Legislation to establish a sovereign wealth fund, in which the state's income from Israeli natural gas wil be stashed, was approved by the government yesterday, after the plan's proponents managed to ovecome vehement opposition.
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One reason the proposal overcame the fierce opposition was the appreciation of the shekel in recent weeks.
The shekel soared against foreign currency as the deepwater field Tamar started to produce. Not everybody is pleased about it: the Bank of Israel has been warning that if the shekel continues to climb it could badly hurt Israeli exports.
Most of the resistance to the bill came from the defense and energy ministries.
The Defense Ministry insisted it would need NIS 3 billion to protect the offshore gas facilities and infrastructure. Meanwhile the Energy and Water Resources Ministry insisted the fund be conditional on agreement that some of the gas should be exported.
Approval of the fund is expected to stymie additional gains by the shekel by signaling the market that part of the state’s revenue from gas will be converted into foreign currency and invested abroad.
Discussion of the legislation was included in the agenda distributed last week ahead of yesterday’s cabinet meeting, but a memo sent out Friday said it was being removed, only to be reinstated Saturday night. Finally, at the request of Energy Minister Silvan Shalom, it was decided that the panel formulating the fund’s method of operation include a representative from his ministry.
It was also agreed that any borrowing from the fund would require a special Knesset majority of 65 (out of 120 Knesset members) rather than an ordinary majority of 61, as in the draft presented last week.
Export policy disputed
The Tzemach Committee empaneled to discuss what to do with Israel's gas recommended allowing exports of any gas exceeding a 450 billion cubic meter reserve to meet domestic needs for 25 years, subject to various conditions.
The committee’s estimates of gas supply and demand, as well as its recommended planning horizon, have been roundly criticized and are likely to cause a dispute when brought up for discussion at the cabinet table.
Environment Protection Minister Amir Peretz insisted that the decision include the establishment of an ethics committee for the fund to set rules to prevent any investment in companies engaged in socially or environmentally harmful activities. His proposal was vehemently opposed and thereby rejected, but it was agreed that the panel formulating the fund’s operations will also examine the ethical implications.
The gas fields discovered in Israel’s waters, notably the giant Leviathan field, which has yet to be developed, should provide the state with hundreds of billions of dollars in revenues over the coming decades.
The fund, which will hold state revenues from taxing profits generated by oil and gas companies, the so-called Sheshinski Tax, will begin to operate when NIS 2 billion in taxes are accumulated. The fund will initially remit 3.5% of its assets to the Finance Ministry each year.
The interministerial panel to formulate the fund’s activities, which hasn’t yet been formed, will submit its recommendations by the beginning of May 2014. The fund is expected to accumulate NIS 50 billion to NIS 70 billion over the next 25 years.
The law imposing additional taxes on gas companies, in accordance with the Sheshinski Committee recommendations, also recommended that a sovereign wealth fund be established to manage the state’s profits from the new tax. The idea behind the fund is that the wealth created by this huge resource should also benefit future generations.
It was also concerned about avoiding what economists term “Dutch disease,” which occurred in The Netherlands in the 1960s after gas exports caused a sharp appreciation in its currency, undermining export competitiveness in other industries. Norway, with its huge oil and gas discoveries, set up a sovereign wealth fund to invest its earnings from these natural resources abroad and in foreign currency.