Guidelines for Industrial Cooperation in Israel

 

Israel’s Parliamentary Constitution and Law Committee approved on March 14^th 2007 amendments to the Mandatory Industrial Cooperation regulation. The amendments bring into force changes recommended by the Industrial Cooperation Authority (ICA), which implements policy on behalf of the Ministry of Industry Trade & Labour. 

 

The new rules impose a mandatory requirement for government corporations and public agencies to ask for Industrial Cooperation when their purchase of foreign goods or services exceeds the threshold of NIS 25m. It also binds health sector institutions to the mandatory policy. Legislation is expected soon to require that Municipal Authorities will have to comply as well. This will affect, for instance, contracts for sewage, water treatment, power systems, etc. The Municipality Law will have to be amended before this can be enforced. 

 

The regulations distinguish between defence related purchases and civil purchases. The former, except when acquisitions are made under FMF, require a 50 percent Industrial Cooperation undertaking. Civil acquisitions require an undertaking of 28 percent from companies in countries which are members to the Government Procurement Agreement (GPA), and 35 percent from all the rest.

 

Overseas companies may contact the ICA regarding any subject related directly or indirectly to their Industrial Cooperation Undertaking or fulfilment activity. Assistance will be provided to potential and existing obligors in identifying and locating suitable Israeli manufacturers and partners for joint ventures, outsourcing, R&D, and other modes of cooperation and strategic partnerships with Israeli industry.

 

All ICA support, assistance and services are provided on a complimentary basis. The ICA will:-

 

• Provide information about Israeli industry.
• Conduct surveys related to Israeli industry.
• Co-ordinate visits by representatives of Israeli industry to foreign companies.
• Co-ordinate visits by representatives of foreign companies to Israel in order to survey local industry.
• Organise conferences between foreign companies and Israeli industry. 

 

Objectives:

 

Long-term cooperation leading to the competitive production of Israeli products. The goal is to develop new markets for high quality goods and to create a framework for bilateral or multilateral industrial and trade cooperation between the foreign company or its subsidiaries, and Israeli industry.

 

In addition to direct R&D grants for industry, emphasis is placed upon regional job creation.

• The encouragement of international co-operation in industrial R&D
• The encouragement of technological entrepreneurship
• The development of future technologies by means of increasing the academic-industrial interaction and cooperation.

 

The Meaning of ‘Industrial Cooperation’:

 

Industrial cooperation shall be by means of local sub-contracting, investment, R&D, technology transfer, work placed in Israel, the purchase of Israeli-made goods, or otherwise as agreed with the ICA.

 

Research and Availability of Grants:

 

The Office of the Chief Scientist (OCS) of the Ministry of Industry, Trade and Labour is responsible for implementing government policy regarding support and encouragement of industrial research and development (R&D).

 

The role of the OCS is to assist in the development of new technologies in Israel as a mean of fostering the Israeli economy, encouraging technological entrepreneurship, leveraging Israel’s science-skilled resources, supporting high added value R&D, enhancing the knowledge base of Israeli hi-tech industries, and promoting cooperation in R&D both nationally and internationally.

 

The staff of the Office of the Chief Scientist (OCS) is available to provide contractors with information or assistance. R&D grants are available to companies whose projects have been approved by the Research Committee of the OCS.

 

An R&D programme must last for one or more years and result in the manufacture of a new product, or a show a significant improvement to an existing product. The development also may lead to a new industrial process, or to a significant improvement in an existing industrial process.

 

Grants may be provided by the Research Committee. They would be for between 20 percent and 50 percent of the estimated R&D expenditure cost, depending on circumstances and the estimated potential of individual projects.

 

Since 1977 the government of Israel has signed agreements with a number of governments to support and encourage R&D co-operation between Israeli and foreign corporations. Cooperative agreements of this kind are implemented under the auspices of the OCS under the Ministry of Industry & Trade. Sometimes they are implemented by the Israel Centre for Industrial Research and Development (MATIMOP).

 

There is a foundation, the Bi-national Industrial Research & Development Foundation (BIRD), funded by a $110m endowment that provides for up to 50 percent of the costs of joint ventures between Israeli and American companies. 

 

Preferential Policy for Israeli Products:

 

Preference is granted to Israeli products over imported products (only with regard to price) provided that the price of the given Israeli product does not exceed that of the imported product by more than 15 percent. This does not apply to suppliers from GPA parties in tenders subject to the GPA.

 

In contracts of a government-owned corporation or agency which exports at least 30 percent of its output, the preference to be granted to Israeli products shall not exceed 10 percent (instead of 15 percent) of the value of the imported products.

