After the draft and the hearing stage, the conclusions of the Committee on Increasing Competitiveness in the Economy, known as the Concentration Committee, have been presented in full. Prime Minister Benjamin Netanyahu has called a press conference, together with Minister of Finance Yuval Steinitz, Governor of the Bank of Israel Stanley Fischer, and Haim Shani, the chairman of the committee. Changes introduced in the final recommendations will compel some of Israel’s large corporations to undergo substantial change.
Under the committee’s interim recommendations, anyone who controlled a significant non-financial corporation that held a significant financial corporation had to sell one or the other within four years. A significant financial corporation was defined as one that manages assets of over NIS 50 billion. A significant non-financial corporation was defined as one with annual revenue of over NIS 8 billion or that borrows more than NIS 6 billion in Israel. In the final recommendations, the threshold is set at NIS 6 billion for both revenue and borrowings.
If the recommendations are accepted, IDB Holding Corp. Ltd. (TASE:IDBH), controlled by Nochi Dankner, will be expected to sell Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), while Delek Group Ltd. (TASE: DLEKG), controlled by Yitzhak Tshuva, is seen selling The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) or Excellence Investments Ltd. (TASE: EXCE), although it is possible that of Phoenix sells Excellence, Delek will not have to sell Phoenix.
What is more, because of the lowering of the revenue threshold, Apax Partners, which holds both Tnuva Food Industries Ltd. and Psagot Investment House Ltd., will have ot sell one of the companies, since Tnuva’s revenue totaled NIS 7.2 billion in 2010.
A completely new section has been inserted into the recommendations, concerning borrowings. As mentioned, a significant non-financial corporation will be defined as one that borrows over NIS 6 billion a year in bonds and bank credit. This means that Melisron Ltd. (TASE: MLSR) and Shikun u'Binui Holdings Ltd. (TASE: SKBN) are also caught, so that Shari Arison will have to sell Shikun u’Binui or Bank Hapoalim (TASE: POLI), and Leora Ofer will have to sell Mizrahi Tefahot Bank (TASE:MZTF) or Melisron.
Pyramid companies
The committee also recommends restrictions on pyramid companies. A pyramid is a structure in which, say, X owns 51% of company A, which holds 51% of company B, which in turn holds 51% of company C. X thus controls C, even though his financial stake in it is only about 13%. The committee recommends not allowing a pyramid structure of more than two layers of public companies.
”New rules will apply to the structure of the boards of directors of public companies in the second layer of a pyramid structure in which there is a significant gap between the controlling shareholders’ voting rights and his indirect holding,” the committee’s recommendations state.
Among the structural changes that the committee recommends, it will be forbidden to from a public company in the third layer of a pyramid, and, from four years after the recommendations become law, it will be forbidden to continue holding a public company in an existing fourth layer of a pyramid structure.
The committee finished its work last week, and the Ministry of Finance intends to bring its recommendations before the government in about a month’s time, and to complete legislative procedures in the Knesset by the Passover holiday, before the Knesset enters recess.
Steinitz: Foreign investors have avoided us because of the concentration
”More than eighteen months ago, we decided that we had to tackle a problem that hurts Israel’s economy and society; the level of concentration in the economy is high, and it impedes competition, which is the friend of the consumer and the citizen,” Netanyahu said. “Competition brings down prices and encourages growth. I am great devotee of competition and I am against monopolies and cartels. The idea is to create a way of doing things that will allow entrepreneurs to grow and prevent those that have grown too much from stifling competition. The reason I sought to set up the committee was to encourage horizontal competition. The second problem is the phenomenon of the pyramids and vertical control. The question is whether people have the power to harm competition. I sought to make the changes, but while protecting the entrepreneurs, because they are the ones who bring growth.”
Netanyahu added the committee’s recommendations “will reduce the phenomenon of haircuts, but won’t completely stop them.” He promised to implement the recommendations “with all possible speed.”
Steinitz called the recommendations “an important milestone for the Israeli economy,” adding, “There is a very problematic phenomenon of concentration of economic power in a few hands. This is a bad phenomenon. It is also bad for democracy. First and foremost, it is bad for the economy and for economic development. Dealing with this matter will benefit our citizens. In some places, we will see improved service and lower prices. It will ensure better democracy. The recommendations will halt new pyramids and reduce old ones, to the point where this phenomenon will disappear.
”There are foreign investors who have avoided our economy because of the concentration in it. This measure raises wages and reduces unemployment and moves the Israeli economy forward. There is a great deal of talk about the nexus between wealth and political power. This measure comes on top of others by the Netanyahu government that we are taking without fear and that are leading in the right direction. As with the Sheshinski committee, despite the campaigns. That’s how it was with the Dead Sea, that’s how it was with fund management fees. All this has been done out of great respect for investors and entrepreneurs.”
Fischer added that the committee’s work had been “completely professional”, and he rejected the criticism that had been leveled at it. “There are those who will say that it is not right, that the committee should have kept to its stance in the interim report. The committee must abide by what is logical. An extremely important factor in competition is imports; we must continue the liberalization of imports. There is no attack here on the private sector. The economy cannot be run on the basis of the public sector. Growth must be based on the private sector, but it important to limit power. In Sweden, the government is almost not involved at all in production, they don’t try to manage. We respect the private sector and understand its importance. It is possible to be a successful person and to earn profits, but within an acceptable social framework.”
Published by Globes [online], Israel business news - www.globes-online.com - on February 22, 2012
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