In the space of a few months, Haviva Cohen, director of the Investment Promotion Center at the Ministry of Industry and Trade, received applications from three leading chip enterprises: Tower Semiconductor, Vishay Intertechnologies, and Intel. All three came with the same “good” intention of setting up plants in Israel. All three asked the State to kindly help them out with aid under the Law for the Encouragement of Capital Investments, which Cohen is responsible for implementing.
Only one small problem dampened the general celebration. The overall investment in Israel planned by the three giant concerns totaled a minimum of $3.7 billion. According to the criteria prescribed by the Law, State assistance is likely to amount to over $800 million – more than double the $350 million annual budget at Cohen’s disposal. Cohen must also handle dozens of routine requests for aid from the Investment Center, each of which involves investment ranging from $30 million to $200 million.
Since the Law does not define priorities, the decision who will and who will not receive aid is actually in the hands of Cohen and her Investment Center colleagues. Such power invites a great deal of pressure and in most cases also guarantees that any decision will be accompanied by a flood of criticism – because when the blanket is too short, someone’s legs are always left uncovered.
”The Law really doesn’t define priorities, but sets a limiting budgetary framework,” Cohen describes the dilemma forcing her to perform considerably acrobatic accounting. “We have therefore been negotiating in recent months with companies, which we never did before, to try to divide the pie into as many slices as possible and keep all the big investments in Israel. That is how the Law expects us to cope.”
”Globes”: Is this a proper way of doing things?
Cohen: ”It would be much more proper and healthy if the Law were transparent and clear, so we wouldn’t have to negotiate details with each company. On the other hand, when the investments are on such a large scale, such negotiations are almost inevitable. Furthermore, when we get requests on the scale of this year, which doesn’t happen every year, we understand that a special budget is required.”
Meaning?
”I mean that the Ministry of Finance must allocate us separate sums as part of the Investment Center’s budget. The problem is therefore being handled in conjunction with the Ministry of Finance. The question of priorities, however, is still a good one.”
Nothing has changed in 40 years
The Law for the Encouragement of Capital Investment was passed in 1959, over 40 years ago. The idea was simple and wise – the State would take part in the investment required to set up plants or expand them, after verifying their usefulness for the economy and channeling them to areas of national priority and promoting the country’s economic and social interests.
Accompanying the Law was a map dividing Israel into three priority areas. Priority area A included the distant, isolated areas of the Negev, the Jordan Valley, and the Galilee. Priority Area B was a sort of inner belt to Area A. Priority Area C was the heart of the country, where in any case everyone preferred to work and develop, making the need for incentives much smaller.
Forty years, however, is a long time, during which Israeli industry experienced several turnarounds. The last of these, the high tech revolution, has made the Law almost irrelevant.
One of the main reasons the Law somehow managed to adapt to advanced industry, in which investment in physical assets is low, compared with those in know-how and human capital, is the tax benefits the Law granted. The law permits an industrial enterprise to waive a monetary grant and choose the alternative of tax benefits. High tech enterprises can also choose this alternative.
”The definition of the Law has to be changed from the Law for the Encouragement of Capital Investments to the Law for the Encouragement of Business Planning,” agrees Cohen, exactly one year since she entered her position. In contrast to her predecessors, she does not refrain from indicating where the Law is deficient, or even confusing and absurd.
Not a few will say that the Law should simply be eliminated and its budget transferred to the Office of the Chief Scientist in the Ministry of Industry and Trade, while expanding the areas in which it grants assistance.
”With all the complaints against the Law, which was enacted 40 years ago for totally different needs and industries, we are getting along not badly, since it leaves a lot of room for judgement.
”I think that our main problem concerns everything to do with high tech, for which the Law has no answer.”
What should the new law look like?
”The new law should be based on two elements. It should be clear and it should be consistent, so that a company can plan far enough into the future, without worrying whether the budget for next year will suffice. The law should also not require daily consulting by the entrepreneur over every move he makes. That may be essential where grants are concerned, but not when the entire risk is taken by the entrepreneur, while we grant benefits at the profit stage only.”
