"It's about time that the institutions did what was right and not just what was convenient. It's very easy to buy bonds of US corporations that issue in Israel. The time has come for the institutions to go into the mortgage and residential real estate markets directly. To obtain a return at low risk is what we want to see in our portfolios today, as savers." - Minister of the Economy and Industry Eli Cohen at the Globes Real estate Conference last week.
1. These are penetrating remarks about our investment institutions, without a doubt. Cohen gave them a basic lesson in investment. But he missed the point entirely. OK, the mortgage market is important, the residential real estate market is important, and it's also important that our investment institutions should contribute to the economy, to creating employment. He simply forgot one undervalued, neglected sector that the investment institutions ignore altogether but that the rest of the world looks upon very favorably – the high-tech sector.
Our headline is harsh. Betrayal is a harsh word, meant to shock, and rightly, for if the institutions invest less than half of one percent of their investment portfolios, which amount to NIS 1.5 trillion, then they are betraying the country's economic future.
On the face of it, Israel has a prosperous high-tech industry with an international reputation, but that is just where we are missing out. There exists here a formidable infrastructure of know-how and innovation that has been built up over many years, but alongside it is an "infrastructure" of low-quality jobs, low wages, and a scale of inequality that is one of the largest in the world. Why does the Startup Nation, that attracts huge (and mainly foreign) investment, fail to pull the rest of the economy along after it?
Clearly, no economy can be based on high-tech alone, and there will always be a need for traditional industries and services. Clearly too, no-one is under the illusion that the economy can rest only on export-orientated industries, but broadening their base, and building production and development bases here, are the keys to solving a large part of the problems of the Israeli economy, that start with wages and end with the social safety nets for those left behind. There's a mighty growth engine here that only has to be worked a little harder, whether through supportive government policy or through the investment policy of financial institutions, which currently take no notice of the most successful Israeli industry ever, with a plethora of excuses (it's too complicated for us, it's too risky for us, it doesn't give us a return). The result of this betrayal is that Israel sells or hires (in the form of brains employed at development centers of global giants) the huge know-how infrastructure created here to foreign investors and foreign companies, most of which also enjoy generous tax breaks. The result is that although the economy is at full employment, it creates too many low-quality jobs, at very low wages by any criteria.
In Israel we have argued for years over how to divide up the cake: why does more go to defense and less to welfare, why does this or that pressure group receive funds leaving nothing for the weak? That's an important discussion, but the really important thing is to make the cake bigger, and that will come only from selling more Israeli services and products in international markets. Increasing exports creates higher quality and better paying jobs, and generates tax revenue both at the corporate and at the individual level, and thus the cake grows. Responsibility for making the cake grow certainly lies with the financial institutions.
2. The problem is very clear, and the solution is simple. All agree that there's a highly developed high-tech industry here that attracts innumerable investors from all over the world. Everyone thinks it's an amazing industry, but the Israeli institutions have decided that it isn't. Broadly defined, this industry accounts for more than 40% of Israel's exports, about 20% of GDP, and 10-11% of the workforce. Each job in it also creates peripheral jobs. These are jobs of the top 10%.
As soon as foreign investors in effect took over the Israeli high-tech industry, a momentum was created in which companies have to be sold. They're foreigners, they want exits, so the investment policy of the venture capital funds has to be to sell. If the investors and funds were Israeli, the Israeli stock exchange could provide the exit, and ownership could change hands: the funds exit, the Israeli public and Israeli institutions enter, and we have a properly Israeli industry that can build companies on this model. There are dozens of high-tech companies that could be floated on the Tel Aviv Stock Exchange, but the truth must be told: it's a stock exchange of bond offerings, banks and real estate. There's no point in high-tech IPOs.
3. What's so complicated about it? You're on two sides of one street, as it were. On one side, high-tech companies, and the investment industry on the other. All that's required is to cross the road, take a few people who have worked in high-tech to replace a few investment managers who haven't a clue about it, explain to them how the business works, and let them get on with it. Instead of barely half of one percent of investment, we'd get 1-2% initially, and then 5%. What could go wrong? You might lose almost all of it as you did with Lev Leviev and Motti Zisser (no, it won't happen)? At least that way you'll contribute towards jobs and tax revenues in Israel, instead of to construction sites in Russia, in all kinds of tangled deals no-one can decipher. It's not rocket science. It's absolutely doable. You only have to cross the road.
4. Why don't Israel Securities Authority chairman Shmuel Hauser and Tel Aviv Stock Exchange chairman Amnon Neubach try to develop a stock exchange appropriate in its regulations to high-tech companies, instead of building a bond market? It's not a matter of leveraged companies with pyramid structures. It's simple: let them raise money, build for them a model that can work. Again, it's entirely possible.
The answer to questions about the near-zero investment in high-tech are always the same: leave us alone, it's risky, we don't understand it, it's not our field, all the money will be lost. Give us a bond of some American real estate company and leave us in peace. It's safer and the return is higher. What about building Israeli industry? All they build is their personal bonuses.
5. A complete high-tech eco-system has been created in Israel built on foreign money. That's excellent, we can enjoy it, boast about it, glory in it, because indeed, everyone believes in us, they really do. The problem is that Israel doesn't believe in itself. The trend is clear. In the end, we're not building an industry here that generates employment, that could produce ten, twenty or even thirty Check Points or a similar number of Nices. An industry is being built that, because of the very fact that it is foreign-owned, must sell out and keep itself going through exits. Then come the complaints: why is an industry of exist flourishing, and not an industry of building companies? Why does a handful of high-tech entrepreneurs alongside a bunch of lawyers and accountants get all the benefit? The answer is: the great betrayal by the Israeli financial institutions and the State of Israel.
6. That brings us back to Eli Cohen, who is very close to Minister of Finance Moshe Kahlon and has pushed through several reforms for him. The most important reform needed just now is a law compelling the institutions to leave their comfort zone and obliging them to invest 5% of their assets in the Israeli high-tech industry. That's all that is required, no more. It amounts to something like NIS 75 billion, and that would be enough to propel this industry forward. It would be enough to build more and more export-orientated companies in Israel. It would help to create more jobs of the quality enjoyed by the top ten percent.
Will you pick up the gauntlet, Eli Cohen? The next Globes High-Tech Conference awaits your announcement.
Published by Globes [online], Israel business news - www.globes-online.com - on March 5, 2017
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