REPLIES OF THE COMMISSION AND THE EEAS TO THE SPECIAL REPORT OF THE EUROPEAN COURT OF AUDITORS "EUROPEAN UNION DIRECT FINANCIAL SUPPORT TO THE PALESTINIAN AUTHORITY" 
Date: 2013-11-27
Institutions: European Commission
Subjects: EU programme, Israel, Palestine, Union delegation, financial aid, terms for aid

EUROPEAN 
COMMISSION 

Brussels, 27.11.2013  
COM(2013) 852 final 

REPLIES OF THE COMMISSION AND THE EEAS TO THE SPECIAL REPORT OF 
THE EUROPEAN COURT OF AUDITORS 

"EUROPEAN UNION DIRECT FINANCIAL SUPPORT TO THE PALESTINIAN 
AUTHORITY" 

EN 

   EN 

 
 
 
 
  
 
REPLIES OF THE COMMISSION AND THE EEAS TO THE SPECIAL 

REPORT OF THE EUROPEAN COURT OF AUDITORS 

“EUROPEAN UNION DIRECT FINANCIAL SUPPORT TO THE PALESTINIAN 
AUTHORITY” 

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 Palestine as a state). On this basis, and starting 
in  the  second  half  of  2013,  a  comprehensive  support  to  the  PA  will  be  provided  in  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 
co-operation.  Numerous  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 effectiveness of such 
demarches could be enhanced by a more consistent and robust approach on the matter from 
Member 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 published in August 2012 and the new contracts are expected to be signed by the 
end of 2013. 

For CSR see point 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 
salaries. 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). 

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  paying  all  eligible 
workers in both West Bank and Gaza Strip regardless of their working status, which is in any 
event, very difficult to clarify. Some Civil Servants are not working 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 point III (Exec Summary) above. 

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OBSERVATIONS 

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  two-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 budgetary 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  EEAS  to  be 
vigilant and to be able to re-assess the situation whenever needed. 

Very few Member States have programmed assistance to Palestine on a multi-annual basis, 
for precisely the same reasons.  

The  EU  Local  Strategy  for  Development  has  recently  been  revised  in  co-operation  with 
Member States and local representatives. 

29. The Commission and the EEAS consider that submitting measures to Member States by 
written  procedures  does  not  make  it  more  difficult  to  carry  out  a  detailed  review  of  the 
mechanism. On a number of occasions, Palestine programmes (PEGASE in particular) have 
been  presented  to  the  ENPI  Committee  as  an  information  point  on  the  agenda.  Member 
States have generally indicated their satisfaction 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  establishment  of  the  PSRG  programme 
which  was  implemented  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  in  the  long  run 
unsustainable  and  that  it  is  time  to  make  adjustments  now  that  the  situation  in  Gaza  has 
remained unresolved for the past seven years. In fact this issue has been raised with the PA 
on a number of occasions in the past.  

Discussions  have  already  started  with  the  PA  aimed  at  finding  a  solution  that  would  take 
account of the concerns raised by the Court, while allowing the PA to continue supporting 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 
Palestinian 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 prevented from working. 

30. It should be noted that, except for the UK, 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 states such as Japan 
and Switzerland. 

3 

 
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 direct financial support) 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  Palestinian  National  Development  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  specific  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 
significant 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 objective is 
to maintain the viability of the Two-State Solution by sustaining basic living conditions of 
the  Palestinian  people.  Palestine  is  not  an  independent  country,  whose  government  can 
mobilise a wide range of resources in support 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 two –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  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  situation,  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”  system  for  release  of  payments  i.e.  both  EU  and  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  Commission  attempts  to  minimise  the  risk  through  regular 
dialogue with the Israeli Ministry of Defence(COGAT), this risk has to be accepted.   

35. The Commission and 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 

4 

 
notice was published in August 2012 and the new contracts are expected to be signed before 
the end of the year 2013. 

Direct  negotiated  procedure  was  requested  and  approved  as  per  art.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 additional requirements (exceptions from the General Conditions 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  international  organisation.  All  equipment  under  the  previous  agreements 
has been transferred to the PA (excluding the DFS Database). These services will be subject 
to an international 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 in-sourcing the PEGASE database and its management are being made. 

