A 2014 Knesset law mandating the creation of a sovereign wealth fund aimed at ensuring that Israeli citizens benefit from the country’s natural gas bonanza, as well as private investors, has not yet been implemented.
Not only is there no fund; not a single person has been taken on to set it up or run it, and a recruitment committee established in 2016 for two years under a retired judge broke up without appointing a soul.
As far back as 2012, it was predicted that the minimum level of cash for the fund to start operating — NIS 1 billion ($290 milllion) — would be reached, and even exceeded, by 2018.
But just NIS 450 million ($130 million) in levies has been collected to date and that was from the Mari-B Yam Tethys gas field, which closed in 2012. The sum was paid in 2013, and not a dime more has gone into the fund since then, according to the Globes business daily. The money is being managed temporarily in a wealth fund by the Finance Ministry’s Office of the Accountant General.
Current predictions are that the fund will not kick off until next year, at the earliest.
At a Knesset Finance Committee meeting held last Monday to discuss the Bank of Israel’s 2020 budget, committee chairman Moshe Gafni said, “We have failed in everything to do with this fund.” He added that the failure “tainted” all the institutions involved because of the total lack of responsibility they had shown.
The fund idea has been around since 2011
The fund, whose proceeds are to be spent on strategic projects for the State of Israel, was recommended by a committee set up in 2009 and led by Prof. Eytan Sheshinksi. The committee’s recommendations (with amendments) were enshrined in the Petroleum Profits Taxation Law (better known as the “Sheshinksi law”) in March 2011. That law left royalties on natural gas (paid to the Energy Ministry) at a uniform 12.5 percent, and went on to detail the way a new, additional, levy on profits (to be transferred to the tax authority) would be calculated. It ordered that a separate law detailing the mechanics of the fund be submitted to the Knesset by November of that same year.
It took three years.
In the meantime, in 2012, an inter-ministerial committee headed by the chairman of the National Economic Council, Prof. Eugene Kandel, predicted that by 2018, the fund would have amassed more than NIS 1.5 billion (according to 2012 dollar-to-shekel exchange rates), exceeding the NIS 1 billion required for the fund to start operating.
The Citizens of Israel Fund Law (available only in Hebrew) was passed in July 2014.
That law determined that the fund’s capital could only be invested overseas, in foreign currency, to protect the stability of the shekel, and that only up to 3.5 percent of investment income could be spent annually on social, economic and educational projects for the first nine years.
The law called for the creation of a recruitment committee to find candidates for the fund’s council and investment committee.
A seven-member council would include representatives of the Prime Minister’s Office, the Finance Ministry and the Bank of Israel, economists, and expert public appointees. Its role would include determining overall investment policy and overseeing implementation, providing the Finance Minister with an annual proposal on how to spend the funds, and appointing the director of a department within the Bank of Israel to carry out the day-to-day work.
What happened was that a recruitment committee, set up under a retired judge, Moshe Gal, failed to make any appointments.
Furthermore, as revealed by Bank of Israel governor Amir Yaron in a letter of response to Blue and White MK Orit Farkash-Hacohen before Monday’s Knesset meeting, a row has erupted between the tax authority and the Accountant General’s office that could lead to further delays in moving the fund ahead.
At Monday’s meeting, Francoise Ben Zur, the point person for setting up the new department at the Bank of Israel, noted that none of the machinery for operating the fund had been created because nobody had been employed to fill the relevant posts.
The real deal of the century?
That such a small amount of cash has been deposited so far is mainly due to the highly controversial terms for paying the levy obtained by the main gas companies involved — Delek Drilling, owned by Israeli Yitzhak Tshuva, and the Texas-based operator, Noble Energy — particularly for the Tamar natural gas field, which started commercial production in 2013. (Delek and Noble also owned the Mari-B).
Tamar’s owners successfully argued that they deserved special conditions because they had discovered the Tamar field in 2009 and started investing in it before Sheshinksi “changed the rules of the game.”
The 2011 law exempts Tamar’s owners from paying anything in levies until they have recouped twice the cash they invested, from day one of exploration (the high-risk part) to the start of commercial production — giving them a maximum of four years to do so.
It then gives them a further period of grace via a formula. Payment only begins once the companies’ total proceeds, minus total expenses, divided by total investments, reaches the figure of 2.
When that happens, the companies have to start transferring 20% of their profits to the sovereign wealth fund (or a fraction thereoff, depending on the month of the financial year in which the payments start). As the share of expenses decreases in relation to the income that comes in, that percentage rises, reaching a maximum of 50% of profits when the formula gets to 2.8. It is capped at 50% thereafter.
In the case of the Leviathan gas field (also mainly owned by Delek Drilling and Noble Energy), and companies that follow in the future, nothing has to be paid in levies until 1.5 of the investment has been recouped, within a maximum of two years. After that, the first 20% in levies will only be paid when the formula yields the figure of 1.5. The maximum levy of 50% kicks in when the formula figure reaches 2.3, remaining at 50% thereafter.
The formula for the Tamar field is expected to reach the requisite figure of 2 later on this year, although creative accounting by the companies’ firms might push it into 2021.
It was supposed to have paid earlier, but the government allowed it to write off additional expenses.
Leviathan, which still has to recoup its initial investment, let alone meet the formula figure for the start of payment, is only expected to start transferring the levy in around four to five years time.
In 2015, the Petroleum Profits Taxation Law was renamed the Natural Resources Taxation Law to reflect the inclusion of other natural resources — mainly the minerals that Israel Chemicals Ltd mines from the Dead Sea and elsewhere in southern Israel — in the levy scheme. The law specified a different method of calculation for levies on non-oil and gas profits.
In December, Globes calculated that the levies on all the industries coming under the law would bring an estimated NIS 250 billion (roughly $72 billion at current exchange rates) into the public’s coffers over a period of 30 years — NIS 155.5 ($45) billion from the Leviathan field, payable from 2024 to 2063, NIS 12 ($3.5) billion from the smaller Karish and Tanin reservoirs (from 2024 to 2032) and NIS 82.4 ($24) billion from the Tamar reservoir (2020 to 2050). The paper was unable to provide a figure for levies to be paid by ICL.
The Bank of Israel: We did everything we could
It remains unclear whether the authorities will succeed in creating the fund’s machinery in time for the arrival of the first NIS 1 billion.
The Bank of Israel’s Yaron told the Knesset Finance Committee, “Everything that the Bank of Israel could have done – we did.”
The committee heard that the bank had already spent more than NIS 2 million ($580,000) — mainly on consultants and technology — in preparation for its role as fund operator.
According to the Globes business daily, the bank has also been reaching out to international financial institutions over the past couple of years in the search for trustees and investment managers. However, it has not been able to sign any agreements because the Finance Ministry has not given it power of attorney to do so.
Farkash-Hacohen, who in 2015 was pushed out of her job as chairperson of the Israeli Public Utilities Authority on Prime Minister Benjamin Netanyahu’s orders for vocally opposing the monopolistic control of the natural gas industry that Netanyahu was determined to push through, has asked for a Finance Committee discussion on the status of the fund. As she wrote to Israel Tax Authority head Eran Yaakov last month, she wants to know who is supervising the monies already collected and how and what steps are in place to ensure public transparency. She also wants the 3.5% limit on the interest that can be spent in the first few years to be expanded in light of pressing needs for upgrading in areas such as transportation infrastructure.