Four Reasons Investors Aren’t Flocking to Israel

And one little hint: To create certainty for business, you have to create certainty for the common Israeli on the street.

Sami Peretz
Sami Peretz
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Stock prices flash on an electronic screen displaying world clocks at the Tel Aviv Stock Exchange (TASE) in Tel Aviv, Israel, on Thursday, Dec. 11, 2014.
Stock prices flash on an electronic screen displaying world clocks at the Tel Aviv Stock Exchange (TASE) in Tel Aviv, Israel, on Thursday, Dec. 11, 2014.Credit: Bloomberg
Sami Peretz
Sami Peretz

"The business world needs certainty. Businesspeople can’t invest when every two days the authorities change the rules in Israel.”

Ever hear that? If not, it means you don’t listen enough to businesspeople and their spokesmen. It’s the latest trend: Blame the government or regulators for sabotaging business and the desire to do business in Israel.

It’s easy to list cases in which the government intervenes in business. We see it in the natural gas sector, where Jerusalem has increased its claim on revenues, limited the potential for exports and is now racking its brains over how to deal with Delek and Noble Energy’s monopoly.

We see it regarding the royalties paid by Israel Chemicals — another natural-resources monopoly. And we see it in the Finance Ministry’s attempts to cap executive pay in the financial sector, and in the government’s initiative to open the skies to competition — to the chagrin of Israeli airlines.

There are very good reasons for all these interventions. They all revolve around fairness, an essential element in any normal society.

The private sector’s case against government is familiar: It’s impossible to do business this way, the government will drive away foreign investors, we’re in favor of competition — but not now. And if we get jerked around we’ll leave Israel.

But somehow we haven’t heard businessmen complaining about the Bank of Israel’s intervention in the foreign-currency market. These efforts have helped strengthen the dollar to four shekels, boosting Israeli exporters. They like this intervention just fine. No executive will say the Bank of Israel’s operations will make his company leave Israel, or that the central bank is driving foreigner investors away.

In any case, let’s examine which type of business is being done here — and which isn't. Insufficient is the founding and building of new businesses; that is, entrepreneurship, something that creates jobs, cultivates competition, encourages innovation and improves service. Not only is the buying and selling of existing businesses less exciting, in too many cases it doesn’t create value or even destroys value.

Troubled tycoons

The government isn’t always to blame. There’s another significant reason for not doing business: collapses that eliminated a generation of tycoons who once bought and sold everything they could get their hands on. Now they’re in trouble with the banks and can’t pay their debts.

A very large number of Israeli companies are currently up for sale, but without potential buyers: El Al, Clal Insurance, Phoenix Insurance (which may have found a Chinese buyer), most of Eliezer Fishman’s companies, a few banks and a few telecom companies.

It’s pretty hard to buy the financial firms — companies with high market values in the billions of shekels — which already shortens the list of potential buyers. And the approval process doesn’t let just anybody take control of the companies that manage our money.

So the banks and insurance companies will remain on the shelf, which shouldn’t bother us too much. If a new owner can’t be found, shares could be sold on the stock market without waiting for rich Americans or Chinese to save the company from Israeli ownership.

How is it that despite record-low interest rates we’ve seen no assault on the companies up for sale? Four syndromes play a role.

1. The liqudity-trap syndrome. The first syndrome is global, not just Israel-centric: the near-zero interest rates that are the fallout of the global financial crisis, after which entrepreneurs haven't liked taking big risks. They prefer slightly higher interest rates and economic conditions a bit less frightening.

This is called the liquidity trap: Interest rates are so low they don’t encourage the doing of business; demand for credit is lower than supply. Businesspeople will leave their bunkers and make investments when interest rates start to rise.

It’s a paradox, I know. Zero interest rates encourage financial investments more than nonfinancial ones. World stock markets are climbing and Israel is experiencing a real estate bubble because of the small supply of land.

2. The cellular syndrome. The cellular telephony sector, which reaped enormous profits for many years and secure cash flow under weak regulation, suffered a dramatic regulatory change. It was opened to competition and took a big hit to profits.

Ilan Ben Dov bought Partner Communications in 2009 on the belief that the high profitability would last forever. He was mistaken, ran into trouble and lost his fortune. We can assume that his case caused a number of businesspeople to be a bit more cautious when sniffing around profitable businesses affected by regulation.

3. The natural-resources extraction syndrome. The government has made do for years with low revenues from the extraction of natural resources; instead it has opted for jobs in the country’s outskirts or encouraged investment in oil and gas exploration.

And now the bastards are changing the rules. Why? Because the division of the pie is unfair. If an industry’s division of the profits is unreasonable, think twice before investing. Maybe that’s the reason few buyers are jumping at the chance to buy the banks or insurance companies.

4. The failed-tycoons syndrome. When we look at newspaper headlines from the last decade and a half, it’s easy to find headlines like “Yitzhak Tshuva aims to buy,” “Nochi Dankner takes control of,” “Lev Leviev acquires,” “Yossi Maiman mulls acquiring,” “Eliezer Fishman invests in” or “Motti Zisser ups his investment in.”

The concentration of economic power

Many deals in Israel by this generation of tycoons, and an even greater number of news reports on failed plans to take over companies could be attributed to them. Tshuva is the only one who made it through the upheaval of the past few years — he found natural gas. The others are limping, have collapsed, or are on their way there.

What characterized this generation? Huge leverage, a lack of focus, an excessive appetite for risk, and ego-driven deals.

The concentration of economic power was one of Israel’s biggest economic dangers, so it’s a good thing some of these people are no longer in business. At some stage capital might thus be allocated more efficiently and with greater diversification. Funds might flow to people whose names don’t arouse awe in the banking industry or capital markets.

So yes, businesspeople need certainty — that’s what they tell us, and it’s easy to identify with this need. Israeli society also needs certainty.

It needs certainty regarding the cost of living, inequality, poverty, corruption, dividing the pie, the connection between money and power, employment, education, health, and of course our pensions. There’s no way to create certainty for business without creating certainty for the people.

That is, anyone who wants to do business here, to invest and prosper, must make sure there are people with purchasing power, stable employment and a future for their retirement. A well-off 10% or 20% of the population won’t be enough to create this certainty. Everybody has to join in.

And to do this, we need reforms to address pension management fees, the cost of living and the profits gained from extracting natural resources. Until then, you better learn to live with all the uncertainty.



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