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Carmelton's Carmel Tunnel project is in danger of never getting off the ground, according to a review by a bank. The review determined that the country's two largest banks - Bank Hapoalim and Bank Leumi - cannot finance the NIS 600 million in loans needed for the project due to stricter credit limitations adopted by the Bank of Israel.

The Carmelton group is comprised of Spain's Dragados, Discount Investments' Property and Building, real estate developer Ashtrom and FIBI Holdings. Since the member companies have a joint control agreement, the new directives mandate associating the entire Carmelton debt with each individual shareholder. Any bank planning on financing the build-operate-transfer (BOT) project would have to view each Carmelton member as having an additional NIS 600 million in debt.

Property & Building is part of the IDB group, which would boost credit to the already heavily leveraged group by NIS 600 million. This would drive the major retail banks over the limit in lending to the six major Israeli borrowers meaning they cannot be involved in funding Carmel Tunnel.

In 1999, the Carmelton group signed a financing arrangement with Israel Discount Bank, but in August 2002, Discount rid itself of the agreement, saying the deal was not financially worthwhile. Discount claims the decision stemmed from changes in the project that were not initially vetted by the bank. Carmelton sued the bank for reneging on the agreement, and the matter is winding its way through the Tel Aviv District Court.

Apparently, United Mizrahi Bank, First International Bank and Union Bank are unable or unwilling to finance such a large project, so Carmelton will be entirely locked out of Israeli financing for the project, which casts serious doubt over the entire project.

In September 1998, Carmelton won the state's tender to construct two two-lane tunnels under downtown Haifa, linking the city's northern and southern peripheries. The state decided that the 5.5-kilometer tunnels would be built and operated by a private entrepreneur who would finance the construction and collect tolls from users during the pre-set operation period before returning the tunnels to the state.

The original BOT agreement determined that Carmelton would pay the state NIS 267 million in royalties and finance 3-4 years of construction work. However, statutory approvals were consistently delayed due to nearby residents' objections, and were granted only recently.

The project is estimated to cost $200 million, and if no alternative financing, for example, via a financial market issue, is found, the state will have to step in. If the state decides to fund the project, the project will be further delayed by a number of years and its full weight will fall on the annual state budget.

The only solution to Carmelton's problem would be relaxing the Bank of Israel directives, whether in its stricter borrower group definition or in its definition of the six major borrowers. Supervisor of Banks Yoav Lehman has said more than once that he is not interested in seeing the new directives limit financing to projects, and if it becomes apparent that this is a problem, the regulatory bodies will seek a solution.