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Mission impossible: Snaring investors for war-torn Palestine

A Palestinian protester hurls stones toward Israeli troops during clashes in the West Bank city of Hebron, October 18, 2015.
Mussa Qawasma | Reuters
A Palestinian protester hurls stones toward Israeli troops during clashes in the West Bank city of Hebron, October 18, 2015.

Even amid fear of a rising "intifada," or uprising, the Office of the Quartet, traditionally one of the mediators in the Israeli-Palestinian conflict, is working on a new economic development program to spur local and foreign investment in the war-torn territories. Called Invest Palestine, its goal is to offer some opportunity to local Palestinians coping with a surge in violence and dangerously high unemployment.

Led by former McKinsey director Kito de Boer, the Office of the Quartet is building international support from development banks, multinational corporations and the Palestinian diaspora, which together would invest some $150 million in projects such as solar-power generators and agri-processing facilities.

Already, de Boer has spoken to GE, claiming the global home-appliance company is "leaning forward" on a small commitment; the company had no comment. Wealthy members of the Palestinian community are also likely to put money into the projects funded through the program.

One of the program's biggest hurdles: finding a way to execute the projects, which means working with the Israelis, who control much of the access to and infrastructure in the Palestinian territories. Supporters of Palestinians say many who would invest do not, because of the history of poor returns on investments stymied by the Israeli occupation and previous rounds of violence. It's also difficult for people who don't have European or American passports to get into the territories. Visas from the Israeli government can be tough to get, and those who do enter can face waits of many hours at the borders.

"We are pushing water uphill," acknowledged de Boer, whose title is head of mission for the Office of the Quartet, a diplomatic group that includes the European Union, Russia, the United Nations and the United States. Until last summer, the Office of the Quartet was headed by former U.K. Prime Minister Tony Blair.

Americans and others who have been watching news videos of violent Palestinian-Israeli confrontations may have a hard time believing that any economic development could happen. Eleven Israelis and 64 Palestinians have been killed in the confrontations during the past six weeks, according to The Associated Press.

Yet, in the conflict-weary Palestinian territories, violence has come to be seen by the business community as seasonal and something to work around.

"It's clear the Palestinians have given up hope, by and large," said de Boer. "Many people who are fighting now are 18 or 20 years old. Their parents are saying it's just not worth it."

In a phone interview and a series of emails with CNBC, de Boer, who lives in Jerusalem and had a distinguished career as one of McKinsey's most senior directors worldwide, talked about why he took on what many believe is the Sisyphean task of trying to put the Palestinian economy on a path of growth.

U.S. Secretary of State John Kerry shakes hands with an official as he arrives for a meeting with Palestinian President Mahmoud Abbas at Abbas' residence in Amman, October 24, 2015. In the middle is Saeb Erekat, the secretary-general of the Palestine Liberation Organization.
Carlo Allegri | Reuters
U.S. Secretary of State John Kerry shakes hands with an official as he arrives for a meeting with Palestinian President Mahmoud Abbas at Abbas' residence in Amman, October 24, 2015. In the middle is Saeb Erekat, the secretary-general of the Palestine Liberation Organization.

U.S. Secretary of State John Kerry called twice to ask de Boer to take the job; the second time, after the latest round of peace talks had collapsed at the end of 2014, de Boer said yes.

He said he was motivated partly by his sense of the injustice being done to the Palestinians by the Israelis — as well as the idea that he might be able to help. He was the head of the Middle East region for McKinsey and had helped found the firm's government practice. He eventually came to understand that Israelis and Arabs see the conflict over Palestine through profoundly different narratives.

Read MoreHow tech will transform the Middle East

"People who are normally smart, thoughtful people don't challenge parts of their narratives," he said. "I have heard (distinguished people) say many times, "Palestinians are educated from youth to want to be suicide bombers and destroy and kill Jews."

De Boer added, "I say, 'Tell me the facts behind that,' and they can't."

He has spent his first nine months on the job doing what might be called economic diplomacy, meeting with people who have connections to Palestine and supporting projects already under way in the West Bank and Gaza.

"He is one of the people who made me passionate to (help)," said Rami Malhas, a Dubai-based Jordanian developer of a Palestinian family who is helping de Boer reach out to the diaspora. "When I see a Dutch guy leaving the luxurious life in Dubai to live in Jerusalem and go through the hassle ... he shamed me and shamed many of us. Obviously, that is a noble thing to do."

