The multi-year plan for offering minority stakes in government companies was inserted into the 2014 Economic Arrangements bill at the last minute. The plan itself, initiated by Government Companies Authority director general Ori Yogev, was unveiled already at the beginning of the year. Until recently, it appeared that it was making no progress, but the budget crises and the need to deal with the swelling budget deficit have created a superb opportunity to rejuvenate the plan. Similar privatization schemes tried in recent years in Israel Ports Development & Assets Company Ltd. and Israel Electric Corporation (IEC) (TASE: ELEC.B22) were strongly opposed by the Histadrut (General Federation of Labor in Israel) and the workers committee, and were cut off at the early (IEC) or late (Ports Company) stages. Recent weeks, however, have seen a positive development: Israel Postal Company Ltd. workers have given their consent to bringing in a private partner to hold 20% of the company's shares. This precedential agreement, together with the benefits to be offered the workers, headed by the option of buying shares at discount prices, is expected to make it easier to convince the workers committees in the larger companies. The formula is offering the workers 10% of the shares at a 30% discount.
Under the proposal presented to the socioeconomic cabinet on Sunday, the state will gradually issue shares in seven government companies. The state will retain control of most of the companies, while up to 49% will be issued. Full privatization of the two ports companies (Ashdod and Haifa), the Environmental Services Company, and three companies operating in Tel Aviv (Halamish, Marine Trust, and Atarim Company for Development of Tourist Sites in Tel Aviv) is expected.
The Companies Authority believes that the planned series of offerings will generate over NIS 5 billion in revenue for the state annually over the next three years - a total of NIS 15-20 billion. Some of the amounts obtained from the sale of the companies will be given to the Ministry of Finance for debt payments, thereby giving the ministry room to increase the budget deficit.
In 2015, the Finance Ministry will attempt to offer shares in relatively small companies in which offerings will be relatively simple, e.g. the Postal Company, whose workers have already agreed to the measure in principle. A privatization agreement was signed with Israel Military Industries workers in April. Israel Natural Gas has already raised money on the stock exchange more than once, and opposition to privatization on the part of the workers committees at the ports companies, which are now far more worried about competition from the private ports, is softening. These four offerings are expected to generate NIS 3.5 billion, and the Finance Ministry will attempt to withdraw another NIS 500 million as a "dividend on account," to be paid for from future offerings. The offerings are expected to produce NIS 5 billion in 2016 and NIS 6 billion in 2017.
One major question is hanging over the Companies Authority's optimistic forecasts: who wants to invest in the capital of unsuccessful companies suffering from inefficiency and nepotism, and largely controlled by their workers committee? Israeli government companies lost NIS 809 million in 2013, despite NIS 67 billion in revenue. Over the years, the Israeli government companies have shown poorer performance than similar companies in Western Europe: the sector's operating profit margin in Israel is only 4%, compared with 7.1% in the UK, 8.5% in France, and over 20% in New Zealand and Norway.
The Companies Authority asserts that the offerings are the best immediate solution to the companies' ills. Public offerings foster transparency and norms of proper administration. The capital partly injected back into a company will make it possible to improve performance and cut prices, which will be translated into an improvement of the profit line. In addition to the theoretical proof, the Companies Authority will provide the socioeconomic cabinet with empirical findings from international studies showing a dramatic change in the performance of government companies around the world after they held offerings.
Published by Globes [online], Israel business news - www.globes-online.com - on October 2, 2014
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