Israel Finance Ministry, Yearly Pension Plan Report

Wages and Prices

In the early and mid-1980s, Israel's economy experienced high rates of inflation, reaching a peak of 445% in 1984. In response to this crisis, in 1985, the Government implemented the Economic Stabilization Program, which succeeded in reducing the rate of inflation to 19.6% in 1986, and maintaining the annual rate of inflation during the period from 1987 through 1991 at an annual average of 17.8%. As a result, price controls that were introduced as part of the Economic Stabilization Program were largely eliminated by mid-1988.

The inflation rate, measured by the Israeli consumer price index ("CPI"), averaged 10.8% during the period from 1992 to 1996, with fluctuations between 8.1% and 14.5% on an annual basis. These fluctuations were largely due to changes in demand for housing as a result of immigration, changes in prices of fruits and vegetables resulting from temporary climatic factors, and the effect of monetary and fiscal policies. The inflation rate in 1997 was 7.0%, with a 10.6% annualized rate in the first seven months that decreased to a 2% annualized rate in the last five months of the year. The cooling of the economy in 1997, the restrictive monetary and fiscal policies, and a decrease in import prices were responsible for the lower inflation rate in 1997. The 8.6% rate in 1998 was higher than expected due to a marked price hike in August-October, following a sharp depreciation of the NIS in those months. The annualized inflation rate until the depreciation was 3%.

Both the Ministry of Finance and the Bank of Israel have stated that maintaining low rates of inflation is one of their main priorities. Since the end of 1991, the Government has begun announcing annual inflation targets as part of its effort to further reduce inflation. Since November 1993, the Bank of Israel has adjusted its key rate of interest on lending to banks on a monthly basis. In May 1999, that rate was 12.0%.
Table No. 10

Selected Price Indices
(Percentage change Dec. - Dec.)

Period	CPI (excluding housing, fruits, and vegetables)	CPI	Wholesale Prices
1993	8.1	11.2	7.2
1994	9.8	14.5	9.7
1995	8.8	8.1	10.0
1996	10.1	10.6	7.0
1997	6.7	7.0	5.9
1998	8.5	8.6	8.2

____________________

Source: Central Bureau of Statistics.

The wage system in Israel is subject to comprehensive indexation under nationwide cost-of-living agreements. These agreements, negotiated by Israel's primary nationwide labor union and representatives of the major employers' organizations in the private sector (subsequently adopted by the public service employees), provide for partial indexation of wages for all employees every six months based on agreed-upon percentages of year-to-year changes of 4.25% or more in the CPI. Furthermore, wages in certain industries are subject to labor agreements that guarantee additional periodic wage increases, as well as equality of treatment with respect to wage increases with workers in other specified industries. In the past decade, wage linkage between sectors weakened as a result of the decreasing scope of unionization and the widening use of personal wage contracts.

In 1998, despite the economic slowdown and increasing unemployment, hourly real wages increased by 3.6%. The increase was due to a lower than anticipated inflation rate, layoffs among lower-wage workers and increased demand for high-wage employees. Wages in real terms increased by 1.9% in 1997 and 2.8% in 1996. The increases during the years 1994-1995 were mainly in the public sector, while wages in the business sector remained relatively steady. In 1996-1998, wages in the business sector increased by 8% in real terms, while public sector wages grew by 2.5%.

Employment and Labor

One of Israel's most important resources is its experienced and highly educated work force. In 1997, approximately 34.5% of the Israeli population over 15 years of age had university or other advanced degrees. With this highly educated population, Israel has developed an export-oriented, technology-based industrialized economy. Over 26% of the Israeli work force consists of scientific, academic, and other professional, technical, and related workers, while 5% consists of administrative or managerial workers. These percentages compare favorably with the percentages of similar workers found in the United States and Japan. The employment qualifications of the recent immigrants have been consistent with the high quality of the Israeli work force, with two-thirds of immigrants from the former Soviet Union having been employed there as professionals, scientists, engineers, and technical staff.

The wave of immigrants since 1990 has led to significant growth in the Israeli labor force. In 1998, Israel's civilian labor force averaged a total of 2.3 million compared to an average of 1.7 million during 1992.

