In an interview with "Globes" Mekorot National Water Company outgoing CEO Shimon Ben-Hamo talks about the Israeli water company's technological capabilities and ability to perform overseas projects, as well as the water his company supplies to Jordan and the Palestinians.
"Globes": As a government company, where do you have a relative advantage?
Ben-Hamo: "We purify a lot of contaminated water in land. You can replace land with other land, but if you don't clean up the groundwater, the contamination will return. That's exactly what happened in the Israel Military Industries Ltd. (IMI) land on Hashalom Road in Tel Aviv. In Beit Hakerem in Jerusalem, they let Mekorot treat the water. Within two years, there was already a working facility, and people have been drinking that water ever since."
Is that what will happen with the IMI land in Ramat Hasharon?
"They're planning a tender of the Accountant General there. You'll see who reaches the tender phase. There will be some who'll say 'do it without government companies,' because the other companies know that whenever Mekorot competes, it wins easily. Mekorot is an expert in treating land and water - a specialist. The project they set up in Mexico was exactly 10 contaminated aquifers they asked us to clean up - every possible contaminant: arsenic, iron, chrome, sewage contamination, everything. What did the private companies do? They brought US companies to compete with us. In the end, it can still get bogged down. In Nahalat Yitzhak in 1995, nothing happened. In Ramat Hasharon, it's 6,000 dunam (1,500 acres) on which 30,000 housing units can be built. At least 30,000 housing units - that's an entire city.
A look at water purification gives an idea of the huge potential of water technology. "The water technology market amounts to at least $250 billion a year. We understand water; we're the best in the world. So we made ourselves a strategic plan to make Mekorot a global company. The president of Guatemala came to us and sat with us for two and a half hours. He studied our water sector, and said, 'I want you to help us.' They want us in Paraguay, Argentina, Mexico, Kazakhstan, Myanmar, and Africa. We advised Azerbaijan, Mexico, Ghana, and Argentina, but the really big money is in construction. We built two desalinization facilities in Cyprus."
Two desalinization facilities - isn't that a little disappointing, considering the expectations?
"Unfortunately, we've only scratched the surface of this potential, and I said it the first day I came to the government. I said, 'With the regulation you have today, it's really impossible to do business, impossible.' I need government approval for every company founded, and every capital investment in the world. I go to the government, and they tell me, 'Come to us after you win the tender, after everything is in order.' So I come after everything is worked out, and it takes them three years to approve it. You start in the Government Companies Authority, and they tell you, 'OK, you convinced us. Now we have to clear it with the Accountant General, get an opinion, go to the budget department for an opinion, go to the Ministry of National Infrastructure, Energy, and Water Resources for an opinion, go the Ministry of Justice for an opinion, go to the Israel Water Authority for an opinion.'
"There is very great potential in Romania for sewage purification facilities. The European Union (EU) has a €4 billion fund just for upgrading the water infrastructure in the country. You get 90% of the funding from the EU, and the city funds 10%. After all, we’re champions in sewage purification plants. We wanted to found a company with a local partner. We went to the Government Companies Authority. They said, 'A great idea. Prepare a proposal, and we'll run with it.' In 2012, we presented it to Minister of National Infrastructure, Energy, and Water Resources Silvan Shalom and Minister of Finance Yair Lapid. Two years passed, the government was replaced, and we went to the next government. They told us, 'Don't wait for government approval. The partner will establish the company and give you an option to acquire 70% of it for NIS 5,000. As soon as the government approves it, you can exercise the option. The partner registered the company in 2012. Now, in 2017, we still haven't gotten government approval."
And the sewage purification plant?
"It's been built."
But can private Israeli companies succeed?
"There are successful companies, but no companies like Mekorot - not in Israel, and not even anywhere else in the world. It's a company with everything in one place: desalinization know-how, sewage purification plants, water quality, planning, water resources management, water supply management and maintenance - there's no other such group in the world. We have 350 engineers and 70-80 subsidiaries. You can go to a country, tell them, 'these are your water resources, these are your needs. I'll write a master plan for water infrastructure and build infrastructure for you.' When I came to Mekorot, we were running. We worked like crazy. At some stage, I saw that the state didn't want it. They put the brakes on us, brakes all the time, so we downshifted, but I'm telling you again - there's huge potential for Mekorot and the water industry in this matter of international business - huge. Like in the defense industries - at least 70% of their sales are overseas - Mekorot can be the same way. We can make billions.
