STATE OF ISRAEL
MINISTRY OF ECONOMY AND PLANNING
Kiryat Ben Gurion
Jerusalem

ISRAEL AS A STRATEGIC BUSINESS CENTER IN THE NEW ERA

March 1995

TABLE OF CONTENTS

Preface – Prof. Shimon Shetreet, Minister of Economy and Planning
The Israeli Economy: Main Highlights
Main Economic Sectors
High-Tech Israeli Advantages
Peace and Economy
Macro Economic Prospects for the Years 1995-2000
Israel’s Risk Rating
Investing in Israel
Prospects for Regional Projects
Prospects for National Projects
R&D Incentives
The Privatization Process

PREFACE

A new world order has been developing in recent years. In Europe and Central Asia, a market economy is emerging, and national boundaries have been reshaped, creating new markets. A new economic environment has also been created in Israel and the Middle East as a whole following the peace process in the region. According to evaluations based on the expected growth of the population and of the economic activity, the region of the Middle East and North Africa as a whole will constitute about 10% of the world economy within 25 years, as compared to about 2% today.

The Israeli economy is a vibrant, growing economy. Against the new background of peace, a more favorable evaluation should be made of its economy. New opportunities are now open, and the Israeli economy is expected to continue growing quite rapidly in the next few years, following a similar growth over the last four years. Furthermore, many changes in the structure of the economy are expected to take place. These will include a greater emphasis in an area which has always been a leading feature of the Israeli economy: advanced technology. They will also include new openings of import and export markets. A few main fields of economic action are expected to be important in the near future: agro-industries, energy, water, tourism, and the development of infrastructures.

The Ministry of Economy and Planning, which is responsible for the global planning of the Israeli economy in the medium- and long-run and for the coordination of economic activities of various ministries, is pleased to introduce to the world business community some highlights of the Israeli economy, a general background on the new business opportunities in Israel and the advantages of Israel as a strategic center for world and regional markets.

Over the years Israel has developed quite established trade relations with the most important economic blocs in Europe, North America and Japan. It has also begun to develop, at a rapid pace, trade relations with new emerging markets, including East and Central Europe, Central Asia, China, India and Southeast Asia.

We suggest a "triangle pattern" or tripartite model for economic cooperation. Such cooperation would involve three parties: an Arab country or the Palestinian Authority, Israel, and a third party from Europe or the U.S. Business partnerships of this kind can help in easing the psychological constraint of bilateral cooperation, and would benefit from the participation of the European partner in terms of investments or marketing facilities outside the Middle East.

In light of the fact that Israel is a rapidly growing economy in a region entering an era ofl peace with advanced infrastructures and a sophisticated business cullture, I hope that business leaders and investors will take advantage of the new business opportunities and review favorably the possibility of investing in Israel and using our country as a strategic center for their trade and business in various regions.

Prof. Shimon Shetreet Minister of Economy and Planning

THE ISRAELI ECONOMY: MAIN HIGHLIGHTS

Gross National Product

The Gross Domestic Product of Israel has reached about 74 billions US$ in 1994 (about 13,700 US$ per capita). This is a growth of 6.8% in comparison with the GDP of 1993. This economic growth has not been surpassed by any of all the 24 OECD countries.

The economic growth in 1993 was quite substantial, although it was lower than the economic growth during 1992: then GDP growth reached 6.6%, and it was higher than in any OECD country.

Immigration

An extremely important factor in the Israeli economic development is the absorption of very significant numbers of immigrants: during the last 5 years, half a million of new immigrants came to Israel, representing 10% of its population of 5.4 million, and creating a challenge to its economy. Most of them came in 1990 and 1991. Since 1992, the number of immigrants stabilized at a level of approximately 6,000 a month.

Unemployment

The level of unemployment in Israel is continually declining since 1992 and reached 7.5% at the end of 1994. It was quite high in the past and reflected mainly the difficulties in absorbing such big numbers of new immigrants in a short period of time.

Inflation

The rate of inflation reached 14.5% in 1994, higher than the inflation in 1993, and after a continuous decline in the past few yeras. Inflation has reached a stable level of around 10%, after a period of hyper-inflation from the late ’70s until 1985, as a result of a stabilization policy which was implemented at that time. A few monetary and fiscal measures have been taken to decrease inflation to OECD levels.

