Treasury team says shorten ICL's Dead Sea concession

Israel Chemicals Photo: Eyal Yizhar
Israel Chemicals Photo: Eyal Yizhar

The team recommends a tender for the concession, with the formation of a government company as a fallback.

Bringing forward the end of the Dead Sea concession to 2020, publication of a tender with a minimum price, and forming a government company to represent a viable alternative - these are the main recommendations of a team headed by the chief economist at the Ministry of Finance, Yoel Naveh, appointed to recommend courses of action as the end of Israel Chemicals' (TASE: ICL: NYSE: ICL) concession approaches. Moshe Kahlon decided to set up the team shortly after becoming minister of finance, while the Sheshinski committee appointed to examine the state's take from exploitation of natural resources came to the conclusion that it was essential that the state should immediately formulate its position as the end of the concession approached, because of the prevailing uncertainty and Israel Chemicals' announcement that it would cease to invest in plants and production infrastructure.

In fact, one of the main fears expressed by members of the government team was that Israel Chemicals would neglect the production infrastructure at the Dead Sea, particularly the evaporation ponds. "As soon as the investment horizon shortens, it becomes very difficult for the board of directors to approve investments with payback periods of 20 or 30 years," a source involved in the committee's work told "Globes". "Investment in the evaporation ponds has a very long payback period, and if Israel Chemicals stops investing in the evaporation ponds they will become useless, which will impose very heavy costs on whoever replaces it," the source added.

Against this background, the team recommends bringing forward the end of Israel Chemicals' concession at the Dead Sea by a decade, to 2020. On the question whether Israel Chemicals will agree to a shortening of the concession period, the committee members were of the view that the uncertainty was having a deleterious effect on the company, and that it would therefore have an interest in reaching an agreement. The committee further recommends that should Israel Chemicals not win the tender, the entity replacing it should have to make a preset annual payment to it. The team recommends that the government should hold a tender for the future concession to mine resources from the Dead Sea. Aware of Israel Chemicals' advantage in such a tender, since it can estimate precisely the costs of extracting the natural resources, the team recommends that the state should take two main steps: it should set a minimum price; and it should form a government company that will take up the production rights if the tender fails. The team believes that setting up a government company will represent a credible alternative that will put pressure on Israel Chemicals to make a competitive bid.

On the very question of the mining of natural resources, the team recommends continuing production from the Dead Sea, despite the objections of environmental experts who claim that production endangers the hotels on the Dead Sea waterfront, and could lead to a drop in the surface level of the lake and to flooding of the hotels. In an attempt to mitigate the damaging effects on the environment, the team recommends that environmental regulation should apply to all areas covered by the concession, and that a levy should be imposed on drawing water from the Dead Sea, with sanctions for failure to abide by salt harvesting conditions.

Another interesting recommendation by the team concerns royalties on downstream products. The team proposes that these products will not be subject to royalties, even while the state and Israel Chemicals are parties to an arbitration procedure on the state's demand to collect royalties on downstream products, a demand that has so far led to a court ruling obliging Israel Chemicals to pay the state compensation of NIS 200 million.

The team was appointed on August 25, 2015, following the recommendations of the Sheshinski 2 Committee, which in 2014 recommended a surtax on Israel Chemicals' profits from minerals production. Naveh's team included representatives of the Ministry of National Infrastructures, Energy and Water Resources, the Ministry of Economy and Industry, the Ministry of Environmental Protection, the Ministry of Justice, the Israel Tax Authority, and officials from the Ministry of Finance Accountant General Department and Budgets Department. Former Ministry of Finance director general Yarom Ariav, and Prof. Motty Perry, an expert in games theory, served as economic consultants to the team.

The team was meant to submit its conclusions by May 1, 2016. Up until September 2017 it held 20 meetings. Among those who appeared before it were representatives of industry and the hoteliers, Haifa Chemicals, representatives of communities in the Dead Sea area, The Dead Sea Preservation Government Company, the Geological Survey of Israel, law and environment pressure group Adam Teva V'Din, former Ministry of Finance budgets director Gal Hershkovitz, and Prof. Eytan Sheshinski, who headed the committee on taxation of natural resources.

Naveh intends to publish his interim report for a public hearing in two weeks' time. A draft of the report has been distributed to members of the tem.

Published by Globes [online], Israel business news - - on January 22, 2018

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

Israel Chemicals Photo: Eyal Yizhar
Israel Chemicals Photo: Eyal Yizhar
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