Shekel: July 2009

 

 

 

 

 

Published by the Government of Israel Economic Mission Ministry of Finance

 

EDITORS: Tamar Roth-Drach (212) 499-5727 This e-mail address is being protected from spam bots, you need JavaScript enabled to view it Beth Belkin

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Overview

• Amid the economic turbulence, the Government of Israel returned to the Global Bond market in what the IFR called “spectacular fashion.” The originally planned $0.5 billion grew to $1.5 billion with orders from more than 300 different investors. This was the largest and most diverse Israeli deal.
• Israel was reclassified as a developed market by MSCI Barra. The change means that Israel will now be included in some of the most important global equity indices. It is also an acknowledgement of the achievements of Israel’s economy.
• The IMF and the Central Bank of Israel expect that Israel’s economy will shrink approximately 1.5 percent by the end of 2009 and return to positive economic growth of approximately 0.5 percent in 2010.
• The pace of the monthly slowdown in the Economic Composite Index is declining, which could mean that the economic downturn may be approaching its bottom.
• During the first quarter, total industrial production fell by 6.4 percent. In contrast, Israel’s pure high technology industries were relatively strong, as they recorded a 5.7 percent increase in revenues during the first quarter.
• Despite the recent downturn in the global economy, the drop in exports of goods and services, and the slowdown in tourism, Israel’s current account balance had a surplus of $2.7 billion in the first quarter of 2009 and is expected to remain positive by the end of the year, according to the IMF.
• During the first quarter of 2009, the unemployment rate rose to 7.6 percent. This rate increase is a result of cutbacks in jobs and an increase in the number of participants in the labor force. The labor force participation rate increased from 56.5 percent in the fourth quarter of 2008 to 56.8 percent in the first quarter of 2009.
• In an attempt to address the effects of the slowdown in the economy, the Bank of Israel gradually cut the interest rate from 4 percent at the beginning of the last quarter of 2008 to 0.5 percent in June 2009.
• Following a 46 percent decline in 2008, the TA-25 Index has risen 25 percent in 2009.
• The government initiated several stimulus packages to address the tough economic situation. The latest stimulus plan will expand guarantees for the banking system, create new funds for mid-size businesses and exporters, further institute negative income tax, reduce the number of foreign workers, implement structural reforms and increase investments in infrastructure.

Editor’s Review

On the Road to Recovery

Amid the economic turbulence, the Government of Israel returned to the Global Bond market in what the IFR called “spectacular fashion.” The originally planned $0.5 billion offering grew to $1.5 billion with orders from more than 300 institutional investors. This was the largest and most diverse Israeli deal. Judging at the economic data, it is easy to understand this success.

It is true that according to the formal economic definitions and as reflected in the national accounts data, the Israeli economy has been in a recession during the past two quarters. But more recent economic indicators portend the beginning of an economic recovery.

During the fourth quarter of 2008 and the first quarter of 2009, Israel’s export-led economy felt the brunt of the global recession, as its GDP declined by 1.6 percent and 3.9 percent, respectively. The business sector was similarly affected, declining 2.4 percent and 5.4 percent in the last quarter of 2008 and the first quarter of 2009.

As the world’s economy slowed and international demand dropped, Israel’s exports for 2009 fell 37 percent during the first quarter of 2009. The drop in the demand for Israeli exports and the contraction in the economy had a negative impact on internal domestic consumption. During that quarter, private consumption fell 3.4 percent and public consumption declined by 7.1 percent. At the same time, fixed capital formation (housing and industrial infrastructure projects) was also negatively affected, declining by 14.9 percent. This decline also shows up in Israelis' demand for foreign goods and services, as imports dropped by 41.3 percent in the first quarter.

The IMF and the Central Bank of Israel expect that Israel’s economy will shrink (by 1.7 percent and 1.5 percent respectively) by the end of 2009. But the good news is that forecasters are expecting Israel to return to positive economic growth of about 0.5 percent in 2010.

The Economy Composite Index, which reflects the activity level of various sectors of the Israeli economy, also showed weakness. However, there is a silver lining in this statistic. Although it fell 3.83 percent during the January–April period, the pace of the monthly slowdown in the Economic Composite Index is declining, which could mean that the economic downturn may be approaching its bottom.

During the first quarter, total industrial production fell by 6.4 percent. That decline was mostly a function of the 27.7 percent drop in semitraditional industries and semi high technology industries. In contrast, Israel’s pure high technology industries were relatively strong, as they recorded a 5.7 percent increase in revenues during the first quarter.