World Trade

The Israeli economy is now undergoing a very solid process of integration into the world economy. This is reflected by the fact that the incrase of imports and of exports in 1994 reached the level of about 10.5%. In absolute terms, Israeli exports are evaluated at 24.5 billion $US in 1994.

– Composition of Exports from Israel 1994

 Industrial goods                  68.7% Tourist services                   9.4% Transportation services            7.4% Financial services                 3.6% Agricultural products              2.4% Other services                     8.5% 

Israeli imports in 1994 are evaluated at 33.4 billion $US.

– Composition of Imports to Israel 1994

 Inputs for production             44.4% Capital goods                     12.7% Tourist services                   9.0% Transportation services            8.6% Consumption goods                  8.4% Financial services                 7.9% Other services                     9.0% 

The process of "globalization" of the world economy is already well established. In the next few years, Israeli world trade is expected to grow at an annual rate of about 8%.

MAIN ECONOMIC SECTORS

Industry

The industrial sector is a main leader in the Israeli economic development. It employs about 23% of the labor force and its production has been rising continuously in the past few years; in real terms, industrial production has increased by about 30% in the last three years.

The composition of industrial production is also in a continuous trend of change. Industrial branches which grow most rapidly are electronics, machinery, and chemicals. More traditional and less high-tech activities in the branches of textiles and food production are in a process of relative decline.

This changing composition reflects also on industrial exports( see comparative charts of exports in 1980 and 1993). The volume of industrial exports increased 12% in 1994, compared with a rise of 15% in 1993. Exports of good and services accounted for approximately 48% of industrial production, of which 50% were high-tech exports.

– Distribution of Industrial Exports, 1980

 Electronics, metal and machinery       37.0% Chemicals and plastics                 25.5% Textile                                14.2% Food, drinks and tobacco                8.9% Light industries                        8.8% Minerals                                5.2% 

– Distribution of Industrial Exports, 1994

 Electronics, metal and machinery       50.2% Chemicals and plastics                 23.3% Light industries                        9.7% Textile                                 8.9% Food, drinks and tobacco                5.0% Minerals                                3.0% 

Agriculture

The development of agriculture in Israel follows the natural pattern it has followed in all developed economies: its share in total employemnt is in a continuous process of decline, but its productivity is increasing. The labor force employed in agriculture is now about 3% of total labor force, but the production of the agricultural products is increasing, and its value has reached more than 3 billion US$. This growth is mainly due to the introduction of highly advanced technologies and to the development of new and improved agricultural products. Consequently, the Israeli agricultural production is now for oriented to exports and industrial processing than local consumption.

– Agricultural Production Value, by Disporal – 1993

 For local consumption                  36.3% For local industry                     34.0% For export                             18.8% Intermediate produce                   10.9% 

Trade, Tourism, Construction

The volume of trade and of tourism activity, as well as that of other services, has also significantly increased in the last year. The basic indicator of large-scale retail trade shows a growth of more than 10% a year.

Tourist activity has recuperated in the last four years from the crisis in this branch during the Gulf War. Tourist arrivals to Israel are now at least twice higher than in the first half of 1991, and the growth of hotel accommodations has followed more or less this saqme pattern.

Construction activity, mainly for housing, has sharply fluctuated, as a function of the waves of immigration to Israel since 1990.

HIGH-TECH ISRAELI ADVANTAGES

The Government of Israel encourages foreign investment and Joint ventures in Israel’s high technology capabilities. The Ministry offers programs that assist foreign businesses in setting up joint research and development, in establishing manufacturing facilities or subsidiaries, and in creating strategic alliances with organizations in Israel for licensing manufacturing, and/or marketing or products. Personalized options are available to the individual investor.

The following are a few examples of Israel’s high technology capabilities.

Israeli expertise in software has produced the following:

– MAGIC: 5th generation application generator and a relational database that enables and users to access, analyze, and present data from corporate databases without writing conventional computer codes.

– ROBCAD: powerful 3D graphic, software package for design, simulation, and off-line programming of flexible automation system.

– WIZARD: software package for cable TV management.

Israeli expertise in biotechnology has produced the following:

– Interleukin-6: the cell regulatory factor that decreases proliferation of tumor cells, boosts immune system function, and strengthens effects of vaccinations.

