"Investments in Intel have paid off handsomely"
Outgoing Investment Promotion Center director Hezi Zaieg expresses no regret over losing Intel's newest fab to Ireland.
One of Zaieg's biggest battles in the past year was against Intel Corporation (Nasdaq: INTC), which has most of its Israeli operations in Kiryat Gat. After a series of huge grants transferred via the Investment Center, totaling almost $1.5 billion since 1996, in exchange for developing activity in the country, the Ministry of Industry, Trade and Labor and its Investment Center unit decided to dictate new terms in exchange for another big investment in the southern town. When Intel asked for a NIS 600 million grant to build its newest state-of-the-art fab in the world in the town, the ministry balked and offered a different location: Beit She'an in the Jordan Valley. Intel rejected the condition ans decided to build the new fab in Ireland.
"Globes": If that is the case, why were you tougher on Intel's latest request?
Zaieg: "Nothing happened. Intel decided to expand, it examined the options and decided to expand in Ireland, where it has an infrastructure to do so at the desired investment. Even the buildings were ready, abandoned buildings, at a cost of $1.5-2 billion. These are expensive infrastructures. Building the infrastructure alone in Kiryat Gat cost Intel $1 billion. That's a huge amount of capital. With all this, at that point in time Intel had to decide and did so. There will be intensive talks between the government and Intel over the next two years about the company's next investment, and the government will presumably want this investment to be made in the north."
Cross your heart: has Intel cost Israel too much money?
"A company like Intel should not be measured by how much it costs us. There are huge advantages in having it operate in Israel."
Nonetheless, let's talk in terms of profit and loss.
"During the years that Intel has operated in Israel, it has returned to Israel far more than the grants it received from the state, especially in terms of income taxes. 7,500 Intel highly paid employees in Israel generate hundreds of millions of shekels in income taxes. In terms of profit and loss, Israel comes out ahead. Intel has brought to Israel a management culture that is not measured in money, with standards and practices that exist only in the US."
Will we see more fat grants to Intel in the coming years?
"I think that the government should create a new incentives formula for mega-investments in the economy, and to condition them on spreading the investments over 10-15 years, rather than three years. If a multinational planning a mega-investment, which would guarantee a lot of jobs, were to come to Israel now, the government should go for it, because we're talking about a strategic investment with a great deal of added value."
Intel has been mentioned as one of the companies with trapped profits that is seeking to export capital from Israel while paying a reduced tax rate. A recent survey among these companies found that most of them prefer not to share the trapped capital with the government. Where did you go wrong?
"The issue of trapped companies has already been discussed, when the reform to the Law for the Encouragement of Capital Investments was written. Back then, the Tax Authority strongly objected to the measure. I think that at that time, it would have deen easier to reach more agreements with companies on this matter. We could have offered a deal on trapped profits together with the reform, and offered the multinationals a single package of tax breaks in exchange for more investment. But we came to them about the trapped profits after the reform when we had no leverage in hand."
You sound displeased/
"I am displeased. No one is pleased. We did not collect enough money and we should definitely have done better. But the mechanism that managed this was the wrong mechanism. The Ministry of Finance and the Ministry of Industry should have cooperated and we would have achieved much more. The fact that the Law for the Encouragement of Capital Investments is so amenable and changeable within such a short period of time does not necessarily create a good situation because there is uncertainty for the companies."
No cut to the Investment Center's budget
"Since I came to the Investment Center, they talked to me about extensive budget cuts. What didn’t they say, what numbers didn’t they toss out. In the end, the budget only grew. It has increased almost ten-fold in the past eight years, from NIS 100 million to NIS 1 billion. Every government realized that there is no better contractor in the country than the Investment Center. Even in the wave of cuts in the next budget, I don’t see anyone cutting the Investment Center's budget. On the contrary, it will only grow because the challenges are great," Zaieg told "Globes"
Even if the Investment Promotion Center's budget is not increased, if the prophecies of doom and the budget axe is wielded against it too, on the grounds of necessity because of the need to reduce the NIS 40 billion deficit, this will not worry Zaieg. He has run the Investment Center at the Ministry of Industry, Trade and Labor for almost eight years. In the coming days, he will hand the scepter over to Nahum Itzkovich, the Ministry of Social Services director general. His appointment was approved by the cabinet in the midst of the election campaign, and caused a storm because of his closeness to outgoing Minister of Industry, Trade and Labor Shalom Simhon.
"Last summer, I already asked Simhon to leave, and in general, I think time limits for a job of this kind is proper. I've served two terms in the job, and that's enough for me. There are a lot of other challenging things that I can do and I want to try them.
Tax breaks and grants for corporations
Zaieg's biggest mark was the reform of the Law for the Encouragement of Capital Investments two years ago. Under the law, the Investment Promotion Center submits grants and tax breaks for industrial enterprises in the periphery, or which export at least 25% of their output. The improvements under the reform include, a reduced tax rate of 12% of turnover by 2015 for exporters located in central Israel and a 6% rate for companies in Priority A development areas. Exporters in the periphery will receive double benefits: a big discount on the companies tax and access to state grants and loans.
The Ministry of Finance and Ministry of Industry, which pushed the amendment to the law, said that it met the new economic challenges facing Israel. The ministries believe that the reform updated the ability of Israeli industry to compete in foreign markets, while offering needed incentives to encourage innovation in the periphery and create jobs.
"In the past two years, most support was for exporters," says Zaieg. "If there is a situation in which someone has to decide for reasons of economy and profit, there is no logic for him to manufacture here using imported raw materials. For him, our involvement in domestic activity is a factor motivating him to stay in the country. With this reform, many enterprises stayed in Israel and retracted plans to move their operations abroad."
How many enterprises?
"Quite a few. It happens when many companies, in addition to the production activity in Israel decided to expand their overseas production to be nearer their target markets. We conducted a review to thoroughly examine what motivates them to do this. The companies said that Israel's tax environment was unfriendly, and if there were government grants and lower tax rates, they'd keep their factories in Israel and maybe expand them."
So you said, yes.
"Ultimately, in industry, business is very conservative and profit margins are not great. We're in a country that is exposed to every fluctuation in the world all the time, and we also have security constraints which create a complex reality that is liable to influence investors. An investor who knows that in exchange for coming here, the government is behind him - that is without question a growth engine."
The reform has nevertheless been lambasted by the business sector, which claims that it only encourages tycoons instead of injecting capital to the companies which really need it to establish industrial activity in the periphery. Federation of Israeli Chambers of Commerce president Uriel Lynn says that the law is illogical and discriminatory, and reflects the fixations of the Ministry of Finance and Knesset Finance Committee by only encourage a few score exporters at the expense of the business sector in general.
In response, Zaieg says, "The fact that there are claims of discrimination by various parties proves that the Investment Center is doing very good work. I have to take care of my customers, and my customers are manufacturers, and only them."
This may be true, but not every manufacturer is an exporter, certainly not at the 25% of turnover eligibility threshold, but still make an important contribution to the economy. They produce goods, create jobs, and are part of the growth engine.
Published by Globes [online], Israel business news - www.globes-online.com - on January 31, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013
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