Israel to Privatize $4b Worth of Government Companies

Among firms to be fully or partially sold are Israel Electric Corporation, Israel Aerospace Industries, Israel Post and Rafael.

Tal Cohen

After last-minute backroom negotiations, the economic-social cabinet on Sunday approved a plan to privatize 11 state-owned companies over the next three years for total revenue of 15 billion shekels ($4.1 billion.)

The sale includes the full or partial sale of some of Israel’s biggest and best-known companies, among them Israel Electric Corporation, Israel Aerospace Industries, Israel Post and Rafael to private investors and/or via initial public offerings on the Tel Aviv Stock Exchange.

“Selling shares to the public through public offerings of major companies will bring about a significant improvement in their performance and profitability, help reduce the national debt and create a new channel for the public to invest its savings,” said Ori Yogev, the head of the Government Companies Authority and a key promoter of the plan, together with his boss, Finance Minister Yair Lapid.

The plan, which calls for the proceeds from the sales to go mostly to paying down Israel’s national debt, was approved by a vote of eight ministers to one, with Environmental Affairs Minister Amir Peretz casting the lone dissenting vote.

The lopsided vote, however, wasn’t indicative of the strong opposition to the privatization plan, which delayed the meeting of the economic-social cabinet for two-and-a-half hours on Sunday. In a private meetings before the formal meeting got underway, Lapid sought to overcome opposition from Likud ministers, including Defense Minister Moshe Yaalon and Transportation Minster Yisrael Katz as well as from Naftali Bennett, the economy minister and leader of the Habayit Hayehudi Party.

In the end, Lapid backed down on plans to give more power to the treasury and the GCA over state-owned enterprises and to form a committee to accelerate the sales. He also agreed to set up a committee to re-examine plans to sell some of the privatization candidates, such as the water company Mekorot, Israel Railways and Israel Natural Gas Lines.

“If we needed any evidence of poor-quality work and decisions taken on the fly, we got them,” Peretz said after the economic-social cabinet finally sat to vote on the plan. “There was no transparency here - just dirty business, an exercise in dividing the spoils of power.”

Under the plan approved by the minsters, the government will sell some 4 billion shekels of companies in 2015, of which 3.5 billion shekels will go to paying down government debt. In 2016, the plan calls for 5 billion shekels in privatizations, with 4.5 billion going to pay down debt and in 2017 6 billion shekels of sales, all but 500 million going to debt repayments.

Strategic companies

The Lapid-Yogev plan divides the state-owned enterprises due to be sold into two categories – companies in which the government has a strategic interest in retaining at least minority control and companies where it doesn’t.

The strategic companies include those providing vital services such as IEC, the water company Mekorot, Israel Railways, Israel Post and Israel Natural Gas Pipelines as well as defense companies Israel Aerospace and Rafael.

Somewhere between 25% and 49% of each of these companies will be sold, either through a direct sale to a private investor or through a public offering on the TASE. In the case of public offerings, the government may not only sell its own shares but allow the company to raise capital by issuing new shares as well.

The rest of the companies will sold off in full, either by direct sales or an IPO, or a combination of both, either in a single block or in stages.

These companies include Haifa and Ashdod ports, the Environmental Services Company and the so-called Tel Aviv companies, which include the housing developer Halamish and Otzar Mifalei Yam, which operates the Tel Aviv Port entertainment and leisure center.

The non-strategic companies include one state-owned arms maker, Israel Military Industries, which had already been slated to be privatized in 2016.

Israel undertook a major privatization drive in the 1990s, but the effort subsequently stalled. The government retains a business empire that had revenues of about 67 billion shekels last year but suffered combined losses of 809 million shekels.

The GCA conceded that the record of Israel’s government-owned companies on transparency and profitability is poor, compared to those in other developed countries. For instance, operating profits for Israeli government companies was just 4.3% of revenues in 2013, compared with 6.6% for Danish companies and 7.1% in Britain.

By selling stakes in companies on the stock market, the GCA said, government companies will be held to higher standards of transparency and become more business-like. Raising capital in the stock market will enable them to invest to improve operations and undertake structural changes without taking funds from the state budget.

Haaretz