IEC Workers’ Shocking Power Play for Shares in New Israeli Broadband Firm IBC

IBC is using the Israel Electric Corporation’s power grid for its fiber-optic cables, but is being short-circuited by IEC workers’ bid for stock in the private company.

Just imagine a hypothetical situation where a Chinese concern wins a tender to privately operate a government-owned Israeli port. In order to avoid being hassled by regulators and gain the cooperation of the bureaucracy, it announces its intention to grant shares in its port operations company as a gift to everyone employed at the finance and transportation ministries – free, no strings attached.

Is it conceivable that civil servants could receive a fee from a private business concern for “not making trouble”? Would it be proper for government employees to receive shares to perform the work required of them?

The answer, it would seem, should be clear. If the move was exposed, the owners of the Chinese concern would likely be investigated on suspicion of bribery, and the bureaucrats investigated for taking bribes. But what appears to be obvious in this imaginary scenario isn’t quite so clear in Israel’s electricity sector.

It seems that the Israel Electric Corporation’s workers committee has, for several months now, been demanding shares in IBC, a new company that plans to lay out fiber-optic cables along the IEC’s network of power lines, in order to compete with Bezeq and Hot in the telecommunications market.

IBC (Israel Broadband Company) is a private company, 60% owned by the ViaEurope Group in partnership with Rapac Communication & Infrastructure, BATM Advanced Communications, Zisapel Assets, and Tamares Holdings, along with Cisco Systems – which will supply technology for the venture.

The electric company received 40% of IBC’s shares in exchange for the use of its infrastructure without being required to put up any additional capital. Another perk is that IBC will be required to hire services of professional personnel from the electric company at “special” rates to be determined by the latter, rather than using outside contractors.

But once the licensing agreement was signed, electric company workers were in no hurry to provide the services required of them. Several months ago, they turned to management, demanding something in return for their own consent to the arrangement. What they demanded was no less than 15% of IBC stock – 6% for free and 9% based on the valuation at which ViaEurope entered the project (approximately 250 million shekels ($71.5 million).

To show they meant business, the workers stalled – and are still stalling – the process of recruiting manpower for the new company, putting its chances of success at risk.

Born in sin

The electric company’s telecom venture was born “in sin” in 2009. For the sake of the competition needed in the duopoly of communications infrastructures to households, the government “sacrificed” the stick it had waved for years against the electric company to compel it to institute reforms. In doing so, it bypassed the Electricity Sector Law, which stated that the company cannot perform activities outside its core field prior to implementing efficiency measures and restructuring.

The circumvention of these legal restraints and concerns over the entry of a monopoly with the ability to cross-subsidize into a new field put regulators at odds with each other for a long time, until finally an agreed formula was drafted that won approval through the Economic Arrangements Bill. Throughout that turbulent period, the electric company’s workers committee held its silence.

Only after the government approved this strange and unusual beast of a mixed company – after the company was exempted from the law, after the legal restraints were removed, after the bidding process for choosing a strategic partner was completed, and after the arrangement was hermetically sealed – only then did the electric company workers awake from their artificial slumber and enter the picture with perfect timing (from their perspective).

According to the licensing agreement, IBC is meant to recruit 130 to 150 new workers under a collective agreement leaner than the one enjoyed by electric company workers. Another group of 10 to 15 expert workers is meant to be loaned by the electric company to assist IBC. A third group of workers, also from the electric company, will have their services hired by IBC, mainly for drafting and ad hoc planning assignments.

The secondment of electric company workers and employing some of them in providing services obviously requires negotiations with IEC and IBC over their salary conditions. But the workers committee at the electric company doesn’t intend to stop at pay premiums to seconded workers. The workforce is now demanding something for itself. The committee engaged the services of Prof. Itzhak Swary’s financial consultancy firm and began its battle for shares.

As expected, the workers committee overcame the hurdle of IEC management without much difficulty. But when the electric company tried to sniff out the Government Companies Authority’s position on the matter, some two months ago, it ran into an absolute refusal as the head of the authority, Ori Yogev, made it clear that such an arrangement would be unthinkable.

To be clear, IBC is a new company created from scratch and is completely separate from the IEC. Unlike the cases of El Al or the companies running Israel’s seaports – where the government agreed to allow workers a slice of shares after privatization – in this case there is no privatization. IBC is a private company that the electric company entered as a partner, in return for the use of its infrastructure. This was also a perk of sorts for the monopoly, to help persuade it to cooperate with the venture.

The electric grid might be a national asset financed by public funds, but the fiber-optics will be laid out on it through private financing. The GCA presumably refused the request because it is void of any legal basis. But the shutting of one door always leads the electric company to try finding another way in, and over the last few weeks it has cooked up a number of schemes to bypass the regulatory barrier.

At this stage, it still isn’t clear how the private investors can be persuaded to have their stakes diluted in favor of the workers committees, especially considering the huge investment required from them in the future. Either way, the fact the committee refuses to accept the GCA’s refusal in approving the transfer of stock – and the government companies’ management’s activism in helping find a roundabout solution – raises heavy concern about the development of a scenario like the one illustrated in the first paragraph.

As everyone knows, the electric grid is held by the government in trust for the entire public, which financed it. So by what right can part of it be transferred to a group of workers neither by way of tender nor for any consideration in exchange? By what right can a group of workers from a government company leverage a national asset to gain special benefits from private sources? How could it dare condition the cooperation required of it by law on receiving a ransom, holding the infrastructure as hostage? What is the difference, by legal definition, between handing over shares – if this is still what they’re after – and committing bribery?

Answers to these troubling questions will likely be delivered in an arrangement to be submitted in the next few days, for approval by the IEC’s board of directors. The issue will then require thorough study not only by the GCA but also by the attorney general’s office.

“All actions concerning the communications company are taken in coordination with the GCA, including labor relations issues, wage agreements and compensation for workers involved in the project,” the IEC responded. “Several alternatives and employee incentive methods are under discussion – as is common in many other sectors of the economy – as part of the project’s launch. Decisions on the subject haven’t yet been made, and the various alternatives are being examined by all relevant sides.”

The IEC’s workers committee refused comment.

IBC noted that it “is working in full and positive cooperation with all partners in the project, and is carrying on the momentum of building the new and unprecedented communications infrastructure.”

Tomer Neuberg