39.  Taking  into  consideration  the  size  of  the  project  and  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 management 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 (please see point 40). 

40. PEGASE DFS is provided to the PA without explicit conditionality: a deliberate choice 
by  Commission,  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  Development  Plan  and  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  co-ordination  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 Civil Service Reform (CSR) in Palestine. On this basis, and 
starting in the second half of 2013, support to the PA will be provided in CSR funded by the 
EU.  EUREP  will  ensure  close  links  between  this  action  and  the  CSP  programme,  also 
facilitating stronger leverage over policy dialogue.   

42.  It  should  be  noted  that  the  Commission  and  the  EEAS  have  actively  sought  to  ensure 
Israeli  co-operation.  Numerous  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,  Association 

5 

 
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 Civil Service Reform (CSR) in Palestine at the end of 2011. On this basis, and 
starting in the second half of 2013, support to the PA will be provided in CSR funded by the 
EU.  EUREP  will  ensure  close  links  between  this  action  and  the  CSP  programme,  also 
facilitating stronger leverage over policy dialogue.   

47.  PEGASE  is  a  specific  instrument  created  to  ascertain  that  the  funds  are  traceable  till  the  end 
beneficiary. The funding is only made available upon agreement on the final list of end beneficiaries 
agreed upon both by the EU and the PA. This instrument 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  Commission  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 in the merger of the SSNRP + SHC programme and 
the  certification  of  households  on  the  waiting  list)  and  its  subsequent  roll-out  in  Gaza  in 
2011.  The  target  of  the  PA  is  120,000  households  enrolled  in  the  programme  – 
corresponding 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 (consumption) 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  insurance 
and in-kind assistance) which complement the cash component. 

52. Delays in payment are the result of various factors that are out of the control of 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).  

6 

 
It should be noted that (i) the September 2011 and September 2012 payments were processed 
on  3  October  2011  and  6  October  2012,  respectively,  i.e.  with  a  delay  of  one  week  only 
compared to the initial target date (usually the last week-end of September); 

(ii)  the  first  quarterly  payment  in  2012  was  made  in  late  April  2012,  due  to  a  shortage  of 
cash, mainly Israeli Shekels (ILS) and U.S 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 reasons not to process the payment in the West Bank without assurance that the 
payment would take place in Gaza, if not at the same time, or soon afterwards. 

53. Please see point 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  West  Bank  and  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 point 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  release  of  payments  i.e.  both  EU  and  PA  have  to 
authorise this.  

58. Please see reply to observation 54. 

59.  With  regards  to  the  use  of  fuel  instead  of  gas,  it  should  be  noted  that  external  factors 
decided on this issue. Neither Israel nor Egypt would allow 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 agreements which establishes conditions for 
transfers of certain tax revenue from Israel to the PA but to which the Commission/EU is not 
a party.  

This  was  one  of  a  number  of  factors  which  led  to  the  Commission  ceasing  to  finance  fuel 
delivering. 

61. The Commission did advise the PA to consider the possibility of carrying out a PEFA 
assessment before 2012. 

7 

 
In November 2011, the PA Ministry of Finance had agreed at technical level on the principle 
of  carrying  out  a  PEFA  exercise.  The  EU  was  planning  to  finance  part  of  the  assessment. 
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  2nd  September  2013.  The  EU  contributed  to  this  World  Bank-led 
assessment through the financing of one expert. 

There have been other assessments of the PA Public Financial Management systems than the 
PEFA  assessments.  The  IMF  has  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  ad  hoc  liaison 
committee (which takes place twice a year) include assessments of the PA Public Financial 
Management Reforms.  

62. The Commission continues to work on this issue regarding Public Finance Management: 
a  World  Bank-led  PEFA  assessment  was  launched  in  March  2013  and  the  report  was 
formally sent to the Ministry 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 
2nd September 2013. 

63. 

