“It has always been about competition. That is what drives human progress. You want to channel it in productive ways, you take the fruits of competition and return them to society... If there are things that block competition – whether concentration of market power, political power or media power – it has to be broken, dismantled. I am trying to do it, even though sometimes they try to break me. So far, they have failed.”
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– Prime Minister Benjamin Netanyahu in conversation with Prof. Luigi Zingales, Washington, D.C., March 2014.
Prime Minister Benjamin Netanyahu blames his inability to dismantle the monopoly of the Israel Lands Administration, cut back private medicine and tackle the monster of the defense budget on vote peddlers and coalition politics. “That’s the price” has become a cliché of cowardice and inaction.
But the indifference Netanyahu, that standard-bearer of competition, has shown toward the gigantic, absolute energy monopoly that sprouted in Israel – that he will have difficulty explaining. There can be no alibi for such sins of omission.
Netanyahu, who is also finance minister these days, belatedly ordered the head of the National Economic Council, Eugene Kandel, to look at the gas industry – not back when the monopoly began to develop but when a regulator got to his feet and decided to take action: Antitrust Commissioner David Gilo.
Israel has plenty of monopolies. Some are natural. Some are mutations that grew thanks to captive or weak regulators, to low awareness among the public and the press, or to academics and watchdogs who fed from their hands or lived in symbiosis with the status quo. Some are the heirs of the planned economy of decades ago.
The latest democracy-gobbling monster is the monopoly squatting on the most precious natural resource of all, which affects the cost of living of each and every Israeli citizen: energy.
We have become inured to corrupt public monopolies like the Israel Electric Corporation, some of whose top people were arrested last week on suspicion of taking millions of dollars in bribes, in exchange for shoving turbines sold to the company at exorbitant prices down the throat of Israeli taxpayers. We have become used to Labor Party and Likud members groveling before powerful unions and inventing theories as to why robbery is okay. We yawn when it turns out that the king of corruption in the Labor Party, Benjamin “Fuad” Ben-Eliezer, planted dozens of his cronies in the IEC.
'Darkness will fall'
But make no mistake: A private monopoly is much more dangerous than a public one. The public one may have dug deeper, but it’s usually a multiheaded monster and a political one too, so it is less effective at trapping the watchdogs. It can also be changed at the public’s will.
A private monopoly is concentrated, focused, sharp and usually cleverer. When it controls hundreds of billions of public money, as the corporate pyramids and the banks do, or when its annual revenues amount to tens of billions as in the case of the gas monopoly – it can simply cut a check for any amount it pleases, endorsed to any professional in Israel. Professors, regulators, journalists and of course politicians and leaders of associations – all see the light when the monopoly embraces them.
Battle erupted within moments of Gilo deciding to go boldly where none had gone before. The first barrage was the usual stuff spit out by reform-killers – “nationalization, Bolshevism won’t let business survive, investors will flee, regulatory uncertainty, the gas will stay in the ground, Israelis won’t have electricity and darkness will fall.”
We’ve heard that before during every threatening reform – the cellular one, and that involving liberation of exports and of the foreign currency market – in fact, every time the government tried to improve the state of the public at the expense of a powerful interest group.
The answer to the spin is just as tedious: Oil drillers can be assured of good profits; they will be amply compensated for their initial, small and high-risk investment in exploration.
The argument isn’t over their profit on high-risk initial investments. We all understand that should be high. The argument is over investment at the second stage, when the risk is lower and the banks are happy to provide financing.
This is where it’s the government’s job to make sure that it doesn’t lose control over a crucial natural resource, leaving it hostage in the supplier’s hands.
This time the battle will be longer and more complicated. With this much money at stake, look what got dragged into the campaign – an old friend who always served well when crisis reared its head: the peace process.
Gas deals and peace
Thus last week we discovered that the obstacle to peace is none other than Gilo, abetted by Deputy Attorney General Avi Licht, the chairwoman of the Public Utilities Authority, Orit Farkash, and possibly the head of the budgets department at the Finance Ministry, Amir Levy.
The gas monopoly had signed an agreement to export gas to Jordan and was poised to sign an agreement with Egypt too. It turned out that only a few gas deals stand between us and centuries of conflict between Islam and Judaism, between Israel and Palestine, between a billion Muslims and 13 million Jews.
Gilo must have wondered this last weekend how an unassuming man like himself became the main obstacle to peace in the region. The truth is that the peace process has long been a refuge for politicians who suddenly find themselves under investigation for corruption.
We have rich experience with the peace our agreements with our neighbors has brought when it comes to energy: Take the electricity we sell to the Gaza Strip to assure the peace, with the odd blip on the way such as the events of last summer. Or the marginal little problems the West and Russia had earlier this year by virtue of the Russian gas pipelines to Europe.
