Israel’s plan to launch a sovereign wealth fund – the Israel Citizens’ Fund (ICF) – is finally going ahead on Wednesday (June 1st) after years of delays and reduced expectations.
The Middle Eastern state’s difficult experience underscores the challenges faced by governments seeking to leverage excesses of commodity revenues or foreign exchange reserves to establish an SWF. Established under the Sovereign Wealth Law of 2014, the fund can only launch when tax collection on super-profits reaches NIS 1 billion (US$300 million) – and the government has now accrued NIS 1.14 billion for the fund (US$342 million). An additional NIS 836 million in natural resource levies are also due, but have not yet been placed in the fund, thereby creating a potential fund size of NIS 2 billion (US$600 million).
One purpose of the fund is to absorb US dollars from gas profits to invest abroad, to prevent the appreciation of the shekel which would undermine the competitiveness of other Israeli exports. The other role is to distribute 3.5% of revenue for social and economic development.
The start-up date for the ICF was pushed back several occasions, moving it well away from the original target of 2018, due to slower revenue flows from its gas reserves and resources such as potash and magnesium. The delay was partly due to disputes over the structure of the nascent gas sector, ahead of the implementation of the gas framework in 2015. This undermined the taxable profits from the Tamar gas field and delayed the development of the Leviathan gas field. At the same time, energy prices fell sharply from mid-2015 and fell even further amid the pandemic.
The slump in energy prices during the pandemic undermined expectations for royalties and has also undermined the long-term energy profit revenues, which were revised down by the Finance Ministry in January to US$32 billion to US$42 billion by 2050 – far lower than the US$72 billion expected in 2013. However, geopolitical risks to oil supplies following the Russian military intervention in Ukraine led to a surge in energy prices, bumping up the funds available to the ICF and potentially helping to raise expectations.
The ICF is unlikely to attain the size of other energy-backed funds, such as those of Norway and the Arab Gulf states. A renewed focus on renewable energy and climate change prompted Energy Minister Karine Elharrar to announce a year-long suspension of new auctions of offshore blocks in December. She reversed the decision in recent days with the launch of a fourth licensing round in order to take advantage of soaring energy prices in the wake of Russia's invasion of Ukraine.
Any slowdown in gas extraction would reduce ICF’s potential size – although it could also play a significant role in the development of renewable energy by emulating Saudi Arabia’s Public Investment Fund (PIF) in recycling fossil fuel revenues into investment in solar farms, as advocated by Israel’s Milken Innovation Center.
Depending on how its mandate and strategy firm up, the ICF may also seek alliances with funds from Gulf states. After all, Abu Dhabi’s Mubadala bought a 22% stake in the Tamar field last September for US$1 billion, investing in the resources that are funding the ICF.
Certainly, the UAE and Israel are forging closer political and economic ties and sovereign funds are usually not far behind. This week saw the signing of a comprehensive trade agreement between Israel and the UAE. Since the normalization of relations between the two states in 2020, bilateral trade flows have totalled US$2.5 billion with US$1 billion in the first quarter of 2022 alone. The UAE hopes to secure US$1 trillion in trade with Israel over the next decade. In January, Israel’s cabinet approved a joint Israel-UAE R&D fund to support tech projects involving Israeli and Emirati companies, particularly in the areas of agricultural technology and renewable energy. These agreements provide the framework for joint investment initiatives by the sovereign funds of both countries.
While Israel’s experience demonstrates the difficulties in establishing and funding a long-term savings and investment fund, Global SWF still expects to see several new SWFs being established in coming years. However, the share of resourced-sourced SWFs, like the Israel Citizens’ Fund, is decreasing rapidly. Mozambique, Congo-Kinshasa and New Caledonia are expected to start up funds based on gas, coltan and nickel, respectively.