(b)  In  September  2012,  Result  Oriented  Monitoring  Report  pointed  out  that:  '"the  project 
suffered delays during its first half of implementation for several reasons (long assessment 
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  effectiveness  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 – Reimbursement of VAT to a luxury hotel in Gaza  

The refund was carried out in accordance with the rules. It should be noted that the arrears 
reimbursed to this company had been accumulated over a period of more than seven 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 component 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 to 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  co-operation.  Numerous  meetings  have  been  held  with  the  Israeli  Ministry  of 
Defence.  When  necessary,  the  EU  Delegation  in  Tel  Aviv  has  also  been  involved.  The 

8 

 
effectiveness  of  such  demarches  could  be  enhanced  by  a  more  consistent  and  robust 
approach on the matter from Member States. 

(b)  Substantial  sums  have  been  allocated  to  Area  C  from  2012  allocation  (€7  million)  in 
addition  to  aprox.€3.5  million  from  Food  Secu rity  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  carried  out  by  the  EU  Delegation  in  Tel  Aviv  already  in 
December 2011. Area C is also a priority objective of the new Action Plan. 

CONCLUSIONS AND RECOMMENDATIONS 

74.  Sustainability  can  only  be  ensured  through  political  progress  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 addressing 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 Civil Service Reform (CSR) in Palestine. On this basis, and 
starting in the second half of 2013, a comprehensive support to the PA will be provided in 
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  co-operation. 
Numerous  meetings  have  been  held  with  the  Israeli  Ministry  of  Defence.  Numerous 
meetings are also held with Israel (at different levels and in various 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  indicators,  taking  into  account  that 
many factors affecting performance are external and outside the control of the PA. Palestine 
is not an independent country, whose government 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 sustaining 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 earlier, some 
donors prefer to fund development projects (rather than direct financial support) also because 
they entail more visibility. 

76.  Direct  negotiated  procedure  was  requested  and  approved  as  per  art.  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 point 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 published in August 2012 and the new contracts are expected to be signed by the 
end of 2013. 

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A service contract tender for the management and implementation of the programme will be 
launched in 2014 (see point 37). 

77. 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. On this basis, and 
starting in the second half of 2013, a comprehensive support to the PA will be provided in 
CSR  funded  by  the  EU.  EUREP  will  ensure  close  links  between  this  action  and  the  CSP 
programme, also facilitating stronger leverage over policy dialogue.   

78. 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  WB  and 
Gaza Strip regardless of their working status, which is in any event,  very difficult to clarify. 
It's  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 agreements which establishes conditions for 
transfers of certain tax revenue from Israel to the PA but to which the Commission/EU is not 
a party. 

This  was  one  of  a  number  of  factors  which  led  to  the  Commission  ceasing  to  finance  fuel 
delivering. 

79. For details of  PEFA assessment, please see reply to 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  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. 

(a)  The  Commission  and  the  EEAS  agree  to  this  recommendation  which  has  already  been 
partially  implemented.  Palestine'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 setting-up of PEGASE. 

(b) The Commission and the EEAS partially agree to this recommendation.  

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As from 2014, the EU will embark on a two-year programming cycle for the development 
part of its financial assistance.  The PEGASE programme was not initially planned to be part 
of this multi-annual programming but the Commission and the EEAS will reconsider their 
position. 

Although  the  Commission  and  EEAS  maintain  their  reservations  on  this  point,  they  are 
prepared to take steps towards implementing this recommendation in so far as possible. 

(c)  The  Commission  and  the  EEAS  agree  to  this  recommendation,  performance  indicators 
will be introduced in the areas mentioned by the Court for PEGASE (see our comments in 
point 31). 

82.  

(a) The Commission agrees to this recommendation. The process of competitive tendering is 
on-going.  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  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  point 
37). 

(b)  The  Commission  agrees  to  this  recommendation  and  will  pursue  on-going  plans  to 
simplify  the  PEGASE  DFS  management  system.  EUREP  is  now  responsible  for 
administering  the  PEGASE  database,  which  was  moved  to  the  EUREP  building  in  the 
beginning of October 2013.  

83. The Commission and the EEAS disagree with this recommendation. On conditionality, 
please refer to our response in point 40. For Civil Service Reform 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 implementation of  the Palestinian Reform 
and  Development  Plan  and  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  2nd  September  2013.  The  EU  contributed  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 discussions 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. 

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