The venture capitalist who wants to transform Israel

Labor MK Erel Margalit tells "Globes" about his plans to improve the Start-Up Nation.

Recently MK Erel Margalit did something that a seasoned (and he isn't one yet) and ambitious (that he definitely is) politician would not have done: he challenged the powers that be. By so doing, he resurfaced, without naming any names, one of Israel's key industrial magnates: Mozi Wertheim, the man behind Central Bottling Co. (Coca Cola), Tara, Neviot, Mizrahi Tefahot, and Channel 2 (Keshet). Margalit (Labor Party) appeared before the Manufacturers Association of Israel's Council, talked about the prices and cost of living created by the industrialists, and told them about his bill, which requires "Market Leaders", declared monopolies and duopolies and non-declared monopolies, to publish financial reports and in fact disclose their overt and covert profit trails. Before him sat the "giants" of the milieu, as well as others.

Most were sitting in polite silence, waiting for this rather upstart MK (he has been in the Knesset for less than 18 months), who is "one of our own" (a businessman and founder of the JVP venture capital fund), who led, and profited from, huge IPOs and billions of dollars' worth of exits, who was rich enough (Forbes rated him as the second-richest Israeli politician, with an estimated value of NIS 220 million) to calm down and understand, like many of his colleagues in the Knesset and government, who calls the shots. One of them couldn't really help himself. Coca Cola Israel Itzhak Tamir scolded him: "You're just pandering to popular opinion. A monopoly is not a bad thing." This verbal scrap has a backstory to it. A while ago before, when it became known that the Antitrust Authority was investigating the possibility that Coca Cola is abusing its monopolistic dominance and investigators raided the company's offices and seized documents, Margalit was quoted as saying "The combination of a monopoly and a TV channel is a danger to democracy."

What was going through your head? Is this how a politician operates? Are you being naïve?

"Naivety is actually a trait I would like to say I have, but…"

You're already regretting this.

"No. I'm not regretting this, and I'm also not a pushover. I stood up to the Manufacturers Association and I knew what I was saying and who I was saying it to. More than half of the people there got up and criticized the excessive prices imposed by the monopolies. Moreover, the more I investigate the subject, the more I realize that I'm in the right place. What I'm doing here is fighting against the injustice of several individuals who have a stranglehold on the market."

Mozi Wertheim.

"I have a certain advantage here: I sat down with the Economic Concentration Committee and saw the absurd bill proposed by the government. I saw how it dramatically affects the cost of living, and how it prevents other players from entering into the market. I learned that and that's how I got to these guys who got us all by the… It turns out that there is an unreasonable number of companies that dominate the market, of certain monopolies with considerable power. The fact is that eventually, it is the opposition that spearheaded the enactment of the Concentration Law, and it's also a fact that two of the Law's chapters have succeeded in flattening the pyramid and in granting more power to the Antitrust Commissioner, but we have failed in our attempt to separate the financial and the real. The threshold determined by the Law is much too high. The vast majority of companies work quietly under the Law's radar. This is why it became necessary to take another step forward and require leading market players to published financial reports so that we'll be able to examine the profit margin with our own eyes."

Some of the financial reports of several market-dominating monopolies have already been disclosed. What is that good for? They simply charge the highest prices possible.

When you consider the consumer product category, there are prices that are 2, 3 and 4 times higher than the US, and that's a fact. Coca Cola, deodorants, razor blades, baby products, food - all of those cost considerably more here. In Israel, a significant portion of those companies are private, and you can't see the profit margin of every product. I demand to know the profit margin. Transparency is key. A monopoly above a certain size will be required to open its books.

Were you and members of your party pressured in any way?

"Yes. So?"

It's your audience, it's power, you're playing it cool, but members of your own party are pressuring you to soften your position. Labor party leader Isaac Herzog from the Herzog Fox Neeman Law Firm was a big-time lawyer working for monopolies, duopolies and market leaders.

