Private Bread, Public Bread

When a government company is run poorly for years, chronically losing money and amassing huge debts, nothing happens.

Lehem Erez is in trouble. The bread, cafe and restaurant chain is losing money, and its debts to banks are growing. Last week it asked for a stay of proceedings, and this week it began looking for new owners.

Ehud Barak IMI
Tomer Appelbaum

It's reasonable to assume that buyers will be found, but the current owners will lose their entire investment in the process and the banks will cancel part of the debt. The new owners will inject new money into the failing chain and make changes and improvements, which it can be reasonably assumed will restore it to a path to profitability and growth. That's how the private sector works, through "constructive destruction." The old owners, who failed, make way for new owners, while the means of production are not damaged. Most of the branches remain intact, and so do the workers and the machines. All with a cent of taxpayer money.

In the public sector, it's a completely different story. When a government company is run poorly for years, chronically losing money and amassing huge debts, nothing happens. The state retains ownership, politicians continue to intervene and interfere, the management is not replaced, the unions continue to demand wage hikes and the company continues to deteriorate.

That is the situation at Israel Military Industries. This week it emerged that the company ended 2009 with a decline in sales and a loss of NIS 140 million. It was no great surprise, because IMI has been losing money for 11 straight years. It survives solely on account of cash injections from the state that could land it a Guinness World Record as the company that has received the most money from government coffers.

Since the mid-1980s IMI has gone through myriad recovery plans that amount to the state funding costly early retirement arrangements for thousands of workers. In the last 23 years the state has transferred NIS 7 billion to the company. But IMI is still ailing.

Underemployment and inflated wages prevent the company from turning a profit. Just six months ago management approved a plan to lay off 500 workers, but its implementation was suspended by Defense Minister Ehud Barak, who does the bidding of Histadrut labor federation chairman Ofer Eini. Last week IMI's board revived the plan, but there's no guarantee that it will be carried out.

The management says that 950 employees must be laid off. The treasury has again agreed to foot the bill for special retirement terms, estimated at about NIS 1 billion shekels, on condition that the workers finally agree to the company's privatization. They are demanding a promise from the Finance Ministry to fund identical terms for an additional 950 employees, in the event of post-privatization efficiency measures. The union is even demanding veto power over every dismissal in the future, together with allowing workers to retire - with the special terms - whenever they want. In other words, the workers will run the company and the new owner will simply sign the checks.

The cabinet voted to privatize IMI back in August 2005, but the resolution was not implemented due to the opposition of then-defense minister Amir Peretz, who viewed the workers as his constituency. Eini, who succeeded Peretz as head of the trade union umbrella organization, has agrees to a partial privatization, through the stock market, but IMI is in no shape to go public now. That's why the solution is to sell it to a private investor. The company's situation may be so grim that even this will be impossible, and it will have to be dismantled, its healthy assets sold off and the remainder simply shuttered.

The problem is that the public isn't aware of the party. It doesn't want to know that the billions the government has pumped into IMI are precisely the billions that are missing from the budgets for drugs and health services, for day-care centers, for the school system and for old-age pensions. There's only one budget. And since we, the taxpayers, close our eyes and don't take to the streets in protest the politicians can continue to make fools of us.

We're lucky that Lehem Erez is in the private sector. Otherwise, we'd have to pay its debts, too.