Israel’s Consumer Watchdog Fiddled as Shoppers Got Burned

The Consumer Council’s board has found embittered employees, organizational chaos and superfluous projects. Maybe that’s why its director suddenly resigned last month.

A four-legged “athlete” performs at the International Dog Exhibition in the south.
Courtesy

After nine and a half years at the helm, Ehud Peleg, the director of the Israel Consumer Council, gathered his employees at the council’s Tel Aviv offices and told them he was resigning.

“I tried to do the best I could,” he told the dozens of staff members two weeks ago. Later they described his comments as strange. “He was brief, to the point and lacking his typical pathos,” one employee told Haaretz. Most said the resignation came as a total surprise.

After the meeting, Peleg sent out a press release stating that “we must continue to strengthen the council so it can act strongly to oppose the unfairness so common in Israeli commercial life.”

The problem is, Peleg played a role in creating the current situation. Many businesses in Israel don’t really care much about the Consumer Council, a government company whose jobs is to ensure that consumers receive their full legal rights from private companies and government entities.

Peleg told the staff that for years he had fought for the council’s budget and to protect their jobs an understatement if anything. When he took over in 2007, the council had only 13 employees and an annual budget of less that 4 million shekels (currently $1.03 million). During his tenure, the payroll expanded to 50 employees and the budget grew to as high as 14 million shekels.

This rapid growth, alongside the change in the public’s awareness after the social-justice protests of 2011, should have made the Consumer Council one of the public sphere’s central players, but the organization has been a dismal failure. During Peleg’s long term, the council, which declined to comment for this article, has not undertaken a single major consumer campaign and has made no real change in the consumer environment.

Busy with itself

TheMarker published an investigative report on the council in May 2015; the organization turned out to be busier with itself than consumer protection. For example, in 2014 it spent over 400,000 shekels for PR consulting to help the three salaried employees in its internal spokesman’s office. In the meantime, it cut two jobs for handling consumer complaints, even as it was forced to ignore thousands of consumer complaints a year on the grounds that it didn’t have the manpower.

Despite the council’s battery of lawyers, it rarely takes legal action such as petitioning the High Court of Justice or filing class action suits. And despite its swelling payroll, most of its work is outsourced via expensive contracts.

“It’s an organization that doesn’t develop its employees,” says a former staffer. “The idea is that the people inside aren’t good enough, so for important things they hire people from the outside.”

TheMarker asked for a copy of the council’s work plan a year ago, expecting to receive a thick, glossy report with goals, targets and budget estimates. Instead, the council sent a two-page list of terse sentences that looked more like text messages. Examples included “initiating and advancing consumer legislation” and “conducting research based on a consumer complaint database.”

During at least a third of Peleg’s term, the council operated without a board of directors. Last March, under public pressure, seven directors were appointed and immediately got down to work, confirming many of the shortcomings TheMarker found in its investigation. The new chairwoman is Oranit Raz, who headed the food manufacturers segment of the Manufacturers Association.

After six weeks of study, the board concluded that the council is plagued by “organizational chaos” and a “crisis of trust between employees.” The board meetings’ minutes describe what was happening behind the scenes. It’s a depressing picture of how the government’s consumer organization was run at a cost of 80 million shekels over the past decade without anyone ever intervening.

The board’s audit committee found that the council had no culture of documentation or prioritizing tasks. Also, plans were not focused, the division of responsibility between employees was unclear, and employees didn’t like cooperating. One told the board he had never seen such hatred as at the council.

When the board asked management why no documentation existed on budgetary matters or policy presentations at the Knesset, top managers said they didn’t have the time they “don’t deal with petty bookkeeping.”

Useless database

The council’s computer systems cost taxpayers up to half a million shekels a year and include its crown jewel: a database of some 40,000 consumer complaints a year. But it turns out staff members can’t exploit this information because they haven’t been trained on how to use it, says Raz, the new chairwoman

The council spends over 180,000 shekels a year on its call center, staffed via outsourcing. The council says the call-center workers answer some 60,000 calls a year, but they merely pass on phone numbers to the people who handle the complaints so they can get back to the callers. Maybe an answering machine could do the job just as well.

The council has found it difficult to lead public opinion and usually intervenes only after a problem has become a major issue. This is clear in the way the council represents the public in Knesset committees. Council officials are often present but don’t have anything to say.

One absurd case was when the Public Petitions Committee met on a mass malfunction of Pelephone’s cellular network in March. The council which had asked for the meeting didn’t present a single point on behalf of consumers.

“We came to the meeting, but the council didn’t have a position,” admitted Peleg at a board meeting. Raz answered: “I’m worried you don’t understand what your role is and the importance of the council’s representatives in the Knesset.”

The board feels that the council lacks influence. The public feels that the council finds it hard to attack organizations and businesses that harm consumers. Some employees blame the council’s legal adviser, Zeev Friedman, who has held his post for 11 years. Some employees say he is tired and weak, someone afraid of confrontations and the courts. Even when employees seek to express a strong opinion in the name of the council, they rarely receive Friedman’s permission.

Many employees hope that once Peleg leaves, other senior officials will follow, with new blood reviving the organization.

The biggest surprise came when the new board was asked to approve the council’s 2015 annual report. The council apparently took expenses from the “management and general” category and allocated them to operational expenses. In other words, management tried to hide its high costs. This to reduce the possibility that management will be asked to become more efficient, said a senior accountant and auditor who examined the annual report for TheMarker.

Management expenses are considered relatively easy to trim; for example, by renting less luxurious offices and spending less on phone plans, travel, outside advisers and advertising. Operating expenses are more difficult to cut; they’re supposed to represent an organization’s raison d’tre. When management costs are inflated, suspicions arise that the cost of running the organization is greater than its benefits and perhaps that the entity has no right to exist.

Understated overhead

One good metric comes from the Finance Ministry’s accountant general division, which says that for organizations with budgets up to 10 million shekels a year, 22% of revenues is the limit for management expenses. This drops to 18% for entities with budgets up to 25 million shekels. If a state-funded body doesn’t meet these criteria, the treasury forces it to make cuts in order to receive government funding.

Using its financial acrobatics, the council showed management expenses of 11% to 16% instead of the 21% to 31% that reflected reality. For example, the council’s new offices cover 490 square meters. Even though the council’s management has numerous private offices and conference rooms, it only books 1.5% of its rental payments, property tax and maintenance costs as applying to management. This is the equivalent of the entire executive staff sitting in a seven-square-meter corridor, the senior accountant and auditor said.

The Consumer Council, however, has defended its accounting methods and noted that its external auditors had approved its allocation of costs between management and operations. Also, the council said it was saving money by outsourcing, while a number of staff members serve in more than one role and this is reflected in its accounting.

In addition, the previous board had approved these methods. In 2015, the accounting method for management expenses was changed based on a decision by the new board, and against the external auditor’s recommendation, the council said.