The Minister Who Saw Through the Emperor's Old Clothes

Environmental Protection Minister Avi Gabbay has revealed that the prime minister and energy minister have been lying for a year about a vital gas deal, so how did he get away with it?

Environmental Protection Minister Avi Gabbay speaking at the energy conference in Tel Aviv, April 2016.
Knesset Speaker

Prime Minister Benjamin Netanyahu has yet to dismiss Environmental Protection Minister Avi Gabbay. Why should he? What could Gabbay have possibly done? Oh, nothing – only that he spoke at an energy conference in Tel Aviv last month and announced that the Israeli government, of which he is part, has been systematically lying to the public for months.

Just like that. If we believe Gabbay, government representatives – from the premier and energy minister to every last bureaucrat in the Finance Ministry and Bank of Israel – have been lying to us for a year and the media has obediently reported every last thing without checking the facts. The emperor is naked, but not a man jack among the politicians and regulators in the energy sector has so much as blinked.

Really, a transcript of what Gabbay said should go into his personal file to show his subversive credentials.

“I also want to discuss the hundreds of billions [of shekels] we hear about,” Gabbay said. “Hundreds of billions, a welfare fund and all those pretty words. Well, I know some economics. I’m pretty good at numbers and I tell you, anybody trying to calculate this thing and enter numbers like hundreds of billions will crash his Excel spreadsheet. There’s no such thing. It simply can’t happen. There is no movie in which these numbers could even approach the right ones.”

Let us explain. For a year, the Israeli government has been shoving down our throats an unprecedented agreement that it struck with the private gas monopoly belonging to tycoon Yitzhak Tshuva and Texas firm Noble Energy. The upshot is that the monopoly will be supplying us with natural gas at double or triple the price that could have been achieved through genuine negotiations. Back to Gabbay.

He read the report for 2015 and saw that “the 700 million shekels [$185 million] that the government takes with one hand costs us about 2 billion shekels [a year] in surplus payments to the Israel Electric Corporation.”

At this point, Gabbay was heckled by Delek Drilling CEO Yossi Abu, who claimed that Gabbay was ignoring corporate tax. Gabbay answered that every company in Israel pays corporate tax, not only the gas companies, adding, “You haven’t been exempted from that yet.

“Ultimately,” he continued, “that 700 million shekels costs us 2 billion shekels. Do you get that! And that’s before exogenous expenses that cost us another 5 billion shekels a year it’s a ratio of 1 to 10. Seven billion shekels against 700 million shekels. And this is the thing we can’t fix. You understand that these 2 billion shekels assume the price drops to $3 [per BTU], which could lower Israeli household bills by 1,000 shekels a month.”

How it came to pass

The High Court of Justice has, meanwhile, struck down the bit in the agreement exempting the monopoly from regulation over 10 years (which was tantamount to Israel’s sovereignty not applying to the monopoly for that time). But the rest of the agreement remains: expensive gas, monopolistic gains that are unprecedented even by international standards, an imprimatur to have the lion’s share of Israel’s gas exported, which would serve the short-term financial interests of the monopoly at the expense of the security of the Israeli citizen.

Tamar
Albatross Aerial Perspective

How could a thing like this come to pass? Isn’t Israel a democracy? Aren’t the regulators independent? Don’t the guys at the Finance Ministry have spines? What about the state comptroller, opposition, academics, experts, environmental advocates?

They do exist, but Netanyahu and the gas companies used the three oldest tricks in the political world to overcome all the democratic institutions, confuse the public and pass laws that benefit an interest group at everyone else’s expense.

1. The simplest gambit – divide and conquer. A year ago, for his own reasons, Netanyahu decided to reach an agreement with the Tshuva-Noble monopoly, knowing that the Israeli public might balk. Netanyahu remembers 2011’s cost of living protests, when a lot of right-wing supporters were among the hundreds of thousands who took to the streets. This time, he made sure to turn the gas plan into a partisan issue: Its supporters are Zionist patriots; its opponents are leftie Israel haters.

Which is patently absurd. For over 10 years, Netanyahu has been telling us that private monopolies are a left-wing artifact and he will shatter them like glass. Netanyahu is the one under whom reforms were instituted to dismantle monopolies in the mobile communications sector, banks, etc.

But Netanyahu knew he could count on the lefties. He knew the only ones who would fight the gas plan would be opposition politicians. He also knew that the moment they attacked the monopolies, he’d win the battle. As soon as Shelly Yacimovich assailed the gas plan, many would see that as proof that the issue wasn’t professional but partisan.

Add the justifiable claim that left-wing politicians usually don’t twitch when the public gets robbed by public monopolies (like the IEC, for instance), and it becomes only natural that the whole story is being cast as left/right just as much as the occupation is, or separation of religion and state.

Looking at cases where the government has managed to force dramatic reforms against interest groups, they were almost always when the interest groups and politicians failed to brand it as partisan. Recent examples include the cellular reform and the bill to impose pay caps at the banks.

