As U.S. warns of Chinese influence, watchdog says Israel fails to vet foreign investment

Even though the cabinet voted in 2019 to establish a mechanism for vetting foreign involvement in Israeli infrastructure projects, no progress has been made, the State Comptroller’s Office said in a report released Monday.

It said ministries and other government agencies still have no obligation to bring projects involving foreign investment to a designated body. Comptroller Matanyahu Englman said that while foreign investment had grown significantly over the last decade and contributed to economic growth, it also comes with drawbacks.

“Control by foreign interests over strategic assets could undermine a range of national interests including national security and our ability to compete in the global economy,” the comptroller’s office said.

The report comes amid growing pressure from the United States over the last two years for Israel to restrict foreign investment. In his report, Englman didn’t point to China, but that has been the target of the U.S. campaign.

In particular, Washington has expressed concerns about Shanghai International Port Group’s 25-year contract to operate the new Haifa port, which is right next to docks used by the U.S. Navy’s Sixth Fleet. Washington has threatened to stop the U.S. Navy from paying port calls to Haifa when the Chinese company begins operations.

Last October, the cabinet approved in principle a plan to set up a body to advise on prospective foreign investments in Israeli companies considered critical to the economy or national security, including firms involved in infrastructure or with access to Israelis’ personal data.

“The defense and finance ministries and the National Security Council must act quickly to implement the cabinet decision regarding a mechanism for examining contracts with foreign entities,” the report said.

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It said this was necessary “to ensure that when contracts involve critical assets, Israel’s national security and national interests will be taken into account and a comprehensive study of the economic benefits versus possible risks will be considered.”

U.S. officials have repeatedly warned Israel about its China ties. At the start of last year, then-Deputy Energy Secretary Dan Brouillette said that if Israel didn’t adopt stricter rules, Israeli-U.S. intelligence ties would be harmed.

In May, Secretary of State Mike Pompeo urged Israel to distance itself from China. Two weeks later, Israel announced that a giant desalination construction contract was not being awarded to Hong Kong-based Hutchison Water.

In addition to Chinese involvement in Haifa, the company China Harbour is developing a new port in Ashdod, while China Railway Tunnel Group has the excavation contract for the Tel Aviv Light Rail’s Red Line and is also its systems contractor. A Chinese company is the only bidder for a similar project for the Green Line, and Power Construction Corporation of China has the contract to widen the Coastal Highway, Route 2.

The United States, which is in the middle of a bitter trade war with China, considers the national security implications of foreign investment via its Committee on Foreign Investment.

Other countries are now taking a tougher stance on Chinese investment, in line with the United States. Canada examines foreign investors forming or buying companies and enforces rules through its Innovation, Science and Economic Development Department. In Germany, the Foreign Trade and Payments Act lets the Economy and Energy Ministry prohibit or restrict foreign investment when there may be a risk to public order or Germany’s security.

In Israel, Prime Minister Benjamin Netanyahu has encouraged bilateral ties with China, especially in high-tech, and Israel has been slow to act. In response to the comptroller’s report, his office said: “Creating a mechanism for filtering foreign investment is a complex and sensitive matter that differs from country to country. There is a reason that no decision has been made yet despite three comprehensive cabinet discussions that have taken place on the subject.”

The comptroller’s report, whose data was partly blocked from public view, emphasized the national security aspects of foreign investment far more than the economic impact of Chinese competition on Israeli companies. The latter phenomenon has stoked complaints by many Israeli companies and the building trade association.

Through 2017, foreign investment in Israel was estimated at a cumulative $129 billion, including $18 billion in 2017 alone.

However, the report did note the problem of foreign state-owned companies participating in critical infrastructure projects.

“A foreign state-owned company may enjoy government support from the country of origin, act on purely noneconomic considerations and use government resources to gain operational and economic advantages over its competitors in the private market,” it warned.