ISSN 1831-0834
EUROPEAN
COURT OF AUDITORS
2013
EN
Special Report No 14
EUROPEAN UNION DIRECT FINANCIAL SUPPORT 
TO THE PALESTINIAN AUTHORITY

EUROPEAN UNION DIRECT  
FINANCIAL SUPPORT TO THE 
PALESTINIAN AUTHORITYSpecial Report No 14  2013
(pursuant to Article 287(4), second subparagraph, TFEU)
EUROPEAN COURT OF AUDITORS
EUROPEAN COURT OF AUDITORS
12, rue Alcide De Gasperi
1615 Luxembourg
LUXEMBOURG
Tel. +352 4398-1
Fax +352 4398-46410
E-mail: eca-info@eca.europa.eu
Internet: http://eca.europa.eu
Special Report  No 14  2013
More information on the European Union is available on the Internet ( http://europa.eu ).
Cataloguing data can be found at the end of this publication.
Luxembourg: Publications Office of the European Union, 2013
ISBN 978-92-9241-451-1
doi:10.2865/55197
© European Union, 2013
Reproduction is authorised provided the source is acknowledged.
Printed in Luxembourg
CONTENTS
Paragraph
 ACRONYMS AND ABBREVIATIONS
I–VIII  EXECUTIVE SUMMARY
1–19  INTRODUCTION
2–10  BACKGROUND
11–19  EU FINANCIAL ASSISTANCE
20–25  AUDIT SCOPE AND APPROACH
26–73  OBSERVATIONS
26–42  DESIGN AND IMPLEMENTATION ARRANGEMENTS: THERE IS A  NEED TO REVISE A  NUMBER OF ASPECTS
27–32  PROGRAMMING FRAMEWORK IN NEED OF STRENGTHENING
33–39  ROBUST ELIGIBILITY VERIFICATION PROCEDURES BUT SCOPE FOR SAVINGS
40–42  POTENTIAL LEVERAGE REDUCED DUE TO ABSENCE OF CONDITIONALITY
43–73   RESUL TS AND SUSTAINABILITY: PEGASE DFS HAS ACHIEVED SOME RESUL TS BUT THEIR SUSTAINABILITY IS 
INCREASINGLY AT RISK
44–52  PEGASE DFS IS REACHING THE ELIGIBLE BENEFICIARIES BUT TRANSFERS ARE BECOMING DELAYED
53–60   PEGASE DFS HAS CONTRIBUTED TO ESSENTIAL PUBLIC SERVICES BUT HAS ALSO PAID CIVIL SERVANTS WHO 
ARE NOT WORKING DUE TO THE POLITICAL SITUATION IN GAZA
61–73   THE FINANCIAL SUSTAINABILITY OF THE PA IS AT RISK DESPITE THE LARGE SCALE FUNDING FROM PEGASE DFS3
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
74–85  CONCLUSIONS AND RECOMMENDATIONS
74–79  CONCLUSIONS
80–85  RECOMMENDATIONS
 ANNEX I  — THE PEGASE MECHANISM
 ANNEX II  — OVERVIEW OF PEGASE DFS-RELATED FINANCING AGREEMENTS AND 
CONTRACTS
 ANNEX III  — SUMMARY OF FUNDS DISBURSED THROUGH PEGASE
 ANNEX IV  — TOTAL PA WAGE BILL DISBURSEMENTS FOR ELIGIBLE CSP AND TOTAL PEGASE 
CSP PAYMENTS 2008–12 MONTH BY MONTH IN EURO AND NUMBER OF ELIGIBLE 
BENEFICIARIES
 ANNEX V  — TOTAL PEGASE CONTRIBUTION TO VPF BENEFICIARIES COMPARED WITH PA 
SOCIAL ALLOWANCE PAYMENTS TO ELIGIBLE VPF BENEFICIARIES 2008–12
REPLY OF THE COMMISSION AND THE EEAS4
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
AHLC : Ad Hoc Liaison Committee
AIDCO : EuropeAid Cooperation Office
AUPs : agreed upon procedures
CSP : support for civil servants and pensioners
CSDP : common security and defence policy
DFS : direct financial support 
EEAS : European External Action Service
ENP : European neighbourhood policy 
ENPI : European neighbourhood and partnership instrument
EUREP : Office of the EU Representative (Jerusalem) (also ECTAO )
NIS : New Israeli Shekel
oPt : occupied Palestinian territory
PA: Palestinian Authority
PEFA : public expenditure and financial accountability
Pegase : Mécanisme Palestino–Européen de Gestion et d’Aide Socio -Économique
PLO : Palestinian Liberation Organisation
PFM : public finance management
PRDP : Palestinian reform and development plan
PSRG : private sector reconstruction in Gaza
SEPS : support for essential public services
TIM : temporary international mechanism
UNDP : United Nations Development Programme
UNRWA : United Nations Relief and Works Agency for Palestine
VPF : support for vulnerable Palestinian familiesACRONYMS AND ABBREVIATIONS5
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
I.
The European Union has provided more than 5,6 bil-
lion euro in assistance to the Palestinian people since 
1994 to support its overall objective of helping bring 
about a two -state solution to end the Israeli–Palestin -
ian conflict. Since 2008, its largest programme in the 
occupied Palestinian territory (oPt) has been Pegase 
direct financial support (DFS), which provided approxi -
mately 1 billion euro in funding from 2008 to 2012. 
Pegase DFS seeks to help the Palestinian Authority 
(PA) to meet its obligations to civil servants, pension -
ers and vulnerable families, maintain essential public 
services and improve public finances.
II.
The audit examined if the Commission and the 
European External Action Service (EEAS) had man -
aged Pegase DFS well. It was carried out from July 
to December 2012 and included a 2-week visit to the 
West Bank, including East Jerusalem, and Gaza in Octo -
ber 2012.
III.
The audit concluded that the Commission and the 
EEAS had succeeded in implementing direct finan -
cial support to the PA in difficult circumstances, but 
that a number of aspects of the current approach are 
increasingly in need of an overhaul. While some impor -
tant results have been achieved, their sustainability 
is in doubt without major revisions to the current 
approach. As part of these revisions, the PA also has 
to be encouraged to undertake more reforms, notably 
in relation to its civil service. At the same time, a way 
needs to be found to bring Israel to take the neces -
sary steps to help ensure that Pegase DFS is effective.EXECUTIVE SUMMARY
IV.
The audit found that several aspects of the program -
ming of funding for Pegase DFS need to be strength -
ened. In addition, while the verification procedures 
established by the Commission are generally robust, 
there is scope for it to obtain savings by making more 
use of competitive tendering and simplifying the com -
plex management system. The Commission and the 
EEAS have not made sufficient use of the large-scale 
funding from Pegase DFS to help leverage reforms 
from the PA, particularly in the field of civil service 
reform.
V.
Pegase DFS has reached the eligible beneficiaries and 
thereby made a significant contribution to covering 
the PA’s salary bill. However, with the number of bene -
ficiaries increasing and funding through Pegase DFS 
from other donors declining, there were serious delays 
in the payment of salaries by the PA in 2012 which led 
to unrest amongst the Palestinian population.
VI.
Pegase DFS has contributed to essential public ser -
vices, but the audit found that in Gaza a consider -
able number of civil servants were being paid without 
going to work and providing a public service due to 
the political situation in Gaza. The Commission and 
the EEAS have not sufficiently addressed this problem.
VII.
Despite the large Pegase DFS funding, the PA was fac -
ing a severe budget deficit in 2012 which was also 
threatening to erode public finance management 
(PFM) reforms. Ultimately, however, the threat to the 
financial sustainability of the PA can to a considerable 
degree be traced to the manifold obstacles imposed 
by the Government of Israel to the economic develop -
ment of the oPt. These obstacles also undermine the 
effectiveness of Pegase DFS.
VIII.
The report sets out a number of recommendations 
which the Commission and the EEAS should address 
when undertaking the necessary review of Pegase DFS.6
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
INTRODUCTION
1. This audit report assesses the European External Action Service’s (EEAS) 
and the European Commission’s management of the direct financial sup -
port (DFS) provided through the Pegase mechanism to the Palestinian 
Authority (PA).
BACKGROUND
2. The European Union, in common with most of the international commu -
nity, supports a two -state solution to the Israeli–Palestinian conflict. This 
envisages the creation of a viable, contiguous and democratic Palestinian 
state, living side by side with the state of Israel in peace and security.
3. The Israeli–Palestinian peace process began with the Oslo accords of 
1993 and 1995. Israel granted some autonomy to the Palestinians while, 
in return, the Palestinian leadership, under the Palestinian Liberation Or -
ganisation (PLO), recognised Israel’s right to exist. Both sides gave com -
mitments that they would start talks regarding final status by May 1996 
and conclude them by May 1999.
4. In the meantime, the West Bank was divided into three areas: Area A, 
which basically comprised urban settlements to be run by the PA; Area  B, 
where the PA became responsible for civilian affairs but Israel remained 
for the time being in charge of security; and Area C, comprising 61 % of 
the territory of the West Bank, where both security and civilian affairs 
continued under Israeli control pending a final status agreement (see 
the Map ). Israeli forces were to withdraw from the Gaza Strip over this 
period. East Jerusalem was not covered by the agreements.7
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
MAP
WEST BANK AND GAZA 
EGY PTJORD ANGOLAN
HEIGHT SSYRIA
West Bank
Gaza
StripLEBANON 
ISRAELDead
Sea34°E 35°E
32°NMedit erranean
SeaJordan River
NablusQaba tiya
Tulkarm
Qalqily ah
Ramallah
Hebr onBethlehemJerichoJenin
RafahKhan YunisGazaJerusalem
ISRAEL
EGY PTJORD AN 0
020 miles
20 k mNPalestinian control (Area A)
Mixed control (Area B)
Israeli control (Area C)
Note:  Israel transferred control of the Gaza Strip to the Palestinian National Authority in 2005. Palestinian-controlled cities on the West Bank 
have been repeatedly re -occupied by Israeli forces.
Source:  European Court of Auditors.8
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5. In 2002, in view of the lack of progress in the Oslo process, the United 
States, Russia, the EU and the United Nations came together to form 
‘the Quartet on the Middle East’ . The quartet established a ‘Roadmap 
for peace’ designed to lead to a two-state solution through the setting 
up of an independent Palestinian state alongside Israel over a period of 
3 years. The most concrete initial progress was the appointment in 2003 
of the first-ever Palestinian prime minister, but the key benchmarks of 
the roadmap were not fulfilled by either party.
6. The peace process suffered a further setback in January 2006, when 
Hamas, which unlike the PLO does not recognise Israel’s right to exist 
and is classified by the EU as a  terrorist organisation, won the Palestinian 
parliamentary elections by defeating the Fatah party1. In 2007, fighting 
broke out between Fatah and Hamas which led to a de facto division of 
the Palestinian territories in June 2007. Hamas took control of the Gaza 
Strip while the PA under Fatah continued to administer the parts of the 
West Bank under its jurisdiction. The EU has had a no-contact policy with 
Hamas throughout the period while aiming to maintain its assistance to 
the local population.
7. As a  result of the Hamas takeover, Israel imposed an even more stringent 
closure of Gaza in 2007 which led to a significant deterioration of the hu -
manitarian situation there. At the end of 2008, Israel launched a 1-month 
military campaign in Gaza (Operation Cast Lead) targeting Hamas, which 
caused considerable loss of life and destruction of property. However, 
after a period of relative calm, a renewed rise in tensions led to Israel 
launching another military campaign in Gaza in November 2012 (see 
paragraph 73).
8. In May 2011, Hamas and Fatah formally reached a reconciliation agree -
ment, although no new general elections have been held and the two 
sides have still to agree on the conditions for the establishment of 
a unity  government. With the UN General Assembly’s adoption of Resolu -
tion 67/19 on 29 November 2012, Palestine, represented by PA President 
Mahmoud Abbas, obtained the status of ‘non-member observer state’ in 
the United Nations.1 Fatah, which was founded 
and headed by Yasser Arafat 
until his death in 2004, is the 
largest political faction within 
the PLO.9
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
9. However, 2012 also witnessed a significant deterioration in the PA’s al -
ready weak fiscal situation. Its overall fiscal difficulties are to a consider -
able degree due to the continuing restrictions placed on it by Israel. It is 
widely considered that these restrictions undermine the viability of an 
independent Palestinian state.
10.  The EU has an association agreement with Israel which includes provi -
sions for political dialogue, economic cooperation and trade liberalisa -
tion. Israel is also a European neighbourhood policy (ENP) beneficiary 
country. It is the only non -European country that benefits from an as -
sociated country status in the EU’s framework programmes for research 
and development and the EU is Israel’s largest source of public research 
funding2.
EU FINANCIAL ASSISTANCE
11.  Following the signing of the Oslo I agreement, the EU considerably in -
creased its cooperation with the occupied Palestinian territory (oPt). 
An ‘interim association agreement on trade and cooperation’ was es -
tablished between the European Community and the PLO on behalf of 
the PA in 1997. The primary objective of the very significant financial 
assistance was, and continues to be, to support progress towards the 
two -state solution. During the period 1994–2006, more than 2,7 bil-
lion euro was allocated to Palestine from the EU’s general budget.
12.  Under the EU’s new ENP launched in 2004, an EU–Palestinian author -
ity action plan was agreed in 2005 to support the PA’s political and 
economic reform agenda over the next 3 to 5 years. A new action plan 
to replace the first one was being finalised at the time of the audit. 
After the introduction of the European neighbourhood policy instru -
ment (ENPI) in 2007, funding was further significantly increased: between 
2007 and 2012 some 2,9 billion euro in assistance was committed from 
the EU general budget (see Table 1 ). Indeed, approximately 20 % of the 
ENPI budget for all beneficiary countries is allocated to the oPt3.2 As of December 2012, 
the EU’s seventh framework 
programme for research and 
development (2007–13) was 
funding over 1 200 projects 
involving nearly 1 500 Israeli 
participants.
3 The ENPI covers 16 
beneficiary countries: Algeria, 
Armenia, Azerbaijan, Belarus, 
Egypt, Georgia, Israel, Jordan, 
Lebanon, Libya, Moldova, 
Morocco, Palestine, Syria, 
Tunisia and Ukraine.10
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13.  As Table 1  shows, the main focus of EU assistance has been on ENPI-
funded direct financial support (DFS), which accounted for 47,4 % of the 
overall assistance in the period 2007–12. A significant share of allocations 
has also been made to UNRWA4, humanitarian and food aid and support 
for the rule of law (including two EU common security and defence 
policy (CSDP) missions).4 The United Nations 
Relief and Works Agency 
for Palestine refugees in the 
Near East, which provides 
basic public services such 
as primary schooling and 
healthcare to some 5 million 
Palestinian refugees from 
the 1948 and 1967 wars and 
their descendants. UNRWA 
provides facilities in 59 camps 
located in Lebanon, Syria, 
Jordan, the West Bank and 
Gaza.
TABLE  1
1  All from the ENPI budget line for Palestine: 19.08.01.02. From 1.1.2007 to 29.2.2008 disbursements were made under TIM. From 2010 the 
total includes the support provided through the PSRG component.
2  Mainly from the ENPI budget line 19.08.01.02.
3  From budget lines 19.08.01.01, 19.08.01.02, 19.08.01.04, 19.03.01/19.03.07/ 19.04.01/19.04.03 (Rule of Law, human rights and CSDP 
missions), 21.02.01/21.02.02/21.02.04 (Food aid), 21.05.01 (Investing in people) and 23.02.01/23.02.02 (humanitarian aid (ECHO) and 
emergency food aid).
Source:  European Commission and European Court of Auditors.TOTAL AID ALLOCATIONS TO PALESTINE FROM THE EU GENERAL BUDGET 2007–12 
(MILLION EURO)
Priority areas 2007 2008 2009 2010 2011 2012 Total
Total from EU general budget 563,3 501,5 525,2 446,8 452,7 451,7 2 941,1
— of which ENPI 456,1 392,0 35 7, 5 380,2 323,3 356,1 2 265,2
DFS1370,0 258,0 219,1 2 37,7 145,0 166,0 1 395,8
Support for UNRWA2100,6 120,0 175,9 104,6 142,9 146,0 789,9
— of which ENPI 73,4 76,0 81,5 88,0 96,7 117, 8 533,3
Other support (humanitarian and food 
aid, infrastructure, rule of law)3 92,7 123,5 130,2 104,6 164,8 139,6 755,4
— of which ENPI 12,7 58,0 5 7, 0 54,5 81,7 72,3 336,111
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
14.  Direct financial support (DFS) was the EU’s response to the political, fis -
cal and humanitarian crisis that followed the temporary suspension of 
most aid to the PA following Hamas’ January 2006 election victory (see 
paragraph 6). The quartet agreed to a proposal by the EU in May 2006 
to establish a  ‘temporary international mechanism’ (TIM) that aimed to 
ensure the direct delivery of assistance to the Palestinian population 
while bypassing a  Hamas -led government. The TIM, initially set up for 
3 months, operated between June 2006 and February 2008. It was then 
replaced by the current Pegase mechanism, which is largely based on 
TIM (see Annex I  for details).