After peaking at 11.2% at the end of 1992, Israel's unemployment rate decreased substantially during the period from 1994 through 1996, as the creation of jobs outpaced the growth of the civilian work force. In 1997, due to the economic slowdown, the unemployment rate increased to an average of 7.7% from 6.7% in 1996. The unemployment rate increased further in 1998 to 8.6%.

Table No. 11

Structure of Employment in Israel⁽¹⁾

	Year
	1994	1995⁽²⁾	1996⁽²⁾	1997⁽²⁾	1998⁽²⁾
Percent of labor force
Business sector
Manufacturing	21.3%	20.7%	20.2%	19.7%	18.9%
Agriculture	3.5	2.9	2.5	2.4	2.3
Water and electricity.	1.1	1.0	0.9	0.9	1.0
Construction	6.6	7.2	7.5	7.2	6.4
Trade and catering	17.0	16.9	16.6	16.7	17.1
Financial and business services	12.0	12.5	13.1	13.7	14.1
Transport, storage and communications	6.1	5.9	6.2	6.2	6.0
Personal and other services.	1.6	1.7	1.7	1.6	1.5
Total	69.2%	68.3%	68.5%	68.4%	67.3%
Public services	30.8%	31.7%⁽³⁾	31.5%⁽³⁾	31.6%⁽³⁾	32.7%⁽³⁾
	100.0%	100.0%	100.0%	100.0%	100.0%
Total workers (in thousands)	1,751.2	1,964.9	2,012.8	2,040.3	2,076.6

____________________

(1) Israeli workers only.

(2) New classification. Not comparable to 1993-1994 data.

(3) Including part of the personal services.

Source: Central Bureau of Statistics.

Surveys undertaken by the Israeli Central Bureau of Statistics regarding immigrants who came to Israel in 1990 indicate that immigrant unemployment declines with length of stay in the country. In 1998, the unemployment rate among immigrants was 11.7% compared to 8.0% for the non-immigrant population. Among immigrants who came to Israel in 1990-1991, unemployment stood at 8.8% in 1998. Immigrant participation rate in the labor force stood at 53.9% in 1998 (57.2% for immigrants arriving in 1990-1991), compared to 53.5% for the working age population as a whole.

Despite the initial difficulties experienced by many of the professional and other highly-skilled immigrants in finding suitable employment, recent statistical data regarding employment in Israel suggests that a large number of immigrants may be moving from their original jobs into jobs better suited to their education and other employment qualifications.

Table No. 12

Principal Labor Market Indicators
(annual average)

	Year
	1994	1995	1996	1997	1998
Permanent average population (thousands)	5,399	5,545	5,685	5,829	5,967
Civilian labor force (thousands)⁽¹⁾	2,030	2,110	2,157	2,210	2,272
Labor-force participation rate⁽²⁾	53.6%	54.1%	53.7%	53.5%	53.5%
Unemployment rate	7.8%	6.3%	-	-	-
Unemployment rate-new definition	_-	6.9%	6.7%	7.7%	8.6%

____________________

(1) The sum of the number of civilian workers and the number of job seekers.

(2) Civilian labor force as a percentage of the population over age 15.

Source: Central Bureau of Statistics.

The General Federation of Labor in Israel (the "Histadrut") has historically played a significant role in the Israeli economy and social system. As part of a structural and organizational reform, the Histadrut concentrates today on its function as a trade union and as a social organization. The Histadrut also has a major influence on labor legislation and social legislation in the Knesset.

Over 30 trade unions are members of the Histadrut. As of December 31, 1998, approximately 40% of the total employees in Israel are members of unions that are related to the Histadrut. Although the percentage of union workers has been declining, mainly due to the abolishment of the linkage between membership in the Histadrut and the Kupat Holim (the main provider of health services), a considerable part of the Israeli labor market is unionized. The coverage of collective agreements is much more comprehensive. The Histadrut signs collective bargaining agreements, affecting workers in both the public and private sectors. In addition to the nationwide agreements (such as the cost-of-living agreement), the collective bargaining network includes collective agreements between occupational or industry unions and employers associations. These agreements are predominant in the public sector. Collective agreements cover issues related to wages, conditions of employment and social benefits.

