Treasury Wants to Replace Industry Grants With Loans

Peripheral regions would receive priority, as would efforts to boost employment in Haredi and Arab communities.

Treasury officials are pushing a proposal to replace state aid for industry with loans. Peripheral regions would receive priority, as would efforts to boost employment in Haredi and Arab communities.

Officials from the treasury and the Ministry of Industry, Trade and Labor have been meeting in advance of the convention of the committee in charge of amending the Law for Encouragement of Capital Investment. The law sets the criteria for state aid to new or expanding industries.

Two important support programs based on this law are expire at year-end: the grants program and the program to encourage employment. A committee, headed by Industry Ministry Director-General Gabriel Mimon and treasury budgets director Kobi Haber, is mandated to discuss the future of the grants program. It will take advantage of its broad mandate to address new proposals for inclusion in the law.

The treasury feels that the present grants program, which subsidizes R&D as a function of the company's location and exports, does not yield sufficient benefit to the state. It prefers to confine support to programs that involve less risk and clearer economic benefit.

Industry wants to keep the grants program, even if with reduced budget. The ministry is drafting new programs, and to mitigate the blow, is prepared to discuss changes in support mechanisms for industry. But it doesn't want to cancel the grants program.

One possibility involves replacing grants to industry with loans, like the arrangement in place for small businesses, to which the state has allocated NIS 90 million. Competition among banks has resulted in loans totaling NIS 600 million under this arrangement. Only 3 percent of the businesses receiving these loans have failed.

Treasury sources say they are willing to discuss any proposal that would make government support of industry more viable, but the plan must reduce bureaucracy and uncertainty for investors.

Industry is preparing several proposals aimed at strengthening peripheral areas and attracting high-tech industry. One idea being considered is increasing the preference for distant peripheral areas compared to areas in closer proximity to central Israel, making an investor in Kiryat Shmona, for instance, eligible for a larger grant than one in Beit Shean. The ministry is also willing to consider reducing the grant amounts in peripheral areas from 24 percent of the total investment to between 10 and 15 percent.

The employment program in the law entitles companies that win government tenders for specific projects included in the program, to a subsidy of part of the salaries of workers employed in peripheral areas. Of the NIS 450 million allocated to the program, more than NIS 300 million have already been spent; the Ministry of Industry intends to use the full budget by the end of the year. Failing to do so, the treasury will allow the remaining amount to be added to the 2008 budget for such tenders.

Industry wants to renew the program in its current form for a few more years. The treasury is expected to agree, with certain changes: mainly, a stipulation that the budget be directed solely to population sectors with the lowest workforce participation, namely the ultra-Orthodox and Arab communities.

The ministry also proposes incentives to high-tech and combined-traditional industries that move to the periphery. The aim is to encourage the thousands of college students studying in these areas to remain there after graduation. In addition, tax benefits, discounts on purchase of residential land and subsidized daycare would be offered.

The tax benefits program enables companies to receive a full or partial waiver of taxes for a period designated by law. This program is also expected to undergo changes. The treasury is satisfied with the program, but suggests creating a greater differentiation between distant and near peripheral areas. According to their proposal, the most distant businesses will be entitled to maximum benefits, while benefits to factories located closer to the center of the country will trimmed. The tax benefits program is now administrated by the treasury, after being removed from the industry and trade ministry in recent years. Benefits are granted after the factory has begun sales, so that the risk to the state is low in comparison to the grants program, in which benefits are granted before the factory begins production and sales.