15.  Pegase DFS has had the broad objective of helping the PA continue to 
function until the overall political objective of a two -state solution is 
achieved. The more specific objectives of Pegase DFS are:
(a) to help the PA to meet its obligations towards civil employees, 
pensioners and vulnerable Palestinian families;
(b) to maintain the functioning of the administration and the provision 
of essential public services to the population;
(c) to implement public finance management (PFM) reforms and re -
duce the budget deficit (including reducing net lending and arrears 
due to the private sector).
16.  Between February 2008 and December 2012, Pegase DFS was provided 
through the five different components described in Box 1 .
17.  Table 2  gives an overview of the amounts committed to the individual 
Pegase DFS components up until December 2012. It shows that the 
support for civil servants and pensioners (CSP) was the most important 
component (72,5 % of total funding). A breakdown of all Pegase DFS 
disbursements to final beneficiaries for each month between February 
2008 and December 2012 is provided in Annex III5.5 This breakdown includes 
all Pegase DFS funds pooled 
in the sub -account of the PA 
single treasury account and 
not only EU general budget 
funds.12
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
PEGASE DFS CONTRIBUTIONS FROM THE EU GENERAL BUDGET PAID TO THE PA 
PER COMPONENT (2008–12) (MILLION EURO)
Donor CSP VPF SEPS Arrears PSRG Total
From EU general budget 726,9 137, 5 106,6 10,0 22,0 1 003,011
Share of EU general budget  
contribution total 72,5 % 13,7 % 10,6 % 1,0 % 2,2 % 100 %
1  Excluding the amount of 22,8 million euro in assigned revenues (From Austria: 1 million euro in 2008; 0,5 million euro in 
2009; 1,5 million euro in 2010 and 1 million euro in 2011. From Japan: 4,78 million euro in 2011. From Belgium:  
9 million euro in 2012 and 5 million euro dedicated to the World Bank programme ‘ESSP’ under the financing  
agreement ENPI/2008/019-776 (EC)).
Source:  European Commission and European Court of Auditors.
BOX 1
PEGASE DFS COMPONENTS
(a) PA civil servants and pensioners (CSP) (ongoing): civil servants and pensioners on the PA’s payroll who 
are considered to be eligible are paid directly from a sub -account of the PA’s single treasury account where 
all donor contributions to Pegase are pooled.
(b) Vulnerable Palestinian families (VPF) (ongoing): Pegase DFS is given to support the PA in providing cash 
assistance to individuals living in extreme poverty in the West Bank and Gaza.
(c) Support for essential public services (SEPS)  — provision of fuel to the Gaza power plant  (suspended 
at the end of 2010): the SEPS provided fuel to ensure the continued provision of electricity to people living 
in Gaza. The component was suspended at the end of 2010 and replaced by a development project in the 
electricity sector.
(d) Private sector arrears  (ongoing): through this scheme, the Commission pays unpaid bills accumulated by 
the PA towards private businesses.
(e) Private sector reconstruction in Gaza (PSRG)  (since December 2009): this component provides financial 
support for businesses destroyed or damaged during the Israeli ‘Operation Cast Lead’ offensive of 2008. It 
typically pays for items such as machinery, office furniture and equipment and buildings.TABLE  213
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
18.  The Pegase mechanism has been set up in such a  way as to ensure 
that funds can be transferred directly to individual beneficiaries from 
a sub-account of the PA single treasury account. Before disbursements 
are authorised, all beneficiaries are screened in accordance with agreed 
upon procedures (AUPs) for the individual components by audit firms 
contracted by the Commission (for details see Annex I ). These arrange -
ments were designed to mitigate the risk of funding ineligible benefi -
ciaries and terrorist activities. An international organisation has been 
contracted since the start of the programme to assist the Commission 
in its management.
19.  Since 2011, the European External Action Service (EEAS) and the Euro -
pean Commission’s DG Development and Cooperation (EuropeAid) have 
been jointly responsible for the annual programming of Pegase DFS. The 
Office of the EU Representative6 (EUREP) in East Jerusalem is responsi -
ble for managing the implementation of the assistance through direct 
centralised management under EuropeAid’s supervision.6 The EU representative 
is appointed by the EEAS 
and functions as head of 
the EU delegation in East 
Jerusalem. In addition to 
the EU representative, there 
is a Council-appointed EU 
Special Representative to the 
Middle East Peace Process 
who acts as the EU envoy to 
the Middle East quartet (see 
paragraph 5).14
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
20.  The Court’s audit addressed the overall question:
21.  ‘Have the EEAS and the Commission managed the Pegase direct financial 
support (DFS) to the Palestinian Authority well?’ To answer this question, 
the audit focused on:
(a) the design and implementation arrangements for Pegase DFS;
(b) the results of Pegase DFS and their sustainability.
22.  The audit examined Pegase DFS from 2008 to 2012. It also examined 
related technical assistance contracts, notably in the area of public fi -
nance management, signed during this period. The Pegase DFS financing 
agreements covered by the audit totalled 1 025,8 million euro, while the 
TA contracts audited amounted to 36,9 million euro. The complete list 
of financing agreements and contracts covered is given in Annex II .
23.  The audit was carried out between 1 July and 31 December 2012 and 
gathered evidence for its assessment through documentary review and 
interviews. It included work in the West Bank, including East Jerusa -
lem, and Gaza, from 30 September to 12 October 2012 (see the Map , 
paragraph 4).
24.  The audit relied as far as possible on the work of auditors contracted by 
the Commission for the Pegase DFS for the period February 2008–De -
cember 2011 (see Annex I  for more details). To test the reliability of the 
work carried out by other auditors, the audit conducted walk -through 
tests of the AUPs for a sample of payments as well as on-site checks and 
interviews of 20 beneficiaries employed by two schools and two hospi -
tals in the West Bank and Gaza7. The audit also included on-site checks 
and interviews of 10 VPF beneficiaries in the West Bank and Gaza and 
two beneficiaries of the private sector arrears and PSRG components.
25.  A PFM expert with considerable experience in the region assisted in 
assessing the state of the PA’s public finances and the progress it had 
made in PFM reform.7 Rafidia hospital (Nablus) 
and Aziz Shahin school 
(Ramallah) in the West Bank 
and Al Shifa hospital and 
Al Zahra school in Gaza City.AUDIT SCOPE AND APPROACH15
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DESIGN AND IMPLEMENTATION ARRANGEMENTS: 
THERE IS A  NEED TO REVISE A  NUMBER OF ASPECTS
26.  In assessing the design and implementation arrangements for Pegase 
DFS, the audit examined whether:
(a) a strategic framework and objectives relevant to the strategy had 
been clearly defined and regularly reviewed;
(b) allocations to DFS reflected needs;
(c) performance indicators were established;
(d) Pegase DFS was adequately coordinated with other donors;
(e) the risks to sound financial management had been comprehen -
sively assessed and mitigation measures put in place;
(f ) the controls established were economical;
(g) conditionality and a  process of policy dialogue had been 
established.
PROGRAMMING FRAMEWORK IN NEED OF STRENGTHENING
27.  The 2005 EU–PA ENP action plan represented the overall basis for EU–PA 
cooperation. However, there was no specific linkage between priorities 
set out in the action plan and the Pegase DFS support, although the 
latter was the EU’s most important funding instrument.
28.  When developing the Pegase DFS programme, the Commission sought 
to target the priorities set out in the 3-year national development pro -
grammes of the PA: first the 2008–10 Palestinian reform and develop -
ment plan and then the 2011–13 Palestinian national development plan. 
However, Pegase DFS funding was only provided on an annual basis 
rather than in line with the 3- year cycle of these national development 
plans, although the latter would have facilitated the planning of the 
assistance.OBSERVATIONS16
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29.  The budget for Pegase DFS funding is decided on each year under con -
siderable time pressure. The Commission does not apply its standard 
internal quality review procedures to the annual Pegase DFS programme 
and consults the ENPI committee over the programme only through 
a written procedure. This has made it more difficult for the Commission 
to carry out detailed reviews of the mechanism. Since the launch of 
Pegase DFS in February 2008, few substantial changes have been made 
to the main CSP component (see Box 1 ). This is in spite of changes in 
the operational environment, including the increasing number of bene -
ficiaries, the rise in the number of civil servants not attending work after 
public sector strikes in Gaza in August–September 2008 and the growing 
need for civil service reform (see paragraph 46).
30.  The Pegase DFS mechanism was intended to facilitate donor coordina -
tion, and hence improve the efficiency of aid delivery, by also allowing 
both EU Member States and other donors to channel funding through 
this single instrument. However, this has become less and less the case as 
Table 3  indicates: the proportion of the main DFS component financed 
from sources other than the EU budget dropped from 32,6 % in 2008 
to 14,8 % in 2012. This in part reflects a general decline in donor fund -
ing. Furthermore, some EU Member States also use other mechanisms 
such as the World Bank Palestinian reform and development plan (PRDP) 
Multi-Donor Trust Fund as well as bilateral funding. At the same time, 
the Commission has attracted little funding from non-EU countries.
31.  No performance indicators were included in the financing agreements 
for Pegase DFS, which makes it harder for the EEAS, the Commission and 
the Member States to assess the concrete results of the support (see also 
paragraph 53). The lack of performance indicators also makes it more 
difficult to demonstrate results in order to attract new funding. Moreover, 
this does not comply with the ENPI regulation’s explicit requirement that 
performance indicators be established for monitoring purposes for all 
forms of ENPI assistance8.
32.  The Commission and the EEAS have not developed a clear strategy on 
how to reduce the PA’s dependency on Pegase DFS support over time. 
While the uncertain political situation makes it unrealistic to establish 
a definitive exit strategy, it would nevertheless have been desirable to 
develop a clear approach, in conjunction with other donors, the PA and 
Israel, to gradually reduce the need for donor funding.OBSERVATIONS
8 Article 13 of Regulation 
(EC) No 1638/2006 of 
the European Parliament 
and of the Council of 
24 October 2006 laying 
down general provisions 
establishing a European 
Neighbourhood and 
Partnership Instrument  
(OJ L 310, 9.11.2006, p. 1).17
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DONOR CONTRIBUTIONS TO PEGASE DFS CSP 2008–121 (MILLION EURO)TABLE  3
Donor 2008 2009 2010 2011 2012 Total
Denmark 6,03 6,03
Ireland 1,50 1,50 0,50 1 1 5,50
Spain 20 25 30 20 4 99
Luxembourg 0,50 0,50 0,50 0,50 2
Hungary 0,20 0,20
Malta 0,15 0,15
Netherlands 19,8528,9235,0736,50 40,34
Slovenia 0,15 0,15
Finland 3 2 1 6
Sweden 10,62 4,60 5,20 6,60 5,13 32,15
United Kingdom 20,80 20,80
Member States subtotal 76,77 42,52 41,27 29,10 22,66 212,32
% of total 32,6  % 22,0  % 19,4  % 20,1  % 14,8  % 22,6  %
EU general budget 159 150,50 171,40 116 130 726,90
% of total 67, 4  % 78,0  % 80,6  % 79,9  % 85,2  % 77, 4  %
Total 235,77 193,02 212,67 145,10 152,664939,22
1 The table includes payments to PA salaries and pensions under the TIM in January and February 2008.
2  Amounts include 6 million euro for the payment of salaries to the civil police/defence (CPD) of the PA, made on 17.2.2009.
3 Earmarked for the payment of salaries to the CPD of the PA.
4   The amount includes 26,2 million euro for the payment of December 2011 PA salaries/pensions, made on 5.1.2012.
Source : European Commission.18
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ROBUST ELIGIBILITY VERIFICATION PROCEDURES BUT SCOPE  
FOR SAVINGS
33.  The Commission established specific verification procedures for the 
Pegase DFS which are well designed to ensure that funds are only 
used to pay beneficiaries which meet the specified eligibility criteria 
(see Annex  I , Boxes 1 to 3). This is in contrast to traditional budget sup -
port programmes where funds cannot be tracked to the final beneficiary 
after the Commission has transferred them to the beneficiary country’s 
treasury account.
34.  However, the Commission has not prepared a  risk assessment addressing 
other Pegase DFS-related risks, such as the specific risks of corruption 
in Gaza, funds not being used for supporting public service delivery or 
the destruction of EU-funded infrastructure by the Israeli military.
35.  At the same time, the lack of a detailed risk assessment has also meant 
that the costs and benefits of detailed individual controls have not been 
assessed. Such an assessment could be used to identify controls which 
are not cost-effective.
36.  All contracts with audit firms and the international organisation9 for the 
AUPs were signed following direct negotiated procedures. The Com -
mission justified its use of such flexible procedures by reference to the 
crisis situation in the oPt10. However, even in countries and territories 
considered to be in crisis, the Commission may still apply competitive 
tendering procedures where feasible. The Court considers that competi -
tive tendering would have been feasible for contracts for management 
services and audit.
37.  The continuous use of the same international organisation as a  contrac -
tor to assist in the management of Pegase DFS has put EUREP in a posi -
tion of increasing dependency on the international organisation over 
time. This dependency is problematic due to the critical and sensitive 
nature of the international organisation’s tasks, particularly in relation 
to its management of the Pegase information system database on pay -
ments to individual beneficiaries. The Commission’s contracting of these 
management services tends to start late in the year and this is then used 
as a reason for applying direct negotiations to speed up procurement.9 The organisation is 
specialised in post-conflict 
reconstruction interventions, 
including damage 
assessments.
10 Notes from the Director-
General of AIDCO, Koos 
Richelle, of 1.12.2006, 
3.7.2007, 20.6.2008 and 
15.7.2010 — extension 
of acknowledgement of 
the crisis situation; note of 
26.6.2011 of Mr Fotiadis, 
DG Development and 
Cooperation — EuropeAid. 
Prior approvals for using 
flexible procedures were 
formally granted by the Head 
of EUREP in accordance 
with Article 190(2) of the 
implementing rules of the 
financial regulation.19
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
38.  Although the eligibility verification checks are robust, there is scope to 
reduce the number of procedural steps11. Similarly, the Pegase database 
management procedures are complex: the verification of the data in the 
database requires the involvement of an outside contractor, an audit 
company and the Commission, both before and after disbursements 
(see Annex I , paragraphs 8 to 13). In recognition of the need to simplify 
the Pegase DFS system, the Commission has launched a study in three 
phases of which two were completed as of May 201212.
39.  The daily fee rate of 1 642 euro paid by the Commission for the team 
leader of one of the contracted audit firms is substantially higher than 
rates paid to other ‘Big 4’13 firms working in the region. The rate of 
1 000 euro for a team leader applied by another audit firm, which is 
contracted to carry out most of the AUPs, is more in line with the rates 
paid to other ‘Big 4’ audit firms. However, if the Commission had used 
competent local audit firms, it could potentially have achieved further 
savings in fee rates for this contract of 25 %14. As the AUPs did not require 
expertise in applying internationally recognised accounting and auditing 
standards, any additional expertise a ‘Big 4’ audit firm might offer was 
not required.
POTENTIAL LEVERAGE REDUCED DUE TO ABSENCE OF 
CONDITIONALITY
40.  Pegase DFS is provided to the PA without conditionality. The only basic 
requirement for the disbursement of funds is that the individual benefi -
ciaries meet the eligibility criteria set by the EU (see Annex I ). The EEAS 
and the Commission have followed this approach to ensure that the PA 
benefits from a predictable flow of funds without the risk of funding 
being blocked by the Commission because conditions are not met. How -
ever, this approach also reduces the potential leverage its considerable 
funding could give it to push for more reforms from the PA. While the 
EEAS and the Commission’s 2011 review of the European neighbourhood 
policy envisaged more funding for countries which made more progress 
with reforms (the so -called ‘more for more’ principle), such an approach 
has not yet been introduced for the oPt15.11 For the CSP and VPF 
components, the ‘activity 
flows’ describing the checks 
to be performed by the 
EUREP , audit firms, PA and 
banks consist of more than 
50 actions. Excluding the PA 
staff involved, the Pegase 
DFS checks require the 
involvement of 16 full-time 
equivalent employees.
