Last week, the Ministry of Finance published the first annual report of the Citizen’s Fund, the sovereign wealth fund. After many years of delays, money finally began to flow into the fund from profits from offshore Israeli gas, as determined by the Sheshinski Commission in 2010.
In the middle of 2022, the first billion shekels were deposited in the fund that started operating. By the end of 2022, the fund’s balance amounted to $617 million, or NIS 2.2 billion at the current exchange rate. According to the latest projections of the Citizen’s Fund, another $10-12 billion will be collected in royalties and taxes from the owners of Israeli offshore gas fields.
The annual report opens with an introduction by Bezalel Smotrich, who also serves as Minister of Finance as Chairman of the Fund Board. He writes, “The Israel Citizen’s Fund was established to preserve some of the profits of natural resources — for the benefit of future generations.” The problem is that this statement contradicts the government’s stated intent to change the fund’s law, so that amounts that are just beginning to accrue can be immediately benefited.
And while Smotrich boasts of a “long-term vision for the benefit of all our children, grandchildren, and great-grandchildren,” the Finance Ministry is already preparing for the directive that will storm the Grandchildren’s and Great-grandchildren’s Savings Bank.
The coalition aspires to chain the Sovereign Wealth Funds Act
In January, before unrest began in Israel over planned judicial reform, Globes revealed that S&P had sent an inquiry to the Finance Ministry about the sovereign wealth fund. The rating agency asked to know whether the sovereignty of the fund, which is currently managed offshore, would be harmed. The various rating agencies and foreign investors quickly realized that the sovereign wealth fund was the tip of the iceberg towards which the Israeli economy was sailing.
Since then, attention has been focused on weakening the independence of other state institutions, particularly the Supreme Court and to a lesser extent the Bank of Israel, which Knesset members in the coalition want to control. All of these have a common denominator that worries the markets: the breaking of existing rules that have been established over many years, and the subjugation of professional positions by politicians.
Unlike the judicial reform legislation that progressed at a brisk pace after the government was installed until it was halted by Prime Minister Benjamin Netanyahu last month, the legislation required to withdraw money from the wealth fund has not been brought forward by either party. Prime Minister or Ministry of Finance. The move has yet to officially begin, but the coalition has already held closed-door talks on the matter. Obviously, there will be resistance to this move from within the Ministry of Finance, if and when practical steps to open the fund are promoted.
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Israel’s sovereign wealth fund has a small portion of the amount planned
Meanwhile, the General Department of Accountants at the Ministry of Finance believes that there are risks in opening a sovereign wealth fund. Nor is the Budgets Division enthusiastic about the government’s mechanism for bypassing the budget to fund its plans. On the other hand, Smotrich’s aides support plans to use the sovereign wealth fund for current needs.
If the government succeeds in obtaining the fund’s money, it will receive a relatively small amount although there will be a strong inflow of money into the fund in the future. Every year, one or two billion shekels will flow into the fund from energy companies in addition to investment returns, which will reach 1.2% in 2022, despite the downturn in the markets. The fund’s money is rather vaguely earmarked for infrastructures. Almost any government plan can be defined as infrastructure, whether it is physical or human, so what money is kept?
There is currently no prioritization mechanism for distributing funds from the Fund. Subject to any bill put forward by the Prime Minister, a situation can arise in which funds are withdrawn without proper oversight, in contrast to funds from the state budget. Will the infrastructure money be used for national projects, such as building hospitals, another airport, or railways? Mostly not. These infrastructures will continue to receive the state budget.
The most likely scenario is that a relatively small amount would be more appropriate to fill specific and sometimes sectoral gaps, reflecting the composition of the government coalition. For example, one of the ideas already floated was to use the money to create classrooms for educational institutions that do not teach basic studies (mathematics and English) and therefore do not receive full state funding.
Ironically, Netanyahu predicted what would happen
Ironically, Netanyahu was the first to predict that politicians would try to take control of the fund and use the money for purposes for which it was not intended. More than a decade ago, even before a single cubic meter of natural gas was produced from Israel’s offshore fields, Netanyahu demanded that the fund’s sovereign status be strengthened in legislation to ensure future generations would benefit from the profits from gas discoveries. The then-current Chairman of the Knesset Finance Committee, MK Moshe Gafni, called for tightening the legislation and preventing any possible loophole to deprive citizens of future gas revenues.
