Be Careful What You Privatize

The lesson of Israel Chemicals is that when it comes to Israel’s natural resources, privatization may not be the best policy.

Moshe_Arens_cropped-150x150By Moshe Arens

Privatizing Israel’s industries and enterprises is in fashion. And why not? For years Israel had a socialized economy, much of it run by government clerks or employees of the Histadrut labor federation. They may have laid the groundwork for the economy of the Jewish state, but they could not provide the economic growth that Israel required. It seemed clear that private entrepreneurs, seeking to make a profit, would do a better job of managing government- or Histadrut-owned enterprises than the employees of either the government or the Histadrut. And in many cases, that turned out to be true. They were ruthless at cutting fat and inventive at seeking new opportunities.

The banks have been privatized, and since the Israeli banking sector seems to be in pretty good shape, which was not always the case in the past, their privatization can be counted as a success.

Beit Shemesh Engines was privatized by me during my second term as defense minister, and what had been a money-losing enterprise was turned into a well-run, profitable company by its new owners. There is a relatively long list of companies that have been successfully privatized in recent years. But there is one glaring mistake, from which a lesson should be learned – Israel Chemicals.

Exploiting the natural resources of the Dead Sea, Israel Chemicals had for years been a profitable company. As part of the privatization frenzy during Yitzhak Rabin’s premiership, with Avraham Shochat as finance minister, the government put Israel Chemicals up for sale. After a competition between Ted Arison and the Israel Corporation, which at the time was controlled by Shaul Eisenberg, the latter won and took control of Israel Chemicals. As vice chairman of the Israel Corporation at the time, I led the negotiations that gave the Israel Corporation control of Israel Chemicals.

And what changed as a result? The management stayed on and the company continued to be very profitable, while executive compensation reached astronomic levels and the profits benefited Eisenberg rather than Israeli taxpayers.

Unlike the reservoirs of natural gas reserves hidden beneath the floor of the Mediterranean Sea, the Dead Sea’s resources did not need discovering. For years the executives of Israel Chemicals, who were government employees, exploited them efficiently to the benefit of all.

Eisenberg’s son later sold the Israel Corporation to the Ofer brothers, and since then Israel Chemicals’ profits have benefited them and the Israeli taxpayer has been the loser. The lesson is that when it comes to Israel’s natural resources, privatization may not be the best policy.

This lesson applies when it comes to Israel’s prime defense companies, such as Israel Aerospace Industries, Israel Military Industries and Rafael Advanced Defense Systems. Here the natural resource that the Finance Ministry is pressing to put up for sale is advanced technological know-how in which the Israeli taxpayer has invested billions over the years and which by right belongs to the Israeli taxpayer. Rafael is a highly successful company, the world’s leader in tactical missiles, and it turns a nice profit despite being run by government employees — proof that state workers are not necessarily lazy good-for-nothings just looking forward to their pensions. IAI is not that profitable, but it has great potential because of know-how accumulated over the years, and it is not at all clear that selling it is the way to turn it around. Even the case for privatizing IMI is not that clear. True, the component of high-tech know-how is not as significant there as it is in IAI and Rafael, but it is still a factor. The most profitable part of IMI, the light weapons division, has already been sold off and the profits from it are now streaming into private hands. Cannibalizing government companies by selling off the more profitable segments may not be such a wise policy. In the process, some of the synergy existing in the company may be lost.

It is time to rethink an all-out privatization policy that has become the fashion in recent years, promoted by government clerks with little knowledge of the companies they want to privatize.

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