Israeli Finance Minister Surrenders to Gas and the Brass

The most important issue in the state budget arguably involves IDF pensions. The treasury was too quick to walk away from a potentially revolutionary reform.

Finance Minister Moshe Kahlon walks past a giant projection of the Israeli flag.
Marc Israel Sellem

While nonunion members of the public and the unconnected started the week as per usual, this is crunch time for a few large and powerful interest groups when it comes to getting their share of the state budget. The methods these groups employ are varied and include helping one another to get what they want.

They also, of course, have politicians to champion their cause in the corridors of power. While one legislative provision or another may have a marginal effect on the average citizen, these interest groups have a hard core of members who might be dramatically affected and are willing to wage all-out war over such details.

These clubs, as we might call them, have a coterie of advisers and lobbyists, something individual members of the public don’t. They have money, and frequently also receive support from wide sections of the media: this is sometimes direct, but usually comes in the form of not highlighting injustices to the public. The clubs know exactly what the significance of each law and regulation is, while members of the public are frequently either apathetic or confused in the face of a flood of legislation. This week, two of the clubs may score the winning points and get what they have long been aiming for.

The debate on the state budget, and defense budget in particular, have reached the “money-time” stage when funds are actually divvied up. The treasury and Defense Ministry agreed on the adoption of small portions of the recommendations of the Locker Committee on future military spending. But when it comes to the most important provision – dealing with the structure of pensions that the army provides to career soldiers – Finance Minister Moshe Kahlon simply caved when agreeing to a 60.5 billion shekel ($15.6 billion) budget for 2016.

For those who don’t remember, Maj. Gen. (res.) Locker suggested a revolutionary change with regard to the entire pension structure at the Israel Defense Forces, proposing a halt to the payment of “bridge pensions” to career soldiers from the time they leave the army until they reach official retirement age. Instead, they would receive a one-time bonus. Locker wanted the army to switch its thinking and no longer have thousands of officers doing little while waiting to retire in their early 40s with a pension that ensures they never have to work again (although they are, of course, entitled to work in the private sector and draw a salary on top of their pension).

Locker proposed retirement from the army by age 35 with a substantial, one-time payoff – and that’s all, other than for a small group of senior combat officers from select units who would continue to enjoy the current benefits. The Locker Committee saw this as a way of creating a younger army without a retiree culture and shifting money to where it is really needed – for training and equipment.

But as expected, Defense Minister Moshe Ya’alon and IDF Chief of Staff Lt. Gen. Gadi Eisenkot didn’t want to hear it, and Kahlon gave in without a fight on perhaps the most important provision when it comes to a future army culture. After caving to the energy companies on offshore natural gas policy, here is another battle Kahlon retreated from so as not to make problems for the governing coalition.

After earlier describing the Locker Committee report as an assault on the army, the defense establishment did accept some of the recommendations in the resultant report. But for them to be effective, they require civilian oversight of actual defense spending, policy decisions, and wage and pension payments.

The army has already “discovered” that it has thousands of officers it doesn’t know how it accumulated. But every time there is a budget problem, the army goes to the prime minster and, one way or another, gets its money. Kahlon seems most interested in getting the budget passed, even if that means missing a historic opportunity to change the structure of IDF pensions, and in the process the entire culture of the defense establishment.

And what about other things like transparency in budget management? It has little significance if the overseer has no authority to approve or disapprove the transfer of funds. Too often, the defense “club” has continued to act in accordance with its own personal interests, and to hell with the fact that it’s the public’s money. It’s not clear this time will be any different.

Gas prices are collapsing

Most commentators and those involved with the market for natural gas say that, despite recent protest rallies in Israel, the government’s natural gas policy framework is about to be approved. Shas leader Arye Dery resigned as economy minister, a post assumed by the prime minister. Netanyahu didn’t hesitate to sign the necessary documents to get around antitrust concerns over the monopoly power it gives the companies – Noble Energy and Delek Group – that are developing the country’s major offshore gas fields. In the process, the policy direction for the natural gas and oil industry will be set for the next two decades.

Off Haifa coast, oil rig at enormous Leviathan natural gas field.
Albatross

All Netanyahu has left to clear now is a toothless round of “consultation” with the Knesset Economic Affairs Committee and a hearing before the High Court of Justice to clarify whether he, as economy minister, can make decisions of such long-term impact while also serving as prime minister, foreign minister, regional cooperation minister and communications minister.

But that shouldn’t prevent members of the public from taking to the streets to protest the gas plan – and that’s because it is not a good deal for them. All one has to do is look at what’s happened to natural gas prices in recent weeks, contrary to almost all the previous statements on the issue by Netanyahu and National Infrastructure, Energy and Water Minister Yuval Steinitz.

It turns out global gas prices have recently fallen to a record low. In Europe, where there is a shortage of gas and it is piped in at great distance from Russia or transported in liquefied form, the price for delivery in 2019 has already fallen below $5 per British Thermal Unit (BTU). In Japan and other Asian markets, where gas is transported by ship, it has sunk to $7.60 per BTU. And these prices include the significant cost of liquefication and shipping to Europe and Asia. So at the site of actual production, the prevailing price is more like $2.50 to $3.

These prices make mincemeat of the main message through which the government’s gas plan has been marketed to the public over the past 18 months. Remember how Netanyahu said the government proceeds from natural gas would amount to hundreds of billions of dollars for education, health and welfare? It’s not going to happen, because the calculations were based on prices from mid-2014 and global gas prices have since plummeted.

And how much does gas in Israel cost? The country’s main gas customer, the Israel Electric Corporation, is paying almost $6 per BTU on long-term contracts, linked to the U.S. inflation index, which is expected to push the price up toward $7 in coming years. Does it make sense for Israel, which is now sitting on huge natural gas reserves, to be paying the same price for gas as countries that have none?

On new contracts (only), the government’s gas framework does provide linkage with the export price for gas. But still, the dream of hundreds of billions in government gas revenues will have to be put on hold unless there is an unexpected spike in prices in the near future (something that no international industry analyst is predicting).

It’s more likely that government gas revenues won’t be a significant source of revenue. And the revenues will only start flowing in another six to eight years (in a best-case scenario), after the gas exploration companies recoup their investments.

The problems with the government’s proposed gas plan are numerous. The framework relies on a private monopoly that lacks government oversight for an extended period of time, and a “stability” clause that, amazingly, undermines the country’s capacity to adapt policy to future economic conditions. It doesn’t provide for the laying of additional gas pipelines to the shore, leaving the country precariously dependent on existing infrastructure. It provides no incentives for the use of natural gas and places the country’s reputation into question for allowing such a monopolistic setup.

Many of those sitting on the fence were persuaded by the argument that the details of the framework were unimportant because of the huge monetary windfall the government would be getting anyway. But since then, gas prices have fallen and a huge offshore gas reserve has been discovered in Egyptian waters. Since these prior arguments don’t hold water, why adopt a gas policy that even the prime minister and energy minister admit is “not perfect”?