The Many-headed Milking Machine

Economic concentration isn't a monster with a single face, it is a hydra. Before tackling it, its different aspects need to be recognized.

Yitzhak Tshuva means to appoint Moshe Amit to chair his insurance company, Phoenix Assurance. Amit, formerly the head of the corporate banking division at Bank Hapoalim, is a highly esteemed banker who has been serving for years as a director on various boards; he also chairs Delek Israel, another of the many companies controlled by Tshuva, one of Israel's biggest businessmen. Amit would be a good man for the Phoenix position.

Phoenix's outgoing chairman, Ehud Shapira, was also a good man for the job. He headed Bank Leumi's corporate division for many years. Good people deserve good jobs.

Are they just good people whom Tshuva happened to identify? Or is there more to this story - something in their record that helped them win the plum job?

Maybe there is: As bankers, both were involved in loans to Tshuva with which he built his business empire. Amit financed Tshuva's takeover of Delek Group in the late 1990s, while Shapira helped fund many other deals.

Israel's tiny economy teems with stories like these. The big companies cultivate relationships with bankers, politicians and regulators. Today a regulator may supervise; tomorrow he'll be an employee. Today a banker may lend; tomorrow he'll get a great job.

That is one aspect of what is called "economic concentration." There are other aspects, some much more egregious.

Economic concentration means that too few people control too many resources. That major decisions that affect the consumer are made by too few people. That there are untouchables: businessmen who have become too strong. That decisions are based on relationships, not merit. That competition is weak and the consumer pays too much.

The alternative to concentration is a free, competitive economy in which consumers have choices, the government and regulators operate free of fear, the banks do not depend on the fate of certain businessmen and resources are routed to where they can do the most good for the economy.

Prime Minister Benjamin Netanyahu said he meant to do something about the domination of Israel's economy by the few. And it is true that things used to be worse. Until the late 1980s, just 20 years ago, the Israeli economy was far more insular. Imports were discouraged. The movement of capital wasn't free. The government controlled the capital markets and directed lending and the two big banks, Hapoalim and Leumi, ruled the business sector.

Much has changed. Reforms opened the economy to imports and greatly reduced the government's involvement in financial markets. The banks were forced to sell their nonfinancial holdings and later, their holdings in provident and mutual funds.

Meanwhile, technology developed, notably in telecommunications. Until the early 1990s, Israel had only one television channel and one phone company (Bezeq ), and the Internet was unknown. It also had no fuel resources, whereas now, vast fields of gas have been found offshore (which begs the question: who benefits from them? ).

But some things haven't changed. The greatest concentration of power remains at the Israel Electric Corporation, which reigns supreme, free of competition, buying most of Israel's gas and controlling the power supply.

Reforms and regulation provided superb opportunities for people with a business bent. Some took these opportunities and built business empires, becoming rich and powerful in the process. Perhaps too powerful, though.

It is time to study the relationships between these business empires and the policy-makers, between the biggest businessmen and the bankers (and insurance companies ), and between the businessmen and the media - as well as the price everybody else pays for their power, from small businesses, which are key to economic growth, to Israeli democracy itself.

Democracy? Yes. While the structure of the economy changed, so did the structure of government. Until the 1980s, Israel was under the sway of two parties, Labor and Likud, with the National Religious Party serving as periodic kingmaker. Since then, the power of fringe parties such as Yisrael Beiteinu and Shas has grown.

Moreover, Knesset members used to be chosen by committees. Today, it's by personal election, for which they need funding.

There are upsides to these developments, such as primaries and better representation of certain sectors. But there are downsides, such as the dependence on rich people to provide funding.

Ultimately, these changes have impaired governance in Israel. Once, governments were built on a single strong party. Today, governments are coalitions of four or five parties. Other forces roared into the power vacuum, such as tycoons, powerful trade unions, even the Finance Ministry's budget department. Each has increased its power year by year.

