Analysis: The financial fallout from a settlement freeze

2,500 homes are under construction - 342 of them begun this year.

By RON FRIEDMAN
maaleh adumim constructi (photo credit: AP)
maaleh adumim constructi
(photo credit: AP)
Whatever the parameters of the settlement "freeze" ultimately agreed upon between Israel and the Obama administration, it is certain that the first to feel its effects will be the companies that build in the West Bank, where 2,500 units are currently in various stages of construction. Getting accurate information on building operations in the West Bank is a difficult task. Most authorities don't distinguish between operations on either side of the Green Line. Officials in the Association of Contractors and Builders, for example, couldn't even provide a geographic breakdown of its members, identifying those who might be impacted if a construction freeze went into effect. According to the Construction and Housing Ministry, in 2008 and 2009 "only several hundred units were offered for development, and it is safe to assume that most of them are in the final stages of construction and therefore will be unaffected by a construction freeze." Sales representatives of the companies currently building in Ma'aleh Adumim were also quick to reassure that since their projects were under construction and some were near completion, they would not be affected by a possible freeze. Most of the construction taking place east of the Green Line today is being done in the region's big cities. Places like Ma'aleh Adumim, Betar Illit, Modi'in Illit and Ariel all have new neighborhoods currently under construction and in different stages of completion. Driving through the settlements, one can see an abundance of signs advertising new housing projects, and the sales offices are all open for prospective buyers. Construction is one of Israel's largest and most central business sectors. The companies that build in the West Bank and stand to lose from a settlement freeze are some of the country's biggest and most well-known construction firms, led by the country's richest businesspeople. For the majority of the companies, the projects in the settlements make up only a fraction of their overall operations, but with apartments selling for more than NIS 1 million and little hope for full government compensation, many of the companies are looking at possible losses of tens of millions of shekels. In an economy that is slowly emerging from a housing recession, a settlement freeze may mean smaller companies will go out of business. "There is a lot of uncertainty at the moment. Many of the prospective buyers are hesitant to purchase units where construction hasn't been started yet," said Saleh Mustafa, a construction supervisor overseeing the first stages of building in a new Ma'aleh Adumim project. The project, called Highland, is owned by the Hadar group, a 45-year-old company with projects across the country. The Highland project is planned to include 44 units and is scheduled for completion in the summer of 2011. Construction began several weeks ago, and foundations are starting to be poured. Mustafa said he was worried that a construction freeze would increase competition for existing jobs, and lower wages. "The site currently employs 45 workers, and they don't know if their jobs are at risk," he said. "When you're talking about freezing a project, there are numerous financial implications," explained Asaf Aricha, a building engineer who has worked as a project manager on numerous residential projects. "Depending on which stage of construction you're at, the losses can arise from several sources," he said. "To begin with, you have the planning expenses. These can make up as much as 10 percent to 15% of the total cost, and if you don't have a final product, they become worthless." Another expense that the construction companies have, even before they begin the work on site, are the different fees that need to be paid to the utility companies and for municipal services such as fire protection. "These fees are all required up-front and, again, are money thrown away if the project doesn't materialize," said Aricha. If the construction has already started, the expenses skyrocket. "Now you're already talking about paying for things like cranes, fences, special equipment, advertising and the like. These are things that take a lot of time and money to dismantle," he said. According to the Central Bureau of Statistics, Israeli building in Judea and Samaria in the first quarter of 2009 is already down by 5% compared to last year, with construction having begun on 342 units. Kadima MK Otniel Schneller, a former director of the Council of Jewish Communities of Judea, Samaria and the Gaza Strip, was quick to say that a complete settlement freeze would never happen. "Nature is stronger than any declaration," he said. Schneller differentiated between a geographic freeze and a demographic freeze: "A demographic freeze will be a financial disaster; a geographic freeze is something that, in economic terms, we can live with." He estimated that a settlement freeze that would include projects already in production would be an impossible burden for the state. "If the government wants to avoid being exposed to lawsuits that will add up to the hundreds of millions of shekels, it must completely differentiate between new construction and construction that is already in progress," said Schneller. He said he both believed and hoped that this was how the government would act. "In purely financial terms, the best thing for the economy is a categorical assertion not to build new settlements, but not to freeze the existing settlements," Schneller said. He added that any development in the big cities or the larger towns of Judea and Samaria would help absorb the people who would have to leave their homes in the case of an overall agreement with the Palestinian Authority. "It makes economic sense to expand the existing large towns and cities within agreed upon areas, but I can't say the same for those places that are in areas not agreed upon. There, the state will end up having to pay damages to purchasers." The large construction firms would not be the only ones harmed by a settlement freeze; next in line would be the contractors and subcontractors, construction supervisors and sales staff, carpenters and truck drivers, laborers and security personnel - and all of these would be hit the hardest. It is estimated that such a freeze would mean a loss of more than 12,000 jobs, a majority of them belonging to Palestinian laborers. Construction companies are reluctant to publicly address their activities in the West Bank because of unfavorable public opinion. "Construction firms that build the Israeli settlements in the Palestinian territories would appear to be the foremost example of firms that benefit directly from the continued Israeli occupation," wrote Dr. Shlomo Swirsky of the Adva Institute, in his 150-page paper titled "The Cost of the Occupation to Israeli Society, Polity and Economy." In his paper, Swirsky pointed out that much of the building taking place in the West Bank would have been carried out regardless of the settlements. "What makes the economic analysis relevant, nevertheless, is the fact that housing construction in the settlements was, and still is, determined not only by purely economic considerations of supply and demand, but also by the political agenda of different political parties controlling the state apparatus," he wrote. Swirsky showed that building in the settlements as a proportion of total Israeli building had fluctuated over the years, depending on the political party in power - from a high of 13.4% during Yitzhak Shamir's term as prime minister, down to 3% when Yitzhak Rabin was in power and then back up to 10% when current Prime Minister Binyamin Netanyahu started his first term in 1996. Today the figure stands at 4.9%. "Frankly, I don't think the economic implications will be too big or too serious. Some construction companies may register a loss, but from the point of view of the economy as a whole, I don't think there will be any serious implications," said Swirsky. Several years ago, lawyers from the law firm of Kabiri, Nevo, Keidar were commissioned to write an assessment on the legality of a construction freeze in the settlements. In it, Omri Kabiri and Zivan Tobby-Alimi asserted that in light of the public benefit that would arise from a peace settlement with the Palestinians, it was perfectly legal for the government to withdraw from its contractual obligations that committed it to construction projects in the West Bank. "It's the government's prerogative to back out of these agreements, and it's a possibility all parties are aware of upon signing," said Kabiri. At the same time, the article maintained that the government would be obligated to reimburse the building companies and service providers for damages produced because of the decision. "The question is whether the government is obligated to pay only for the losses incurred by the complainants on funds that were committed, or whether they had to reimburse them for loss of income as well," said Kabiri. "This is something I would recommend the contractors look into." Construction and Housing Ministry spokesman Kobi Blich said that because a freeze wouldn't include units currently under construction, there was no policy in place that addressed the issue of the government reimbursing construction firms.