given to quality and relevance. PEGASE will therefore focus on supporting the QEFA and VTI initiatives. PEGASE will continue to suppor t the Ministry of Education and Higher Education through the ESSP for non -recurrent costs but will also seek to improve the quality of higher education through the Tertiary Education Project. PEGASE will also take forward support to the ‘Vocational Trai ning Initiative’ (VTI) programme through the new Technical and Vocational Education Training Centre which will be finalised in 2008. B/ Operating modalities and financial system This activity is centrally managed by PEGASE with activities being coordina ted with the Ministry of Finance and the Ministry of Education and Higher Education. Financing Agreements will be signed with the Palestinian Authority and contracts to provide expertise and technical assistance will be signed directly with providers.

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C) Monitoring, control and audit

PEGASE activities will be subject to the standard monitoring, control and audit provisions of all EC programmes. PEGASE will arrange for Steering Committees for project activities and regular performance monitoring will be assured by PEGASE and the EC's external monitoring programme. All projects will be subject to external audits/inspections by the various control and oversight entities.

D) Financial needs The total estimated PRDP needs for Development Projects for the Education Sector in 2008, amount to $77 million (€53 million).

The total estimated PRDP needs Development Projects for the Social Sector in 2008 amount to $141 million (€97 million).

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Mécanisme "Palestino Européen de Gestio n et d'Aide Socio -Economique" PEGASE

ANNEX II Fiche 5

Supporting the Programme for Improving Health A) Scope and objectives Support to recurrent and non -recurrent costs of health service provision will continue to be supported under PEGASE. In addi tion, PEGASE is ready to work with the PA to support institutional capacity building in the Ministry of Health. The PRDP identifies two initiatives for donor support; ‘Health Quality Improvement’ (HQI), and ‘Health Care Affordability’ (HCA). PEGASE can support these two initiatives by contributing to improved performance of the health system and its governance by the Ministry of Health (MoH) in the West Bank and Gaza. Specifically, PEGASE can focus on improving the quality of service delivery, including primary and secondary prevention of non communicable diseases, at containing and rationalising the health expenditures whilst ensuring access and quality services delivery, while at the same time supporting governance improvements in a comprehensive way. In this context three main areas could be considered for support through PEGASE.

1. Institutionalisation of Quality Improvement

a. Implementation of guidelines, including update, elaboration of protocols and flowchart, upgrade and training of personnel and cur ricula;

b. Preparation of guidelines for secondary and tertiary care referrals; c. Improvement of primary and secondary prevention of non communicable diseases;

2. Improvements to Resource Allocation

a. Licensing, accreditation, contracting and procurement of pharmace utical, medical consumables, minor medical equipment, other good and services;

b. Rationalisation of resources allocation, including elaboration of investment master plans on infrastructure, equipment, maintenance and human resources for secondary and tertiary care and rehabilitation;

c. Promoting managerial capacities of hospitals through decentralisation including the management health information system;

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3. Strengthening Health Sector Governance

a. Development of MoH stewardship role and functions, including accou ntability and Health in All Policy;

b. Capacity building to the Policy and Planning Unit on policy reform, prioritisation, resource mobilisation and allocation, financing the review of the health insurance system, planning and coordination;

c. Disaster preparedness and management plan;

B) Operating modalities and financial system Part of this activity is centrally managed by PEGASE with activities being coordinated with the Ministry of Finance and the Ministry of Health. Implementation can also be undertaken i n a decentralised manner through annual workplans with prior PEGASE approval. A coordination unit can be established in the Ministry of Health. Financing Agreements will be signed with the Palestinian Authority and contracts to provide expertise and tech nical assistance will be signed directly with providers. C) Monitoring, control and audit In addition to PA evaluations, monitoring and audits, activities will be subject to the standard monitoring, control and audit provisions of all EC programmes. PEGASE will arrange for Steering Committees for project activities and regular performance monitoring will be assured by PEGASE and the EC's external monitoring programme. All projects will be subject to external audits/inspections by the various control an d oversight entities.

D) Financial needs The total estimated PRDP needs for Development Projects for the Health Sector in 2008, amount to $32 million (€22 million).

The total estimated PRDP needs Development Projects for the Social Sector in 2008 amount to $141 million (€97 million).

