Privatization has cost Israelis dear

Trajtenberg is wrong to believe that breaking government monopolies and unions will lower consumer prices.

Prof. Manuel Trajtenberg (photo credit: Mark Neiman / GPO)
Prof. Manuel Trajtenberg
(photo credit: Mark Neiman / GPO)
Breaking the unions, privatizing government monopolies and opening economic sectors to competition is the message that the Trajtenberg report’s chapter on infrastructure wanted to send the government. Israel’s infrastructure is in need of improvement, but the Trajtenberg recommendations will not solve the problems, but will actually worsen them.
Railways, seaports, and airports are inefficient and pay their employees exorbitant salaries, but opening them to competition under the present model will result in higher prices, non-competitiveness, and will weaken the middle class. The evidence appears in plenty in the report, but was ignored by its authors.
Instead of learning the lessons from past failures, the authors redouble them. This is irony taken to the extreme: the Trajtenberg report proposes that we pursue the same path that prompted the social protest that led to the establishment of the committee in the first place.
The objective is set out in the chapter’s opening sentence, entitled, “The government’s difficulties to lower prices due to the governability problem vis-à-vis powerful organizations.” These organizations are the strong workers committees at the government monopolies. “They are just as bad as the tycoons and in some cases even worse,” says a top source close to the Trajtenberg committee.
The line of reasoning is as follows: infrastructures are characterized by low productivity because the unions prevent efficiency; the government is afraid to confront the unions; and the public pays the price for its helplessness. To highlight the point, the committee reveals a tiny secret: the salaries at the government monopolies – Israel Electric Corporation, Mekorot National Water Company, Israel Ports Development & Assets Company Ltd. and Israel Airports Authority – are an average of 36 percent higher than the salaries of employees with equivalent skills in the private sector. The so-called overpayment to these employees is NIS 1 billion a year.
“This means that this money is transferred – through prices for services that the monopolies are supposed to provide – directly from households to the groups of employees at these companies,” says the source.
Who will profit from privatization? The strong unions drink our blood, the Trajtenberg committee trumpets. In the days before the cottage cheese protest, this demagoguery would have caused a storm. The public would have reared up against the exploiter, and the chat room talk-backs would have written, “Privatize them!” But the public, how shall we put it? – has matured.
It wasn’t the government monopolies who raised the price of cottage cheese, and they are not to blame for the high cost of living. This is also what the Trajtenberg report shows. The report says not a word about the biggest government monopoly, IEC, even though the price of electricity in Israel is one of the highest in the world.
“We took the path of citing examples, and to present one outstanding example,” said the committee to explain the absence of IEC from its report. The example that the committee chose was Ashdod Port Company, Haifa Port Company, and Eilat Port Company.
Their inefficiencies and the great power of their workers committees are well known. Trajtenberg estimates the damage they cause the economy at “hundreds of millions of shekels” a year, but he fails to show how this affects the prices of goods on store shelves.
Meanwhile, the Ashdod Port, which has so enraged Finance Ministry officials with the generous incentives it gives employees, has reported record profits, and will probably pay the government a dividend of up to NIS 400 million on them.
The Finance Ministry rejects out of hand the approach of Ashdod Port CEO Shuki Sagis, who works with the union to improve the company’s performance. In view of the company’s performance, maybe his policy is worth some consideration.
In the case of Egged Israel Transport Cooperative Society and Dan Public Transport, Trajtenberg gets the right numbers. They cost NIS 720 million a year, but it is the Finance Ministry that pays. If they were privatized, the government subsidies would disappear and the price of bus tickets would rise accordingly.
We know this because that is what happened in the diesel for transportation market. According to Trajtenberg, the lack of competitiveness in this market costs the public NIS 400 million a year. The lack of competitiveness in the cooking gas market costs the public NIS 150 million a year. The competitive condition between the fuel companies is catastrophic, and the public pays the price. It is not clear how much.
There is no government monopoly in the diesel for transportation, cooking gas, and gas stations markets, and there are no strong unions in them either. The barriers in these markets were all removed and they were opened to full competition.
The result is that the public pays more for all these products. And now Prof. Manuel Trajtenberg is calling to reimpose government prices controls on diesel for transportation and cooking gas.
The honorable committee members ignored the writing on the wall and their mandate. Breaking the unions is the solution to the high cost of living.
Privatization examples
Buses – Trajtenberg: Open the market to competition by 2015.
86% of public transportation users ride buses and the rest use trains. In the 2000s, Egged and Dan controlled 95% of the bus market. In 1997, the government decided to privatize bus routes, through the sale of clusters of routes by tenders, while simultaneously promising Dan and Egged that their market share would not fall below 71-75%. Their fares are subsidized by 25%. The Trajtenberg committee recommends opening the entire public transportation market to competition and require competitive prices and service by 2015, and future subsidy agreements will not exceed the sector’s average operating costs.
Seaports – Trajtenberg: Cost the economy hundreds of millions of shekels a year.
99% of Israel’s cargoes pass through its three seaports.
In 2005, the government, at the initiative of then Finance Minister Binyamin Netanyahu, decided to break up the Ports Company and gradually privatize them by 2010. The first part has been carried out, and the second part is just now getting underway.
The ports are regional monopolies, their productivity is 15-25% less than their foreign peers, cost the economy a fortune through delays, waiting times for lading and unlading of ships, and the cost of storage at port. The Trajtenberg committee recommends privatizing the new wharfs at Ashdod Port and Haifa Port to create intra-port competition, because “we cannot permit inter-port competition", and expedite the new wharfs’ construction to complete them in 2012.
Gas stations – Trajtenberg: Cartels with the fuel companies.
There are 35 fuel companies, but four – Delek Israel Fuel Corporation, Paz Oil Company, Sonol Israel and Dor Alon Energy in Israel – control 90% of the market and the government controls the price of gasoline. There is no real competition.
There are two main market barriers: the prolonged planning and licensing procedures for gas stations, and the difficulty in signing contracts with car fleets. The Trajtenberg committee recommends giving priority to independent companies in planning, and order the Israel Land Authority to set aside land for 40 independent gas stations in the next two years, and the National Infrastructures Ministry should set a mechanism requiring the big fuel companies to sell gas stations in city centers to small companies.
Cooking gas – Trajtenberg: Small companies are pushed aside.
Cooking gas sales total NIS 2.4 billion a year. Since 1989, the government has tried to boost competition in the market by bringing in new suppliers.
There are currently 30 suppliers, but four companies – Amisragas, Pazgas, Supergas, and Dorgas – control 90% of the market. There are two main barriers in the market: the difficulty of an apartment or office building to replace its supplier, and discounts by large companies to push out smaller companies. The Trajtenberg committee recommends reimposing government price controls at the wholesale and retail level to lower prices.