The defense companies have the Ministry of Defense.
"The Ministry of Defense profits from it. It realized the enormous added value in this thing. A large proportion of research and development comes from these projects. India comes and orders a surveillance plane from Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1). IAI goes and builds a surveillance plane for India, does research and development in the process amounting to tens and hundreds of millions of dollars a year, and everything else the IDF gets for free. Israel gets R&D on a huge scale at the customer's expense. The defense companies don't have to wait three years for government approval - they have a fast track. Approval by the director general of the responsible ministry and the Government Companies Authority director is enough. With the fast track, you can get approval in three months. In water, the state also improves its image. When you do good things like a desalinization plant for farmers in India, sewage purification plants in Romania, Argentina, or Myanmar - these are all places we're involved in planning, but not construction."
What does cost cutting mean for you?
"It means cutting costs. First of all, what is important is that Mekorot is a very, very local company. 90% of its business is from revenue in Israel, and the vast majority of this business and revenue comes from the rates. Good and suitable regulation is critical for a company like Mekorot, because it plans for the long term, raises money and invests. During my period, the company invested over NIS 6 billion in the new National Water Carrier. We made the entire water system national. We brought water to the north. Desalinized water now flows to Akko and Karmiel from the plants in Sorek, Palmachim, and Ashdod. We reversed all the flow directions."
Would we be in a crisis today without the desalinization plants?
"We're in the fourth straight year of drought in the north. The entire north is suffering from a substantial decline in rainfall, and the average rainfall in the north is about 65% of the threshold. This is the Kinneret (Sea of Galilee), the Golan Heights, and the upper Galilee you're seeing. The amount of rainfall is 65% of the multiyear average."
So it's because of desalinization.
"Yes, because of desalinization and the new National Water Carrier we built. Building a desalinization plant on the seashore is much easier than covering all of Israel with large pipelines, reservoirs, and plants, with all the statutory obstacles you have to overcome to cross the mountain and the Greater Tel Aviv area. Keep in mind that the private power stations were shut down for months waiting for the Israel Electric Corporation (IEC) (TASE: ELEC.B22) workers' committee to agree to connect them to the grid. They caused problems for them and made their lives miserable. With us, when the desalinization plants were built, we were already prepared with all the necessary infrastructure to receive the water."
Your salaries are regarded as high.
"The number of our workers hasn't increased; it has even gone down by 70 to 1,600. Together with the IEC workers, we raise the average. At the IEC they average NIS 20,000 plus a month; our gross salaries are NIS 16,000-17,000."
You were supposed to implement a streamlining plan.
"The plan was to cut 100-120 staff at Mekorot and another 50 at Shaham. We're the only company today other than Osem Investments Ltd. (controlled by Nestle SA (SWX:NESN)) with an AAA credit rating (for local debt). Up until 2006, IEC had an AAA rating, but it has since fallen. I fought so that the budget department wouldn't take steps that would affect our credit rating. Once it goes down, raising it again is an impossible task."
So how do you explain that IEC's credit rating went down so much, while Mekorot's stayed the same?
"You have to manage it. Our most recent financing round was for NIS 700 million last September. We issued 35-year bonds at linked interest of about 2.31%, and that's the lowest financing cost in the economy today. The buyers were all the investment institutions, the universities, and even the IEC pension fund."
What is your profit margin?
"Around 3%, which puts us among the highest of the government companies. When I came to Mekorot, there was still a concept of dividing the entire national system into three companies in the north, the center, and the south. We managed to convince them that it would be better to have one system connected to everywhere. It saves energy and provides enormous operational flexibility."
Are you no longer regarded as a monopoly?
"We managed to change the Ministry of Finance's concept by persuading them to make Mekorot the water system manager, instead of weakening it. The Ministry of Finance initially sided with the Water Authority and the farmers, who wanted to found regional water corporations. We told them, 'You have 57 municipal water corporations, now farmers will start 70 more , and then you'll be surprised when the price of water goes sky-high."
Do you agree with the claims that setting up water corporations is the reason for the dramatic rise in the price of water?