Other changes include the widening gap between rich and poor. From a socialist nation ruled by the Histadrut labor federation, Israel has become a model of capitalism topped by a thin layer of very rich, powerful people with much to offer regulators and politicians, from direct contributions to cushy jobs. Their power is greater than ever before. Theirs are one of the many faces of economic concentration.

One of many - because any attempt to tighten the definition of economic concentration to a single aspect misses the big picture. It is an hydra, with multiple heads, each of which needs attention. Perhaps not all the many facets can be handled simultaneously. But mapping them out is crucial to understanding the dangers.

1. Concentration by sector

This is the most straightforward aspect of economic concentration: Certain sectors, such as banking, cellular communications and insurance, have very few players, and hence very little competition. The consumer has difficulty switching providers because of the barriers the players erect. Prices for service are sky-high and choices are limited.

In banks and insurance, there are fewer players than ever before. In the early 1990s, Israel had 25 banks and 25 insurance companies. They have since consolidated to form seven banks and 10 insurance companies today. In banking and insurance, the big players control 50% to 65% of the market.

In the cellular industry, the advent of new players used to spark competition. Cellcom's entry lowered prices at Pelephone, and Partner's arrival forced Cellcom and Pelephone to upgrade their infrastructure. But for years now, nobody new has arrived to propel these three to compete.

All these fields are subject to regulators. But the regulator's mission isn't to ensure competition, it's to protect stability. The supervisors of the banks and insurance companies seek primarily to make sure these institutions remain strong and that none collapse.

In a sense, economic concentration serves the regulators beautifully. But the price of the regulators' peace of mind is borne by the public, through service fees at the banks, management fees for pension savings and cellular phone bills. The public pays the bills subserviently, not realizing that if the concentration were diluted, they would pay a lot less.

There is an argument among the regulators over who is responsible for competition. The Antitrust Authority wants additional powers to help it promote competition, but the supervisors over the banks, the insurers and the communications companies are reluctant to relinquish any power. This dilemma is one that must be addressed in the debate over economic concentration.

Solutions exist, such as letting in new players, tearing down the barriers that stop people from switching service providers, lowering fees, creating low-cost service options and more. All that's needed is action.

2. The shared table

The big business concerns are naturally at the heart of the problem. These are companies with holdings in a vast array of industries, including the finance sector. But another issue is also worthy of notice: not only relations within the groups, but the mutual relations among the big groups.

The economy's major powers often find themselves supping at the same table - or in plain English, sharing a common interest. Bank Leumi is the Ofer family's partner in Israel Corporation. Previously, Leumi was Zadik Bino's partner in Paz Oil, until it sold its holdings. Yitzhak Tshuva and Nochi Dankner are partners in a gigantic (and ill-fated ) property investment in Las Vegas. Shari Arison and Lev Leviev are partners in Derech Eretz, the company that operates Route 6.

How do shared interests affect decisions at each group? Big groups have big power. Their entry into a sector can change the balance of power - though that doesn't happen much, as it is in the big groups' interest to preserve the existing order of things, not to encroach on each other's territory.

That alone, dear reader, depresses competition. It is true that we wouldn't necessarily want competition to come from the biggest players anyway, because they already have too much power. But there are solutions, such as imposing financial restrictions on groups that collaborate. Among other benefits, that would protect them, and the economy as a whole, from the domino effect.

3. Cross-holdings of finance and industrial concerns

Prices, service quality and barriers to switching are painfully obvious to the eye. That isn't the case for financing. The potential dangers lurking in the relations between big business and the banks and insurers that finance them are fearsome.

Fifteen years ago, one facet of this problem was recognized, and a public commission headed by David Brodet was formed to address it. The commission ruled that the banks had to sell their holdings in nonfinancial companies such as Koor Industries, Clal Industries, Africa Israel and Migdal. That decision lies behind the rise of today's tycoons - Nochi Dankner, Yitzhak Tshuva, Lev Leviev and others.

