Israel Offering Intel $700m Grant, Without Checking Merits First

Hopes Intel will build new plant here, not elsewhere; but didn't first check whether the investment would actually benefit Israel.

The state has informally promised U.S. chip maker Intel a $700 million grant if the company build a new semiconductor plant in Israel. Knowledgeable sources say, however, that the government did not first examine the economic feasibility of its proposal. Furthermore, the offer comes just a few weeks after the Finance Ministry convened a committee to revisit corporate benefits that could change the way they are conferred.

The offer, which was proposed in recent weeks, was informal only because Intel has not yet submitted a detailed investment plan. In addition, the company has not decided whether to upgrade its existing facilities in Kiryat Gat or build a new plant, and whether its next major investment of this nature will be in Israel or elsewhere. Intel is expected to decide on the matter in the first quarter of 2014.

Intel says the grant is justified by the income tax paid in Israel by its employees here and the employees of its local subcontractors, as well as the corporate taxes and taxes on dividends it pays and the technology transfer to Israel.

But in the past, senior treasury officials have argued that the benefit to the state accruing from Intel’s subcontractors should be taken out of the equation. In addition, they say, the benefit to Israel from such grants must be weighed against the benefit to the economy if other companies were given the money instead.

A thorough examination of the economic feasibility of providing the new grants to Intel will come only after the company presents its plans, at an estimated cost of $50,000 to $100,000. The Encouragement of Capital Investment Law requires the government investment center to investigate the economic feasibility of every government grant provided under the provisions of the statute.

The informal $700 million offer came as part of the state’s bid to encourage the American high-tech company to upgrade its current facilities in Kiryat Gat in addition to building new facilities. In an earlier round of global competition for an Intel plant, two years ago the company chose Ireland over Israel as the site for a new plant to manufacture its next generation of 14 nanometer processors. This was after Ireland offered better terms than Israel, but also because the company’s existing facilities in Ireland were older and in more urgent need of an upgrade.

The Intel semiconductor plant in Kiryat Gat, which uses 22-nanometer technology, is facing obsolescence within several years if it is not upgraded to the latest 10-nanometer technology. In the recent talks, the government offered Intel $200 million to upgrade the Kiryat Gat plant and $700 million in support of a new plant.

Since 1996, Intel has received hundreds of millions of dollars in Israeli government grants every few years. The grants were provided without a comprehensive examination of their projected economic impact. The major consideration in prior grants considered by Israeli prime ministers and other cabinet ministers with economic portfolios was how the investment by high-tech multinationals in Israel would enhance Israel’s image in the field in an effort to attract other firms. In practice, however, most of the other multinational high-tech companies that are here have established a research and development presence in the country to take advantage of the indigenous know-how and entrepreneurship of the country’s high-tech sector.

Ilya Melnikov
Courtesy of Intel Israel