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Mécanisme "Palestino Européen de Gestion et d'Aide Socio-Economique" PEGASE

ANNEX III

Economic and Private Sector Development

The private sector should be the main source of growth in the future. Private sector -led growth is severely constrained by existing obstacles to movement and access lea ding to increased costs, economic fragmentation, low investment, and loss of human capital. A dynamic private sector will create jobs facilitating a reduction in public expenditures and an increase in public revenues. Without improved movement and access , both internally and externally, there is little prospect for the private sector to flourish and play this role. The implementation of the Agreement on Movement and Access (AMA) is a precondition for a viable Palestinian economy. The PA aims at developing a market economy led by the private sector. While the potential is good, recent conditions have led to a 'hollowing -out' of economic activity, with a lack of investment and much-reduced productive capacity. The aim is for quick impact projects but als o support for longer term development which leads to sustainable job creation and economic growth, in particular in the industrial and tourism sectors. This requires tri -partite action by Israel, the PA and the donor community to improve the investment cl imate and remove obstacles to movement and access. Key elements of PEGASE include the Quartet Representatives Quick -Impact Projects (QIPs). These are designed to provide near -term stimulus but, more importantly, to illustrate the positive impact of parallel actions by the PA, Israel and donors to create the proper environment for Palestinian businesses to flourish. Institutional reforms are key in the trade and investment areas to create an enabling environment for private sector investment, trade and gro wth. A conference with private sector investors is foreseen to highlight investment opportunities and generate increased investment in Palestine. Borders and crossing are very important and the planned rehabilitation of the General Administration for Cro ssings and Borders (GACB) will be dealt with as a priority of PEGASE. Three programmes are envisaged by the PA to support institutional reform, enterprise development and trade facilitation. The ‘Institutional Reform for Enterprise’ (IRE) focuses on the legal framework; the ‘Enterprise Investment and Development’ (EID) programme will focus on access to credit for SMEs and investment finance; ‘the Trade Infrastructure and Facilitation’ (TIF) program will promote trade agreements and ensure necessary infras tructure and arrangements to increase trade.

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Agribusiness development is also a PA priority which can contribute to quick recovery, in particular, through the construction of agro -industrial business parks and developing commercial opportunities up and down the supply chain. Options are being reviewed for the construction of one or more industrial parks which can create employment, but are subject to removal of restrictions on access and movement. Tourism is a sector which has traditionally played an important economic role and tourism assets need to restored, upgraded and rehabilitated. Finally, the PA intends to improve the capacity of government agencies active in the housing sector including Municipalities, the Ministry of Public Works and Housing , and the Land Authority, and to reform the corresponding legal and administrative framework. Attached project Fiches: 1. Supporting the Palestinian Private Sector - reduction of arrears 2. Private Sector Development

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ANNEX III – Fiche 1

Supporting the Palestinian private sector – reduction of arrears

A) Scope and objectives The Palestinian Authority (PA) build s up debts towards private sector businesses, namely for the purchases of goods and services for the Palestinian administration as well as for the refund of VAT paid in excess by companies. These become arrears when the debt is not settled after an accepta ble grace period. This PEGASE activity will consist of the reimbursement to the PA of arrears due to the private sector and settled by the Ministry of Finance (MoF). It represents an important contribution to the Palestinian economy by directly addressing one of the major causes of the crisis of the private sector.

The settlement of arrears results in a rapid injection of funds in the economy, which provides immediate financial relief to the private sector, raises its purchasing power and helps the surviva l of businesses. It also has a positive impact on job maintenance, ensures that the provision of services to the administration can continue, improves the MoF cash flow and indirectly the financial exposure of banks.

B) Operating modalities and financial system For the payment of arrears PEGASE receives a request from the Ministry of Finance to cover a certain quantity of private sector arrears. PEGASE auditors verify and control arrears invoices provided by the Ministry of Finance of the PA, ensuring th ey meet the eligibility criteria of both the PA and PEGASE. Following verification, a further certification to verify eligible invoices is undertaken. Following final approval of all audit reports, PEGASE makes a transfer of funds into a project sub -account of the Single Treasury Account (STA) of the Ministry of Finance, with double signature for the release of funds. PEGASE authorises the release of funds for the payment of arrears by the MoF and then verifies MoF payments with an ex -post audit. Alternatively a reimbursable modality could be considered as follows. At regular intervals, PEGASE receives a request from the MoF for the refund of a set of recently settled arrears and selects those eligible for reimbursement by undertaking a full audit of arr ears paid by the Ministry of Finance, in accordance with PEGASE criteria. Following the audit PEGASE makes a transfer of funds to the Single Treasury Account (STA) for an amount deemed eligible under the audit.

