According to Sheshinski Committee, which submitted its recommendations on government royalty and tax policy for natural resource exploitation, offshore Tamar gas exploration site could generate average annual government revenues of NIS 2 to 3 billion for next 30 years.
By Avi Bar-Eli

The state’s future revenue from the sale of oil and natural gas will not be included in the regular state budget, but instead be put into a special fund. This decision is based on an understanding reached in the government following preliminary discussions over how to distribute the state’s share of the revenue from oil and gas exploration.

According to the model taking shape, royalty and tax payments from the sale of oil and gas would be directed first to cover a portion of Israel’s external debt. In addition, the state would establish a special fund the assets of which would ultimately be invested abroad.

The arrangement is an effort to avoid the so-called Dutch disease, a reference to the aftermath of the discovery of natural gas off the coast of the Netherlands in the 1960s. The country experienced a sharp rise in its currency at the time, the guilder, after a rush of incoming foreign money. This caused a sharp rise in the value of the guilder, which made Dutch exports less competitive while the price of imports fell. Local industry was hurt and unemployment rose, accompanied by a rise in public debt and inflation.

According to the Sheshinski Committee, which has just submitted its recommendations on government royalty and tax policy for natural resource exploitation, the offshore Tamar gas exploration site alone could generate average annual government revenues of NIS 2 to 3 billion for the next 30 years. The revenue would result from 11% royalties from the site along with a progressive tax levy of 20% to 50% on partnership profits.

Although Israel’s external debt is currently NIS 110 billion and revenues from Tamar are expected to be small in comparison to the country’s gross domestic product of about NIS 800 billion, the thinking in the government is still that the revenues should be earmarked for a special fund, on the assumption that Tamar revenue will be followed by state revenue from other exploration sites that ultimately could have a significant impact on the balance of payments.

In the course of the Sheshinski Committee proceedings, consultants were asked to create an information database on how other countries with natural resources have dealt with the issue. Among the examples considered was the Singapore government’s investment fund for its surplus income. The fund manages assets of $330 billion and employs about 1,000 people around the world.

The Norwegian model was also looked at. Norway’s fund is managed as a unit of the country’s central bank with a whopping $600 billion in assets in a variety of sectors.

The committee also examined the concept of a stabilization fund designed to counter fluctuations in state revenue caused by sharp changes from natural resource sales. Such funds exist in Chile, for example, due to the volatility of the price of copper, and in Russia.

In the past, the Finance Ministry has opposed earmarking royalty revenues out of concern that it would create a precedent depriving the regular budget of other types of revenue in the future. In the coming months, government ministries will consider which model is most appropriate for Israel.

Among the issues to be discussed is at what stage of development of the natural resource state revenues will begin to be earmarked. A decision will also be made regarding how much of Israel’s external debt should be paid off, with the understanding that it should not be eliminated entirely, so that access to international markets is maintained.

Later on, details regarding the operation of the investment fund and investment policy for the fund will be set, including the extent of diversification of investment.

Concern over an Israeli version of the Dutch disease following the major discoveries of natural gas off the Israeli coast has already led to calls by public figures for the government to prepare in advance for the impact of future income windfalls. Bank of Israel Governor Stanley Fischer, for example, has called for the establishment of a state fund for foreign currency investment in financial assets abroad.

Representatives from the Bank of Israel and the Finance Ministry have arranged a visit to the Netherlands to learn from the Dutch experience.

http://english.themarker.com/state-to-use-gas-income-to-retire-external-debt-1.335495