Why Doing Business in Israel Is No Fun Anymore

The days of the big tycoons and sweetheart deals for big companies are over. There’s too much regulation and too little control.

Bank of Israel chief Karnit Flug presenting the new 200-shekel bill, December 2015.
Bank of Israel chief Karnit Flug presenting the new 200-shekel bill, December 2015. Emil Salman

Not many things win wall-to-wall consensus in Israel, but if there’s one, it’s that the state suffocates business. Or anybody wanting to do business. They’d need one of Bibi’s submarines to avoid drowning in the sea of red tape – licenses, permits, more permits, taxes and fees and paperwork, and that’s before they can sell so much as a peanut.

Speaking at TheMarker conference on society and the economy last week, Bank of Israel Governor Karnit Flug took the audience aback with a story about a kibbutz in southern Israel that wants to set up a new factory in the stead of one they closed down. It can’t get the new plant off the ground because of government obstacles, Flug said.

Flug usually confines her speeches to macroeconomic policy and talks about the Israeli economy from a bird’s eye view. This time she came down to the micro level, hoping that talking about the problems of an individual company would better drive the message home.

The seemingly endless catalogue of papers that the business needed before it can start operating included permits from fire officials and a number of ministries including Environmental Affairs and Health; the Israel Antiquities Authority, the Home Front Command, local authorities and more. And each and every one of those bodies made its own demands. Handling each one takes time and money, which is why businesspeople resort so often to machers – fixers – middlemen who handle this headache for them. They may not be able to save you time, though.

Nu, Israel, you shrug – that’s life. But there’s a price to all this bureaucracy. The harder it is to do business in Israel, the more the difficulty impedes job creation and economic growth. Entrepreneurship is stifled, resource allocation is inefficient and the upshot of all this is that the cost of living in Israel is higher.

Taking care of business
Israel's ranking in the Doing Business index

Bureaucracy bears a price, and the governor named it when describing the kibbutz factory. But that’s just the direct price of the kibbutz’s costs on trying to build this business that can’t fly yet. The indirect costs are even higher and they certainly do impact our cost of living in Israel, and the quality of service we receive, and our productivity. They even lie behind the low pay in many areas. In the index tracking the ease of doing business, Israel fell to 52nd place, from 26th a decade ago. We’ve become enured to businessmen wailing about the excessive regulation in Israel, and to the threats that they’ll pull up roots and move. But there are also legitimate complaints that require handling.

The last decade has been marked by the fall of the Israeli tycoons and the recognition of ills, including economic concentration, sweetheart relations between big money, big business and big media, haircuts on the stock market, gargantuan executive salaries that were completely unmerited by performance – in short, ways that inefficient businesses jacked up costs for everybody.

It’s good that they’re gone because business can be looked at more cleanly, to see what contributes to the economy and what does not, and therefore, what should be encouraged and what shouldn’t be.

Many of the newest ventures in Israel are high-tech, but even though the cost of money is cheaper than ever thanks to low interest rates, there’s been no tidal wave of investments (leaving Intel out of it, and its $6 billion upgrade in Israel, and SodaStream moving its factory from the West Bank to the Negev at a cost of $80 million).

Israel is, all in all, pretty generous in encouraging business. The biggest amount of all has gone to Intel, which has received $1.5 billion in various Israeli government grants over the years, and which also pays a seasonally adjusted measly 5% corporate tax on its Kiryat Gat plant.

Intel plant in Kiryat Gat: Still Israel’s best workplace.
Alberto Denkberg

SodaStream has received $15 million in grants and tax breaks, and pays 9% corporate tax. But its CEO, Daniel Birnbaum, said at TheMarker conference that he regrets setting up business in Israel, because of the obstacles regarding use of land, hiring Palestinian employees and worker training. In any case, 98% of what his plant manufactures is for export, and it’s soda, not natural resources. So building the plant in Israel is meaningless – it could have been built anywhere. Some place with less red tape.

Maxine Fassberg, CEO of Intel Israel, feels the problem with Israeli bureaucracy is that “there’s no baal bayit,” – nobody’s in charge. Businesses find themselves working with endless local and national authorities, but there’s no one address to handle all problems; and there’s no accountability in the government circles when things don’t work. Each office may have a point as far as it’s concerned, but when businesses fail to open, the whole state has a problem.

Fassberg suggests the government create a position, “commissioner of improving the handling of business encouragement in Israel.” Say Israel does, pays him well, sets him measurable goals such as making sure all permits etc. arrive within 30 days of application. Would it work? No – this or that authority, the fire department or the local council would inevitably gum something up and he wouldn’t last a month. There is no meaning to a system of reward and punishment for a single person, however lofty his position, unless he is given real powers.

Economic processes are usually driven by positive and negative incentives. Government licensing clerks are not particularly incentivized to work at Road Runner speed. Why should they? There’s no bonus or even a letter of appreciation for efficient work. The result is that people despair of doing things alone and turn to fixers, which opens the door to corruption.

So how can Israel make doing business easier? The key lies in reforming the public sector, local and central government. The goal should be ambitious: to become one of the 10 countries in the world where it’s easiest to do business, through incentivizing the ministries and government offices to meet goals.

According to Flug’s statistics, the areas where Israel is worst include permits for construction, permits to connect newly constructed buildings to the electricity grid, contract enforcement, registration of properties and tax payment. Ironically, Israel is quite efficient at closing down businesses (where it ranked 31st) versus opening them (ranking of 41).

A while back, I went into a neighborhood kiosk and noticed that its owner, a woman around 70 years old, was looking down in the mouth. She showed me a letter she received from a lawyer, demanding she pay 100,000 shekels (around $25,000) because she had shown, on the television installed in her business, a soccer game that was considered commercial broadcasting watched by more than 15,000 people. Ridiculous – her kiosk couldn’t contain 15,000 sitting together to watch a match. It had only one chair, hers, anyway.

Yet she had to hire a lawyer to make this absurdity go away. The lawyer cost less than 100,000 shekels. But there was also a cost in anxiety and stress, which she paid in full. The unbearable ease at which businesses threaten the little man through their batteries of lawyers is costing us all heavily – and even that drags on entrepreneurship and growth.