Israel May Open Infrastructure Projects to Investment Through Publicly Traded Funds

A special committee tasked with the issue submitted interim recommendations to the Israel Securities Authority and the tax authority to open the new investment venue

A bridge being built near Israel's Highway 1
Olivier Fitoussi

A committee for encouraging the establishment of funds for infrastructure investment has submitted interim recommendations to the Israel Securities Authority and the Israel Tax Authority that would enable the public to invest in infrastructure projects through publicly traded funds.

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The two authorities are responsible for arranging any such activity. The recommendations include a host of rules and tax benefits, based on the REIT law, which regulates real estate investment funds.

The committee recommends giving infrastructure funds a special tax regime, based on taxing fund shareholders directly rather than the fund through the corporate tax. These bodies’ revenues would be tax exempt, save for exceptional revenues, in order to encourage investment by provident funds. Rules were also proposed for funds and shareholders setting off losses.

The committee also recommends giving fund entrepreneurs tax benefits, like postponing tax payments for moving infrastructure ventures to the fund in exchange for issuing shares. The upshot is controlling shareholders would pay a reduced purchase tax by postponing the date of paying capital taxes/betterment taxes until the assets are realized or when the fund has its IPO.

90% of earnings

Another recommendation was to require infrastructure funds, which will be proprietary limited companies, to be registered on the stock exchange within three years of their establishment. At no point during their first five years of trading will five or fewer investors be allowed to hold 50% or more of any fund, in order to increase the spread of investors.

The funds will have to distribute 90% of their earnings to investors, which differs from the limited company model that gives discretion regarding profit distribution strictly to the board. However, profits from selling infrastructure assets will be divided within 12 months from the point of sale.

The funds are to invest in infrastructure projects, at least 75% of them in Israel, the committee recommended. Such projects include all facets of production, treatment and/or delivery of water, sewage, refuse, electricity and fuels as well as road construction and operation; mass transportation, sea and air ports, including parking lots for them; the establishment and operation of telephone, internet, radio, cellular, cable and satellite infrastructure; or any infrastructure operated through a partnership agreement between the state and the private sector.

The fund’s leverage will be adapted for the investment horizon for infrastructure projects, and according to a formula set forth by the committee, which Nehemia Kind, the deputy accountant general and attorney Meir Levin, the deputy attorney general, headed.

“The funds will be able to serve as a significant tool for funding infrastructure projects, and to lead to increased competition in the credit market for financing projects and in the price of the projects,” the committee report stated. “Specifically, the committee sees great importance in increasing competition regarding debt organization for infrastructure projects, a field that is characterized by a most limited number of players. Additionally, the committee believes the funds’ securities will be an investment tool that could be significant for the public in general and for institutional bodies in particular, to direct funds into the capital markets and to strengthen trade on the stock market.”

The committee stated it believed that increasing financing sources for Israeli infrastructure projects will reduce credit costs and increase the state’s ability to carry out projects of national importance.

Israel’s infrastructure projects are worth 50 billion shekels, and projects worth tens of billions of shekels more are in the pipeline, but the funding sources are relatively sparse, mainly major banks and insurance companies. Dave Lubetzky, CEO of IBI Investments, says he believes the new funds will contribute to competition for infrastructure funding, and will support the entry of midsize funding bodies, like investment houses.

“The global experiment with infrastructure funds is good,” he says. “We welcome the allowing of such types of corporations in Israel. In general, we believe that the REIT structure has many advantages for investors compared to investing through the usual public company, as management and financial expenses are known in advance. Moreover, the obligation to distribute a dividend, and the fact that the funds are very focused on a specific field, in addition to being fully tradable, makes these instruments successful.”

Avi Berkowitz, the deputy to the chief investments manager at Meitav Dash, said he believed the funds would increase institutional involvement in infrastructure funding. “These funds will allow the public to be exposed directly to investment in infrastructure ventures, something that had been prevented until now,” he said. “It’s an investment horizon that enables receiving a steady and stable cash flow over time and is expected to allow diversifying an investment portfolio.”

An ‘attractive investment tool’

Anat Guetta, the chairwoman of the Israel Securities Authority, commented that she has made developing and expanding the capital markets a major goal of the authority for the coming years. “The new investment horizon is an excellent example of fulfilling this goal, and of the connection between strengthening the capital market and strengthening the economy,” she said. “It is an attractive investment tool for investors who both want to increase trade on the stock market and to help develop and fund infrastructure ventures of national importance in Israel.”

Eran Yaakov, the tax authority deputy chairman, says that the combination of the tax break and the obligation to distribute profits every year make the arrangement attractive to investors. “I am full of hope that the matter will indeed expand the Israeli capital market through advancing the development of infrastructure on a national level.”

The committee included representatives from the securities authority, Finance Ministry, Justice Ministry and National Economic Council. The committee will accept written proposals from the public regarding the interim recommendations through November 15.