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C) Monitoring, control and audit An audit team is in charge of identifying the arrears eligible for reimbursement on the basis of the eligibility and priority criteria defined in a verification plan.

The private businesses benefiting from the payment of arrears identified as eligible for reimb ursement by PEGASE’s auditors are screened by PEGASE’s Management Team against sanctions lists and other ad-hoc lists.

D) Financial needs The total estimated PRDP needs for budget expenditures to support the payment of arrears in 2008 amount to $125 million (€86 million).

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ANNEX III FICHE 2

Private Sector Development

A/ Scope and objectives

PEGASE will build upon the existing EC portfolio and focus both on PA Institutions crucial for present and future economic development, as well as on private sector firms. As set out in fiche 1, the most direct form of support of PEGASE responds to one of the key priorities of the PRDP, the clearance of expenditure arrears to the private sector. PEGASE will provide auditing and verification services to other donors who also wish to clear Palestinian Authority arrears to private sector suppliers. Substantial capacity buildi ng support has already been provided by the EC in the area of trade facilitation including the legal framework. Institutional support has also led to the creation of the Palestinian Shippers Council (PSC), whose facilitation efforts could be further enha nced. Support to customs management and administration (ASYCUDA) is ongoing and has recently been expanded to include the Rafah crossing point. PEGASE will enhance this and, as soon as the political environment is ready to accommodate such support, will finance initiatives that will facilitate trade flows through the crossings of Karni, Rafah, Allenby. In addition, PEGASE can support the promotion of the institutional development of key PA agencies in the area of commercial law enforcement and in key in stitutions critical for trade facilitation, in particular PA customs, the Palestinian Standards Institute and the Ministry of National Economy. These activities are formalized in the PRDP as a 'Trade Infrastructure and Facilitation’ (TIF) programme. PEGASE will support Palestinian firms in benefitting from their trade preferences with the EU which is currently extending liberalisation of trade in services to the Palestinian economy. PEGASE assistance will target individual firms as well as researchers, p olicy-makers and trade negotiators with training, research, institution building and export promotion. Other areas that could be supported through PEGASE are developing capacity in a number of areas such as rules of origin, competition, public procurement , trade in services and regulatory work, as well as the full implementation and upgrading of the EC -Palestinian Authority Interim Association Agreement on trade and cooperation.

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PEGASE will also further support the business associations such as Paltrad e, Palestinian Federation of Industries (PFI) and the Chambers of Commerce, in the framework of the PRDPs ‘Institutional Reform for Enterprise’ (IRE) programme. The creation of Business Centres could also be supported under PEGASE to the benefit of SMEs. PEGASE will initiate a feasibility study to examine the needs in the context of existing organisations and local structures, in coordination with the PA.

PEGASE will enhance the European -Palestinian Credit Guarantee Fund which is providing credit guarantees through the local banking system. Further support will be granted allowing the fund to expand its activities. Other direct activities could include grant matching schemes with private enterprises, financial services schemes, supporting the upgrading of SMEs, larger businesses and business membership organisations in the development of new markets, products, and technologies. All these activities support the ‘Enterprise Investment and Development’ (EID) programme of the PRDP.

The Quartet Representative has agreed with the parties on a series of Quick -Impact Projects (QIPs) which are designed to show the benefits of concerted actions. PEGASE will build upon the EC's existing portfolio and will commit to finance several of these QIPs. Support will be studied in particular in the areas of border crossings (management, training, infrastructure) and trade facilitation. Support to the initiative on industrial parks could also be envisaged under the PEGASE if the necessary conditions are met. In the agricultural sector, work will continue under PEGASE to add value in key sectors, by delivering assistance to enhance productivity and profitability through improved marketing and distribution. PEGASE will support the land registry, legal reforms in the housing ma rket, and will study financing mechanisms designed to develop the mortgage market. B) Operating modalities and financial system This activity is centrally managed by PEGASE with activities being coordinated with the Ministry of Finance and other relevant ministries and organisations. Financing Agreements will be signed with the Palestinian Authority and contracts to provide expertise and technical assistance will be signed directly with providers. C) Monitoring, control and audit PEGASE activities wi ll be subject to the standard monitoring, control and audit provisions of all EC programmes. PEGASE will arrange for Steering Committees for project activities, and regular performance monitoring will be assured by PEGASE and the EC's external monitoring p rogramme. All projects will be subject to external audits/inspections by the various control and oversight entities.

D) Financial needs The total estimated PRDP needs for Development Projects for the Private Sector Development in 2008, amount to $73 mil lion (€50 million).