12 Two of the three 
simplification scenarios 
proposed in the Phase 2 
report propose that a part 
of the work now carried out 
by audit firms, such as the 
IT-based checks, be taken 
over by the EUREP and the 
PA. They also propose that 
the function currently carried 
out by the international 
organisation be fully or partly 
insourced to the EUREP .  The 
report estimates the potential 
savings of choosing the 
most economical scenario 
at 472 200 euro per year or 
just over 1 million euro after 
3 years.
13 Deloitte, KPMG, 
Ernst & Young and 
PriceWaterhouseCoopers.
14 The Court compared the 
fees paid with the fees of 
‘Big 4’ and other international 
audit firms contracted by the 
Commission for other audits 
in the West Bank, Lebanon, 
Jordan, Syria and Egypt. For 
these, the daily fee rates for 
team leaders varied between 
1 100 euro and 1 250 euro. 
A competent West Bank-
based audit firm visited by 
the audit team who was 
contracted by other donors, 
including USAID, charged 
750 euro per day for a team 
leader.
15 ‘A new response to 
a changing Neighbourhood’ ,  
COM(2011) 303 final, 
25.5.2011.20
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
41.  Even without conditionality, the large scale of Pegase DFS provides an 
opportunity for the EEAS and the Commission, in conjunction with the 
wider donor  community, to have a structured dialogue with the PA on 
key reform issues in areas benefiting from the funding, notably civil ser -
vice management reform (see paragraph 46) and achieving better value 
for money in the education and health sectors. However, only limited 
progress has been made in these areas through dialogue with the PA.
(a) Dialogue within the framework of implementing the CSP compo -
nent has largely been limited to practical issues related to indi -
vidual, recurrent payrolls.
(b) Little progress has been made through the dialogue in the donor  –
PA sector working group on public administration and the civil 
service, which did not meet at all between February 2011 and Octo -
ber 2012. The health sector working group has also not functioned 
satisfactorily.
(c) The subject of civil service reform was raised by the Commission in 
the 2008 annual meeting of the ENP sub -committee dealing with 
the governance reforms contained in the action plan. However, 
it was not until 2012 that a civil service law was selected by the 
sub-committee as a ‘deliverable’ from the PA.
42.  Pegase DFS financing agreements have systematically included a special 
condition requiring Israel not to impose additional restrictions on the 
oPt. While fulfilment of this condition could have a  significant impact 
on improving the effectiveness of DFS, the EEAS and the Commission, 
despite increased efforts since 2012, have not been able to secure Israel’s 
agreement to comply with it. This is notwithstanding the fact that Israel 
is ultimately also a beneficiary of Pegase DFS, at least to the extent that 
Pegase DFS contributes to relative stability in the neighbouring oPt16.16 It could be considered 
from the perspective of the 
Fourth Geneva Convention 
relative to the Protection of 
Civilian Persons in Time of 
War that Israel benefits from 
the fact that Pegase DFS 
contributes to basic public 
services in the oPt, the cost of 
which would otherwise have 
to be met by the occupying 
power.21
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
RESUL TS AND SUSTAINABILITY: PEGASE DFS 
HAS ACHIEVED SOME RESUL TS BUT THEIR 
SUSTAINABILITY IS INCREASINGLY AT RISK
43.  The audit examined for each of the three key objectives (see para -
graph 15) whether:
(a) Pegase DFS was used for the intended purpose;
(b) amounts paid to individual beneficiaries were justified;
(c) objectives, expected outputs and results were achieved;
(d) appropriate steps were taken to ensure sustainability.
PEGASE DFS IS REACHING THE ELIGIBLE BENEFICIARIES BUT 
TRANSFERS ARE BECOMING DELAYED
CSP COMPONENT
44.  The audit confirmed that Pegase DFS funds were paid to and reached 
the eligible beneficiaries. From 2008  to 2012, the average number of 
civil servants and pensioners that regularly had part of their salary paid 
by contributions from the CSP component rose from 75 502 to 84 320. 
This represents approximately half of the PA’s 170 000 civil servants and 
pensioners.
45.  During this period, the average monthly PA wage bill for beneficiaries eli -
gible for Pegase support rose from 45,1 million euro to 62,9 million euro, 
an increase of some 39 %. However, at the same time, contributions from 
Pegase DFS for the CSP fell from 21,3 million euro (47 % of total pay to 
eligible beneficiaries) in 2008 to 10,4  million  euro (16  %) in 2012, mainly 
due to reductions in contributions to Pegase DFS from other donors. This 
is putting increasing strains on Pegase DFS’s capacity to effectively sup -
port this component. As Figure 1  shows, contributions from Pegase CSP 
were made to every PA payroll up to the March 2011 payroll. Since then, 
contributions have been less regular and assistance has been increas -
ingly frontloaded to the first quarter of the year as the PA’s revenues are 
particularly under pressure during this period17.17 The spike for the 
December 2011 payroll 
shows that the entire annual 
contribution from Spain was 
used to contribute to that 
payroll (see also Table 3  and 
data in Annex IV ).22
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
46.  After rapid expansion between 2000 and 2007, since 2008 the PA has 
tried to limit the growth in public sector employment to 3 000 employ -
ees per year. However, this level of growth still represents a significant 
additional burden on the overstretched budget. At the same time, the PA 
has made little progress on civil service and pension reforms to reduce 
the fiscal impact of the increasing numbers of staff and pensioners, for 
example, by reducing the number of PA staff or amending the rules 
regulating entitlements18. The EEAS and the Commission, along with the 
wider donor community, have not succeeded in developing a reform 
agenda to tackle these issues.18 While a decision to freeze 
public hiring and promotions 
could be an appropriate 
measure in the short term, 
a more comprehensive 
long-term agenda should 
focus on structural reforms 
for the civil service system. 
This could include a review 
of public service grades 
and pay scales, including 
allowance categories, which 
are currently prescribed in 
the ‘Civil service law’ (World 
Bank economic monitoring 
reports to the Ad Hoc Liaison 
Committee (AHLC), dated 
18.9.2011 and 23.9.2012).
FIGURE  1
TOTAL PA WAGE BILL FOR CSP-ELIGIBLE BENEFICIARIES COMPARED WITH THE 
PEGASE DFS CONTRIBUTIONS PAID TO BENEFICIARIES (2008–12)
80 000 000
70 000 00060 000 00050 000 000
40 000 000
30 000 000
20 000 000
10 000 000
 0
Payroll month
January 2008March 2008May 2008 July 2008 Sept. 2008 Nov. 2008January 2009March 2009May 2009 July 2009 Sept. 2009 Nov. 2009January 2010March 2010May 2010 July 2010 Sept. 2010 Nov. 2010January 2011March 2011May 2011 July 2011 Sept. 2011 Nov. 2011January 2012March 2012May 2012 July 2012 Sept. 2012 Nov. 2012
Euro
Total wage bill for eligible beneﬁciaries (euro) Total of Pegase contributions (euro)
Source:  European Commission.23
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
47.  The EEAS and the Commission have focused on ensuring Pegase DFS 
reaches eligible beneficiaries, but have not paid sufficient attention 
to the fungibility of the funding provided. Pegase DFS support to the 
CSP component has freed up the PA’s own budget for funding person -
nel which are not eligible for Pegase DFS, including the PA’s security 
apparatus.
48.  A clear sign of the challenges to the sustainability of the present system, 
in the absence of civil service and pension reform, is the increasing 
difficulty the PA has had in paying salaries and pensions on time. From 
February 2008 up until June 2012, of the 52 monthly PA payrolls, 47 
were made within 7 days of the end of the payroll month. However, for 
all PA payrolls between June and December 2012, salaries and pensions 
were paid with more than 10 days’ delay, and in up to three instalments, 
due to the lack of funds. These delays led to demonstrations and strikes 
among civil servants from September 201219. The unpredictability of 
funding and resultant social unrest threatens to undermine the previous 
achievements of Pegase DFS.
VPF COMPONENT
49.  The audit also confirmed that the VPF component had been paid to the 
eligible beneficiaries as listed in the Ministry of Social Affairs’ database. 
The average quarterly contribution to the VPF component was 9,7 mil-
lion euro. Until 2011, Pegase DFS provided 100 % of the funding for the 
VPF, since then it has provided approximately 74 % while the PA has pro -
vided 26 % to beneficiaries eligible for Pegase VPF support. In addition, 
since 2011 the PA has supported another 30 000 to 40 000 beneficiaries 
not eligible for Pegase DFS support. In total, the EU provides 47 % of the 
total cost of the social allowance payments, while the remaining 53 % 
are covered by the PA (50 %) and the World Bank (3 %) (see Annex V ).
50.  In contrast with the CSP component, the PA and donors, including the 
EU, worked closely together to reform social assistance leading to a  sig-
nificant overhaul of the system in 2010. The reform has produced a more 
rational system for targeting VPF through the use of proxy means testing. 
Technical assistance from the Commission contributed to the reform 
process.19 There were strikes in 
September 2012 ( Palestinian 
Economic Bulletin , Issue 72, 
The Portland Trust, 
September 2012, p. 1) and 
most recently in February 
2013 ( Palestinian Economic 
Bulletin , Issue 77, The Portland 
Trust, February 2013, p. 2).24
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
51.  Despite the progress made on reforms, the social protection system 
is also stretched by a growing number of beneficiaries. The average 
number of beneficiaries supported by the quarterly contributions from 
VPF increased from 44 035 in 2008 to 59 915 in 201220. Because of the 
pressure on the system, the current level of support provided to benefi -
ciaries is low: it is estimated to cover only 19 % of a typical household’s 
consumption, due to the large size of many of the households depend -
ent on the support.
52.  The difficulties the PA has in funding the system are reflected in recent 
payment delays. While the quarterly payments under the VPF component 
were made on time up to the third quarter of 2011, since then three of 
the payments (October 2011, April and October 2012) have been made 
with delays of between 1 and 3 months (see Annex V  for data). As for 
the CSP component, these delays in VPF payments in 2012 reflect the 
PA’s mounting fiscal crisis.
PEGASE DFS HAS CONTRIBUTED TO ESSENTIAL PUBLIC SERVICES BUT 
HAS ALSO PAID CIVIL SERVANTS WHO ARE NOT WORKING DUE TO THE 
POLITICAL SITUATION IN GAZA
SUPPORT TO THE DELIVERY OF PUBLIC SERVICES
53.  Approximately 53 % of the Pegase funding for salaries from the CSP 
2008–12 went to the education sector and 17 % to the health sector. 
Thus Pegase DFS has also made significant inputs to the delivery of es -
sential public services. In the absence of performance indicators linked 
to Pegase DFS (see paragraph 31), it is more difficult to assess how far 
the sectors supported by Pegase DFS have obtained value for money 
from the inputs provided.20 This is despite the 
freezing of the caseload of 
beneficiaries in Gaza since 
October 2009.25
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
54.  However, the audit found indications that in Gaza a considerable number 
of civil servants were receiving salaries, partly funded by Pegase DFS, 
because they were eligible for support by virtue of being on the PA 
payroll but who were not going to work due to the political situation in 
Gaza (see paragraph 6)21. Out of 10 Gaza beneficiaries selected by the 
audit for interviews, three stated that they were not working, while one 
was absent. The audit also found that the State Audit and Administra -
tive Control Bureau was obliged, in accordance with PA regulations, to 
pay salaries for its 90 staff members in Gaza, all of whom are unable to 
work. These findings are consistent with estimates based on data from 
interviews provided in a 2010 evaluation of Pegase contracted by the 
Commission which indicated that 22 % and 24 % respectively of the staff 
employed by the PA Ministries of Health and Education in Gaza were not 
working at the time22.
55.  The Commission and the EEAS, while aware of this problem, have not 
taken adequate steps to address it and were unable to provide clear 
information on the extent of this practice. Given the amount of money 
which the EU is providing through Pegase DFS, it would have been ex -
pected that they could obtain such information from the PA. The audits 
contracted by the Commission were not designed to find out whether 
personnel being paid by Pegase DFS were actually working, only that 
they were eligible for funding.
56.  Despite the importance of this issue, there was no transparent reference 
to Pegase DFS being used to pay non-performing workers in any of the 
Commission’s financing documentation for the annual programmes.
57.  The audit also found that Gaza beneficiaries of the Pegase DFS CSP com -
ponent have to rely on PA contact persons in their workplaces to com -
municate with the PA on changes in their situation affecting pay and 
allowances. However, these contact persons in some cases cannot oper -
ate openly towards the Hamas-led administration. The informal nature of 
these communication channels between Gaza civil servants and the PA 
in Ramallah makes the payroll system prone to corruption by actors at 
all levels. The EEAS and the Commission have not addressed these risks.21 Some civil servants were 
dismissed after the Hamas 
takeover because they 
supported the PA, while 
others were demoted or 
locked out following the PA 
trade union strikes of August–
September 2008.
22 Interviews conducted in 
January 2010 (interim Pegase 
evaluation 2010, pp. 23–24).26
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
58.  While Pegase is intended to support public services for the benefit of 
the Palestinian population, the payment of non-performing civil servants 
does not serve this objective.
PROVISION OF FUEL TO THE GAZA POWER PLANT
59.  Pegase DFS also provided fuel for the Gaza power plant from 2008  to 2010 
at a cost of 183,8 million euro, including 106,6 million euro from the EU 
general budget23. The use of industrial fuel rather than gas, which the 
plant was originally designed for, was neither an economical nor a sus -
tainable solution. Whilst this support did help provide electricity, power 
cuts continued24. The ending of donor funding towards the end of 2010 
and the ongoing Israeli blockade of Gaza has led to a deterioration of 
the situation.
60.  Approximately half (some 90 million euro) of the Pegase DFS funding for 
fuel purchases was spent on VAT and excise duties. The Commission was 
unable to establish how far this amount was refunded to the PA by the 
Government of Israel through the agreed clearance mechanism (see also 
paragraph 70). It was also unable to establish whether the PA actually 
used reimbursed amounts for the intended purpose of providing essen -
tial public services. This represents a shortcoming in the Commission’s 
management of Pegase DFS25, especially when the PA is struggling to 
meet even its most basic obligations.
THE FINANCIAL SUSTAINABILITY OF THE PA IS AT RISK DESPITE THE 
LARGE-SCALE FUNDING FROM PEGASE DFS
PUBLIC FINANCE MANAGEMENT REFORMS
61.  A public expenditure and financial accountability (PEFA) assessment in -
cluded in a 2007 World Bank public expenditure review provided a robust 
baseline for measuring improvements in PFM. However, a follow-up ex -
ercise has not yet been carried out despite improvements in PFM being 
a key objective of Pegase DFS and it being standard practice to have 
follow-up PEFA exercises every 3 to 5 years. Only in 201226 did the Com -
mission recommend to the PA that such a follow-up should be carried 
out.23 Some 65,3 million euro 
was funded by Germany.
24 Scheduled electricity cuts 
in Gaza since July 2006:  
Saturdays, 8.00–16.00; 
Sundays, 16.00–23.00; 
Tuesdays, 8.00–16.00; 
Wednesdays, 16.00–23.00; 
Fridays (alternating weeks), 
8.00–16.00 and 16.00–23.00.
25 The Court of Auditors 
drew the Commission’s 
attention to the problem in 
connection with its work on 
the Declaration d’Assurance  
2008. EuropeAid’s Internal 
Audit Capability highlighted 
it in connection with its 2009 
audit of Pegase.
26 Recommendation in 
‘Implementation of the 
European Neighbourhood 
Policy in the occupied 
Palestinian territory — 
Progress in 2011 and 
recommendations for 
action’ , SWD(2012) 120 final, 
15.5.2012, p. 3.27
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
62.  The most recent PFM assessments of the PA27 suggest that while there 
have been some improvements in PFM, there are still significant short -
comings. Among the weaknesses identified is the inadequate legislative 
scrutiny of the budget and the external audit reports. Weaknesses were 
also noted in government procurement and commitment controls and in 
the availability of information on resources received by service delivery 
units.
63.  DFS and related technical assistance has contributed to some of the 
improvements in the PA’s PFM.
(a) Technical assistance has been provided to help develop the internal 
audit function. For the main completed project, the outputs had 
mostly been achieved although the internal control component 
suffered from shortcomings. The activities of another, still ongoing, 
internal audit project were broadly on track.
(b) Technical assistance is also being provided to the national audit 
body, the SAACB, although it is subject to some delays. More fun -
damentally, the SAACB’s independence and effectiveness is threat -
ened by the continued absence of an active and effective parlia -
ment for it to report to.
(c) The project ‘Palestinian National Authority’s financial institutions’  
provided training and equipment to the Ministry of Finance. Most 
deliverables were achieved as planned.
