A Regulatory Roadmap for Investors: Current State and Recommendations for Improvement
The “Regulatory Roadmap for Investors” was initiated against the backdrop of the heavy bureaucratic and regulatory burden with which the business sector must contend when establishing new manufacturing plants and doing business in Israel.
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This burden is reflected in many international indices, publicized by the World Bank; the World Economic Forum; and the OECD, all of which work in various ways to improve regulation all over the world. The indices rank countries according to the quality of their regulation and the degree of their competitiveness.
• These indices point to the fact that regulation in Israel leaves much room for improvement.
• In 2018, Israel ranked 54 among 190 countries and fifth from the bottom among OECD countries, in the World Bank’s Ease of Doing Business Indexwww.doingbusiness.org/data/exploreeconomies/israel
• Israel ranked particularly low on the following sub-indexes: registering property (130), tax payments (99), and contract enforcement (92).
• In 2018, Israel ranked 41 among 138 countries in the sub-index “Government Regulation Burden” presented in the Global Competitive Index reportwww.weforum.org/reports/the-global-competitiveness-report-2017-2018 . While this is a considerable improvement as compared with previous years (in 2014, Israel ranked 116), there is still much room for improvement.
• In addition, a survey conducted by the World Economic Forum, reveals that the Israeli business sector representatives listed “government bureaucracy” as the most significant obstacle to doing business. Findings of a report published by the Israel Democracy Institute for the 2017 Eli Hurvitz Conference indicate that this problem is not as dominant in developed countries ranking high on competitiveness, but is characteristic (along with corruption issues) among those ranking low.
• Israel ranks 39 out of 45 countries on the OECD’s Product Market Regulation (PMR) Index (according to the most recent published report, 2013www.oecd.org/eco/growth/indicatorsofproductmarketregulationhomepage.htm#cyc
).
• A variety of surveys conducted over the years by the Manufacturers Association of Israel (MAI) and the Israel Chamber of Commerce also confirmed that regulation and bureaucracy are the main obstacles standing in the way of doing business and investing in Israel.
One of the outcomes of this heavy regulatory burden is the decline in the number of new plants being established in Israel. According to Central Bureau of Statistics, in 2013-2016 an average of only 11 plants were established each year, as compared with 38 each year between 2009-2012, and 49 between 2005-2008. At the same time, Israeli industrialists continued to expand their production lines, but chose to do so mainly outside of Israel. Thus, according to the Manufacturers’ Association, while the number of new plants in Israel continues to decline, the share of industrial companies operating abroad increased from 16% in 2005 to over 30% today.
The decision to establish a new manufacturing plant or expand an existing plant stems from the desire to take advantage of market opportunities and to increase production capacity. The more time that elapses between the decision and actual production, the greater the risk that an industrialist will miss out on the opportunity, and/or that their competitors will get there first. In those cases industrialists may sustain irreversible losses in the volume of revenue and potential for future growth.
In light of these trends, the Israel Democracy Institute and the “Invest in Israel” Division of the Ministry of Economy and Industry, initiated a project aimed at: creating a regulatory roadmap for investors; promoting transparency and equity of the process of establishing production plants in Israel; strengthening equality of opportunity among different businesses; and narrowing the existing information gaps between large and small industrialists, thus reducing the need to use intermediaries and “operators”.
The goal of this initiative is to provide an effective response to the difficulties experienced by industrialists when establishing an industrial production plant. These difficulties stem from the very fact that this is a complex process, demanding an in-depth understanding of a variety of areas and familiarity with how to work with regulators and government officials in order to meet the various regulatory requirements.
To move forward on this project, we established a steering committee whose members include representatives of the Ministry of Economy and Industry, the Prime Minister’s Office, the Ministry of Finance (General Accountant), representatives of the Manufacturers Association of Israel (MAI), and IDI experts. The committee’s work was accompanied by consultation provided by the Kav Project (BDO) Management Consulting Firm.