– FRONE: human fibroblast-derived beta interferon that strengthens resistance to viral infections for treatment of leukemia, uterine cancer, and breast cancer.

– Human and animal growth hormone, such as Bio-Tropin, which elicits no immune response.

Israeli expertise in technology related to environmental management and alternative energy has produced:

– Micro-drip irrigation systems that provide safer, more efficient delivery of water and fertilizers.

– Photo-degradable plastic material used ‘In farming and agriculture production Israel] expertise in electro-optics technology has produced the following:

– Fast Digital Fiber Optic Interconnect Communications.

– Medical lasers: first commercial C02 infrared fibers for internal surgery.

– Compact, high-power, 9kw industrial laser.

– Solid-state tunable laser in the visible range.

– Pioneered diffractive optic components for laser application.

Israeli expertise in communications technology has produced the following:

– Fast Digital Fiber Optic Interconnect Communications.

– Single phone line for Integrated Services Data Network, fast voice and data transmission of fax, phone, computer, TV.

– Digital electronic patch-panel: centralizes IDN ermanagement.

– Trilogue: enables standard phone access to voice/fax dumail, virtual phone service.

Israeli expertise in computer-related field has produced the following:

– CompuPhone: keyboard/electronic digital telephone.

– NS32000: first commercial 32-bit microprocessor.

– i386 microprocessor

– i860XPTM: largest microprocessor, with RISC technology, experti2.5 million transistors per chip.

– Overdrive chip: speed doubler for 486 microprocessors.

Israeli expertise in microelectronics has produced the following:

– 7830 SEM-CD (Scanning Electronic Microscope – Critical Dimensions): measuring tool for semiconductor manufacture.

– NS32032: first commercial 32-bit microprocessor.

– NS32CG16: first microprocessor optimized for advanced reprinters and "brain" of many laser printers.

Israel spends 3.3% of its GDP on Research and Development-the highest percentage in the world. In contrast, the US, Japan, Germany, France, Switzerland, Canada, and the U.K. average between 1.3% and 2.9%. Israel shows also an extremely high proportion of scientists and engineers employed in R&D, as compared with many developed countries.

PEACE AND ECONOMY

The peace process and the Cairo Agreement between Israel and the PLO as well as the peace treaty with Jordan mark the beginning of a new era in relations between Israel and the Palestinians and Israel and the Arab countries. This new beginning may prove to be the threshold of a bright and prosperous future, so far unknown in the battle-scarred Middle East. The peace process will lead to an era of new horizons and new opportunities in the economic, political, cultural and social spheres, as well as environmental cooperation among the nations of the Middle East. The Casablanca Conference was a first step.

Proceeding from the assumption that the peace process will lead to full peace agreements with Syria, Lebanon and perhaps other countries as well, we can expect both political and economic normalization in the Middle East. Such normalization will enable reinforcement of economic ties between Israel and its neighbors, and will attract foreign investments in this region.

The implementation of peace has also an economic price. The needed rebuilding of spatial and security structures which are necessary even in a time of peace have very ificant costs. In addition, indirect costs of peace may be paid by a few economic sectors in Israel which will be negatively affected by the new type of relationships, mainly the sectors of agriculture and of food and textile industries.

On the brighter side, peace will bring about a lowering of the defense burden. A region-Wide political arrangement that proves reliable in the long run will engender political stability – a prerequisite for sound social and political systems. This stability will allow for a significant slowdown of military armament, particularly in Israel. Reduction of the defense burden will release newly available resources for constructive alternative applications, such as investment in infrastructures, education, social services and health.

Increasing political stability in the Middle East will directly reduce the uncertainty and risks involved in economic projects in the region and accordingly lower the price of capital available to local and foreign entrepreneurs for financing their investments. This will lead to increased investments in Israel and in the neighboring Arab countries.

We expect that peace will soon bring about the total lifting of the Arab boycott and all that it implies. Israel will thus benefit from the removal of difficulties and obstacles in trade and in economic and business relations between it and the rest of the world. This w ill generate an increase in foreign investments and exports, the range of import sources for Israel and lower the costs of export and transport to and from Israel.