"I'm facing all kinds of pressure to soften my position, but none of that pressure comes from the leadership. Herzog is giving me his full support. After all, most of the business sector is not made up of monopolies and conducts itself fairly. A monopoly can also conduct itself fairly. The vast majority of businessmen are honest, serious individuals who are building this country and provide its people with a livelihood. I admire people who build their own business in a good and honest fashion. On the other hand, the Israeli economy, and that includes the stock market, has a small number of owners who maintain pig-greedy, unreasonable habits - and these must be denounced. So I'm facing pressure. So what? We have to do this in order to grow, in order to let small and medium businesses prevail and grow, and to fend off poverty. So they're pressuring me. It's no big deal."

Did a Legislative Ministerial Committee on Legislation approve this bill?

"I'm expecting Yair Lapid and Naftali Bennett to get up and say, 'we're with you on this.' So far they haven't raised any objections, and they gave us until the beginning of the next Knesset session to reach a settlement with the Ministries. We're seeing progress. It's no cakewalk, and involves quite a bit of drama."

Owners and managers of large food companies are organizing a public campaign in an attempt to convince the people that the government is to blame for the high cost of living.

"I'm happy about that, because the moment they start blaming others for it, it means they're already admitting the problem. That's a good start. I'm ready and willing to consider the government's part in and responsibility for the high cost of living, but I also know that the companies, the managers and owners, are to blame. So let's enforce transparency and then we see who's to blame. If a bottle of coke costs four times more in Israel than it does in New York, then maybe the government is to blame as well, but the monopoly contributes to that, perhaps decisively."

We haven't heard a word about the Israel Electric Corporation (IEC) (TASE: ELEC.B22) monopoly, the Israel Ports monopoly, the Israel Airport's Authority's monopoly, and so on and so forth.

"That's something else. Here we're dealing with a national monopoly."

The outcome is the same. Strong labor unions act as a multifaceted monopoly that is also responsible for the cost of living. You and your friends in the Labor Party are afraid, even terrified, of hurting the unions and the support they give and may continue to give you in the elections.

"That's not true. I want there to be a discussion about the ports as well. I'm currently researching the topic. We need to further develop existing ports and build another port or two. I called for a discussion in the Knesset, and it raised the anger of certain individuals, including Transport Minister Yisrael Katz and the heads of the Ports Labor Union. As for the Electric Company, I realize that extensive reform is on its way."

Reform that will paralyze the future of competition, reinforce the Electric Company labor union's monopoly, and result in higher rates.

"I'm still investigating the matter. I haven't gone too deep into it yet."

And how does the Labor Party reach decisions on its economic positions?

"We have discussions, a lot of discussions among socio-economic party members. Buji (Herzog) and I also have a lot of in-depth talks about economic issues."

Was there a "shadow government"? Do you see yourself as a shadow Minister of Finance or Minister of the Economy?

"I'll let you decide that."

What do you or your fellow party members think about differential VAT?

"Other countries have that. It's very interesting, particularly when it applies to food. I do not know how to properly implement it, but I support the idea."

What about senior executive salaries?

"If there is one topic that people have begun handling well, it's definitely that. The Minister of Finance Yair Lapid and the Ministry of Finance's Supervisor of Capital Markets Dorit Selinger did some good work on senior executive salaries. Any salary in excess of NIS 3.5 million a year will not be recognized as expenses by the Income Tax Authority. It's a first step in the right direction."

You're well-versed in macroeconomics. What do you think about financiers who earn NIS 6, 8, 10 million a year? About a distressed syndicate CEO who earns NIS 16 million?

"I find it absurd. In the industry I come from, some types of successes create value for shareholders. Something starts off small and then grows. Having a large salary even when the company's losing money is not only an outrageous habit of people who are economically and socially indifferent - it's also an absurd business practice. You've lost money, so by what right do you withdraw such amounts? By what right does the Board dare to approve it? The fact that the public is talking about it is already a good thing. People are less excited about lavish festivities or the wedding of this or that magnate's son or daughter. The main idea is that only those who provide their shareholders with lucrative yields should be rewarded accordingly. Those who are losing money or staying put, however, should not."