The Steering Committee aims at achieving four objectives:
1. Creating a regulatory roadmap for investors to serve as a “guide for the perplexed” aimed at investors wanting to establish an industrial plant in Israel; this roadmap will provide greater clarity and transparency of the procedures required for both local and foreign investors
2. Identifying the difficulties and shortcomings of the existing regulatory processes
3. Formulating a set of operational recommendations to enhance transparency and accessibility, making the process friendlier to investors
4. Providing assistance to regulators in implementing the committee’s recommendations
The Importance of Implementing the Report’s Recommendations
The crucial importance of implementing the recommendations of this joint project comes to the fore in light of the drawn-out nature of the current process. Our research results indicate that the bureaucratic and regulatory process for establishing a new manufacturing plant ranges from 22-45 months (2-4 years), excluding the time needed for construction, and without taking into account specific cases requiring further approval stages than in the case of the “classic” plant, which served as the basis for our current research. And so, the process (including construction) may take 4-6 years.
In the course of the 2017 Eli Hurvitz Conference, the importance of streamlining the regulatory burden was presented in a detailed document, Streamlining Regulation in Israel and the Bureaucratic Burden: A proposal for a multi-Year work planhttps//:en.idi.org.il/media/9139/hurvitz2017.pdf, p.47 . One of the proposal’s recommendations was to launch the current project on creating a regulatory road map for investors interested in establishing a manufacturing plant in Israel.
The working group wishes to emphasize the critical importance of promoting and implementing the recommendations of this report in coordination with processes which are already in place and/or being launched by the government.
These processes include a variety of programs led by the Prime Minister’s Office, including: a 5-year plan for reducing regulatory burden; a program for easing bureaucratic burden in cooperation with the National Fire and Rescue Authority and the Ministry of Economy and Industry; and a program for improving planning and construction processes in industry and incorporating the recommendations of the inter-ministerial committee for improving the business environment, under the leadership of the Accountant-General.
The committee was appointed by the Accountant-General in June 2017. Its recommendations aim to make doing business in Israel easier by cutting down on bureaucracy, making the interactions between the business sector and the government simpler and more efficient, and creating a work plan to improve Israel’s ranking on the World Bank’s Doing Business Index.
We believe that the adoption of our recommendations will create a simpler and more efficient investment process in Israel; save time and funds for entrepreneurs and industrialists; enhance transparency of procedures; bolster equality of opportunity; and reduce the incentives and opportunities for corruption. Moreover, we believe that the adoption of these recommendations will serve as a significant incentive for investors – local and foreign alike – to establish and/or expand manufacturing plants, and thus increase the volume of employment and accelerate the growth of Israel’s economy.
The Roadmap: Flaws and Challenges in the Current Process, and Proposed Solutions
Objectives 1&2: Developing a regulatory roadmap for investors and identifying faults and malfunctioning in the process
Below is a description of the current process of establishing an industrial plant in Israel, stage by stage:
1. Stage 1: Locating a site
• Process: Locating land that is appropriate for the specific industry
• Main difficulties: The information provided by available sources is often only partial and out-of-date; existing zoning laws are not suitable for various industries
• Duration of the process: 3-6 months
2. Stage 2: Allocation of land
• Process: Applying for allocation of land with an exemption from a tender
• Main difficulties: Manufacturers’ applications for land with an exemption from a tender are directed to the general waiting list; the process of land assessment by private appraisers is very lengthy; the resources of the Industrial Areas
Administration are limited; there is a substantive defect in the interface between the Ministry of Economy and Industry and the Israel Land Authority in the transition from the stage of locating the land and the stage of applying for land allocation without a tender
• Duration of the process: 6-12 months
3. Stage 3: Receiving a construction permit
• Process: Submitting an application for a permit to do construction work at the site
• Main difficulties: Incompatibility between the information provided to the entrepreneur and regulatory demands; the demands are very stringent and leave no room for professional discretion on adaptation to different industries. industrialists must provide a large number of documents, certifications, and proof to ensure that the plant will comply with the demands of the relevant regulation
• Duration of the process: 6-12 months
4. Stage 4: Construction and receipt of a Certificate of Occupancy (Form #4)
• Process: Meeting the regulation requirements
• Main difficulties: Regulatory bodies present additional requirements; access to the regulators’ to conduct tests and receive certification of approval is problematic, leading to significant delays in the construction process
• Duration of the process (not including the construction itself): 6-12 months
5. Stage 5: Receiving a business permit
• Process: Applying for a business permit and meeting additional requirements of the regulatory bodies
• Main difficulties: Regulatory bodies demand to meet additional requirements even after they have provided certificates of approval at earlier stages of the process
• Duration of the process: 1-3 months
The bureaucratic process to establish an industrial plant takes 22-45 months (2-4 years, not including construction time).
