‘Israel should invest gas revenues in human capital at home rather than in foreign funds’

Shraga Biran argues for using the $126b. on expanding education, tackling inequality, poverty, unemployment.

July 4, 2013 22:14

SHRAGA BIRAN 370. (photo credit: courtesy)

To maximize the socioeconomic potential of the public revenues generated by the country’s natural gas finds, Israel should invest these profits not in a speculative foreign fund as planned but instead in domestic human capital, a prominent lawyer-businessman told The Jerusalem Post on Wednesday.

The gas from Israel’s 282-billion- cubic-meter Tamar reservoir is already flowing into the country, and that of neighboring 545-b.cu.m. Leviathan should be online within a few years – presumably with some going to export and some staying at home.

All in all, Israel is expected to receive about $126.2 billion in gas revenues over the next 25 years, as 60 percent of profits will go to the state’s coiffeurs through the mandate of the Sheshinski Committee, former Bank of Israel governor Stanley Fischer recently confirmed to the Knesset’s Science and Technology Committee. The revenues will be approximately $5.06b. annually in 2026 and 2027, will increase to $7.62b. annually in 2028 and then remain $9.82b. annually from 2030 through 2037.

Investing that expected $126b. in gas revenues in social infrastructure is “the opportunity of this generation,” according to a study released by the Institute for Structural Reform, run by Israeli attorney-businessman Shraga Biran.

“We always had the feeling that Moses chose this country of honey and milk only and led us out of this wealth of gas and black oil,” Biran said on Wednesday. “Finally we are finding that Israel is not only the blessed country and God corrected his mistake and found this story of gas and oil in Israel.”

While Biran and his colleagues agree that “the gas discoveries are a blessing,” they stress that the funds generated by these discoveries should not be invested in a speculative sovereign wealth fund in investments abroad. Such a decision, they explained, would be “a fatal mistake and counterproductive from the social economic point of view.”

Instead, they feel that the money should be invested in human capital through a longterm, socially oriented strategy investment.

Biran is a primary shareholder of the Alon Group, which owns 4% of the Tamar reservoir, and he personally has less than a 1.5% stake in the basin.

He stressed, however, that providing an opinion on the government’s revenue investment choices provides no conflict of interest whatsoever, as it has no relationship to the growth of his personal investments.

As per the Oil Profit Taxation Law of 2011, the government must establish a fund through legislation to manage the profits generated through taxation on hydrocarbons, and these funds must serve socioeconomic purposes. However, in the 2012 State Oil Revenue Management Fund Law, the government determined that only 3.5% of the funds within the first 10 years – or $622.30 million – will actually go to solving socioeconomic issues, the study said.

Such a mandate is contradictory to the goals of the Oil Profit Taxation Law, which stresses that the fund must be used for social and economic goals, the study explained.

Placing the money “in highrisk foreign investments that are highly speculative” could “lead to heavy losses and surging costs,” it warned.

“Our basic message is that today’s generation is a future generation of about 25-30 years, if you invest in social aimed funds, you invest in the future generation, into longterm projects that are connected with research and development and education, directly through long-term investments,” Biran said.

Many have argued that a failure to invest the revenues in foreign funds will cause Israel to suffer from “Dutch Disease” – a phenomenon in which a large, unexpected increase in revenues from resources causes a sharp appreciation in the exchange rate and thus prompts a decrease in the production and competitiveness of the tradable sector.

However, the study explained, Israel’s gas revenues will not likely be high enough to cause the country to suffer seriously from Dutch Disease, as the gas revenues will amount to less than 1% of the gross domestic product per capita.

Fischer, National Economic Council head Eugene Kandel, Energy and Water Minister Silvan Shalom and others strongly advocate the creation of the sovereign wealth fund according to the Norwegian Government Pension Fund Global model, which places the profits in foreign markets.

Yet the study argues that such a decision is a mistake because the economic situations of Israel and Norway are entirely different. Norway, for example, has a GDP two times that of Israel and has a growth rate that is 7% higher, the authors explained.

Meanwhile, Israel’s gas revenues are relatively low in relation to Israel’s GDP as a whole, because the amount of gas found in Israel’s waters are not actually that enormous compared to other hydrocarbon countries around the world, they added.

“If Israel is to face the Dutch Disease, it will be in a weak manner that will have minor impact on the Israeli economy,” the study continued.

“Investing the revenues in a speculative foreign fund will cause much more damage to the Israeli economy.”

A sovereign wealth fund will not be immune to global market fluctuations and will not provide a “safety cushion” that the government strategists desire, and could lead to monetary losses “precisely when the money is needed the most,” the authors said.

Although the gas revenues are a temporary income that could disappear within a few decades, as the gas reserves are only projected to last for about 25 to 30 years, the funds should be invested in human capital in Israel, the study explained. The money should be dedicated to tackling inequality, battling poverty, expanding education, furthering research and development and decreasing unemployment, according to the authors.

“Place the money into a fund that will direct the investments not to secure an income in the future but to try to work out a long-term project that will reduce the poverty – by applying it to education for kids and enabling them to move on the social ladder and by making school much more effective by this point of view, and creating more infrastructure within the universities through hardcore research,” Biran said.

In Biran’s mind, a good model to follow would be the 1980 Bayh-Dole Act of the United States, which allowed inventors – from universities, small businesses, etc. – to claim ownership of their technologies for commercialization rather than the government.

“This has created a boom in the technology of the United States,” he said.

First and foremost, Biran said he felt that within the education realm, the gas revenue funds should be heading to development of basic sciences, research and development and other technological fields.

Funding more startup ventures would also be key, he said.

Meanwhile, he also stressed the importance of providing children with smaller class sizes and “upgrading the whole educational” system.

“All these elements which are reducing poverty are opening to the new generations the ability to move on the social ladder of research,” he said.

“The whole infrastructure of education and research and development has to be elevated, especially with a look socially to the new middle class of the country.”

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