What about budgetary pensions? In 2015 the state budget earmarked NIS 19.6 billion for funding budgetary pensions.

"Budgetary pensions should be a thing of the past, and they are now. Now we need to think about what to do next. Billions of shekels are being spent on this, and the right thing to do is to place a cap on income. It's true that people used to get their benefits in the past, but today we need to set a maximum threshold as we've now reached completely senseless amounts. We need to make sure that budgetary pensions do not exceed a certain amount, which comprises the whole of the retiree's income."

Judges, as are some retired IDF officers, have budgetary pensions that reach NIS 70,000 and 80,000 a month.

"These pensions are neither reasonable nor moral, not even for retired judges."

What they're saying is 'this is a contract signed between an employer the government and an employee.' "That's true. It is a contract, and that's why we need a certain legislative process. We need to set a maximum budgetary pension that will also account for other income received by the retiree. The idea is to make sure that whatever comes out of the public purse is within reason. Since this is a complicated issue which relates to quite a few delicate issues, a committee will need to be established. The committee will have to take a very close look at the matter and determine certain criteria, pass resolutions and have the Knesset pass them into law. There's no escaping it. The public burden is too heavy."

"What about the security budget? (Margalit is a member of the Joint Finance, Foreign Affairs and Security Committee S.K.L).

"We have a tremendous amount of respect for the military. Everyone in my family has served. On the other hand, there's no doubt we need a serious revision of the security budget. The IDF and the Ministry of Defense must adapt themselves to present-day challenges and threats, but they are more prepared for them than they were 15 years ago. They are indeed more technologically-advanced and sophisticated, but the situation of our neighboring countries has changed. As a result, you see military units that are very adapted to threats that are doing fantastic work, but some units require rethinking. For example: how many armored divisions do we need? What will the air force look like? What does "cyber warfare" mean (also in terms of reducing expenses elsewhere)? How many people are needed in purchasing missions? Every time the Finance Committee discusses the defense budget, and I hope this won't happen this year, we suddenly run into all kinds of terrifying threats that involve Iran and so on. That's the rhetoric we're facing. And one more thing: just look at all the money that goes into pensions and various payments. Why not implement the Goren Committee's recommendations, for example, which dealt with pensions for IDF invalids. They gave their recommendations at the end of 2010. Has anything happened since?"

Let's say you're the Prime Minister. The Minister of Defense and the IDF Chief of Staff come up to you and say, "If you cut by NIS 2 billion, you get 200 dead soldiers in the next war. You cut by NIS 5 billion, you get 500.' Then what do you do?

"I've been attending budget meetings all my life, in many places and many companies. It takes a lot of dedication, determination and time to deal with all that. The defense budget must be rethought. It must. Maybe we need to take out everything that isn't essential to the IDF's core operations, such as rehabilitation, budgetary pensions, retirement age, and so on. These should be handled by others. The army has to deal strictly with defense and homeland security, rather than become a kingdom within the state. I would recommend the Chief of Staff to prepare a "zero budget", that is, to build everything up from scratch. That will give us a picture as to where we want to go. There are talks, for example, about the IDF moving to the south, and we don't have the money to relocate everything at the right time and speed. To that I say: no more telling us stories. You figure it out, and not in your usual ways, but in a financially-feasible way. Think of it as a financial transaction. For example, get a mortgage on IMI or Tzrifin lands as an advance payment for the move, work swiftly, and then deduct the relevant amounts.

"Our people are gasping for air."

Discussions are starting on the 2015 budget. Of the last budget concluded in late May 2013 you wrote: "This budget is so riddled with issues that we have a moral obligation to fight against it…There's no disputing it…This is a bad budget. Period."

"The budget was bad because of two main reasons: it pushed 50,000 families below the poverty line by raising the VAT rate and by cutting back on pensions without prior warning. I can actually see before my eyes how a child's lunchbox is now empty because of that. The other reason is that it heralds zero growth. For small businesses, for technology, for the North District, for the South District, for Arabs, Bedouins or Ultra-orthodox Jews. The end result is that the rate of unemployment is actually much higher than what we find in official figures. The economy is suffering from terrible unemployment. I hope that the next budget will change things, although I'm not entirely sure that's going to happen.

