In the Money

Battle Over Israeli Pyramids Rears Its Head Again

The third part of the bill poses the highest stakes for big business.

The third and final chapter of the business concentration bill comes up for debate before the Knesset this week. As opposed to the previous two chapters – separating financial holdings from non-financial holdings, and dismantling the so-called pyramids – business groups structured as cascading tiers of companies controlled by one at the top – this one promises to elicit a mild yawn. It deals with government decision making processes, or requiring the government to take competitiveness and concentration into consideration in every tender it conducts, whether in privatizing a company or granting a concession or license for a public asset.

Even back in the concentration committee hearings, this chapter seemed the most boring and least important. But everyone should start waking up: There are signs that the battle over this third chapter will be the stormiest, the most tense, and the most loaded with lobbyist pressures of all three. The sharpening of swords can already be heard – and for good reason: Compared to the other two, the third chapter concerns nearly all of the country's large firms, in every industry and every field. Its potential implications for those companies are serious. This isn't just about disbanding four or five extensive pyramids, but about a fundamental change in growth potential for innumerable leading Israeli companies.

This is because this chapter could potentially lock the gates of government to companies as a customer or allocator of public assets. This is no trivial matter. Not only is the government a major customer for many sectors of the economy, but all large contracting firms are dependent on infrastructure tenders put out by the state. The government is also an important,if not critical, customer for cellular, fuel, and transportation companies.

But the government's role as customer is of lesser significance. Most of its clout comes from assigning the rights for the use of public resources. Almost all of the country's largest companies built themselves up by acquiring public resources from the government. Some notable examples include the IDB concern with Cellcom's cellular license, Delek Group with its gas exploration and water desalination licenses, and Israel Corporation through its ownership stakes in Zim Integrated Shipping Services, Oil Refineries, Israel Chemicals, and power plants.

None of these companies will be able to continue expanding based on acquiring new companies or licenses from the state. The new law will block them and restrain their continued growth.

Israel Corporation already learned this the hard way when the state barred it from participating in the tender for the privatization of Eilat Port. The tender was left with a sole contender and the port was eventually sold at a low price due to lack of competition. In this case, the state chose to lose out on the immediate deal in the belief that the short-term damage would be outweighed by the long-term contribution towards improving competition and reducing business concentration. This clearly wasn't a simple decision for the state.

The law will require the state to consider competitiveness and concentration in every business relationship. The definition for concentration includes every concern defined to be a substantial corporation (sales exceeding NIS 6 billion a year or financial institutions with over NIS 40 billion in assets) with a monopoly and a stake of over 50% in any specific infrastructure sector or the ownership of a newspaper (why newspapers and not every media outlet, only the legislators would know). The list of sectors defined as being vital includes most of the economy's infrastructure sectors. Anyone dealing with communications, transportation, aviation, energy, water, mining, sewage, and even finance is in the law's, and the government’s, crosshairs.

Definitions in the bill are hazy so it isn't entirely clear how competitiveness/concentration considerations will be weighed up. Each case will be considered on its own merit, and even a new regulator appointed to advise the government. The requirement is only to take competitiveness/concentration under consideration and not necessarily to turn it into a verdict. The concern is that if large enterprises are barred from participating in tenders, there simply won’t be any contenders left. It is therefore likely that large enterprises won't be disqualified from the outset but will just lose points in the tender and this will probably force them to be make their bids more competitive to make up for it.

The broad definitions, therefore, are raising heavy concerns among many companies: Shikun & Binui, Israel’s largest construction company and part of the Arison Group; Danya Cebus, another large construction firm connected with the Africa-Israel group; the Tshuva Group in its entirety; the fuel companies worried that they won’t be allowed to build new gas stations; all the telecoms companies worried the state will block them from participating in tenders; and others.

There are also grave concerns among the large government monopolies: Mekorot, Israel Electric Corporation, and port operators. The legislation effectively prevents large government corporations from expanding their operations. That would be it for Mekorot's entry into the desalinization field. That would likely end the ports' struggle to take over the new pier and prevent its transfer to a competing private company.

The list of potential victims of the law in the private and government sectors is as long as the bill and explains the frenzy of lobbyists these days in the Knesset. Many companies have plenty to lose from the legislation, so it's important that the public stops being bored, and starts being vigilant.

Ofer Vaknin