ISRAEL: An Introduction
Israel Overview
Despite the impact of the global slowdown and internal political uncertainty, the Israeli economy remained strong in 2022. According to The Economist’s ranking, the Israeli economy became the fourth best-performing economy in the world in 2022. This demonstration of strength can be attributed to many factors - the tech industry, Israel’s strong currency, lower inflation rates, and the country's lack of dependence on Ukrainian and Russian gas and oil. According to more than a dozen forecasts compiled by Bloomberg, Israel is poised to achieve 3.5% gross domestic product growth in 2023 as well as 2024.
Despite many internal and external challenges emanating from its unique geopolitical position, Israel has maintained its standing as a global centre of technological innovation with an active and vibrant local economy and robust export industries.
Innovation and Technology
While 2021’s records were not broken in 2022, it was still an impressive year for the Israeli tech and innovation scene. Israel's transformation from a "Start-Up Nation" to a "Scale-Up Nation" seems to have been completed.
International interest in Israeli start-ups remained strong in 2022, yet it did not reach the numbers of 2021.The economic atmosphere, especially during the second half of 2022, showed a decrease in both the number and the size of international investments. These results mirror worldwide trends and should be viewed with the understanding that 2021 was a remarkable year. Moreover, with the exception of 2021, in 2022 there were more transactions and higher financial volumes in acquisition deals and IPOs than in any year in the entire preceding decade. Thus, the Israeli tech market is still proudly waving its flag.
The local high-tech economy is international in nature and is greatly influenced by global trends. Companies working in cybersecurity (where Israel is the centre of the global ecosystem), healthcare, artificial intelligence (including big data and deep learning), blockchain, foodtech, and the automotive industry are expected to continue to attract significant non-Israeli investments.
Two other prominent tech sectors in Israel are fintech and climatetech. The fintech sector is enjoying the fruits of the open banking reform, which finally entered into effect in June 2022. Adopting the principles of the European PSD2 directive principles, the main goal of this reform is to remove competition barriers and to increase efficiency in the provision of financial services in Israel by allowing access to financial information. Undoubtedly, we can expect this step to facilitate the growth and activity of Israeli fintech companies in 2023.
The rise in interest in climatetech is a result of the global climate crisis, as well as the Russia-Ukraine war, which is demonstrating the dangers of reliance on fossil fuels. Israeli entrepreneurs have been flocking to join this emerging industry, reaching nearly 700 start-ups according to a PLANETech report. The number of Israeli start-ups in the carbon dioxide capture sector has also quadrupled over the past year.
Traditionally, US companies have led the way in making investments in Israel. Though US interest remains strong, in recent years, Europe, China, and Japan have begun to catch up. Additionally, with the recent accords between Israel, UAE, and Bahrain, investors from these countries are looking to invest in Israeli companies and reap technological and economic benefits going forward. This trend is only in its early stages, but is expected to grow in 2023 and onwards.
Israeli technology companies continue to be a major contributor to the Israeli economy. The recent boom in company valuations, the abundance of investor money, and the continued increase in the salaries and equity compensation of employees have made the high-tech sector a lucrative and sought-after employer. Given the economic downturn in 2022 and the uncertainty relating to future fundraising options from the market, high-tech companies are beginning to demonstrate a more conservative approach, with a focus on profit rather than growth. This paradigm shift has already manifested in tech companies announcing downsizing measures and corporate streamlining.
With the anticipated decrease in funding options, we can expect early-stage companies to seek research and development participation from the Israeli Innovation Authority (IIA), from which about NIS1.2 billion were invested by mid-2022.
Furthermore, the overhauled R&D Law has made IIA-sponsored technology more accessible to foreign investors and purchasers, allowing such sponsored technology to be transferred outside of Israel. Israeli taxation rules also provide benefits to multinational companies holding their intellectual property in Israel, offer capital gains exemptions to foreign investors, and provide tax benefits for corporate restructuring.
Infrastructure – Electricity, Gas, and Transportation
Israel is in the midst of an infrastructure boom. The annual investment in infrastructure for the next ten years is expected to more than double, from USD6 billion to USD14 billion.
In the transportation sector, major projects in almost all sub-sectors - railways (both regular and light), metro systems, new roads (including technologically enhanced toll roads), tunnels, bridges, and seaports - saw a significant rise in volume, including the publication of new tenders.
2022 was marked specifically by a continuation of the trend for rail industry projects (light rail, regular rail, and high-speed rail), first set in 2021. In 2022, the largest and most ambitious infrastructure project in Israel, the metro line network, valued at ILS150 billion, saw the publication of the tender for the selection of metro line managers. Final bids are expected to be submitted in the first months of 2023. These tenders and mega projects are attracting major international players to Israel.
In the energy sector, the Israeli government continues to take measures towards reducing CO2 emissions. In a recent decision, the government reaffirmed that by 2030 30% of the total energy production in Israel will be from renewable sources and 70% from natural gas. Accordingly, several initiatives and projects for photovoltaic power plants are being promoted. In October 2022 the Israel government published a BOT tender for the construction in Ashalim of a 100MW capacity PV plant. In the beginning of 2022 the Ministries of Energy and of Agriculture published the results of a call for pilot projects for the development of dual-use agro-PV facilities. More than 160 pilot projects for agro-PV facilities were allocated, which testifies to the importance of this technology in the Israeli landscape, where lands are a scarce commodity.