64.  However, the mounting economic crisis faced by the PA means that gains 
in institution building, especially in the area of public financial manage -
ment, risk being eroded28.
THE OBJECTIVE OF REDUCING THE BUDGET DEFICIT
65.  Pegase DFS has provided more than 1 billion euro to the PA, or an aver -
age of some 200 million euro each year, between 2008 and 2012. This 
corresponds to more than 10 % of the PA’s annual revenues and, as such, 
has played a key part in keeping the PA’s budget deficit down.27 Including the International 
Monetary Fund’s (IMF) 
regular reports to the Ad Hoc 
Liaison Committee (AHLC) in 
September 2012 and March 
2013 and its PFM progress 
review of January 2012.
28 This issue is highlighted in 
the World Bank’s economic 
monitoring report and the 
IMF staff report to the AHLC 
(both dated 19.3.2013).28
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
66.  Pegase DFS included a specific component to which the EU general 
budget contributed 10 million euro to address private sector arrears29. It 
covered goods and services and VAT refunds to 416 beneficiary compa -
nies in the West Bank and Gaza over a wide range of sectors30, although 
the Commission did not set clear selection criteria for which companies 
and sectors should receive funds (see also Box 2 ). The component helped 
the PA pay a significant share of the arrears owed to the private sector 
in 200831. However, this boost to reducing the arrears problem has been 
short -lived.
67.  While the provision of fuel to the Gaza power plant was also intended to 
reduce net lending by the PA by reducing Gaza’s electricity bills, it also 
only brought a short-term improvement. Nevertheless, a new EU techni -
cal assistance project launched in 2011 with a budget of 2 million euro 
to restructure the electricity sector in the West Bank and Gaza has good 
prospects in the medium term of bringing more sustainable results.29 A total of 27,8 million euro 
was disbursed from the 
private sector arrears 
component, which included 
contributions transferred 
from the TIM programme and 
other donors (see Annex III ).
30 Hotels, medical supplies, 
printing, motor trade, car 
rental, computers, electronics, 
textiles, tourism, agricultural 
supplies, engineering and 
insurance.
31 In 2008, the PA paid 
some 48 million euro 
(70 million US dollars)  
out of 86 million euro  
(PRDP 2008–10 estimate)  
of outstanding arrears.
BOX  2
REIMBURSEMENT OF VAT TO A  LUXURY HOTEL IN GAZA
The selection criteria for the largest beneficiary of the private sector arrears component were open to ques -
tion. A  luxury hotel in Gaza received a  VAT refund of 2  586 266 euro, which represented 9  % of the total amount 
disbursed from Pegase DFS, towards the payment of arrears and 23 % of the total arrears paid to suppliers in 
Gaza. In contrast, the average payment to companies was 59 864 euro and 88 % of companies received an 
amount below 100 000 euro. In addition, whereas in general companies benefiting from the Pegase DFS sup -
port were providing inputs to support public services, at the time of the audit visit in October 2012 the hotel 
was barely operating.29
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
68.  Overall, the PA’s already fragile financial situation deteriorated signifi -
cantly in 2012. The overall budget deficit is estimated at 1,7  billion US 
dollars (1,3 billion euro) (17,1 % of GDP). In particular, the PA faces a li -
quidity crisis with a large build-up in net arrears (see Table 4 ). The level 
of PA loans from the Palestinian banking sector has also been rising since 
2008 and in 2012 stood at 1,4 billion US dollars (1,1 billion euro equiva -
lent to 112 % of banks’ equity). This risks undermining the stability of 
the banking sector. At the same time, donor funding, on which the PA is 
heavily dependent, dropped substantially from 1 146 million US dollars 
(858 million euro) in 2010 to 774 million US dollars (587 million euro) 
in 2012 (see also paragraph 45). In 2012, donor support to finance the 
recurrent budget deficit was 214 million US dollars (166,6 million euro) 
less than anticipated32.
69.  The PA itself can take some measures to address the crisis. These include 
key structural reforms, notably in the areas of civil service reform and 
pension reform (see paragraph 46). The deteriorating fiscal situation 
increases the need for the EEAS and the Commission, in cooperation 
with other donors, to effectively engage with the PA in addressing these 
issues.
70.  However, both the financial sustainability of the PA and the economic 
development of the oPt, which is essential for financial sustainability, 
continue to be fundamentally undermined by a series of constraints 
imposed by the Government of Israel (see below). These constraints 
also undermine the effectiveness of Pegase DFS as well as other donor 
assistance. Despite significant efforts, the current approach by the EEAS 
and the Commission, in conjunction with EU Member States, has not 
been effective in bringing Israel to adopt a  more cooperative approach.32 Fiscal Challenges and 
Long Term Economic Costs , 
Economic Monitoring 
Report to the Ad Hoc Liaison 
Committee, 19.3.2013, World 
Bank, p. 6.
TABLE  4
NET ARREARS ACCUMULATION 2009–12 (MILLION EURO)
2009 2010 2011 2012
Total 190,7 83,3 392,1 451,9
Source:  IMF staff report for the meeting of the AHLC, 19.3.2013, p. 14.30
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
(a) Although approximately 70 % of the PA’s revenues come from 
so-called clearance revenues which are indirect taxes collected by 
Israel on behalf of the PA from imported goods, this system is af -
fected by Israel’s sporadic suspension of these transfers as well as 
the lack of transparency concerning the amount of fees deducted 
by Israel for goods and services it charges to the PA. Both of these 
elements undermine the predictability of the PA’s revenues.
(b) Israel continues to control all of the West Bank’s Area C, which is 
the largest part of the oPt and the one with the most potential 
for economic development. Israeli planning regulations and travel 
restrictions on Palestinians currently in effect in Area C, as well as 
continuing encroachments into the most fertile areas by new Israeli 
settlements, have largely prevented Palestinians from developing 
Area C. Resolving the Area C issue is essential to the long-term 
sustainability of the PA. The issue was addressed in a critical July 
2011 internal report by the EU heads of mission.
(c) Restrictions on imports and exports from the oPt as well as move -
ment and access into Israel and between the West Bank and Gaza. 
Restrictions on Gaza are particularly severe.
71.  The Pegase DFS funded one component, the PSRG, to support the reha -
bilitation of the private sector in Gaza after Israel’s 2008 ‘Operation Cast 
Lead’ destroyed many local enterprises. Damage specifically to the pri -
vate sector was estimated at 108,7 million euro33. The PSRG component 
has provided funding of 22 million euro to 915 companies.
72.  The engineers supervising the implementation of PSRG estimated that 
the funds paid by the PSRG programme replaced only approximately 
20 % of the previous capacity of the businesses. More fundamentally, 
companies continued to suffer from the weight of Israeli restrictions, as 
was directly observed during an audit visit to one of the beneficiaries 
in October 2012 (see Box 3 ).
73.  Sustainability of the PSRG results depends more on the political context 
than on further donor financial assistance. This was clearly demonstrated 
when a new Israeli military operation in Gaza in November 2012 re -
sulted in further damage, including limited damage to 22 of the PSRG 
beneficiaries34.33 Figures based on 
study contracted by the 
Commission.
34 The total value of 
PRSG-funded assets 
was estimated at 
150 000 US dollars.31
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
PSRG SUPPORT FOR AN ELECTRICAL COMPONENTS COMPANY IN GAZA
The company was established in 1986 in the vicinity of an industrial-free zone. It produces electric outlets, 
switches and lights. Before ‘Operation Cast Lead’ , it had 90 employees and occupied a 3-storey building of 900 m2 
which was completely destroyed during the bombing. The company has received a grant of 641 180 euro from 
the PSRG.
At the time of the audit, the company had 25 employees and was operating at 30 % of its previous capacity 
with a reduced product range. It faced several problems:
(a) four items bought by the company in the framework of the PSRG component for 71 300 US dollars had been 
held in the harbour of Ashdod since 8 September 2011 following the Israeli Ministry of Defence’s orders of 
June and July 2010; in total at least 400 000 euro worth of equipment purchased by different companies as 
part of the PRSG component was estimated to be blocked by the Israeli authorities at the time of the audit;
(b) the Israeli closure of Gaza, which meant that there was no physical access to the West Bank and other markets;
(c) a lack of capital and access to loans. The fact that the PRSG component had not reimbursed the company for 
equipment it had purchased, as it was still held by the Israeli authorities, clearly contributed to this problem.BOX  332
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
CONCLUSIONS
74.  The audit concluded that the Commission and the EEAS had succeeded 
in implementing direct financial support to the PA in difficult circum -
stances, but that a number of aspects of the current approach are in -
creasingly in need of an overhaul. While some important results have 
been achieved, their sustainability is in doubt without major revisions 
to the current approach. As part of these revisions, the PA also has to be 
encouraged to undertake more reforms, notably in relation to its civil 
service. At the same time, a  way needs to be found to bring Israel to take 
the necessary steps to help ensure that Pegase DFS is effective.
75.  Pegase DFS has typically been funded on a year -to-year basis using ac -
celerated approval procedures and with few changes to its main com -
ponent — the payment of civil servants and pensioners — despite the 
changing operational environment. Despite the requirements of the 
ENPI regulation, there is a lack of performance indicators which makes 
it difficult for the EEAS and the Commission to assess and demonstrate 
results. Although Pegase DFS is intended to serve as a mechanism for 
other donors to also channel funding, their contributions are declining.
76.  The Commission has established a robust verification system for ensur -
ing that funding reaches the eligible beneficiaries. However, the system 
is in need of simplification. At the same time, the Commission has pro -
cured the contractors without competitive tendering because of the 
crisis situation in the oPt, whereas it would have been feasible to carry 
out tendering and obtain their services more economically.
77.  Pegase funds reached the intended beneficiaries and the funding has 
played an important part in supporting vulnerable families (and encour -
aged useful reforms in this area) and contributed to maintaining health 
and education services. However, the Commission and the EEAS have 
not sufficiently used the very large-scale funding from Pegase DFS to 
civil servants‘ salaries as leverage with the PA to push forward much-
needed civil service reforms. The increasing numbers of beneficiaries 
and the reduced funding from donors is increasingly placing the current 
approach under stress. In the second half of 2012, there were significant 
delays in the payment of salaries by the PA, leading to widespread unrest. 
Support for social assistance is also under strain. The increasing number 
of beneficiaries, recent delays in the quarterly transfers to beneficiaries 
and the low level of allowances all raise concerns about the sustainability 
of the system. Urgent action is needed to address these problems.CONCLUSIONS AND RECOMMENDATIONS33
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
78.  In Gaza, the audit found that salaries were being paid to large numbers 
of beneficiaries who were not working due to the political situation. 
The situation in Gaza made it difficult for the Commission to carry out 
on-the -spot controls and ensure that rent -seeking was not taking place. 
The EEAS and the Commission did not have clear information on the 
extent of this problem nor do they refer to the issue in their documen -
tation on financing Pegase DFS. The payment of civil servants who are 
not working does not meet one of the main objectives of Pegase: to 
provide public services for the benefit of the Palestinian people. The 
Commission was also unable to establish how Israel and the PA had used 
approximately 90 million euro which Pegase DFS paid for VAT and excise 
duties on fuel to enable the production of electricity at the Gaza power 
plant.
79.  Some progress has been made in PFM reforms with support from tech -
nical assistance provided by the Commission. However, the extent of 
progress is difficult to assess as the Commission and the EEAS have not 
yet agreed with the PA to carry out a follow-up of the 2007 PEFA assess -
ment. Progress made in improving the PA’s public finance management 
risks being eroded by the increasingly severe budget deficit and liquidity 
crisis. Despite large-scale funding support from Pegase DFS since 2008, 
the fiscal situation of the PA deteriorated markedly in 2012. Ultimately, 
the effectiveness of Pegase DFS — in terms of building up a financially 
viable PA — is being undermined by the numerous economic restrictions 
imposed by Israel. The EEAS and the Commission, despite their efforts, 
have not yet been able to ensure that Israel engages positively to help 
make Pegase DFS effective.
RECOMMENDATIONS
80.  Based on the above conclusions and given the opportunities provided 
by the new 2014–20 programming period and a new EU–PA action plan, 
the Court recommends that the EEAS and the European Commission 
undertake a major review of Pegase. The review should take the recom -
mendations listed below into account.34
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
81.  The EEAS and the Commission should strengthen the programming of 
the future Pegase DFS, specifically by:
(a) linking it more closely to the new EU–PA action plan;
(b) planning allocations on a multiannual basis;
(c) developing performance indicators, particularly in the areas of 
health, education and PFM, to better assess and demonstrate its 
results.
82.  The Commission should reduce the costs of administering Pegase DFS 
by:
(a) using competitive tendering for contracts relating to the manage -
ment and control of Pegase DFS whenever feasible;
(b) simplifying the Pegase DFS management system by making the EU 
representation in Palestine responsible for administering the Pegase 
database and taking over some of the checks currently outsourced.
83.  The EEAS and the Commission should apply conditionality to the future 
Pegase DFS, specifically by linking it to concrete progress by the PA on 
civil service reform and PFM reform.
84.  The EEAS and the Commission should reach an agreement with the PA for 
the funding of salaries and pensions from Pegase DFS for civil ser  vants 
in Gaza to be discontinued and redirected to the West Bank.
85.  The EEAS and the Commission, in conjunction with the broader donor 
community, should further engage with Israel, within the framework of 
broader EU–Israeli cooperation, in order to determine what steps Israel 
needs to take to ensure Pegase DFS is more effective.35
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
 This Report was adopted by Chamber III, headed by Mr Karel PINXTEN, 
Member of the Court of Auditors, in Luxembourg at its meeting of 
22 October 2013.
For the Court of Auditors
Vítor Manuel da SILVA CALDEIRA
President
36
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
1. The Pegase mechanism is aimed at ensuring that support is provided directly to the intended bene -
ficiaries and that funds are disbursed in a transparent and accountable manner. An overview of the 
payment and verification system established by the Commission is provided in Figure 1 .ANNEX  I
FIGURE  1 — OVERVIEW OF THE PEGASE PAYMENT AND VERIFICATION SYSTEM
Beneﬁciaries‘ lists
from PA Ministry of Finance 
(civil servants/pensioners, 
recipient of social allowances)Ex ante controls and 
veriﬁcations by EU auditor
Application of EU eligibility criteriaWorld Check 
(international 
sanctions list)Final list of payees 
(eligible Pegase 
beneﬁciaries)Payment to Pegase 
eligible beneﬁciaries
Donors‘ contribution 
(memorandum 
of understanding)EU and donor’s funds 
available in dedicated 
sub-account of the 
PA single treasury accountCross-check of data with 
other Pegase programmesLetter to the PA Ministry of 
Finance to authorise the 
release of the EU/donors 
contribution on the basis of 
the list of eligible Pegase 
beneﬁciariesEx post audits 
and on-the-spot 
controls
Source:  European Commission.
2. To ensure the reliable verification of individual recipients of funds, as well as to mitigate the risk 
of misuse of funds, all beneficiaries of Pegase funds under the different components are screened 
against international sanctions lists and other ad hoc lists via the use of the ‘World Check’ software. 
An international organisation is contracted (through a  contribution agreement) to host, manage and 
perform basic IT checks on beneficiary data (see paragraph 8 for details).THE PEGASE MECHANISM37
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
3. All Pegase DFS components are managed with the support of contracted ‘Big  4’ audit firms. The 
contracted auditors are responsible for identifying Pegase eligible populations and proposing the 
level of payments to them on the basis of criteria defined by the Commission and a set of agreed 
upon procedures (AUPs). The eligibility criteria for three of the components verified through AUPs 
are set out in Box 1 .
