* U.S. aid goes to well-connected Palestinian telecom firm
* Supporters say Abbas-backed Wataniya had no other options
* Aid was meant for struggling small and mid-sized firms
By Adam Entous
RAMALLAH, West Bank, April 24 (Reuters) - U.S. aid in the form of loan guarantees meant for Palestinian farmers and other small to mid-sized businesses has been given to a mobile phone firm backed by President Mahmoud Abbas and Gulf investors.
The shift in U.S. taxpayer support to Wataniya Palestine, a joint venture between a Kuwaiti and Qatari telecoms group and a holding company for public assets, the Palestine Investment Fund (PIF), has dismayed sponsors of small private enterprise.
Its supporters counter that help for Wataniya Palestine is good for jobs and free markets at a time when Washington is throwing its weight, and money, behind Abbas as a bulwark against Hamas Islamists in Gaza and as a partner in efforts to relaunch peace negotiations with Israel.
Among the firm's advocates is Middle East envoy Tony Blair, who pressed Israel to grant Wataniya Palestine radio frequencies so the company can challenge a monopoly long held by PalTel.
Mohammad Mustafa, Abbas's chief economic adviser and chairman of both the PIF and Wataniya Palestine, said the $16 million in loan guarantees for Wataniya were justified by the global credit crunch and the company's potential to bolster the Palestinian economy. He said plenty of guarantees remained to boost smaller businesses, as intended by programme sponsors.
But former PIF board members and advisers, speaking on condition of anonymity, challenged the justification for granting U.S. loan guarantees when Wataniya Palestine's financial backers were highly profitable.
"They don't need to provide them a guarantee. They are not the targeted beneficiary," said Samir Barghouthi, general manager of the Arab Centre for Agricultural Development, which helps small businesses. "This is not acceptable."
Small business owners and advocates said it sent the wrong message about Washington's growing role in the Palestinian private sector, which is dominated by a small group of wealthy companies and investors linked by a web of cross-holdings.
MIXING INVESTMENT WITH DIPLOMACY
Support from the loan guarantee programme came from the U.S.-based Aspen Institute, whose Middle East Strategy Group brought together prominent Americans, such as former Secretary of State Madeleine Albright and Sen. Dianne Feinstein, with Palestinian business leaders, including PIF directors.
Among these were Samer Khoury, a top executive at Consolidated Contractors Co., and Tarek Aggad, whose Arab Palestinian Investment Company (APIC) lists President Abbas's youngest son, Tarek, as a vice president. President Abbas's elder son, Yasser, was also part of the Aspen Institute panel.
Feinstein pushed through legislation to authorise the programme, funded by the U.S. government's Overseas Private Investment Corporation (OPIC) and the PIF, and overseen by the Aspen-linked Middle East Investment Initiative.
Launched in 2007 with much fanfare, the programme offered up to $230 million in loan guarantees, leveraging commitments of $110 million from OPIC in Washington and $50 million from the PIF. They set a lending range of $10,000 and $500,000.
In its July 2007 launch announcement, the U.S. State Department said: "The initiative will provide affordable, longer-term loans to small and family-owned Palestinian businesses that would otherwise not have access to them.
"These might include an olive grower who wants to expand operations, a young person with a small information technology company, or someone who wants to hire neighbours to produce and export Palestinian embroidery."
The programme began as planned. In the first 11 months of 2008, the portfolio had 46 loans totalling $7.6 million, nearly 80 percent of which were for between $10,000 and $200,000.
Then, in December, programme administrators expedited approval of what they termed two "exceptionally" large loans totalling $16 million to support Wataniya Palestine, according to a monthly progress report.
An official who helps administer the loan programme, speaking on condition of anonymity, said the decision to support Wataniya Palestine was made quickly after Palestinian banks warned that they might not be able to provide loans.
OPIC spokesman Timothy Harwood said the agency "concluded that by virtue of its significant job creation potential -- more than 2,000 jobs are expected to be created through the project -- it was a worthwhile investment, and consistent with OPIC's mission to support economic development in emerging markets".
The PIF, a 43-percent shareholder in Wataniya Palestine and OPIC's partner in the loan programme, did not take part in the decision on the $16 million in loans, the fund and OPIC said.
Some Palestinian officials and small businessmen questioned why a company co-owned by the PIF and Kuwait's National Mobile Telecommunications Co. (Wataniya) NMTC.KW, a unit of Qatar Telecommunications Co. (Qtel) QTEL.QA, needed U.S. help.
The PIF reported a $260 million profit in 2007. Kuwait's Wataniya posted more than $280 million in profit in 2008.
"I don't think getting a bank loan was a problem," said one top Palestinian official involved in banking regulation.
Mustafa said the guarantees were needed to provide comfort to local banks, which the PIF wanted involved in the deal. "I guess these guys were scared," Mustafa said, citing the credit crunch, war in the Gaza Strip and the uncertainty over when Israel may release radio frequencies for the new firm.
Mustafa said that the primary focus of the programme was to benefit small businesses, but that the rules were flexible enough to let larger firms benefit as long as they met certain criteria, "especially the number of jobs that you can create".
Reem Abboushi, head of the Palestinian Businesswomen's Association, which provides small loans to women, countered: "Small business will create many more jobs and sustainable jobs in the long run than the big-scale investment."
Mohammed Abu Bakr, a 52-year-old Jenin brickmaker, said he had little hope of benefiting from U.S. assistance. Like most of his small businessmen friends, he said, he was convinced it went to better-connected "big businessmen and the rich". (Additional reporting by Ivan Karakashian in Jerusalem and Wael al-Ahmed in Jenin; Editing by Alastair Macdonald and Samia Nakhoul) (For copies of contracts and other supporting documents about this series, go to blogs.reuters.com/axismundi)