During the last three years, the Histadrut and the government have agreed upon far-reaching reforms in the Israeli pension system. See "Public Finance-Pension Funds."

Role of the State in the Economy

Historically, the Government has been involved in nearly all sectors of the Israeli economy, particularly in defense related businesses. Traditionally, ownership of industry in Israel was divided between the Government, the Histadrut and the private sector, with the Government and the Histadrut prominent in heavy and basic industry. The Government has also participated in the economy through significant subsidization of certain industries and products, and through financial support of private sector investments. In recent years however, the Government has made significant progress towards the privatization of State-owned enterprises and the reduction of its subsidization of industry. Moreover, in recent years, the Histadrut has disposed of most of its commercial holdings.

As of December 31, 1998, the Government owned 110 State-owned companies, 51 of which are commerenterprises. The remainder of the State-owned companies, such as funds established as vehicles for employee savings, are not commercial. State-owned enterprises are divided into two categories: Government Companies and Mixed Companies. Government Companies, which exclude State-owned banks acquired pursuant to the Bank Shares Arrangement (defined below under "Privatization"), are those in which the Government owns more than 50% of the voting shares and are subject to the provisions of the Israeli Government Companies Law and the regulations promulgated thereunder (the "GCL"), as well as the directives of the Companies Authority (as defined below under "Privatization"). The provisions of the GCL regulate the management and operations of Government Companies and the circumstances under and procedures by which the Government may sell shares in Government Companies. Mixed Companies are companies in which the State owns less than 50% of the voting shares. Under the GCL, Mixed Companies are not subject to the same degree of regulation as Government Companies. However, Mixed Companies do remain subject to certain provisions, including the appointment and qualification of the directors chosen by the Government and the establishment of terms of employment.

Government Companies play a significant role in the Israeli economy. In 1997, Government Companies accounted for 8.1% of total exports and 3.5% of GNP, although they employed only 2.5% of the Israeli workforce. These companies include several public service monopolies and a number of companies that either engage in activities considered crucial to Israeli national security or provide important services to the Government.

The Government has initiated a number of regulatory arrangements with the major Government Companies that are designed to increase competition in the markets in which these companies participate, and thus prepare them for privatization. Nevertheless, the pace of privatization may be affected by the need for further regulatory and structural reforms and formulation of policies that will define the post-privatization environment in which these companies will operate. The development and implementation of some of these policies and reforms may take a considerable period of time.

Privatization. An essential element of the broader structural reforms initiated by the Government over the past several years to promote the growth of the private sector and to enhance competition was the Government's move towards privatizing its business holdings. Privatization efforts have included the full or partial sale of State-owned companies, banks and activities which were previously performed by the Government or statutory authorities. From 1986 through 1998, the Government sold all or a portion of its share holdings in 77 companies and banks, with total receipts of approximately $7.3 billion. In 1998, privatization receipts to the Government totaled $1.37 billion.

Privatization of all State-owned enterprises, other than banks, is administered by the Government Companies Authority (the "Companies Authority"). Pursuant to the Bank Shares Arrangement (as described below), the responsibility for privatization of banks is in the hands of the Ministry of Finance through MI Holding, a wholly-owned government entity. MI Holding advises the Minister of Finance regarding bank privatizations and manages the process according to the Minister's instructions. The previous Government transferred the responsibility for the Companies Authority from the Ministry of Finance to the Prime Minister's Office. The ministerial privatization committee consisting of the Prime Minister, as chairman, the Minister of Finance, and the Minister of Justice (the "Privatization Committee") has the power to initiate the privatization of any Government Company or Mixed Company without the consent of the minister directly responsible for such Government Company or Mixed Company, and to authorize preparatory measures necessary to effect such privatization. The Companies Authority also has general authority relating to the supervision of Government Companies, including the right to convene board meetings and the authority to issue directives to Government Companies in relation to decisions of the Privatization Committee.

