A power struggle has erupted between the Bank of Israel and the Ministry of Finance over the management of the sovereign wealth fund for Israel's oil and gas tax revenues. Yesterday's cabinet decision handed management of the fund to the Bank of Israel. "The principles of the sovereign wealth fund were formulated months ago, but it has been held up by the war between the Ministry of Finance and the Bank of Israel over its management," a top official involved in the process told "Globes."
Both the Ministry of Finance and the Bank of Israel want to hide the battle from the public, which once again ended with Governor of the Bank of Israel Prof. Stanley Fischer getting the upper hand. The cabinet decided that the sovereign wealth fund will be managed by a Bank of Israel team, which will be overseen by an investment committee of experts with officials from the Ministry of Finance and the Bank of Israel mixed in.
Above the investment committee will be a board of directors chaired by the finance minister. Other directors will include the Ministry of Finance budget director, the deputy governor of the Bank of Israel, the chairman of the National Economics Council, and thee experts selected by a search committee. This model is basically a copy of the model of the Norwegian sovereign wealth fund, which is based on the Santiago Principles, signed by 25 countries as guidelines for sovereign wealth funds.
The bone of contention is over the interpretation of the Santiago Principles, which call for the separation of the day-to-day management of fiscal policy and the management of sovereign wealth funds. Fischer held that the Ministry of Finance should not have sole management of the fund. He was supported by National Economics Council chairman Eugene Kandell, and Prime Minister Benjamin Netanyahu decided in his favor.
In practice, only Norway and Chile's sovereign wealth funds are managed by their central banks. In most countries, such as New Zealand, Singapore, Canada, and Australia, as well as the State of California, sovereign wealth funds are managed by an external or designated entity, or by a statutory corporation. Mexico's Finance Ministry manages its sovereign wealth fund.
Finance Ministry fury
The Bank of Israel does not want to discuss the dispute. "There were disagreements; so what? What's the big deal? What is important is that the sovereign fund was formulated in a professional and serious way, and that the final product is excellent. There are no winners and losers here," said a source at the Bank of Israel.
Behind the scenes, however, many officials talk about a major explosion and outraged Ministry of Finance officials. Minister of Finance Yuval Steinitz has already capitulated many times - to Fischer over the new Bank of Israel Law; to Histadrut chairman Ofer Eini over the minimum wage and contract workers; to MK Haim Katz (Likud) over management fees and women's retirement age; and of course, to Netanyahu, who just a few months ago, took policy planning away from the ministry and gave to the Trajtenberg Committee.
In contrast to previous cases, this time Steinitz was at the center of the battle. His place was taken by Accountant General Michal Abadi-Boiangiu, who is considered to be the only brilliant appointment made by Steinitz during his term as minister. "It is not clear why she capitulated. The Accountant General is responsible for the management of the state's assets, and the sovereign wealth fund is the most important of all these assets," said a top Ministry of Finance official.
"Moreover, we've already seen how the Bank of Israel lets the finance minister 'supervise' such large amounts of money. Look what's happening with the foreign currency reserves. The exact same thing will happen here too - we won't have a clue what is happening over there."
Another Ministry of Finance official said in wonder, "Is it less serious that the both the foreign currency reserves and the sovereign wealth fund totaling tens of billions of dollars will managed from within the Bank of Israel, in one room next to the other?"
Under the Bank of Israel Law (5770-2010), management of the foreign currency reserves should be coordinated with the finance minister, and under his oversight. In practice, Fischer manages the foreign currency reserves as he wants. Knowledgeable sources say that, one day, Steinitz sent to top officials to the Bank of Israel to find out exactly what was happening with the reserves. Fischer lectured them for two hours, and they left the building more confused than when they entered. "Do you understand what he said," one official asked the other, who replied, "I didn’t understand a word, either."
Why did Abadi-Boiangiu capitulate?
For Abadi-Boiangiu, the sovereign wealth fund was her baptism of fire, and it put her at odds were her colleagues.
Abadi-Boiangiu's initial position was that the Bank of Israel's demand to manage the sovereign wealth fund was reasonable. She is the only Ministry of Finance official who has ever managed billions of dollars in a foreign currency portfolio, when she was at First International Bank of Israel (TASE: FTIN). She knows the banking system well, and she knows something about managing such large securities portfolios. For the Ministry of Finance to manage the sovereign wealth fund, it would have had to set up redundancy systems at a cost of tens of millions of shekels. A top ministry official, who supported her, said that the Bank of Israel already has these redundancy systems.
Abadi-Boiangiu also believes that the Ministry of Finance does not need to manage everything, and in particular it does not need unnecessary wars with the Bank of Israel. This attitude stems from the fact that the Accountant General was not raised in the ranks of the Ministry of Finance but rather came from the Ministry of Health where she successfully streamlined Israel's health funds within just a few years. One source said, "If Michal has wanted to run the fund herself she would have succeeded," recalling the tough talks she held with Israel Chemicals Ltd. (TASE: ICL) which forced the company's senior executives to finance 90% of the Dead Sea salt harvesting. Her predecessors had demanded much less.
Bank of Israel said in response, "Staff discussions were held in full cooperation with between Ministry of Finance representatives, the Bank of Israel, Ministry of Justice and National Economics Council. The decision was agreed by all parties and is based on practices by which similar funds are managed in other developed countries."
The Ministry of Finance said, "The way the fund will be managed was fixed in agreement after discussions. There is no country where a sovereign wealth fund is run by the Ministry of Finance and the committee decided to act in accordance with accepted international principles on the subject. The Ministry of Finance rejects all claims about the Accountant General on the subject."
Published by Globes, Israel business news - www.globes-online.com - on February 20, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012