The total estimated PRDP needs Development Projects for the Economy Sector in 2008 amount to $93 million (€64 million).

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Mécanisme "Palestino Européen de Gestion et d'Aid e Socio-Economique" PEGASE

ANNEX IV

Public Infrastructure Development Substantial investment in public infrastructure is required and the management of public infrastructure needs to be reformed to ensure financial sustainability, as well as effective a nd efficient service delivery which meets the needs of the population. Public infrastructure offers limited coverage and is generally of insufficient quality and out of reach of some vulnerable groups. The PA intends to ensure that public infrastructure works in a more commercially -orientated way and can become financial ly viable. Greater private sector participation is envisaged. PEGASE will focus on all these priorities. Electricity is a key sector given its impact on the daily life of the population and on the PA budget through net lending. The network is fragmented with many distribution systems and a high dependence on Israel. The Gaza Power Station (GPP) could be more efficient if run on gas as intended, and there is no generation capacity in the West Bank. Poor service levels have led to system losses and inefficiencies. Major infrastructure investment is foreseen under the ‘Electricity Sector Investment’ (ESI) programme which will focus on upgrades of networks, control centers, and the installa tion of pre-paid meters. It will also include a component aimed at exploring alternative energy sources, for example, solar power. Water and waste water treatment is a key issue with low volumes and poor quality. Sewage infrastructure in north Gaza is a key problem, as is salination. In the territory , many treatment plants are not functioning or are highly inefficient. 60% of untreated waste water is pumped into the sea off Gaza, and approximately one third of waste water from Israeli settlements is disch arged untreated in the West Bank with public health concerns, and with acute problems already witnessed like in Beit Leiha following the collapse of a sewage pool, killing and injuring dozens. The Beit Leiha sewerage lake is a key component of the ‘Wate r and Wastewater Management’ (WWM) programme and includes rehabilitation of networks, new wells, as well as policy, coordination, and regulatory and engineering capacity. Lack of appropriate dumping sites and waste management equipment is leading to pollution with adverse consequences for public health, agricultural development, and quality of life in general. The ‘Solid Waste Management’ (SWM) programme focus on the development of affordable and sustainable regional waste management. The ‘Road Improve ment’ (RI) and ‘Road Safety’ (RS) programmes will focus on the rehabilitation of the road network and will include capacity building for sector ministries and agencies to ensure more effective planning and coordination of construction and maintenance, as w ells as regulation and enforcement. Independent air and sea access also remain a priority with a feasibility study for the development of an airport in the West Bank being planned. Attached project fiche 1: infrastructure projects

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ANNEX IV Fiche1

Infrastructure Projects A/ Scope and objectives

Given the high degree of interdependence between infrastructure developm ent and environment, common planning in both fields will be undertaken in line with PA priorities. PEGASE will make funds available to support the upgrading of the electricity network and of other electricity infrastructure, for example, for the installat ion of additional sub -stations. These projects will begin immediately under PEGASE. Further support will be made available, in line with PRDP priorities, to help reduce electricity losses though the PRDP ‘Electricity Sector Investment’ (ESI) programme. The EC has been working with the PWA for many years, including the support of the Beit Leiha sewerage project in north Gaza. The Emergency Fuel Distribution programme under the TIM ensured water plants and pumping stations continued to operate whilst the p ower station was out of service due to IAF bombing. PEGASE therefore will continue to support the ‘Water and Wastewater Management’ (WWM) programme and will provide technical and policy support where necessary. In addition, support will continue for the EXACT/Water Data Banks project involving Israel, oPt and Jordan. PEGASE will support the ‘Solid Waste Management’ (SWM) programme by implementing a new solid waste project providing equipment and expertise. The EC has worked on the establishment of a Joi nt Israel-Palestinian Energy Office and both sides wish to pursue this project. The office could deal with issues of common interest, such as Israel -Palestinian electricity interconnections and the solar energy project etc. which will be addressed by PEGASE. Similarly, under the framework of recent regional and bilateral meetings and committees, the PEGASE could support the re -activation of the Israeli -Palestinian Joint Transport Office (JTO). Funds could be mobilized quickly to promote this type of technic al cooperation between both sides. In support of the Quartet Representative's Quick Impact Projects, PEGASE will intervene to rehabilitate schools to improve the quality of education, as well as to support health centre refurbishment. Finally PEGASE is re ady to support the rebuilding of local police stations and urgent local infrastructure projects as requested by the PA.

