Over-regulation and public criticism

I have had a hand in international business affairs involving Israel for some 35 years. During that time, I have witnessed a dramatic change in the reactions of foreign – primarily US – businessmen to the idea of doing business in or with Israel.

Initially, it was not unusual to hear an American businessman say: “I am prepared to donate money to Israel, but not to do business there.”

As time passed, however, the perception of Israel changed. No longer was Israel a place to make a “small fortune” – i.e. to convert a large fortune into a small one. The bureaucracy was deemed manageable and business practices began to take on internationally accepted standards. These developments, together with the “Start-Up Nation” quality of Israeli business, attracted significant foreign investment in many fields.

During the past few years, the winds have changed.

Three events in particular have once again thrown Israel back decades in international business perception.

The first event involved the retroactive change in royalties payable on offshore gas finds. Populist politicians began bemoaning the rape of national resources by business tycoons. One after another, self-made critics published self-righteous tirades against the offshore gas prospectors, counting their riches even before a single liter of gas was extracted from the ground.

When these profits were compared with minimum wage and average income, the prospectors were made to look like pariahs. What about the substantial risks taken by the prospectors who literally poured hundreds of millions of dollars into the ground before they knew if the fields would be productive? What about all of the companies who tried previously to find gas or oil and lost their entire investment? Not a word. The ever-hypocritical Israeli public acted precisely as expected, by maligning the successful explorers while at the same time begging to invest in their securities offerings!

I happened to be in New York when the Sheshinsky report was issued. I was shocked to find that US businessmen had been following the drama in great detail. When the committee decided that the retroactive revision of gas royalties was appropriate since it was “really” an amendment of the tax laws, one of my American colleagues said: “It smacks of the basest political subterfuge one would expect from a third-world country. When previous exploration activities were unsuccessful, did anyone suggest that the government reimburse the investors for their losses?”

How many of the committee members ever put their own capital in such a risky venture? (When I returned to Israel, I quickly checked the backgrounds of the committee members – overwhelmingly present and former government officials.)

The second event involved the world real-estate crisis that crippled companies throughout the globe. When Israeli companies could not meet their debt obligations, the same populists and critics derided the restructuring activities which allowed the companies to survive.

Two new Hebrew expressions were branded: The major shareholders became “Tykoonim” and the public was deemed to have taken a “haircut.” The latter was particularly offensive since it raised the memories of Nazi victims whose hair was shaved against their will upon their entry to the camps. Once again, not a word about the profits that Israeli investors had made over the years as they participated – through the investment companies – in the global real-estate bubble. Not a word about the Israeli investors who drove prices to the sky.

The third event is essentially another populist outcome of the “Tykoon” branding: “concentration” or “rikuziyut.”

Like any modern, capitalist economy, success bred success. Companies that were successful in one field, plowed their profits into other areas. Using the same skills that brought them previous profits, the growing companies enjoyed similar successes in new fields. These activities were carefully watched by the Antitrust Authority.

As soon as competition could be materially impaired, with resultant potential adverse affects on the public, the Antitrust Authority stepped in. One of the positive results of this regulation of investment was that successful investors and managers began to spread their talents – and once again they succeeded.

To the same self-righteous critics who proclaimed their naive, populist, but economically baseless platitudes against the gas profits, the “tykoons” and the “haircuts,” this was further, fertile ground to spread their calumnies. For unknown reasons, “concentration” of success became anathema – and the public, of course, picked up on these proclamations.

Investors and business entrepreneurs finally became exasperated with these and related developments, and have begun to flee from over-regulation and unfounded public criticism, to shores which are more welcoming.

The Bank of Israel has reported on a net outflow of investments in Israel for many months. Similarly and consequentially, there has been a constant stampede to purchase dollars, with a concomitant increase in the exchange rate. Israel is suffering from a “brain drain” of businessmen and a “monetary drain” of hard currency.

If Israel wants to regain its position as a modern economy, whose greatest resource is its human talent, then it must create an environment to provide investors, promoters and entrepreneurs with the conditions necessary to succeed. Self-righteous criticism by neophyte politicians may make headlines; but such criticism will not do what only business success can do – create jobs, attract foreign investment and keep Israeli businessmen at home.

The writer is an advocate & attorney at law with Weksler, Bregman & Co.