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The long road to free enterprise

If you remember when Bezeq privatization began, raise your hand.

One of the signs that economic issues, in their broadest context, have returned to the focus of public interest was when Prime Minister Ariel Sharon promised recently to advance the privatization process. The exact wording of the announcement is not particularly important, since this commitment has no practical significance.

This government has not advanced the cause of privatization very far this year, just as there was no real progress last year or the year before that, under the present government or under its predecessor.

This does not mean that there has been no progress at all. In the 16 years since the privatization process began in Israel, a substantial number of privatizations have been completed. A closer look at them, however, reveals one of the more interesting phenomena of privatization in Israel: we have reached a stage at which one needs a long memory or vast knowledge of the economic history of the state in order to know what has been privatized, when and how.

Take, for instance, the current case of Bezeq. There is already new generation of young people, both in government and in the financial sector, who do not know that the privatization of Bezeq actually began in the fall of 1990. It was back in the difficult days of the Persian Gulf crisis that Bezeq held its initial public offering on the Tel Aviv Stock Exchange.

When the Gulf War ended and the atmosphere had change dramatically, there was another public offering, at much higher prices, of course. Since then the wretched tale of the attempts to privatize Bezeq has dragged on to this day.

Even fewer people are aware that the most successful privatization of a state-owned company ¿ Haifa Chemicals ¿ took place in the summer of 1986. The buyer was Aryeh Ganger, and the man who spearheaded the sale was the minister of industry and trade at the time ¿ what was his name? Ah yes, Ariel Sharon.

The sale aroused opposition because of the past connections between the well-known minister and the businessman who acquired the controlling interest (26%) in the company. The main objections concerned the low price and the manner in which the sale was conducted ¿ without a tender or full transparency. The criticism was apparently justified, but so was the sale.

What made the sale so successful? The company, after being freed from the shackles of state ownership, flourished. Its business boomed, it grew, exported more and even invested in factories abroad, employed more workers, reported profits (and paid more taxes in various fashions). All this was in the years following the sale. Later on it suffered setbacks and made the headlines in negative contexts, including pollution and harming the environment.

What can one learn from the case of Haifa Chemicals? The main lesson is that privatization works, that a going concern that is transferred from the state to private ownership can flourish and succeed more easily.

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Privatization, however, is no guarantee that a company will in fact succeed, certainly not in the long term. If it fails, its owners will sell it (willingly or otherwise) and the new owners will attempt to succeed where their predecessors failed.

Furthermore, there are lessons to be learned from the manner of the sale: how to sell ¿ and how not to sell ¿ state-owned companies. It¿s best to get a good price and essential to make the process fair and transparent. One shouldn¿t sell to cronies, certainly not in a ¿tailored¿ deal, or one that is a foregone conclusion.

Another issue is the need for regulatory measures. In the case of an industrial company, like Haifa chemicals, these measures could be ecological. In the case of Israel Aircraft Industries (IAI), or at least part of it, such measures would be security-related. In the case of the banks, the regulatory element is particularly prominent ¿ but even then it has to be separate from privatization itself.

This means the economic and business factors behind privatization apply in all cases, and it is they that must dictate the goal ¿ to transfer the company to private ownership. In keeping with this policy, the next stage must focus on ¿how.¿

Israeli experience, and all the more so that of the rest of the world, has shown that there is no single method that suits all the companies and all the circumstances. Some companies are best sold via the bourse ¿ either locally or internationally. Others are better suited for sales directly to ¿strategic¿ investors. In many cases it is both fitting and appropriate for part or all of a company to be sold to its workers and/or executives.

The main reasons for the Israeli failure in the privatization process ¿ the duration of the process, the difficulties that characterize it and the large number of companies that have yet to be privatized ¿ are the inability or unwillingness to act according to the above principles.

First and foremost, there was no clear consensus on why the companies had to be privatized. Most governments have not devoted time to an in-depth discussion of the matter. At most, they adopted privatization as a concept that had to be declaimed without understanding its essence or importance.

Ministers of finance and senior treasury officials in various governments saw the process mainly as a way to raise funds for budgetary needs. Ministers of the relevant ministries naturally saw every sale as an encroachment on their empires.

But while ministers and prime ministers come and go with increasing regularity, the officialdom remains. And government officialdom ¿ in general but not in every case ¿ objected to privatization, not only for reasons of bureaucratic power games, but also for ideological reasons.

If we have learned anything from the years of dealing with privatization, it is that the ¿Bolshevik attitude¿ is not an exaggeration or a slogan. It correctly describes the worldview of many senior officials in the state establishment in general and in the Justice Ministry in particular. This perception still views profit as bad, private wealth as exploitation of the weak and public ownership as something good, fitting and preferable.