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B) Operating modalities and financial system

Part of this activity is centrally managed by PEGASE with activities being coordinated with the Ministry of Finance and relevant line ministries. Implementation can also be undertaken in a decentralised manner through annual workplans with prior PEGASE approval. A coordination unit can be established for infrastructure activities. Financing Agreements will be signed with the Palestinian Authority and contracts to provide expertise and technical assistance will be signed directly with providers. C) Monitoring, control and audit

In addition to PA evaluations, monitoring and audits, activities wi ll be subject to the standard monitoring, control and audit provisions of all EC programme s. PEGASE will arrange for Steering Committees for project activities, regular performance monitoring will be assured by PEGASE and the EC's external monitoring pro gramme. All projects will be subject to external audits/inspections by the various control and oversight entities.

D) Financial needs The total estimated PRDP needs for Development Projects for the Electricity Sector in 2008, amount to $16 million (€11 million).

The total estimated PRDP needs for Development Projects for the Water Sector in 2008, amount to $27 million (€19 million).

The total estimated PRDP needs for Development Projects for the Solid Waste Sector in 2008, amount to $4 million (€3 million).

The total estimated PRDP needs for Development Projects for the Infrastructure Sector in 2008, amount to $85 million (€59 million).

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Mécanisme "Palestino Européen de Gestion e t d'Aide Socio-Economique" PEGASE

ANNEX V

Summary of projects with International Organisations and Non State Actors

In parallel to the assistance to the Palestinian Authority channelled through PEGASE, the EC will continue its partnership with international organisations and Non State Actors in order to meet specific needs (refugees, humanitarian issues, peace building) and to support Palestinian civil society.

1. UNRWA

The United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) is one of the EC's main partners. The European Union has provided humanitarian and developmental assistance to Palestinian refugees in the West Bank and Gaza Strip, Jordan, Lebanon and Syria since 1971, by contributing to the operational budget of UNRWA. Since 2004, the European Commission alone has contributed more than € 60 million annually in support of UNRWA's budget, and in 2005, it became the largest single donor to UNRWA. The most important support in terms of amount is channelled directly to the regular budget (General Fund) of the Agenc y.

Special projects targeting the Agency's social safety net scheme, camp rehabilitation or specific sector support such as education, waste water, or institutional reform of the Agency complement the above mentioned support to the regular budget.

2. Non State Actors and Human Rights programmes:

These programmes support international and Palestinian Non State Actors, in the field of Peace Building, Democracy and Human Rights, Health, Poverty Alleviation, Community Based Development and Cultural Activitie s. The two main programmes directed at Non State Actors are the Partnership for Peace Programme aiming at promoting the Middle East Peace Process through direct civil society relationships and co -operation among actors from Israel, the occupied Palestinia n territories and neighbouring countries, and the European Instrument for Democracy and Human Rights.

3. ECHO interventions:

In addition, DG ECHO, the EC Humanitarian Aid Department provides support to 7 main sectors of intervention: food aid and food s ecurity, water and sanitation, health, cash for work, psychosocial support, coordination and protection. ECHO also supports UNRWA's Emergency Programme. In 2008, DG ECHO will provide around € 52 million of humanitarian assistance to the Palestinian territ ories.

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ANNEX VI

Legal and contractual Framework The Legal and contractual Framework applicable to contributions will vary depending on the origin of funds. For EC Contributions

- Availability of funds will follow Commission Internal procedures (Inter -services Consultation, Comitologie and Commission Decision by Written Procedure).

- Implementation of these contrib utions will be made through the signature of Financing Agreements with the Palestinian Authority represented by the Prime Minister, the Ministry of Finance and, if needed, by the Ministry in charge of the implementation.

- Contractual and Financial procedu res will be those foreseen in the Financial Regulation (Council Regulation 1605/2002 lastly modified by 1995/2006) and its Implementing Rules (Commission Regulation 2342/2002 lastly modified by 487/2007), and the Practical Guide to contract Procedures for EC External Actions.

For Other Donors' Contributions

Depending on the legal constraints of each donor, the Legal Agreements with the Palestinian Authority can take different forms and it should be decided on a case by case basis.

- The Donor will usually sign with the Palestinian Authority represented by the Prime Minister or the Ministry of Finance either a Financing Agreement or a Memorandum of Understanding.

- The Donor signs in parallel with the Commission a MoU defining the tasks entrusted to the PEG ASE

All these Legal Agreements will specify the implementing modalities of Aid: purpose of grants, conditions of payment, reporting, monitoring of actions, evaluations, audits and controls, etc.