The tourism sector experienced a difficult first quarter in 2009, especially when compared to 2008 when a record of more than three million visitors came to Israel. Clearly, the global credit crunch and the military operation in Gaza at the beginning of the year kept tourists away. During the period of January through April, only 736 thousand visitors entered the country, which is a decline of 22 percent when compared with the corresponding period in 2008.

Despite the recent downturn in the global economy Israel’s current account balance had a $2.7 billion surplus in the first quarter of 2009 and is still expected to remain positive. Indeed, the IMF predicts that at the end of the year the current account surplus will reach 1.14 percent of GDP.

In terms of the labor force, Israel ended 2008 with an unemployment rate of 6.1 percent compared with 7.3 percent at the end of 2007. During the first quarter of this year, the unemployment rate rose to 7.6 percent. This rate increase is a result of both cutbacks in jobs and a positive increase in the number of participants in the labor force. The labor force participation rate increased from 56.5 percent in the fourth quarter of 2008 to 56.8 percent in the first quarter of 2009.

While economic activity was trending down, consumer prices turned slightly higher. Following a drop of 0.6 percent in the CPI during the fourth quarter of 2008, 2009 began with another drop of 0.6 percent in January-February. Nevertheless, in March, April and May prices went up by 1.9 percent. As of now, total inflation for the year is 1.2 percent and the inflation for the past twelve months is 2.8 percent. These changes are in line with market expectations and are forecasted to continue.

The Central Bank expects inflation to end the year within the 1-3 percent target range set by the government. Some of the change in the CPI is attributed to actions taken by the Central Bank. In an attempt to address the effects of the slowdown in the economy, the Bank of Israel gradually cut the interest rate from 4 percent at the beginning of the last quarter of 2008 to 0.5 percent in June 2009. The cuts were meant to increase economic activity by reducing the cost of credit. In addition, the Bank of Israel continued to purchase U.S. Dollars in an attempt to increase its foreign currency reserve. That action also served to stabilize foreign exchange markets. Last but not least, the Central Bank has recently started buying government bonds in the open markets to preserve their value. Since this has begun to be implemented only recently, time will show its true impact.

Like the equities market in the United States, the Tel Aviv Stock Exchange was driven in the last couple of months by winds of optimism blowing around the globe. Following a 46 percent decline in 2008, the TA-25 Index has risen approximately 33 percent in 2009. As investors grew more confident in the performance of the economy, they returned to the stock market.

Amid the economic turbulence, a new government has been established and a new economic plan has been introduced. The Ministry of Finance has chosen a two-pronged approach for dealing with the tough economic situation. Its first step is a proposed biennial budget, which will stabilize 2009- 2010 fiscal years by fixing expenses for the two-year period and eliminate the need to present a new budget next year. The budget includes a 3.05 percent rise in expenses for the years 2009-2010 and deficit ceilings of 6 percent and 5.5 percent of GDP in 2009 and 2010 respectively. Expenses will increase by only 1.7 percent per year in 2011. The proposed budget will be handed to the Knesset for final approval in July. The second step is the initiation of a multi folds stimulus package to support the market and arouse business activity. The latest stimulus plan will expand guarantees for the banking system, create new funds for mid-size businesses and exporters, further institute negative income tax, reduce the number of foreign workers, implement structural reforms and increase investments in infrastructure. The government declared that it is committed to returning to a low level of expenditure and reducing the budget deficit after the economic recovery.

Ben Gurion once said that “in Israel, you are not a realist if you don’t believe in miracles.” It seems that although we have been hit by the global economic crisis, we will not need miracles since we are already on the path to recovery.

Public Private Partnership Projects in Israel

An Efficient Way to Execute Infrastructure Projects

Uzi Levin, Head of PPP Projects Division; Efrat Shriki, Coordinator, PPP Projects Division; Marc Hanhart and Adi Van Velsen, Project Managers, PPP Projects Division, Ministry of Finance

The execution of governmental projects in Israel, in partnership with the private sector (PPP projects), started some 15 years ago. In the last seven years, the use of this method for executing major infrastructure projects has developed significantly.

The first projects executed were in the transportation and water sectors. Additional projects in the construction and energy fields are also currently being executed.

The table on the facing page illustrates the current list of major PPP governmental projects by sectors.

The Government of Israel envisions that investment in infrastructure will encourage economic growth, the private sector’s involvement will improve the level of government supplied services, and that optimizing the risks allocation between the public and the private sectors will contribute to public wealth.

The infrastructure projects executed in Israel have already reached a significant volume of $9 billion.

Out of this total figure, the transportation sector represents about 70 percent; energy, 15 percent; water, 11 percent; and construction, 4 percent.

