Taking Stock / Cottage Cheese on Our Faces

"I woke up this morning feeling smeared with cottage cheese." (Muzi Wertheim - controlling shareholder of Mizrahi-Tefahot Bank and Channel 2 licensee broadcast company Keshet and of the Central Bottling Company, which controls Coca-Cola Israel, Israel Beer Breweries, Neviot mineral water, Prigat juices, Tara Dairy and the license to sell Muller dairy products in Israel - speaking to the press on June 16 ).

Muzi Wertheim.
Moti Milrod

Muzi Wertheim is one of the most powerful businessmen in Israel. He can deal with a few curds on his face. So can Ofra Strauss and Zehavit Cohen. Cottage cheese is bland and doesn't stain. As long as consumer outrage remains confined to cottage cheese, Wertheim has no real cause for alarm.

He can start worrying when the public debate reaches more serious issues, such as the "lethal trinity" - the unholy ties among manufacturers, (in his case, Coca-Cola Israel ), financial institutions (ditto, Mizrahi-Tefahot Bank ) and the media (Keshet ).

It's not Wertheim who is blind. It's all the Israelis - consumers, taxpayers, entrepreneurs, newlyweds, college graduates entering the workforce - everyone who wants equal opportunities, social solidarity and a competitive economy. The cottage cheese on all of our faces could blind us to Israel's real issues today.

For the past year, up until several weeks ago, three major Israeli newspapers had been staunchly against the creation of the government committee appointed to study economic concentration and competition. These were marginal issues, the papers said.

But in the past month there was a reversal; they began to bellow that Israel really does have a terrible problem of economic concentration.

cohen - Ofer Vaknin - July 12 2011
Ofer Vaknin

But don't get all excited. The opportunists will bide their time and grab the first chance they get to go back to explaining how this economic concentration thing is all nonsense, that it's natural for eight people to control a trillion shekels in public assets. They will go back to claiming that in small economies it's completely normal for a handful of business groups to control cartels and monopolies, financial institutions and media outlets too. They will try to direct the public rage at the weakest element in the economy, the politicians. With a handful of people controlling the newspapers and handing out the cushiest jobs, elected representatives are mere candles in the wind.

The truth is difficult to see through a veil of cottage cheese. Here's a short guide to recent events, glossary included.

Zehavit Cohen, Apax: The international private equity fund Apax Partners began operating in Israel 20 years ago. During the last decade it invested heavily in "start-up nation" - Israeli high-tech. But in high-tech, unlike other areas, life is hard. It's competitive. It relies on talent alone. The hundreds of millions that Apax sank into high-tech generated pitiful returns for the fund's partners and managers.

Six years ago Apax came to understood the Israeli game. "Start-up nation" is a cute slogan, but in Israel the real money is in cartels and monopolies. Apax joined forces with media mogul Haim Saban and bought the controlling interest in the Bezeq phone company. From the moment Apax got into Bezeq, Israel's regulators and cabinet ministers made sure to stymie any whiff of competition. Bezeq, Cellcom and Partner Communications became the most profitable businesses in the land.

steinitz - Haaretz - July 12 2011
Limping in the rear

Apax exited Bezeq after just four years with net inflation-adjusted annual returns of 33%, making Bezeq the fund's best investment, anywhere in the world, at the time.

This week the Organization of Economic Cooperation and Development OECD a report on Israel's telecommunications market, calling it one of the most backward in the world. It's no wonder. When competition is eliminated and company owners are allowed to help themselves to NIS 20 billion in dividends, there are no resources for the market to advance and develop.

Encouraged by its success with the Bezeq monopoly, Apax went on to the dairy monopoly. Before acquiring the controlling interest in Tnuva, the heads of Apax explained that they were very interested in developing Tnuva's business in Eastern Europe.

But Israel's reality bit quickly: Tnuva didn't really stand a chance of conquering Eastern Europe, or Europe. Concentrated, uncompetitive economies don't grow companies that can compete in world markets. The way to increase corporate value is by leveraging their monopolistic power, which means raising prices in captive markets.