On December 31, the American-Israeli monopoly that controls the Israeli gas supply whipped another joker out of its sleeve: U.S. Secretary of State John Kerry called Netanyahu to chide him over the shocking rumor that had reached the State Department in Washington.
The Jews who run the American aircraft carrier called “Israel,” bizarrely decided that alongside an army, the Western Wall, Masada, the Church of the Holy Sepulchre, the Dead Sea and an abundance of excellent hummus restaurants – they also want an independent antitrust authority, originally an American invention from the late 19th century. What nerve!
Kerry was forced to remind the chieftain of the natives of the “basics”: “It is important for all countries to have a strong investment climate, including a consistent and predictable regulatory framework.”
In other words, the advantage belongs to an investor who has an absolute monopoly that nobody can ever compete with; he can ream consumers as he pleases. The regulators must know they’ll be dealing with him a great deal over the years and will toe the line.
Which brings us back to our opening quote: Those were the parting words uttered by the prime minister in our joint meeting with Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago, on capitalism, competition and the relations between money, government and the media, after Netanyahu declared the professor to be his guru.
Zingales had caught Netanyahu’s attention with his book “A Capitalism for the People,” in which he argued that the U.S. was rapidly sliding in the direction of his homeland, Italy – a model of rotten crony capitalism where giant corporations and mainly the banks set the rules, blocking competition and on the way, corrupting academia.
The case of gas regulation in Israel is a classic for a debate by Zingales and Netanyahu. The prime minister and Kerry, each for their own reasons, keep confusing “pro-market” economic policy and “pro-business.” What produces growth, innovation and quality of life is, of course, pro-market economic policy. Yet American politicians rebuke the native Israelis, on behalf of Noble Energy, telling them which economic policy they expect them to employ.
To understand who the rebukers are and how far the image of American capitalism is from the reality in Congress, in the administration, and mainly in the U.S. markets – we need not strain ourselves.
For instance, Sandeep Vaheesan, special counsel to the American Antitrust Institute, and Lina Khan, a policy at the New America Foundation, published a Washington Post article in June entitled “How the United States became uncompetitive and unequal.” They describe how the Republicans and Democrats separately and together, over the last 30 years, destroyed the competition and antitrust revolution in America that had begun a century ago under Teddy Roosevelt, William Taft and Woodrow Wilson. That was a progressive time in which a handful of politicians, newspapermen and lawyers fought the American robber barons who had gained footholds in most sectors, from the rotten health care system to retail to aviation and food – and of course, the press.
Yes, the press. The average Israeli who gripes about the HOT telecoms company and used to grouse about Cellcom, Partner and Pelephone, doesn’t know about Comcast, Verizon, AT&T and T-Mobile. He should, to really understand how dramatic the reform in the Israeli cellular industry has been; how remote the image of the “greatest capitalist democracy in the world” is far from really having competition; and how violent and effective the lobby of the big American phone companies is against the political and regulatory system.
American leaders who tried to do something about the lousy quality of broadband discovered they were up against a determined enemy, who wielded lobbyists and corrupted politicians with perfectly legal donations, so they wouldn’t have to invest in infrastructure and broadband. Confronted with such suggestions, AT&T CEO Randall Stephenson did not lose his wits: “The idea of private capital competing with taxpayer-provided capital just feels inconsistent to us with what a free-market system looks like,” he told the Senate in June.
The U.S. phone companies think the government must not lay down broadband infrastructure lest it compete directly with their lousy, expensive service. The government’s job is to stand aside while Americans get milked for third-world quality broadband.
The paucity of competition in many American sectors is such a poorly kept secret that Goldman Sachs even wrote in a note to clients this year that it recommends focusing on companies operating in an “oligopolistic market structure” where there’s “lower competitive intensity, greater stickiness and pricing power with customers due to reduced choice” in order to maximize their returns.
Fantastic. American capitalism in all its wonder. Aficionados of the U.S. market model should learn this “lesson.”
Naturally, we should not generalize: The U.S. has branches, especially the unregulated ones, where there is fierce competition and innovation. But in the heavy and most central industries in that country, key interest groups legally corrupt members of Congress and were able to create, in the last 20 or 30 years, discriminatory market structures that are both backward and face little competition.
We haven’t even gotten into the American finance system, which five years after the great financial crisis still has banks too big to be allowed to fail, or be sued, or to have their managers do time for fraud.
Well, fixing the United States isn’t our job and in any case it can afford all that. Israel, however, cannot afford to have a gigantic monopoly in the energy market that’s too big to be supervised.
Gilo’s decision was a wake-up call for all regulators in Israel. They need to think how to harness the gas reserves found at the bottom of the Mediterranean Sea as a growth driver and a way to lower the cost of living in Israel instead of reducing us to a third-world country in which oil barons call the shots. Most importantly: It’s a wake-up call for politicians who spout slogans about the cost of living and defending the middle class, but under whose nose the biggest monopoly in the history of Israel arose and began to kick.