1 Macro economic reform in Israel: The Trajtenberg Committee for Economic and Social Change and the Competitiveness Committee Professor Eugene Kandel January 2012

2 Trajtenberg Committee for social economic change: Conclusions and their Implications

The Protest’s Origins Source: CBS

Housing Prices Source: CBS

Principles: Reducing the cost of living in Israel Reducing inequality Emphasis on parents of young children Maintaining fiscal responsibility Social Services TaxationHousing Competiti -veness and cost of living

Easing the cost of living Encouraging competition Changes in taxation

Cancel purchase taxes and customs Limit the use of anti-dumping tariffs Adoption of European standards Limit monopolistic control of key industries - food, fuel, seaports, water, etc.. Easing the cost of living Encouraging competition Changes in taxation

Cancel excise tax increase on fuel Import duty exemption on a personal import through the Internet on goods up to 300$ Easing the cost of living Encouraging competition Changes in taxation

Assistance for young families Offsetting the education cost Changes in taxation

Increasing the supply of day-care centers for children ages 0-3 Free Education Act applied for ages 3-4 Afternoon educational frameworks subsidy for ages 3-9 Reducing excess burden of payments from parents Assistance for young families Offsetting the education cost Changes in taxation

Two tax credits to fathers of children ages 0-3 Expansion in the earned income tax credit grants for working mothers Assistance for young families Offsetting the education cost Changes in taxation

Reduction of inequality Changes in taxation Assistance to underserved populations

Stopping the declining path of direct taxation Raising the top tax bracket Raising the corporate tax rate and tax on capital gains Reduction of inequality Changes in taxation Assistance to underserved populations

Encouragement of employment of ultra-Orthodox Encouragement of employment of minorities Integration of people with disabilities in the labor market Enforcement of labor laws Reduction of inequality Changes in taxation Assistance to underserved populations

Improvement in the housing market Increase in housing supply Urban renewal Housing composition

Setting clear objectives for planning and marketing of housing units Detailed government support and removal of planning barriers in large housing projects Lowering the minimum price in Israel Lands Administration auctions Reducing the concentration of land ownership Dealing with empty apartments, and creating incentives for reconstruction of unsuitable apartment Improvement in the housing market Increase in housing supply Urban renewal Housing composition

Promoting an Urban Renewal Plan Close guidance of selected compounds Dealing with development costs Establishment of decisive appraiser mechanism for issues of urban renewal Improvement in the housing market Increase in housing supply Urban renewal Housing composition

Create long-term rental market Determining the affordable housing designation Construction of small apartments requirements Improvement in the housing market Increase in housing supply Urban renewal Housing composition

The Committee's Conclusions Recommendations relate to a variety of problems raised during the protests of last summer The report does not change the system, but improve it from within The solution is not a complete one, but it deals with many of the problems

Implications of the Report Immediate and significant relief of economic burden, especially for young couples Reduction of inequality Creating a competitive and more efficient economy Improvement of decision making processes

Competitiveness Committee Main Recommendations 21

Committee Mandate To examine the impact of current economic structure on the competitiveness in different market sectors and on current financial stability and economic efficiency. To recommend desirable policy measures, in particular in the following topics: 1.Control of a public company through pyramidal ownership structure 2.Financial companies owned by non-financial firms 3.Measures to strengthen corporate governance in public companies 4.Application of antitrust policy 5.Special conditions for the allocation of government assets and obtaining licenses and franchises by business groups 22

Committee's Work 3 working groups: 1. Financial and non-financial holdings Headed by Prof. Eugene Kandel, head of the National Economic Council 2. Pyramidal business groups Headed by Prof. Shmuel Hauser, chairman of the SEC 3. Allocation of public assets Headed by Prof. David Gilo, chairman of the Israeli antitrust authority 23

Public funds Financial sectorBusiness sector Bank Provi -dent fund Bank Pension fund Bank Infra- structure Real estate EnergyFood Communic- ation Commerce Holder of controlling interest 24 Financial and Non-Financial Holdings Pension fund Holder of controlling interest

International comparison: 10 major groups as a percentage of market value of public companies 25 41% Source: Economics Department, the Securities Authority The distribution of control of public companies in Israel International comparison- number of tiers Israel’s Large Groups Tend to Form Pyramidal Ownership Structures with a Controlling Shareholder with a controlling shareholder Source: Economics Department, SEC  OECD  Non- OECD

Potential Problems with Pyramidal Ownership Structure Tunneling Inefficient allocation of resources Excess risk-taking Internal capital market (not effective) Double leverage Persistence Controlling shareholder’s interest can be different than the companies he controls 26 controlling shareholder Company A Capital: 51% Vote: 51% Company B Capital: 26% Vote: 51% Company C Capital: 13% Vote: 51% 51% Public

Potential Macro-Level Problems Impact on macro economic stability Combined Influence in several markets Deterring foreign investors Inflation of indices Underdeveloped capital markets 27

International benchmark- Number of “tiers” 28 Source: Masulis et al Family Business Groups around the World: Financing Advantages, Control Motivations and Organizational Choices

Key Recommendations 1.Separation of holdings in significant financial activity and non- financial activity 2.Prohibition of directors tenure in both financial and non-financial companies 3. Improvement of corporate governance and minority shareholder rights in pyramidal business groups 4.Restrictions of expansion of pyramids and their control of existing companies 5.Empowering the Antitrust regulatory authority to deal with pyramidal business groups 6.Competition considerations while allocating public assets 29

Implication Increase in competition within the market and market competitiveness Reduction of systemic risk Improvement of capital allocation in the market Continuance of the Israeli capital market development 30 Full implementation will be carried out gradually and is expected to affect the economy in the medium and the long term