BOX 1 — PEGASE ELIGIBILITY CRITERIA FOR CSP, VPF AND ARREARS COMPONENTS
Civil servants and pensioners (CSP) Vulnerable Palestinian families (VPF) PA arrears to the private sector
Employees on the PA’s payroll 
with the following positions and 
statutes are ineligible  for Pegase 
DFS contributions under the CSP 
programme:
(i) ministers and deputy ministers;
(ii)  workers identified as ‘daily paid’ 
employees;
(iii)   employees/pensioners of the security 
forces and the civil police;
(iv)   employees who work at non‑govern ‑
mental organisations supported by 
the PA, labour and trade unions sup ‑
ported by the PA and various political 
parties supported by the PA;
(v)  exclusions from the international 
and ad hoc sanctions lists (i.e. ‘World 
Check’).Households registered in the PA Minis -
try of Social Affairs’ cash transfer pro -
gramme (CTP) are eligible to receive 
a monthly allowance of minimum 
NIS 250 and maximum NIS 600 from 
Pegase under the VPF programme if:
(i)  they are eligible to receive cash assistance 
at the cut‑off date of the applicable CTP 
database (i.e. beneficiaries registered to 
receive exclusively  the following type of 
assistance are ineligible: medical insur ‑
ance, food assistance, referral to institu ‑
tions, care, youth shelter or other);
(ii)  they have been identified as ‘ex ‑
tremely poor’ as per the application of 
proxy‑means testing;
(iii)   they have a valid, complete and correct 
bank account through which the payment 
of the allowances can be made, for West 
Bank beneficiaries ; they do not receive di ‑
rect payments under other Pegase schemes  
(i.e. PCSP).To be eligible, arrears to the private sec -
tor must fulfil the following criteria:
(i)  they must be outstanding for more than 
45 days from the invoice date, have been ap ‑
proved by the PA Ministry of Finance in accord ‑
ance with its internal procedures and have still 
not been paid;
(ii)  where applicable, the legal status of the bene ‑
ficiary is in compliance with all legal require ‑
ments of the PA regulations for the private 
sector;
(iii)   claims must be accompanied by all the neces ‑
sary supporting documents;
(iv)   they must not have been already covered by 
other EC payments under other programmes;
(v)  the beneficiaries and/or their representatives 
must not appear on any list of companies/ in ‑
dividuals that have been engaged in illegal or 
terrorist activities;
(vi)   they must not be related to goods supplied 
or services provided for the direct or indirect 
bene  fit of the PA security and military services.
Source:  European Commission.ANNEX  I38
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
4. In addition to the ex ante  verifications of eligibility carried out, ex post  verifications are done to con -
firm that disbursements to individuals (mainly through bank accounts) were properly executed.
5. For the CSP component, detailed checks (but not on-site inspections) are carried out on 5 % of all 
new beneficiaries with 6-month intervals.
6. For the SEPS component, the beneficiary was the Gaza power plant. For each fuel delivery, the veri -
fications described in Box 2  were carried out.
BOX 2  — SEPS VERIFICATIONS
The contracted auditor verifies that invoices submitted by the fuel supplier to the Ministry of Finance (MoF) are accurate, 
valid and eligible for payment, and relate to the goods and services actually rendered.
An audit team attends the fuel deliveries on a daily basis and also prepares an ex ante  verification report on the eligibility 
of the requests for payment submitted by the MoF.
An international organisation prepares and maintains a database with information regarding all aspects of fuel provision 
and related services.
7. The eligibility criteria for the PSRG are presented in Box 3 .ANNEX  I39
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
BOX  3 — PSRG ELIGIBILITY CRITERIA
The PA set the basic criteria for which companies were eligible for the programme.
(a) Registered commercial and manufacturing firms; firms that lost core production equipment or infrastructure; firms 
that are able to prove damage.
(b) The applicant should be the owner of the damaged property or a legal agent.
(c) The scope of the programmes was limited to the following operating assets: production machinery, office furniture, 
office equipment and physically damaged buildings, facilities and other business premises.
The EU set additional eligibility criteria.
(i) The value of the claim is to be equal to or above 1 000 US dollars.
(ii) Registration of the legal entity allowing it to operate in accordance with the PA requirements, including VAT 
registration, if applicable; and including registration of the legal entity’s ownership and representatives.
(iii) In order to be eligible for financing, potential beneficiaries were required to have been registered with the PA 
by 26 December 2008 at the latest.
Considering the large number of businesses registered by entities other than the ministry, such as the Chamber of Com -
merce, various ministries and associations (for licensing doctors, pharmacists, etc.), EUREP felt obliged to relax the criteria. 
The financing agreement with the PA was amended accordingly to replace the wording ‘registered’ with ‘allowed to do 
business in Gaza’.
8. The Pegase mechanism depends on the safe handling of large quantities of electronically stored data 
about thousands of individual beneficiaries. The international organisation provides IT and technical 
support for the payment process and performs maintenance of the system including hardware and 
system software, network infrastructure and developed software (user interfaces, databases, report -
ing and notification services) and technical support regarding integration of other software (e.g. the 
‘World Check’).
9. Data in the Pegase information system is received from external sources (channelled to the inter -
national organisation by EUREP), transformed into the proper format, validated for completeness, 
loaded into the database and processed according to a set of rules. Data is also exported from the 
system and forwarded to relevant parties at appropriate points in the payment process.ANNEX  I40
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
10.  The system stores payment and beneficiary information, including approval of beneficiaries, payment 
confirmation, exclusions, results from ex ante  verifications and bank rejections. EUREP can currently 
review and update the data, which can be uploaded to the system by EUREP or the international 
organisation’s IT staff.
11.  Access to the system is restricted in accordance with different authorisation levels related to staff 
functions, tasks to be performed and levels of responsibility. The system supports payments for the 
benefit of all five Pegase DFS components.
12.  The Pegase information system supports the following four verification phases:
 οpreparation phase;
 οprocessing phase;
 οpayment phase;
 οpost -payment phase.
13.  Figure 2 shows the data flows and verifications carried out in each of the four phases and how they 
are interconnected.
14.  For additional independent assurance, financial audits of Pegase DFS as a whole are carried out peri-
odically. Financial audits for the periods February 2008–June 2009 and July 2009–December 2010 
have been carried out, while the financial audit for 2011 was still ongoing as at 31 March 2013.ANNEX  I41
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
VERIFICATIONS IN THE PEGASE INFORMATION SYSTEMFIGURE  2
Preparation phase Post-payment phase Processing phase
Ex ante 
auditing checksFinal payment 
lists from PAEx ante audit phase
(CSPs, CPDs only)
Final cross 
checks 
with other 
payment 
schemesECTAO 
payments
clearance 
(rejection
policies/Visa
chain processing)Issue ﬁnal lists, 
CDs and reports 
for other 
stakeholdersFor CSPs or CPDs 
Current month 
payment lists
Auditing checks
Pegase DatabaseVISA
conﬁrmedPerform 
the paymentEx post 
auditing checksPayment phase
Local banks 
feedbackAdditional
IT services
Cross check with 
other ongoing programme
World CheckInitial 
beneﬁciaries 
lists from the PA
Cross checks 
with other schemes
Source:  European Commission (‘Assessment of the Simplification of Procedures/Enhancement, Cost -Effectiveness and Efficiency of the 
Pegase DFS Mechanism’ , Inception and Phase 1 Report, November 2011).42
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
Financing 
agreement/
contract 
numberTitleFinancing 
agreement/
contract 
dateCommitted 
(euro)Contracted 
(euro)Paid  
(euro)
Direct financial support — recurrent expenditure1
ENPI/2008/019 ‑
776  (EC)Pegase support to recurrent expenditures of PA 19.3.2008 176 000 000 176 000 000 176 000 000
ENPI/2008/154 ‑
854  (CL)Supporting the provision of essential public services 8.4.2008 56 000  000 56 000  000
ENPI/2008/155 ‑
591 (EC)Individual commitment for regularisation of payments under 
Pegase imprest account, VPF, bank fees14.4.2008 500 000 500 000
ENPI/2008/155 ‑
637 (EC)Individual commitment for regularisation of payments made 
through Pegase imprest account, VPF14.4.2008 9 500 000 9 500 000
ENPI/2008/155 ‑
640 (EC)Individual commitment for payments of allowances to  
CSP Component 1 of recurrent expenditures project14.4.2008 95 000 000 95 000 000
ENPI/2008/159 ‑
007 (EC)Individual commitment for payment of arrears under  
DEC 1977622.5.2008 10 000 000 10 000 000
ENPI/2008/166 ‑
130 (EC)Additional contribution to the ESSP Phase III  
TF 070598 ‑ MDTF ‘the World Bank Group’14.12.2008 5 000 000 5 000 000
ENPI/2008/020 ‑
254 (EC) Pegase support to recurrent expenditures of the PA (Part II) 8.8.2008 40 000 000 40 000 000 40 000 000
ENPI/2008/163 ‑
882 (EC)Payment of allowances to CSPs — Pegase support to recur ‑
rent expenditure Part II20.8.2008 34 000 000 34 000 000
ENPI/2008/164 ‑
449 (EC)Payment of allowances to VPFs — Pegase support to recur ‑
rent expenditure Part II (imprest account)20.8.2008 5 946 765,17 5 946 765,17
ENPI/2008/164 ‑
456 (EC)Payment of bank fees — allowances to VPFs — Pegase sup ‑
port to recurrent expenditure Part II (imprest account)20.8.2008 53 234,83 53 234,83
ENPI/2008/020 ‑
425 (EC) Pegase support to recurrent expenditures of the PA (Part III) 5.11.2008 42 000 000 42 000 000 42 000 000
ENPI/2008/169 ‑
663 (EC)Individual commitment for payments of allowances to  
CSP Component 1 of recurrent expenditures project III17.11. 20 0 8 30 000 000 30 000 000
ENPI/2008/169 ‑
666 (EC)Individual commitment for regularisation of payments made 
through Pegase imprest account, VPF17.11. 20 0 8 1 000 000 1 000 000
ENPI/2008/169 ‑
667 (CL)Supporting the provision of essential public services 1.12.2008 11 000 000 11 000 000
Sub-total 2008 258 000 000 258 000 000 258 000 000
1  The committed amounts include assigned revenues from Austria: 1 million euro in 2008; 0,5 million euro in 2009; 1,5 million euro in 2010 and  
1 million euro in 2011; from Japan: 4,78 million euro in 2011; and from Belgium: 9 million euro in 2012. Assigned revenues came to a total  
of 17,88 million euro.ANNEX  II
OVERVIEW OF PEGASE DFS-RELATED FINANCING AGREEMENTS AND CONTRACTS43
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
ANNEX  II
Financing 
agreement/
contract 
numberTitleFinancing 
agreement/
contract 
dateCommitted 
(euro)Contracted 
(euro)Paid  
(euro)
ENPI/2008/020 ‑
577 (EC) 2009 Pegase: support to recurrent expenditures of the PA 17.12. 20 0 8 168 000 000 168 000 000 168 000 000
ENPI/2008/172 ‑
720 (EC)Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2009: sup ‑
porting Palestinian administration and services31.12.2008 108 000 000 108 000 000
ENPI/2008/172 ‑
721 (EC)Individual commitment for regularisation of payments made 
through Pegase imprest account VPF31.12.2008 20 795 000 20 795 000
ENPI/2008/172 ‑
722 (EC)Supporting the provision of essential public services 31.12.2008 38 930 000 38 930 000
ENPI/2009/214 ‑
989 (EC)Individual commitment for regularisation of bank fees for 
VPF payments made through Pegase imprest account31.12.2008 275 000 275 000
ENPI/2009/021 ‑
634 (EC) 2009 Pegase (II): additional support to recurrent exp  
of the PA 13.7. 20 0 9 39 000 000 39 000 000 39 000 000
ENPI/2009/215‑
912 (EC)Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2009 (Part 
II): supporting Palestinian administration and services22.7. 20 0 9 39 000 000 39 000 000
ENPI/2009/021 ‑
840 (EC) 2009 Pegase: support to recurrent exp of the PA (Part III) 30.11.2009 12 100 000 12 100 000 12 100 000
ENPI/2009/226 ‑
722 (EC)Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2009 —  
Part III: supporting Palestinian administration and services2.12.2009 3 500 000 3 500 000
ENPI/2009/226 ‑
733 (EC)Pegase 2009 — Part III — Component 2 of recurrent  
expenditures: individual commitment for regularisation of 
payments made through Pegase imprest account VPF2.12.2009 7 744 000 7 744 000
ENPI/2009/226 ‑
734 (EC)Pegase 2009 — Part III — Component 3 of recurrent  
expenditures: supporting the provision of  
essential public services2.12.2009 700 000 700 000
ENPI/2009/227 ‑
317 (EC)Individual commitment for regularisation of bank fees for 
VPF payments made through Pegase imprest account2.12.2009 156 000 156 000
Sub-total 2009 219 100 000 219 100 000 219 100 00044
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ANNEX  II
Financing 
agreement/
contract 
numberTitleFinancing 
agreement/
contract 
dateCommitted 
(euro)Contracted 
(euro)Paid  
(euro)
ENPI/2010/021 ‑
955 (EC) Pegase 2010: support to recurrent expenditures of the PA 16.12.2009 169 500 000 169 500 000 169 455 197,80
ENPI/2010/230 ‑
426 (EC)Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2010:  
supporting Palestinian administration and services31.12.2009 127 000 000 127 000 000
ENPI/2010/230 ‑
836 (EC)Individual commitment for regularisation of bank fees for 
VPF payments made through Pegase imprest account31.12.2009 557 060,22 542 160,22
ENPI/2010/230 ‑
838 (CL)Individual commitment for regularisation of VPF payments 
made through Pegase imprest account31.12.2009 30 872 388,14 30 872 388,14
ENPI/2010/256 ‑
540 (EC)Technical addendum to existing individual commitment 
for regularisation of VPF payments made through Pegase 
imprest account ENPI.2010/ 230 ‑8381.12.2010 8 070 551,64 8 038 649,45
ENPI/2010/256 ‑
579 (EC)Technical addendum individual commitment for payments 
of allowances to CSP Component 1 of recurrent expenditures 
project 2010: supporting Palestinian administration and 
services ENPI/2010/ 230 ‑4261.12.2010 3 000 000 3 000 000
ENPI/2010/022 ‑
594 (EC) Pegase 2010: additional support to recurrent expenditures of 
the PA (Part III) 5.10.2010 41 400 000 41 400 000 41 400 000
ENPI/2010/253 ‑
282 (EC)Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2010:  
supporting Palestinian administration and services22.10.2011 41 400 000 41 400 000
ENPI/2009/021 ‑
839 (EC) Private sector reconstruction in Gaza (PSRG) 23.12.2009 26 781 281,79226 752 630,25 23 346 684,70
ENPI/2010/241 ‑
786 (EC)Individual commitment for financial assistance to beneficiaries 
of the private sector reconstruction programme in Gaza23.5.2010  25 781 281,79 21 010 876,69
ENPI/2010/235‑ 337Technical assistance to support ECTAO in implementing the 
Pegase programmes in the occupied Palestinian territory.31.3.2010 686 943,46 686 943,46
ENPI/2010/236 ‑718 Technical assistance to support ECTAO in implementing the 
Pegase programmes of ‘Support to the settling of PA arrears 
to the private sector’ and ‘Private sector reconstruction in 
Gaza’ (PSRG)19.4.2010 284 405 90 000
Sub-total 2010 237 681 281,80 237 652 630,30 232 643 018
2 Financing agreement ENPI/2009/021-839 of 22 million euro plus Japanese contribution of 4,78 million euro.45
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ANNEX  II
Financing 
agreement/
contract 
numberTitleFinancing 
agreement/
contract 
dateCommitted 
(euro)Contracted 
(euro)Paid  
(euro)
ENPI/2010/022 ‑
829 (EC) Pegase 2011: support to recurrent expenditures of  
the PA — Part IMULTI 77 000 000 77 000 000 77 000 000
ENPI/2011/261 ‑
044 (EC)Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2011 —  
Part II: supporting Palestinian administration and services18.1.2011 77 000 000377 000 000
ENPI/2011/023 ‑
095 (EC) Pegase 2011: additional support for recurrent exp of the PA MULTI 94 200 000 94 200 000 94 200 000
ENPI/2011/266 ‑
987 (EC)Individual commitment for regularisation of VPF payments 
made through Pegase — single treasury account of the PA30.5.2011 29 000 000 29 000 000
ENPI/2011/266 ‑
991 (EC)Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2011:  
supporting Palestinian administration and services — Part II30.5.2011 65 200 000465 200 000
ENPI/2011/023 ‑
376 (EC) Pegase: support for recurrent exp of the PA 2011/2012519.12.2011 46 000 000 46 000 000 46 000 000
ENPI/2012/284 ‑
110 (EC)Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2011/12: 
supporting Palestinian administration and services —  
frontloading 201225.1.2012 45 000 000645 000 000
ENPI/2012/284 ‑
113 (EC)Individual commitment for regularisation of VPF payments 
made through Pegase — single treasury account of the PA25.1.2012 1 000 00071 000 000
Sub-total 2011 217 200 0008217 200 000 217 200 000
3 Out of this amount, 17 million euro was allocated to pay for December 2011 salaries and pensions and was paid in January 2012.
4 Out of this amount, 9,2 million euro was allocated to pay for December 2011 salaries and pensions and was paid in January 2012. 
5 Encoded in parallel with ENPI/ 2011/023-610 being an integral part of the same financing agreement.
6  This amount was allocated to PA salaries and pensions for the first quarter of 2012. The overall amount of 90 million euro under the individual commit -
ment ENPI/2012/284-110 has been encoded in parallel with ENPI/2011/023-376 and ENPI/2011/023-610 being an integral part of the same financing 
agreement.