Isn’t there some overlapping with the Chief Scientist here?
”The truth is that when software is being developed, I don’t know where R&D plans supported by the Chief Scientist end and industrial manufacturing begins. We need to create in the Ministry of Industry and Trade a clear support plan for young companies, starting with the Chief Scientist and continuing with the Investments Center and other aid plans in the Ministry, such as training of human capital and marketing encouragement. All these things are stations in the life of a company planning its business advancement route.
”It is preferable to prepare this as some entity within the Ministry, supervising a clear and continuous process. In that way, we can avoid so many examinations - ours and those of the marketing fund and the Chief Scientist, whereas we look differently at some of these things. There is room for synergy between the Research and Development Law and our Law, and we will have to find it in work processes, not in legislation. The result will be much greater than the sum of its parts.”
Intel and the $1 million question
Intel’s Kiryat Gat plant, established at a cost of $1.6 billion, began operating in June 1999. In the framework of the Law for the Encouragement of Capital Investments, the State, after considerable hesitation, provided $600 million. Controversy over the benefit to the economy in general and Kiryat Gat in particular from the enormous investment continues to this day. The controversy has intensified since the possibility of a $3.5 billion Intel investment in Israel was raised, requiring another State grant.
What is the answer to all the $1 million questions?
”First of all, the legislative authority answered, saying that it thinks that government assistance is needed to encourage capital investment. A project like Intel’s plant is inordinately profitable to its owners, and the plan would unquestionably be implemented, with or without our intervention, but not necessarily in Israel. We used to think that Israeli companies were always our captives and would establish plants in Israel, but today we know that’s not completely true. More and more Israeli companies are investing overseas and acquiring overseas companies. The government grant is unquestionably a way of keeping them here.
”Still the question of how much we should pay for one job is a legitimate question. Should we support these investments at any price and indefinitely? In recent weeks we have been focusing on this question, which has not hitherto been asked, because of budgetary restrictions.
As part of the previous investment in its plant, Intel took on itself a series of social, professional, and business commitments, such as procurement from Israeli companies. Has Intel met its commitments?
”We have not yet summed up Intel’s activity. I assume that if we reach a serious discussion of the new investment plan, we will evaluate Intel’s record. The feeling is that the company takes its commitments seriously. It assigned a team on the matter and made an effort; progress is visible.”
Teva said thank you and went overseas
The list of complainants includes those believing that the Law for the Encouragement of Capital Investments needs a boost. The suggestion is sometimes made to restore the maximum rate of State support under the Law from 24% to 38%. Cohen is unenthusiastic. “I think 38% is too high,” she says.
What is the correct rate?
”In my opinion, the capital investment grant rate should vary from 20% to 25%. Perhaps more thought should be given how to give high-risk, high-potential companies an initial push, and less to companies that we have already supported for a given period of time and that already know where they are going.”
What about the fact that you support companies like Delta, Amdocs, and Teva, whose equity sometimes exceeds the Investment Center’s annual budget?
”Look at Amdocs, which received $30 million. This is an excellent example, because it demonstrates precisely the absurdity of the Law. What is behind the support for Amdocs? Office spaces with desks and computers. Work stations and communications tools, backed by much higher tax benefits.
”If we take Teva as a counter-example, a very considerable part of its activity is not in Israel, so that if we want it to set up a plant in Israel, we will have to grant assistance. We won’t run after every company that threatens not to set up a plant here, though. We had an experience like that with Teva, which submitted a request we didn’t like. We approved only what we thought was right. We got a polite letter from them. They did not try to appeal the decision, but said thank you very much, they were not interested in our help. They took their business elsewhere.
”There is, however, something even more ridiculous. One of our basic requirements is first of all economic feasibility for the owners, not just for the national economy. Even if the plan will provide jobs for many unemployed people and suit the Zionist vision, if it is not profitable for the owners, it will not last. If it is so profitable, however, the Law is apparently unnecessary.”
