Sovereign wealth fund to begin operating in 2017

Dr. Nadine Baudot-Trajtenberg

The decision by the Knesset as part of the Sheshinski 2 bill has surprised the Bank of Israel, which expected the fund to operate from 2020.

The target date for putting a sovereign wealth fund into operation has been advanced by three whole years as a result of the anticipated approval by the Knesset of the Sheshinski 2 bill for imposing an excess profits tax on the production of natural resources. In recent months, the Bank of Israel has slowed its preparations for establishing the new fund, under the assumption that it would not be needed before 2020. It now appears, however, that the fund is slated to begin operating in 2017.

In the original bill, the revenue from the excess profit tax to be imposed on Israel Chemicals (TASE: ICL: NYSE: ICL) and other producers of natural resources was designated for a special purpose fund on behalf of residents of the Negev. This clause was changed at the last minute, however, among other things due to concern that the money from the fund would be exploited for political purposes. Instead, it was decided that this money would be put in the sovereign wealth fund in which money from the excess profits tax on production of natural gas recommended by the first Sheshinski Committee is to be deposited. Revenue from excess profits tax on the production of potash, bromine, copper, and phosphates is expected to reach NIS 400-500 million a year, according to the Ministry of Finance estimate, or NIS 280 million a year according to the estimate presented by the Prime Minister's Office.

The Knesset approved the sovereign wealth fund, officially called the Israeli Citizens Fund, in July 2014. The fund is scheduled to go into operation when the cumulative excess profits tax collected by the state reaches NIS 1.2 billion. NIS 300 million in excess profits tax has been accumulated from the Mary B natural gas reservoir in Yam Tethys, which has since been emptied. Initially, most of the fund's revenue is due to come from excess profits tax on natural gas production from the Tamar reservoir, and in the middle of the next decade from the Leviathan reservoir. The tax will be imposed only after the developers make back 2.3 times their initial investment on exploration and development of the reservoir.

As part of the natural gas plan the Tamar developers are slated to invest $2 billion more in expanding the Tamar reservoir for exporting gas to Egypt a "recognized" investment that will delay the imposing of the excess profits tax until 2020.

The decision came as a big surprise to the Bank of Israel, which is legally responsible for establish the fund. Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg, who is responsible for the process of setting up the fund, is currently engaged in preliminary preparations for founding the public credit database, but the Bank of Israel today said, "The Bank will be ready to operate the fund when the time comes."

According to a forecast presented to the Knesset by then-Governor of the Bank of Israel Stanley Fischer in 2013, $72 billion will be accumulated in the fund by 2037. Since then however, delays have occurred in the development of the Leviathan reservoir, and global gas prices have plunged. Current estimates of the money that will accumulated in the fund are one third lower.

Published by Globes [online], Israel business news - www.globes-online.com - on November 11, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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Dr. Nadine Baudot-Trajtenberg
Dr. Nadine Baudot-Trajtenberg
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