A number of articles have appeared in the Israeli press challenging the wisdom of the Ariav Commission and its mission of creating an “Israeli financial center.” Below is the case for Ariav as one of the most important strategic initiatives on the Israeli public agenda.
The fact that a world-class investment management industry has never emerged in Israel is the result of a string of missed opportunities dating back to the earliest days of Israel’s history. Indeed, many of the backers of the modern Zionist enterprise hailed from the pinnacle of international finance. In fact, the rare ingredients critical to this industry have always been present in abundance in Israel. These same ingredients - local professional experience gained in markets around the world, a solid higher-education system, firm legal and accounting infrastructure, and boundless indigenous talent - produced one of the world’s leading start-up technology industries.
Government initiatives in the early 1990s created regulatory and tax conditions that encouraged capital flows into the technology sector. As the sector’s main building blocks were already in place, this was the catalyst that unleashed the technology start-up industry. In a very short time, Israel launched a technology industry that is envied around the world. The Israeli public has been the prime beneficiary, through job-creation, export-growth, GDP-growth, rising tax revenues, and industrial diversification within the Israeli economy.
The state of financial services in Israel today is very similar to that of technology in the early 1990s. Until recently, the primary impediment to a parallel boom in global financial services was an inhospitable regulatory environment. This environment is changing. The capital-market reforms of 2003 and 2004 dramatically lowered major regulatory hurdles, creating conditions for a nascent industry with massive long-term potential for the Israeli economy and for our society. This reform must continue if we are to build on this trend.
The naysayers who dismiss Ariav’s mission as a pipe-dream, have typically done so on the basis of feasibility and complexity. Those who have asserted that Tel Aviv will never be a London or a New York, or even a Singapore or an Ireland, are missing the point. There is no meaningful international ranking of financial centers, and nobody gets a prize for coming in first. The only quantitative measures of success that matter are those of contribution to the Israeli economy.
As to the precise definition of "financial center", the market will guide us. The sub-sector of investment management is already taking root, and has attracted initial talent from around the world. Additional talent, on a scale that would surprise most readers, is waiting in the wings. The market’s longer-term evolution will be guided by the forces of local and global supply and demand.
I would suggest Ariav’s detractors also note that this train may be leaving the terminal without them. Savvy institutional and private investors from around the world have already discovered a small, but globally-competitive investment industry in Israel. A significant number of investment professionals, immigrants and returning Israelis, hailing from top-tier international investment firms, are currently managing global investments for global clients. Sophisticated clients, who have access to investment managers in London and New York, are choosing to have money managed by a firm in Tel Aviv. Israel is already exporting financial services pre-Ariav.
The commission can and should serve as a massive accelerator of this trend. Ariav can be most effective by helping to create conditions that will attract more smart and seasoned professionals to live and work in Israel; and by further simplifying the tax and regulatory environment, particularly as it applies to foreign investors seeking the services of Israeli money managers.
It is rare that we are presented with an opportunity to add such enormous value to Israeli society with relatively little effort or risk, based on a model that has already begun to prove itself. There should be no significant cost here. With such tremendous upside and no downside, I challenge anyone to explain how we can responsibly turn our backs on Ariav.
The author is the CEO of KCPS & Company , an investment management firm with offices in Tel Aviv and New York. KCPS is an advisor to the Ariav committee.
Published by Globes [online], Israel business news - www.globes-online.com - on July 28, 2008
© Copyright of Globes Publisher Itonut (1983) Ltd. 2008