Israel

This report describes the contours of a potential financing plan for sewage infrastructure in the Kidron Valley -- one of the middle east's most culturally, historically, and environmentally pivotal resources for economic development. In 2010, the Kidron Basin Working Group proposed the Kidron Basin Master Plan, and in 2013, it completed the implementation plan for the basin. The proposed plan is a comprehensive, integrated infrastructure and economic / community plan for the redevelopment of the Kidron Basin from the Old City to the Dead Sea -- crossing between Israeli and Palestinian areas. One of the main elements of the master plan, and a precondition for sustainable development, is infrastructure finance to clean up the sewage flowing through the valley. This financing plan is based on discussions with stakeholders and leaders throughout the region and on regional market conditions for project financing. Its elements are intended to be market-based, leveraged, and financially feasible and sustainable. The proposed financing model suggests the creation of a special purpose vehicle to provide the sewage collection and treatment services on a contract basis with the Israeli and Palestinian water authorities, using a combination of bonds, private and social equity, and subordinated debt through the capital markets, international development loans and guarantees, and philanthropic impact investments. This project financing model is feasible based on the proposed capital structure, terms, and estimated market conditions. Further, the new infrastructure will support the growth of tourism-related revenue in the greater Jerusalem region, serving the development of the Israeli and Palestinian communities. New and expanding businesses will produce incremental value-added taxes, real estate taxes, improvement taxes, use fees, and license fees, which broaden the case for feasibility.

Introduction By: Yuval Steinitz, Minister of International Relations, Intelligence and Strategic Affairs, Israel Welcoming Remarks: Speakers: David Gershon, Chairman and CEO, Superderivatives Shmuel Hauser, Chairman, Israel Securities Authority Anath Levin, Head, Financial Markets Division, and Member, Board of Management, Bank Hapoalim Oded Sarig, Commissioner of Capital Markets, Insurance and Savings, Ministry of Finance, Israel Moderator: Roger Stein, Managing Director, Research and Academic Relations, Moody's Corporation; Research Affiliate, Massachusetts Institute of Technology. How can Israel advance from startup nation to scale-up nation? Finance could hold the key. The creation and commercialization of disruptive technology is the Israeli economy's hallmark and a core contributor to its growth. However, tech companies face a shortage of both late-stage and public market funding and often find themselves prey to foreign multinationals. Consequently, Israel can claim only a minor position in the global technology value chain. How can Israeli capital markets become an active partner in the launch of new technologies? How can they provide local and foreign investors access to innovation without the companies being forced into premature IPOs or mergers? Our panel will discuss the elements of a new corporate and public finance model for Israel and consider what lessons can be adopted beyond its borders and what it can learn from abroad.

Speakers: Yosef Abramowitz, President, Arava Power Company; CEO, Energiya Global Capital Mark Kahn, Partner, Omnivore Partners Andrew Neff, Director, Israel Finance Institute Amir Peleg, Founder and CEO, TaKaDu Ltd.; Chairman, SWAN-Smart Water Networks Forum Eyal Rosner, Chairman and Director of Administration, Alternative Fuels Initiative, Israeli Prime Minister's Office Moderator: Eugene Kandel, Head of the National Economic Council, Israeli Prime Minister's Office. The scarcity that Israel once faced in food, water, energy, and health now plagues many countries around the world. Before the century is out, the planet's population will cross the 10-billion mark. How will resources be allocated to sustain humanity without denying billions an acceptable standard of living or ravaging the environment? In each of these core problems, Israel has pioneered breakthrough technologies that lower prices, increase productivity and transform markets. In short, they create abundance from scarcity. Were these innovations to be globalized, they would hold great promise for developing nations in the areas of water management, reforestation, renewable energy and health services, among others. How can sufficient capital be deployed for commercialization? What type of partnerships can diffuse these innovations fast enough to make a difference? This panel will examine the challenges and solutions for a range of applications.

Speakers: Lorin Fife, Chairman Emeritus, Jewish Community Foundation of Los Angeles Alan Hoffmann, CEO and Director General, Jewish Agency for Israel Carl Kaplan, Managing Director, Koret Israel Economic Development Funds Yaron Neudorfer, CEO, Social Finance Israel Izzy Tapoohi, President and CEO, Israel Bonds Moderator: Davida Lachman-Messer, Senior Fellow, Milken Institute Israel Center. Israel's economic growth has been inadequate and shared unequally. Social cohesion is a key aspect of Israel's national security, yet charitable giving has fallen off and the new government faces growing deficits with insufficient resources to bridge dangerous social and economic gaps. To face these challenges, Israel needs a novel, flexible and efficient system to channel capital into projects with social and regional impact. In this roundtable, we will explore the use of charitable and government funds leveraged by private capital through matching and structured finance to solve pressing social, community and environmental challenges. The focus will be creating double bottom line returns via social investment funds and intermediaries and social impact bonds.

