PRINT THIS PAGE Cleantech needs government support
25/04/2007. Source:IVCJ. Dr Ofira Ayalon, Technion’s Samuel Neaman Institute
Government support can provide a needed boost to Israel’s clean technology industry and significantly increase its chances for success in world markets, says Dr Ofira Ayalon in this IVCJ article. Environmental technologies can contribute to economic growth as well as improve environmental quality and protection of resources. The annual world market for clean technologies (cleantech), valued at more than $200bn, is one of the fastest growing markets in the world. Cleantech encompasses activities that produce goods and services to measure, prevent, limit, minimize or correct environmental damage to water, air and soil, as well as problems related to waste, noise and ecosystems. It includes technologies, products and services that reduce environmental risk and minimize pollution and resource use.
These activities can be divided into pollution management (e.g., air pollution control, waste water treatment and waste management) and resource management (e.g., water supply, recycled materials and nature protection).
According to an Israel Export Institute report, there are currently 500 companies in the cleantech field in Israel. Furthermore, Israel has a well-established technological knowledge base and a reputation for innovation, especially in the fields of drip irrigation, desalination and renewable energy. Despite this potential, the Israeli cleantech industry accounts for only $200-300 million, less than 0.5 percent of total world production.
In 2004, the Samuel Neaman Institute at the Technion - Israel Institute of Technology conducted a study to analyze the advantages and weaknesses of Israel’s environmental technology industry and to pinpoint the major reasons that this sector’s global potential has not been realized, either by the Israeli government or by the private sector through investment.
Government intervention justified
The study determined that there is a malfunction in this market in Israel, which justifies government intervention. Specific types of government intervention were proposed and means to support the environmental technology industry were recommended. (The full report is available in Hebrew through the S. Neaman Institute web site, www.neaman.org.il.) In order to assess the potential benefits of government support to the cleantech industry, two scenarios were assumed. The first was based on current support (business as usual), which concentrates on incubator enterprises, without differentiating between cleantech and other firms.
The second scenario envisioned dedicated support of cleantech firms in all stages of development through governmental investment in beta sites, marketing, state risk insurance, and other financial and administrative means. The basic assumption of the model was that government support of a firm would increase its chances of success in all respects. The probability of success was calculated according to interviews and questionnaires with key relevant personnel.
Finally, a cost-benefit analysis for the Israeli market was conducted, including estimations of worldwide cleantech growth, the share of Israeli cleantech entities in the market, and anticipated benefits to the Israeli economy through tax revenue, employment, and the like in both intervention options (business as usual and government support).
Despite global trends (cleantech has become the fifth largest venture capital investment category in North America with a $502 million investment in Q4 2005 alone), it was found that private Israeli VCs do not invest in clean technologies.
Advantages of Israel’s cleantech industry
Israel has a well-established technological knowledge base in environmental quality. Its expertise is particularly strong in the field of utilization and management of water resources, including marginal water and wastewater. Israel also has the know-how, research, and practical infrastructure for the development and application of technologies in the areas of desertification (including desalination and advanced irrigation systems), solar technologies, (e.g. Solel Ltd.) and geothermal energy, (e.g. Ormat Technologies).
Moreover, it has the capacity to respond to the needs of the global environmental market through innovation, creativity and the ability to adapt unique solutions to local problems. Israel’s advantages compared to other countries derive from two major factors. First, it is an industrial country with an arid climate, with vast experience in developing systems for water, agriculture, sewage treatment (recycling), solar energy and land resource management for the domestic market.
Second, in the wake of the substantial immigration of the early 1990s, Israel acquired scientists with expertise in two major fields: (a) materials (e.g., metallurgy, a field most prominent in Germany and Russia), and (b) processes (development of processes of separation and assembly of materials in production). The combination of materials and process expertise has led to development in fields such as water, waste recycling, air and alternative energy sources. Furthermore, Israel’s defense industry has generated technologies and knowledge that can be adapted for environmental applications based on separation and assembly of materials.
Government assistance is particularly important at the early stages of cleantech enterprises in order to motivate and encourage start-ups as well as small and medium-sized enterprises. The prospective clients for cleantech technologies are typically government agencies or organizations that are required to employ government-approved technologies. Private firms, as well as private financial institutions, usually find it very difficult to reach such organizations. Government assistance, however, can bridge this gap.
As in the defense market, where Israel’s domestic utilization of its own defense systems demonstrates their special capabilities to the world, the government should promote the use of cleantech technologies in Israel, thereby proving their feasibility to overseas investors and potential clients.
At present, the cleantech industries in Israel do not receive any government assistance through the regular channels, such as the national investment center, tax relief, the Chief Scientist, and export funds, mainly because most of these government instrumentalities require proof of increased production. Cleantech firms, though, contribute to their clients (and the State) by reducing the level of pollution.
Results of cost-benefit analysis
The study translated both costs and anticipated benefits (increased probability of success of the companies, increased employment, growth in income from taxes, increased export, and more) of government intervention into economic values. This enabled a comparative economic analysis of the two options, using the year 2004 as a base.
The table above presents selected results of the cost-benefit analysis, based on the assumptions presented above. The analysis was based on comparison of the different costs required – the cost of aid at the beta site stage, marketing costs, insurance, and the like – with the benefits – additional jobs, repayment of grants by successful firms, increased income from taxes, and the like — calculated for each option.
The analysis reveals that, if governmental support continues in the same order without dedicated support of the cleantech industry, in the year 2026, Israel will hold only a 1.8 percent share of the world cleantech market. If, on the other hand, the government increases its support to the field, from the incubator stage to maturity, Israel’s share may reach 3.6 percent of the world market. In this case, after the year 2012, the Israeli market will break even, and the revenue from taxes paid by cleantech firms will exceed government investment in the industry.
Conclusions
Our findings indicate that specific government intervention is justified and can give this industry a major boost. Government investment in the field would enable Israel to capture 3.6 percent of the world cleantech market by 2010, increasing revenues by $3 billion, compared with the business-as-usual scenario, and creating some 10,000 jobs. It is projected that by 2010, after six years of government intervention in the industry, the benefits will exceed the costs. Without this support, Israel’s market share will remain a meager 1.8 percent. This difference between the two options means some $3 billion in lost revenues, a reduction in environmental quality in Israel, loss of commercial opportunities, and other disadvantages. Moreover, according to this analysis, investment in cleantech would create some 20,000 jobs by 2020.
Support may consist of direct administrative measures, financial assistance, monetary equivalents, or indirect administrative means (such as increasing public awareness of environmental technology, diligently enforcing compliance with environmental regulations to spur factories to adopt clean technologies, ensuring inclusion of Israeli firms in bids for government and public tenders, increased dissemination of information on international project opportunities, and of course, concrete government action in this field).
The government may also provide financial support to cleantech firms beyond the incubator stage, invest in funds dedicated to assisting in the establishment of beta sites, finance professional consultation, provide mentoring-coaching in business development and marketing, include environmental technologies in the MAGNET program (Generic Pre-Competitive Technologies and Research and Development program supported by the Ministry of Industry and Trade), finance international marketing efforts, and extend aid in other forms.
In light of the above, it is clear that government intervention to promote the development and implementation of cleantechs in Israel will not only improve the quality of the environment in Israel, but will also help promote the export of environment-related technologies, while making a significant contribution to the Israeli economy. Furthermore, this governmental vote of confidence will send a clear signal to industry and the private sector to invest in this field.
This article appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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