Oops ($7.5 Billion Down the Drain)

What would you think of a manager who - two years after he presented you with a detailed, thought-through costs program - ups and announces that actually, costs ran 40% higher?

You probably wouldn't be sending him roses or applauding his talents. You'd probably politely show him the door.

But that's just what happened to you. You, as shareholders living in Israel, recently got slammed with just that sort of "Oops, we made a mistake, costs were 40% higher than we thought". Not just the price of popcorn, but NIS 18.5 billion worth of costs that accidentally mushroomed to NIS 26 million.

Oops, oh well, that's $7.5 billion down the drain, which could have easily relieved all the old people in Israel of their penury, or financed three reforms in education.

How did that happen to you? Easily. You didn't even notice. The only notice of the error was a Finance Ministry press release dated March 14, called, "The budget for the development of the rail transport system has been updated".

The sub-title of the press release quotes treasury budget director Kobi Haber warning the Israel Railways management: "The Finance Ministry will not tolerate breaches of the budget. Any excess will lead to instantaneous suspension of the project."

That is what Haber had to say when forced to agree to increase the Railways' investment budget to NIS 26 billion. Scary stuff.

How did Israel Railways overspend its budget by NIS 7.5 billion? Good question. Ofer Linchevsky, the trains' new manager, says it's actually just NIS 2.5 billion. The rest, NIS 5 billion are costs on new projects that the Railways had not planned for in advance, even though it filed its investment plan just three years ago.

Oops, there went Holon's water supply

Okay, what about that NIS 2.5 billion? Formally, Linchevsky simply says, "Not planned for". Unexpected. For instance, if when laying the rail one finds a burial site, or hits the water pipes of the city of Holon and then one has to rebuild the entire water system, that sort of thing.

Informally, Linchevsky knows that his answer is untenable. NIS 2.5 billion are a deviation of just 13% but when it's enormously more than the government is spending on raising the minimum wage, eyebrows rise.

Linchevsky knows it. He won't say so, but that's why he was appointed eight months back: to clean out the stables.

The last manager, Yossi Mor, was shown the door ("quit") and in the eight months that Linchevsky has been there, half the management has been replaced. Naturally, don't leap to conclusions; nobody was fired; but seven top managers are gone.

Instead of the severed seven, external controls have been put in place: a company whose job is to supervise the Railways' loans and approves their execution. The company gets to vet the Railways budget together with the Finance Ministry, and combs through it at the level of the individual project. It and the Finance Ministry receive monthly reports from the Railways, on milestones and so on.

With that extra NIS 7.5 billion, Israel Railways lost its independence, which is a small price to pay for the tremendous damage it has done.

But what happened? The system had been inadequate to the task, Linchevsky admits: all the projects had been budgeted in one great soup, without any monitoring or controls. He promises that it can't happen any more: each project gets its own special budget and then there's that external overseer. No more "not planned for", no more deviations. Or at least, when deviations happen, they will be transparent. In terms of the management of public money in the State of Israel, this is what they call a revolution.