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ANNEX VII

Payment Systems

A) Objective PEGASE operates with a complete range of systems for the disbursement of funds. This allows it to effectively respond to the specif ic needs of each activity as well as to satisfy the specific requirements of each donor. These systems, alongside a clearly defined legal and contractual framework (Annex VI) and a system of monitoring, audit and verifications (Annex VIII), ensure that the support to Palestinians is provided efficiently and effectively and funds are disbursed with full transparency and accountability.

B) Description of the payments systems As a wide range of activities are implemented through PEGASE, five systems for the disbursement of funds are put at the disposal of donors. The payment systems are adapted to the requirements of each of PEGASE’s fields of activity and, within each field, to the specific nature of each activity. Direct budget support through the Single Treasury Account (STA) This payment system is put at the disposal of all donors willing to provide direct and un -earmarked budget support to the PA. Funds are made available directly into the STA. In the relevant agreements, donors agree with the PA the payment schedule and define the conditionalities for the disbursement of the subsequent tranches. At the request of donors willing to provide direct budget support, PEGASE offers its assistance in the setting up of the system, as well as ex -post verification services whenever deemed necessary by the donors (i.e. verification of benchmarks, respect of conditionalities). Direct payment to a specific sub -account of the STA This payment system is designed for decentralised activities. This management type cov ers numerous activities, for example, in the fields Economic and Private Sector Development and Public Infrastructure Development. Decentralised activities are defined by agreements between PEGASE and the PA, whereby PEGASE makes funds available in a sub -account specifically opened for each activity. The overall contribution is made available in tranches in accordance with the payment schedule set out in the relevant agreements between PEGASE and the PA. Payments from the project account are authorised upon a double signature from a PEGASE and a MoF representative.

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At regular intervals, MoF transmits to PEGASE the bank statements for the project accounts. The MoF informs PEGASE of the appointment of an authorising officer and an accounting officer ensuring a separation of duties, as well as of the measures taken to ensure the preparation of separate and reliable accounts. This payment system can also be applied for some selected centrally managed activities like the payment of private sector arrears. Un der this system, PEGASE auditors verify and control arrears invoices provided by the Ministry of Finance of the PA, ensuring they meet the defined eligibility criteria. Following approval of audit reports, PEGASE transfers the funds into a project sub -account of the Single Treasury Account (STA), with double signature. PEGASE authorises the release of funds for the payment of arrears and then verifies MoF payments with an ex -post audit. Coordinated and phased payments This payment mechanism is designed f or activities where PEGASE and MoF merge their funds to allow the final beneficiaries to receive a single payment, regardless of the source of funds. The parallel funding mechanism is particularly indicated for activities centrally implemented by PEGASE in close cooperation and daily contact with the relevant Ministries. The parallelism of the funding results in the funds being merged directly in the bank account of the final beneficiary. Ex-post reimbursement of identified expenditures This payment system applies to activities managed by the relevant Ministries of the PA and PEGASE reimburses selected eligible expenditure on the basis of an ex -post audit. Funds are disbursed through the STA, as could be the case for the funding of net lending related co sts and the reimbursement of arrears due by the PA to the private sector. With regard to net lending, PEGASE periodically transfers funds to a sub -account of the STA opened specifically for the activity on the basis of a payment schedule defined in the rel evant agreement between PEGASE and MoF. Funds are then reimbursed to the PA following a request for refund audited ex -post by a team of auditors. Funds from the project account are released only upon a double -signature from a PEGASE and a MoF representative. A reimbursable modality can also be used for private sector arrears payment as follows. At regular intervals, PEGASE receives a request from the MoF for the refund of a set of recently settled arrears and selects those eligible for reimbursement by un dertaking a full audit of arrears paid by the Ministry of Finance, in accordance with PEGASE criteria. Following the audit PEGASE makes a transfer of funds to the Single Treasury Account (STA) for an amount deemed eligible under the audit. Direct payments of expenditures and suppliers This payment system covers various fields of activity. Payments of goods/services providers directly contracted by PEGASE are made available in the validated bank account indicated by the organisation and in accordance with the payment schedule set out in the relevant contracts. This final payment system also applies to PEGASE’s support to the PA Social Protection System. The final beneficiaries of PEGASE’s support are individually paid over -the-counter through a network o f local banks to which PEGASE disburses funds at regular intervals, such as on quarterly basis.

