Accountant General Decides on a Series of Additional Steps to Promote Infrastructure Projects

The Accountant General, Dr. Yaron Zalika, has decided on a series of additional steps to address problems that hinder the implementation of major infrastructure projects, with the goal of accelerating investments in infrastructure during 2005 and beyond.
 
The decision was taken after the issue was studied by the Accountant General’s office, which identified several key obstacles:
 
Accounting and Tax Aspects
Pursuant to the generally accepted accounting principles employed in Israel until the present, and on account of the nature of projects conducted using the PFI/BOT method, the entrepreneur showed a profit only in the late stages of the project, which created a disincentive for local public companies to invest in them. Against this background, the Israel Accounting Standards Board, in cooperation with the Accountant General’s office, recently drew up a draft for modifications in the current accounting principles, such that an entrepreneur may, in certain situations, spread out the anticipated profits over the entire lifetime of the project.
 
It should be noted that in the wake of the change in the standards, there was a fear that should the tax authorities adopt the new accounting principles, the viability of projects planned according to the old accounting principles, which did not allow for tax payments during the initial years of the project, might be adversely affected. Accordingly, the Accountant General and the director of the Tax Authority have agreed that projects registered with the State before the publication of the recommendations of the subcommittee of the Israel Accounting Standards Board will be taxed according to the old accounting principles, thereby solving the entrepreneur’s cash-flow problem.
 
 
Financing Barriers
1. Projects undertaken by the PFI/BOT method combine construction with operation and maintenance for the life of the agreement (around 25 years). Under the Value-Added Tax Law, the entrepreneur is liable for taxes on all the anticipated revenues of the project the moment construction is complete, even though its income will be spread out over a protracted period.
 
The time gap between income from the project and the date of VAT payment creates a cashflow problem for the entrepreneur, which it must solve by taking a loan that increases the cost of the project. Thus the State, which in fact bears the cost of the project, is really taking a loan to pay VAT to itself. Accordingly it has been stipulated that value-added tax will be collected when construction of the project is complete and that, in order to improve the project’s cashflow and lower its costs, the contract between the State and the franchise holder will specify that the State will transfer the amount of the value-added tax to the franchise holder, which will in turn pay it to the tax authorities, when construction of the project is complete.
 
2. Today projects are financed by local banks. This increases financing costs because of the lack of competition in the Israeli banking sector. In order to increase competition in the financing market and lower project costs, it has been decided that franchise holders will be able to receive protection from the State for the foreign-exchange interest applying to bank loans. This will allow them to take cheaper loans abroad without an unnecessary interest risk, as part of the Accountant General’s policy of streamlining the allocation of risks between the entrepreneur and the State.
 
 
Entry Obstacles
1. In order to increase the degree of certainty among bidders, it has been decided that in every large infrastructure tender competition, before the final competitive stage, preliminary discussions will be held with potential bidders and other relevant players (such as the Contractors’ Association), to promote common brainstorming. It should be emphasized that before the competitive stage and selection of the winning bidder, there is usually no conflict of interests between the bidders and the State; both share the goal of cutting red tape that prolongs construction schedules and increases the cost of projects.
 
This decision is already being implemented in the RFP for Highway 431 and for the light rail system in Tel Aviv.
 
2. Assessing the viability of projects: The economic viability of projects will be studied before the RFP is published, based on a fixed set of parameters drawn up recently by the relevant agencies. The study will be conducted by a team from the projects department of the stateowned Inbal Insurance Company. The decision, intended to avoid the undesirable phenomenon of the cancellation of tenders after publication, was taken in the wake of reports by the State Comptroller criticizing the lack of adequate research before the publication of tenders.