In 1983, as a result of the collapse in the share prices of several large banking institutions on the Tel Aviv Stock Exchange ("TASE"), the Government entered into an arrangement (the "Bank Shares Arrangement") with shareholders. Under the Bank Shares Arrangement, the State purchased shares from the banks' shareholders at the time of the crisis. As a result, the State gained a controlling stake in five of the six largest Israeli banks (though it did not exercise any management control over these banks). The Government's ongoing privatization program is intended to result in the sale of the State's controlling interest in these banks. Implementation of this program continues to progress as the Government has reduced its bank holdings through a variety of public and private transactions.

In February 1998, the State sold a 7.6% stake in Bank Hapoalim in a public offering in Israel that resulted in proceeds of approximately $168 million. In June, the State sold an additional 1.8% stake for $65 million to Goldman Sachs & Co. The State also sold 31.8% of the shares in United Mizrahi Bank in a public offering, and an additional 10.7% through the exercise of public options, resulting in proceeds of $259 million. At the beginning of 1998, the State sold to the public options to purchase additional shares it holds in Bank Leumi. Proceeds from exercising these options through December 1998 were $163 million. In April 1998, the State privately placed a 2% stake in Bank Leumi, for approximately $52 million, to Lehman Brothers. In addition, in September 1998, the State sold a 7.6% stake in Bank Leumi in a public offering in Israel that resulted in proceeds of $163 million. In 1999, through the end of March, the State sold an additional 3.7% of the shares of Bank Leumi, and 2% of the shares of Bank Hapoalim. Aggregate proceeds from these sales are approximately $145 million. As of January 1999, the State owns 54.01% (fully diluted) of Bank Leumi, 24.34% (fully diluted) of Bank Hapoalim, 19.52% of Union Bank, 6.69% of United Mizrahi Bank, and 59.95% of Israel Discount Bank.

For many years, Israeli banks owned controlling interests in non-banking companies. As a result of amendments in 1994 and 1996 to the Banking (Licensing) Law, banks were required to decrease their equity holdings in non-banking companies to 25% by the end of 1996, and to 20% by the end of 1998. As a result of these amendments, the banks have sold a significant portion of their holdings in a number of companies, including the sale of Africa Israel and Leumi Holdings Insurance by Bank Leumi, and Clal Holding and Delek by Bank Hapoalim.

Table No. 13

Selected State-Owned Companies⁽¹⁾
(at, or for the period ended, December 31, 1997)
(in millions of dollars, except percentages)

	Percentage Direct and Indirect Ownership of Government	Total Assets	Long-Term Liabilities	Total Revenues
Bezeq, the Israel Telecommunications Corp, Ltd.	54.3%	$4,318	$1,400	$2,239
Israel Electric Corporation Ltd.	77.8	10,735	7,333	2,049
Oil Refineries, Ltd.	74.0	1,143	422	1,579
Israel Chemicals, Ltd.	2.2	3,412	1,207	1,793
Zim Israel Navigation, Ltd.	48.6	1,144	725	1,470
El Al Israel Airlines, Ltd.⁽²⁾	100.0	1,008	772	1,260
Petroleum & Energy Infrastructures, Ltd.⁽²⁾	100.0	246	16	4,774

____________________

(1) Based on consolidated and NIS adjusted financial statements as of December 31, 1997 according to Israeli accepted accounting principles. Amounts converted from NIS to Dollars at the exchange rate on December 31, 1997 ($1=NIS 3.536).

(2) Based on financial statements as of September 30, 1997 ($1=NIS 3.5).

Source: Ministry of Finance; Government Companies Authority.

Set forth below are summary descriptions of the State-owned companies included in the above table and certain other State-owned companies. Also described below are specific steps taken or planned by the Gto prepare those companies for privatization or to reform of their structure and operations.