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ANNEX VIII

Monitoring, Control and Audit Systems

Advanced monitoring, control and audit systems are set up for all of PEGASE’s activities. These systems ensure the efficient and effective provision of support to Palestinians, while protecting the interests of donors par ticipating in PEGASE by ensuring that funds are disbursed with full transparency and accountability and in compliance with the relevant agreements between PEGASE and the PA. A) Description of monitoring, control and audit systems High standards of control are achieved through a system of audit and monitoring verifications. This system is adapted to the requirements of each of PEGASE’s fields of activity and, within each field, to the specific nature of each activity. The system takes into account the sensitivity of each activity, the geographical location, the applicable management type and payment system, the contractual framework and donors’ specific requests. To ensure high standards of verification of individual recipients of funds and in order to avert any risk of misuse of funds, all direct beneficiaries of PEGASE funds under all the various scenarios detailed below are screened against sanctions lists and other ad -hoc lists. The monitoring and audit verifications are designed along the following lines: Activities centrally managed by PEGASE Activities centrally managed by PEGASE, such as the monthly contribution to the payment of salaries and pensions to PA civil servants, the direct payments to beneficiaries of the Ministry of Social Affairs social protection programme and the deliveries of fuel to the Gaza Power Generating Company (GPGC) are implemented under the continuous overview of an independent team of auditors. The team of auditors is in charge of identifying PEGASE’s eligible benefic iaries and/or invoices on the basis of the eligibility criteria defined by PEGASE in the relevant audit plans. Ex -ante agreed upon procedure audit reports are produced by the audit team prior to each payment and, on an ad hoc basis, ex-post audits are performed to confirm that disbursements were properly executed. To the extent necessary and in accordance with the sensitivity of each programme, the activities are, in addition, subject to in situ monitoring by a team of auditors and monitors. In particular , the deliveries of fuel to the GPGC are strictly monitored by an audit team through the daily attendance of fuel deliveries.

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Decentralised activities Decentralised activities are defined by agreements between PEGASE and the PA, whereby PEGASE makes funds available in the Single Treasury Account (STA), normally in a sub -account specifically opened for each activity. This management type may cover numerous activities in the fields of Governance and Institutional Building, Economic and Private Sector Deve lopment and Public Infrastructure Development. The implementation of the activities is delegated to the relevant PA Ministries, which are in charge of procuring contracts and paying contractors in accordance with the procurement and payment procedures identified as applicable in the relevant agreements between PEGASE and the PA. The awarding of contracts by the PA is subject to PEGASE’s ex -ante or ex-post approval depending on the amount of each contract. Payments from the project account are authorised up on a double signature from a PEGASE and a Ministry of Finance (MoF) representative. The budget of contracts awarded to contractors includes a provision for interim/final audits. The relevant agreements foresee an interim and/or external audit of the overa ll activities carried out and the right for PEGASE or participating donors to monitor at all times the implementation of the activities. Activities implemented through a reimbursable scheme These activities are defined by agreements between PEGASE and t he PA, whereby PEGASE makes funds available in the STA. This management type can cover activities in different fields, such as the payment of private sector arrears due by the PA under Economic and Private Sector Development and the funding of other net le nding under Social Development. Once the relevant agreements are signed and the eligibility criteria for the identification of eligible expenditures are defined by PEGASE and the PA, the operational aspects of these activities are dealt with by the PA, whereas PEGASE reimburses ex -post selected expenditure on the basis of ex -post audit reports issued by a team of auditors. Funds are made available in a STA project sub -account, payments can be made only upon a double signature by representatives from PEGAS E and MoF. The relevant agreements foresee an interim and/or a final audit of the overall activities carried out. Activities managed by International Organisations or NGO’s These activities are defined by specific and direct agreements between PEGASE an d international organisations or NGO’s. The audit and monitoring of activities implemented through international organisations are carried out in compliance with the terms of the relevant agreements, such as the Financial and Administrative Framework Agreement between the European Community and the United Nations. The contracts awarded to NGO’s include a provision for interim/final expenditure verification. Additional external audits can be executed at PEGASE’s request whenever deemed necessary. B) Evaluation of PEGASE A mid-term evaluation report of PEGASE will be issued in mid -2009 and a comprehensive final evaluation report will be undertaken by the end of 2010.

