Taking Stock / Debunkers 'R Us
After a five-year sabbatical, the privatization slogan made a comeback in the headlines last week. Benjamin Netanyahu, who rode the expression that symbolizes free market economics throughout his term as prime minister, apparently decided to put the privatization plan along with reducing the tax burden right back at the center of his economic policy.
We wouldn't want to weaken the hand of our new economic prime minister; after two years of Finance Minister Silvan Shalom, we understand the natural tendency to praise any change, any initiative and any wind of change that blows from the treasury.
There is no doubt that government's trend toward divesting itself of company ownership is usually constructive, and it is also clear that increasing the supply of shares of large, well-established companies on the stock exchange will boost the capital market.
Nonetheless, before privatization becomes the centerpiece of the new world, it seems we should reexamine a few commonly accepted truths:
* Privatization will lead to growth: Apparently not. Selling the shares of state-owned companies to the public via the stock exchange or to businessmen will not bring any succor to the economy in the short term. Does anyone remember that a few months ago the state sold a block of options on 6 percent of Bank Leumi on the exchange floor? Did that boost growth at all?
Even in the long term, there is a huge question mark surrounding the contribution of such sales to growth. The real contribution to growth doesn't come from the sales, but from structural change in the sectors in which the companies operate.
* Privatization will put money in state coffers: Yes, but not much. The primary motivation to go public, sell and privatize state-owned companies now is the need to raise funds from every possible corner to plug the enormous government budget deficits. But we should mention that the capital market is at a low it hasn't seen in 15 years, making the sale of shares incredibly difficult - and the prices will be rock bottom.
Many of the companies mentioned as Netanyahu's privatization targets are either bad businesses or ones with regulatory problems that raise serious doubts about their ability to create profits. How much is oft-mentioned national air carrier El Al worth? In the best case, a few tens of millions of dollars, in the worst case, it could even have a negative value.
How much is Israel Electric Corporation worth? An interesting question best put to the analysts at the international ratings agencies who determined that without government support it could go bankrupt. How much will the state raise by selling the controlling core of its best company, Bezeq? Much less than the budget deficit for January and February.
* Privatization will lead to structural change in the economy: Apparently not. There is no doubt that privatization's real contribution in the long term is structural change - mostly the advent of competition and streamlining in sectors in which government monopolies exist.
But experience shows there is no clear connection between the sale of state-owned companies and structural change in their sectors. The best example is Bezeq: the company is still state-run, but most of its areas of operations were opened to competition in the past decade.
It is even possible to imagine a scenario in which selling a company into private hands makes it harder for the government to open a market to competition. Would selling IEC shares to the public lead to structural change in the electricity market? Not necessarily. Politicians from both the left and the right have caved in repeatedly before its strong labor union in anything related to opening the market to competition - and there is no reason to think listing the company on the stock exchange would change that reality.
* Privatization will rescue the stock exchange: Nope. It might save the year for a few underwriters, consultants, lawyers, brokers and others of their ilk - but it won't rescue the stock exchange. The Tel Aviv Stock Exchange's principal problem today is not a terrible shortage of "quality goods" as large government companies are often called, but a huge surplus of state goods: bonds issued by the Finance Ministry.
The public is staying away from the exchange today not due to the lack there of strong, established companies, but mostly because the government in the past year boosted the interest it is willing to pay on bonds to record highs. When shekel-denominated bonds pay 12 percent and CPI-linked bonds pay 6 percent, there is no motivation to buy stocks.
* Privatization is the symbol of advanced, open economic policy: True, but the connection to the Israeli economic reality is very tenuous. Selling a few state-owned companies through the exchange to the general public or in off-floor deals to a few tycoons won't substantially change the Israeli economy.
Real privatization is not the sale of state-owned companies, but the reduction of government spending as a portion of economic activity. The government's share is now 56 percent of GDP, the highest of any developed country.
The real goal of any government or politician seeking to "open" the Israeli economy and "liberalize it" to quote Netanyahu, is to reduce government spending to 40 percent of GDP in five years.
The problem is that this plan requires strong and responsible leadership planning for the long term and willing to make painful decisions. Privatizing companies is child's play compared to substantial reduction of the government's share in the economy.
And the results are in keeping with the size of the task: privatizing companies makes splashy newspaper headlines, while reducing government's role in economic activity would change the face of the economy beyond recognition.