PrivatizationBack to International Devision Homepage
In Israel, as with many young nations, it was originally the state which provided the initial impetus for the development of business and the creation of a national capability to compete in world markets. Moreover, in Israel's case, government intervention in the economy was heightened by its complex security situation and the need to develop a sophisticated military industrial complex. However, as the economy matured and the private sector developed, the government has sought to reduce its involvement in the economy.


Introduction
Objectives
Description
The Privatization Process
Developments since 1986
Privatizing the Banks
The Government's Options Plan
Conclusion

Introduction
In Israel, as with many young nations, it was originally the state which provided the initial impetus for the development of business and the creation of a national capability to compete in world markets. Moreover, in Israel's case, government intervention in the economy was heightened by its complex security situation and the need to develop a sophisticated military industrial complex. However, as the economy matured and the private sector developed, the government has sought to reduce its involvement in the economy.

Today, there is wide-spread cross-party support for privatization, which has ensured that the subject is not regarded as a contentious issue.

Objectives
Privatization is a powerful economic instrument, which should not be misconstrued as a goal in its own right. The Ministerial Committee on Privatization has set out six key objectives for the government's privatization policy:
a. To foster a greater degree of competition in the business sector by reducing government involvement, to the largest extent possible.
b. To both improve and modernize the efficiency of monopoly companies that are wholly or partially state-owned.
c. To increase Israel's economic integration into the world economy through attracting foreign investment in domestic companies.
d. To obtain appropriate financial re numeration for government-owned assets sold, which can then be used towards reducing the state's internal debt.
e. To widen share ownership especially among the companies' employees.
f. To further develop Israeli capital markets, by encouraging the entrance of new investors.
It should be clear from the above that the government sees this policy as an important means by which to encourage competition, foster efficiency and stimulate growth.

Description
Due to Israel's security concerns and its small size, its economy has a centralized character. Many of its major sectors are either natural monopolies, or dominated by a small number of companies. These sectors include: banking, communication, energy, transportation, defense industries, water and land.

Under the Government Companies Law, only companies in which the government holds 50% or more of the voting rights are defined as government-owned. The government, by this definition owns 119 companies, of which 57 are termed 'business oriented'. These 57 companies account for more than 75% of the aggregate turnover.

Government companies account for 3.6% of employment in Israel, down 16% from 1992. Their sales account for 15.5% of GDP, also down from 1992 - by 2.5%.

Of these 57 companies, around thirty will remain for the time being in government hands, to assist the government in the implementation of social and economic policies. One such example is Amidar, a company that provides low priced housing. The remaining companies are candidates for privatization. These companies can be divided into two categories: those that exist in a competitive environment and those that are public utilities (like Israel Electric Corporation).

The Government Companies Law, which was passed by the Knesset in 1975, created the Government Companies Authority (GCA), a statutory body that operates within the framework of the Ministry of Finance and is responsible for supervising government owned companies. Within this authority a special privatization division has been established, which is responsible for coordinating privatization activities.

The Privatization Process
Once a company has been recommended for privatization, the process is generally as follows. The GCA discusses with the company's board its plan to privatize and submits recommendations to the government minister directly responsible for the company. Final recommendations are presented to the Ministerial Committee on Privatization (which is chaired by the Prime Minister), whose approval is required before the process can begin.

Following the approval of the Ministerial Committee, the GCA, representatives of the Ministry of Finance and the relevant ministry are responsible for coordinating the sales process. Whether the company in question is sold through public offering or direct private sales (or some combination of the two), the approval of the Knesset Finance Committee is needed (other Knesset committees might also be involved in the process).

Direct private sales involve the preparation of a detailed offering memorandum, which is sent to potential buyers and interested parties. Initial bids are received and selected potential buyers are invited for further negotiations and supplied with additional information. The final bids are often negotiated further by the government.

Public offerings are executed via prospectus and underwriters are chosen through an open bidding process.

It is clear that no formula or privatization method is suitable for all companies and the appropriate course of action needs to be determined on a case-by-case basis. Consequently, the methods used require adjustment in order to reflect government objectives, market conditions, attitudes and valuation over time.

Privatization is a complex process, which often requires structural changes to achieve the desired aims of increased efficiency and greater competition. The issue of how to privatize and how to deal with objections of the company's board and its employees are all delicate subjects. Therefore, the progress of privatization has been slower than desired, though the pace has increased considerably over the last two years.