Peace will increase and foster economic cooperation. Agreements will be signed for economic cooperation between Israel and its Arab neighbors

(after the Agreement already signed with the Palestinians). Such agreements will facilitate mutual trade, the movement of capital and labor, under agreed conditions, and the free movement of tourists within and outside the region. Business partnerships between the economies of the region will develop on their own, without government intervention.

One of the most promising areas of cooperation and economic prospects is regional tourism. Reducing uncertainty and increasing stability will raise the Middle East’s proportionate share of overall world tourism. Agricultural industries, too, only stand to gain from peace in the region.

implementation of political arrangements will bolster trade and business service sectors in the Israeli economy and may transform Israel into a regional strategic center for international corporations in various fields, such as finance, commnunications and logistics. Furthermore, the Israeli economy’s relative advantages in industry will be based on hi-tech enterprises and human capital, minimizing the need for artificial incentives.

MACRO ECONOMIC PROSPECTS FOR THE YEARS 1995-2000

The trend of expansion which has characterized the Israeli economy in recent years will continue for the next few years. The GDP will grow, according to the plan, at a yearly average of about 4.9%; the GDP of the business sector will grow faster – about 5.8%. This rate of GDP growth implies a yearly average growth of 2.2% per capita in the years 1995-2000. At the same time, imports will grow at an annual rate of 7.2%.

The targeted growth rate will require an increase of about 8.5% per year in commodities and services exports. An increase of 5.3% per year is needed in fixed investments. Growth in exports and in investments is highly dependent on the peace process. It is still difficult to estimate the influence of this process on the Israeli economy. We have assumed that, at the first stage, it will stimulate economic activity in the region, based on expectations for growth. These expectations will be realized in relatively higher investment levels (domestic and foreign), and the penetration of Israeli exports into new markets.

This expansion will also be reflected in an increase in employment and a consequent drop in unemployment rates, in spite of continuing growth in the civilian labor force.

                   Population, Labor Force and Employment                   1992    1993    1994    2000     1993   1994     2000                                                 Estimate Forecast       Estimate  Annual                                                                  average                                            (In Thousands)         (Quantitative growth rate)  Mean Population 5,123.6 5,256.7 5,394.7 6,276.0   2.6     2.6      2.6  Working-age     3,574.4 3,682.1 3,794.1 4,538.5   3.0     3.0      3.0 population  Civilian        1,875.8 1,946.0 2,007.1 2,437.2   4.7     3.1      3.3  labor force  Employment      1,650.2 1,751.2 1,836.2 2,254.7   6.1     4.9      3.5  Unemployment      207.6 194.8     178.9   182.5                         Resources and Use of Resources                           (Real Rate of Change)                                  1986-1989   1990-1993    1994    1995-2000                                  Average     Average   Estimate   Average                                                                               In Annual Terms  Resources                          4.7         8.1       6.2        5.8  (Exc. defense import) G.D.P.                             3.6         5.6       6.7        4.9 (G.D.P. Business Sector            4.7         6.6       7.8        5.8 Civilian Import                    6.5        12.2      12.0        7.2 Uses (exc. defense imports)        4.7         8.1       6.2        5.8 Private Consumption                7.0         7.2       9.4        5.1 Domestic Public Consumption        1.4         2.5       1.7        3.4 Investment in fixed assets         4.3        16.3    1  2.9        5.3 Investments in branches of         1.7        24.2    1  7.3        5.2  economy Investments in housing             2.9        43.1       1.4        5.8 Export of Goods & Services         4.7         6.2      10.6        8.5                               ISRAEL'S RISK RATING  International Country Risk Guide (ICRG), March 1994:  Israel's position has improved in every category. The total composite rating rose from 52.5 in March to 74 in August 1994. Expected total composite rating in 1995 - 78.0.            ICRG Monthly Report of August 1994 Israel - Country Risk                 Political  Financial  Economic  Composite   Rank in                  Risk       Risk       Risk    Rating      the World                                                            out of 130                best=100    best=50   best=50   best=100    Countries                                                              best=1  March '91        42          29        33.5      52.5         79 December '91     58          33        32.5      61.5         56 December '92     71          39        35        72.5         38 December '93     70          40        36        73           37 August '94       71          40        36.5      74           43 

Institutional Investor, March and Sept. 1994

Israel’s credit rating has improved from 39.6 points in March 1993 to 43.4 points in March 1994 and to 46.5 in September (out of 100, a higher score denotes lower risk). Israel risk ranking improved from 46th in March 1994 to 43rd in September 194, out of 135 countries.

