Prime Minister Benjamin Netanyahu received the interim recommendations of the committee on economic concentration this morning, ahead of the press conference at which the recommendations were made public.
At the press conference, Netanyahu said that he established the committee because "I saw that Israeli consumers were suffering from the rise in the cost of living, and because they can compare it with prices for goods and services around the world. We have a cost of living problem because of a lack of competition. My goal is to boost competition in the economy in order to lower the cost of living."
Netanyahu cited the example of the opening of the international calls market to competition, which slashed the cost of calls. He warned, however, that it was important to ensure that competitiveness did not harm business. "We want to ensure that there will be competition, but without harming the ability of businesses to grow and develop. Businesspeople are important to the Israeli economy. They are the friends of the Israeli economy. We don’t want to hurt business, but to ensure fair competition across the economy."
Netanyahu promised to submit the concentration committee's final report to the cabinet within three months, and that its recommendations would lower the cost of living. "We want people to pay less when they go to the supermarket, and pay less for services. They will pay less because there will be less concentration and more competition."
Minister of Finance Yuval Steinitz said, "Separating holdings between financial and non-financial companies is essential for creating a more competitive market, as well as addressing the issue of complex structures and pyramids." He added, "The committee is like a scalpel for dealing with distortions in a very calculated and responsible way… The committee is dealing with problems in national infrastructures, whether in transport, communications, or energy."
Steinitz promised to promote the concentration committee's recommendations, just as he promoted the Sheshinski committee recommendations. He said that the concentration committee's recommendations were good for both consumers and pension savers.
Governor of the Bank of Israel Prof. Stanley Fischer congratulated the committee and said that it did "serious work". He said that it would "offer solutions to problems found in many small countries. There is very creative work, especially in the handling of pyramids. The committee has done great work in dealing with pyramids. It created a very creative and successful structure for dealing with them."
The main interim recommendations of the committee on economic concentrations are:
Separation between financial and non-financial holdings - i.e. banning control or ownership of a major financial institution by a large non-financial corporation or by a company that controls a large non-financial corporation. The committee defines a large financial corporation as a company that has at least NIS 50 billion in assets under management (2.5% of the economy's total financial assets).
The committee defines a large non-financial corporation as a company with more than NIS 8 billion in sales (0.5% of the economy's total sales proceeds), and a balance sheet footing of over NIS 20 billion.
In other words, the same controlling shareholder cannot hold both a large financial and a large non-financial company. The committee recommends preventing a director from simultaneously serving on the boards of both a financial and a non-financial company.
The committee recommends limiting control of a bank by a large non-financial company.
Breaking up holding companies with a pyramid structure. These are holding large companies that hold other companies which are headed by the same controlling shareholder. The committee advises dealing with this issue through corporate governance, rather than by imposing restrictions. In other words, it is leaving up to companies' shareholders to deal with this issue through "tools of corporate governance, which will ensure that each company in the structure will be managed for the interests of all shareholders and not just the interests of the controlling shareholder."
The committee does not outlaw pyramid structures, but allows investors to distinguish between cases in which the pyramid creates value for them, in which case it can continue business as usual, and cases in which the pyramid serves the interest of the controlling shareholder, in which case the shareholders will be allowed to balance the character of management or leave it if necessary.
The committee also covered large holding companies that have assumed heavy debts through bond issues, which is liable to jeopardize the entire economy in an economic crisis. It recommends strengthening the Antitrust Authority "to ensure that the existence of a few strong business groups will not harm economic and industrial competitiveness." It also recommends levying a tax to reduce the incentive to take loans to make leveraged acquisitions.
A concentration committee team headed by Antitrust Authority director general David Gilo examined the terms for the allocation of public assets. Its main recommendation is that, before the privatization of an infrastructures or natural resources company worth more than NIS 150 million - including water, energy, communications, transport, and healthcare companies - an advisory committee headed by the Antitrust Authority director should examine the consequences on concentration in the economy. This advisory committee should also include the director general of the Ministry of Finance, a representative of the Attorney General, and the chairman of the National Economics Council.
Following the publication of the interim recommendations, a hearing process will begin in which large companies and their controlling shareholders can respond to the draft report. This process will take three weeks. "The final report to the government will be submitted in three months, and if approved, it will be sent to the Knesset to complete the necessary legislative process," states the concentration committee.
On the basis of the economic concentration committee's definitions of a large non-financial company, the recommendations mean that The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) and Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS) will have to be sold by their controlling shareholders, Yitzhak Tshuva's Delek Group Ltd. (TASE: DLEKG) and Nochi Dankner's IDB Holding Corp. Ltd. (TASE:IDBH), respectively. Zadik Bino will have to decide if he wants to sell Paz Oil Company Ltd. (TASE:PZOL) or First International Bank of Israel (TASE: FTIN).
However, Shufersal Ltd. (TASE:SAE), controlled by Nochi Dankner, Shikun u'Binui Holdings Ltd. (TASE: SKBN), controlled by Shari Arison, who also controls Bank Hapoalim (TASE: POLI), and Tnuva Food Industries Ltd., controlled by Apax Partners Israel, which also controls Psagot Investment House Ltd. (all three of which had a turnover of more than NIS 7.5 billion in 2010) all passed beneath the economic concentration committee's radar.
Published by Globes [online], Israel business news - www.globes-online.com - on September 19, 2011
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