Some of the significant projects include:

• A project for water desalination located in the Sorek estuary; this facility will produce 150 million m3 per year;
• The construction of three solar power plants (thermo-solar and photovoltaic) in Ashalim;
• A central and advanced police training center in the city of Bet Shemesh;
• Metropolitan highways to Tel Aviv (431, 531);
• Cross Israel Highway that connects the south and north of Israel (Route 6);
• The Carmel Tunnels;
• A private prison facility.

The state of Israel also expects to launch additional infrastructure projects, focusing on renewable energy and environmental protection.

A key factor for successful execution of PPP projects is to achieve an optimal risk allocation between the private and the public sectors. Each sector should be responsible for the risks it can better cope with. The public sector will typically be responsible for land acquisition, for discriminatory changes in laws and legislation, and for political risks. Market-demand risks and force majeure risks are shared risks.

Over the last few years the Government of Israel has introduced changes in the tender policy in order to facilitate the implementation of the projects and to shorten the time frame between the financial close and the start of construction of the projects: unified accounting principles, easing of tax treatment, market interest rate change protection, various indexation and protection options being granted to concessionaires. An option to refinance after completion of the construction phase is also granted in order to encourage institutional investors to participate in the long- term financing of the projects.

The Government of Israel has also taken steps to encourage participation of foreign investors (bidders and lenders) in the execution of PPP projects: interest rate change protection for foreign currency denominated loans (Dollars and Euros), foreign currency exchange rate protection, and payment to the concessionaire in foreign currency (Dollars and Euros).

In a number of projects, foreign entities are involved as members of the bidding groups, as subcontractors, or as part of the financing institutions. For instance, foreign banks have taken the lead for the financing (in Euros) of the Hadera desalination plant.

The following is a brief summary of PPP activity in the energy field:

The state of Israel is seeking to enlarge its diversity of energy sources, especially in the field of renewable energy for two main reasons: to reduce environmental damage and energy independence.

Therefore, the government instituted a policy, that would require the electricity producers to increase their use of alternative energy. By the year 2020, 10 percent of Israel’s electricity will come from renewable energy.

As part of this governmental policy, in September 2007, the Israel Government decided to construct three power plants near Ashalim in the Negev, for a total production capacity of 250 Mega Watts. The complex consists of two thermo-solar power plants, capable of producing from 80 to 110 Mega Watts, and a photovoltaic power plant capable of producing 15 Mega Watts (the state shall be entitled, as per its option, to instruct the wining bidder to extend the production up to 30 Mega Watts).

This policy will be executed by three separate international BOT tenders, in which the concessionaire plans, constructs, operates and maintains each solar power plant. Upon termination of the operation term (25 years) the power plants will be transferred from the concessionaire to the state. Each of the concessionaires will be granted an electricity production license for the operation of the solar plant, in accordance with the Israeli Electricity Economy Law of 1996, with all the considerations aside.

In December 2008, 17 groups passed the pre-qualification stage (ten groups in the photovoltaic tender and seven groups in the thermo solar tender). The tender documents were published in the first quarter of 2009.

The Division for Public Private Partnership Projects acts on behalf of the Ministry of Finance in the execution of PPP projects. It is responsible for managing, coordinating, planning and executing the tender process until the concessionaire is selected supervising the activities vis a vis the concessionaire and its financing partners until the financial close is reached, and coordinating the activities of the implementing authority during the operation phase of the projects (supervision of the execution of the concession agreement).

The main goals behind the creation of the PPP division were to build a professional entity for PPP activity in Israel aimed at making the tender process as efficient and simple as possible, to have a leading force in the implementation of the concession agreement, and to set standards for PPP activity in Israel in conjunction with governmental authorities, the private business sector and financial institutions.

The direct link to PPP projects in the Accountant General’s office of the Ministry of Finance is http://ppp.mof.gov.il/Mof/PPP/MofPPPTopNav/MofPPPProjects/

The Israeli Incubator Experience – Innovative Success

Yifat Leibovich, Vice President Operations, Maayan Ventures Ltd.

Technological incubators in Israel are support organizations that give fledgling entrepreneurs an opportunity to develop their innovative ideas with the goal to ultimately launch a new business. The program has been underway since 1991 and is administered by the Office of the Chief Scientist of Israel’s Ministry of Industry, Trade and Labor (OCS).

The incubators assist entrepreneurs at every level of development. They nurture them at the earliest stage of technological innovation, helping them to implement their ideas by turning them into exportable commercial products and forming productive business ventures in Israel.