"The Middle East tied with Latin America (when Mexico is excluded) as the most active region in the survey. Nine of the 14 countries there rose a point or more and only one fell at all, yielding a net rise of 1.3 points. The northern group (of countries in the Middle East) is closely associated with Israel. Buoyed up by signs of a peace pact between (after 4.5 points increase a year earlier) 2.7 for Lebanon, 2.3 for Egypt and 1.0 for Jordan.

Merrill Lynch, The Israeli Economy, April 1994:

"The Israeli economy is poised to benefit from the trend toward peace in the Middle East, though much depends on successful completion of the Israel-Palestinian peace accord and further progress toward comprehensive regional peace…After more than a decade of disappointing economic performance and high inflation, economic stabilization policies undertaken in the mid-to-late 1980’s have laid a foundation for stable growth and moderate inflation…The economy is expected to post growth rates averaging 5% to 6% for the remainder of the decade."

International Monetary Fund, "Israel-1994" Spring1994:

"Israel presently enjoys the basic preconditions for high and sustainable medium-term economic growth. These included a skilled and rapidly growing labor force, and environment of greater macroeconomic stability, and an improved geopolitical situation very different from that which had hitherto restricted market access and inhibited foreign investment."

INVESTING IN ISRAEL

Benefits of Investment in Israel

– Export incentives
– Free trade agreements with USA, EC, EFTA
– Special tax deductions
– Reduced tax rate or full exemption on capital gains
– Accelerated depreciation
– Government loan guarantees
– Reduced tax rates or full exemption
– Government grants
– A highly developed communication and transportation infrastructure
– World class universities and advanced research centers
– Skilled and educated work force
– Wages that are significantly lower than in the US and Europe
– Prevention of double taxation by tax treaties

The Encouragement of Industry (Taxes) Law

The following benefits are granted under this law to industrial enterprises engaged in manufacturing (including international transport and hotels) that meet the criteria designated in the law:

Depreciation of patents and know-how used in the enterprise will be granted at a rate of 12.5% for eight years. Amortization over a period of three years will be granted for the cost of issuing shares traded on a stock exchange.

The right to file consolidated returns by parent and subsidiary industrial enterprises that form a single production unit will be recognized. In such a case, a consolidated tax assessment will then be made of the parent corporation.

Exemptions may be granted from income tax and capital gains tax or land appreciation tax that would otherwise arise from the merger of industrial enterprises which form a single production unit. Losses accumulated by the transferring corporation may be carried forward and set off by the recipient corporation, subject to certain limitations.

Free Trade Agreements (FTA)

1. Israel is the only country to have concurrently free trade agreements with the United States, the European Community and EFTA countries.

2. In 1985, Israel and the United States signed an agreement establishing a Free Trade Area (FTA) between them. The Israel-US FTA provides for the gradual elimination of all tariffs between the two countries and for their total elimination by 1995. Most products became tariff-free immediately upon signature of the FTA agreement.

3. In 1975, Israel and the European Community signed an FTA agreement between them. In 1992, Israel signed a similar agreement with the EFTA countries. These agreement eliminate most obstacles to trade, including tariffs of goods origination in the EC, the EFTA countries and Israel.

4. By taking advantage of Israel’s trade relation with the US, the EC and the EFTA countries, American and European industry can manufacture or process goods in Israel for duty-free export both to Europe and the United States.

5. Raw materials or unfinished goods may be imported to Israel duty-free from the United States and Europe. Exports to Europe must be substantially transformed in Israel in order to be considered of Israeli origin. The revalued product may then be exported to the EC and EFTA countries and the US duty-free, resulting in great savings to the manufacturer.

6. Additional savings can be realized if the product is wholly manufactured in Israel. In such case, one eliminates shipping costs and benefits from the lower cost of Israeli labor.

Source: The Israel Investment Handbook, Ministry of Finance, Jerusalem, 1993.

