Dankner in court
Dankner in court. Photo by Daniel Bar-On
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Business concentration in Israel poses a systemic risk to the economy due to the size of the big business groups,” according to a groundbreaking study by the Finance Ministry. Prepared two years ago, the study was finally released on Tuesday.

The study was a critical factor in winning Knesset approval for the Business Concentration Law in December. The legislation places limits on holding groups structured as pyramids and bars cross-holding between major financial and non-financial companies.

Partly leaked to TheMarker when it was prepared in 2011, the report was released to the public on Tuesday as part of the State Revenue Administration. It documents the activities of 13 business groups over the years 2003 to 2008, using information from the Tax Authority.

Contrary to what was widely believed, the report found that the degree of business concentration had grown in those years, with the combined profits of the 13 groups growing to 6% in 2008 from 4% in 20002.

It found that the highest degree of concentration was in communications and finance, where the big holding groups accounting for 84% and 53% respectively of all profits. When holding companies are structured as pyramids, companies lower down are weakened financially as they channeled capital to companies further up as dividends.

The treasury report found that the salary gaps between senior managers in the holding groups and their employees had widened over the years, while in the rest of the business sector the differential had remain virtually unchanged. Compensation paid to executives grew 3.4-fold in the six years while that for employees increased just 15%.

“There were cases where it was found that business groups characterized by monopoly power and lack of competition heightened the risk to the economy’s stability,” the report said. “Most of the business transactions were made in the search of political dividends, rather than in creating businesses that would support [economic ] growth.”

The report pointed to the vertical integration that is characteristic of many of the holding groups, which put all elements of a particular industry or market inside the group, undermining competition and enhancing their monopoly power. For that reason, the report said, the groups posed a systemic risk to the economy.