Gov't cos can invest NIS 1b in Israeli startups

Yaakov Quint Photo: Einat Levron

Israel Railways, Israel Electric Corporation, Israel Postal Company, and Amidar can buy startup shares without ministerial approval.

Government companies will be able to invest up to NIS 1 billion in startups on a fast track that does not require cabinet approval or approval from the ministers responsible for the company. According to the fast track approved yesterday by the cabinet, the director of the Government Companies Authority will be authorized to approve limited share investments in a startup. The decision will become effective within two weeks.

The Government Companies Authority initiated the measure a year ago under previous director Ori Yogev, and it was furthered by current director Yaakov (Yanki) Quint.

The Government Companies Authority director's authority to approve investments in startups was limited to up to NIS 65 million per company or 3% of the equity of the government company making the investment, whichever is lower. On the other hand, the volume of shares that a government company can buy in the fast track was limited to 20% of the startup's shares. Every government company can make several such investments with a cumulative total of NIS 20 million a year in the first three years and NIS 40 million a year starting in the fourth year.

The original decision limited the cumulative amount that a government company could invest in startups to NIS 200 million, but it was decided at yesterday's cabinet meeting to increase this amount to NIS 1 billion per investing government company.

Another restriction states that approval by the Government Companies Authority director is contingent, and can be appealed within 30 days. The cabinet decision provides two ways that such approval can be appealed: The "red track" allows the ministers responsible for the company and the Government Companies Authority itself to return the request to the ordinary track of government approval, and the "orange track" entitles the Ministry of Finance Budget Department (if the company's budget is funded from the state budget, such as NTA Metropolitan Mass Transit System and Netivei Israel (National Transport Infrastructure Company) and the Public Utilities Authority (electricity) and the Israel Water Authority (in deals that could affect government rates) to oppose approval, in which case the minister responsible for the company can approve the investment without cabinet approval.

In order to prevent misuse of the fast track by management of government companies, it was decided that investments in this track must be part of the core business of the government company making the investment. It was also decided that the investment can be made only after the startup has built a prototype, so investments cannot be made in startups still at the alpha stage or those in an incubator.

It was also stipulated in yesterday's cabinet decision that an inter-ministerial steering committee would be set up, headed by the Ministry of Economy and Industry director general and including the head of the National Economic Council, the Government Companies Authority director, the Israel Innovation Authority CEO, and the Ministry of Finance budget director. The committee's job will be to remove regulatory barriers and promote innovation in government companies.

Never-ending bureaucracy

Last October, the Government Companies Authority ordered the formation of mechanisms for devising a policy that will encourage activity involving innovation. The Ministry of Finance said that it was aware of calls and interest on the part of startup entrepreneurs dealing in postal services (relevant to the Postal Company), protection of infrastructure from attacks (relevant to companies such as Israel Electric Corporation (IEC) (TASE: ELEC.B22) and Israel Natural Gas Lines), energy saving, various uses pertaining to roads, and even government housing company Amidar. The Ministry of Finance says that the fact that the government companies have monopolies in infrastructure is forcing startups lacking cooperative efforts with local companies to do business overseas.

In the current legal situation, a government company must get through obstacles before it can get approval to buy shares or establish a joint company with other investors. Buying shares in a privately owned company is a deal requiring cabinet approval, and the two ministers responsible for the company (the minister of finance and the minister responsible for the company, such as the minister of transport or the minister of national infrastructures, energy, and water resources) must submit a request for cabinet approval. Then-Mekorot National Water Company CEO Shimon Ben-Hamo told "Globes" how his company had lost a business opportunity to be a partner in water purification facilities in Romania because of the regulatory requirements. "We wanted to found a company with a local partner. We went to the Government Companies Authority. They said, 'A great idea. Prepare a proposal, and we'll run with it.' In 2012, we presented it to Minister of National Infrastructure, Energy, and Water Resources Silvan Shalom and Minister of Finance Yair Lapid. They both supported it, but by the time it came up for government approval, there were elections. They told us from the beginning, 'Don't wait for government approval. The partner will establish the company and give you an option to acquire 70% of it for NIS 5,000. As soon as the government approves it, you can exercise the option. The partner registered the company in 2012. Now, in 2017, we still haven't gotten government approval."

Government defense companies Rafael Advanced Defense Systems Ltd. and Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) did manage to get over the regulatory hurdles when they got a special fast track for a joint venture. There is no limit for the amount of investment in the fast track for defense companies, and the proportion of holdings is limited to 50%.

Published by Globes [online], Israel business news - - on May 8, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Yaakov Quint Photo: Einat Levron
Yaakov Quint Photo: Einat Levron
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