Zehavit Cohen, Managing Partner of Apax Israel and Chairwoman of Tnuva Food Industries, didn't invent the wheel. She merely borrowed it, accepting the system in Israel, which is to use borrowed money to buy a monopoly and then jack up prices.

eini - Haaretz - July 12 2011

After building up her self-confidence with Tnuva she went on to buy the biggest controller of other people's money in Israel, Psagot Investment House.

She cannot repeat the exercise, though, because there is competition in the money management sector. She will build up terrific power, however. Will she use it to get Psagot to fight for its customers' rights, or to build up the clout of Apax?

That's what regulators are for ... But for now the regulator seems to be fast asleep.

Facebook: The Facebook rebellion against cottage cheese was the first time Israeli consumers organized and rose up against one of the great monopolies. For the first time, consumers realized they have power. But if the public thinks consumer boycotts will lower prices overall, improving their standard of living and increasing disposable income, they're in for a nasty disappointment.

Cottage cheese prices may be lower today, but tomorrow hard cheese will be more expensive and the day after that it will be the turn of Internet access, and next week all the retail chains will raise their prices.

The only cure is structural change that brings consumers real alternatives.

There is no substitute for market forces in forcing all players to treat the consumer as king. Adam Smith said it, 300 years ago: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

The owners of the cartels and monopolies rub cottage cheese in our faces and tell us about consumer power. They know consumers are weak, weary and confused. As long as consumers are obsessing over the price of cottage cheese, or gasoline, instead of exercising their power through Facebook, in the street, or at the polls to prod politicians into changing the system - the status quo is safe.

Yuval Steinitz: In recent months the finance minister has begun to grasp the structure of the Israeli economy. The penny dropped when he tried to turn the Sheshinski Committee recommendations on raising state royalties on the exploitation of natural resources into law. Then he found out who really runs the country.

But Steinitz is only beginning his journey of discovery. Some of his image and strategy consultants, who also work for the most powerful tycoons in the land, caution him against throw out the baby with the bathwater. They say he must tread carefully lest he do more harm than good, that he mustn't take on these people.

Smoke and mirrors

It's demagoguery, of course. There is no risk in eliminating economic concentration. It won't cause harm. There is no need to balance interests because there is only one interest: to create a more competitive economy, with higher productivity.

Steinitz should have the Finance Ministry professionals conduct a serious study of the performance of big business. He would find that these groups create the fewest jobs, make their profits solely from companies that face no competition and constantly widen the gap between the lowest and highest salaries.

Steinitz needs to tell the public that the concentration and competition committee was not created in order to lower the price of cottage cheese, but above all to strengthen Israel's business sector, encourage entrepreneurship and to give power and opportunities to companies and businesspeople who do not belong to concentration groups. That the committee is batting for business, for entrepreneurs and for consumers.

Ofer Eini: Last week TheMarker reported that while the general public has been howling against high pump prices for the past six months, the chairman of the Histadrut labor federation has been lobbying on behalf of the gasoline sellers. He's been trying to persuade the National Infrastructure Ministry not to reduce the markup on fuel.

Please don't be surprised. The stability of "the system," the concentration-riddled uncompetitive economy, relies on strong ties between the powerful trade unions and the tycoons. In recent years these entities have realized they have more in common than not, and that they need to join forces to preserve the status quo: Me with my private monopolies and you with your governmental ones.

Much has been said about the need for a "roundtable" of employers, government and workers. But the roundtable needs to address competition, competitiveness and productivity. It needs to study how to forge government policy that strengthens the weakest workers while also increasing productivity and the effectiveness of both the public and private sectors. That sort of roundtable is crucial for Israel to realize its growth potential.

But Israel's roundtable is one of cronies. Sitting around it are the tycoons that control the private monopolies and big financial firms; representatives of the powerful unions, that can paralyze the nation with a single word and also control thousands of party members; and government officials, who quake in fear of the tycoons and the unions.

Who isn't sitting around the roundtable? The disenfranchised: the million workers who are not connected to a state or private monopoly, who inherited no millions, who have no extraordinary talents, who have no idea that when they retire in 20 years they won't get a pension, who don't understand the matrix in which they live, who think there's somebody up the ladder taking care of them. The roundtable has no representatives from the people of Israel, who don't understand they are seeing reality dimly, through a layer of cottage cheese.