The Brodet Commission highlighted the problem of a bank both owning a giant concern and financing it. For one, the bank's decisions could be based on shoring up the concern for the bank's sake, even when such financial support made no sense. The upshot is "inefficient resource allocation": Instead of money going to places that could support economic growth, it went to support the bank's own companies. That also poses risks for the bank, if the company being supported is economically unviable.

But banning the banks from owning real companies was just half the job. The commission neglected to address the opposite situation, of a real concern owning a bank.

Today, all Israeli banks except Leumi are owned by business concerns. Shari Arison owns Hapoalim, along with Housing & Construction. The Ofers control Mizrahi-Tefahot, plus Israel Corporation. Mozi Wertheim is the Ofers' partner in controlling Mizrahi-Tefahot, and also owns the Central Bottling Company (popularly if inaccurately known as Coca Cola Israel ). Nochi Dankner owns the IDB group, and also Clal Insurance. Yitzhak Tshuva owns the Phoenix insurance company, the brokerage Excellence and the sprawling Delek Group.

These people wield tremendous power. They have access to information about their rivals that can affect their businesses. Their entwined mutual relations exacerbate the inefficient allocation of resources. Money goes where these people find it convenient to go.

The Brodet Commission's job needs to be completed. Big business concerns must be barred from owning big finance institutions. They must choose one or the other: big business or finance.

4. Employment service for senior officials

You can find them in all the large corporations: former politicians, ex-Finance Ministry and Bank of Israel employees, retired bankers, former regulators and retired police officers. Yesterday they supervised the business sector; today they work in it.

This may be the most complex aspect of concentration: Israel's public servants know their employment future lies precisely in the places they are supervising.

Does it affect their decisions? How do we cause them to ignore extraneous considerations such as future employment?

Ostensibly, there is a mandatory cooling-off period of a year or two for public officials who switch to the private sector, to prevent them from working in companies they formerly supervised. But that may not solve the problem. Since the big businessmen have shared interests, they can easily find a job for a regulator until the end of the cooling-off period. And extending the cooling-off period is no solution; that would deter good people from public service.

Are there any exceptions? One of the most courageous people in the Israeli economy is Bank of Israel Governor Stanley Fischer. He knows how to make unpopular decisions regarding the business sector. But he is also very different from the other regulators, since he has no real vested interest in Israel's economy. He arrived here as an older man and he plans to return to the United States; he isn't awaiting an offer from business tycoons like Yitzhak Tshuva, Nochi Dankner or Sami Ofer.

Thus the solution may be adding a new criterion for appointments to certain key positions: The candidates must be people who really are not dependent on anyone and won't be in the future.

5. Economic distortions

An Israeli antitrust expert once said, "In Israel, either you're a monopoly, or you're in a cartel, or you're part of an oligopoly." Having said that, he went to work for one of the oligopolies.

It is painfully true. And the price, for new entrepreneurs and consumers alike, is heavy.

Take, for example, the Israel Electric Corporation. The company is inefficient and pays its people far too much. It is a monopoly with no competitors and exerts total control over Israel's electricity supply. Yet it is in difficult financial straits, and the solutions to its problems are not clear.

If the company were operating in competitive market conditions, streamlining would be its first step (which doesn't necessarily mean layoffs ). But the IEC has no competitors, and it has become accustomed over the years to the fact that the government, which owns it, will always extricate it from its financial problems.

So what is the company doing to deal with its situation? It is seeking permission to hike its rates by 18%.

We can guess what a price increase like that would do to small businesses. It could kill at least some of them.

If it were only a matter of electricity, it would be no big deal. There are businesses that can afford it. But the pattern by which the IEC operates is common to many other companies as well. The banks will always prefer to raise fees instead of streamlining, the insurance companies collect high premiums from small businesses, and the same is true for various raw materials controlled by monopolies, such as cement, industrial gases and so on.