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ANNEX IX

Reporting and IT System

A) Objectives

All PEGASE activities are covered by a wide -ranging reporting and IT system. The IT management tools allow PEGASE to collect, store and elaborate all re levant data on its activities. The reporting system provides a clear, transparent and continuous flow of information to the donors participating in PEGASE as well as to all stakeholders involved. B) Reporting

At regular intervals, PEGASE issues reports on it s activities to donors participating in the programme and to stakeholders. The reports have been designed to respond to specific information needs and target predefined recipients. Reports generated from the PEGASE database A database for the collection and storage of data on PEGASE is set up. The database is regularly updated by the PEGASE IT Section and any relevant data is constantly uploaded. The PEGASE database is the main source of data for reporting. A number of management reports for the use of PEGASE are generated by the database based on specific queries; these include summaries and general overviews of payments processed as well as breakdowns of individual beneficiaries of support. Financial report and narrative reports On a regular basis, PEGASE issues different types of narrative and financial reports. The objective of these reports varies depending on their recipients. Detailed financial and operational information is regularly provided in the interest of the budgetary and political authorit ies. In addition, all donors contributing to PEGASE’s activities receive a monthly report providing financial and operational information on the status of ongoing activities. Other reports are circulated to all international and local stakeholders, includ ing a weekly information bulletin summarising the most relevant financial and operational information on PEGASE. As detailed in Annex VIII , advanced monitoring, control and audit systems are set up for all of PEGASE’s activities. All donors participating in PEGASE have full access to the corresponding monitoring and audit reports on the basis of which their contributions are disbursed.

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Operational and Financial report and evaluation report An operational and financial report covering the overall implem entation of PEGASE is published and distributed to all donors and stakeholders every six months. The report includes an executive summary, explains the background and context in which PEGASE operates, provides info rmation on the operational structure and the funding mechanisms of all PEGASE’s activities, provides a complete set of financial data covering all the activities and describes the monitoring and control systems put in place. In addition, a mid-term evaluation report of PEGASE will be issued in mid -2009 and a comprehensive final evaluation report will be undertaken by the end of 2010 . C) IT system

PEGASE IT system consists of an integrated set of IT management tools. For example, each disbursement of funds is authorised via a “payment module” in the relevant IT system to grant approvals by a succession of authorised signatories, in compliance with applicable financial regulations. The IT system is designed in a way to enable the import of data provided by th e PEGASE team of independent auditors and upload details on all beneficiaries of payments. The format and quality of the data are preliminarily treated to comply with the “payment module” format and are imported prior to each payment. The system serves a number of purposes, including stable storage and processing of large amounts of data and exporting validated payment instructions as well as supporting different categories of payments. In its current structure, the IT system covers the lifecycle of the be neficiaries’ and payments’ transactions and can be used to follow -up each beneficiary record by using an interface for updating personal information. It can also provide data in the format needed to screen beneficiaries against international sanctions list s and other ad-hoc lists. All interfaces of the IT system allow uploading of relevant background documents and provide users with a shared network. To ensure a continuous match between the IT architecture and PEGASE activities, the IT system is regularly reviewed to identify possible changes or the need for upgrading of certain features.

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ANNEX X

Estimated Financial Needs and Resources Estimated Financial Needs The PRDP sets out the medium-term fiscal framework (MTFF) based on the baseline scenario macroeconomic framework for 2008 -2010. On the basis of the MTFF figures, the European Commission has estimated the budgetary needs for 2008, by budget category, as set out in Table 1 below.

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Estimated Development Project Needs in 2008 In addition to meeting its budgetary needs, which is a PA priority, the PRDP also identifies a range of key development projec ts in various sectors for which donor support is necessary. The funding needs by sector for these PA priorities are listed in Table 2 below.

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Estimated Available Financial Resources At the Paris donor conference on 17 December 2007, t otal pledges for 2008 reached € 2.3 Billion ($ 3.4 Billion). The European Union pledged over € 1.1 billion ($ 1.6 billion) equivalent to 48% of total donor pledge for 2008. Within this amount of € 1.1 billion, the European Commission pledged for 2008, € 438million ($ 635 million) of which €249 million ($361 million) for budgetary expenditures and € 74 million ($108 million) for development projects which will be implemented through PEGASE. In addition, the European Commission pledged €114 million ($166 million) for humanitarian and UNRWA support. A summary of donor pledges is set out in Table 3 below.

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Estimated Needs versus Estimated Available Financial Resources Concerning 2008, while the estimated needs for PRDP development expenditures are exceeded, pledges to cover budgetary expenditures are less than the projected needs by nearly €190 million ($300 million). Table 4 below shows the PRDP overall needs, available PA resources, pledged donor funds, as well as the overall balance. A breakdown of donor support for individual expenditure items is to be determined in coordination with the PA and through the normal donor coordination channels.

NB: All conversions made at an exchange rate of 1 EUR = 1.45 USD

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