But if the plan fails, Israel will be able to go to the world and say "see, we tried EVERYTHING--everything you suggested--now you see, transfer is the only solution." The Palestinians would have to understand that this plan is really a plan to legitimize transfer--then they would be more likely to actually try to make peace.
The whole point is to force their hand, to force them to choose their destiny. Right now, things look bleak, it looks like they'll just continue with the intifada indefinitely. The Palestinians have to see what they COULD have, and then they have to see they could lose it all. That will force them to act. Just think--maybe there would be a large march in the streets against terrorism (if they knew terrorism would lead to their expulsion).
Either way Israel wins--the terror ends, or the Palestinians are expelled.