Trade statistics for the year 1994 show that the most important trading partners of Israel today are the countries of the European Community and of North America: they count for 64% of all Israeli exports and 77% of imports. However, the new political and economic constellation raises the expectations for a few new emerging markets, in countries with a rapidly growing economy. Some examples are in Asia: China to which Israel has exported 59 millions US$, India (352 million), Hong Kong (844), Japan

(983) and Thailand (248). In East and Central Europe: Russia (191), Czech Republic (22), Romania (74), Poland (39).

Exports by Destination, 1994

 North America                     31.3% European Communities              28.8.5 Asia                              18.8% Oceania & unclassified countries   9.5% East Europe & Turkey               4.0% EFTA                               3.2% Central & South America            2.6% Africa                             1.7% 

Imports by Area of Purchase, 1994

 European Communities              51.1% North America                     18.6% Asia                               9.6% EFTA                               9.1% Oceania & unclassified countries   6.6% East Europe & Turkey               2.5% Africa                             1.4% Central & South America            1.1% 

PROSPECTS FOR REGIONAL PROJECTS

The region of the Middle East and North Africa plays today a relatively modest role in the World economy. The total product in all countries of the regions today about 2% of the World Product. However, we are probably entering now a new political and economic era, in which the importance of this region will grow considerable. According to estimations made on the basis on an extrapolation of data of the World Development Report regarding population growth and GNP per capita growth, within the next 25 years this bloc (including Israel) will constitute 10% of the World economy. In relative terms, the importance of this region is therefore expected to be 5 times higher than it is now. This means that there will be a growing importance of the region as an economic entity, and of its role in the world economy. Such an economic growth provides an interesting challenge for business enterprises. From the point of view of multinational corporations and other business planners Middle East and North Africa must be a central element in their medium and long term planning.

Beyond the options of business partnerships on the basis of private investors, national projects of cooperations should be considered on a regional basis. Such regional cooperation may be based on the use of common natural resources (such as the Dead Sea), and of common infrastructures (such as a port in Eilat-Aqaba). Many ideas have already been raised, and a careful analysis should be done in order to evaluated the economic feasibility of such projects.

All those projects need heavy investments which may be profitable only in the long run. Many of them should therefore be led by the governments of the relevant countries rather than by private entrepreneurs, and the financial and professional participation of a third country may be required in many cases.

Joint regional projects may be bilateral, involving the cooperation of two countries, or multilateral, involving the cooperation between some or all the countries in the region of the Middle East and North Africa.

In the bilateral track, an important opportunity in the general agreement reached by the delegations of Jordan and Israel to the Peace talks about the Jordan Rift Valley (JRV). In a paper which is being submitted now by the World Bank with the endorsement of both Israel and Jordan, a few projects are submitted for evaluation. A distinction has been made between long term projects which still need a longer term feasibility study and "fast-track" projects, which can be examined already now. Four groups of fast-track projects are suggested.

A first group includes projects related to the necessary steps for realizing border opening potential. Here are included road links and border crossings, joint tourism promotion, trade and transport facilitation.

A second group relates to "seed" activities that prepare for further cooperative undertaking. In this group can be included R&D and training in various fields, exchanges of regional and urban master plans, water resources monitoring.

A third group refers to environment oriented projects, such as the management of tourism activity increase (on the Red Sea shore and in the envisaged "Maritime Peace Park") and environmental profile monitoring.

The fourth and last group includes projects that provide economics of scale. Examples are connection of electric power, communication grids, coordination in airport management and development in Aqaba-Eilat.

In the track of the longer term development joint projects, the heavier one is by far the Red Sea – Dead Sea Canal. The feasibility of such a canal is still to be carefully analyzed, from various angles. A very important one of course is the economic viability, but other extremely important considerations are the environmental impacts (including those on ground water) and the challenge of seismic risks. At this stage we can say that initial studies conducted by the Ministry of Economy and Planning show that desalination of water in the Mediterranean is less expensive than the canal project.

Other long term projects which can be considered are in the fields of agricultural development, conservation of nature and cultural heritage, human resource development, energy, telecommunication, new transport and trade links, tourism, industry and mineral resources.