Shochat’s company
Recent months have been difficult for the Ministry of Industry and Trade in general and the Investment Center in particular. With Meretz’s withdrawal from the government, Minister of Industry and Trade Ran Cohen resigned.
When Cohen left, there were rumors that Minister of Finance Avraham Shochat would be appointed in his stead. The Ministry of Industry and Trade was in an uproar. It actually turned out that Shochat was one of the best friends of the Ministry, particularly of Haviva Cohen, who became his trusted confidant. Warm personal relations and professional appreciation blossomed between the two. It is said that Shochat consults her by telephone every other day on everyday matters concerning the Ministry of Industry and Trade.
How will you get the exceptional budgets required to handle the requests on you desk, in the absence of a minister in the government to fight for you?
”It was extremely important to have a minister, and the absence of Ran Cohen was definitely felt. Nevertheless, we do not feel completely orphaned, because we have a sympathetic ear in the Ministry of Finance budgets division and the Prime Minister’s Office. There is currently an atmosphere supporting growth and industry, and employment in outlying areas is certainly a concern of this government.”
The State Comptroller is angry
The State Comptroller caused the Investment Center additional discomfort this year. The Comptroller’s Office conducted an examination of enterprises receiving aid between 1988 and 1995. They found that 32% were no longer active, 14% no longer existed, 15% had not implemented a single investment plan approved for them, although at least one year had passed since the date for completion of the plan, and 17% of the supported enterprises still active were at great risk, 5% of which were in the process of liquidation.
”Since the Law for the Encouragement of Capital Investment was passed, the ministries responsible for its implementation have poured billions of dollars in ventures. In spite of this, the Ministry has never evaluated the contribution of the Law to industry in Israel, particularly to industry in high-priority regions,” the Comptroller stated in the chapter dealing with the Investment Center.
Harsh findings and cogent criticisms
Cohen: ”We have greatly strengthened our auditing and supervisory processes for investments in recent years, in order to stop the money before it leaves the cash box. We have also strengthened auditing after the investment has been made. From this standpoint, the Investment Center has been turned around in the last four to five years, and we feel much more at ease than in the past. We recognize the fact that there were failures, but I don’t think that there were more failures in industry supported by us than in industry in general.”
Before we become superfluous
Another blow to the Investment Center last year was the closing of the New Horizon factory in Ofakim, of the family of Tefron and Macpell, successful and prosperous Israeli textile companies. The State invested NIS 22 million in the plant, but its owners did not manage to make it profitable and announced its closing, leaving over 100 workers unemployed. The unpleasant saga ended with the purchase of the factory by Jordanian investor Omar Salah and his Hong Kong partners for about a third of the amount invested by the State.
”The case of New Horizons was traumatic and very frustrating for us,” Cohen says. “We examined it as much as possible and reached the conclusion that the Law had been misused. We definitely considered that a group with such strong backing could have been more generous, although they injected a lot of money into the factory over the past year. We decided that the project had been a real failure for them also, until at a certain stage they decided to cut their losses.”
What is the conclusion?
”The conclusion is that as a sole means, the Law will not revolutionize the outlying areas. A combination of efforts is required: infrastructures, such as transportation and industrial services; quality of life; education, of course; and a lot of air to breathe. Instead of spreading a limited budget over many things, financial sources must be very focused and massive treatment given to several problem points for several years.”
So who do you represent: the interests of the nation, the industry, or the outlying areas?
”I am part of the policy. I regard myself as a State employee implementing political policy and an advisor in its formulation. The manufacturers’ interests concern me only to the extent that they contribute to the country, its output, its growth, and the periphery. I am not the Manufacturers Association, and I do not promote the interests of manufacturers, but the good of the Israeli economy. The goal is the Israeli economy.”
Published by Israel's Business Arena on November 13, 2000