More notably, the government launched a major reform in the electricity sector, offering for sale five of the Israel Electric Corporation's most aged gas power plants. After successfully selling three of these stations, the fourth station, Eshkol, is now for sale.
In the gas sector, Israel continues to benefit from the huge gas discoveries of the last decade. The development of the Tamar and Leviathan gas fields, the fourth and sixth largest gas discoveries in the past decade, has led to substantial investments in gas infrastructures, and to the entry of new global players, especially since the signature of the Abraham Accords with the United Arab Emirates. In 2021, Mubadala Petroleum of Abu Dhabi purchased a 22% stake in the Tamar offshore gas field for USD1 billion. In late 2022, after months of delays due to the COVID-19 pandemic, the Greek Energean (and its French subcontractor Technip) finally achieved its goal of delivering the Karish FPSO offshore Israel’s coast and connecting it to the gas grid.
In addition, in the past year, and for the first time, Israel achieved a maritime agreement with Lebanon regarding both countries’ borders, in order to explore and exploit natural resources.
Investments and Capital Markets
In 2022 the Israeli capital market demonstrated mixed trends. On the one hand, following the massive domestic and foreign investments that took place throughout 2020 and 2021, foreign investors and acquiring parties maintained an interest in domestic industries. For example, Phoenix Holdings, one of Israel’s largest insurance and asset management companies, announced that ADQ, a fund controlled by the Abu Dhabi government, intends to purchase control of the company for ILS2.3 billion. On the other hand, only 13 companies completed an initial public offering on the Tel Aviv Stock Exchange this year, raising ILS2.4 billion. This is compared to the 94 companies that undertook IPOs in 2021, raising about ILS10 billion.
The Israel Securities Authority (ISA) continued to promote its goal of making the capital market accessible to the public as well as to international investors, by encouraging the transition to iXBRL (a technology that allows for the digital transformation of reporting in the capital market). Alongside the new TASE UP platform, these changes align the ISA with the equivalent standards of reporting to the American SEC and the European ESMA.
The ISA has also granted initial licences to fintech companies that provide financial information services to the public and to businesses, in order to improve competition among financial services.
In May 2022 the Knesset Finance Committee approved a new initiative to expand local access to instruments of international funds. Following the amendment, the ISA will consider the possibility of listing mutual funds traded on leading stock exchanges in the sector of funds traded in the United States and Europe, subject to meeting certain mandatory conditions.
ESG
ESG reporting and investment have been on the regulatory radar in 2022. The Bank of Israel has been the leading Israeli regulator to update its instructions to banks on the assessment of climate change risks and addressing those risks in their policies. It has also warned banks about updating the ESG reporting obligations applicable to them to include better descriptions and more detailed analysis, including issues related to carbon emissions in all three scopes.
The Capital Markets, Insurance and Savings Authority (CMISA) has provided instructions to institutional investors on how ESG investment policy is to be adopted and published.
Finally, in December 2022 the ISA updated its instructions to portfolio managers and investment advisers on evaluating if ESG considerations are to be included in risk assessment, choice of investments, review of clients’ needs, and analysis of return. These policies are to be made available and accessible in a legible manner to the public.
These instructions are expected to drive the ESG discourse and encourage the market to address climate change concerns.
Regulatory Landscape
The continued political instability in Israel in 2022 prevented the implementation of major statutory reforms. However, regulators continued to promote issues within their supervisory powers.
Major reforms associated with open banking have come into force in the financial sector. The scope of the data available and the entities subject to the reform will continue to grow and create opportunities for innovation. In addition, regulation allowing foreign payment service providers to operate in Israel was approved. Finally, the CMISA issued a series of regulations aimed at strengthening the corporate governance, risk management, and consumer protection aspects of these services.
All of these regulatory changes, while creating an additional layer of complexity, aim to enable further development and competitiveness in the financial sector.
In 2023, a new centralised regulatory authority, established in 2022 to streamline some of the processes and oversee other regulators, should begin operating. Its influence on the regulatory burden in the areas of securities, banking, competition, environment, public procurement, consumer protection, communications, health, importation, and standards remains to be seen.
Another regulator active in 2022 was the Privacy Protection Authority, which published a series of instructions and circulars related to its position on the implementation of Israel’s Privacy Protection Law. In addition, significant efforts in aligning the Privacy Protection Law with the European GDPR are being made in order to maintain Israel’s adequacy status. This will be one of the main challenges for 2023 and may lead to significant changes in the Israeli privacy landscape.
2022 was also an intensive year in competition law. Material issues to the competition agenda were addressed in precedential determinations and rulings by the Competition Authority and by Israeli courts. These issues include excessive pricing by monopolies, new merger announcements, and ramped-up efforts to contend with restrictive trade practices. With rising costs of living, we can expect to see a continuation of this approach, including closer supervision of mergers to prevent food and consumer goods suppliers from becoming too dominant.
Local Legal Environment
Looking at 2022 as a whole, Israel’s economic conditions and business climate have experienced strong growth. Local law firms must continue to broaden their capabilities to service the international interest in Israeli companies, assets, and technologies; the complex infrastructure projects in planning and under construction; and the ever-complicated regulatory environment. Although Israel has a large per-capita concentration of legal professionals, the competence required to service cross-border clients is reserved for a smaller circle of law firms, namely those with an international mindset.