PROSPECTS FOR NATIONAL PROJECTS

Road No. 6 – The Trans-Israel Highway

Road No. 6 (the Trans-Israel Highway) is the central transportation project planned for construction during the next 15 years. The road will be Israel’s main traffic artery in the 21st century, and thus a principal component in the development of the road network in the center of the country and the solution to the severe traffic problems in the Gush Dan metropolitan area. It will also create a rapid link between the north and south of the country and between those areas and the center of the country, and will thus contribute towards dispersing the population. This fast road will constitute another costal road in addition to the existing one. The overall length of the road will be approximately 300 kms.

The investment required for constructing the road in its entire length totals 2-3 billion dollars. Construction of the highway will continue for over 15 years. The amount the construction of the central section between Gedera and Iron, which will be 90 kms. long, is estimated at approximately 800 million dollars. Construction of this section will take about 5 years, and should be completed by the year 2000.

Underground Railway in Tel Aviv

A proposal to build an underground railway in Tel Aviv is currently being examined. A number of foreign companies have expressed an interest in this large project. At this stage the economic viability of the project and the various cost estimates are being investigated.

The Tel Aviv Municipality intends to issue a tender for the project during 1995. According to the Municipality’s plans, the group which is successful in the tender will also operate the railway and participate in financing its construction.

The length of the outline of the underground railway will be between 12 to 14 kms., and the cost of its construction is likely, in the basis of preliminary estimates to be in the neighborhood of 750-850 million dollars.

Manufacture of Electricity by Private Promoters

The Ministry of Energy allows its principal companies and private promoters to establish factories for the manufacture of electricity from whom the Electric Corporation will undertake to purchase approximately 900 megawatts at competitive prices, through the year 2000.

In connection to this, there is a project currently being considered for the manufacture of electricity from oil shale. The project will be carried out by either the Electric Corporation or private promoters, or a combination of the two. The size of the power station and its capacity have not yet been fully determined. The details are still in the negotiating stage with respect to possible promoters. Once of the companies involved in the negotiations wishes to construct a power station on the Rotem plateau in the Negev, which will utilize oil shale and have a capacity of 300 megawatts, requiring an investment of hundreds of millions of dollars.

The Carmel Tunnel Project

This project comprises two tunnels to be excavated underneath the Carmel ridge. At the northern approaches to Haifa, the tunnels will connect the Checkpost junction with the southern approaches to the city via the Ruppin interchange. The traffic in each tunnel will be one-way, northward and southward respectively. The tunnels will allow north-south traffic to pass directly while simultaneously serving respective traffic between the Carmel neighborhoods.

Each tunnel will be approximately 6 kilometers long and contain two lanes of traffic.

The investment required is estimated at 105-120 million dollars. The period required to complete the project would be approximately four years, and it appears that actual construction would commence in 1996.

The project is designated for privatization. The bidder who is successful in the tender will excavate the tunnels and operate them as toll roads.

Ben Gurion Airport "Terminal 2000" Project

The present terminal at Ben Gurion Airport is not capable of supplying the level of service required for existing traffic. Approximately 5 million passengers passed through the terminal in 1993 and approximately 5.8 million in 1994.

The new project involves the construction of a new and modern passenger terminal and other infrastructures, thus enabling the terminal to absorb the increased amount of passengers anticipated in the future.

The planned terminal will be modular in its building concept, and it will be built in stages. The total amount of the investment in the project will total approximately 850 million dollars. In its final stage it is anticipated that Ben Gurion Airport will be able to absorb approximately 16 million passengers per year, on the basis of the new terminal and the existing one.

At the first stage, investment in the project will be approximately 500 million dollars – the new terminal will be built to serve a traffic volume of approximately 5 million passengers. Construction of the terminal in the basis of this volume of traffic will be completed within 4-5 years, and when operational in conjunction with the existing installation, will give Ben Gurion Airport a capacity of approximately 9-10 million passengers per year. Additional land is required in order to carry out the project, and the Ayalon River will also have to be diverted. It will therefore be necessary to appropriate approximately 4,000 dunams.

