FAQs - Project Finance in Israel
In Israel, project finance is a well-established financing method that has been commonly used in the last 15-20 years. It is used for debt financing in a variety of industries, particularly in public-private partnership projects. Project financing is used in a number of industries, including water desalination, power, and transpiration, residential projects as well as large-scale protection programs.
Debt transactions in project financing are arranged according to international requirements, which include standard security packages and agreements (senior debt agreements, common terms agreement, equity subscription deeds, inter-creditor agreements, direct agreements with all major project parties etc.
Q1. What are the key legislations and key regulatory bodies that govern the project financing in Israel?
The project financing is not governed by any specific legal framework; it is regulated by the general legislation which is applicable to all of the financial sector in Israel.
The banking sector is governed by the-
- Banking Ordinance of 1941,
- The Banking Licensing Law of 1981 and
- The Banking (Service to customer) Law of 1981.
The Banking supervision law department of the Bank of Israel issues its proper code of Banking Business Directives which further regulates other aspects of banking in Israel.
The key legislation which applies to other financial institutions is the-
- Control of Financial Services Law of 1981 and control of financial services law of 2005 and the other regulations promulgated thereunder.
The key applicable regulatory bodies in the financial sector are-
- The Commissioner of Capital Markets, Insurance and savings at the ministry of finance and the Banking Supervision Department of the Israel bank regulates the banking sector in Israel.
Q2. What are the legal frameworks and authorities that govern the PPPs, and where have PPP frameworks been used most successfully?
There are no clear frameworks or legislation that apply to PPP ventures, apart from general statutes such as the Mandatory Tender Law of 1993, the Contract Law (General Part) of 1973, and the Contract Law (Remedies for Breach) of 1970.The relevant authorities have amassed a wealth of experience in the implementation of projects, especially in the fields of infrastructure and transportation in a PPP scheme, over the years. In practice, a contractual structure has emerged, and the majority of PPP ventures are focused on the same general terms and risk sharing between the government and the private investor.
Q3. In what sector is project finance commonly used?
The project financing has been a very well established scheme in Israel and is now being widely implemented from the past 15-20 years now. It is a form of debt financing in many sectors but mainly when there is public private partnership (PPP). Electricity, transportation, water desalination are the sectors in which such financing is commonly used, moreover it is also commonly used in large scale security projects and residential projects.
Q4. How are the debt transactions structured in project finance?
The project finance debt transactions are structured as based on international norms, including standard protection packages and agreements (senior debt agreements, common term agreements, inter-creditor agreements)
Q5. What is the composition of the market when it comes to the types of active lending institutions? And has the composition of the lending institutions changed in the past years?
At present almost all the Israeli banks are involved in project financing, the main arrangers of the credit consortiums are the two largest banks Bank Hapoliam and Bank Leuim. The other banks such as HSBC, The European Investment Bank, and Deutsche Bank also play a vital role in the Israeli project market.
In recent years it has become more and more common for the non-bank financing institutions to provide finance through the project finance scheme without any involvement of any banks as arrangers for example insurance companies and pension funds. This is being done in order to avoid additional cost and gain a better control of the project.
Q6. Are there any major current projects or initiatives which may affect or influence the activity?
In September of 2017 the government of Israel had for the first time published a multi-year plan with 147 infrastructural projects each of them costing at least ILS100million. The majority of such projects fall under the PPP sector. Moreover in the energy sector as well in December of 2017 principles for a major sector reform agreed between the government and the Israel Electric Corporation, this agreement included sale of six power plants to the private investors this once again comes under the scope of PPP and majority of the projects financed will be through project financing.
Q7. What are the most notable transactions taking place in the Israel market?
Many Project Finance Projects have been introduced by the government in the past two years. The first hospital in Israel implemented under the PPP scheme has started operating commercially, Along with this in the energy field the second pumped storage power plant has gotten finance through project finance scheme.
Q8. How will these above mentioned projects impact the market and are there any other noteworthy developments in project finance transactions when it comes to energy projects and infrastructural developments?
The above mentioned projects have been structured according to the common practices which are applicable to the project finance scheme. Differences can be seen in the interface with the relevant government agency. A custom collection of provisions was used in some projects to protect senior lenders' rights (in terms of security package and step-in rights) as well as the project's financial stability. Moreover the growing interest of the banks and other financial institutions in the PPP projects in various fields of infrastructure and energy from the past few years will moreover increase the need of project financing.
Q9. Have there been any changes in the laws and regulations affecting financing structuring, such as guarantee and social regimes, local currency rules, and foreign investment restrictions?
There are no limits on foreign investments, foreign currency trade, or inward or outward investment under Israeli law, with the exception of anti-terrorism and anti-money laundering legislation. A few years ago, no significant improvements in applicable law regarding finance structuring in terms of guarantee and protection regimes were made.
Q10. How has the volume of credit impacted during such changes?
The volume of credit provided by the financial institutions over the last decade have increased constantly because major governmental led reforms in the financial sector and one more reason is that these institutions have increased their involvement in credit arrangement and credit management.
Q11. Are there any laws, regulations, or policy mechanisms under consideration that could have an effect on project finance in Israel?
If adopted, the government plan outlined in section 1.3 may have a substantial effect on the size and magnitude of projects under construction in the PPP system, and there is no general legislative structure for the implementation of PPP projects and no clear regulation relevant to project finance. In terms of broader amendments, a revised insolvency proceedings statute has been released for public comment, with suggested changes to applicable insolvency law in different areas.
Q12. What are the common misconceptions about project finance that exist in Israel?
While Israel is a small country in terms of size and population, the scope of projects that are or could be funded through the project finance scheme is vast and disproportional to the country's size. Complete PPP investment was around ILS19 billion in the second quarter of 2016, with projects under construction accounting for another ILS10 billion. The cost of currently tendered projects is expected to be ILS4.5 billion. While some investors consider Israel to be a high-risk country for investments due to the current situation, the risk is mitigated to some extent by the state in many large-scale PPP projects by having restricted safety nets in the event of conflict, terror, or hostile action. Such safety nets ensure the repayment of senior debt if any of these events occur.
Q13. Have any measures been taken to prepare for any form of market idiosyncrasies?
Those interested in project financing should familiarize themselves with the contractual and legal structure that applies to the sector and project in which they wish to invest. Furthermore, many of the related sectors, such as energy and water, are highly regulated, and investors can expect to interact with government authorities frequently. In highly complex infrastructure projects in specific locations, assessing the risks associated with such projects necessitates a thorough understanding of the relevant authorities' activities. Such programs, in collaboration with local infrastructure organisations, are strongly recommended in this regard.
Q14. What are the predictions for the development and financing sector in the coming months?
The development of large-scale PPP projects is expected to continue in the coming years. It is estimated that the Road 16 project (ILS1.5 billion) and the IDF communication base project (ILS2 billion) will be awarded. The tenders for the Jerusalem LRT Green Line Project (ILS1.5 billion) and the Gush-Dan Fast Lanes project will be issued (ILS1.5billion). Tenders for large-scale PV power plants are also scheduled to be issued in the PV market. PV projects on a medium and small scale will continue to be developed in compliance with relevant regulations. In addition, at least one conventional power plant financial close is expected, while wind farm projects are expected to mature and secure construction financing.