Regulation Is an Obstacle to Conducting Business in Israel

Regulation in Israel is an obstacle and barrier to promoting and conducting business in Israel. This statement is widely agreed upon across the board by everyone from small one-man operations to big business tycoons.

Actually, the government itself agreed to this statement and established a “Committee to Streamline Regulatory Work in Israel”. The Committee recently released its recommendations, which, among others, includes: streamlining regulation and increasing coordination between the regulators, while encouraging self-regulating bodies; reducing regulatory costs; and having a third party explore significant decisions.

In addition, the Committee wants to establish clear boundaries between the role of the Ministry in charge and the role of the independent economic regulatory authority.

The Committee reiterated that any regulator will serve the high level goals and economic policy of the government.

The questions now are whether implementing the recommendations of the Committee will bring about the desired change over time, and whether or not the recommendations themselves are sufficient. In my opinion, the answer to both of these questions is “probably not”. Here are several reasons why.

All Committee members are prominent regulators who hold key regulatory roles in Israel. Not one member of the Committee has experience from the private sector working with various regulatory authorities. A Committee seeking to improve regulation efficiency must include, along with members from the regulatory side, representatives from the private sector in order to have a useful and productive dialogue.

The Problem: A One Dimensional Outlook

In Israel there is almost no transfer of officials from the business sector to the regulatory sector.

A high level regulator who served in a senior position in the same industry (but in the private sector) will generally be a better regulator. Such a regulator has the ability to truly understand the consequences and implications of decisions.

In contrast, a regulator who has never before been on the business side will have less of an understanding of the other side’s perspective, potentially creating a lack of communication and understanding between the business side and the regulatory side.

The differences between the two sides often create an impossible dialogue. If the government wishes to streamline regulation, it must encourage regulators to gain business experience and likewise encourage businesspeople to serve a term as a regulator, thus creating a two-way road between the public and private sectors.

Though this type of relationship may bring up allegations of conflict of interest or improper handling, there are various arrangements which can be implemented to solve these issues, such as a “cooling off” period (in which the government pays the salary) and conflict of interest arrangements.

Ultimately, the consequence of a disconnection between the business and regulatory sectors far outweighs concerns about there being too close of a relationship.

A regulator’s view of the world is usually quite narrow as a result of viewpoints shaped by a career spent in one governmental office or one regulatory authority. A regulator often does not see the big picture or understand the high level goals and economic policy of the government. Therefore, decisions will simply not be able to take into account or give weight to various factors outside the regulator’s immediate scope of responsibility.

The Committee is attempting to streamline the regulation dealing with this problem by setting mechanisms to increase dialogue and consultation between the regulators and by transferring decision making to a third party. But this does not address the underlying problem – the narrow worldview of the regulator.

In this context, we should learn from the army. Senior officers are required to experience a variety of different roles in different battalions. In addition, every ranking officer above a certain level must go through training in a special senior officer’s course.

In the regulatory field, this means that the state should encourage transitions between offices and various regulatory agencies, as well as to establish an administration that requires every officer of a certain rank to attend cross-training, which will equip them with a broader worldview and suitable tools for more informed decision making.

Eliminating a Culture of Inaction

With regulators it is often difficult to reach decisions, a fact that those who work with regulatory authorities are aware of. Regulators simply do not have an incentive to make decisions. Denying a request is always more simple and safer than fulfillment. Any and all decisions may give rise to public criticism or oversight by the State Comptroller.

The regulator is not required to set deadlines for decision making, which contributes to a culture of indecision. The Committee’s recommendations do not deal with this problem and leave intact the current situation in which the regulator has no incentive to make a decision and is not measured by decisions. Instead, the Committee should set a mechanism to create a dynamic environment that encourages and requires quick decision making.

Another problem is the fact that today there isn’t an orderly process of appealing regulatory decisions.

Every citizen has the right to appeal a court decision. However, regulatory decisions, which may have significant repercussions even more than any court ruling, cannot be appealed. In my opinion, the Committee should create a forum comprised of regulatory, private sector and academic professionals that functions as an appeals forum for decisions made by the regulator.

The establishment of such a forum will create over time standards to promote more transparent regulatory work and conduct in Israel, and will outline how the overall considerations should be weighted when making a regulatory decision.