Israel Continues to Embrace Public-Private Partnerships - International Law Office

International Law Office

Projects & Procurement - Israel

Israel Continues to Embrace Public-Private Partnerships

January 13 2004

The Cross-Israel Highway
Tender Procedure
The Tel Aviv Metro Project
Comment


Israel continues to embrace the concept of project finance and numerous projects are currently in development. Over the past three years Israel's economy has been rocked by the dual effects of the global economic downturn and the continued fight against terrorism. Despite these not insignificant difficulties (and perhaps as a result of them), the government continues to look favourably at developing Israel's infrastructure through the implementation of build-operate-transfer projects. Traditionally, infrastructure projects have been used to kick-start the economy, and since the economy is still in recession and construction costs are low, now is an ideal time for infrastructure development to occur. Israel's commitment to public private-partnerships was recently reaffirmed at an Israel Private Finance Initiative conference held in London.

The Cross-Israel Highway

The success of the Cross-Israel Highway toll road project has inspired the government to adopt the public-private partnership method for the development of various transportation and desalination projects, as well as the development of schools, prisons and other public sector utilities. The Cross-Israel Highway reached financial close in Autumn 1999 and was named 'Transport Infrastructure Deal of the Year for the Middle East' by Project Finance Magazine. The $1.35 billion dual-currency financing was, and remains, Israel's largest project-financed project. The highway consists of an 86-kilometre (km) electronic toll road that runs from just south of Tel Aviv to just south of Haifa. The highway has up to four lanes in each direction and consists of 13 complex interchanges, 80 bridge structures, 100km of agricultural roads and a 450-metre twin-barrel tunnel, which was constructed to preserve an archaeological site. The aims of the highway include easing traffic congestion in the Tel Aviv metro area and developing northern and southern regions of the country. The highway employs a state-of-the-art electronic tolling and video recognition system. There are no toll booths or plazas, and drivers have the choice of equipping their vehicles with electronic tags or paying by means of a licence-plate video recognition system, which is connected to the online motor vehicle licensing bureau. Since this technology eliminates the need for barriers to facilitate toll collection, it has been necessary for a unique toll payment enforcement law to be enacted. Under the concession contract, the contractor, a joint venture comprised of affiliates of the project sponsors (Africa Israel Investments Ltd, Housing and Construction Holding Co Ltd and Canadian Highways International), was given five years in which to complete construction of the highway. However, sections of the highway have progressively been opened to traffic and tolling since Spring 2002 and the entire highway is scheduled for completion ahead of schedule in early 2004. The highway has served as a template for additional transportation projects, particularly the Jerusalem light rail project (which is approaching financial close) and the recently announced Tel Aviv metro project.

Tender Procedure

Government-sponsored projects are typically tendered in a competitive bid process that is subject to domestic tender law. In the past, the tender process has proved to be somewhat lengthy and has resulted in two almost knee-jerk reactions following the selection of a preferred bidder. Due to the relatively easy availability of court action (for which only a minimal filing fee is required), losing bidders typically turn straight to the courts while the preferred bidder simultaneously engages the government in a re-negotiation of the project concession contract, arguing that amendments are crucial in order to achieve financial close. Such actions have led to exasperation within both government and sponsor circles. However, the process is gradually becoming more streamlined and sponsors, government and lenders are becoming more sophisticated in their project-financing techniques. Documentation is also becoming more standardized, which should result in less negotiation and a shorter time frame for financial close. Government officials are also becoming more comfortable with the private sector taking responsibility for sectors that until recently were the exclusive domain of the public sector.

The Tel Aviv Metro Project

Recently, the government and several municipalities published a request for a proposal for the design, construction and financing of the first line of the Tel Aviv metro project. The first line will be 22km in length and is set to cost around $1.5 billion. The final cost of the entire system is expected to be several billion dollars. One of the challenges facing bidders for such project work has been the sourcing of sufficient funds in the domestic banking market (sources of long-term funds are limited due to the relatively small number of banks and Bank of Israel limitations, while foreign financial institutions have been discouraged from further expansion in the domestic market due to security issues). Consequently, the government has offered to provide funds in the form of grants (eg, a 70% grant for the Jerusalem light rail project, payable in instalments). Similar support mechanisms are expected to be incorporated throughout this project. The provision of direct funds by the government underscores its philosophy that the private sector is better equipped to manage large-scale infrastructure projects.

Comment

Israel greatly values the participation of international companies with requisite experience and financial strength in these projects, and frequently makes such participation a prerequisite for a consortium's participation in a particular tender. International participation is considered essential given that many of the projects are the first of their kind in Israel. A review of the composition of recent participating consortia shows that international corporations continue to show an active interest in participating in Israeli projects.


For further information on this topic please contact Yehuda Raveh at Yehuda Raveh & Co by telephone (+972 3 562 0303) or by fax (+972 3 561 8558) or by email (ravehtlv@ravehtlv.co.il).



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