Bezeq, the Israel Telecommunications Corp. Ltd. ("Bezeq"), is the State-owned telephone corporation. Its operations are subject to regulatory arrangements by the Government, including tariff and structural supervision. Arrangements implemented since 1994 are designed to increase competition in the communications sector. Bezeq's legal right to exclusivity in supplying international telephone services was terminated. As a result of a recent tender published by the Ministry of Communications, two additional new providers of international telephone services began to operate in 1997, and a third cellular license was awarded early in 1998. In July 1997, the State reduced its interest in Bezeq to 63.6% (fully diluted) by selling a 12.4% interest to Merrill Lynch & Co. for $250 million, $50 million of which was included in the 1997 budget and the balance of which was recognized in the 1998 budget. In February 1998, the State sold additional shares in a public offering in Israel, raising $138 million and reducing the State's ownership level to 54.33% (fully diluted).

Israel Electric Corporation ("IEC") is a legal monopoly with responsibility for the entire Israeli electricity industry. Since 1992, IEC has been subject to tariff supervision that includes efficiency incentives. In March 1996, IEC's exclusive concession from the Government expired and the Electricity Industry Act was enacted. Additionally, an authority for the supervision of public electric utility services was established. The purpose of the new law is to regulate activity in the electricity industry for the benefit of the public, and to achieve reliability, availability, quality and efficiency, while guaranteeing cost minimization within a competitive market. The new law provides for a ten-year transition period, during which IEC has a license to transmit, distribute, supply and market electricity. According to the new law, the owner of the license for transmission or distribution functions will be required to purchase electricity from other generators of electricity, and to enable other licensed producers to use the same transmission and distribution channels to supply electricity to its consumers. On January1, 1998, IEC received licenses, valid until March3, 2006, to produce electricity at each of its 56 generation units.

Oil Refineries Ltd. ("Oil Refineries") is the only oil refinery company in Israel. Oil Refineries operates in the framework of Government reforms that have linked fuel prices in Israel to fuel prices in the international market. Oil Refineries is entitled to sell its products strictly to wholesalers and to certain key customers. The Government is currently exploring various methods of increasing competition in the Israeli oil sector, including the allocation of the two refinery facilities to separate companies, one in Haifa and one in Ashdod, deregulation of tariffs, and allowing Oil Refineries' concession to expire by its terms in 2003.

Israel Chemicals Ltd. ("Israel Chemicals") is an integrated group of companies engaged in obtaining the minerals and chemicals of the Dead Sea, and in the manufacturing, development, marketing, and sale of chemical and fertilizer products. Most of Israel Chemicals' sales are to markets outside of Israel. In February1995, the State sold a 24.9% stake in Israel Chemicals to two private investors (under common control). In March 1997, the State sold an additional 17% stake to the same investors. In addition, 25.5% of the shares are held by the public and traded on TASE. In June 1998, the Finance Committee of the Knesset approved the Government's decision to sell the remainder of the State's shares in Israel Chemicals in a public offering on TASE. In December 1998, the State sold 29.3% of outstanding ICL shares in a public offering in Israel, raising $302 million and reducing the State's ownership in the company to 2.2%.

Zim Israel Navigation, Ltd. ("Zim"), which is privately managed, is Israel's major shipping company. The Government is currently considering reducing its ownership position in Zim.

El Al Israel Airlines Ltd. ("El Al") is the Israeli national air carrier. The Government is in the process of preparing for the privatization of El Al. Important elements of this preparation will be the restructuring of El Al's capital structure, the formulation of a plan to finance El Al's expenses for security measures (at least a portion of which are expected to continue to be financed by the Government), and the issue of flights on the Jewish Sabbath and holidays (days on which El Al currently does not fly due to Government regulations enacted in 1982). In 1995, El Al emerged from a reorganization program under which it operated since 1982 due to labor difficulties at that time. The Privatization Committee decided in June 1998 to privatize up to 50% of El Al by means of a public offering of state shares and newly issued stock in proportions yet to be determined. The privatization is conditional upon the authorization of the Knesset Finance Committee, which has yet to be granted.

