Jerusalem Center for Public Affairs


Privatization of the Israeli Economy


The Application of Environmental Finance in the Israeli Setting: The Yarqon River as a Case Study

This volume, the ninth in a series on aspects of privatization in Israel, focuses on ways to finance projects that improve the quality of life without dependence on public financing - specifically, the renewal of the Yarqon River in Tel Aviv and the economic development of adjacent areas. This volume presents the views of Israeli and international financial experts, officials of the Yarqon Authority and the Ministry of Environmental Quality, and experts in the fields of law and water management. The volume is based on discussions at a conference held in June 2002 sponsored by the Milken Institute and Tel Aviv University in cooperation with the Tel Aviv-Los Angeles Partnership.

Methods and Models of Privatization

On January 2, 2002, a closed roundtable for selected experts was held in Jerusalem on "Methods and Models of Privatization," in cooperation with the Koret Foundation. Yaron Yakovs, Director of the Government Companies Authority and the individual in Israel in charge of privatization on a national scale, who also lectured in our September 2000 event, opened the forum with a general discussion of models and a review of future plans for large-scale privatization undertakings. Discussions of two major case studies followed: David Hermesh, Director General of El Al Israel Airlines, reviewed possible ways to privatize the national carrier. Yitzhak Klein, Director General of M.I. Holdings, who is in charge of privatizing the major banks in Israel, spoke of the possibilities in this realm. Prof. Ben-Zion Zilberfarb, academic coordinator of the Jerusalem Center's Privatization Program and former director-general of the Israel Ministry of Finance, presented a comprehensive summary of the methods of privatization relevant for Israel.

Since the beginning of the privatization process in Israel (in 1985), a number of possible methods of privatization have been available, with two variations being dominant. The first and most popular is the sale of the entire enterprise to a private company or individual, which accounted for 45 percent of privatized companies during the period 1985-1997. The sale of a controlling interest in government companies was never done through the stock market. In some cases a minority stake was issued to the public, but the controlling interest was sold through private placement. No effort has been made to spread ownership among the public, as has been done successfully in Britain. Indeed, this is one of the central criticisms of the process of privatization in Israel. The workshop reviewed the various methods of privatization available, and considered a change of emphasis that may help to speed up the process. Indeed, the adoption of methods that allow for expanded ownership of privatized companies by the general public will help broaden public acceptance of the entire process.

Privatization and Workers' Rights

On June 25, 2001, a conference was held in Jerusalem on Privatization and Workers' Rights, in cooperation with the Koret Foundation, the Konrad Adenauer Foundation, and the Milken Institute. As a result of our previous work, we have learned that one of the greatest blocks to privatization is the problem of protecting workers' rights, this in a country where labor unions are quite strong.

Some 100 participants came together from throughout the country including Knesset members, lawyers specializing in labor law, representatives of labor unions and companies slated for privatization such as Israel Aircraft Industries, El Al Israel Airlines, Elta, Bank Leumi, the National Coal Company, and the Ports and Railways Authority, as well as representatives from the General Federation of Labor (Histadrut), local authorities, and the relevant government ministries including Defense, Finance, and Justice.

Minister of Regional Cooperation Tzippi Livni, who opened the conference, formerly served as Director-General of the Government Companies Authority, the body responsible for the privatization of government-owned companies. Also participating was guest expert Birgit Breuel, former President of Treuhand, the German Privatization Authority, who described Germany's extensive experience with the massive privatization of East German enterprises after the country's reunification.

Presentations at the conference were also made by:

  • Dr. Hadara Bar-Mor, Esq., Assistant Dean, Law Faculty, Netanya Academic College
  • Nir Gilad, General Accountant, Ministry of Finance
  • Efraim Jiloni, Chairman, Economic and Social Authority, General Federation of Labor
  • MK Haim Katz, Secretary, Israel Aircraft Industries Workers Union
  • Yuval Rachlevsky, Director of Wages and Labor Agreements Unit, Ministry of Finance
  • Tzion Shema, Secretary, Bank and Insurance Workers Division, General Federation of Labor

Privatization in Local Government: Models and Lessons

On June 13-14, 2001, a conference was held in Ashkelon on Privatization in Local Government: Models and Lessons, cosponsored by the Koret Foundation, the City of Ashkelon, the Economic Corporation of Ashkelon, and the Milken Institute, to discuss successful privatization efforts in that city and the growing experience with privatization in other Israeli municipalities. This conference presented an opportunity to present working examples of privatization and allowed those in attendance to learn from the practical models which were presented, and from the experience of other local authorities represented at the conference as well. Some 90 participants came together over two days to discuss the current experience of Israeli local authorities with outsourcing and joint ventures with private companies, in a venue which afforded them a unique opportunity to exchange information.