When this is how the large monopolistic bodies operate, the economy does not use its resources efficiently. It atrophies, develops flab in undesirable places and prevents resources, including financing and manpower, from being transferred to places where their contribution to the economy could be much greater.

Small and medium-sized businesses have difficulty flourishing when the large service providers and raw material producers are controlled by a small number of players who have no interest in disrupting the present order.

Again, solutions do exist. They include reforming all noncompetitive markets, opening industries to competition, providing incentives to companies to streamline and improve service to the public, creating competitive alternatives in every industry and barring price increases for basic services such as electricity unless the provider becomes more efficient.

6. Concentrated media

Having said that economic concentration is a threat to democracy, the role of the media bears scrutiny. Israel's media scene is fairly concentrated, though the problem is somewhat alleviated by the Internet.

Israel has four widely circulated newspapers, two commercial television channels and several regional radio stations. The main problem isn't their numbers, but their degree of freedom - or in other words, how their content is influenced by big business and politicians.

"The more concentrated the media market is, the graver the danger of biased intervention by businessmen who own media outlets," warned a Knesset research department paper on concentration in the media. And concentration is the appropriate term in this case, as a few businessmen own multiple media outlets.

"The existence of multiple, various media outlets is not enough to ensure conceptual pluralism and freedom of the press," the report continued. "If all the media outlets are owned by the same people, they can steer the content of those outlets."

Yedioth Ahronoth ruled the printed press for years, but now finds itself contending with a new kind of threat - a free newspaper, Israel Hayom, printed by gambling magnate Sheldon Adelson. Its advent led two old rivals, Yedioth (Noni Mozes ) and Maariv (Ofer Nimrodi ), to ally against it, mainly by trying to promote legislation that would limit the distribution of free papers.

Mozes has a partner in Yedioth: Eliezer Fishman, who also owns the business paper Globes. Adelson, for his part, has commercial relations with Haaretz, which prints Israel Hayom for him, even though Haaretz and Israel Hayom are at opposite ends of the political spectrum: Adelson ardently supports Netanyahu and the right, while Haaretz is associated with the left and a fight against the occupation.

7. Control of ad budgets

This is an important result of concentration in the media. Newspapers and commercial TV channels have two sources of income: users and advertising. The latter generally provides at least 50% of the media outlets' revenues.

Most advertisers are large industries: cell phone companies, banks, investment companies and car importers. And large advertisers have significant leverage for pressuring media outlets: They can protest "bad press" by withholding ads, which badly hurts the income of the newspaper or channel.

Do solutions exist? Banning ads is an aggressive tactic, but in the name of freedom of expression, media outlets should not be prevented from using it. Additionally, the economy's major advertisers should be mapped, and steps should be taken to prevent overly large players from emerging in the advertising market. For example, it could be decided that if a business group owns more than a certain percentage of the advertising market, it will not be able to acquire another company that advertises extensively.

8. Concentration in employment

Israel's biggest conglomerates are big employers - but that doesn't necessarily mean they create jobs. If that sounds contradictory, it isn't. They were mostly formed through acquisition upon acquisition, not by creating companies from scratch. Israel Corporation bought Israel Chemicals, Nochi Dankner bought IDB, Ted Arison bought Bank Hapoalim and Yitzhak Tshuva bought Delek. They didn't found them.

Jobs in Israel are created by small and medium-sized companies, and by new markets opened up through reforms and technological progress. The Bachar reform changed the capital market, insurance was changed by the advent of direct insurance, and so on.

But the sheer numbers the big concerns employ gives them additional leverage over policy-makers. ICL, for instance, is presently howling that if the government scales back its tax benefits, it will be forced to lay people off - and it recruited local governments in southern Israel to argue its case. When the Finance Ministry wanted to force multichannel television operators to provide low-cost, pared-down packages, HOT threatened that hundreds of jobs were at stake.

Politicians quail at the thought of workers burning tires in the streets and protesting outside their homes. But when the government bows before threats of layoffs, it merely perpetuates this concentration in employment.