 

An Israeli product is a product in which the Israeli content exceeds 35 percent.

 

Threshold:

 

Mandatory industrial cooperation will be required for government acquisitions above NIS 25m (c.$6M). Follow-on agreements whose value exceeds NIS 500,000 within five years of the date of the original contract, will also be covered.

 

Subcontracting Requirement:

 

Unless otherwise agreed with the ICA, a minimum of 20 percent local sub-contracting related to the project/product purchased from a foreign company is required for fulfilling the obligor’s Industrial Cooperation Undertaking.

 

Quota:

 

The regulation distinguishes between ‘defence and security’ purchases, and acquisitions for the civil sector.

 

1. Defence and security purchases require an undertaking of at least 50 percent of foreign content value.

 

2. Civil procurements from countries that are signatories to the Government Procurements Agreement (GPA) of the WTO will be subject to a requirement of 28 percent of foreign content value.
   
   [An extension to the GPA was won in December 2005 permitting the country to continue to require direct or indirect programmes in the commercial sector for not more than 28 percent of import content value through 2008. The GPA covers commercial procurements from the US, European Union, Japan, S. Korea, and Switzerland; altogether some 36 of the WTO’s 140 members].

 

3. Civil purchases from non-GPA countries are levied at 35 percent of foreign content value.

 

Multipliers:

 

Multipliers will encourage buy-back programs involving industries in the Galilee, Haifa and the Negev, areas targeted for employment and regeneration. The incentive will be offered to defence and to civil contractors. The multipliers are currently under consideration.

 

Penalties:

 

There are no penalty provisions for non-compliance. Companies that refuse to fulfil their undertakings will be blacklisted.

 

Government agencies floating civil sector tenders that fail to comply with the requirement to ask for industrial cooperation in their tender documents will have their tenders suspended until there is compliance.  

 

Fulfilment Period:

 

To be negotiated case-by-case but in general an undertaking should be implemented within the validity period of the supply contract. The ICA may extend the fulfilment period if there are complexities involved.

 

Pre-performance Offset - the Umbrella Industrial Co-operation Agreement (UICA) – and Credit Banking:

 

An Umbrella Industrial Co-operation Agreement (UICA) is an agreement between the ICA and a foreign supplier to the Government of Israel which covers Industrial Co-operation Undertakings related to its sales during a defined period of time.

 

The purpose is to encourage significant pre-performance activity though the accumulation of credits. Credits may be banked, usually for not less than five years, and may be used to cover obligations accrued within the validity period of the UICA.

 

This type of agreement may be advantageous to both parties because:

 

• Negotiations regarding Industrial Cooperation Undertakings occur only once. Since all the procurements by the Government of Israel are covered by the UICA, any subsequent negotiation concerning each purchase is unnecessary. 
  
  
• The supplier’s surplus industrial cooperation activities in Israel are maintained in its account and will serve to cover obligations resulting from its future sales in Israel.
  
  
• The supplier’s corporate divisions, as well as its subsidiaries, may also (to an agreed extent) take part in the fulfilment of the obligations stemming from the UICA.
  
  
• The agreement is brought to the attention of potential Israeli buyers, Government purchasing departments, agencies etc.

 

Procedure:

 

The bidder is required to include, as an integral part of its bid, a signed undertaking to implement an Industrial Cooperation Programme with Israeli industry. An Industrial Cooperation Undertaking form is to be submitted to each bidder by the government entity as part of the tender or RFP documents. 

 

The entity issuing the tender, in agreement with the ICA , may to a certain point alter the undertaking form. The undertaking must be signed and executed by the manufacturer of the goods offered and will become an integral part of the proposal.

 

Government entities are obliged by the "Tenders Law Regulations" to obtain the ICA 's approval regarding the foreign company's Industrial Cooperation Undertaking prior to signing any supply contract exceeding the threshold of NIS 25m. The ICA will grant its approval after reviewing the undertaking document and ensuring its full compliance with the Regulations.

 

The responsibility for obtaining a formal Industrial Cooperation Undertaking signed by the foreign company lies with the relevant government purchasing department. Once the undertaking is signed, the responsibility for communicating with the company and monitoring its fulfilment will be ICA 's. The ICA will receive the company's periodical progress reports and keep the relevant departments updated concerning any developments related to the fulfilment of the company's undertaking.

 

BOT Linkage to Industrial Participation:

 

Major civil works, for instance for the Tel Aviv Light Railway project, are scheduled to be carried out on a Build-Operate-Transfer (BOT) basis. The government will provide grants for up to 80 or perhaps 90 percent of project cost and successful bidders will have to undertake to engage with domestic industry for 30 percent of the value of the grant.