Five minutes before the end of a session of the special Knesset committee for supervising the state fund for natural gas revenues, committee chairman Avi Dichter of Likud reminded the participants what the fund could have been doing for Israel right now.
“We need to ask whether using the money only in a few years suits the fragile situation we are currently in,” said Dichter. The law that created the “wealth fund,” as it is known, states that the money should be managed with a long-term outlook in order to aid future generations.
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The fund was created out of fears that politicians would use gas revenues to fulfill short-term, populist goals, or as Energy Minister Yuval Steinitz said, to prevent the Dutch disease – when natural resource discoveries enrich state coffers, strengthen the local currency and thus weaken the economy in the long-term.
The law governing the fund states that the Knesset, at the request of the government, can permit the fund to loan money to the Finance Ministry in unusual situations, such as an environmental disaster that hurts the economy – which is what is happening in Israel now, amid the coronavirus pandemic.
Should the government ever get around to legislating the 2020 budget and look to the fund to cover the deficit created by the coronavirus crisis, it will discover there’s not much money there. As of the end of 2018 – the last year for which the Finance Ministry’s accountant general released the figures – the fund contained only some 449 million shekels ($130 million).
The fund, as well as the bodies that are supposed to manage it, hasn’t actually been created yet. It was slated to begin operation only once it contained at least 1 billion shekels, which was supposed to happen by the end of 2021. Over the past four years, it hasn’t actually taken in any new money. According to the Knesset’s Research and Information Center, the last year natural gas royalties were collected was 2015, when some 125 million shekels entered the fund.
This wasn’t the original plan. In 2013 the Bank of Israel forecast that between 2018 and 2022, the fund would take in some $3.9 billion. If this had happened, the fund would already be up and running – and perhaps the government would already be using the money now, at this time of crisis. The massive disparity between the forecast seven years ago and the current situation demands an explanation. Senior Energy Ministry officials provided no such explanation during Tuesday’s Knesset session.
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However, a report drafted by the Knesset Research and Information Center found the disparity stems primarily from additional exploration and development costs at the Tamar gas reserve that were recognized for tax purposes, including expanding the Tamar gas field and laying an additional natural gas pipeline from the field to the Ashkelon coast.
The Tax Authority does not provide any information on its tax deliberations with private companies, even when they affect the Israeli economy as a whole. We can only hope that Dichter will summon the Tax Authority chairman to the committee to ask why the authority recognized billions of extra dollars in expenses, decimating the wealth fund’s revenue.
Even looking forward, perhaps we should be scaling back our expectations of the fund. Shimon Cohen, head of the accounting and economics division at the Energy Ministry’s Natural Resources Administration, told the committee, “The plan was that only after 10 years would Sheshinski taxes start accumulating, and we’re on target,” referring to the Sheshinski committee, which called for increasing royalties on natural resource exploitation. Steinitz added, “We’ve already received billions and we’ll ultimately receive tens and hundreds of billions of shekels from the natural gas.”
Energy Ministry Director General Udi Adiri explained, “The big money will arrive in 2023 onward.” And yet, the royalty payments are based on the profitability of natural gas. Natural gas and oil prices have crashed in the wake of the coronavirus crisis, which may reduce companies’ revenues and profits, and subsequently the state’s tax revenues.
A nonprofit lobby aimed at promoting the public’s interest, Lobby 99, gave the committee a report casting doubt at the fund’s profitability forecasts. “Over the next decade as well, the wealth fund won’t be collecting revenue in keeping with government forecasts or the gas companies’ forecasts,” it states.
Forecasts by the gas companies, primarily Yitzhak Tshuva’s Delek Drilling and Kobi Maimon’s Isramco, which say payments to the fund will total $7.1 billion by the end of the decade, suffer from “excessive optimism,” the report states. “The gas companies’ revenues are likely to be significantly damaged amid the expected increase in competition as the Leviathan gas reserve comes online and the Karish and Tanin gas reserves come online as expected in 2021, the collapse in global energy prices and the high risk entailed in gas export deals with Jordan and Egypt.”
All of this means the wealth fund is likely to undershoot forecasts. “The gas companies’ forecasts for the next decade include average annual sales of $4 billion a year. We estimate that based on an analysis of the natural gas economies in Israel, Jordan and Egypt, this is an overestimate, and we forecast average annual gas revenues of only $2.2 billion a year. Thus, the wealth fund will collect only about $4.2 billion over the next decade,” the document states.
“The government argued that the wealth fund would collect hundreds of billions of shekels, and that they would be invested in education and welfare for future generations, but results to date indicate that all the forecasts are off,” states Lobby 99 VP Merav David. “The Bank of Israel and the Finance Ministry said that by 2018 the companies would start paying Sheshinski taxes [natural gas levies]. The energy minister distanced himself from these forecasts in [Tuesday’s] committee discussion, and didn’t offer an explanation for the fact that the wealth fund is yet to see a single shekel. The committee needs to investigate why the forecast was false and fix the law so that Israel’s citizens can profit from natural resources, instead of the lion’s share of profits remaining with the gas companies.”
During the session, Steinitz stated that between 2012 and 2019, Israel’s revenues from natural gas and oil drilling had totaled $5.5 billion from royalties and $6 billion from corporate tax. This money went straight to the state budget, instead of into the wealth fund.