7 This amount was allocated to PA salaries and pensions for the first quarter of 2012.
8  26,2 million euro was added at the end of 2011 for December salaries and 46 million euro committed on 2011 credits are for frontloading to the first 
quarter of 2012, including 1 million euro in assigned credits from Austria. The total of 72,2 million euro should therefore be considered part of the budget 
for 2012. The total allocated budget for 2011 is therefore 145 million euro.46
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ANNEX  II
Financing 
agreement/
contract 
numberTitleFinancing 
agreement/
contract 
dateCommitted 
(euro)Contracted 
(euro)Paid  
(euro)
ENPI/2011/023 ‑
610 (EC) Pegase: support for recurrent exp of the PA 2012 — Part II 19.12.2011 69 000 000 69 000 000 69 000 000
ENPI/2012/284 ‑
110 (EC)Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2011/12: 
supporting Palestinian administration and services —  
frontloading 201225.1.2012 45 000 000 45 000 000
ENPI/2012/284 ‑
113 (EC)Individual commitment for regularisation of VPF payments 
made through Pegase — single treasury account of the PA24.1.2012 24 000 000 24 000 000
ENPI/2012/023 ‑843Pegase 2012: support to the recurrent expenditures of the 
PA — Part II18.10.2012 24 800 000 24 800 000 24 800 000
ENPI/2012/305 ‑379 Individual commitment for payments of allowances to CSP 
Component 1 of recurrent expenditures project 2012 Part II: 
supporting Palestinian administration and services25.10.2012 13 800 000 13 800 000
ENPI/2012/305 ‑390 Individual commitment for payments of allowances to VPF 
Component 2 of recurrent expenditures project 2012 Part II: 
supporting Palestinian social protection system25.10.2012 11 000 000 11 000 000
Sub-total 2012 93 800 000993 800 000 93 800 000
Total Pegase DFS 1 025 781 282 1 025 752 630 1 020 743 018
9 72,2 million euro had already been committed for frontloading on 2011 credit, which brings the total to 166 million euro for the 2012 budget allocations.47
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
ANNEX  II
Financing 
agreement/
contract 
numberTitleFinancing 
agreement/
contract 
dateCommitted 
(euro)Contracted 
(euro)Paid  
(euro)
Major TA contracts related to DFS implementation support10
MED/2007/145 ‑324 TA for finance facility II — arrears 29.10.2007 659 136,50 659 136,50
ENPI/2007/145 ‑484 TA action in the West Bank and Gaza to support the TIM 1.11.2007 545 000 545 000
ENPI/2007/146 ‑120Further EC emergency support to the Palestinian people in 
the West Bank and Gaza Strip (TIM windows 2 and 3)26.11.2007 1 210 496,84 1 210 496,84
MED/2008/ 
153 ‑790 Support to the PDFS unit of the Pegase mechanism 20.3.2008 2 550 722,85 2 550 722,85
ENPI/2009/200 ‑
563Pegase needs assessment mission in Gaza and identification 
of priority areas for donor financial support16.2.2009 694 465,20 694 465,20
ENPI/2009/201 ‑712 EC emergency support to the Palestinian people in the  
West Bank and Gaza Strip (Pegase — support to recurrent 
expenditures of the PA)27 .2.2009 1 190 399,72 1 190 399,72
ENPI/2009/207 ‑600 TA for the identification, implementation and monitoring of 
development projects in West Bank, Gaza Strip and East  
Jerusalem as well as support to Pegase direct financial 
suppor t 29.4.2009 3 896 917 3 896 917
ENPI/2010/246 ‑160 Technical assistance — TA for the identification,  
implementation and monitoring of development projects in 
West Bank, Gaza Strip and East Jerusalem as well as support 
to Pegase Direct Financial Support25.8.2010 1 983 662,05 1 983 662,05
ENPI/2011/264 ‑7012011 Technical assistance action for the identification,  
implementation and monitoring of development projects  
in West Bank, the Gaza Strip and East Jerusalem as well as 
support to Pegase direct financial support (PDFS)29.4.2011 2 500 000 2 434 252,84
ENPI/2011/262 ‑520 Technical assistance to support EUREP in implementing the 
Pegase programmes in the West Bank and Gaza Strip30.3.2011 1 235 600 975 785,75
ENPI/2012/284 ‑
0052012 TA for the identification, implementation and  
monitoring of development projects in the West Bank, Gaza 
Strip and East Jerusalem as well as support to Pegase direct 
financial support 29.2.2012 2 500 000 2 370 000
Sub-total 18 966 400,16 18 510 838,75
10 The contracts were selected on the basis of materiality (contracts above 275 000 euro).48
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
ANNEX  II
Financing 
agreement/
contract 
numberTitleFinancing 
agreement/
contract 
dateCommitted 
(euro)Contracted 
(euro)Paid  
(euro)
Major TA contracts related to institution and capacity building
ENPI/2009/209 ‑
464Support to the PNA’s financial institutions 11.6.2009 310 366,80 279 330
ENPI/2010/231 ‑390Technical assistance to the Ministry of Social Affairs (MoSA) 
in the occupied Palestinian territory9.3.2010 2 198 379 1 946 509,42
ENPI/2010/231 ‑065Technical assistance (Phase III) to reinforce PA internal audit 
and internal control departments22.3.2010 800 000 794 115,88
ENPI/2010/243 ‑559Improving health and well ‑being among people affected by 
mental illness in Gaza: building local capacity for service 
provision and support15.7. 2010 2 329 848 1 612 911
ENPI/2010/248 ‑920Institutional strengthening of the State Audit and  
Administrative Control Bureau8.10.2010 3 722 300 1 940 379,71
ENPI/2011/248 ‑905TA support EUREP in implementing the ‘Institutional  
development and electricity sector reform’ project in the 
framework of the implementation of Pegase PDFS  
programmes in the West Bank and Gaza Strip27.1. 2011 1 995 105 1 984 242,85
ENPI/2011/261 ‑041Technical assistance to enhance the PA’s capacities in aid 
effectiveness and good governance (GSG coordinator)24.2.2011 432 027 341 289,30
ENPI/2011/270 ‑253 EU support to TVET development in the oPt 17. 8. 2011 4 000 000 1 500 000
ENPI/2011/279 ‑345 TA to reinforce PFM and internal auditing 1.12.2011 2 184 400 826 506,45
Sub-total 17 972 425,8 11 225 284,61
Total 1 062 720 108 1 050 479 14149
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
ANNEX  III
SUMMARY OF FUNDS DISBURSED THROUGH PEGASE
 Civil servants 
and  
pensioners  
(CSP)Civil police 
and civil  
defence  
(CPD)Vulnerable 
Palestinian 
families Support for  
essential  
public  
servicesPrivate sector 
arrearsPrivate  
sector  
reconstruction 
in GazaTotal
YearMonth of  
disbursementAmount (euro)
2008February 22 061 275 8 283 749 30 345 024
March 34 284 281 7 512 910 4 748 826 5 872 358 52 418  376
April 22 190 184 12 170 064 5 443 951 39 804 199
May 35 530 287 6 424 669 41 954  957
June 21 326 546 7 475 092 9 896 548 3 722 310 42 420  495
July 14 763  600 11 233 844 4 685 347 30 682 790
August 14 654 950 12 644 495 27 299 445
September 35 403 365 8 873 487 9 059 387 4 559 654 57 895 892
October 12 784 641 12 784 641
November 14 956 569 5 320 646 20 277 216
December 14 849 556 9 363 890 3 266 549 27 479 995
Total 2008 230 020 614 33 225 378 95 833 417 24 283 619 383 363 028
2009January 25 019 151 914  999 25 934 150
February 23 535 916 5 957 387 365  837 29 859 141
March 26 042 684 9 166 509 7 935  189 43 144 382
April 22 934 571 6 582 430 29 517 001
May 12 928  927 10 461 756 2 999 875 26 390 558
June 12 973 571 13 483 031 7 204 661 33 661 264
July 12 983 581 7 562 712 20 546 293
August 12 746 538 8 450 202 21 196 740
September 25 726 437 9 288 785 8 480 912 43 496  134
October 4 080 359 200  000 4 280 359
November 29 789 693 10 619 722 40 409 415
December 9 219 962 6 670  249 15 890 211
Total 2009 204 681 069 5 957 387 41 158 287 79 329 028 3 199 875 334  325  647
2010January 6 290 363 7 171 680 13 462 043
February 20 676 363 1 964 134 1 353 402 23 993 900
March 22 852 534 10 137  710 149  875 33 140  118
April 20 773  605 20 773  605
May 20 950 191 4 363 234 25 313 425
June 8 959 311 10 223 374 1 991 637 21 174 322
July 8 893 244 3 067 502 4 782 616 16 743 362
August 14 036  739 9 701  649 1 625 455 25 363 843
September 8 930 184 1 989 776 3 582 649 14 502 608
October 37 056 283 4 011 936 41 068 219
November 20 389 247 2 123 295 22 512 542
December 20 590 940 6 856 359 1 133 941 28 581 240
Total 2010 210  399  003 9 135 815 36 919 092 21 660 178 149  875 8 365  265 286 629 22850
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
ANNEX  III
 Civil servants 
and  
pensioners  
(CSP)Civil police 
and civil  
defence  
(CPD)Vulnerable 
Palestinian 
families Support for  
essential  
public  
servicesPrivate sector 
arrearsPrivate  
sector  
reconstruction 
in GazaTotal
YearMonth of  
disbursementAmount (euro)
2011January 3 981 591 1 231 765 5 213 356
February 19 471  331 4 915 131 24 386 462
March 19 796 636 9 406  668 146  134 29 349  438
April 20 226 656 20 226 656
May 2 566 615 2 566 615
June 9 765 125 3 866 9 768 990
July 22 153 357 22 153 357
August 22 383 281 2 830 515 25 213 796
September 16 246 382 16 246 382
October 10 042 543 10 042 543
December 12 051 842 3 456 350 15 508 192
Total 2011 124  259  235 4 915 131 41 266 178 150  000 10 085 245 180 675 788
2012January 47 668 179 1 050 485 48 718 664
February 24 510 502 24 510 502
March 22 405 955 22 405 955
April 22 420 524 9 990 238 32 410 762
May 22 315 959 22 315 959
June 9 875 815 9 875 815
October 9 759 786 1 620 414 11 380 200
November 18 677 130 18 677 130
December 6 715 634 10 882 801 17 598 435
Total 2012 164 713 884 40 508  640 2 670 899 207 893 423
Grand total 934 073 804 20 008 333 193 077 575 196 822 624 27 783 369 21 121  409 1 392 887 114
Total CSP and CDP 954 082 137
Source:  European Commission.51
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
ANNEX IV
TOTAL PA WAGE BILL DISBURSEMENTS FOR ELIGIBLE CSP AND TOTAL PEGASE 
CSP PAYMENTS 2008–12 MONTH BY MONTH IN EURO AND NUMBER OF ELIGIBLE 
BENEFICIARIES
Payroll monthSalary/pension paid  
(bold italics = late)1Pegase contribution2 to 
beneficiaries (euro)Total PA pay for eligible 
beneficiaries (euro)Total number of eligible 
beneficiaries3
Jan ‑08 5.2.2008 22 061 275 40 648 607 73 826
Feb ‑08 6.3.2008 34 284 281 45 693 175 74 014
Mar‑ 08 6.4.2008 22 190 184 40 719 893 74 063
Apr‑ 08 6.5.2008 35 530 287 44 557 242 74 160
May ‑08 10.6.2008 21 326 546 43 033 758 73 761
Jun ‑08 7.7. 20 0 8 14 763 600 43 881 800 73 818
Jul‑08 7. 8. 20 0 8 14 654 950 43 158 255 73 947
Aug ‑08 4.9.2008 15 617 485 46 932 662 78 493
Sep ‑08 25.9.2008 19 785 879 45 824 002 78 340
Oct‑ 08 5.11.2008 14 956 569 52 360 648 78 153
Nov ‑08 3.12.2008 14 849 556 49 363 160 77 951
Dec‑ 08 6.1.2009 25 019 151 45 037 410 78 162
2008 average 21 253 314 45 100 884 75 724
Jan ‑09 17 .2.2009 23 535 916 48 610 399 78 038
Feb ‑09 5.3.2009 26 042 684 46 754 502 78 049
Mar‑ 09 6.4.2009 22 934 571 46 285 785 77 994
Apr‑ 09 7. 5. 20 0 9 12 928 927 47 323 840 78 063
May ‑09 7.6.2009 12 973 571 47 607 723 78 298
Jun ‑09 6.7. 20 0 9 12 983 581 47 433 886 80 580
Jul‑09 4.8.2009 12 746 538 47 882 970 80 620
Aug ‑09 3.9.2009 12 831 501 48 555 553 78 696
Sep ‑09 16.9.2009 12 894 936 46 839 660 78 996
Oct‑ 09 4.11.2009 14 835 798 49 017 979 79 916
Nov ‑09 24.11.2009 14 953 895 47 421 969 80 163
Dec‑ 09 6.1.2010 6 290 363 48 820 026 80 021
2009 average 15 496 023 47 712 858 79 120
Jan ‑10 4.2.2010 20 676 363 50 577 131 80 551
Feb ‑10 3.3.2010 22 852 534 51 708 439 80 608
Mar ‑10 6.4.2010 20 773 605 53 766 495 80 585
Apr ‑10 5.5.2010 20 950 191 54 692 448 80 576
May ‑10 7.6.2010 8 959 311 56 814 476 81 032
Jun ‑10 5.7. 2010 8 893 244 59 043 295 80 988
Jul‑10 5.8.2010 14 036 739 56 735 240 81 133
Aug ‑10 6.9.2010 8 930 184 58 631 942 84 628
Sep ‑10 6.10.2010 37 056 283 55 454 559 84 981
Oc t ‑10 4.11.2010 20 389 247 54 457 318 85 026
Nov ‑10 6.12.2010 20 590 940 56 492 298 84 948
Dec‑ 10 5.1.2011 3 981 591 59 150 450 84 808
2010 average 17 340 853 55 627 007 82 03552
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
ANNEX IV
Payroll monthSalary/pension paid  
(bold italics = late)1Pegase contribution2 to 
beneficiaries (euro)Total PA pay for eligible 
beneficiaries (euro)Total number of eligible 
beneficiaries3
Jan ‑11 6.2.2011 19 471 331 58 409 452 84 465
Feb ‑11 6.3.2011 19 796 636 58 218 925 84 544
Mar ‑11 5.4.2011 20 226 656 58 590 035 84 444
Apr ‑11 5.5.2011 0 57 359 539 ‑
May ‑11 5.6.2011 0 59 599 729 ‑
Jun ‑11 6.7. 2011 22 153 357 59 859 246 84 274
Jul‑11 2.8.2011 22 383 281 58 999 587 82 864
Aug ‑11 14.9. 2011 16 246 382 57 855 264 83 070
Sep ‑11 3.10.2011 0 57 009 951 ‑
Oc t ‑11 5.11.2011 0 60 178 790 ‑
Nov ‑11 6.12.2012 0 58 874 557 ‑
Dec‑ 11 5.1.2012 47 668 179 61 866 492 84 581
2011 average 13 995 485 58 901 797 84 035
Jan ‑12 7 .2.2012 24 510 502 62 406 634 84 569
Feb ‑12 7.3. 2012 22 405 955 60 706 774 84 278
Mar ‑12 11.4.2012 22 420 524 66 930 548 83 937
Apr ‑12 9.5.2012 22 315 959 64 595 271 83 987
May ‑12 7.6.2012 0 64 354 004 ‑
Jun ‑12 11 and 18.7.2012 0 62 891 548 ‑
Jul‑12 12 and 29.8.2012 0 63 029 985 ‑
Aug ‑12 11 and 16.9.2012 0 60 889 140 ‑
Sep ‑12 18 and 21.10.2012 0 61 593 991 ‑
Oc t ‑12 11, 21 and 23.11.2012 18 677 130 61 055 815 84 168
Nov ‑12 23.12.2012 and 14.1.2013 7 277 887 62 298 382 84 064
Dec‑ 12 20.1.2013 7 192 124 63 683 828 83 820
2012 average 10 400 007 62 869 660 84 174
Total 941 828 181 3 242 546 483
1 Beneficiaries paid more than 7 days after the last day of the payroll month.
2 Contributions in January and February 2008 were made under the TIM.
3 Averages include only the months where there were contributions from Pegase.53
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
ANNEX V
TOTAL PEGASE CONTRIBUTION TO VPF BENEFICIARIES COMPARED WITH PA SOCIAL 
ALLOWANCE PAYMENTS TO ELIGIBLE VPF BENEFICIARIES 2008–12
Payroll monthTotal Pegase 
pay to 
beneficiaries 
(euro) Number 
of Pegase 
beneficiariesAverage 
Pegase 
payment 
(euro) PA 
contribution 
(euro) Total PA pay 
to Pegase 
beneficiaries 
(euro) Total PA pay 
to additional 
beneficiaries 
(euro) Number of 
PA additional 
beneficiariesAverage PA 
pay to add. 