Israel’s social sector – the public and private agencies, institutions, and businesses that address the country’s social and economic development – plays a vital part in its economy by identifying and dispensing crucial services. But even though such spending is among the highest in the developed world – 5.6 percent of GDP – the country is behind in employing the relatively new tool of social or “impact” investing, which leads to social good while delivering a financial return to companies. This new report explores ways that impact investing can help the nation’s social sector evolve. “We identified a large gap in the marketplace, which is an important step toward building a complete social investing system in Israel,” said Glenn Yago, Institute senior director and founder of its Financial Innovations Labs®. “We’ve captured the best advice of top experts in impact investing, and we believe the time is right for bringing new approaches to Israel, where there’s great receptivity to innovation.” The report recommends ways to overcome barriers, including legal and regulatory restrictions, revenue challenges, and access to capital. It details specific approaches for scaling up current financing programs, replicating best practices from other nations, establishing a social investment fund, and creating policy tools to provide incentives for social investment in Israel.

Wealthy families and individuals tend to control a large number of corporations within a given economy. Family business groups might consist of hundreds of firms operating in many sectors. For example, 85 business groups control more than half the aggregate stock value in South Korea, and six family groups control 20 percent of stock market capitalization in Denmark. These business groups have always been a dominant form of economic organization in Israel and have purportedly played a critical role in Israel's economic development. Previous work has shown that 20 business groups account for nearly 50 percent of the market capitalization of the Tel-Aviv Stock Exchange. The report "Business Groups in Israel: Development, Diversification, and External Finance" further investigates the business group phenomenon in contemporary Israel. It summarizes the historical development of business groups and examines the diversification of business groups and the multimarket contacts that result. The report also includes an international comparison of business groups' dominance based on data from recent literature and an analysis of the groups' capital structure, bond issues and dividend payments.

Located at the nexus of three continents, Israel is home to a diversity of complex ecosystems. But as population density has increased over the past decade, there has been a spike in commercial and residential development in areas that once supported a wealth of animal and plant life, creating an urgent need for conservation. Efforts to date -- based on regulatory policies and designating land as national parks -- have proven ineffective, pointing to the need for new solutions. The Milken Institute and Israel's Ministry of Environmental Protection brought together a diverse group of scientists, capital market experts, governmental officials, foundation executives, architects, and land developers for a Financial Innovations Lab® to evaluate potential incentive programs and other financial mechanisms that could be used to appropriately value Israel's biodiversity. The market-based approaches identified during the course of Lab discussions, though developed with Israel in mind, can also be applied to other regions where biodiversity is under threat -- in any nation with a functioning market economy.

Speakers: Abby Cohen, Senior Investment Strategist and President, Global Markets Institute, Goldman Sachs Eugene Kandel, Head of the National Economic Council, Israeli Prime Minister's Office Aaron Mankovski, Chairman, Israel Advanced Technology Industries (IATI); Managing General Partner, Pitango Venture Capital Yair Seroussi, Chairman, Bank Hapoalim Moderator: Glenn Yago, Senior Director, Israel Center; Senior Research Fellow; and Founder, Financial Innovations Labs, Milken Institute. Israel produced better risk-adjusted returns than all other developed stock markets in the past decade as its technology-driven economy attracted global investors. But growth has been inadequate and unequally shared within Israel, resulting in high levels of income and wealth inequality. The Israeli paradox is that despite strong GDP growth, the growth rate in GDP per capita has lagged. In a country where social cohesion is requisite for survival, this paradox drew focused attention with peaceful protests last summer; government commissions have been attempting to address issues ranging from the price of cottage cheese to corporate pyramids and economic concentration. Policy discussions are now focused on opportunities to bridge these gaps within Israel and attempt to match the fastest-growing emerging economies. The Israeli paradox represents a case study for emerging and frontier markets in how to accelerate growth while expanding economic inclusion and achieving sustainability.

Speakers: Doron Gal, CEO, Kaiima Eugene Kandel, Head of the National Economic Council, Israeli Prime Minister's Office Glen Schwaber, Partner, Israel Cleantech Ventures Iris Yedidia, Group Leader, Agricultural Microbiology and Biotechnology, Agricultural Research Organization, Israeli Ministry of Agriculture Moderator: Alma Gadot-Perez, Director General, Milken Institute Israel Center. Eco-innovation is an approach to promoting sustainable growth while overcoming scarcity in fuel, food and water. Touching on policies, processes and products alike, we will present a series of potentially disruptive eco-innovations in energy, industry, agriculture and transportation. In Israel, the Milken Institute has been involved in a series of Financial Innovations Labs and policy developments including an oil-free initiative, natural gas development, a greenhouse gas reduction program, solar energy tariffs, and water and agrotech initiatives - all of which can have international applications. This panel will host a number of technology and policy thought leaders at the forefront of eco-innovation breakthroughs.

Most insider trading discussion focuses on U.S. firms, where managers are "strong" and owners are "weak." Israel, by contrast, has many publicly traded firms where a single or small, tightly knit group of shareholders holds a controlling interest in the company through a business group. In these "group firms," the primary corporate governance problem is the risk of minority shareholder expropriation through tunneling, or transferring assets out of the firm and to the controller. The risk of tunneling essentially implies a large information asymmetry problem between the controller and the world of outside investors, who can no longer reliably assess the value of the firm. The authors explore the extent of that problem in different types of firms, tracing its impact on spreads. In this working paper from the Koret-Milken Institute Fellows Program, they find strong evidence that the possibility of insider trading by financially connected directors in business group firms actually serves to reduce price uncertainty in those firms.