Israel's Mekorot Amasses Debt as Ambitious Desalination Project Goes Sour

Ashdod plant plagued by delays and technical problems, leaving state-owned company’s subsidiary unable to repay debt

The concrete tank of a desalination plant in Ashdod.
Tomer Appelbaum

An ambitious plan by Mekorot to enter the desalination business has ended up saddling the state-owned water company with massive debts and the start of a humiliating retreat from the business.

Following an expose in TheMarker last week about how the company amassed a debt of 1.2 billion shekels ($330 million) after a decade of technical problems and delays constructing a giant desalination plant in Ashdod.

The 1.6 billion shekel plant began producing water a year ago — nearly four years after it was supposed to begin operations, and it is still not working at full capacity and may never do so due to faulty construction and engineering. As a result, the plant is expected to lose an estimated 35 million shekels a year, rather than earning money for Mekorot.

Unable to meet debt repayments, despite hundreds of millions of shekels pumped into the unit by its parent company Mekorot, Mekorot Development is technically in default. The company has written off 400 million shekels from the Ashdod project – its entire shareholders’ equity– which will come at the expense of the taxpayers.

Last week, the board of Mekorot finally decided to put an end to the failed venture and approved a plan to sell all the projects being undertaken by Mekorot Development & Enterprise, the subsidiary that developed the Ashdod plant and was responsible for developing new businesses for the company.

The bright yellow pipes inside a desalination plant in Ashdod.
Tomer Appelbaum

In the meantime, Mekorot Development will have a “going concern” warning attached to it, meaning its auditors are not confident it can survive as a business, and write down another 366 million shekels on the Ashdod plant, bringing the total, to date to 420 million.

In addition, officials from the finance, energy and justice ministries will meet shortly to develop a strategy for rescheduling Mekorot Development’s debt to its two lenders – the European bank for Reconstruction and Development and a consortium of Israeli lenders led by Bank Hapoalim.

“Our situation is terrible, there’s nothing else to say,” said one government source who asked not to be identified last week. “It’s a sad day for the country. It’s difficult to look at a failure like this in a government company.”

The depth of Mekorot’s financial woes were kept under wraps until they were reported in TheMarker, forcing the board and the government to act. The delays in owning up to the problem could ensnare Mekorot further.

Nir Keidar

“If the affair is only surfacing now, it suggests that a crime was committed and if so then there has to be a resolution,” said the government source. “Everyone makes mistakes and if a manager errs that happens but if Mekorot’s management knowingly concealed something and failed to disclose everything, that’s a crime.”

He said the cash flow from the desalination plant can’t cover repayment of the principal, which means that the parent company will have to cover Mekorot Development’s losses or risk the unit going into default. “If this occurred in a publicly traded company, the Israel Securities Authority would have opened an investigation,” he said.

Mekorot’s desalination plant is one of five in Israel, but the only one for which the licensing rights were awarded without competitive bidding. That was a favor handed to the company in exchange for labor unions’ agreeing to restructure the business.

The build-operate-transfer called for a plant that would produce 100 million square cubic meters of potable water at the relatively high price of 2.48 shekels per cubic meter and was supposed to begin operations at the end of 2013.

But the project got bogged down quickly over technical and other details as well as a failed attempt to award the contract to General Electric and the Israeli engineering company Baran with competitive bidding. In the end, the contract to build the plant was awarded to a consortium comprising the Spanish company Sadyt and Israel’s Minrav Project.

But the construction was plagued by technical faults which have limited the plant’s capacity to no more than 85% of what it was designed for and what its license terms require. The delays have exposed the company to government penalties of 70 million shekels a year as well as depriving it of all the revenues it had planned on.

As a result, Mekorot, the parent company, ended up injecting some 630 million shekels — the maximum it could under the law —into Mekorot Development and that still left the subsidiary short of the cash it needed to repay its bank loans.

The snafus have led to a flurry of accusations and counter accusations. Mekorot is suing the contractors for 700 million but the contractors are blaming Mekorot for much of the problem. Sadyt and Minrav are also at odds. As early as 2014, the banks were threatening to put Mekorot Development into default.

Last February, TheMarker reported that Mekorot Development had fired a quarter of its staff as part of a recovery program after it ended 2015 with negative equity and required cash from its parent company to meet debt payments.

A spokesman for Mekorot who spoke to TheMarker last week put the brunt of the blame on the contractors. The company had wanted to develop the Ashdod plant itself but was forced by the government to use a contractor, which resulted in the delays, the company said.

“Mekorot believes that the company, its creditors and the government should combine forces and immediately initiate a recovery program for the facility,” the company said. “This is the way to solve the problem for the sake of the water industry, Mekorot and the creditors. “