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Israel’s natural gas wealth fund disappoints

Despite grand promises that billions of dollars would pour into Israel's sovereign wealth fund from maritime natural gas fields, little money has arrived.

Norway, the United Arab Emirates, Canada, Azerbaijan and Russia are among the mineral-rich countries that have established sovereign wealth funds to distribute profits from natural resources among their citizens. Such funds are designed with the next generations in mind, to prevent overvaluation of the local currency and to channel revenues into fueling economic growth and spending on fields like education, health and welfare. Israel established its statutory wealth fund seven years ago, but the promises of billions of shekels in revenues have failed to materialize. The fund has not even been fully established amid the low profits claimed by the companies extracting the gas from the reservoirs.

Exploitation of these offshore Mediterranean gas fields began in the middle of the previous decade, and according to 2014 assessments were expected to yield revenues of 260 billion shekels ($81 billion). The forecast stipulated that the sum would depend on the amount of gas produced and on global gas prices.

The 2014 law governing gas exploitation mandates that 57% of taxes from gas profits would be placed in the Israeli wealth fund, which would invest the money in high-yield instruments and channel the profits into economic and social goals to be determined by the government in its annual budget. The Bank of Israel’s forecasts at the time put the amount of the fund at over 14 billion shekels ($4.4 billion) by 2022. However, Shlomo Phillip of the Tax Authority reported this week to the Knesset wealth fund oversight committee that as of the end of June 2021, the tax revenues from the profits of the energy companies had reached only 741 million shekels ($231 million). Phillip added his assessment that the amount would exceed the one-billion-shekel mark within the coming year, reaching the threshold amount for activating the fund.

Committee chair Mossi Raz said at the hearing that predictions of billions of shekels flowing into the wealth fund were erroneous and the mechanism should have been called the “poverty” rather than the “wealth” fund. Unless the law is amended, he added, there is no point in establishing the fund as the sums are so miniscule.

Raz demanded that the gas company profits be examined in an independent audit and that the state explain why it had agreed to a tax write-off for the expenses of the energy companies. “The sums are small and worthless; this is one per mille from the state budget. If that were the forecast, the fund would not have been set up. … The whole model needs to be changed. It is not possible for the state to allocate natural resources to companies that are not completely transparent." In the past, he said, we thought that natural gas presented an environmental problem, but supported the venture for economic reasons. Now it seems that the economic benefits are marginal.

He concluded, "The whole model was a mistake and we will have to change it completely, including the environmental model.”

Adi Brender of the Bank of Israel's research division explained at the meeting that the gap between the forecasts and actual revenues stemmed from the companies' expenses on other investments in the southern Tamar gas field and in an additional gas pipeline, tax write-offs. As a result, payment of their taxes was postponed from 2018 to mid-2020 and the sum was reduced. Yet another reason and perhaps the most significant, Brender added, is the high gas prices on which the forecasts were based. With the market growing increasingly competitive in recent years, the average price of gas declined and with it the profits.

The Finance Ministry's Deputy Chief Economist Lev Drucker was slightly more optimistic in reporting to the panel, saying the state’s annual gas revenues were slightly over 3 billion shekels ($940 million) and by 2029, the fund is expected to total over 5 billion shekels ($1.56 billion).

Profit evaluations have been adjusted over the years, with the Tax Authority reporting in July 2020 that the gas company profits would reach 600-700 million shekels a month within five years, and that the wealth fund would accumulate up to 200 billion shekels ($62.4 billion) in all. That report to the Knesset assessed that the wealth fund would accumulate capital in the amount of at least 38 billion shekels ($12 billion) by the end of the decade.

Former Prime Minister Benjamin Netanyahu addressed the forecast on Facebook last year, deflecting criticism from environmentalists and social activists over his approval of the natural gas exploitation plan and its benefits to the gas tycoons. “I did not give in,” he wrote. The gas produced from Israel’s reservoirs will funnel tens of billions of shekels into the state coffers for the benefit of Israel’s citizens, Netanyahu added.

Netanyahu was referring to the controversy over taxation of the energy company profits, which delayed the start of production. Following the appointment of various committees to study the issue, the government decided to raise taxes on the companies’ profits in return for a “stability” clause determining that the relevant law would remain in force and could not be changed for a fixed time period. The tax increase was defined as a super-profit tax, which would only be collected after gas sales allowed the companies a return on their initial outlays. The companies — Delek Drilling and Nobel Energy — are now being accused of abusing this clause to pump up their expenses and thereby limit their tax liability.

The wealth fund was supposed to address public criticism over the tax payment schedules and address claims that Netanyahu was doing the bidding of the gas tycoons and their megacorporations. According to some publications, these companies appear to be practicing aggressive tax planning to compensate for the decline in the price of gas and reduce the tax liabilities on their profits. The companies have also appealed the amount of tax levied on them by the state and have held up payment.

The government has begun advancing an amendment to the law that would oblige the drilling companies to first pay what the state demands and only then begin legal proceedings to contest the sum. Finance Minister Avigdor Liberman argues that the legislation will speed up payments into the wealth fund.

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