Israel Railways hurtling towards financial disaster

Israel Railways Photo: Israel Railways Spokesperson

Dragged into debt by its cargo subsidiary, and failing to exploit its commercial potential, Israel Railways is using accounting tricks to extort taxpayers' money.

Israel Railways published its financial reports on Friday, with a NIS 273 million loss for the third quarter, which it attributes to the opening of the new high-speed railway line to Jerusalem, although other reasons are also involved.

Analysis of the financial data by "Globes" reveals several items highlighting the company's dire financial straits. Among other things, Israel Rail Cargo Company, an Israel Railways subsidiary, has a working capital deficit and is unable to pay its debts. In addition, two thirds of Israel Railways' revenue comes from state subsidies. As if that were not enough, Israel Railways went from a small operating profit to a large operating loss. Its debt is extremely high and its equity is less than 3% of its balance sheet total. The most important story, however, is concealed in a request to record a 'going concern' warning for Israel Rail Cargo.

What is Israel Railways doing about its financial situation? It is trying to use accounting tricks and raise money from the state. Sources inform "Globes" that at the board of directors meeting dealing with its financial reports, management requested that a going concern warning be recorded for Israel Rail Cargo. The request was rejected owing to opposition by the Ministry of Finance and the Government Companies Authority. The logic behind such a request is clear, given the subsidiary's difficult situation, but the Ministry of Finance and the Government Companies Authority assert that the subsidiary is fictitious; it is actually an integral part of Israel Railways.

The subsidiary has only a few employees, and its sole customer is Israel Railways, its parent company. Accountants who read the reports at the request of "Globes" reached the same conclusion. Although Israel Rail Cargo is formally a company for all substantive purposes, it is actually just a show company.

What interest does Israel Railways have in recording a going concern warning for its subsidiary? According to government sources, Israel Rail Cargo serves as an accounting garbage can for transferring losses from its parent company. The subsidiary's shaky state can also be used to extort more money from the state.

As stated in the financial reports themselves, "The cargo subsidiary is acting with state representatives in cooperation with Israel Railways to revise the state's development and operation agreement in order to reduce the annual erosion in subsidy payments." In the framework of the requested revision, the subsidiary is seeking, among other things, to change the subsidy rate - the model for subsidizing the operation of containers.

The decline in Israel Rail Cargo's revenue is attributed to several justifiable reasons. Cargo trains are not given enough time on the tracks because passenger trains have priority, which creates railway traffic jams in the central region. Since passenger trains are given preference in subsidies, Israel Railways emphasizes its passenger division. The cargo division, which transports goods and could have been a good source of revenue for Israel Railways, is relegated to second priority. Now that the new line to Jerusalem is operating, it has fallen to third priority.

"The line to Jerusalem caused no damage; on the contrary"

A week from now, Israel Railways' management will present its plan to the board of directors for redressing the company's financial state, sources inform "Globes," given the company's heavy losses over the past two years.

To the surprise of many, Israel Railways' announcement pointed a finger at the high-speed railway to Jerusalem, which it said added to its losses in the past quarter, because "the number of passengers did not increase sufficiently, owing to the diversion of trains from high-demand routes to the high-speed line to Jerusalem, which is in its running-in period and is limited to 400 passengers per train, resulting in reduce revenue from an incentive subsidy."

This assertion contradicts official statements by senior figures in the Ministry of Transport that the project is consistent with Israel Railways' business interests. The minister of transport again emphasized today in a radio interview, "There was an absolutely false difference here between the headlines and the content. There are heavy losses in cargoes and other things. Not only is the line to Jerusalem not damaging Israel Railways; it is opening a new source of revenue."

A look at the figures in the report, however, shows a continual drop in Israel Railways' gross and operating profit margins in the past two years, reaching a peak in the third quarter. As a result of operating the high-speed train and diverting railway carriages from the popular lines to the line in a running-in stage, Israel Railways did not sell enough tickets, and the amount of its subsidy was substantially affected, because under the old agreement, in which the subsidy is per passenger, Israel Railways receives NIS 10 per passenger.

Israel Railways is losing on both counts. Congestion on the high-demand routes is terrible, causing fewer people to use them and damaging the company's reputation, and revenue is declining. Some believe that Israel Railways deserves compensation for launching the national project that caused its financial situation to worsen. "Israel Railways paid a heavy price for launching the high-speed line. You can't demand that it carry out a national project and also take away its revenue," a transportation industry source told "Globes."

