JERUSALEM, 2 September 2007 (IRIN) - Recent concerns that Hamas might profit from revenues of the Gaza power company prompted the European Union (EU) to cut funding to the plant. Parts of Gaza were plunged into the dark for several days until the EU agreed to resume its fuel payments.

Heavily reliant on foreign aid for basic services, the Gazan economy continues to plumb new depths.

Conservative estimates from UN sources say at least US$1.3 billion in aid went to the Palestinians in 2006.

However, after Hamas's election victory in early 2006, giving aid through the Palestinian Authority (PA) became problematic, as the Islamist movement is widely seen as a terrorist organisation. Its government was boycotted by the West.

As development aid and support to the PA ran into trouble, humanitarian needs were expected to rise. The consolidated humanitarian appeal of 12 UN agencies and 14 non-governmental organisations (NGOs) in December 2006 asked for over US$450 million, the third biggest humanitarian assistance request in the world. However, that appeal was only 29 percent funded as of mid-2007 [http://ochaonline.un.org/cap2005/webpage.asp?Page=1579].

Some states, including Arab countries, bypassed the Hamas government and gave money directly to the office of President Mahmoud Abbas of Fatah.

Norway remained almost alone when it agreed to resume funding in March 2007 after the formation of a Palestinian unity government. Others, like Japan, which earlier this month said it would give US$11 million to the PA and another $9 million in humanitarian aid, had waited until all Hamas elements were out of the government.

In June, Abbas fired Hamas ministers, after the Islamic group ousted his Fatah forces in Gaza, and appointed a caretaker government led by economist Salam Fayyed, considered a "partner" by Western officials. But in Gaza, Hamas remains in control and is still boycotted.

To show their support of Fayyed, some governments boosted aid.

The USA, which does not typically pay salaries in aid programmes, restarted infrastructure projects recently, an official said. Congress recently announced some US$80 million for a security team, which works to reinforce Abbas' security forces.

Canada and Australia donated money to the Temporary International Mechanism (TIM).

The TIM

The TIM, a European invention, was established, Ian Hoskins of the European Commission (EC) in Jerusalem told IRIN, "to prevent a humanitarian crisis".

Before Hamas's electoral victory there was a trust fund, set up by the World Bank and largely funded by Europe, which helped the Palestinian Authority (PA) pay salaries and provide services. After the elections, in order to circumvent Hamas and still get aid to the Palestinians, the TIM came into existence, mostly funded by the EU.

Through this mechanism - the only one of its kind in the world - PA employees receive "allowances" straight to their bank accounts; money goes to hospitals and schools and the poorest Palestinians receive social allowances [see box].

Some 350 million euros have been distributed through this system, which was essential as Israel had placed a near - total freeze on transferring tax revenues to the PA from March 2006 until after Fayyed was appointed premier.

However, an Oxfam report from early 2007 [http://www.oxfam.org.uk/applications/blogs/pressoffice/2007/02/over_a_million_euros_a_month_o.html] criticised the TIM's high overhead costs and said it was damaging the local economy.

EU officials said the overhead costs were within acceptable margins and that there was no other option at the time as the PA was controlled by Hamas.

"With this system I can keep track of every payment to every person," said Hoskins, pointing out how the intricate TIM allows him to make sure every cent goes to its intended target.

Although the TIM's transaction costs are higher than the trust fund's , Hoskins notes that in general more European money is coming in.

More fish, less fishing rods

Besides trying to give aid without it going to Hamas, donors face several key dilemmas.

Some observers claim that as Hamas remains boycotted, donors may actually be fuelling tension between rival Palestinian parties.

Also, there is concern that Gaza will become totally aid-dependent as its regular economy heads for collapse.

"There has been an increasing orientation of giving more fish and less fishing rods, which has been exacerbated by the boycott of Hamas," said Nicolas Pelham of the International Crisis Group.

"If there is a humanitarian crisis, the international community will be held responsible," said Hoskins.

While stopping humanitarian aid is not an option, "we'd be delighted to shut down the TIM and do more institutional development and long term development projects," like the EU did before 2000, Hoskins said.

With the Fayyed government in place in the West Bank, some observers think next month's donors' meeting with new international envoy Tony Blair may have a focus on exactly such projects, but might leave Gaza out.

"Steps must be taken to strengthen elements of a modern state," said Neve Gordon, a political lecturer at Israel's Ben Gurion University. "Freedom of movement is crucial."

Some accuse the international community of substituting for other responsible parties, including Israel, as the occupying power in the occupied Palestinian territories.

Michael Bailey of Oxfam in Jerusalem said his organisation is dealing with this dilemma through advocacy.

"It's not fair for the people in Gaza to lose aid in order to move politics. There are two options: Giving humanitarian aid and keeping silent or giving aid and speaking up against the siege [on Gaza]," he said, referring to the border closures.

"We must make sure people understand why aid is being given," Bailey added.

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