Objective 3: Operational solutions to reduce the time needed for establishing an industrial plant
1. Locating land: Existing sources of information targeted at industrialists must be updated frequently; raising industrialists’ awareness of existing sources of information
2. Land allocation: Development of an online system at the Israel Land Authority which is aligned with Ministry of Economy systems so to create an efficient network of “information traffic”; working with external consultants in the Ministry of Economy in order to reduce the time for examining applications for land allocations without need for a tender; creating a separate track for industrialists in the Israel Land Authority; limiting the number of manufacturers’ applications through the Ask Once system; early appraisal processes in the Israel Land Authority for plots of land designated for allocation to industry
3. Receiving a construction permit: Enhancing trust between regulators and manufacturers by enabling the use of affidavits, rather than documents certifications; limiting the time period during which the regulator can request changes by providing an automatic authorization for receipt of a construction permit after a specific time period has elapsed, if during that time the regulator did not identify a problem in the document’s and plans which were submitted; reducing regulation burden by adapting the regulation to the accepted standard in western countries
4. Construction and receipt of a Certificate of Occupancy: Appointing a coordinator to connect between the industrialists and those responsible for issuing approvals; establishing a special track for dealing with the industrial structures of each relevant regulator; improving development activities in industrial areas and making them more efficient
5. Receiving a business permit: Basing the permit on regulatory approvals and affidavits which were provided in the earlier stages of the process (construction permit and certificate of occupancy); implementation of the proposed solutions, which is the responsibility of the regulators themselves, can significantly reduce the length of the process by about 50%, or 1-2 years, instead of 2-4 (excluding construction time)
Many of the recommendations presented in this report were formulated after a series of meetings with relevant regulators – such as the Ministry of Economy, the Israel Land Authority, and the Government ICT Authority – and were adapted in accordance with constraints in the field. At the same time, the report includes general recommendations submitted to the various regulators for examination and implementation, for example: adapting regulations to meet the accepted standard in Europe and the US. We must emphasize that we attribute great significance to the continuation of this process and to our partnership with the relevant regulators and government ministries. This will enable us to move forward towards the project’s next stage, in which some of the remaining general recommendations will be translated into action items and policy.
Team Composition
Team Leader
Daphna Aviram-Nitzan, Director of the Center for Governance and Economy, IDI
Team Members
The Israel Democracy Institute
Dr. Assaf Cohen, Researcher, IDI; Head of the MBA Program, Rupin College
Omer Selivansky, Researcher at the Center for Governance and Economy
Prof. Yuval Feldman, Senior Research Fellow and Co-Director of the Labor Market Reform Program, IDI; Kaplan Professor of Legal Research at Bar-Ilan University; Member of The Young Israel Academy
Dr. Eyal Peer, Researcher
The Ministry of Economy and Industry
The Foreign Investment and Industrial Cooperation Authority
Eyal Eliezer, Head of “Invest in Israel”
Ilan Laufer, Director of the Investors Service and Government Relations
Gilad Beery, Head of Economic Research