ISRAEL: An Introduction
Overview
2023 proved to be one of the most turbulent years in Israel’s recent history. It began with Minister of Justice Yariv Levin’s announcement of plans for a judicial overhaul. This proposal sparked a massive wave of civic protest as many feared the reforms would undermine Israel’s status as a vibrant democracy. The Israeli business community, in particular, strongly resisted the government’s proposed changes. Tech entrepreneurs played a significant role in financing and participating in these protests, with high-tech workers joining demonstrations in large numbers.
The economy faced further challenges following Hamas’ attack on Israel on 7 October 2023, and the subsequent invasion of Gaza. The effects of the conflict on Israel and its economy are still unfolding. The massive recruitment of reservists delayed various projects across the technology, infrastructure and housing sectors. Moreover, many in the business community volunteered in civic assistance projects, demonstrating resilience and solidarity.
As of March 2024, reservists are returning to their workplaces, fostering a drive to rebuild and innovate. Anticipated surges in cyber and military technology are expected, translating warfare lessons into new technologies. Sectors such as money transfer, NGO outreach and community tech are also poised to progress in the aftermath of the conflict, and the market is beginning to recover.
Innovation and Technology
Mirroring a global trend, Israel’s tech sector faced a downturn in 2023, contrasting sharply with previous record-breaking years. Macro-economic challenges, almost universal revaluations of tech firms, the anticipated judicial reform and the invasion of Gaza strained the Israeli ecosystem. However, international interest in Israeli start-ups remained strong. Despite a decrease in both the number and size of international investments, Israel’s tech market attracted significant global investments in AI, cybersecurity, healthcare, blockchain and fintech. The open banking reform and upcoming payment services licensing regime further bolstered Israel’s fintech sector. While historically US and European interest in Israeli tech has dominated, Emirati and Bahraini interest has recently grown, spurred by the recent diplomatic accords. Despite challenges, expectations are high for renewed interest in Israeli innovation post-war.
The decrease in company valuations, waning investor interest and uncertainty regarding future fundraising options have prompted high-tech companies to adopt a more conservative fiscal approach. This shift is evident in tech companies announcing downsizing measures and corporate streamlining. Despite this, the high-tech sector remains the highest-earning sector in the market.
In anticipation of a decrease in funding options, early-stage companies turned to the popular Israel Innovation Authority (IIA) for research and development support. The IIA received increased governmental funding in 2023 and expects further support in 2024 to mitigate the shortfall in external financing for the Israeli tech sector. Recognising the need for additional early-stage funding, the IIA introduced new financing programmes for tech incubators and governmentally funded investor clubs, and the R&D Law was amended to reduce the obstacles to transferring IIA sponsored technology outside Israel.
Leading Israeli investors also established “emergency VCs”, providing swift financing solutions for companies facing challenges. 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.
Additionally, the ITA introduced a “green track” for favourable tax treatment for SAFE investments.
The Israeli innovation and tech sector remains robust and firmly entrenched in global markets. The scrapping of the judicial reform and the anticipated conclusion of the Gaza invasion in 2024 are expected to pave the way for the innovation and tech market to swiftly recover.
Infrastructure – Electricity, Gas and Transportation
Israel experienced an infrastructure boom in 2023, with annual investment expected to double over the next decade from USD6 billion to USD12 billion. Major transportation projects, including railways, metros, roads, bridges and seaports, saw significant growth, with new mega tenders being announced. The rail industry, in particular, witnessed advancements with the metro line network, valued at ILS150 billion and attracting major international players. However, the war brought new challenges to the sector, with military spending and manpower shortages expected to impact on projects under construction and in the planning stages.
In the energy sector, Israel is targeting 30% renewable energy and 70% natural gas use by 2030. Initiatives include promoting power plants, exemplified by a recent PPP tender for a 100 MW capacity PV plant in Ashalim. The government also launched a major reform in the electricity sector, offering five of the Israel Electric Corporation’s gas power plants for sale. Israel’s electricity sector reform includes dismantling the IEC’s monopoly, introducing a new network manager (Noga), and a market model allowing IPPs to sell directly to consumers from January 2024.
Meanwhile, the gas sector continues to benefit from the huge gas discoveries of the last decade, with substantial investments in gas infrastructures and the entry of new global players, especially since the signing of the Abraham Accords.
Investments and Capital Markets
In 2023, Israel’s capital market, particularly the Tel Aviv Stock Exchange (TASE), experienced notable volatility due to internal and external factors. The proposed judicial overhaul and the ongoing conflict in Gaza impacted on market sentiment. Subdued IPO activity was observed on the TASE, with only one company completing an IPO in 2023. Secondary offerings also decreased compared to the previous year.
In response, the Israel Securities Authority (ISA) implemented measures to ease regulatory burdens and promote new regulations, including the licensing framework for payment services. In January 2024, the Ministry of Finance and the ISA proposed initiatives to boost the capital market, expand dual listing opportunities and encourage the use of commercial papers. These measures aim to enhance investment avenues and modernise regulations to align with evolving market dynamics.
ESG
ESG reporting and investment remained a regulatory priority in the first half of 2023, with a focus on climate change and risks. The Bank of Israel led efforts to address climate risks in policies and issued instructions on managing financial risks linked to climate. The government endorsed a climate bill targeting emissions reduction, although its advancement was likely delayed due to the war. The market enacted instructions issued by the Capital Markets, Insurance and Savings Authority to stimulate ESG discussions and prompt climate change mitigation efforts. The invasion of Gaza also spurred extensive social-philanthropic engagement by the business sector, highlighting traditional ESG aspects such as fair employment and community relations.
Regulatory Landscape
Regulatory reforms in 2023 were limited, except for the Regulation of Payment Services Law, coming into force in mid-2024. The Bank of Israel aimed to broaden access to regulated payment systems and promote open banking reforms. A newly established centralised regulatory authority, operational since 2023, is expected to impact on regulatory burdens across various sectors. Israel also progressed in aligning AI regulation with global standards and saw deregulation reforms in the telecom sector. Competition law took centre stage as the Competition Authority aimed to combat rising living costs through legislative amendments targeting concentration reduction and competition enhancement.
Local Legal Environment
2023’s economic and business challenges required local law firms to enhance their capabilities to serve international interest in Israeli entities. Expertise in navigating complex infrastructure projects and multifaceted regulatory, political and military dynamics was and still is essential. While Israel has a high lawyers-per-capita count, expertise in cross-border clientele is concentrated among a small circle of firms with an international outlook.