In order to facilitate privatization the Ministerial Committee for Privatization was established, consisting of the Prime Minister, the Minister of Finance and the Minister of Justice. This committee is empowered to privatize state-owned enterprises without the consent of the minister responsible for the company. Furthermore, in August of 1993, the Knesset approved an amendment to the Government Companies Law that added a new section dealing with privatization and provides for more efficient tools for implementing it. This legislation enables the GCA to deal effectively with entrenched interests, be it from a ministry or from the company in question, that have often slowed the pace of implementation. The amendment enables the GCA to direct a candidate company to take specific steps that are essential for privatization. Moreover, it makes possible the removal of board members who appear to be acting to frustrate the privatization process.

Developments since 1986
The government began to implement its privatization program in 1986. Since then, the state has ceased to be the holder of 64 government companies, government subsidized companies and mixed companies and two banks. In seven other companies and four other banks the percentage of government holdings has declined.

Since 1990, there have been significant advances in implementing the government's plans. In the last couple of years the privatizations carried out include the private sale of the controlling interest of Israel Chemicals Ltd. (24.9% of share capital) to the the Eisenberg Group, the private sale of 100% of the shares of Israel Shipyards Ltd. and 100% of the shares of Israel Housing and development Ltd..





Privatizing the Banks
So far, the following interests in the banks were finalized:
* IDB Holding Company - sale of control ($230 million)
- public offering ($344 million)
* Israel Union Bank - sale of control ($49.5 million)
* Israel General Bank - entire sale ($16 million)
* Bank Hapoalim - public offering and employees ($360 million)
* Bank Leumy - public offering and employees ($273 million)
* United Mizrahi Bank - sale of control
The following tenders are planned for the first six months of 1996:
* Israel Discount Bank
* Israel Union Bank
* United Mizrahi Bank

The Government's Options Plan
The Minister of Finance appointed a Committee to examine the issues involved in issuing shares or share options in Government-owned companies. The recommendations were adopted and are to be implemented in the near future. Those recommendations are:
1. Bundles of stock options will be distributed, free of charge, to all registered voters. The bundles will include options for the purchase of stocks in several Government companies and banks that are candidates for privatization.
2. The price for converting the options into shares will be set at a certain percent of the average price of the shares, twenty days prior to the realization date.
3. The companies to be included in the plan will comply with the following terms:
  3.1. All planned structural changes will have been completed.
  3.2. A certain preannounced percentage of stocks will remain in Government hands.
  3.3. Either the company's shares are already traded on the stock market, or should be issued prior to the realization date for the options.
  3.4. In some cases the controlling interest in the company may be sold at a future date (the option holder will be informed of this prior to purchase).

4. The first stage will consist of NIS 6 billion worth of options. In this case the conversion cost for each of the 3 million beneficiaries should range between 1,400 to 1,600 NIS, and the benefit from purchasing the stocks between 400 to 600 NIS.
5. Companies whose stocks are not yet traded on the stock market will be required to publish a prospectus.
6. The options will be transferred by the Bank of Israel to the commercial bank chosen by the beneficiary, as a result of a wide-spread advertizing campaign.
7. An administrative body, headed by a professional figure and reporting to the Government Companies Authority, will be responsible for coordinating the different agencies involved in this plan.
8. A special team should look into the legal aspects of the plan and prepare the necessary legislation. The issues that require legal examination are:
  8.1. The protection of the beneficiaries' right to privacy;
  8.2. The regulation of the contact between the state and the citizens;
  8.3. Tax exemptions for the discount accruing from the plan;
  8.4. Amending the Restrictive Business Practices Law.

9. Due to the potential consequences of the plan for the stock market, certain parameters should be re-examined immediately prior to the implementation of the plan.

The amounts of capital raised by sales of government holdings, have been substantial, in total $3.4 billion. Until 1990, the government rased $427 million. From 1991 to 1992, the government raised $1.025 billion and in 1993 alone the government raised $1.241 billion. In 1994 the revenue totaled $207 million and in 1995 $535 million.

Among the preparations taking place now are of Bezeq, the national telecommunications company, El-Al, the national airline, TAHAL, the water planning company and Zim Israel Navigation Ltd..

Conclusion
Israel is committed to strengthening and expanding the private sector's role in the economy. Privatization is but one aspect of the structural reforms occurring in the economy. There can be no doubt that expanding the business sector goes hand in hand with increased competition. Similarly, increased competition is linked to opening the domestic market to foreign companies and their products. Trade liberalization is integral to increased integration in the global economy. Therefore, privatization is a fundamental instrument in the structural reforms that Israel is undergoing.
Ministry of Finance The Israeli Economy Israel Investment Policy Privatization Infrastructure