Conference participants included:

  • Shmuel Bar Lev, Head of Katzrin Local Council, Golan Heights
  • Noa Ben Arye, Esq., Chief Counsel, Union of Local Authorities
  • Avraham Ben David, Director General, City of Ashkelon
  • Amihai Ben Dror, Director, Municipal Policy Unit, Union of Local Authorities
  • Tzion Cohen, Deputy Director General, Mekorot Water Company
  • Yaakov Efrati, Director General, Ministry of Infrastructure
  • Hillel Granot, Director General, Petach Tikva Economic Development Corporation
  • Anna Hazan, Deputy Director, Local Government Section, Ministry of Interior
  • Yehoshua Hazenpertz, Accountant, Schiff, Hazenpertz and Associates
  • Dr. Arye Hecht, JCPA Fellow
  • Zvi Marom, Director General, Jerusalem Center
  • Ron Nachman, Mayor of Ariel
  • Michael Reiner, Representative of the Koret Foundation in Israel
  • Hagai Shefer, Director General, Milgam Urban Services
  • Haim Turgeman, Director General, Ashkelon Economic Corporation
  • Benny Vaknin, Mayor of Ashkelon
  • Prof. Glenn Yago, Director of Capital Studies, Milken Institute, Los Angeles
  • Prof. Ben Zion Zilberfarb, former Director General, Ministry of Finance

Alternative Financing for Urban Infrastructure

The Jerusalem Center cosponsored a conference in Tel Aviv on September 13, 2000, on "Alternative Financing of Urban Infrastructure: The Habimah Parking Structure Project," together with the Milken Institute, Tel Aviv University, and the City of Tel Aviv-Yafo. A few months later the Habimah Theater parking structure was chosen as the first-ever "pilot" project in Israel for the issuance of municipal bonds. If successful, this practice may be adopted by other municipalities and could herald a real revolution in the expansion of financial resources for local authorities.

The presentations included:

  • Robert P. Feyer, Bond Counsel at Orrick, Herrington & Sutcliffe LLP, "Outline of Legal Considerations for Parking Revenue Financing"
  • Michael A. Freed, American Capital Access Financial Guaranty Corporation, "Improved Access to Capital through Bond Insurance"
  • Stanley Gold, President of Shamrock Holdings, Chairman of Tadiran Communications, and former Chairman of Koor Industries, "Alternative Urban Economic Development: Lessons from the U.S."
  • Ariel Kappon, Director General of the City of Tel-Aviv-Yafo, "Tel Aviv-Yafo Development Projects"
  • Miri Katz, Chairperson of the Israel Securities Authority, "Issuing Municipal Bonds in Local Authorities"
  • Anat Keinan, Chief Financial Officer of the City of Tel-Aviv-Yafo, "Sources of Finance for Urban Development"
  • Ron Lubash, Managing Director of the Israel Group of the Investment Banking Division of Lehman Brothers international bank, "Municipal Revenue Bonds for Parking Facilities"
  • Dror Nagel, General Manager of Gmulot Ltd., "Municipal Bonds as an Investment Option"
  • Fruma Narov, Senior Vice President of Urbitran Associates civil engineering, "Parking Facility Feasibility: The American Experience"
  • Dorit Salinger, General Manager of Maalot, The Israel Securities Rating Company Ltd., "Examining the Possibility of Grading the Habimah Parking Facility"
  • Prof. Glenn Yago, Director of Capital Studies at the Milken Institute, "Alternative Financial Structures"
  • Ronen Zelnir, Managing Director of IBI Underwriting & Investments Ltd., "How Do You Market Them?"

Capital Market Reforms and the Privatization Process

On September 19, 2000, the Jerusalem Center and the Milken Institute sponsored a closed forum for experts on capital market reform. As a prerequisite for privatization, it is necessary to reform the capital market to enable the raising of funds from the public or investment companies to privatize government-owned companies or services.

Moderated by Prof. Ben-Zion Zilberfarb and Dr. Glenn Yago, the forum included the following presentations:

  • Dr. Glenn Yago, Director of Capital Market Studies, Milken Institute, "Capital Access and Economic Growth"
  • Prof. Yaakov Ne'eman, Former Finance Minister, "Factors Impinging Upon Privatization Policy"
  • Yaron Jacobs, Director General, Government Corporations Authority, "Privatization of State-Owned Enterprises"
  • Dr. Asher Blass, Chief Economist, Bank of Israel, "Cost of Existing Pension Fund Arrangements"
  • Dr. Eyal Sulgenik, Chief Examiner, Israel Securities Authority, "Capital Market Reform: Survey, Analysis, and Implications"
  • Adi Rivlin, Deputy Minister for Capital Markets, Finance Ministry, "Improving Demand and Supply in the Capital Markets"
  • Prof. Ben-Zion Zilberfarb, Former Director General, Finance Ministry, "Capital Market Regulation"