The Two-Seas Canal

Projections on the demand for water indicate the urgent need for desalination. Four variants of desalination projects are being considered; one along the coast of the Mediterranean Sea (Med Sea) and three via transfer of sea water to the Dead Sea. The alternative of lowest investment cost could be the desalination at the Med Sea. The most efficient of the other three on the basis of investment cost, is the Qatif route (from Gaza) to Parsa. The field costs of the transfer-alternatives, not including the compound interest during the construction period, are larger than the Med-Sea variant by the following sums:

The Qatif-Parsa route: + US $ 1.1 billion The Haifa-Hamadiya route + US $ 1.2 billion The Aqaba-Neot Hakikar route + US $ 2.2 billion

The conclusion is that if any of the three Two-Seas canal variants were selected, the respective foregoing difference-sum should be given as a grant fitted to the one which is selected. The interest rate of the rest of the investment should not exceed 5%.

The need for desalination will arise for Jordan by the end of this decade: A quantity of 220 MCM will be needed. In the year 2010 a quantity of 85 MCM will be needed west of the Jordan river assuming that the following years are normal ones. But if drought years should prevail, the need for desalination will arise by the year 2000.

R & D INCENTIVES

The Chief-Scientist Office takes into account the following criteria:

1. Innovativeness in the development of new technologies.

2. Management, production and marketing capabilities of the firm, as well as a marketing strategy for the new product.

3. Preference is given to products with a high value-added which can compete on international markets.

4. The introduction of new technology and expansion of scientific manpower.

The above being in accordance with meeting standard criteria.

SUPPORT LEVEL FOR PROJECTS

Standard support – 50% of costs

Improvements in products developed through OCS grants – 30%

Products for the military market – 30%

R&D in Development A zones, if researchers residents of these areas: 60%, and 45% for military products

New startups where the activity is R&D, and there is no source of financing other than equity provided by those performing the R & D, 66% for budgets up to $150,000. The government actively participates in new ventures through risksharing grants to new investors. If the investment/ venture succeeds, the grant is repaid in the form of royalties.

TAX INCENTIVES

An industrial company may write off, in a given tax year; investment in R&D carried out during that year. In certain cases, investment in R&D by a non-principal may be recognized by the tax authorities.

OTHER MODES OF SUPPORT

The OCS encourages companies with a turnover of 5 million dollars of more and/or holding companies with capital of 7.5 million dollars, experienced in R&D, to adopt groups with new R&D initiative. The OCS will support such R&D programs with a 66% grant of up to a budget of $300,000 a year for two years. The adopted group must receive at least 30% of the new venture.

The OCS encourages the development of advanced generic technologies, which enables the industry to maintain its competitiveness. The level of support is at 66% of the approved programs. The applications and the management of the said programs will be done by groups of industrial companies in conjunction with research institutions.

Support to subcontract R&D with 20% grants to companies with a turnover of less than 100 million dollars and whose salaries are 70% or more of the approved program.

THE PRIVATIZATION PROCESS

The overall number of government owned companies is 170, of which about 40 business oriented companies are real candidates for privatization. Furthermore, there are also about 30 companies whose continued existence, whether generally or as government – owned companies, can no longer be justified.

The list of business-oriented companies includes 8-10 large companies that jointly account for the overwhelming portion of the activity of all government companies together.

Moreover, each of these large business-oriented companies accounts for almost all the activity of the economic sector to which it belongs.

a) El Al Israel Airlines Ltd. – Israel’s only national airline (100% held by the State)

b) Bezeq – The Israel Telecommunication Corp. Ltd. – a communications monopoly which account for almost all of the activity in the sector (75% held by the State).

c) Oil Refineries Ltd. – which holds a monopoly over petroleum refining in Israel (74% held by the State).

d) Israel Aircraft Industries Ltd – the country’s most prominent manufacturer of defense related products, and the largest employer in Israel (100% held by the State).

e) Israel Military Industries – the country’s second largest manufacturer of defense related products (100% held by the State).

f) Israel Electric Corp. Ltd – the company holding the monopoly over the generation, transmission, distribution and connection of electricity in Israel (100% held by the State).

g) Israel Chemicals Ltd. – manufacturer, processor and exporter of most of Israel’s natural resources (75% held by the State).

h) Israel Shipyards Ltd. – which supplies maintenance, construction, and repair services to civilian and military vessels (100% held by the State).

i) Zim Israel Navigation Ltd. – Israel’s national maritime carrier and by far the most dominant force in local shipping (48% held by the State)

j) Housing & Development for Israel Ltd. – one of the largest residential developers and building contractors in Israel (100% held by the State).