beneficiaries 
(euro)
Mar‑ 08 7 512 910 41 321 182 0 0 0 0 0
Jun ‑08 7 475 092 41 113 182 0 0 0 0 0
Sep ‑08 8 873 487 46 025 193 0 0 0 0 0
Dec‑ 08 9 363 892 47 680 196 0 0 0 0 0
2008 average 8 306 345 44 035 188 0 0 0 0 0
Mar‑ 09 9 166 509 48 798 188 0 0 0 0 0
Jun ‑09 13 483 031 49 645 272 0 0 0 0 0
Sep ‑09 9 288 785 50 531 184 0 0 0 0 0
Dec‑ 09 9 219 962 52 114 177 0 0 0 0 0
2009 average 10 289 573 50 272 205 0 0 0 0 0
Mar ‑10 10 137 710 51 826 196 0 0 0 0 0
Jun ‑10 10 223 374 49 672 206 0 0 0 0 0
Aug ‑10 9 701 649 49 754 194 0 0 0 0 0
Dec‑ 10 6 856 359 33 134 207 0 0 0 0 0
2010 average 9 229 773 46 097 201 0 0 0 0 0
Mar ‑11 9 406 668 57 912 162 0 0 0 0 0
Jun ‑11 9 765 125 49 578 197 0 0 0 0 0
Oc t ‑11110 042 543 50 556 199 0 0 0 0 0
Dec‑ 11 12 051 842 66 626 181 45 4 834 134 2 986 118 27 339 109
2011 average 10 316 545 56 168 185 45 4 834 134 2 986 118 27 339 109
Apr ‑1219 990 238 64 743 154 79 5 663 659 5 116 698 30 704 167
Jun ‑12 9 875 815 64 417 153 86 6 043 567 5 569 566 31 952 174
Oc t ‑1219 759 786 55 599 176 58 7 975 634 3 242 195 40 219 81
Dec‑ 12 10 882 801 54 900 198 40 8 501 210 2 169 995 42 372 51
2012 average 10 312 201 59 915 170 66 6 603 641 4 024 613 34 517 118
1 Payments delayed due to the non-availability of cash/liquidity in banks in Gaza and of the budget as a result of the recurrent PA financial crisis.
Source:  PA Ministry of Finance data with EU/donor and PA breakdown plus Pegase database records.54
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEAS
VI.
The issues surrounding the civil servants who are not 
able to work in Gaza (e.g. PA-support strike, its duration, 
its extent and its effects, Hamas’ reactions) are complex 
in the circumstances of the Gaza Strip where objective 
verification is difficult. DFS is a PA-driven programme. 
The Commission and the EEAS stand by their decision to 
support politically the PA (core of the future Palestinian 
state), which decided to continue to pay all eligible work -
ers in both the West Bank and the Gaza Strip regardless of 
their working status, which is, in any event, very difficult 
to clarify. Some civil servants do not work in Gaza simply 
because they are locked out by the de facto authorities. 
Others, although actually working, would still officially say 
that they are not working due to political reasons.
Any decision to stop contributing to salaries in Gaza is 
expected to be politically very sensitive. 
The Commission and the EEAS consider that they have 
sufficiently addressed this problem. This issue has been 
raised with the PA on a number of occasions at the highest 
political level and will continue to be the focus of future 
discussions. 
VII.
For engagement with the Government of Israel, see 
response to paragraph III (Executive Summary) above.EXECUTIVE SUMMARY
III.
At the end of 2011, the Commission launched a project to 
assess the needs and identify feasible projects in the area 
of civil service reform (CSR) in Palestine (this designation is 
without prejudice to positions on the recognition of Pal -
estine as a state). On this basis, and starting in the second 
half of 2013, a comprehensive support to the PA will be 
provided for CSR funded by the EU. EUREP will ensure close 
links between this action and the CSP programme, also 
facilitating stronger leverage over policy dialogue. 
It should be noted that the Commission and the EEAS 
have actively sought to ensure Israeli cooperation. Numer -
ous meetings have been held with the Israeli Ministry of 
Defence (COGAT) and various Israeli government officials 
in a number of contexts and fora. When necessary, the EU 
delegation in Tel Aviv has also been involved. The effec -
tiveness of such demarches could be enhanced by a more 
consistent and robust approach on the matter from Mem -
ber States.
IV.
In 2011, the need for increased competition was taken into 
consideration and is being addressed, with the launch of 
an international tender process to contract ex ante  and 
ex post  audit services related to the implementation of 
all Pegase DFS programmes. The forecast notice was pub -
lished in August 2012 and the new contracts are expected 
to be signed by the end of 2013.
For CSR, see response to paragraph III (Executive Summary) 
above. 
The leverage of the policy dialogue at PA level through the 
substantive DFS should not be underestimated.
V.
It should be noted that, during several months in 2012, 
Israel did not transfer the clearance revenues to the PA. 
This was a key factor in the delays in the payment of PA sal -
aries. Nevertheless, since the start of 2013, WAFA, PBS and 
Ministry of Religious Affairs employees have been removed 
from the list of eligible beneficiaries, returning the number 
to around 75 000 (down from 84 000).55
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEASOBSERVATIONS
27.
EU action plans set priority objectives which have been 
jointly agreed by both the EU and the PA and do not 
include an indicative financial framework. A new EU–PA 
action plan (AP) was approved by the Council in March 
2013. This new AP is more closely aligned to development 
assistance needs (and vice versa) than its predecessor, 
which was concluded before the setting-up of Pegase.
28.
As from 2014, the EU will embark on a 2-year programming 
cycle for the development part of its financial assistance. 
Palestine is one of the most sensitive points in the overall 
budget for external financial assistance and the budget -
ary authority has, in recent years, frequently increased the 
initial Commission proposal. The annual amounts available 
for Palestine are only known with any degree of confidence 
very late in the budgetary process. The volatile political 
situation also requires the Commission and the EEAS to be 
vigilant and to be able to reassess the situation whenever 
needed.
Very few Member States have programmed assistance to 
Palestine on a multiannual basis, for precisely the same 
reasons. 
The EU local strategy for development has recently been 
revised in cooperation with Member States and local 
representatives.29.
The Commission and the EEAS consider that submitting 
measures to Member States by written procedure does 
not make it more difficult to carry out a detailed review of 
the mechanism. On a number of occasions, Palestine pro -
grammes (Pegase in particular) have been presented to the 
ENPI committee as an information point on the agenda. 
Member States have generally indicated their satisfac -
tion with the procedures used and did not refrain from 
asking for further clarifications whenever they deemed it 
necessary.
The Commission and the EEAS consider that the estab -
lishment of the PSRG programme, which was imple -
mented after ‘Operation Cast Lead’ , as well as the use of 
the SEPS and arrears component demonstrate the ability 
of the programme to adapt to changes in the operational 
environment.
The Commission and the EEAS are, however, aware that 
this situation is unsustainable in the long run and that it is 
time to make adjustments now that the situation in Gaza 
has remained unresolved for the past 7 years. In fact, this 
issue has been raised with the PA on a number of occa -
sions in the past. 
Discussions have already started with the PA aimed at find -
ing a solution that would take account of the concerns 
raised by the Court, while allowing the PA to continue sup -
porting its employees in Gaza.
The Commission and the EEAS stand by their political view 
that the PA must continue supporting its workers in Gaza 
as a key element of maintaining the unity of a future Pal -
estinian state and allowing the PA to retain a foothold in 
Gaza. Due consideration should be given to the fact that 
the Commission and the EEAS took and implemented this 
decision in view of political considerations and that most 
of the workers who are not working in Gaza are in fact pre -
vented from working.56
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEAS30.
It should be noted that, except for the United Kingdom, 
which only contributed to Pegase in 2008, no other donor 
to Pegase DFS has moved from Pegase DFS to the World 
Bank Trust Fund. Furthermore, Pegase also attracted 
funding from non-member countries such as Japan and 
Switzerland.
The decline in funding can be attributed primarily to the 
decline in the fiscal situation of Member States as well as 
to a certain degree of donor fatigue. Some Member States 
and other donors prefer to support development projects 
(rather than DFS) as it gives them more visibility.
31.
The Commission acknowledges that the current situation 
of Pegase does not include performance indicators.
The EEAS and the Commission are guided in this respect 
by the indicators contained in the Palestinian reform and 
development plan and the Palestinian national develop -
ment plan, on whose priorities Pegase was and remains 
based. This is also a measure of conditionality.
The Commission also accepts to introduce performance 
indicators for Pegase, which will take into account the spe -
cific situation of the PA and the particularity of the Pegase 
programme.
The aim of providing DFS through Pegase is to enable the 
PA to meet its existing commitments to its population, 
insofar as this is possible. It is not realistic to expect a sig -
nificant qualitative improvement of these in the current 
financial situation. 
The factors on which the achievement of the objectives 
depend are mainly external and beyond the PA’s control. 
Pegase DFS is a political instrument whose ultimate objec -
tive is to maintain the viability of the two-state solution 
by sustaining the basic living conditions of the Palestin -
ian people. Palestine is not an independent country whose 
government can mobilise a wide range of resources in sup -
port of a particular target.DFS is not a classic project which can be evaluated in 
terms of PCM. It is designed to assist the PA to deal with a 
long-term problem in the expectation that, by keeping the 
authority in being, the EU will contribute to the two-state 
solution of the Middle East peace process. 
32.
In line with the PA’s 2-year state-building plan of 2009, 
which envisaged a reduction on dependence on external 
aid, the EEAS (and previously DG RELEX) sought in each 
programming to decrease the proportion of DFS; but it has 
simply not been possible to reduce this drastically because 
of the threats to the PA’s survival. These issues have also 
been raised in the framework of Ad Hoc Liaison Committee 
(AHLC) meetings. 
In the present circumstances and given the political situ -
ation, the possibility to reduce funding is not in line with 
the current EU policy. 
34.
The beneficiaries are known and subject to ex ante  and 
ex post  verifications. Funds are paid upon application by 
the PA and the provision of the necessary supporting 
documentation. 
These funds essentially only transit through the central 
treasury sub-account, which operates a ‘double key’ sys -
tem for the release of payments, i.e. both the EU and the 
PA have to authorise this. The risk of corruption is therefore 
minimal. Insofar as the risk of destruction of EU-funded 
infrastructure under the Gaza private sector programme is 
concerned, this risk was known and, although the Com -
mission attempts to minimise the risk through regular dia -
logue with the Israeli Ministry of Defence (COGAT), this risk 
has to be accepted. 57
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEAS35.
The Commission and the EEAS are prepared to critically 
examine the cost-effectiveness of controls and weigh 
these against the risks involved.
36.
In 2011, the need for increased competition was taken into 
consideration and is being addressed, with the launch of 
an international tender process to contract ex ante  and 
ex post  audit services related to the implementation of 
all Pegase DFS programmes. The forecast notice was pub -
lished in August 2012 and the new contracts are expected 
to be signed before the end of 2013.
A direct negotiated procedure was requested and  
approved as per Article 168(2) of the implementing rules of 
the financial regulation and was duly justified at the time. 
37.
Direct award was justified under the implementing rules of 
the financial regulation. 
Following a specific EUREP request, all agreements with 
an international organisation have been subject to addi -
tional requirements (exceptions from the general condi -
tions applying to international organisations), particularly 
in relation to additional reporting requirements, auditing 
and the transfer of equipment.
EUREP has completed the transition from a contribution 
agreement to a 1-year service contract with the interna -
tional organisation. All equipment under the previous 
agreements has been transferred to the PA (excluding the 
DFS database). These services will be subject to an interna -
tional restricted tender in 2014.
38.
It should be noted that the verification and management 
procedures applying to the PDFS programmes are being 
reviewed.
Arrangements for insourcing the Pegase database and its 
management are being made.39.
Taking into consideration the size of the project and the 
political sensitivity related to the implementation of the 
programme, EUREP deliberately made the choice not to 
give the contract to a local firm at the time.
Further to the exercise to review the verification and man -
agement procedures of Pegase, an international call for 
tender has been launched for the contracting of ex ante  
and ex post  audit services related to the implementation of 
all Pegase DFS programmes.
While the absence of formal conditionality is due 
to the unique circumstances, this does not imply 
the absence of leverage vis-à-vis the PA (see 
paragraph 40).
40.
Pegase DFS is provided to the PA without explicit condi -
tionality: a deliberate choice by the Commission, the EEAS 
and Member States in line with their political objectives in 
the Middle East peace process.
However, the EEAS and the Commission are guided by the 
indicators contained in the Palestinian reform and devel -
opment plan and the Palestinian national development 
plan, on whose priorities Pegase was and remains based. 
This is a measure of conditionality.
Leverage does exist thanks to this reliable and consistent 
contribution from the EU. EUREP is currently working on 
improving leverage through policy dialogue, in coordina -
tion with interested Member States, through the recently 
established EU Pegase Informal Group.
41. (a)
At the end of 2011, the Commission launched a project 
to assess the needs and identify feasible projects in the 
area of CSR in Palestine. On this basis, and starting in the 
second half of 2013, support to the PA will be provided 
for CSR funded by the EU. EUREP will ensure close links 
between this action and the CSP programme, also facilitat -
ing stronger leverage over policy dialogue. 58
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEAS42.
It should be noted that the Commission and the EEAS 
have actively sought to ensure Israeli cooperation. Numer -
ous meetings have been held with the Israeli Ministry of 
Defence. Various other meetings are held with Israel in the 
framework of EU–Israel bilateral relations and these issues 
have been raised in the Association Committee, Associa -
tion Council and in the political dialogue with Israel. When 
necessary, the EU delegation in Tel Aviv has also been 
involved. The effectiveness of such demarches could be 
enhanced by a more consistent and robust approach on 
the matter from Member States. Nonetheless, the Council 
itself has moved from Council conclusions of a more broad 
nature to much more concrete ones (particularly May 2012 
and December 2012).
46.
The Commission launched a project to assess the needs 
and identify feasible projects in the area of CSR in Pales -
tine at the end of 2011. On this basis, and starting in the 
second half of 2013, support to the PA will be provided 
for CSR funded by the EU. EUREP will ensure close links 
between this action and the CSP programme, also facilitat -
ing stronger leverage over policy dialogue. 
47.
Pegase is a specific instrument created to ascertain that 
the funds are traceable to the end beneficiary. The funding 
is only made available upon agreement on the final list of 
end beneficiaries by both the EU and the PA. This instru -
ment has been installed to avoid any possible de-routing 
of EU funding. Therefore, the Commission and the EEAS are 
of the opinion that the Pegase funds are not fungible in 
budgetary terms.
Concerning the argument that Pegase has allowed the PA 
to save some of its resources and redirect them to other 
uses, the Commission and the EEAS contest this finding 
which cannot be demonstrated in practice. The Commis -
sion and the EEAS consider that there is no evidence that 
Pegase has resulted in funding being redirected to the 
recruitment of security forces, which in any case receive 
support from other sources.48.
Beyond reforms, sustainability is closely linked to political 
progress on reconciliation and on ending the occupation.
A key element in the ‘increasing difficulty the PA has had in 
paying salaries and pensions on time’ in recent times has 
been Israel’s suspension of the ‘clearance revenues’ . This 
sudden drop in income was not accounted for by the PA. 
The fiscal situation of Member States as well as a certain 
degree of donor fatigue has certainly played a role in the 
capacity and willingness of donors to react to this crisis. At 
the same time, the PA was hoping to attract more funding 
from Arab donors.
51.
It should be noted that the caseload of beneficiaries of 
cash assistance has increased from 2010 onwards due to 
various factors, including the introduction of the cash 
transfer programme (CTP) in 2010 (consisting of the 
merger of the SSNRP and SHC programmes and the cer -
tification of households on the waiting list) and its sub -
sequent roll-out in Gaza in 2011. The target of the PA is 
120 000 households enrolled in the programme — corre -
sponding to the estimated number of households living 
in extreme poverty in Palestine. On the level of assistance: 
the basis for calculating the amount of financial benefit for 
eligible households is the ‘50 % bridging the gap’ policy. 
