Israel's sovereign wealth fund: No money, no management

Leviathan gas reservoir / Photo: Albatros

Lower than expected revenues from the Tamar gas reservoir and government paralysis mean the fund meant to invest in Israel's future is yet to get off the ground.

What happened to Israel's sovereign wealth fund? MK Orit Farkash-Hacohen (Blue and White) asked Knesset Finance Committee chairman Moshe Gafni (United Torah Judaism) to hold a discussion on progress in establishing the Israeli Citizens' Fund, which is meant to accumulate hundreds of billions of shekels.

"Globes" has discovered that the original 2018 date for beginning the fund, which was postponed a number of times, will now be postponed again, this time until 2021. The reason is that revenue from the Tamar natural gas reservoir, the source of tax revenue for the fund, which was projected to exceed NIS 1 billion, is lower than expected.

Furthermore, monetary aspects are not the only thing delaying the fund. A check by "Globes" revealed that an appointment committee selected three years ago by the Ministry of Finance and headed by Judge (ret.) Moshe Gal, has yet to appoint a single member to the agencies entrusted with managing the fund.

Sovereign wealth fund: Gas will become a growth engine

The Israeli Citizens' Fund is designed to accumulate revenues paid to the state treasury from the super profits tax levied on gas reservoirs since 2011, as recommended in the Sheshinski I Committee report, and from revenues paid to the state treasury from the super profits tax levied on producers of natural resources since 2015, as recommended in the Sheshinski II Committee report. Under the Sovereign Wealth Fund Law passed in July 2014, the sovereign wealth fund can begin operating as soon as NIS 1 billion has accumulated in it. Starting a year from that date, the fund is entitled to distribute 3.5% of its revenue each year for social, economic, and educational purposes, in accordance with the proposals submitted to it by the government, and subject to approval by the fund's institutions, headed by its council.

Farkash-Hacohen believes that there are grounds for reconsideration of the mechanism for using the fund's profits, "in view of the infrastructure crisis, particularly in transportation, and given the mushrooming deficit. Growth-generating investment in infrastructure projects will also allow the current generation to benefit from the fund, not just the next generation."

Farkash-Hacohen told Gafni that she wanted "to understand the existing government preparation and supervisory mechanism for the deposits in the fund, and who is responsible for it." She stated that according to updated estimates, deposits amounting to NIS 14 billion are due to reach the fund in the next five years. She asked that representatives of the Bank of Israel, the Israel Tax Authority, and the Ministry of Finance should be summoned to the discussion in order to report on the status of the fund, its transparency to the public, and the previous forecast for deposits, in comparison with the present.

"The sovereign wealth's principal and profits are extremely important for every Israeli," Farkash-Hacohen wrote at the end of her letter.

According to a recent analysis by "Globes," the fund will accumulate NIS 250 billion over the next 30 years: NIS 155.5 billion from the Leviathan reservoir (to be paid in 2024-2063), NIS 12 billion from the Karish and Tanin reservoirs (to be paid in 2024-2032), and NIS 82.4 billion from the Tamar reservoir (to be paid in 2020-2050). In addition to these sums, the fund will receive an unknown sum from Dead Sea Works, a subsidiary of Israel Chemicals, and from any new gas reservoirs discovered in Israel's territorial waters in the coming years.

When the Sovereign Wealth Fund Law was enacted, the National Economic Council predicted that the fund would begin operating in 2018, after NIS 1.5 billion had already been accumulated in it by that year. The first amount was paid into the fund's special account, managed by the Bank of Israel, as early as 2013 - NIS 459 million in taxes on super profits from the Mari-B reservoir, closed in 2012, a year after the Knesset enacted the Petroleum Profits Taxation Law. Not a shekel more has been deposited in the fund since then, even though the developers of the Tamar reservoir have accumulated an estimated NIS 6 billion in profits.

The tax levied on the developers of the gas reservoirs applies only to super profits, defined as a profit in excess of 150% of the investment in exploration and development of the reservoir, plus 5% annual interest. In the case of Tamar, a higher threshold was set - a 200% return on the recognized investment. The Tamar developers received additional concessions, among other things on the length of the period during which expenses are recognized.

The reason for the special arrangement for Tamar was concern by the state that the Tamar developers would apply for international arbitration of their claim that the tax was imposed on them retroactively (the reservoir was discovered in 2009, two years before the Petroleum Profits Taxation Law was enacted). Despite all of the concessions, Tamar was scheduled to begin paying tax in 2017, some of which was to be put into the sovereign wealth fund.

The state agreed in 2014 to recognize $216 million in expenses for installation of compressors that would make it possible to increase the gas capacity of the pipeline from the reservoir, plus $437 million for exploring and developing a small gas reservoir southwest of Tamar. The upshot, according to a calculation by "Globes," is that the Tamar reservoir will begin contributing to the sovereign wealth fund in July 2020.

Figures obtained by Farkash-Hacohen indicate that the Tax Authority will receive NIS 200 million in tax revenues from the Tamar reservoir in 2020, which will not put it over the NIS 1 billion threshold for putting the fund into operation.

Only in 2021, when tax revenues from Tamar will amount to NIS 1.6 billion, will the Israeli Citizens' Fund be able to operate - another one-year postponement, from 2020 to 2021, in the fund's operation.

NIS 500 million vanished because of Leviathan

The figures given to Farkash-Haochen do not include the fact that the Leviathan reservoir recently won an Israel Electric Corporation (IEC) tender at the expense of a large quantity of gas that IEC was supposed to buy from Tamar. Besides some reduction in the electricity rate, the IEC tender won by Leviathan will reduce the sovereign wealth fund's proceeds in 2020-2022 by NIS 500 million.

Ironically, the delay in operating the fund rescued the government from great embarrassment, because the process of establishing the fund has made very little progress to date. Under the Sovereign Wealth Law, the fund will have a council, investment committee, and audit committee. The council is to have seven members and the investment committee five members.

What has actually been accomplished? Very little. A search committee headed by Judge (ret.) Moshe Gal was appointed by Minister of Justice Ayelet Shaked. Other members included the Prime Minister's Office director general, Ministry of Finance director general Shai Babad, the deputy governor of the Bank of Israel, and Prof. Momi Dahan of the Hebrew University of Jerusalem as a representative of higher education. Sources inform "Globes" that the committee interviewed a number of candidates, but had trouble deciding whom to recommend.

The search committee has not met in recent months because of delays in the appointment of a deputy governor for the Bank of Israel, who will be a committee member. Due to the additional elections and delays in forming a government, it is unclear when, if ever, the current committee will resume its work.

Published by Globes, Israel business news - en.globes.co.il - on December 4, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Leviathan gas reservoir / Photo: Albatros
Leviathan gas reservoir / Photo: Albatros
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