Why is Israel outsourcing its national infrastructure to China?

Editor's Note: All in all – together with additional tenders that are still ongoing – Chinese companies are operating in Israel today in deals reaching more than $20 billion and more is on the way.

By YAAKOV KATZ
CHINESE CONSTRUCTION workers work on the Ashdod Port in 2016 (photo credit: REUTERS/AMIR COHEN)
CHINESE CONSTRUCTION workers work on the Ashdod Port in 2016
(photo credit: REUTERS/AMIR COHEN)
The China Civil Engineering Construction Corp. (CCECC) dug the Gilon Tunnel in the North in 2014 at a cost of about NIS 600 million. In 2010, it worked as a subcontractor on the Carmel Tunnel project at a cost of NIS 450 million, and in the last couple of years it has been working on Tel Aviv’s light rail Red Line at a cost of about NIS 1.7 billion.
Ashdod’s new port? It built part of that as well, for a modest NIS 3.2 billion.
The China Harbour Engineering Co. (CHEC) also participated in the construction of the Ashdod Port, and just a few weeks ago, won an NIS 1.9 billion tender together with an Israeli partner to purchase the Alon Tavor power plant, the first of five Israel Electric Corporation power stations to be privatized.
The China Railway Tunnel Group (CRTG) won a tender to dig the tunnels for the Tel Aviv Red Line in a project expected to reach NIS 3 billion, as well as another tender on the same project under which it will install the electronic systems needed to run the light rail at a cost of NIS 2.5 billion.
Another Chinese company – CRRC Corp. Ltd. (CRRC) – won the tender to supply rail cars for the Red Line for a hefty NIS 1.2 billion.
The Shanghai International Port Group Co. Ltd. (SIPG) won the tender to operate the new Haifa Port, an NIS 1.2 billion contract that will go into effect in 2021 when construction is complete.
Add to this the sale of Tnuva – Israel’s largest food company – to China’s Bright Food in 2014, and the merger of Israeli agrochemicals manufacturer Makhteshim Agan with ChemChina in 2011, deals that were valued together at almost NIS 14 billion.
All in all – together with additional tenders that are still ongoing – Chinese companies are operating in Israel today in deals reaching more than $20 billion and more is on the way.
What makes this more interesting is that all of the companies listed above – CCECC, CHEC, CRTG, CRRC, SIPG, Bright Food and ChemChina – are owned by the Chinese government. In other words, Israel is outsourcing its national infrastructure – ports, highways, tunnels, power plants, food companies – to one single entity: the People’s Republic of China.
This situation has two primary opponents, one domestic and one international. In Israel, the Israel Builders Association, whose members are losing out on lucrative deals, is trying to fight back. On Tuesday, the association’s attorneys from the Yigal Arnon law firm wrote a comprehensive letter to Michal Halperin, head of Israel’s Antitrust Authority, to Shai Babad, director-general of the Finance Ministry, and to Prof. Avi Simhon, head of the prime minister’s National Economic Council, demanding that the Law to Promote Competition and Reduce Concentration – passed in 2013 – be applied when it comes to China.
Since the law is not being applied to the Chinese government, there are currently some tenders that three to four Chinese companies bid on even when they are all owned by the government in Beijing. “They outbid one another,” explained an executive in an Israeli company. “It is almost impossible for us to gain traction in the tender.”
The Chinese investments in Israel are doing something else: they are straining Israel’s ties with its greatest friend in the world today, the US government.
In June, the Senate issued a veiled warning to Israel against letting SIPG run the Haifa Port, used by the Navy’s Sixth Fleet, which – as reported exclusively in this paper in December – has already warned that it will stop docking there once the Chinese take over in 2021.
The US “has serious security concerns with respect to the leasing arrangements of the port of Haifa as of the date of the enactment of this act; and should urge the government of Israel to consider the security implications of foreign investment in Israel,” read the National Defense Authorization Act, approved by the Senate.
There is barely a meeting today between US officials and their Israeli counterparts in which the China issue does not get mentioned. Energy Secretary Rick Perry brought it up last week during his talks with Prime Minister Benjamin Netanyahu, as did Secretary of State Mike Pompeo during his visit in March, and Trump’s national security adviser John Bolton also raised the issue when he was recently here.