Bank of Israel: Raising debt is an accounting trick

The weakest link in the Israel Railways today is probably Israel Rail Cargo, which reported an operating loss of over NIS 15 million. The subsidiary was founded in July 2014 under the Israel Railways reform agreement, together with another subsidiary for developing Israel Railways' real estate properties. When the subsidiary was founded, Israel Railways predicted that the company would reach annual revenue from cargo transportation of NIS 400 million within five years from transporting chemicals from Dead Sea Works, for example.

Matters turned out differently, however. As of September 30, the subsidiary had a NIS 13.7 million working capital deficit and was having difficult paying its debts. Israel Railways' report states that the subsidiary started paying Israel Railways 60 days late, in violation of the credit terms agreed by the companies. Israel Railways' board of directors last week decided not to demand that Israel Rail Cargo pay its debt for the next year, "as long as such a demand puts the subsidiary at risk of bankruptcy."

Israel Rail Cargo is but a prominent symptom of the problems afflicting Israel Railways itself. Is it a commercial company for all intents and purposes, a government support unit, or an arm of the Ministry of Transport? According to its financial statements, Israel Railways does not meet the criteria for a profit-making company. Almost two thirds of its revenue comes from the state budget. In the first nine months of the year, the state gave the company over NIS 1 billion for development and operations out of Israel Railways' total revenue of NIS 1.8 billion.

Despite the enormous real estate potential of Israel Railways' properties, it has almost no revenue outside of ticket sales. Assuming that the volume of ticket sales is not affected by the price, it would have to triple ticket prices in order to balance its budget without government support. In actuality, such a measure is impossible, because it is clear that the number of passengers will fall if the price of an interurban trip from Jerusalem to Akko, for example, jumps from NIS 51 to NIS 150.

Another important fiction in Israel Railways' reports concerns the debt that it is raising. The company raised NIS 1 billion in an issue of five-year bonds in 2015, following which it began to publish financial statements. The Bank of Israel said that this issue was nothing other creative accounting by the state; since the state pays the debt to the bondholders, the bonds issued are state bonds for all intents and purposes.

According to its reports, Israel Railways has NIS 24 billion in fixed assets. The value of the assets should be depreciated over time. In the third quarter, for example, Israel Railways reported a loss on a NIS 209 million decrease in the value of asset. Although this is a relatively small amount, compared with the total value of the assets, it wiped out almost a fifth of the company's equity, which fell to NIS 800 million.

Israel Railways said in response, "Israel Railways does not comment on internal discussions."

No way to make a reform

Instead of talking about the failures of the high-speed railway line to Jerusalem, crowding at stations, and electrification of the next railway lines, we have chosen to focus on Israel Railways itself, if it can be called a company at all. Israel Railways is not actually an ordinary business company; it is a branch of government, with all the pathologies resulting from that status.

It did not have to be that way. In 2014, following drawn-out negotiations with a belligerent workers' committee, an agreement for reforming Israel Railways was signed. In the bottom line, the state paid Israel Railways' workers pay rises of 16% on the average in exchange for their consent to incorporation, the founding of subsidiaries for cargo and real estate, putting 30% of railway carriages maintenance outside the company, and a number of changes in the collective agreement designed to increase management's ability to control the company.

What has happened in the four years since the agreement? Salary expenses for Israel Railways' workers rose sharply from year to year. What else? Almost nothing. The real estate subsidiary and the cargo subsidiary were registered and founded, but the plan to bring strategic investors into them did not materialize. There is no revenue from them.

In Europe and East Asia, railway stations are a focus of bustling commercial activity and offices. In Israel, railway stations are an urban wasteland. At a time when truck cargo prices in Israel are skyrocketing, thereby increasing the cost of living, cargo trains are standing empty at the stations.

Where is Israel Railways' management? Instead of pushing its subsidiaries ahead, it focuses on extorting money from the state. Why make an effort to earn a profit when it is easier to increase the subsidy by accumulating losses and adding going concern warnings?

Published by Globes, Israel business news - en.globes.co.il - on December 6, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

5 Comments
View comments in rows
Update by email about comments talkback
POST
Comments
Israel Railways Photo: Israel Railways Spokesperson
Israel Railways Photo: Israel Railways Spokesperson
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018