January 18, 2020

Israeli expertise, meet California’s needs

We gathered in Silicon Valley this past March, all smiles and applause, to watch Israeli Prime Minister Benjamin Netanyahu and Gov. Jerry Brown sign the Memorandum of Understanding on the Establishment of a Strategic Partnership for Joint Innovation, Exchanges and Cooperation, or MOU. Six years in the making, the signing of the MOU felt like sweet success to those of us involved in bringing it to fruition.  But was it anything more than feel-good political theater? Was it even necessary? After all, two-way trade between Israel and California totaled more than $4 billion in 2013 — one of the largest two-way trade relationships between Israel and a U.S. state — and the fact remains that the shelves of government offices around the world are littered with highfalutin international accords gathering dust. Why should this one be any different?

The difference is that this MOU constitutes a crucial foundation to produce conditions in which Israeli know-how can contribute to meeting California’s genuine needs, and vice versa.  For California, these needs are undeniable in the areas of water (in light of California’s “epic” drought), and energy (given California’s ongoing transformation of its energy portfolio in favor of renewables, energy efficiency and storage). Israel’s capability in water technologies is well known.  The Israeli national water company, Mekorot, is a world leader in wastewater recycling, irrigation and desalination technologies. On the energy side, Israel long has been recognized for its proficiency in solar and geothermal energy production.  

That the MOU exists at all is thanks to the work of Brown, Israeli Consul General David Siegel, Los Angeles City Councilmember Bob Blumenfield, nonprofits including Faith2Green and the Southern California Israel Chamber of Commerce, and individuals such as Los Angeles City Commissioner Jerry Levey. (I am proud to have been part of this effort ever since 2009, when I led a delegation of California leaders to Israel; that trip helped galvanize the forward movement of the MOU, which then-Assemblymember Blumenfield had initiated.) Nevertheless, it remains just a framework document, containing a series of goals and aspirations, all waiting to be brought to life. It is the road ahead — the path of implementation — that will determine the true success of the MOU. 

The MOU is intended to promote closer commercial ties between Israel and California in seven areas of activity, foremost among them Water Conservation and Management, and Alternative Energy and Related Clean Technologies. While the MOU will foster a two-way relationship between Californian and Israeli businesses — to be achieved through intergovernmental working groups, sister-city relationships, academic exchanges and California’s Innovation Hub (iHub) network — part of the equation is that Israeli companies will be welcome to offer their expertise to meet certain needs in California. In the water and energy sectors, this means such companies must be afforded admittance to California’s markets. 

However, while the California water and energy sectors may be ripe with opportunities for Israeli companies, they are difficult for foreign entities to penetrate.  Both markets are highly regulated.  The water supply industry is dominated by publicly owned agencies, the largest of which is the Los Angeles Department of Water and Power (LADWP). There are well over 400 public water utilities throughout the state, serving around 85 to 90 percent of the demand, and there are more than 100 private (or “investor-owned”) water companies, but they, too, are subject to strict regulatory oversight. Sanitation in California is largely the domain of the public sector, with approximately 900 public wastewater treatment plants in operation statewide.  The energy field in California is dominated by four investor-owned utilities (which have about a 70 percent market share); the rest of the market is serviced by numerous publicly owned agencies (again, LADWP is the biggest of these).  In other words, the water and energy sector is split between publicly owned utilities, which are government agencies, and private enterprises that work in such an intensely regulated environment that they, too, must be viewed as comparable to governmental entities.

This is key for Israeli companies to grasp. Governmental bodies do not function like private firms. They have an array of policy and regulatory mandates to follow, including: public bidding procedures for contracts, local business preferences, policies for the support of minority-owned and women-owned enterprises, and a plethora of other social programs.  On top of this, jurisdictions such as Los Angeles have multifold layers of scrutiny, which necessitate a close familiarity on the part of the market entrant with the political process. And there are stakeholders — labor, business, environmental and community organizations — that have a keen interest in the projects and contracts undertaken by the local utility. All of this means that an aspirant would need first to establish a material presence in the target region. While some Israeli enterprises have done this successfully, this endeavor requires an investment which Israeli entrepreneurs may be reluctant to make, given the uncertain returns. Short of this, Israeli companies will have to entertain joint ventures or subcontract arrangements with already entrenched market players as a means of gaining an initial foothold.   

The MOU is intended to catalyze entry into the California water and energy markets by qualified Israeli companies. But there are innate obstacles to address in securing more openness. And here, the formation of task forces to examine how best to facilitate that entry (with its concomitant attraction of capital, galvanization of business activity, stimulation of innovation and production of jobs), while safeguarding local priorities, becomes all-
important. Los Angeles is to be commended for taking the first step to convene such a team of experts (thanks to a resolution sponsored by Blumenfield).  

Notwithstanding the challenges, the panoply of opportunities in California is so rich that Israeli companies should not be deterred in attempting to bring their capabilities to the state.  California has the demand, and Israel can provide some of the supply. It is up to those tasked with charting the road ahead to bring that demand and supply together; in other words, to breathe life into the MOU.

H. David Nahai is an attorney and consultant.  He is a partner at the Lewis Brisbois law firm and President of David Nahai Consulting Services.  He specializes in real estate, energy and water matters.  He is the former general manager and commission president of the Los Angeles Department of Water and Power.