“I want to make sure that every country is wide-eyed and awake with respect to the threats that are posed by China, and then make sure they understand as well America will have to make decisions too,” Pompeo said during his visit. “If certain systems go in certain places, then America’s efforts to work alongside you will be more difficult, and in some cases, we won’t be able to do so.”
All warn Israel about the repercussions of giving the Chinese too much access to Israel’s economy, not to mention the growing investments by Chinese VCs in Israel’s hi-tech firms and start-ups.
FOR ISRAEL and China, the interests vary. China is promoting its Belt and Road initiative, and is seeking to gain influence in Israel like it is in other places in the Middle East and Africa. It also wants Israeli technology. At the same time, Israel looks at China as a trading partner, which unlike the Europeans, is not stuck on the conflict with the Palestinians. All it wants is to do business.
“It would be one thing if Israel was just another country doing business with China,” one US official explained recently. “But Israel is one of our closest allies, with which we have a high degree of intelligence cooperation.” Having that intelligence fall into Chinese hands, the official explained, is something America is not willing to risk.
Another Washington insider explained that the Chinese issue has the potential to lead to a shift in Republican support for Israel. “The Democrats distanced themselves because of the Palestinians, and China could be what leads to a crisis with the Republicans,” the insider said.
Due to the US pressure, Netanyahu has held a series of security cabinet meetings in recent months to discuss the creation of a new oversight mechanism that would have to approve foreign investments or infrastructure deals in Israel.
Due to countries like China, these types of mechanisms are becoming the norm throughout the West. In December, for example, Germany tightened foreign investment regulations to give the government the authority to block purchases of stakes in German firms by non-Europeans. Under the new rules, Berlin can intervene if a non-European investor buys a mere 10% stake in a company.
Canada has adopted stringent regulations for approving deals with foreign state-owned firms – like the ones doing business in Israel – requiring two types of reviews, and that the deal be determined as a “net benefit” for Canada.
In the US, the president has the authority to block sales on national security grounds and deemed a risk by the US-China Economic and Security Review Commission, established by Congress in 2000 to monitor the national security implications of America’s economic relationship with China.
In the US, for example, federal tax dollars cannot be used to buy rail cars for public transportation from state-owned companies in China. In Israel, on the other hand, there is no such prohibition, and orders for rail cars have already been made.
There are currently two schools of thought inside the security cabinet. National Security Council head Meir Ben-Shabbat has favored a strict mechanism to placate the US, while Simhon, head of the National Economic Council, wants to see a more lenient mechanism to not scare off potential investors, not only from China but from other countries as well.
Ben-Shabbat has the support of the Defense Ministry, which is concerned that the negative feelings on the Chinese issue could spill over into the IDF’s ties with the Pentagon.
Simhon, on the other hand, has the support of the Economy Ministry and especially its Foreign Trade Administration, which is concerned that a strict mechanism could undermine efforts to increase trade. A decision is expected in the coming weeks.
FOR NOW, Israel could start by doing something as simple as stopping deals with Chinese companies that also do business in Iran.
The CRRC is the perfect example. It won a Transportation Ministry tender a few years ago to supply 90 light railway carriages for Tel Aviv’s Red Line, plus a 16-year maintenance contract. The fact that it also has significant business in Iran – where it has supplied hundreds of cars for rail systems in Tehran, Isfahan and Shiraz – should have set off alarms in Israel because it is against the law.
In 2012, Israel passed the”Law on the Struggle against Iran’s Nuclear Program” with the objective of imposing sanctions on individuals and corporations that help Iran advance its nuclear program.
The law declares an additional goal that looks to impose restrictions “on corporations that maintain business relations with Iran, for Iran’s benefit or in its territory, as part of the international struggle against Iran’s nuclear program.”
CRRC should have fallen into the category, but it didn’t. Instead, a few months ago, the office of Israel’s accountant-general sent a letter to bidders on Jerusalem’s light rail system – CRRC is part of a group vying for the deal – saying that companies working in Iran can still bid for the multi-billion shekel project.
This is ridiculous.
Israel and its government is at the forefront of the global efforts to stop Iran, and the need for tough sanctions to help stop its nuclear program.
Why should other countries impose sanctions and toughen up on business ties when Israel doesn’t? Before calling out others, Jerusalem should make sure that it is first doing its part.