Protecting Sensitive Israeli Infrastructure From China’s and Dubai’s Money

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Chinese President Xi Jinping, left, and other top leaders in Beijing last December.
Chinese President Xi Jinping, left, and other top leaders in Beijing last December.Credit: Yao Dawei/AP

In 2015, Shandong Landbridge, owned by Chinese billionaire Ye Cheng, won a 99-year lease to Australia’s Port Darwin when it was privatized, after offering $400 million dollars – 25 times its annual profits. Shortly after the deal was announced, the U.S. government expressed concern that “port access could facilitate intelligence collection on U.S. and Australian military forces stationed nearby.” Indeed, the U.S. Navy uses the port. Sound familiar?

That same year, the Chinese firm SIPG won Israel’s tender to operate the private bay port adjacent to Haifa Port. Here, too the U.S. (belatedly) claimed the move was nothing but another stage of China’s imperialist “One Belt, One Road” plan, whose main goal is Chinese control of foreign infrastructure facilities as a strategic economic lever. The Americans pressured the Israelis, too, to limit Chinese holdings in its infrastructure, and, in vain, to cancel the tender. However, the similarity ends here.

Australia has had its Foreign Investment Review Board since 1975 supervising foreign acquisitions of state properties, while Israel had no such controls until last year. Following the Darwin tender, the board’s authority expanded to cover real estate deals and private investments in infrastructure.

The government established a risk management center for foreign investments in 2017. An intelligence official joined the supervision. The board has to approve any deal of national security importance involving foreign investment of at least 10%. The board can also place limits and cancel deals retroactively.

In contrast, little has changed in Israel since 2015. Authorities seem to prefer to wait until a tender winner seems problematic before debating whether to intervene. There are no clear rules to evaluate suitability. A former security source says, “It happened that security officials read in the paper that a strategic asset had been transferred to foreign hands without anyone bothering to inform them.”

The diplomatic-security cabinet only decided in late 2019 to establish an advisory board for reviewing foreign investments in infrastructure, yet the board was left toothless. Morover, reviews are voluntary. The Finance Ministry’s chief economist, Shira Greenberg, was appointed as the board’s head, but substantive discussions on disqualifying foreign investments took place, in practice, in circles close to Prime Minister Benjamin Netanyahu – usually the National Security Council. Such meetings were unofficial, undocumented, unprofessional and anything but transparent.

Like with other strategic issues, Israelis prefer to decide not to decide, to postpone everything to the last minute, to welcome pressure, to embarrass, to force a pilgrimage to the Prime Minister’s Office, to hint – and only after using all evasive maneuvers making one of two choices: to miss it with eyes wide open, or to send someone to weakly announce a decision that everyone will renounce afterward.

China's activity at Haifa port could provide an opening for technological surveillance, the U.S. is concernedCredit: Heidi Levine,AP

In short, it’s a routine Levantine mess in which only one responsible adult holds the key worth billions – Netanyahu.

However, what happens when a Russian player eyeing a political foothold, or an Emirati player with deep pockets interested in Israeli assets, joins the Chinese, with their cheap capital and manpower? And who is worrying about profitability – how do we not kill healthy competition and avoid xenophobic regulation that empowers local monopolies?

Enter Strategic Affairs Minister Orit Farkash-Hacohen (Kahol Lavan), her director-general Ronen Manelis and Shin Bet security services head Nadav Argaman to take the gloves off.

The result is a thick document classifying Israeli infrastructure by degree of sensitivity. It presents the infrastructure tenders and projects due to be published in the coming years, and it proposes a professional model for deciding whether to approve foreign investments in specific projects. The report’s architects say the reason for the timing is that Israel has long been a “target for infiltration attempts by foreign states, namely China – and in light of the expected rise in investments by Gulf states in the coming months.”

Stop being ‘surprised’

The authors’ starting point was that Israel is in the midst of three unavoidable economic trends: globalization; geopolitical normalization that increases interest in Israel as an investment target; and infrastructure investment in the wake of significant technological changes in electricity markets (renewables), water (desalination) and transportation (autonomous travel).

At the same time, countries have ramped up supervision of foreign investments of their infrastructure, especially in times of coronavirus, when struggling companies provided easy targets for cheap takeovers. The entire world seeks a model balancing the need for boosting investments, maintaining competitive markets, lowering costs and increasing knowledge, and preserving national strategic interests in critical infrastructures. As the document gently puts it, “Foreign agents are liable to have interests that don’t match the country’s interests, and worse yet – are liable to abuse their access to infrastructure.”

The Strategic Affairs Ministry’s document is thus divided into three parts. The first maps sensitive infrastructure in Israel; the second sets a benchmark for international supervisory systems; and the third proposes a system suitable for Israel.

Mapping infrastructure used an innovative methodology, dividing the energy, water, communications, media and transportation sectors into 54 segments. Parameters like business concentration, who the players are, regulatory force, development expectations or existing foreign involvement are considered. The segments are also classified by security sensitivity, using criteria like potential economic damage from being shut down, risk in information leakage or exposure to intellectual property theft.

תערוכת טכנולוגיה בדובאי בתחילת דצמבר. מבקרים מעטיםCredit: Jon Gambrell/אי־פי

Managing the electricity grid, natural gas delivery, holding server farms, airports or social networks were classified as highest sensitivity; electricity delivery, oil refinery, water delivery, managing communications networks and the undersea cable were rated high sensitivity; desalination plants, cellular services and trains were classified as medium sensitivity; and low sensitivity included ownership of power stations, bus companies or toll roads.

The authors mapped 134 companies and found over 60 tenders expected in these sectors. We should hope the mapping will stop the government’s from being “surprised” every time anew and allow it, should it wish, to prepare for every tender or project, including the prospect of foreign ownership.

Stakeholder meddling

The second part of the work compared supervisory systems abroad, focusing on countries with similar regulatory characteristics to Israel: United States, Canada, Australia and Germany. Israel lagged far behind. Other states legally mandate reporting of foreign deals by the sides involved. Reporting in Israel, in contrast, is voluntary, by the regulator and with no differentiation by type of deal.

Even when the board gets a referral, it is examined narrowly. Decisions are made without legal anchoring or transparency. Canceling a deal requires a unanimous vote, which leaves substantial decisions to the prime minister. This reality has two consequences. It leads to meddling by stakeholders, absent a professional process, and it exposes the prime minister to dangerous external pressures. Therefore, the document suggests expanding the authority of the existing board and making it mandatory.

The documents proposes the treasury to head the board, which would include representatives from the Economy Ministry, the Competition Authority, the Defense Ministry, the Shin Bet and an official from the ministry related to the deal in question. Ministers from the diplomatic-security cabinet as well as a National Security Council representative would oversee the board. This arrangement would balance economic and security interest in the decision-making process, while distancing the Prime Minister’s Office from discussions. The prime minister would only be authorized to discuss appeals of disqualifications.

According to this model, the board would conduct a risk assessment of the investment regarding vital national interests and then place limits or conditions based on the assessed sensitivity.

This approach is a type of stoplight model, classifying each segment by sensitivity. Thus, the highest sensitivity (red) would require board review; moderate sensitivity (yellow) would require reporting to the board; and low sensitivity (green) would allow the responsible regulator to consult with the board but not require its approval.

This system would be operated for privatization before publishing tenders and for private deals after the deals, while obliging reporting. The board would either approve, place conditions or reject deals. Conditions would range from requiring further information from foreign investors to removing sensitive assets from the deal, limiting ownership percentage or requiring investors to leave certain activities in Israel.

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