Fatah has long been the driving force of Palestinian nationalism but as a party of government it proved itself inept, divided and, in the early years especially, brazenly corrupt. It ran a disastrous parliamentary election campaign in 2006 which ended in a Hamas victory. This should have been a wake-up call but the party has struggled to reform. The conference in Bethlehem, which opened this morning, is the party's first real public test.

The choice of venue itself is significant. The Oslo Accords created a Palestinian government, albeit a government under occupation. The decision to hold the conference in Bethlehem sends a message: Fatah's centre of gravity now lies inside Palestine, not outside with the diaspora. A senior Fatah figure, Tunisian-based Faruq al-Qaddumi, blew his top on al-Jazeera television recently and ended by accusing President Mahmoud Abbas of murdering Yasser Arafat.

Ironically, Qaddumi was the chief beneficiary of Arafat's death: he succeeded Arafat as the party's general secretary. His decision to boycott Bethlehem means he will lose this role. Abbas has won a first-round, pre-conference victory by bringing another senior rejectionist, Muhammad Ghneim, on board, while sidelining Qaddumi and cutting his funding as a warning to all recalcitrant leaders abroad.

Qaddumi may have been sidelined, but his case illustrates many of Fatah's problems. Under Qaddumi, Fatah went into the 2006 elections with a paper leader so opposed to the election platform of peace via negotiations that he had chosen to live in exile. With no final authority to decide who could run for office, self-appointed Fatahawiyas ran against each other, fatally splitting the vote. Incredibly, Fatah had no party lists: to be a member, it was sufficient to declare that you were a member.

The party has at last formalised its membership lists. It now has 300,000 paid-up members in Gaza and the West Bank and has conducted widespread elections to choose conference delegates. When the names of the 2,000 delegates were published to widespread grumbling, they soon swelled to 2,300, or possibly 2,500, but there has been no overt crisis.

Hamas's refusal to allow delegates from Gaza to travel has proved more troublesome. Hamas appears to have calculated that it is in its best interests to sabotage the conference. While figures like Jibril Rajoub demanded a postponement, Abbas insisted it would go ahead regardless.

There are charismatic political figures outside Fatah – one thinks of Mustafa Barghouti, Hanan Ashrawi or Salaam Fayyad – but none has proved capable of running a party, or even winning any election seats other than their own. There is no alternative to Fatah, the only secular party with mass appeal, and the only possible route for young ambitious politicians. Even a dysfunctional Fatah remains popular: a recent poll gave them 35% to Hamas's 19%.

Renewal is not outside the bounds of possibility. The party is divided because it has four elements that too often seem unconnected. It is the leading party of the diaspora worldwide, from Pacific universities to Mediterranean refugee camps. It is the body charged with running a negotiations team. It is the party of technocrats like Shtayyeh who make up the bulk of the current, Fayyad government. And lastly, it is a grassroots party machine in Palestine.

This grassroots party is the vehicle for most party debates and the most democratic element of the party, anywhere. The task is to build a new, transparent party structure which encompasses these four elements, while also reflecting the reality that Fatah's centre must lie inside Palestine. The shift of power to Palestine has been a natural process that began years before the Oslo Accords, even before the intifada of the 1980s.

Holding the conference in Bethlehem formally recognises that the fight for Palestine begins and ends in Palestine. If Fatah can create a new national party, it will be in far better shape to start the real business of any political party: winning elections on the ground. This is the big test, the answer to the question "what happens on the day after?" Ultimately, the most important election will be the referendum that follows any peace agreement. If it succeeds in negotiating a deal, Fatah must also be able to deliver a Yes vote for it, here in Palestine. The campaign begins the day the Bethlehem conference ends on Thursday.