The legislation that seeks to direct investment to Israel's disadvantaged peripheral regions is beyond repair and must be replaced by effective government spending in several specific areas, a scholar argued recently.
"The [Law for the Encouragement of Capital Investment, or LECI, passed in 1959] has failed to achieve any of its intended objectives while wasting billions of shekels of taxpayers funds. It should be rescinded immediately," Koret Fund research fellow Shelly Hasan said in her study, presented at the Acre conference.
Dr. Roby Nathanson, director of the Israel Institute of Social and Economic Research and a panelist at the event, concurred that the LECI was the product of the closure and high level of state organization that characterized the Israeli economy at the time and, therefore, was "not appropriate for the modern age and not [appropriate] for this era."
Since the law's adoption, the government has given grants amounting to "tens of billions of shekels," while the cost of tax benefits granted under the law is thought to amount to additional billions, the study noted.
Hasan cited a State Comptroller study on LECI spending between 1985 and 1989, which found that only 36% of the plants that received approval for grants had completed their investments, and that of 7,000 jobs that were expected to be created as a result of the spending, only 524 actually materialized. At the 16 largest factories benefiting from the money, the number of employees should have grown by 2,600, but actually declined by about 4,800., according to the study. An Industry, Trade and Labor Ministry Investment Center study of factories that received LECI Approved Enterprise status between 1990 and 1992 showed that their actual output levels were 55% below forecast and that their exports were 54% below forecasts.
Hasan also noted that while the cost of creating one job through LECI programs came to NIS 2 million according to a comptroller survey, creating one job through the Small and Medium Enterprise Authority's Fund for Promoting Small Business cost only NIS 5,644, on average.
Funds budgeted for the LECI instead should be spent on infrastructure projects improving transportation between the periphery and major population centers across the country; speeding cuts to corporate tax rates to attract investment; encouraging exports; and increasing leveraged credit to small businesses in the periphery "instead of continuing to support LECI-type industry failures," Hasan's study found.
For example, the government could have canceled the NIS 2b. budgeted for the LECI in 2006 and used part of the money to construct the Acre-Karmiel railway line - priced at NIS 943 million but shelved due to a lack of funding "thereby contributing in a practical manner to employment and growth," Hasan said.