leviev - Haaretz - March 2, 2008
London home of Israeli tycoon Lev Leviev. Photo by Haaretz
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The young Italian suddenly turned serious. "We have a lot of work ahead," he told me gravely. He helped himself to my ballpoint pen, asked the waitress for a napkin and started to write.

Work? What on earth?

The young man was a regional manager in charge of the Eastern Europe and Middle East division at one of the world's five biggest companies, a multinational that, until the crisis, had also been one of the world's most highly esteemed companies. A few days before, his office called to ask that I meet with him during his visit to Israel, to exchange views.

I'd held any number of meetings of the type since the Oslo Accords; people from big companies drop by Israel to study the land up close. They like to meet not only with business leaders and politicians but also with journalists, and analysts who know the market inside out.

Meetings of this sort usually have three topics. The first is Tel Aviv: How amazing it is, how lively and cheerful, and how great the food at the restaurants is. "I didn't know Israel was so Western," they usually say.

Then the conversation turns to politics: the Israeli-Palestinian struggle, the peace process and the scandal du jour involving the prime minister or some minister or other. Then it moves onto high-tech: startups, venture capital, Israeli innovation, the contribution of the Israeli army's secret divisions to industry, the great wave of immigration from Russia and the conquest of Nasdaq.

But this young man was not into polite chitchat about salads and struggles. He was smart and very experienced in international financing. He was more the type for blunt questions with crisp answers.

"Can you name the five most important families in the Israeli economy?" he fired at me.

"You mean the big companies? Teva, Check Point, Israel Chemicals?" I tried.

"No. I know the technical stock-market data. I want the names of the families, the people who control your economy."

I told him. He wrote down every word, pausing to ask questions: Who is diversified, who is focused, who is politically involved, who is involved in the press.

That meeting, roughly a year ago, ended late. He invited me to call and drop by for a drink when I happened to be in the area. "I have some fascinating stories for you," he promised, got into his limousine and drove away.

By the next morning I'd forgotten the whole thing.

Yet that meeting has come back to mind time and again in recent months. The first time was when an Israeli investment banker told me about a new wrinkle: When they offer deals to foreign investors, they're asked about "the Israeli families" and whether one of them should be brought on board to the investment.

"One of the big global hedge funds called. They were looking at buying a big finance company in Israel," the banker said. "The hedge fund started background checks and then called back to ask whether I thought one of the Israeli families should be brought into the deal. They'd realized that in Israel, it doesn't pay to do business unless you're connected with one of the families. You need protection. You need to be in the club." You need, in short, connections in government and the press, he summed up.

The first manager to ask me directly about "families" was Italian. The first foreign paper to devote an article to the Israeli families was also Italian, the highly respected Corriere della Sera. Italians know all about families.

Tel Aviv on the Tiber?

The meeting and indeed the whole topic came to mind again last week as lobbyists and representatives of the gas companies warned - in the local papers - that the Sheshinski Committee's recommendations would scare off foreign investors. Nobody would do business with an Israeli government that "changes the rules," they wailed.

A government that changes the rules of the game irrationally, or unreasonably, just because a given industry is making huge profits, can hurt its image among foreign investors.

But that's only true if the decision is unreasonable and not transparent. That wouldn't seem to be the case with the Sheshinski recommendations, nor is the Finance Ministry likely to take a risk like that.

The impression is that in the 15 years since foreign investors began to massively target Israel, they complain about the government mainly when they're already invested, have made monopolistic fortunes, feel the investment has run its course and want to get out, profits intact.

But when they're contemplating a new investment, foreign investors look at other things: growth, the state of the relevant market, the labor market, innovation and political risks.

And, lately, they're taking an interest in the families and are asking whether, to work in Israel, they should connect with one of them.

The change in dialogue from the degree of sophistication in the economy and high-tech to the families is bad news for the Israeli economy. If Israel gets branded as a place run by a handful of business groups, like Thailand, Turkey and other emerging markets, it will be a loss of historic proportions.

Foreign investors horde to China despite the corruption. But Israel isn't China. It can't afford the same things China can. Nor are we Italy, riddled with rot and whose economic competitiveness has been deteriorating for years. Silvio Berlusconi has dealt one blow after another to the country's image, culminating in serial sex scandals, and the business community that had supported him belatedly realized that its image is under threat, too.

But Italians have Italy and they aren't surrounded by enemy nations. They can afford, perhaps, to drop in the international rankings. We can't. We must move in the other direction.

Brand Israel and Brand Tshuva

The stability of the Israeli economy in the wake of the financial crisis and the successes of Israeli high-tech are a great opportunity to change the international dialogue and upgrade the Israeli brand - to move the dialogue from struggle to entrepreneurship, from Gaza to innovation, from Iran to economic growth in a hostile environment.

Israel's brand is still all about innovation and high-tech, not monopolies and families. But that could change, causing us tremendous harm.

The Jewish state deserves an exciting economic story, not a tale of the Five Families controlling great monopolies who send armies of lobbyists to fight the good fight in the Knesset.

The face of Israel's economy should be stories like ICQ, Iscar and Check Point. The story of Yitzhak Tshuva was exciting when he bought the Plaza Hotel in New York and found gas in the seabed. The Tshuva brand - as an Israeli icon - should be all about entrepreneurial spirit and man of the people makes it, not lobbyists battling government committees.

The battle over the Sheshinski Committee, and its interim recommendation that the state take a bigger tax bite from oil and gas companies, has just begun. But the public interest has won one, and not because of the recommendation - - it's too soon to say how that will work out. Yes, the devil lies in the details, and the firebrand orators on both sides know perfectly well how vast the uncertainties are.

No, the public interest won because just a few months ago there had been no debate at all about royalties on the vast gas finds in the sea. It won because matters of tremendous importance had been finalized behind closed doors, without public debate, without numbers, without scenarios. The big companies and their armies of lobbyists controlled the debate.

That has changed. Now we hear two voices, albeit shrill ones. One is screaming that foreign investors will flee and the gas will stay in the seabed and we mustn't change the rules of the game. The other is screaming that the public deserves a fair share because these are national assets and the tycoons shouldn't get it all.

The truth doesn't lie in the middle. It lies somewhere else. It's the job of the Finance Ministry and the legislators to balance business interests (creating a welcome environment for sophisticated players who bring know-how and will improve productivity ) and the public interest (don't give away national assets to a handful of well-connected people ).

It's their job to listen to the business people and ensure that the fiscal environment remains welcoming for business, and for gas and oil exploration, while making sure that the economy is a competitive place where the winners are the good guys, the efficient ones, not the ones who know how to manipulate the system. Or what's left of it.