Teaching treasury officials that time is money
"One of the surprising things I discovered after becoming accountant general at the finance ministry, overseeing all infrastructure matters," said Yaron Zelekha in an interview with Haaretz, "was that the state did not bother to prepare English-language versions of some tenders even if they required foreign partners. Moreover, there was no attempt to ensure a logical division of risks between the project developer and the state, and there were no uniform feasibility studies of the projects."
As a result, he said, some problematic tenders were issued, others were canceled after being issued. There were few bidders, an impossible bureaucracy, and limited financing options. Zelekha took the job 11 months ago when many infrastructure tenders - including some for constructing roads, light rail systems and gas and water installations - were being prepared and several others were bogged down amid conflicts between government offices.
"Since I took over the job," he said, "there has been growing momentum in infrastructure projects. We released the natural gas project, the tender for Highway 431 from Nes Tziona to Modi'in, and the express lane project at the entrance to Tel Aviv. Many other projects were initiated."
He said he decided to review the tenders and map out what problems were impeding developers from speedy implementation of projects. "We did preparatory work and created a system that properly divides the risks between the state and the developers."
What kind of problems surfaced in the review?
"It turned out, for example, that the state did not attribute any importance to the substantial sums invested in the tender and to the amount of time required of them. That's why the state had no problem canceling tenders even after bids had been submitted.
There were also many bureaucratic problems - the tenders were complicated and had threshold requirements that were often illogical. For example, there was a requirement to include foreign partners as if there were no Israeli expertise in the field, especially among manufacturers.
"Another problem was inconsistency in tenders. No lessons were learned from each successive tender, because there was no single manager overseeing them all. Furthermore, the government was sending the message that a contract is not a final document and everything is open to negotiation.
"The relationship between the government and the bidders was plagued with problems, resulting in a small number of bidders. When a company bids on a tender and loses, the investment is written off, and a lot of money is involved. The government didn't understand this and just canceled tenders in a way that to my eyes was scandalous. Officials simply didn't understand why it was a big deal for a company to just write off $2 million.
"In addition, the managers of the firms that were bidding had focused on preparing the bid and as a result let slip many other opportunities. Government officials just don't understand that time is money - they don't know the value of time."
What solutions were offered? How many of them are currently being used?
"First, I appointed someone to be responsible for all infrastructure projects - deputy accountant general, Zvi Halamish. We looked at lessons learned from the Trans Israel Highway tender and applied them. In all tenders, we added a stage between the preliminary selection and the final tender, a consultation stage during which banks and bidders are asked for adjustments. We also made some other changes - we simplified tender forms, applied lessons from previous tenders, protected interest rates and made legal clarifications."
What about canceling tenders?
"I guaranteed that government tenders once issued would not be canceled. In a survey we found that in some cases economic feasibility studies had not been done according to agreed parameters. As a result, when everything was ready, the treasury's budget department would find the project was not feasible and ask to cancel it. So we set up a team and with the budget department we drafted fixed, agreed parameters for assessing projects.
"We announced compensation for bidders should we decide to cancel a tender - full compensation, amounting to millions of shekels. We provided this guarantee in the tenders for laying the express lane at the entrance to Tel Aviv, for Highway 431, and for the Tel Aviv light rail system. But I'm not worried - I won't have to pay anyone, because I don't plan to cancel any tenders.
"We also found that companies dropped out during preparing the tender if they concluded the investment needed or the risks implied were too high. We decided that whoever came in second, with no more than a 10-15 percent gap from the winning bid, would get back most of the expenses involved in bidding on the tender.
"In addition, the second lowest winning bid would be the alternate if the winner was unable to exercise his option. Thus we signal the winner that there is an alternative and his bargaining space is small. The second place bidder will not rush to appeal because he won't want to get into a conflict with the state."
What about tender winners who then drop the project because it doesn't seem worthwhile?
"I have no hesitation about foreclosing on the guarantees given by tender winners and filing multimillion-shekel suits for damages incurred by the state as a result. I'm not willing to reopen contracts or improve terms."
What about blocks on project financing?
"Financing blocks led to a situation where it was almost impossible to get foreign financing. Moreover, there was talk of institutional financing and nothing was done. The setup of the grants was such that the winner had to raise most of the money at the beginning, and that obliged him to turn to one of the big banks, Leumi or Hapoalim, because only they could handle the high costs.
"Therefore we got the companies' ratings and got assessments on the project. With that it's possible to approach institutional investors and raise capital at least in part. Then for the rest, it is possible to approach smaller banks. Another step we took was to interest the finance department at treasury, set up by Eldad Frecher when he was deputy accountant general and which is responsible for state financing of projects.
"For fundraising abroad, we promised protection for foreign exchange interest and not just on local interest rates, because protecting local interest rates gave an advantage to raising those funds. We also decided to issue a startup grant during the startup period so that it would be possible to carry out projects."
What about taxation of projects? Developers said they are asked to pay VAT immediately on the conclusion of construction even though the state's payments are spread out over many years?
"The head of the Tax Authority, Eitan Rub, realized the problem and we decided to increase the grant to match the amount of VAT."
One of the main problems with these projects was the length of time it took to reach the financial closing, for example with the Jerusalem light rail system the process lasted almost two years. Is there a solution?
"Yes. We decided on a system of incentives for the developer. With Highway 431 for example, it turned out that the benefit per month to the economy from the moment the road opened would be NIS 10-20 million. To speed up the process, we set a closing date of ten months from the date of the signing of a contract between the state and the winner. If the developer succeeds in doing so before the date determined, he will receive a NIS 1 million bonus for each month he is ahead of schedule.
What guarantee is there that the situation on procedures won't revert to what it was when you leave office?
"I have no intention of implementing a new policy that lasts a year and then leaving. I want to educate a new generation that will work according to the rules."