Benjamin Netanyahu Breeds His Own Pet Tycoons

Netanyahu has Sheldon Adelson on his right, Shaul Elovitch on his left, Tshuva in the background and his ministers are cowed.

Ofer Vaknin

Before Israel’s social-justice protests in 2011, the government had an easier job of running the economy without too much public interference. As long as you kept the people distracted with security issues, an imaginary peace process and a perennial wrestling match between the ultra-orthodox and the nonobservant, you could keep the financial agenda in a back room for the benefit of a clique of tycoons who control about half the nation’s money and most private monopolies.

The thing is, Prime Minister Benjamin Netanyahu never did like the local tycoons. They could swear loyalty to him until the cows came home but Netanyahu assumed they had social and business ties with the original elitist Mapai-nik establishment – Ariel Sharon, Ehud Olmert and his arch-enemy, Noni Mozes, publisher of the Yedioth Ahronoth news group. Generally, he was not wrong.

So come 2010, Netanyahu decided to ride a campaign pursued by TheMarker, and to set up the business concentration committee (backed by Stanley Fischer, who at the time, was the highly respected governor of the Bank of Israel).

In his wily way, Netanyahu dangled the committee as a Sword of Damocles above the heads of local business leaders for about a year. The idea was that as long as they behaved and kept their newspapers under control, the committee would go the way of all such committees, i.e., nowhere.

But then came the protests of five years ago which put Netanyahu on the horns of dilemma.

Netanyahu casts his lot with the people

There was a whiff of popular rebellion in the air; the reins of government seemed to be slipping from his hands; the public was waking up and seeing the economy’s real structure.

The tycoons tried to persuade Netanyahu that they had the clout and the means to suppress the uprising if he’d just cancel those pesky reforms and stamp out competition.

Yet as hundreds of thousands of angry Israelis marched in the streets, Netanyahu cast his lot with them, and against the business barons. “Start moving your asses,” he barked at the startled members of the business concentration committee. They responded by admitting for the first time that Israel had a serious problem with economic concentration and published a biting report that enabled real change in the structure of the capital market and power in Israel.

The cellular revolution kicked off (with the help of Moshe Kahlon, then communications minister), and mobile communications rates dropped by as much as 90%. The business concentration law passed. A wave of reforms in competitive industries took off, the secrets of crony banking were revealed - and one after another, the lions of leverage began to implode. As the public began to wake up, their business model – government ties, weak regulation, borrowing billions upon billions from captive customers at the banks and insurance companies – fell apart.

Three years later, Netanyahu explained his political and economic doctrine in an interview with TheMarker.

“The main source of power that companies can cooperate with are politicians, which creates crony capitalism. In our system in Israel, they can also hook up with other forces, such as the power of the press, which has control over political forces, and that will give you crony capitalism too if competition is prevented, prices rise and the weaker parts of society are paralyzed,” Netanyahu said.

Netanyahu told TheMarker that he badly wanted to stop crony capitalism because it ultimately makes the poor even poorer.

Yes, the prime minister of Israel actually spelled things out. He explained how crony capitalism works, shielded by smokescreens and distractions like “left” and “right.” Most politicians in recent decades have served the interests of the uncompetitive sectors which abuse regulations in order to milk investors, consumers and taxpayers.

Who needs a wolf in the house

Yet a little more time passed; Netanyahu won reelection, trounced his rivals, and his plans moved in an entirely different direction.

He no long wanted to use the historic opportunity he had been given to dismantle interest groups. What he wanted was to grow new tycoons, and ensure that they were trained.

Unlike their predecessors, the tycoons of 2016 would be tame and heed Netanyahu’s instructions.

Energy and real estate baron Yitzhak Tshuva, who controls the Delek group, is the most obvious example.

Before the last election, politicians and ministers - the finance minister to the antitrust commissioner, and the chairman of the electricity board - had sought to force the great gas monopoly to succumb to the rules of competition, supervision and taxation. Avi Licht, the deputy attorney general, even published a highly Teddy Rooseveltian opinion, calling the gas monopoly which belongs to Tshuva and others a threat to democracy itself.

But after the elections, everything changed. The antitrust commissioner and electricity board chairman were cast aside. The Finance Ministry’s budget department was replaced. Energy Minister Yuval Steinitz seems to be moonlighting as the gas monopoly’s PR person. Avi Licht tamely helped Netanyahu pass the gas framework unrevised and has just won another eight-year stint on the job. He’ll probably be the next attorney general, or maybe a supreme court justice. Why get into a brawl with Netanyahu? People have to pick their battles.