The Mekorot Water Company Ltd. ("Mekorot") is the State-owned water company. It supplies approximately 60% of Israel's fresh water. Although Mekorot presently receives capital financing from the State, the Government anticipates that this financing will not continue after 1998, and that Mekorot will thereafter finance its operations through private sources. Approximately 27% of Mekorot's income from supplying water is subsidized by the Government through payments intended to compensate Mekorot for the below-market tariffs charged mainly to agricultural and other consumers. In 1993, Mekorot and the Government agreed on an arrangement establishing efficiency incentives for the years 1993 through 1997 and securing Mekorot a normative return on equity, enabling it to raise capital in private capital markets rather than receiving subsidized loans from the Government. The Government and Mekorot continue to operate under this arrangement, which expired at the end of 1997.

Petroleum and Energy Infrastructures Ltd. ("PENIN") provides infrastructure services for the petroleum industry, including acting as the sole provider of storage and transportation services for refined oil. PENIN's subsidiaries plan, build, operate, and maintain systems and facilities for the transportation and distribution of petroleum products. PENIN operates under a concession from the Government scheduled to expire in 2001. Under the terms of this concession, PENIN is a tax-exempt entity, and the State controls the tariff rates of its products and services.

Two other Government Companies, Israel Aircraft Industries, Ltd. and Israel Military Industries, Ltd., are, like other defense-related industries worldwide, in the process of undergoing major restructuring in response to changing market conditions. As part of the restructuring process, the number of employees of these companies has been reduced significantly, resulting in large severance pay expenditures by both companies, which have had a negative effect on their recent operating results.

Government Subsidies. Prior to 1985, the Government heavily subsidized certain segments of the Israeli economy, including basic foodstuffs and agricultural products. The level of direct Government subsidies has been reduced significantly since 1985. The remaining direct Government subsidies consist primarily of subsidies for water, for public transportation, and for agricultural production. Government subsidies for basic products totaled NIS 2 billion (of which NIS 240 million are agricultural subsidies) during 1998.

Economic Incentives. The Government provides significant assistance to the manufacturing sector under laws designed to encourage investments in "approved enterprises," mainly in peripheral regions of the country. A project that qualifies as an "approved enterprise" is eligible for assistance in the form of cash grants and certain tax benefits.

Beginning in January1997, the Government implemented a significant reduction in the rate of g. For the purpose of determining eligibility for grants, three industrial regions have been identified: Region A, the most remote regions of the country; Region B, the peripheral regions of the country (closer to the central regions than A); and Region C, all other regions. The rate of grants as of January 1998 for Region A is 24% for investments up to NIS 140 million, and 20% for investments above this limit, compared to 10% for Region B for all levels of investments, and 0% for Region C for all levels of investments.

An investor is eligible to convert the grant into an income tax deduction or exemption. An enterprise located in Region A is eligible for the highest deduction and one located in Region C qualifies for the fewest benefits.

During 1998, Government commitment for grants to the manufacturing sector (aimed at providing economic incentives) totaled NIS 1.4 billion, compared to NIS 1.5 billion in 1997 and NIS 3.7 billion in 1996. (All prices are introduced by nominal figures). In addition, the Government has decided to discontinue the Government guarantees described under "Public Debt-Government Guarantees."

Kibbutzim and Moshavim

Kibbutzim are collective settlements that traditionally were primarily agricultural. However, most kibbutzim now derive a majority of their revenues from manufacturing, tourism, and other services. There are approximately 270 kibbutzim in Israel with approximately 117,000 members. Moshavim are cooperative settlements, most of which consist of individual owners of small farms. Moshavim derive a large percentage of their revenues from agriculture. There are approximately 455 moshavim with approximately 185,000 members. Both the kibbutzim and the moshavim experienced financial crises in the 1980s.

In 1988, the Government and the bank creditors of the moshavim agreed upon a rescue and recovery program for the moshavim. In 1992, the Knesset approved legislation requiring partial debt forgiveness by the moshavim's bank creditors, partial repayment of moshavim debt using the proceeds of certain required asset sales by the moshavim, and the restructuring of the remaining moshavim debt at below-market interest rates. The total outstanding amount of the moshavim debt subject to the 1992 legislation is NIS 10.5 billion. The implementation of the 1992 legislation is ongoing. As of December 31, 1998, the 1992 legislation had been implemented with respect to approximately 75% of the individual moshavim members and 65% of the moshavim union obligors on the moshavim debt. By December 31, 1998, NIS 5.14 billion, representing 48.8% of the debt, was settled.