The gap is the difference between the welfare rate (con -
sumption) and the household extreme poverty line. The 
cash component of the CTP provides financial assistance 
to meet 50 % of this gap and this makes up the base cash 
benefit rate. Beneficiary households usually have access 
to additional sources of income (remittances) as well as 
additional/complementary assistance (i.e. health insur -
ance and in-kind assistance) which complement the cash 
component.59
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEAS52.
Delays in payment are the result of various factors that are 
out of the control of the Ministry of Social Affairs/Ministry 
of Finance, including: (1) the availability of cash/liquidity in 
banks in Gaza; and (2) the availability of budget as a result 
of the recurrent PA financial crisis (including transfers of 
clearance revenues from Israel). 
It should be noted that: (i) the September 2011 and Sep -
tember 2012 payments were processed on 3 October 2011 
and 6 October 2012 respectively, i.e. with a delay of 1 week 
only compared to the initial target date (usually the last 
weekend of September);
(ii) the first quarterly payment in 2012 was made in late 
April 2012, due to a shortage of cash, mainly Israeli Shek -
els (ILS) and US dollars, at the local banks in Gaza (as a 
result of Israeli restrictions on liquidity). Although this did 
not concern the West Bank, the PA opted for political rea -
sons not to process the payment in the West Bank without 
assurance that the payment would take place in Gaza at 
the same time or soon afterwards.
53.
See paragraph 31 above.
54.
The issues surrounding the civil servants who are not 
able to work in Gaza (e.g. PA-support strike, its duration, 
its extent and its effects, Hamas’ reactions) are complex 
in the circumstances of the Gaza Strip where objective 
verification is difficult. DFS is a PA-driven programme. The 
Commission supports politically the PA (core of the future 
Palestinian state), which decided to continue paying all 
eligible workers in both the West Bank and the Gaza Strip 
regardless of their working status, which is, in any event, 
very difficult to clarify. It is perhaps worth recalling that 
amongst those civil servants not working in Gaza, many are 
effectively locked out by the de facto authorities.
Any decision to stop contributing to salaries in Gaza is 
expected to be politically very sensitive.55.
See comment on paragraph 54.
57.
The beneficiaries are known and subject to ex ante  and 
ex post  verifications. Funds are paid upon application by 
the PA and the provision of the necessary supporting 
documentation. 
These funds essentially only transit through the central 
treasury sub-account, which operates a ‘double key’ system 
for the release of payments, i.e. both the EU and the PA 
have to authorise this. 
58.
See reply to observation 54.
59.
With regards to the use of fuel instead of gas, it should 
be noted that external factors decided this issue. Neither 
Israel nor Egypt would allow the export of gas to Gaza, 
therefore the use of diesel fuel was the only possible 
option.
60.
The issue of VAT and other taxes on fuel delivery with Israel 
extends much further than Pegase and is part of an overall 
issue in relations between the EU and Israel. Efforts had 
been made by the Commission to get an exemption from 
paying VAT on the fuel deliveries, but the discussions were 
not successful. It was apparent that the issue could only be 
resolved at the highest political levels.
The Commission considers that it cannot be criticised for 
not being able to establish how VAT and excise duties 
which it pays are used by the authorities, whether Israeli 
or Palestinian, under the Paris protocol of the Oslo agree -
ments which establishes conditions for transfers of certain 
tax revenue from Israel to the PA, but to which the Com -
mission/EU is not a party. 
This was one of a number of factors which led to the Com -
mission ceasing to finance fuel deliveries.60
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEAS61.
The Commission did advise the PA to consider the possibil -
ity of carrying out a PEFA assessment before 2012.
In November 2011, the PA Ministry of Finance agreed at 
technical level on the principle of carrying out a PEFA exer -
cise. The EU was planning to finance part of the assess -
ment. However, the PA subsequently decided to delay the 
assessment.
A PEFA assessment was launched in March 2013 and the 
PEFA report was formally sent to the Ministry of Finance in 
June 2013 and was accepted by the ministry in the same 
month. It was published on 2 September 2013. The EU con -
tributed to this World Bank-led assessment through the 
financing of one expert.
There have been other assessments of the PA public finan -
cial management systems than the PEFA assessments. The 
IMF carried out PA public financial management progress 
reviews in April 2008, April 2009, December 2009, October 
2010, January 2012 and January 2013. In addition, the IMF 
staff reports to the meetings of the AHLC (which take place 
twice a year) include assessments of the PA public financial 
management reforms. 
62.
The Commission continues to work on this issue regarding 
PFM: a World Bank-led PEFA assessment was launched in 
March 2013 and the report was formally sent to the Minis -
try of Finance in June 2013. 
Any form of legislative scrutiny is difficult in the absence 
of a functioning Palestinian legislative council. It was 
accepted by the ministry in the same month and published 
on 2 September 2013.
63. (b)
In September 2012, a result-oriented monitoring report 
pointed out that: ‘the project suffered delays during its first 
half of implementation for several reasons (long assess -
ment needs studies, reshaping of activities, a low level of 
knowledge of English for trainees and a lack of translators). 
Most of these problems have been solved during the first 
part of 2012.’ At the time, the overall efficiency and effec -
tiveness of the project implementation were considered 
‘good’ by the monitor.66.
The refunds were carried out in accordance with the rules. 
The major concern was to boost the economy by injecting 
long-due arrears into the private sector. The outstanding 
arrears were subject to the obligatory audit controls before 
the payments were done.
Box 2  
The refund was carried out in accordance with the rules. It 
should be noted that the arrears reimbursed to this com -
pany had been accumulated over a period of more than 
7 years from December 2000 until January 2008. The fact 
that the hotel was barely operating in October 2012 is due 
to the situation in Gaza and the continued blockade.
67.
Support to the Gaza power plant was intended to meet a 
particular emergency, rather than to be sustainable. When 
another approach was proposed by the PA, this compo -
nent of Pegase was no longer funded.
68.
A key element in the ‘increasing difficulty the PA has had in 
paying salaries and pensions on time’ in recent times has 
been Israel’s suspension of clearance revenues. In addition, 
the fiscal situation of Member States as well as a certain 
degree of donor fatigue has played a role in the capacity of 
donors to react to this crisis. At the same time, the PA was 
hoping to attract more funding from Arab donors.
70.
It should be noted that the Commission and the EEAS 
have actively sought to ensure Israeli cooperation. Numer -
ous meetings have been held with the Israeli Ministry of 
Defence. When necessary, the EU delegation in Tel Aviv has 
also been involved. The effectiveness of such demarches 
could be enhanced by a more consistent and robust 
approach on the matter from Member States.61
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEAS70. (b)
Substantial sums have been allocated to Area C from the 
2012 allocation (7 million euro) in addition to approxi -
mately 3.5 million euro from the food security programme. 
Pegase will also make funds available in Area C through an 
extension of the Gaza private sector recovery programme 
to the West Bank, with special emphasis on farmers and 
communities affected by the separation wall, Israeli army 
demolitions and settler violence. 
The issue of Area C is high on the political agenda. It 
has been discussed various times at the PSC and an EU 
demarche was already carried out by the EU delegation in 
Tel Aviv in December 2011. Area C is also a priority objec -
tive of the new action plan.
CONCLUSIONS AND RECOMMENDATIONS
74.
Sustainability can only be ensured through political pro -
gress on reconciliation and the ending of occupation. 
However, the two issues of reform and Israeli measures are 
important and the Commission and the EEAS are address -
ing these issues as follows.
At the end of 2011, the Commission launched a project to 
assess the needs and identify feasible projects in the area 
of CSR in Palestine. On this basis, and starting in the sec -
ond half of 2013, a comprehensive support to the PA will 
be provided for CSR funded by the EU. EUREP will ensure 
close links between this action and the CSP programme, 
also facilitating stronger leverage over policy dialogue.
The Commission and the EEAS have actively sought to 
ensure Israeli cooperation. Numerous meetings have been 
held with the Israeli Ministry of Defence. Numerous meet -
ings are also held with Israel (at different levels and in vari -
ous fora) in the framework of EU–Israel bilateral relations 
and through the delegation in Tel Aviv. The effectiveness of 
such demarches could be enhanced by a more consistent 
and robust approach on the matter from Member States.75.
The Commission agrees to establish performance indica -
tors, taking into account that many factors affecting per -
formance are external and outside the control of the PA. 
Palestine is not an independent country whose govern -
ment has a normal control of a wide range of resources to 
meet specific targets.
Pegase DFS is a political instrument whose objective is to 
maintain the viability of the two-state solution by sustain -
ing the basic living conditions of the Palestinian people. 
The lack of donor funding through Pegase is more a result 
of donor fatigue or of the economic situation rather than 
a deliberate decision to not use Pegase. As mentioned ear -
lier, some donors also prefer to fund development projects 
(rather than DFS) because they entail more visibility.
76.
A direct negotiated procedure was requested and  
approved as per Article 168(2) of the implementing rules of 
the financial regulation and was duly justified at the time.
It should be noted that the verification and management 
procedures applying to the PDFS programmes are being 
reviewed (see paragraph 38).
In 2011, the need for increased competition was taken into 
consideration and is being addressed, with the launch of 
an international tender process to contract ex ante and ex 
post  audit services related to the implementation of all 
Pegase DFS programmes. The forecast notice was pub -
lished in August 2012 and the new contracts are expected 
to be signed by the end of 2013.
A service contract tender for the management and imple -
mentation of the programme will be launched in 2014 (see 
response to paragraph 37).
77.
At the end of 2011, the Commission launched a project to 
assess the needs and identify feasible projects in the area 
of CSR in Palestine. On this basis, and starting in the sec -
ond half of 2013, a comprehensive support to the PA will 
be provided for CSR funded by the EU. EUREP will ensure 
close links between this action and the CSP programme, 
also facilitating stronger leverage over policy dialogue. 62
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEAS78.
The issues surrounding the civil servants who are not able 
to work in Gaza are complex in the circumstances of the 
Gaza Strip where objective verification is difficult. DFS is a 
PA-driven programme. The Commission supports politically 
the PA (core of the future Palestinian state), which decided 
to continue paying all eligible workers in both the West 
Bank and the Gaza Strip regardless of their working status, 
which is, in any event, very difficult to clarify. It is worth 
recalling that amongst those civil servants not working 
in Gaza, many are effectively locked out by the de facto 
authorities.
Any decision to stop contributing to salaries in Gaza is 
expected to be politically very sensitive.
The issue of VAT and other taxes on fuel delivery with Israel 
extends much further than Pegase and is part of an overall 
issue in relations between the EU and Israel. Efforts had 
been made by the Commission to get an exemption from 
paying VAT on the fuel deliveries, but the discussions were 
not successful.
It is apparent that the issue can only be resolved at the 
highest political levels.
The Commission considers that it cannot be criticised for 
not being able to establish how VAT and excise duties 
which it pays are used by the authorities, whether Israeli 
or Palestinian, under the Paris protocol of the Oslo agree -
ments which establishes conditions for transfers of certain 
tax revenue from Israel to the PA, but to which the Com -
mission/EU is not a party.
This was one of a number of factors which led to the Com -
mission ceasing to finance fuel deliveries.
79.
For details of the PEFA assessment, see reply to paragraph 
61 above. 80.
The Commission and the EEAS agree to review the Pegase 
mechanism and take the recommendations made by the 
Court into account.
The EEAS and the Commission are reviewing the Pegase 
mechanism on a regular basis according to the changes 
on the ground (e.g. PSRG component after ‘Operation Cast 
Lead’ and more recently the component for East Jerusalem 
hospitals).
However, the Commission strongly disagrees that a ‘major’  
review of Pegase needs to be undertaken.
81. (a)
The Commission and the EEAS agree to this recommen -
dation which has already been partially implemented. Pal -
estine’s new AP is the first of the new generation of APs 
negotiated since the review of the ENP , which includes 
priority objectives to be achieved which have been jointly 
agreed by both the EU and the PA. The text is more closely 
aligned to development assistance needs (and vice versa) 
than its predecessor, which was concluded before the set -
ting-up of Pegase.
81. (b)
The Commission and the EEAS partially agree to this 
recommendation. 
As from 2014, the EU will embark on a 2-year programming 
cycle for the development part of its financial assistance. 
The Pegase programme was not initially planned to be part 
of this multiannual programming, but the Commission and 
the EEAS will reconsider their position.
Although the Commission and the EEAS maintain their 
reservations on this point, they are prepared to take steps 
towards implementing this recommendation insofar as 
possible.
81. (c)
The Commission and the EEAS agree to this recommen -
dation; performance indicators will be introduced in the 
areas mentioned by the Court for Pegase (see our response 
to paragraph 31).63
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
REPLY OF THE COMMISSION 
AND THE EEAS82. (a)
The Commission agrees to this recommendation. The pro -
cess of competitive tendering is ongoing. In 2011, the 
need for increased competition was taken into considera -
tion and is being addressed, with the launch of an inter -
national tender process to contract ex ante  and ex post  
audit services related to the implementation of all Pegase 
DFS programmes. The forecast notice was published in 
August 2012 and the new contracts are expected to be 
signed by the end of 2013. A service contract tender will 
be launched in 2014 (see response to paragraph 37).
82. (b)
The Commission agrees to this recommendation and will 
pursue ongoing plans to simplify the Pegase DFS manage -
ment system. EUREP is now responsible for administer -
ing the Pegase database, which was moved to the EUREP 
building at the beginning of October 2013. 
83.
The Commission and the EEAS disagree with this recom -
mendation. On conditionality, refer to our response to 
paragraph 40. For CSR, the Commission launched a needs 
assessment in 2011. On this basis, support to the PA will be 
provided in 2013. EUREP will ensure close links between 
this action and the CSP programme, also facilitating 
stronger leverage over policy dialogue.
The EEAS and the Commission also consider the imple -
mentation of the Palestinian reform and development plan 
and the Palestinian national development plan, on whose 
priorities Pegase was and remains based, as a measure of 
conditionality.
A PEFA assessment was launched in March 2013 and the 
PEFA report was formally sent to the Ministry of Finance in 
June 2013 and was accepted by the ministry in the same 
month. It was published on 2 September 2013. The EU con -
tributed to this World Bank-led assessment through the 
financing of one expert.84.
The Commission and the EEAS agree only partially to this 
recommendation.
The Commission and the EEAS agree to enter into discus -
sions with the PA concerning the funding of salaries and 
pensions in the Gaza Strip with a view to obtaining an 
agreement that would take into account the concerns of 
the Court.
85.
The Commission agrees to this recommendation.64
Special Report No 14/2013 — European Union direct financial support to the Palestinian Authority
European Court of Auditors
Special Report No 14/2013
European Union direct financial support to the Palestinian Authority
Luxembourg: Publications Office of the European Union
2013 — 64 pp. — 21 × 29.7 cm
ISBN 978-92-9241-451-1
doi:10.2865/55197

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QJ-AB-13-013-EN-C
EUROPEAN COURT OF AUDITORS
IN THIS REPORT, THE EUROPEAN COURT OF AUDITORS ASSESSED HOW WELL THE EUROPEAN COM -
MISSION AND THE EUROPEAN EXTERNAL ACTION SERVICE MANAGED THE PEGASE DIRECT FINANCIAL 
SUPPORT (DFS) PROGRAMME WHICH HAS BEEN THE EU’S LARGEST PROGRAMME IN THE OCCUPIED 
PALESTINIAN TERRITORY SINCE 2008, PROVIDING APPROXIMATELY 1 BILLION EURO IN FUNDING 
FROM 2008 TO 2012. 
IT CONCLUDES THAT THE COMMISSION AND THE EUROPEAN EXTERNAL ACTION SERVICE SUCCEEDED, 
DESPITE DIFFICULT CIRCUMSTANCES, IN IMPLEMENTING THE PEGASE DFS PROGRAMME. HOWEVER, 
A NUMBER OF ASPECTS OF THE CURRENT APPROACH ARE INCREASINGLY IN NEED OF AN OVER -
HAUL. WHILE SOME IMPORTANT RESULTS HAVE BEEN ACHIEVED, THEIR SUSTAINABILITY CANNOT 
BE ENSURED WITHOUT MAJOR REVISIONS SUCH AS ENCOURAGING THE PALESTINIAN AUTHORITY 
TO UNDERTAKE MORE REFORMS, NOTABLY IN RELATION TO ITS CIVIL SERVICE. AT THE SAME TIME, 
A WAY NEEDS TO BE FOUND TO ENGAGE ISRAEL INTO TAKING THE NECESSARY STEPS TO HELP ENSURE 
THAT PEGASE DFS IS EFFECTIVE.