"Completely. Look, the concept of municipal water corporations was invented in the 1980s. 20 years passed before the corporations themselves started operating. Several things happened on the way. The situation changed, but the concept remained the same. In the late 1980s, the municipalities had a very low level of service, but during the years when the water corporations began operating, the municipalities had already become stronger, and were able to provide services in transportation, education, and culture. There were things that were objective, such as desalinization, which made water more costly for everyone. There was also a lack of investment in infrastructure. Together with this, however, they applied VAT to the corporations, which previously didn't apply to the municipalities, and they founded 57 corporations, each of which had a CEO, a deputy CEO, a legal advisor, offices, and engineers. 57 instead of 5. They grew from 500 workers to over 1,500."
There's no need for more than five water corporations in Israel?
"Look at IEC. How does it provide electricity to the home sector? It has five districts handling the entire distribution and doing it well. You don't need more that."
Were you surprised to find out that the agricultural sector had old informal arrangements allowing communities to pump water privately?
"Let's look at this with a little perspective. Basically, we're a threshold desert country, with very, very difficult climatic conditions for agriculture, and we still have the world's best water system. That's the real situation. There are all sorts of problems on the way, islands like that, like the case of the water associations in the north where the water resources are located, and they historically had pumping rights. Less than 20% of the farmers in the north use over 50% of the potable water, sell it to themselves at NIS 0.50. All the others, 80%, buy water from us at an average price of NIS 2.60, because that's what we supply - and they want to us to increase it. This difference is unjustifiable. I went on a tour of our northern section, and they told me, 'We're supplying water to Beit Hillel at an average price of NIS 2.60, and right next door, at Kibbutz Dafna, they sell it to themselves for NIS 0.40-0.50 - what's going on here?'
"We went to the government, and said, 'Let's make a national pool. We'll take all the water, all the costs, and the costs will be the same for everyone. Let there be one national price for agricultural water, like there is for drinking water, like there is for gas, like there is for electricity, like there is for any critical infrastructure. Someone living in Eilat pays the same price as someone living in Tel Aviv.' It took time."
Water for Jordanians and Palestinians
"When I came in 2010, Israel had all dried up. In 2016, we're already selling water surpluses to Jordanians and Palestinians. Today, we supply Jordan with 55 million cubic meters a year. The entire water consumption of Greater Amman comes from us. We want to increase the amount to 100 cubic meters within two years, which will mean that most of Jordan's drinking water will come from us."
Do we sell it at cost price?
"We're losing money on it, because we lose money on the first 20 million cubic meters, and barely get the cost on the next 30 million cubic meters. That's part of our relations."
The Palestinians accuse us of stealing water from them.
"With the Palestinians, we undertook in the Oslo Accords to supply them with 25 million cubic meters. Today, we're supplying them with 52 million cubic meters just in Judea and Samaria, not to mention the Gaza Strip and the Jordan Rift Valley.
They complain that Jews in Judea and Samaria get six times as much water as a Palestinian.
"That's wrong, because the agreements are built on sharing the mountain aquifer between us. We can drill in the mountain aquifer, and they can drill, and they're doing it. We bring water to the Jewish residents of Judea and Samaria, and we also bring the Palestinians 50 million cubic meters. In addition to what we bring the Palestinians, they themselves produce another 100 cubic meters. In any case, there's an approved master plan that triples the amount of water for the Palestinians."
Who will pay for it?
"We'll build it, but they'll pay for it in the price of the water. The aim is to triple the quantity of water for them - to go from 50 million plus cubic meters to 170 cubic meters."
Where will we get this amount of water from?
"From desalinization. They'll expand the existing plants and build two new ones: one in Emek Hefer and one in western Galilee. Increasing the amount of desalinized water to triple the current amount is no problem. A very large increase in water demand in Judea and Samaria is projected, and we're going to supply it all. The Palestinians will get the same amount of water that the Jews get."
What's going to happen with their untreated sewage?
"There was a very big dispute with the Palestinians about who would take the water, this sewage. A month ago, we reached agreement in principle. The Palestinians' sewage will flow in a pipeline from the Kidron River to Nebi Mussa, be treated in our plant, and become treated wastewater. This treated wastewater will flow in the Jordan Rift Valley, and some of it will irrigate Palestinian fields. It could take two or three years."
Published by Globes [online], Israel Business News - www.globes-online.com - on February 19, 2017
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