Precipitous economic decline

The economy in the Palestinian territories has been on a downward spiral. Capital investment as a percentage of the $13 billion GDP in the territories has been halved to 5 percent since 2000, de Boer said. Even Palestinians themselves invest outside: $2 billion of capital has flowed out to places, including Jordan and Dubai. Donor aid has been cut 47 percent between 2010 and 2015, excluding the more than $3 billion the international community pledged to rebuild Gaza.

But the Palestinian Authority — which governs for 4.6 million people — needs to create 1 million jobs over the next 15 years to bring unemployment down to 10 percent, de Boer said. Gaza has the highest unemployment rate, over 50 percent, on the planet. That's despite the fact that Palestinians have placed a high value on education and 10 percent of all Arab university graduates are from Palestine.

There are 49 Palestinian higher-education institutions, according to the European Commission on Higher Education in the Occupied Palestinian Territory.

"One of the longest occupations in modern history is eating away at the ideals of the vision of Israel and the hope for a Palestinian homeland. Occupation is cancer for both the occupier and the occupied," de Boer wrote in an email to CNBC. "I am committed to a two-state solution — both sides have rights and strong arguments. ... This is unfashionable, but that does not mean it is wrong."

Raising money for a war zone

De Boer's new initiative, Invest Palestine, has the advantage of being in his control — which could be a big advantage. The Office of the Quartet will still need to work with both the Palestinian Authority and the Israeli defense ministry's coordinator of government activities in the territories.

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Palestinian businessmen say there is money waiting in the wings for projects there, but people are reluctant to invest, given the spotty record of success in Palestinian investments and the ever-present dangers of violence or bureaucratic obstacles that grow out of security concerns.

Read MorePalestinian attacks stoke Israeli fears of recession

"Hundreds of millions could go in to the West Bank," said Malhas. He said he thought he could easily raise money for a teacher training program, a hospitality training program and housing in the West Bank. "There are passionate investors," he said, noting the main problem is that foreigners have trouble gaining access to the region, which often acts as a deterrent.

Yet de Boer said he believes he can line up equity for the projects his office has identified, including a 30–60 megawatt solar-power generator in Area A or B that could be up and running within two years. The office has also identified a pipeline of 17 agricultural businesses, especially in agriprocessing, including almonds, frozen strawberries and tomato paste.

To get Invest Palestine off the ground, the Quartet hired an analyst and took over an office in Ramallah from global private-equity firm Abraaj Group.

Combinations of equity and debt can finance individual projects, he said, leading to a total invested through Invest Palestine of about $300 million. He said motivated investors, those with a personal or corporate interest in supporting the Palestinian territories either because of personal connections or because of its symbolic importance to the Arab market would likely invest for annual returns of 8 percent to 10 percent a year.

Students at the University College of Applied Sciences in Gaza City, Gaza, attend a graduation ceremony on September 8, 2014.
Mohammed Asad | Anadolu Agency | Getty Images
Students at the University College of Applied Sciences in Gaza City, Gaza, attend a graduation ceremony on September 8, 2014.
"Despite the turmoil, there are areas of strength in the Palestinian economy, including an educated workforce and a start-up tech community."

De Boer said there is progress being made on a handful of other projects, including a 3G network for the territory and a desalinization plant for Gaza. On the 3G network, "we are cautiously optimistic that we will see major progress in a matter of weeks," de Boer said.

Despite the turmoil, there are areas of strength in the Palestinian economy, including an educated workforce and a start-up tech community, which includes incubators in Ramallah and one in Gaza called Gaza Sky Geeks. And there is a population of 4.6 million, which means investments in sectors that serve that population, such as pharmaceuticals, housing and education, can perform well. There's also tourism potential — Bethlehem, for instance, is in the West Bank.

"Kito has great understanding for the macro needs of the Palestinian economy. Can he break through what his predecessor could not? That is the big question," said Zahi Khouri, chairman of National Beverage, which has the Coca-Cola franchise in the territories. He added, "With his diplomatic savvy, we hope he will, whether in the tourism sector or in basic infrastructure projects."

De Boer emphasized that creating 1 million jobs means undertaking the kinds of broad infrastructure projects, like water and spectrum, that enable companies to grow or grow faster. European grants are funding a desalination plant in Gaza, but de Boer said his office has been playing a supporting role to help.

"Reversing the degeneration of the Palestinian economy will require access to the main economic levers of any economy: land, water, spectrum, movement and access of goods and people. It should be stressed that this is not easy, because Israel has a right to defend itself," he said.