* Watchdog groups say government oversight needed
* Fund says private sector board good for long-term growth
By Adam Entous
RAMALLAH, West Bank, April 28 (Reuters) - The fund that manages Palestinian public investments has been transformed in ways advocates say promote long-term growth, but critics argue lack government oversight.
The debate stems from a decision by President Mahmoud Abbas to cut the Palestine Investment Fund's (PIF) ties to the government after Islamist Hamas's January 2006 election victory.
Watchdog groups and some public officials say the cash-strapped Palestinian government, headed by Western-backed Prime Minister Salam Fayyad since Abbas sacked the Hamas-led administration in 2007, should get back the reins of the 7-year-old fund, whose board is appointed by Abbas.
They argue that the PIF's independence from the government raises questions about accountability and the potential for conflicts.
Others counter the government should stay out of the PIF's affairs, citing concerns the cabinet would try to use the fund to cover short-term expenses, undermining its investments.
"The government is focused on paying the bills month to month, while the PIF is focused on the long-term," said a Palestinian official who backs independence from the government, which struggles each month to raise enough funds to pay wages.
Mohammad Mustafa, the chairman and CEO of the PIF, doubles as Abbas's chief economic adviser. As has been the case since its inception, the board is dominated by prominent businessmen, some of whose companies have taken part in ventures in which the fund has important asset stakes.
Azmi al-Shuaibi, head of the Coalition for Accountability and Integrity (AMAN), said there appeared to be "a conflict of interest", but added that tackling the issue was not a priority for the Palestinian Authority (PA) or president at present.
A senior PIF official countered that since 2006, when Mustafa took over, the fund has followed a "strict policy" of not doing business with board members and their companies.
The debate comes at a time when the United States, European Union and other donors are urging foreign business to invest in the Palestinian territories -- part of efforts to promote peace with Israel and to support Abbas and his West Bank-based government against the Hamas Islamists in the Gaza Strip.
Set up in 2002, the PIF under then-finance minister Fayyad consolidated varied and secretive holdings accumulated under Abbas's predecessor, Yasser Arafat, and posted the accounts publicly for Palestinians and investors to see.
The PIF at the time sought to put a distance between the PA and business to stem talk of corruption and nepotism under Arafat's Fatah faction. That talk aided the rise of Hamas.
"The objective was to get out of commerce and act like a state," a former PIF leader recalled.
Changes at the PIF followed Fayyad's resignation in late 2005 and Hamas's parliamentary election victory. "The policy, the board -- everything changed," said a former director.
To prevent the PIF from falling under the control of the new Islamist government, which was shunned by Washington and the EU as a terrorist organisation, Abbas severed the fund's links to the cabinet and asserted his office's primacy.
Mustafa, a World Bank veteran, was put in charge. Board seats for the finance and economy ministers were scrapped.
The investment strategy also changed.
Under Fayyad, the PIF sold off stakes in what were deemed to be "mature" sectors, including telecoms, a shift backed by the United States to boost public confidence in the PA.
"It was good for its time," a current PIF official said of the approach under Fayyad. "Times change. Strategies adjust."
Under Mustafa, the PIF sold off smaller holdings and some big foreign assets. Mustafa then made large investments at home, from real estate to a 43 percent stake in Wataniya Palestine, a mobile phone venture to challenge a decade-old PalTel monopoly.
The PIF said its involvement was needed because the private sector was too weak or too risk averse. PIF profits rose, including $260 million in 2007 alone.
"We wanted it to be more commercial, more investment and more developmental," Mustafa said. "That requires certain governance. Government institutions are not good at that."
A former Western adviser to the PIF countered that the fund's founding principles were "compromised".
"The whole point of the PIF was to create an institution that would be a bulwark against presidential authority, and an institution that would scrub the investments and manage them in a transparent way," he said.
Full breakdowns of assets are no longer published publicly -- part of efforts, Mustafa said, to limit the risk of holdings being seized in suits against the Palestinian Authority (PA).
Mustafa said the fund's disclosure policy was under review, and that measures were in place to avoid conflicts of interest. Abbas has named a 30-member "general assembly" to oversee key decisions and the fund's books are reviewed by the PA comptroller and shared with international institutions.
Shuaibi has proposed a law to expand the PIF's accountability. It calls for the board to be run by the finance minister, a post held once again by Fayyad. He has been sidelined from the PIF since Abbas appointed him to run the PA after Hamas's takeover of Gaza in June 2007.
Some PIF directors are cool to the idea of the government, and Fayyad, returning, officials say. Diplomats cite tensions over how much of the PIF's profits are passed to the PA. Fayyad and board members have clashed in the past over assets being sold or used as collateral for loans, and over subsidies.
Mustafa said the PIF paid nearly $650 million to the PA over the last five years without getting any reinvestment in return.
(Additional reporting by Ivan Karakashian in Jerusalem; Editing by Alastair Macdonald and Samia Nakhoul) (For copies of contracts and other supporting documents about this series, go to blogs.reuters.com/axismundi)