Workers Score a Privatization Victory

Far from a major achievement for the government, last week’s agreement paving the way to sell state-owned Israel Military Industries is a costly sell-out

Ofer Vaknin

With hardly anyone noticing, a historic agreement privatizing Israel Military Industries was signed last week.

After more than 15 years of continuous red ink, the government has now succeeded in ridding itself of an enormous financial burden, with 1,200 employees being put on early retirement and most of the company sold off to private investors. Just one unit, doing highly classified work, will remain in the Defense Ministry.

But in its desperate effort to put an end to the long-running saga of IMI, the government has made a series of costly mistakes that have already saddled taxpayers with billions of shekels of costs. And that’s just the beginning, because of the worrying precedents established in privatizing the arms maker. The direct cost of privatizing IMI is likely to be as high as 5 billion shekels ($1.44 billion), a figure that reaches 8 billion shekels if you count the commitments the Defense Ministry made to buy IMI products in the future.

That’s a pretty steep price tag for a company that is a business failure in almost every respect and had been effectively bankrupt for several years. If it hadn’t been owned by the government, it would have been closed a long time ago.

There was a time when officials would threaten to close a failing government company – it happened with El Al Airlines in the 1980s – but that time has long since passed. Instead, IMI has created a precedent in which a failed company isn’t shuttered, but showered with billions of shekels of new investment.

It’s a rescue plan, not for the company but for its unionized employees. It means there is no price to pay when the management of state-owned companies fails.

IMI’s failures are huge, but in money terms they are small compared with those of Israel Electric Corporation, which has tens of billions of shekels in debt – and like IMI is negotiating over the terms of a reform and restructuring. There is an excellent chance that the precedents the government has set with IMI will come back to haunt it with IEC. Except that in IEC’s case the costs could reach 12 billion shekels in payoffs to the workers, without them even agreeing to give up the monopoly they enjoy.

The victors in the struggle over IMI are the employees and the Histadrut labor federation.

If they had been employed in the private sector they would have found themselves at their advanced age without work, without any career prospects and with no prospect of supporting themselves to pension age. In the private sector people like these have to dig into their savings at the expense of a comfortable retirement.

That doesn’t happen to those who toil in the public sector. In contrast to their colleagues in the private sector, IMI employees who find themselves without a job need not worry about their retirement savings because the government has committed to funding them until they reach pension age.

In fact, it’s not an ordinary pension: It isn’t based on their average salary or their career history at IMI, but on their final and inevitably highest monthly salary before they left the company. As a result, each and every IMI employee is receiving a pension package equal to 900,000 shekels as well as other benefits that bring the total cost up to between 1.2 million and 1.3 million shekels.

The especially dangerous precedent established at IMI is breaking the rule that says a defined contribution pension plan is nothing else.

It’s bad enough that the government is charting new territory at IMI in pension giveaways, but it is doing so at a company with a long record of failure that left the state picking up 3 billion shekels of losses over the years.

The answer, of course, is that they are represented by the Histadrut labor federation and employed a spineless management. Far from being a great achievement, as the treasury is portraying the move, the IMI privatization is simply a function of deep and open pockets, and a massive policy and management failure by the State of Israel.

The failure, if course, is the government’s and the company’s. The deep pockets that are being raided are yours and mine.