By absorbing a large portion of the risk in the early stage, when commercial money plays a minor role, the technological incubators provide entrepreneurs with facilities, financial resources, tools, professional guidance and administrative assistance. During their stay in the incubator, the entrepreneurs may turn their abstract ideas into products that are marketable in the international marketplace.

There are 24 technological incubators in Israel today. Out of these, 15 are located in peripheral areas. One incubator was established specifically to develop biotechnology.

Approximately 200 projects in various stages of research and development are being carried out in the technological incubators at any given time. By the end of 2008, more than 1,200 projects had matured and left the incubators. Of these, 59 percent successfully attracted private investment. Forty percent of the companies are still in operation since leaving the incubators.

By the end of 2008, the total cumulative private investment in “graduate” incubator companies was more than $2.5 billion (see chart below).

Last year, 57 startups graduated from the incubators, 68 percent of which have attracted private investments.

In recent years, incubator projects have successfully been able to raise more than twice the initial investment made by the government, within two years of their admittance into the incubators (Round A Funds as shown in chart on facing page).

However, without the government’s initial investments in these start-ups , the projects would never have gotten off the ground and the private investments that they have successfully attracted would have been directed elsewhere, if at all.

The technological incubators have become massive repositories of ideas for the establishment of high technology venture companies. It is well known that the incubator program is the number one manufacturer of start-ups in Israel today, establishing more than 70 new start-ups each year. The program has positioned itself as an important source of deal flow for the venture capital industry that is constantly searching for new technologies in which to invest

MAAYAN VENTURES – INCUBATOR SUCCESS STORY

The Maayan Ventures incubator was established in 1990 and privatized in 2003. The incubator, located in Omer (Israel’s Negev region), at first managed only five portfolio companies and was relatively unknown. In late 2005, Maayan Ventures became the first incubator to be traded on the Tel Aviv Stock Exchange (TASE).

In July 2006, Maayan expanded its outreach by acquiring the ATC incubator in Dimona, now called Rotem Ventures, and in December of that year, also purchased the Am-Shav Incubator in Sde-Boker, now known as Iris Ventures.

The combination of the three incubators has made Maayan Ventures into the largest incubator in Israel. It provides the portfolio companies with unparalleled financial strength and strategic connections.

By joining Maayan Ventures, technology start-ups benefit from financial investment, business tools, and the support services essential for their ventures’ success. Working in cooperation with the Office of the Chief Scientist within Israel’s Ministry of Industry and Trade, Maayan Ventures invests during the entry stage, providing start-ups with the security that comes from knowing that the support will be there when they need it the most. Maayan Ventures also has the financial resources to reinvest in its portfolio companies during future rounds.

Maayan also aims to attract promising entrepreneurs and start-ups to the Negev region. Maayan is located in the heart of the Negev desert, helping to promote the area as an ideal financial environment. The goal is that the Negev will become economically attractive for industry and investments, while drawing high-profile residents.

As of March 2009, Maayan manages a portfolio of 55 companies in various fields including medical devices, communications, IT, materials, cleantech and homeland security solutions.

Maayan is not a VC fund and does not compete with VCs, but instead provides the missing “layer” between the technological ideas and the phase in which a start-up becomes interesting for VCs. Maayan’s willingness to remain with the companies in later stages gives the entrepreneurs a feeling of security, knowing that someone is looking after them. This significantly impacts the companies’ value and ability to raise funds.

Maayan Ventures is proud of its best-of-breed portfolio companies. The combination of outstanding entrepreneurs with Maayan’s hands-on support makes its portfolio companies stand out. Early investments increase the chance of significant ROI.** Maayan’s unique deal flow generates more than 400 opportunities annually. These lead to an investment in 10-15 new companies every year. Deal flow sources include: a referral, leading VCs, university technology transfer companies, patent attorneys, and Maayan investors.

The Israel government realized the potential of early stage investments and established the incubator program. The incubators, with Maayan in the lead, were willing to take the early stage risk. They constantly plant seeds of innovation and nurture them as they grow into promising new technologies. Today, there is ample proof as to the accuracy of this vision. It remains extremely valuable to the State of Israel, to the entrepreneurs, to the incubators and to all of the investors involved.

This publication includes the opinions, estimates and projections of the various authors and not of the Government of Israel Economic Mission, Ministry of Finance. The reports are for information purposes only and are not intended as an offer, solicitation or recommendation with respect to the purchase or sale of any security. The publisher does not guarantee the accuracy or completeness of the provided information and shall not be liable for any errors or omissions therein. Readers should consult and rely on their own advisors for all pertinent investment, legal and accounting issues.