Seven months after it was launched, the Israel Citizens' Fund (ICF) accumulated just US$617 million by end-2022, according to the Ministry of Finance.
Under the current government’s coalition agreements, the fund could be used for immediate use for infrastructure, thereby eroding its inter-generational savings mandate and undermining its potential for growth. Yet, over the second half of 2022, it reported a robust performance with a 1.2% return from its investments in public equities and cash assets – in stark contrast to the negative yield reported by most of the sovereign investor universe.
In terms of the global sovereign wealth sector, the future generations fund is a minnow. By way of comparison, Botswana’s commodity-backed Pula Fund is nearly six times times bigger at US$3.43 billion in late 2022, close to the ICF’s original target of US$4 billion. ICF is also smaller than the Palestine Investment Fund, which has an AUM of just under US$1 billion. It was established in 2003 by the consolidation of commercial assets and investments held by the Palestinian Authority which operates as a strategic investor in the Palestinian territories.
The ICF was long in gestation. 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.
Established under the Sovereign Wealth Law of 2014, the fund could only launch when tax collection on super-profits reached NIS 1 billion (US$300 million). An additional NIS 836 million in natural resource levies lifted the fund to its present level. 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 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 last year by the Finance Ministry 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.
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.