Pyramids of Egypt and Elovitch

Why pick on Tshuva? There’s another pet tycoon that Netanyahu has been cultivating for a year now – Shaul Elovitch.

Unlike his friends the Dankners, Elovitch always managed his business with the state quietly and discreetly. He didn’t get involved in buying and controlling media outlets, for instance.

In 2010, Elovitch bought the Bezeq phone company (from Apax and Haim Saban). Bezeq has a cellular company, Pelephone, which had been the group’s cash cow for years.

However, competition arrived in Israel’s cellular industry a year later, and the Pelephone cash cow started to shake. Elovitch’s pyramid of debt was under threat. Three years ago, the pyramid’s bonds began to collapse and the market began to worry that Elovitch would wind up like Dankner and Fishman – spiraling down the drain.

Elovitch learned his lesson and Netanyahu saw opportunity.

So for four years, the Elovitch empire has been hitting the brakes and basing its fortunes on the wireline market (phone lines), which the government never did open to competition.

Here are some simple figures. Before the cellular reform, mobile operators were running operating profits to the tune of 40% to 50% of their revenues. Now their operating profits are half that, which led to the collapse of two of the pyramids that depended on dividends from cellular companies.

Wireline remains a monopoly, and its rate of gross profit is 60%. It is a monopolistic money machine of the worst sort (or the best, depending whose side you’re on).

If the government was to copy the cellular reform to wireline and profits were to drop from 60% to 40%, Elovitch would be in roughly the same position as Nochi Dankner, Ilan Ben-Dov, Yossi Maiman, Moti Zisser, Joseph Grunfeld and Eliezer Fishman. He would be an ex-tycoon.

Since its privatization, Bezeq paid out billions upon billions in dividends. The company also owes billions upon billions and the holding company through which Elovitch owns it, B Communications, owes hundreds of millions. Above that there is Internet Gold,with yet more debt. (Eurocom, which is privately owned by the Elovitch family, owns 66% of Internet Gold, which owns nearly 65% of B Communications, which owns 26.3% of Bezeq. Note that both B Communications and Internet Gold are traded on Nasdaq.)

But Netanyahu has lost his interest in competition and reforms, at least where there’s a chance to make a quick political dividend. He might let Kahlon reform the banks – he agreed to that in the coalition agreement. But if Tshuva and Elovitch want to be friendly pet tycoons, Netanyahu seems perfectly willing to arrange convenient regulations for them.

With the establishment of his latest government, Netanyahu named himself minister of communications; he threw out the thoroughly professional director general of the Communications Ministry and named a loyalist; and he shut down efforts to reform the wireline market.

Former Communications Minister Gilad Erdan, who had promoted the wireline reform, was peeved, and decided to air the dirty laundry and expose the system. Upon dismissal of the ministry’s director general, he realized the wireline reform had just died and announced a private member’s bill to dismantle Bezeq.

“In recent years Bezeq has everything in its power to thwart and postpone the execution of reform, which would lower costs for people by double-digit percent,” Erdan said at the time. “I reached the conclusion that the only way to deal with a monopoly this powerful is to force the sale and holdings in the content and services field, and leave it only as an infrastructure company.”

What happened to Erdan’s bill? Has Bezeq been dismantled? Has it hawked its holdings in content and services?

Nothing; no; and don’t be silly. The reform has moved not a nanometer and if anything, we’re moving in reverse.

Last year Netanyahu agreed to let Bezeq merge with its Yes cable television subsidiary. Netanyahu is also thinking of ending the structural segregation at Bezeq, which is exactly the opposite direction Erdan says is necessary for the sake of competition and efficiency. But Elovitch needs to end the separation so Bezeq can make more money and pay him more dividends, which he needs in order to pay off his pyramid’s vast debts.

Last week TheMarker correspondent Nati Tucker reported on negotiations between the website Walla, which belongs to the Shaul Elovitch-Bezeq group, and the business newspaper Globes. For now, Globes staff have blocked the move. For three decades, Globes belonged to highly leveraged businessman Eliezer Fishman. The newspaper’s staff knew how the system works; what sort of journalism and convenient regulations the indebted tycoons want. Globes reporters want something better.

It may not help them. Netanyahu saw the close, comfy ties among Olmert, Sharon, and Mozes of Yedioth, and he wants the same thing. Netanyahu wants to be bigger than Olmert.

And this has been working out for him so far in the past year. He has Sheldon Adelson on his right, Shaul Elovitch on his left. The owners of Channel 2 are feeling threatened, Tshuva is in the background and his ministers are cowed. This system worked for Sharon and Olmert, too, for years and years, until the day it stopped working.