Let's get to the point. Suppose you're in charge of the budget.

"The truth is that we have several key issues to address: housing, and we have a comprehensive plan that will cause a revolution and make things happen. Cost of living: our guys are struggling for air. We need better-quality employment because people want to make progress. I would raise the government spending target, raise the deficit in a calculated fashion, and handle issues that relate to growth and inequality in groups that will provide yields and generate growth. The ultra-orthodox want to be involved in the workforce, 30,000 young Arabs in the North District are yearning to fit in. We need to help them, sure, even subsidize their employment for a few years. Small businesses are the very heart of the Israeli economy We need a national plan. There are 460,000 small and medium businesses. They are our future. There are many others who want in and that is simply denied of them. We need to have the banks, the institutions and regulators involved in this endeavor and to designate an agency that will be responsible for the whole thing. We don't need another group of 20 or 30 officials and a mountain of paperwork that oversee the business and force you into running circles. In its better days, Israel could do certain things in ways that no one else could: We doubled and tripled the size of the cake, and got new population groups in.

You need money for all that. From where?

"I will raise the deficit in a controlled fashion and show the IMF how I intend to pay it all back. The resultant growth will invigorate the business sector. I know we can reduce inequality by way of education and communal development. My mother used to be an educator at the Kibbutz and my dad ran a local youth center. I'm all for education and communal development. The Israeli government must offer direction to small businesses, to technology. It must formulate a plan for the North, South and Jerusalem Districts, and not everything should come out of the budget. I'm talking about a new social-democratic way that combines money, the business sector, and government assistance.

Friends call you the "Socialists' Millionaire".

"Fourteen years ago I didn't have it, and then I got it. So what? Until I was 40 I had been experiencing every problem faced by the middle class, and, a year after my company finally made it I founded the largest social project in Jerusalem. I've been an activist for 11 years, and I visit the neighborhoods every day. I really don't feel like I should apologize to anyone."

You've proven yourself a success and you contribute to society. What's your weak point?

"I should be more patient."

The Labor Party's all-star team is unable to shake down Benjamin Netanyahu's hegemony. Even after Sheli Yechimovich was replaced by the new chairman Itzhak "Buji" Herzog, the party seems unable to go up in the polls. Despite the fact that Kadima is now a shadow of its former self, Yesh Atid is shrinking, and Moshe Kahlon's entry into fray the Labor Party has failed to restore its position as Israeli politics' alternative. At most, it is another satellite leftist-centrist party challenging the Likud. Even the small Meretz party is making gains and absorbing those disappointed with the performance of Yesh Atid, Ha'tnua and Kadima, leaving the Labor Party without a piece of the pie.

In the world of business, from which you come, it is customary under such circumstances to make a change, to change teams, to look for new markets, perhaps introduce a change of leadership, or enter the government.

"The Labor Party is starting to become an alternative. Buji's leadership can create an alternative, more centrist party which defies the government. We led a revolution by electing him and we succeeded. This is Buji's shot, and that's his greatest strength - he knows how to surround himself with a tightknit group of people. We will bring the alternative with the support of all satellite and major parties. It's becoming clear today that Israel is tired of Netanyahu. You see it everywhere across the country, particularly in places that were Likud strongholds in the past. In addition, Netanyahu is getting tired. After three terms in office it's time to let go of the reins and make room for new forces that can handle Israel's new reality. His strategies and theses of a fat public sector and a thin public are also outdated, and are severely frowned upon by the middle class."

Should the Labor Party enter the government in order to save the political process in case Bennett resigns?

"Netanyahu wants the Labor Party in the government so that it acts as a security guard who releases prisoners. The Labor Party will not enter the government just to serve as Netanyahu's good security guard. The Party has a political creed that seeks a historical compromise. Netanyahu tries to brand himself as a moderate right-wing leader who cooperates with the center in order to reach a historical agreement, but that is really not the case right now. At this point, the process is headed towards some very dire straits. The Labor Party should get up and say: 'Netanyahu's leadership has failed. We provide an alternative."

