Israel's Business Climate
Two significant problems with the Israeli economy are the amount of funds earmarked for defense (20 cents of every dollar are spent on weaponry and preparedness) and government ownership of Israel's largest companies; e.g., Israel Electric Corporation, Israel Aircraft Industries, Oil Refineries Ltd., El Al (the national airline), and Bezeq (the telephone and communications company).
Furthermore, the country's largest, the Labor Federation (Histadrut) controls other major industries and services such as Tnuvah (an agricultural marketing cooperative), and Kupat Holim (a huge system of health care clinics and hospitals).
In 1998, privatization raised approximately $1.2 billion through public offerings on the Tel-Aviv Stock Exchange (TASE).1 Highlights included sale of the Government's remaining 30 percent interest in Israel Chemicals (ICL) and its disposition of interest in United Mizrahi Bank, Bank Leumi, Bank Hapoalim and Bezeq. In addition to privatization through the TASE, the government sold some of its bank holdings to Lehman Brothers and Goldman Sachs, which purchased 2 percent of Bank Leumi and 1.8 percent of Bank Hapoalim, respectively. These investment banks subsequently resold the shares to international institutional investors.
During the first half of 1999, privatization activity via the TASE slowed noticeably - to less than $400 million. The Government raised $145 million from Lehman Brothers and Goldman Sachs, which purchased 4 percent of Bank Leumi and 2 percent of Bank Hapoalim, respectively and which again resold the shares to their investors. In July 1999, Bank Hapoalim sold a further 6 percent of its shares on the London Stock Exchange, marking the first offering of an Israeli bank on an international stock exchange.
Prospective privatization activities in the near future include the reduction of government holdings in Israel Discount Bank, Bank Leumi, Bank Otzar Hashilton, El Al Airlines and Bezeq.
The country's electrical capacity has struggled to keep pace with the economic growth, forcing state-owned monopoly power utility, Israel Electric Corporation (IEC), to accept competition from private producers.
Since 1996, Israeli law has permitted private generators to generate 20 percent of total capacity: 10 percent from within Israel and 10 percent from cross-border projects. All the independent power projects must to sell electricity to the IEC.
The Israeli Ministry of National Infrastructure plans to issue two international tenders for 350-400 MW combined cycle power plants. An inter-ministerial committee is working on determining the exact parameters of the projects, in particular the quantity of electricity the plant will be allowed to sell to the IEC and to the private sector. There have been numerous delays to the privatization of Israel's electricity sector. These obstacles were mainly due to the fact that the IEC itself was involved in the process by issuing the Independent Power Production tenders. The Ministry of National Infrastructure will issue the upcoming tenders, thus creating market expectation that the IPP program will receive new impetus, creating substantial opportunities.
Opportunities in natural gas projects are also expected to increase due to their environmental advantages. Interest has been high in a planned 320 MW plant, to be fueled by Egyptian natural gas. Enron and Gaz de France have shown interest in developing the US$ 1 billion pipeline from Egypt, while ABB, British Gas and Amoco are among interested bidders for the plant.
However, official negotiations on the supply of natural gas between the Egyptian and Israeli governments were suspended in 1998. Sources in both Egypt and Israel indicated that the suspension was due to political, not commercial considerations. Nevertheless, in late-1999, Egypt announced officially its willing to provide Israel (as well as the Palestinian Authority and Jordan) with natural gas.
In the construction sector, the Shalom Project is the largest project ever undertaken in the Middle East. With an aggregate cost of US$ 400 million, it includes the construction of three business skyscrapers, the tallest of which reaches a height of 180 meters, and has become one of the leading shopping malls in Israel.
A Canadian firm, Magil, and its local Israeli partner, Cementcal Ltd., built more than 300,000 square meters of the project, including a parking lot. A single management company belonging to Canit Hashalom Investments Ltd. manages the project.
Build Operate Transfer
There are three major transportation projects scheduled for the next 5 years and valued at a combined US$ 4 billion. The projects are the Cross-Israel Highway, the Tel Aviv Metro and the Carmel Tunnel. All may be conducted on a BOT basis.
BZW and Poalim Capital Markets and Investments, the investment banking arm of Bank Hapoalim, are advising the government on the Cross-Israel Highway, the country's first toll-road. The first phase of the project, to be constructed on a BOT basis, consists of a ninety kilometer central section of the road stretching from the Yad Benjamin region, near Gedera, to Hadera, in the north of the country.
The winning consortium will build and operate the highway for up to thirty years. The US$ 750 million estimated cost of the project will be met by toll levies.
The proposed Carmel Tunnel, which would alleviate the traffic bottleneck into Haifa, has progressed further than both the Cross-Israel Highway and the Tel Aviv Metro projects. In other sectors, the scope for project finance is more limited. Water and sewerage is a municipal sphere, but some BOTs are being discussed.
Airport and port expansions and are also areas where private money is being considered. At the end of 1997 the Israeli Airports Authority issued the first tenders for construction of the new Ben Gurion international airport terminal. A new terminal was built at Haifa airport, which has been opened to short distance international flights. Privatization of Haifa airport is under consideration. Expansion of ground facilities and upgrading the main runway will be delayed until a decision regarding the airport's future is made. Furthermore, agreement has been reached between the governments of Israel and Jordan regarding joint use of Aqaba airport. Israel will close the Avdat military airfield to civilian wide-body aircraft and build a new terminal at Ein Evrona, north of the current Eilat terminal.
The Israeli Ports and Railways Authority plans to issue a preliminary international tender for the expansion of Ashdod Port. The project will involve marine excavation, extensions of breakwater and construction of new quays to increase the Port's container handling facility by 50 percent to 1.7 million containers annually. The cost of the project will exceed $500 million. The deepening of the Port will provide anchorage for vessels capable of handling up to 6,000 containers. In addition, some of the new quays will have facilities for anchorage of bulk vessels with a capacity of 100,000 tons.
Between 1992 and 1995, franchising nearly doubled from US$ 90 million to an estimated US$ 160 million. More than 50 percent of franchises come from America and include Domino's Pizza, Pizza Hut, McDonald's, Kentucky Fried Chicken, Kenny Rogers Roasters, Burger King, Dunkin’ Donuts, Ben and Jerry's and Haagen Dazs. Additionally, Ace Hardware and Office Depot opened franchises in the early 1990s. Toys-R-Us opened in 1995.
Most franchises in Israel are owned by a main franchisee, who owns and operates branches throughout the country. Subway is an exception, operating a network of individually owned outlets. Mailboxes Etc. is entering the market with individually owned franchises. The key to success in Israel lies in strong management and ongoing, in-country training programs.
Consumer malls have sprouted up across the country. Trendy, specialized national chain stores and franchises have become increasingly popular, replacing traditional food and consumer goods monopolies. Success lies offering a variety of new products, customer service and changing consumer consumption habits.
Principal Business Opportunities
Toys and Games
Computers and Peripherals
Franchising (especially in the fast food sector)
Machine Tools/Metalworking Equipment
Processed Food (including beverages and cigarettes) Food Processing/Packaging Equipment
Airport/Ground Support Equipment
Chemical Product Machinery
© 2000 Mena Report (www.menareport.com)