Grumpy Old Man: A gold mine – but whose?

A relatively small notice appeared in the March 23 Jerusalem Post (and, I suppose, other newspapers): “Want to determine the policy of the Gas Royalty Fund? The Ministry of Finance invites you to submit your candidacy for the management of the State of Israel’s gas Royalties Fund. Registration will be possible until April 22, 2018.”

As someone who understands a thing or two about editing and proofreading, calling it “Gas Royalty Fund” and then “gas Royalties Fund” makes me wonder whether they know what they’re doing over at the Finance Ministry – I mean, get the fund’s name straight before any talk about divvying it up. (For the record, the name is Hakeren Le’ezrahei Yisrael, or the Israeli Citizens’ Fund.) Then there’s the way the notice starts: “Want to determine the policy….?” A notice that starts like this makes me think of an adult at the beach: “Kids! Who wants ice cream?” My first impression was that they were looking for people like you and me to sit in a large hall and give a show of hands.

Be the first to know –

No matter. This was the first time I saw any governmental body talk about the royalties from our offshore natural gas – a true gold mine. To learn more, I turned to someone who has been intimately involved in the financial side of the gas fields since 2010, Prof. Eytan Sheshinski.

PROF. SHESHINSKI is a world-renowned economist. Israeli- and American-trained, he’s emeritus professor of public finance at the Hebrew University of Jerusalem, a visiting professor at places like Harvard, Princeton and Stanford, and a widely recruited international consultant. In fact, he’s been (and continues to be) one of the top go-to guys whenever the Israeli government is faced with a serious economic issue – which is to say often.

In 2010, with new and relatively significant offshore gas fields in operation, Sheshinski was asked to head a committee to help update a 1952 law and the subsequent amendments overseeing the commercial extraction of oil and gas. Those regulations were, he states, “outmoded and, if I may say, quite sloppily worded because [back in 1952], nobody thought we had much [resources].”

The extant law outsourced everything in return for royalties on 12.5% of revenues.

“The government started to ask itself – quite typically in Israel, which is to say belatedly – are we receiving adequate revenue? According to world standards, is 12.5% reasonable?” It turns out that in comparison to other countries, Israel’s 12.5% royalty, thrown in with corporate taxes on these endeavors (together called in professional jargon the “government take”), was the lowest, at about 30-35%, while the world average was in excess of 60%.

“There was no bidding [by competitors]….

This is why Israel’s government take was so low,” he explains.

Sheshinski’s job was to determine how to tweak the old policy or come up with a new one.

“The solution,” he says, “was to add a progressive excess-profits tax. This would raise the government take to in excess of 60%,” a figure more in line with OECD averages.

In 2011, new legislation based on the committee’s recommendations was passed. The franchisees appealed in court but lost. (A second Sheshinski-led committee recommended similar restructuring for private income generated from all the country’s natural resources, most notably Dead Sea potash.) The new law also established the Israeli Citizens’ Fund, whose coffers would be filled by the tax on excess profits while royalties and corporate taxes would go into the regular government budget. Its funding has been delayed due to other waffling, such as the government’s sudden decision to rethink monopolies and consumer prices for domestically-used gas, and, of course, the resulting lawsuits.

SO WHAT about the fund itself? “There are some 40 wealth funds around the world,” Sheshinski says. “The record is very checkered. Some have been very successful, but many have been robbed by their governments.”

Wealth funds are for long-term planning, such as improvements in infrastructure, education and health services for populations across the board. This is because governments are usually not that far-sighted when politics and short-term interests typically take over.

The Israeli fund will be run by a management council overseen by the Bank of Israel.

“What they will do,” Sheshinski says, “is… God knows. There will be a lot of politics, I guess, because there will be only three non-governmental appointees, with the rest coming from government ministries and services.”

One clause in the rules allows the Knesset to borrow from the fund in cases of emergency.

“That kind of policy,” he notes, “is similar to funds in Africa that were robbed.

This is because a ‘loan’ can be indefinite.”

In addition, go define “emergency.”

So how can we be sure the money will not be used for political purposes? “I think there will have to be a high level of transparency. All the annual disbursements will have to be made known to the public, and the public will express its opinion…. There’s no other way,” Sheshinski says.

“The prime minister said the funds will be for security, for education and whatever.

But when you say ‘education,’ this is a vague term. It could be higher education, it could be elementary education and it could be yeshiva education. You have to put context into these words, and this will be politics. No question.”

He would like to somehow be engaged in the work of the wealth fund’s council.

“All this was my baby, so to speak,” he says. “I don’t want to brag, but I certainly was involved. They were our recommendations and I certainly would like to follow up. I will express my opinion if needed.”

When told the name of the column this information would appear in, Sheshinski states very matter-of-factly: “You have solid grounds to be grumpy.”

THE WEALTH fund council is to be headed by the finance minister. On the appointments committee are other people from the political world, including Eli Groner, director-general of the Prime Minister’s Office, and Shai Babad, director-general of the Finance Ministry.

I worry about this because of places like Tunica, a rural county in the US state of Mississippi that legalized gambling to improve local living standards, primarily through jobs and government take. Alas, it didn’t work out that way.

According to a Washington Post investigative report, “it was a story of a largely white political leadership that did not grasp the depths of poverty facing many black residents and did not choose to use the casino revenues that flowed into the county in an equitable way. So instead of funding skills training and providing programs for the vulnerable, they poured money into a riverfront wedding hall, an Olympic-size indoor swimming pool and a golf course designed by a former PGA Tour pro – all while implementing a massive tax cut that primarily benefited the wealthy.”

Sound familiar? It’s called poor planning.

Or the wrong people. Or people with their hands in the till. These are three scenarios we’re familiar with around here.

It’s only the transparency Sheshinski so desperately wants that will keep Israel from becoming another Tunica.

It’s up to all of us to follow the money