It was Netanyahu who conceived the idea of the wealth fund in 2010, shortly after the gas discoveries. A person working in those days with Netanyahu, Gaffney and other politicians on legislation for the status of a wealth fund remembers how they tried to put more and more protection against premature opening of the fund. When he asked them why they were actually required to restrain themselves, they replied that “sometimes you have to protect politicians from themselves”.
Professor Eugene Kandel, who at the time served as chairman of the National Economic Council and chair of the board that established Israel’s sovereign wealth fund, told Globes he opposed attempts to change the use of the Israel Citizens Fund.
He said, “The fund was established after years of hard work, and everyone agreed that it should promote three goals: to distribute revenues from natural gas to future generations, to provide a security cushion for extraordinary macro events, and third, to prevent ‘Dutch disease’ (increasing the strength of the shekel). These three objectives have not changed, but suddenly, without doing any preparatory work, we were surprised to find this thing in the coalition agreement. I can’t tell. I have no explanation why a topic that has been discussed so rigorously and delicately, like very few things in Israel, turns into a political question. It’s very strange, because coalition agreements usually include things that are political rather than professional. Advance any of the three goals.”
Kandel insists there is no economic sense in the fund investing money in infrastructure projects. “It’s funny to do that, because the money that will accumulate in the fund in the coming years is paltry compared to the money that institutional investors are holding, which can go into infrastructure and actually go into infrastructure. They have close to NIS 2 trillion and the fund, in five years, It will be less than 10 billion dollars. If there are already high-return projects, send them there. If there is a high return to the economy but low investment, then it is better for this fund, which is financial and wants to achieve the three goals, to invest elsewhere.
Kandel compares what the government wants to do by using the fund to build infrastructure with a family inheritance. “Basically, they say they want to leave the road instead of the money for future generations. It’s like parents decide to buy a sofa to bequeath to their children instead of leaving the money.
When asked if creating infrastructures is not a beneficial investment for future generations, Kandel answered. “If they want to use the money for infrastructure, you don’t need the financing. Just put the money directly into the state budget. The problem is that very quickly the money will not go to infrastructures but to coalition and defense needs.”
Kandel said there was also criticism of the government’s plans last month during a Knesset session by the People’s Fund Oversight Committee headed by MK Lior Son Har Melek of Otzma Yehudit, which he attended. Professor Eitan Cheshinsky himself participated in the discussions and protested what the government wanted to do. He said, “It bothers me as a citizen that there is a clause in the coalition agreement that may turn the fund into a small amount of cash for the state.”
The committee’s discussions were extraordinary, with two veteran professors appointed by Netanyahu a decade ago to establish the sovereign wealth fund coming to the Knesset to protect it. They seemed shocked by the potential change and warned against wasting the inheritance of future generations. But there was almost no one to listen to them.
With the exception of Sonn Har Melech himself, none of the other MKs bothered to attend to discuss the matter. “Today’s main message is to protect the fund’s money. Today we heard an economist who is very upset about this issue,” summed up Son Har Melek3.
Meanwhile, the fund has less money than expected
Another difficulty with withdrawing money from the fund is that the vast majority of it is not liquid. According to the investment policy, most of the amount is invested in stocks (60%), and the rest is mainly in corporate bonds (36.5%). Only a small amount of funds is held in the form of cash assets (3.5%). This cash amount is for government use. According to the Fund Law, in each of the first ten years of its activity, the Fund transfers to the state budget an amount equal to 3.5% of its assets.
Last year was the first year the country earned money from the “Sheshinski tax” that was levied on energy companies a decade ago. But the fund’s return, which is currently “only” about $21 million, is still small compared to the state budget and paltry compared to the promises made to the citizens of Israel in recent years.
The amount accumulated so far in the fund is much lower than initial expectations. A decade ago, the Bank of Israel estimated that at this point the fund would have raised more than $4 billion — six times the amount currently in the fund. Moreover, the latest forecast of $12 billion in the fund by 2032 is well below the $72 billion previously projected by 2037.
Published by Globes, Israel business news – en.globes.co.il – on April 11, 2023.
© Copyright Globes Publisher Itonut (1983) Ltd., 2023.
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