Treasury rescues Israel Railways from collapse with NIS 60 million emergency infusion
Finance Ministry is expected to provide another NIS 100 million next month as well.
The government has recently saved Israel Railways from financial collapse with an emergency cash infusion of NIS 60 million.
While most recent media attention has focused on Israel Railways' labor problems and plans to change its organizational structure, it turns out the rail operator was on the verge of meltdown.
TheMarker has learned that Israel Railways approached the government about a month ago for the urgent request for an injection of cash after it racked up a deficit of about half a billion shekels. The railroad had been deferring payments to suppliers and putting off payment of its debts.
The Finance Ministry's financial aid enabled Israel Railways to continue to operate and meet its payroll. The ministry is expected to provide another NIS 100 million next month as well. In total the railroad needs about NIS 200 million by the end of the year.
The finance and transportation ministries are currently examining the circumstances of the railway's deficit, figuring out why the seriousness of its cash flow problems were discovered so late and how Israel Railways can be extricated from its current predicament.
In the meantime, the Finance Ministry has dispatched an accountant, Yehuda Malul, to Israel Railways' offices to monitor the government company's financial operations.
The railroad gets a government subsidy based on ridership projections (and separate funding for development costs ). Last year, the government subsidized the railroad's ongoing operational budget by NIS 410 million.
Israel Railways has finished the year at a loss every year since it became a government corporation in 2003. In the past five years alone it has racked up losses totaling about NIS 800 million. Last year it lost NIS 220 million, which was about 33% higher than losses the year before. The widening losses were the result of higher operating costs and the railroad's failure to meet the passenger and freight targets on which the government's subsidy agreement was based. Last year, for the first time, the railroad also recorded a cash flow deficit (of NIS 4 million ), although its passenger load was slightly higher at 38 million compared to 36 million the year before.
Israel Railways' revenues grew last year by 3.5% to NIS 1.8 billion, but the figure pales in comparison to the 10.7% revenue increase the year before. When it comes to passenger revenue, the railroad's take last year was essentially unchanged from the year before, but payroll costs rose by NIS 530 million due to the recruitment of about 300 new employees who boosted the railroad's workforce by 14%.
"The situation's horrible, but in the government they understand that they are responsible for [the situation] to a substantial extent," a source close to the railroad said during the weekend. In fact, over the past few weeks, senior Israel Railway executives have been engaged in contacts with finance and transportation ministry officials regarding a new subsidy agreement that might even replace the current funding formula before it is due to expire at the end of the year.
However, at the same time the railroad would be asked to streamline its operations with moves that would include replacing some of its current business relationships, save on fuel costs and the time spent on maintenance, and perhaps even selling off assets. At this point, there is no talk of shutting down train lines operating at a loss, but sources in the government have expressed criticism over the fact that a reform pact reached with the railroad's employees did not include a plan to streamline operations.
Unlike other transportation projects, such as the Route 6 toll road and the Carmel Tunnels in Haifa (where motorists also pay tolls ), the government does not provide a guaranteed revenue stream to Israel Railways when passenger revenues fall below projected levels (as has occurred, for example, with the new line running south of Tel Aviv ).
Israel Railways management is trying to extend the due dates on about NIS 250 million in loans from Bank Hapoalim, Union Bank and First International Bank. These were taken out to deal with last year's cash flow problems, particularly to meet a huge debt of about NIS 200 million that the railroad amassed to Paz. For eight years the gas company provided Israel Railways with fuel to run its trains, on the basis of payment within 180 days beyond the current month.
In January this year, two Paz competitors, Sonol and Dor Alon, successfully bid on the railroad's fuel business, but in the process forced the railway to address the bill it owed Paz, which is currently just under NIS 54 million.
Paz declined to comment for this article, but the fuel company has been in contact with the finance and transportation ministries in an effort to have them intervene on the debt. Israel Railways is also late in paying security and cleaning service suppliers. It may also have difficulty paying two bus companies, Egged and Superbus, which provide bus transportation via the railroad on Sundays when soldiers travel back to base. The railroad put the buses into service so the soldiers don't crowd out other passengers on the trains on that day of the week.
Israel Railways' recent bank loan was taken out without the government's approval and government officials were surprised only to hear about it after the fact. The Finance Ministry claims the railroad had committed as part of the development funding it is getting from the state to get the ministry's accountant general office's approval for any loans, and the railroad failed to do this.
For its part, however, the railroad countered that its 2007 agreement with the government contains such a condition. The finance and transportation ministries will be looking into the legality of loans provided to the railroad.