Gov't funding fails to coax tech cos away from Central Israel

Beersheva Photo: Shutterstock

One program alone has poured NIS 624 million down the drain in helping companies set up R&D centers in Beersheva, Knesset research reveals.

Despite the fast growth of Israel's tech sector and the rapid increase in revenue, company valuations, the number of new employees and the taxes pouring into the state coffers, investment by the government and Israeli and international tech companies in the country's outlying regions have failed. According to research by the Knesset, which was presented to the Economics Committee today, for a debate on increasing tech employment in the regions, 53% of Israeli tech companies are located in Tel Aviv.

The research outlined how the flagship programs of the Ministry of Economy and Israel Innovation Authority had failed such as an incentives program for tech companies to operate in Beersheva and former Minister of economy Eli Cohen program, "Putting the Periphery in the Center," which never got off the ground.

Knesset Economics Committee chairman MK Michael Biton (Blue & White) said, "There have been some successes in the periphery like bringing Intel to Kiryat Gat and making Yokneam an important center of operations, but Kiryat Gat and Yokneam have for a long time not been in the periphery."

NIS 624 million down the drain in Beersheva

One of the biggest failures presented by the Knesset research department regarding incentives for tech companies to work in outlying regions is called "Budget Track 15," in which companies that set up development centers in Beersheva received subsidies for the salaries of people who lived locally.

In the project, which began in 2010 and reached its peak in 2014, NIS 624 million was handed out - an average of NIS 2 million per employee - to a short list of companies that set up development centers in Beersheva including ECI, which raised the lion's share of the money - NIS 354 million, as well as other companies including RAD, Audiocodes and EMC.

The program, the research found, was halted two years ago. "Globes" was told that "its customers" had reduced their activities in Beersheva, or at least not increased their presence in the region despite the major capital raised from the state. ECI, for example, closed down its operations in the south, while RAD and Audiocodes did not expand their development centers and currently each one employs less than 100 people. EMC, the only international tech company that joined the program, significantly reduced the number of development engineers at its R&D center and turned it into a kind of 'offshore' center - that is to say a programming center where R&D was for new products that were not at the core of the company's activities.

A senior source familiar with the details of the program told "Globes," "Subsidizing companies to finance salaries of workers in the periphery brings in the long term activities like this that are typically offshore centers. The companies decide to set up a software center in Beersheva, instead of India or Ukraine but that's not what the meant to do. Originally, the Ministry of Economy sought to encourage tech activities - in other words R&D in the full sense of the word but unfortunately that's not what happened."

One of the problems from which the project suffered was attracting tech workers to the south. They did not flock there in large numbers. As the program only subsidized employees living in the south, the companies struggled to find suitable employees and their requests to expand the limits for which workers were subsidized to Kiryat Gat and Ashkelon were not accepted.

After the program was ended, the Israel Innovation Authority decided to set up a similar program called "Encouraging R&D offices in the periphery," as part of which the companies do not receive subsidies for employees' salaries but overall support of between 50% and 70% of R&D expenses, while most of the employees live in the region.

The program operates in a cluster of local authorities and has so far not received large demand from the companies, which out of concern of the shortage of talented employees in the periphery, and in the Covid era, encourages work from home. So far only one company has joined this track - chipmaker DSPG - which received a NIS 6 million grant last year.

One of the claims by the coordinator of the Knesset research, which was echoed by Biton, is that the "Putting the Periphery in the Center" program was never implemented.

One of the explanations was that the innovation chain was not properly budgeted and that the Ministry of Finance or Ministry of the Economy never transferred the allocated budget for the program. "The Innovation Authority didn't know the plan," Biton said during the Knesset debate.

The Israel Innovation Authority rejects these charges and claims that after it was first announced, the program was never implemented and not completed by the government bodies. "Since the press release on the subject was issued, there was no synchronized efforts by the government on the topic of 'Putting the periphery in the Center,' the Israel Innovation Authority said. "The Authority is operating several successful initiatives in the periphery including setting up R&D offices of large companies in the Galilee and launching three entrepreneurial incubators in Karmiel, Yerucham and Bnei Shimon (near Rahat)."

In the past incubators operated on a model in which entrepreneurs were given incentives to work for two years in outlying regions but most of them adopted specialties in the local economy such as food-tech and medical cannabis.

According to the Knesset data, in 2018 53% of tech companies were in Tel Aviv, 23% in the Central region, 8% in Jerusalem, 7% in Haifa, 6% in the north and just 3% in the south.

What can be done?

Although the Knesset discussed the problem no reasons for the failure of past programs were presented. In order to learn the lessons from the past, the government should refrain in the future from subsidizing employees' salaries because the tech companies tend to transfer more and more jobs to offshore roles at the expense of R&D. There must be more coordination between the many local authorities in outlying regions and they should be formed into clusters as has been done in the Bar Lev High Tech Park in the north. There should be more investment in tech entrepreneurs living in the outlying regions instead of trying to attract employees to move from the center. The government should also invest directly in education ventures for young adults and youth because the most important component is the development of talent.

One of the most successful ventures is the Weizmann Institute's Education for Science venture. For an investments of 'just' several tens of millions of shekels in Netivot and Arad, 10th to 12th grade students have been encouraged to explore science, mathematics and physics.

Published by Globes, Israel business news - en.globes.co.il - on November 29, 2021.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.

Beersheva Photo: Shutterstock
Beersheva Photo: Shutterstock
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