US-China Trade War: Challenges for Foreign Investors in Israel
Foreign direct investments (FDI) in critical Israeli infrastructure and services, especially by entities representing foreign countries, are subject to oversight, mainly to ensure national security.
Israeli Regulatory Supervision of FDIs
Whenever a foreign entity applies for a license to operate strategic infrastructure or services in Israel, or applies to transfer even a minor stake in the ownership thereof, its application is subject to examination and control by the State. However, Israel does not have an overarching regulatory framework requiring prior approval for transactions with national security implications, only sectoral legislation that may restrict FDIs. This includes the Government Companies Law, the Real Estate Law, financial legislation, etc.
The outcome is that FDIs are supervised according to such sectoral regulations, and each regulatory authority is responsible for supervising its own sector. (For example, the Ministry of Transportation is responsible for approving the grant of a permit to a foreign entity to control port infrastructure.) These powers may also apply to changes in ownership or to the granting of a right to an asset or to infrastructure, even if no foreign entity is involved. (For a review of the FDI supervisory regime in Israel, see here.)
The Ministry of Finance’s Advisory Board for Supervising FDIs
In 2019, Israel’s Ministerial Committee on National Security Affairs decided to form an advisory board in the Ministry of Finance to examine the national security aspects of FDIs. The advisory board’s very formation demonstrates Israel’s prioritization of national security considerations when examining FDIs in Israel. The board’s role is to assist regulatory authorities empowered under specific statutory provisions to examine FDIs that could jeopardize national security interests. This conclusion is substantiated by the few cases addressed by the advisory board so far, mainly FDIs in critical infrastructure in Israel.
Trade War between the US and China – Implications for the Israeli Arena
Besides scrutinizing the national security aspects of FDIs, Israel must also take foreign policy considerations into account. Such considerations have acquired higher importance due to the escalated trade war between the United States and China, the repercussions of which are also resonating in the Israeli arena.
Within this context, it is not surprising the US administration expects Israel to align itself with its position with regard to FDIs in strategic infrastructure in Israel, especially by Chinese companies. All the more so considering Israel’s growing dependence on the United States for security, economic, and political assistance due to the current geopolitical and military situation, and recognizing that the current US administration prioritizes its economic interests over other considerations (including legal considerations).
Prioritization of Foreign Policy Considerations
A pertinent example is the Jerusalem Light Rail’s Blue Line. Foreign policy considerations apparently prompted an Israeli regulatory authority to change a prior decision about engaging in a material transaction with the Chinese government-owned company CRRC to supply railway cars for this project. However, even more recently, the regulatory authority changed its mind a second time.
During the tender for the Blue Line project, the Ministry of Finance disqualified CRRC after Israel had already approved the transaction and after reaching an agreement that CRRC would supply at least 132 railway cars for the project at a total cost of about ILS 2 billion. The ministry instructed the companies that won the tender for the construction of the Blue Line, Dan and Denya Cebus, not to accept CRRC’s cars and advised that the railway cars would be purchased during a separate and future competitive proceeding.
Israel did not publicly explain its decision to withdraw from the agreement with the Chinese company. In fact, it cited neither national security considerations nor foreign policy considerations. However, one can assume the decision did not derive from national security considerations for two reasons: (1) Since it appears the advisory board was not involved in this decision, and although we cannot completely rule out the assumption that the State also reached its decision based on national security considerations, it is reasonable to assume the primary reason for withdrawing from the agreement was not necessarily related to national security. (2) The decision to disqualify a Chinese company for national security considerations would have been reached a long time ago, when Israel first held the tender for procuring the railway cars, and yet the Chinese company won that contract.
In any case, the agreement’s invalidation at such a late stage is blatant evidence of a change in Israel’s approach toward exercising discretion, namely prioritizing foreign policy considerations vis-à-vis the United States, considering the growing tensions in economic relations between the United States and China.
Israel Looking to Protect Relations with the US and May Refuse Chinese Investments
Our presumption is that this example attests to Israel’s willingness (or that of its sectoral regulatory authorities) to block investment or acquisition transactions involving Chinese entities or any other entities embroiled in disputes with the United States. This holds even if the transaction has been approved by the highest echelons and is at an advanced stage, and even if cancellation exposes Israel to significant economic and other risks, including, inter alia, the payment of enormous compensatory sums.
The difference between national security considerations and foreign policy and economic considerations is not always clear. Sometimes a decision is explained as being based on national security considerations when its actual motivation was something else, such as foreign policy or economic considerations deriving from Israel’s trade relations with other countries. In other words, Israel will use “national security considerations” as its official explanation for decisions that may be based on other considerations, such as diplomatic pressure.
Quite recently, the US administration lifted its objection to the purchase of the railway cars. Accordingly, Israeli government entities received the green light to proceed with the transaction. The current procurement format includes two components that apparently facilitated approval of the transaction: (1) The project’s concessionaires and not the State of Israel will purchase the railway cars directly. (2) The railway cars will be purchased from an American subsidiary of CRRC and not from CRRC itself, thereby enabling the Americans to also profit from the transaction.
We note that the concessionaires are not obligated to purchase the railway cars from CRRC and are legally entitled to execute the purchase from the Polish company Pesa, if it agrees to the transaction. (Pesa originally rejected the contractual agreements with the concessionaires as a result of the Swords of Iron War and the downrating of Israel’s credit rating.)
Recent developments in US-Israel relations (and the intense economic and non-economic pressures the US is currently imposing on various countries in order to achieve its objectives), as well as the CRRC case, seem to demonstrate Israel’s current policy of prioritizing foreign policy and economic considerations, regardless of whether or not they may affect national security.
Recommendation to Foreign Entities Looking to Invest in Infrastructure in Israel
The “zigzag” in Israeli officials’ positions within a relatively short time frame attests to the considerable importance being attributed to messages received from the US administration. This thus opens a window of opportunity for business entities to exploit the Israeli government’s acquiescence to the US administration to promote their own economic interests.
We recommend that foreign entities looking to invest in infrastructure in Israel or engage in major critical infrastructure or service transactions with Israel (as well as Israeli entities looking to cooperate with such foreign entities) seriously weigh developments of this kind. For instance, we suggest such entities arrange adequate legal protections at an early stage of the negotiation process.
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