The Red Lines Surrounding Israel’s Red Tape

The government must achieve a balancing act between an effective bureaucracy that provides the necessary checks and balances, and a transparent system that is accessible to all.

Yariv Katz

In sentencing Holyland project developer Hillel Cherney to three and a half years in prison for bribery, the Tel Aviv District Court had warm words for the defendant. “Cherney learned from state’s witness Shmuel Dechner that without paying huge sums in bribe money, he wouldn’t be able to move forward and build the Holyland project, which for him was the project of a lifetime,” Judge David Rozen wrote. “Cherney, who was living as a normal citizen – salt of the earth, an exemplary citizen – met with despicable circumstances that ensnared him into committing serious acts of bribery. His conviction in this case is totally foreign to his way of life.”

It was almost an apology on the part of the judge, who also sentenced former Prime Minister Ehud Olmert to six years in prison for accepting bribes while he was mayor of Jerusalem. But when it came to Cherney, Judge Rozen was almost sorry to sentence the man who understood that without making such payoffs, he didn’t stand a chance of advancing his business interests with Israeli officialdom.

The same thoughts resonated last week when top officials at Shemen Oil & Gas Resources were arrested on suspicion of paying bribes to workers and management-level officials at the Ashdod Port. Shemen was engaged in drilling for oil off Ashdod’s Mediterranean coast, and therefore needed dock space from which to conduct the drilling operations. The suspicion is that it was made clear to Shemen – allegedly by then-port CEO Shuki Sagis, among others – that without paying bribes, the company would not be able to get the port services it so badly needed. And in this case, too, the situation allegedly led to the payment of bribes.

There’s no direct connection between the Holyland and Ashdod cases, other than the common denominator of ugly and corrupt government bureaucracy. The innocent citizen who is ground down by bureaucracy is faced with accepting his fate or being forced to hire a wheeler-dealer who can expedite matters.

The question of whether such middlemen are a cover for accepting bribes is a very sensitive one. Apparently there are instances in which the middleman is simply making use of his familiarity with the bureaucratic system to help untangle things. But there are also cases in which he exploits his personal connections with bureaucrats, and where payment of money is made to advance matters that otherwise would not move forward. Under these circumstances, as in the Holyland case, the middleman is already involved in bribery.

Withering bureaucracy is the fertile ground that gave rise to both scandals and without which there would be no need for middlemen – and that’s whether the intermediaries are engaged in that gray area of expediting procedure or cross the line and pay bribes. And in the absence of such bureaucracy, the system would not give rise to corrupt officials who exploit the bureaucratic morass and accept the payoffs.

Also worth noting is another corruption case involving the Investment Center at the Economy Ministry (then known as the Industry, Trade and Labor Ministry). The case concluded with a conviction for breach of trust against the minister at the time, that same Ehud Olmert.

The bureaucracy at the Investment Center, where officials had to decide whether to give government grants to private manufacturing facilities, provided the opening that ultimately led to Olmert’s conviction. At such an agency, where there was a lack of transparency and wide discretion was left in the hands of bureaucrats without set criteria or oversight, there was an opening for corruption.

This resounding lesson is overlooked in the debate over the law for the encouragement of capital investment. An interministerial committee headed by Finance Minister director general Yael Andorn is currently at work, reconsidering the provisions of the existing law. This follows a public outcry over the fact that the law provided tax benefits amounting to some 7 billion shekels ($2 billion), with almost 60% of that going to four major exporting companies – with Teva Pharmaceutical Industries at the top of the list.

The giving of the benefits to a select few – and the fact that, for the most part, the law provided support to companies that were already strong – sparked criticism and a demand that the law be revised. This was undertaken even though the capital investment law had already been reexamined just four years ago.

The earlier rethink, led by Haim Shani – then the Finance Ministry director general – followed the trauma of the Investment Center investigations, and the understanding that the weighty bureaucracy that characterized the investment law was actually damaging its aims.

Not only does excessive bureaucracy encourage corruption, as the Olmert case shows; it also does harm to the principle of equal opportunity. It was only major firms who could afford the necessary legal advice that were able to navigate the administrative maze in the law, and take full advantage of the benefits it offered. It was the complex procedures inherent in the law that resulted, in part, in four major export firms getting 60% of the law’s benefits.

As a result, the Shani committee took the revolutionary step of eliminating the bureaucracy. Instead of a complicated approval process in which a large amount of discretion was given to bureaucrats, the panel went with an antibureaucratic law, which stated simply that any company where exports represented more than 25% of its sales was entitled to the tax benefits. The rate by which the benefit was calculated was also simplified: 10% or 15%, depending upon the geographic region in which the company’s manufacturing was located.

Such a radical solution appeared necessary in light of the problems presented by the law in its prior form. But the newer approach was also not without its problems, because, in the absence of bureaucracy, there is also no room for judgment to be applied – even when it turns out that one company, such as Teva – which is already tethered to Israel as a result of the drug-patent protection Israeli law accords it – gets billions of shekels in benefits from the legislation.

This is the situation facing the current Andorn committee, which has a number of proposals designed to curb the benefits to a single company to an extent, and also to try to link the benefits to a criterion in addition to the extent of the firm’s exports.

One proposal under serious consideration would limit a company’s benefits to the amount of its total payroll costs, in an effort to encourage job creation. (There would also be a provision that would guard against payment of bloated salaries to a few to artificially inflate the payroll figure.) Other proposals would link the benefits to innovation, as a means of encouraging groundbreaking companies to expand their operations in Israel.

These proposals are appropriate in light of the recognition that linking benefits solely to a 25% export criterion does not serve Israel’s needs. On the other hand, the lessons learned by the Shani committee regarding the corrupting influence of bureaucracy should not be forgotten.

The legislation emerging from the Andorn committee’s recommendations will probably make the capital investment encouragement law more complex and bureaucratic than it is now, but it is important that it lose its current simplicity and clarity.

When dealing with the confluence of complete government discretion and the total absence of any discretion on the part of government bureaucrats, an appropriate middle ground must be found.