State Comptroller blasts infrastructure authorities

Yosef Shapira slams country's energy officials for poor planning, "short-term vision;" ministry responds in agreement.

Haifa bay power plant 311 (photo credit: Ariel Jerozolimski)
Haifa bay power plant 311
(photo credit: Ariel Jerozolimski)
State Comptroller Yosef Shapira slammed the Energy and Water Ministry and the Israel Electric Corporation for both a faultily managed “shortterm vision” and financial mismanagement, in a report issued on Wednesday.
Overall, Shapira determined that many deficiencies pervade the decision-making among all those involved with Israel’s electricity supply for the future. The shortcomings have largely arisen from the fact that electricity sector planning has been predominantly short-term and without an overarching vision, involving repeated approval of emergency plans and financial burdens imposed upon consumers, according to Shapira.
In response, the Energy and Water Ministry said the office agrees that there is a fundamental program with managing the electricity sector. Since he assumed office, Energy and Water Minister Uzi Landau has been concerned with the issues of decentralization and governance of the power sector, according to the ministry. In order to improve the decision-making process, the ministry has launched a memorandum of law that includes a rearrangement of the authorities and responsibilities in the electricity sector.
The IEC must promote the preparation of a plan to establish Project D, and the regulators of the electricity sector must act vigorously to carry out the decision to establish this project and renewable energy production units – to lay the groundwork to supply the growing demand for electricity in the sector, while maintaining energy security and a strategic balance of mixing fuels used at power stations in the coming decades.
The IEC, alongside the Interior Ministry’s Planning Administration and the Israel Lands Authority, must likewise accelerate the expansion of the electricity transmission network in order “to enable the flow of electricity produced at private local power stations to consumers all across the country reliably as needed,” Shapira said. Meanwhile, promoting the construction of renewable energy production units and maintaining a strategic balance of mixed fuels at power stations will remain crucial, he said.
Such a fuel mixture, the Energy and Water Ministry agreed in its response, has always been key to the office’s strategic mission and will help ensure the vitality of the electricity sector.
This means, however, that Israel must keep coal as a 50 percent share of its electricity supply source, according to the ministry.
Calling Israel an “energy island,” the ministry said that its policy is to achieve a reserve of about 20% in order to provide the country with a safety net in its energy economy.
In several sections of the report, Shapira took a close look at the inner operations of the IEC and found severe problems with its financing procedures as well as its overall management and board of directors.
IEC raises capital in both Israel and abroad, and its principle mode of doing so in recent years has been the issuance of long-term bonds and loans – a method with which the State Comptroller has a serious issue.
In addition, the cost of raising capital has been greatly affected by the company’s credit rating.
A constant feeling of uncertainty, due to delays in decisionmaking regarding structural changes in the electricity sector, has also contributed to the price increase in raising capital for the IEC.
Rather than using other methods to raise capital, which could have improved company cash flows, the IEC preferred to raise capital immediately and failed to discuss alternatives, according to Shapira. Among such options would have been raising capital for the short- or medium-term at lower interest rates – a method that could have saved the company hundreds of millions of shekels, the state comptroller wrote. By issuing short- and medium-term debts at lower interest rates, more investors may be attracted, because higher interest rates often involve much longer-term commitments to tying up sums of money.
Although the accountant-general disagreed with the timing of an IEC bond issuance in January 2009 –$500 million from JP Morgan and Citibank through bonds issued in the Singapore Stock Market – the IEC management did not raise his complaints to the board of directors for discussion, Shapira pointed out. The board, for its part, did not request comprehensive information and did not check, based on the specific data of the issuance abroad, if the issuance timing and its conditions were indeed worthwhile in light of changing market conditions, approving the the deal’s execution, he explained.
An additional problem with the bond issuance was the fact that Israeli investors were “discriminated against” because they were denied the opportunity to purchase the company’s bonds issued abroad, Shapira noted.
“The State Comptroller’s Office is strongly opposed to the conduct of all of the involved entities, particularly the findings that concern abnormal conduct of the board of directors and the management,” Shapira wrote, similarly blaming the Government Companies Authority and the Accountant- General’s Office for their lack of further involvement.
“This is a failure that demonstrates that not enough effort was invested in examining alternatives that would have allowed for the saving of hundreds of millions of shekels,” he continued.
“In order to prevent the recurrence of future such issuance deficiencies, the State Comptroller’s Office believes that it is appropriate for the attorney-general to review the need for establishing guidelines for board members and officials of these bodies and of other government companies, so that they will behave in the future with care – otherwise impose on them personal responsibility.”
Another improvement in the IEC’s management that the state comptroller called for involved replacing the person responsible for auditing the company in the Accountant- General’s Office with an objective, independent body. The IEC should not itself be involved with selected such a body, and Shapira wrote that he sees any such involvement as quite grave.
The state comptroller additionally criticized the IEC for its “irregularities” in pension and wage supervision, saying the firm did not follow appropriate procedures in its questionable approval of billions of shekels, according to the report.
“The State Comptroller’s Office condemns the abnormal functioning manner of the management company,” Shapira wrote.
In response, a statement from the IEC said that the company welcomes the State Comptroller’s Report and is glad to see that the office finds energy to be of high importance. The IEC is constantly working to make improvements and treats all such recommendations with great seriousness, according to the company.
“We view this as very important and we will work in full cooperation with all the bodies audited in the report in order to promote the auditor’s recommendations,” the statement said, stressing that the IEC had been completely cooperative throughout the examinations.