2. Make nice, nicer, nicest: Another way the interest groups – here, the gas companies – can bypass the democratic institutions is to make sure that most of the relevant experts, regulators, academics and journalists are economically and/or socially motivated not to criticize the monopoly. Ads and campaigns touting the importance of the gas create the conceptual environment in which regulators fear the power and knowledge of the monopoly, and gradually capitulate to it, without losing their public legitimacy.

What people see is TV ads about how important the gas is, which creates the perceptual environment in which regulators, afraid of the monopoly’s power, can gradually succumb to its demands without losing their public legitimacy.

3. Then there’s the method of sowing doubt and creating discord, which works wonders with the press – just look at coverage of global warming.

For years, Prof. Jesse Shapiro of Brown University has been studying the relation between interest groups and the press, and the economic and sociological processes that create media bias. The fact that the press has a political bias is not new. Most readers opt for media channels (and sources of information) that reflect their own opinions. So the business and editorial model of the press is to pander to readers’ prejudices.

As both left and right succumbed in recent decades to various interest groups, the real action isn’t to be found in the left or right bias, but in the bias toward power and money. Note the cases of big tobacco and the polluters in this context.

The common denominator behind cigarettes and global warming is the eons it takes from the moment clear scientific evidence starts to accrue and the moment politicians and regulators start to take action. The press may share the blame for that. Shapira and others have shown how tobacco companies and polluters acted to thwart regulation that would protect health/the environment. One of their tools was to openly (and covertly) employ experts whose job was to sow doubt, to indicate that tobacco and global warming remained controversial, when that was not the case any more.

But back to Gabbay. The environmental protection minister, who attended all the cabinet meetings on the gas plan and had access to all the government’s information on the subject, repeated what we have written here in recent months: The “hundreds of billions of shekels” in revenues for the state that the prime minister, energy minister and gas companies keep talking about are pie in the sky.

A public committee determined that the government’s share in royalties grew in recent years. The 700 million shekels Gabbay mentioned will increase in the years to come. But even after they double or grow tenfold someday, they’ll amount to less than 1% of Israel’s GDP.

That forecast, which is dramatically lower than the numbers the public hears every week, relies on IEC paying a high price for the natural gas and the export of much of it, instead of lowering the price of gas for local industry and limiting exports for the sake of Israel’s energy security.

The “hundreds of billions of shekels” campaign is the lubricant with which the gas plan is being shoved down the public’s throat. Royalties of hundreds of billions of shekels are the ostensible basis for the campaign to get the gas out of the ground. The public thinks the purpose of the gas plan is to get the gas out of the ground, bringing the state hundreds of billions of shekels in royalties – figures that the environment minister says are ludicrous.

The strategy chosen today by most Israeli newspapers is to quote the prime minister, energy minister and gas companies, and, occasionally, the handful of opponents to the plan. What they should be doing is demanding that the government present the Excel spreadsheets Gabbay talked about, and their underlying assumptions – exactly how those hundreds of billions of shekels were calculated. If the government refuses, they should find specialists that are not affiliated with a monopoly or afraid of it, and try to help calculate the real numbers.

The present conduct of the media serves the gas companies. In the guise of neutrality or objectivity, news networks and most newspapers repeat week after week the message of hundreds of billions, sovereign wealth fund and masses of tax revenue – no matter how far-fetched these things are.

The gas companies, the politicians cooperating with them and the regulators who fear them see that the system works. Just like with cigarettes and climate, the “neutral” debate distorts public opinion in favor of the interest groups, allowing the politicians to avoid confrontation.

They should be stopping the politicians and companies from repeating the empty slogan of “hundreds of billions” by instantly demanding the spreadsheets. Proof. That’s what reporters seeking truth, not objectivity, would do.

Sometimes, public opinion can be swayed by ideas coming from the margins, and then journalists are free to stop quoting from press releases of interest groups. Science and economic analysis become “safer.”

An example of an area where we have passed the point of no return, and pseudo-neutrality is over, is whether the current structure of the banking system is competitive, efficient or near optimal. For years, nobody asked; even the Bank of Israel presented both sides of the discussion and, worse, took the banks’ side, arguing stability. After the financial crisis, the social protest and a public campaign, the banks’ position began to lose its legitimacy. Today, the media isn’t afraid to ask bankers if they don’t think concentration should be reduced and the system made more efficient.

We should stay optimistic about the gas, too. The vast gap between the “hundreds of billions of shekels” and the actual royalties will bubble up again and again.

Ultimately, the defects, price and damage of the high price of gas, a monopoly and weak regulation will be clear to all, and the public pressure will mount. We can only hope that, en route, the institutions of democracy, such as the media, are not damaged beyond repair, leading the public to cynicism, despair and apathy. When the TV show “Big Brother” draws higher ratings than the actions of the real Big Brother, we’re in real danger.