The agreement establishing the main rescue and recovery program for the kibbutzim was signed by the bank creditors of the kibbutzim, the kibbutzim, and the Government in 1989. The plan provided for a reduction in the kibbutzim's outstanding indebtedness by NIS 4 billion, of which 40% was to be paid by the Government and the remainder was to be written off by the bank creditors. The plan also provided for the restructuring of NIS 8 billion of the kibbutzim's outstanding loans from the banks. This restructuring is to be funded in its entirety by below-market loans by the Government to the kibbutzim's creditors.

By early 1995, it had become clear that the NIS 4 billion in debt reduction for the kibbutzim, negotiated in 1989, was inadequate. On May 6, 1996, a supplemental agreement was signed by the kibbutzim, the Government, and the seven relevant banks. The principles of the agreement included the following: (a) NIS 5 billion indebtedness of the kibbutzim and the corporations they own was to be written off (in addition to amounts provided for in the 1989 agreement) by their bank creditors; (b) NIS 0.85 billion was to be written off by the banks, provided the kibbutzim pay their debts regularly in the first three years following the signing of the agreement (the "Incentives"); (c) the kibbutzim will surrender to the Government their rights to use 27% of their land leased from the Government; and (d) the Government would pay the banks between 25% and 35% of the aggregate sum of the indebtedness to be written off and of any Incentives. Pursuant to the supplemental agreement, an aggregate of NIS 2.2 billion of kibbutzim debts were written off, NIS 760 million of which was paid to the banks by the Government. In April 1999, an additional agreement between the Government, the banks and the kibbutzim was signed, and was approved by the Knesset Finance Committee. The principles of this agreement are: (i) the kibbutzim will surrender 30,000 dunam (1,000 square meters) of land to the Government, (ii) the banks will forgive the kibbutzim debt (NIS 4 billion), where 35% will be paid to the banks by the Government in five annual CPI-linked plus 1.5% payments, and 65% will be written off by the banks, and (iii) the Government will market the 30,000 dunam of land. The proceeds of the land sales will be distributed between the Government (35%) and the banks (65%).

Environmental Regulation

Since the establishment of the Ministry of the Environment (MOE) in 1989, many environmental laws and regulations have been formulated and promulgated. In 1998, a new procedure for establishing environmental regulations has been implemented. Under this procedure, the Ministry of the Environment formulates environmental standards after consulting with representatives of relevant government ministries and bodies that are likely to be affected by the proposed regulations. The timetable for preparing each standard is not to exceed 24 months. Recently, proposed regulation regarding packaging, particulate matter (PM), and fuel storage have been under consideration through this procedure.

In January 1998, a new covenant was signed between the MOE and the Manufactures Association, concerning reduction in pollutant emissions. The landmark decision to sign such a covenant is the first example in Israel of voluntary compliance by industry with emission standards which have yet to be promulgated. The largest Israeli industries also signed the covenant. In addition, the MOE has concluded an agreement in principle with IEC, the Israeli electric provider. In this agreement, which is to be ratified shortly, emission standards in the company's power plants were defined.

Recognizing the importance of adopting environmental management systems, such as ISO 14000, in creating international business opportunities, many Israeli companies are adopting such management systems. During 1998, nine major Israeli firms won certifications of ISO 14001, while others are in the process of being certified.

In May 1996, Israel ratified the Climate Change Convention and established an interministerial committee to prepare an inventory of greenhouse sources and sinks, and to formulate policy lines for the reduction of greenhouse gas emissions. In addition, Israel ratified the Kyoto Convention. In March 1996, Israel signed and ratified the Convention to Combat Desertification. Israel ratified the Vienna Convention for the Protection of the Ozone Layer, the Montreal Protocol on Substances that Deplete the Ozone Layer as well as the London, Copenhagen and Vienna Amendments to this agreement. In August 1995, Israel rectified the Convention on Biological Diversity. In 1994, Israel ratified the Basle Conversion on the Control of Transboundary Movements of Hazardous Wastes and their Disposal.