ISRAEL Law and Practice Contributed by: Shiri Shaham, Yuval Shalheveth, Aviad Lachmanovitch and Asher Bichoonski, Arnon, Tadmor-Levy
sub-contractors, including major equipment supply contracts, may be governed by foreign law. 8.4 Foreign Ownership Tender documents for major PPP projects require owners, as well as other parties such as major sub- contractors and lenders, to be incorporated and resi- dent in countries with diplomatic relations with Israel. Ownership by non-Israeli entities may require special approval. Non-Israeli ownership of real estate is subject to an approval process. However, this is not applicable in many cases, since PPP projects usually involve rights of use rather than ownership of real estate. Lenders must also meet criteria set out in tender documents, which are usually focused on their credit rating, and it is common, but not mandatory, to use a local security agent. In some cases the realisation of pledges requires the sale of the project to an alternate concessionaire, which must meet the criteria set forth in the tender process for the original concessionaire. 8.5 Structuring Deals Most large-scale PPP projects require the conces- sionaire to be an Israeli limited company, though lim- ited partnerships are sometimes permitted, especially in the electricity sector for tax reasons. There are no specific laws governing the structuring of project companies, though accounting treatment may differ. In many cases the shareholders of the project com- pany are required to meet certain financial or profes- sional criteria. 8.6 Common Financing Sources and Typical Structures Project finance is typically arranged by local or inter- national banks, often in syndicates with institutional investors (mainly pension funds and insurance com- panies). If Israeli institutional investors participate in the financing, under the rules applicable to them, they must require the arrangers to retain a minimum hold- ing, disclose conflicts and fees, and share information.
Export credit agency financing is used occasionally, mainly for key equipment, but project bonds and pri- vate equity are less common as sources of senior debt. Two additional bridge financing structures that are often seen in project finance are as follows. • Equity Bridge Facility (EBF) extended to finance the equity investment required by the senior project finance lenders and usually secured by external assets and not by project assets. • Grant Bridge Facility – in many state projects the government is obligated to pay a substantial grant upon completion of construction. Sponsors sometimes take a short-term loan, secured by such grant and payable upon receipt thereof. 8.7 Natural Resources Israel’s main natural resource is natural gas, which is highly regulated. Upstream activities are overseen by the Petroleum Commissioner, while midstream and downstream are regulated under the Natural Gas Sec- tor Law 2022. Local supply obligations are imposed, and gas exports require approval. The electricity grid is not connected to neighbouring countries, so electricity export is not possible. 8.8 Environmental, Health and Safety Laws While there are no specific regulations for financial projects, ESG-related policies are in place. Financial institutions must disclose ESG factors in investment policies, and the Israeli taxonomy provides a frame- work for assessing environmental impact. Israeli banks are required to identify, consider and manage environmental risks within their lending activi- ties. A directive of the Bank of Israel that will enter into force in 2026 requires Israeli banks to also manage cli- mate-related financial risks taking into consideration 12 principles (adopted from the Basel Framework). Environmental permits, such as for air emissions, haz- ardous substances, and business licensing, are com- monly reviewed by lenders as part of the due diligence process in project finance.
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