How do you explain the fact that the Labor Party is unable to create an alternative to Netanyahu?

"I believe the Labor Party is going to win by a landslide in the next elections. In 3-7 years you will find us at the helm."

The last Labor Party leader who won you the Prime Minister's office was Ehud Barak in 1999. Is it possible that the Labor Party had lost its agenda?

"In the last few years the Labor Party has been conducting itself as though it heads a labor union, while forgetting the fact that it actually has a country to run. We should restore the power possessed by the party that founded this country. We've experienced a setback, but the party wants to be back in the limelight. We are a team: Buji Herzog, Eitan Cabel, Omer Bar Lev, Merav Michaeli, and I. To Buji's credit, I should say he knows how to build a team."

Should we talk with the Palestinian unity government?

"Our dialogue with the Palestinian Authority must be pursued. The Authority is our partner. Hamas is not a partner and should be left out of the negotiations."

Will you run for Party leader in the next elections?"

"At this point I intend to support Herzog in the next election, and will endeavor to see him elected Prime Minister. I have a lot of learning to do. I'm proud to say that I'm taking my time familiarizing myself with parliamentary work, and I will have to do the same when I begin fulfilling my duties as minister. I am also learning to work as a team member who supports the leader and avoids undermining him."

What's your take on Lapid's performance as Minister of Finance?

"In order to be the Minister of Finance one needs to have practical experience. However, I do appreciate his intentions and value him as a person. I admire the integrity he demonstrated when he entered politics. As Minister of Finance, however, he should have done things differently."

Will the Labor Party form a government with him in the next term?

"We intend to have him in the next government we form along with Tzipi Livni."

What about Bennett?

"Not Bennett. Bennett and Uri Ariel have systematically sabotaged many of the negotiations and have led Israel down a very strange path."

What about the Likud? The Likud has some people we can work with, alongside some very extreme factions. I would be happy to collaborate with the more moderate elements in the party."

When are the next elections due?

"Two years from now, I suppose."

Look at the kind of impact you had as a business entrepreneur and company CEO as opposed to what you managed to achieve in one year as MK. Wouldn't it be easier to exert influence from the outside?

"No, not at all. I'm extremely satisfied with my work. I am overseeing the entire process from the Knesset, and, like I said: in 3-7 years from now you will find us at the helm and in charge of everything."

Erel Margalit

Age: 53

Place of residence: Grew up in Kibbutz Na'an, where he lived until the age of eight, and then moved with his parents to Karmiel and later to Jerusalem, where he lives today.

Marital status: married to Debbie, a painter, and father of three daughters: Tair, Eden and Maya.

Military service: served in "Orev Golani" as fighter and commander.

Education: PhD in philosophy from Columbia University, New York. The subject of his doctoral thesis was "The Entrepreneur as a Leader in the Historical Process".

Previous functions:

Founded the JVP venture capital fund, which - over the past 20 years - has been involved in the founding of over 90 companies and the creation of thousands of jobs; founded the "Be'keila" NPO designed to reduce social inequality among children and adolescents in Jerusalem in education and society; founded the "Hama'abada" (Laboratory) Theater (today the "Zapa Ba'ma'abada" Theater), which provides Jerusalem artists with a place where they can pursue their art; is number ten amongst Labor Party members, and in this Knesset has been serving for the first time as a member of the Finance Committee, the Science and Technology Committee, and the Joint Finance, Foreign Affairs and Security Committee. In addition, he serves as the Chairmen of the Jerusalem Lobby at the Knesset, the Small and Medium Businesses Lobby; the Negev and Galilee Lobby; the Training and Employment of Ultra Orthodox (Haredi) Jews Lobby; the Promotion of High-tech and Economy within the Arab Sector Lobby; and the Employment of Citizens over 40 Years of Age Lobby.

And: Margalit was the point guard of the Israeli Southern District Youth Basketball Team.

Published by Globes [online], Israel business news - www.globes-online.com - on May 8, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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