BOI urges changes in investment law

In 2006, the Bank of Israel's 2006 Annual Report indicated that the benefits granted under the program had failed to create employment in areas where investments were undertaken.

The Bank of Israel on Tuesday urged the government to make structural changes to the capital investments program and also to reduce the program's budget in hopes of gaining acceptance into the Organization for Economic Cooperation and Development (OECD). "The purpose of the capital investment program should be to boost employment and raise the standard of living in low socioeconomic areas," the Central Bank said in a report detailing the changes needed to ensure the efficiency of the Encouragement of Capital Investments Law. The bank added that "it would be advisable to set a downward path that would gradually reduce the budget of the program, particularly in light of Israel's candidacy for membership of the OECD," and warned that in 2005 the public cost of grants and tax benefits to encourage capital investments was higher in Israel than the EU average. But these demands met with an angry response from manuacturers. "Without the support of the program for the encouragement of capital investment and its manufacturer grant program, Israel will fail to produce large international companies and will also see local investments continue to drop and move abroad," said Shraga Brosh, president of the Israel Manufacturers' Association, at the Knesset Economics Committee's discussion on the efficiency of the program, which was first introduced in the 1950s. "A decision by the Finance Ministry to slash the program's budget would prompt an exodus of the industrial sector," Brosh warned. Brosh added that the ministry's policies over the last decade have eliminated approximately 90 percent of the budget for the encouragement of capital investment, which awards grants to small- and medium-sized businesses, reducing the number from NIS 1.3 billion in 1997 to NIS 133 million today. In 2006, the Bank of Israel's 2006 Annual Report indicated that the benefits granted under the program had failed to create employment in areas where investments were undertaken, prompting the bank to recommend that grants should be more labor focused and less capital focused. "The aid should include grants in capital and labor, with one- third earmarked towards capital and two-thirds towards labor subsidies, in line with the division of business sector income," the Central Bank recommended last year. Similarly, Ya'acov Barkai, the Finance Ministry's representative at the Economics Committee, said Tuesday that the main aims of the program when it was originally constructed - to boost the competitiveness of Israel's economy and prompt a foreign exchange influx - were not relevant anymore today. "The program encourages capital investment but does not encourage employment," he said. Brosh, meanwhile, urged members of the Economics Committee to support an increase of the budget to NIS 500m. a year and NIS 250m. for labor subsidies, in addition to expanding tax incentives. Citing the need to increase employment in the periphery, the committee voted to request a budget of NIS 500m. for the investments program, a move that was opposed by the Central Bank, which stressed that the cost of the program should be reduced. If the government, nevertheless, chose to increase the budget, it said, the benefits should be granted via the tax system as this would encourage high quality initiatives. "That said, the limitation on the total amount of the tax benefits, which was removed in 2005, should be reinstated," said the bank. The bank also noted in its report that preference should be given to initiatives that incorporate specialized knowledge and technological innovation and require skilled laborers and those that involve widespread training in an effort to create stable employment. "In order to encourage projects based on skilled, highly paid labor, the grants should be graded, rising with the level of wages," stated the bank's report. "Tax benefits should be granted, on condition that the investment and employment targets - defined when the project was submitted - have been met," said the bank.