Privatization and Increasing Competition in the Israeli Economy

On October 10-12, 1999, the Jerusalem Center and the Milken Institute sponsored a closed forum for experts on "Privatization and Increasing Competition in the Israeli Economy." The widely lauded forum looked at such topics as capital market reforms, municipal and local reforms, and decentralizing the peace process. The proceedings of the conference were published in Hebrew for an Israeli audience in the volume Privatization and Increasing Competition in the Israeli Economy. ([JCPA and the Milken Institute, 2000] 157 pp. in Hebrew and 82 pp. in English; Softcover $12 - NIS 40) Privatization and Increasing Competition in the Israeli Economy

Participants included:

  • Dr. Asher Blass of the Research Department of the Bank of Israel
  • Yaakov Efrati, Director General, Ministry of Infrastructure and former Director General, Ministry of Interior
  • JCPA Fellow Manfred Gerstenfeld
  • Mayor Stephen Goldsmith of Indianapolis, a leading innovator in the privatization of municipal services in America
  • Eran Goren, CEO of Nessuah Zannex Ltd.
  • Mayor Gabi Kadosh of Eilat
  • MK Nachum Langenthal, former Director General, Ministry of Transportation
  • Sassi Shilo, Acting Director General, Economics Company, Israel Union of Local Authorities
  • Arnon Tiberg, Director General, Delta Galil Industries Ltd.
  • Stef Wertheimer, Chairman, Iscar Ltd.
  • Dr. Glenn Yago, Director of Capital Market Studies at the Milken Institute

The forum was under the academic direction of Professor Ben-Zion Zilberfarb, former Director General of the Ministry of Finance.

Practical Privatization: Lessons from Cities and Markets

On June 18, 1998, the Jerusalem Center for Public Affairs and the Milken Institute held a conference in Jerusalem on Practical Privatization in Local Government, bringing together a distinguished group of Israeli officials and American experts including the Prime Minister and Finance Minister of Israel, and the Mayor of Indianapolis. The proceedings of the conference were published in Hebrew for an Israeli audience in the volume Practical Privatization: Lessons from Cities and Markets, which outlines how outsourcing and privatization can be used by Israel's local authorities to improve their ability to deliver quality services to their residents at lower cost. ([JCPA and the Milken Institute, 1999] 122 pp. in Hebrew and 51 pp. in English; Softcover $12 - NIS 35) BOOK PHOTO

The conference discussed how outsourcing and privatization can be used by Israel's local authorities to improve their ability to deliver quality services to their residents at lower cost. The government of Israel, like that of so many other states, has found that it has reached the limits of its effectiveness in domestic service delivery and that it, perforce, must give most of its attention to those critical issues for which states are established, namely, foreign affairs, defense, and managing or regulating the economy. All other tasks must take second place, whether that is intended or not. For local government, on the other hand, those standard domestic tasks are matters of first priority. Indeed, even while hard and fast lines can no longer be drawn, we can say that local authorities exist primarily to serve their citizens in the delivery of those services.

Formally, Israel is a highly centralized state, yet it has never been as centralized in reality as it appears on paper and, indeed, local authorities have had considerable room for maneuver in providing the services they are called upon to provide. Much of this flexibility has been gained through their independent efforts to fulfill the formal demands of state law. For example, if a state law requires a minimum number of classrooms per number of students in a municipality's schools, a local authority will borrow money for them from the country's banks, if necessary, to build them, when the Ministry of Education does not have the funds, and then will successfully demand reimbursement from the state.

This leads to a second truth, namely, that local authorities gain independence and maneuvering room not only by managing grants but by managing deficits. At the same time, unlike state governments which have far more flexible resources (they can print money as legal tender), local governments are seriously constrained from a budgetary perspective. Hence, to be successful, they must maximize their savings while delivering the services they are called upon to deliver.

To make matters even more complex, local authorities are not merely service delivery bodies but are designed to foster citizenship as well, a task perhaps more important. Indeed, in the complex modern world they represent the first line of civic activity and citizen involvement. Since fostering citizenship and civil connections -- what elsewhere I have labeled "civil community" -- requires local governments of sufficiently small scale, the ability of such local governments to outsource many of their service delivery tasks is not only a vehicle for lowering costs, but also for enabling local authorities with small tax bases to survive as independent bodies within the larger body politic. Contracting with outside private and specialized entities that gain economies of scale by operating on business lines in many localities, offers small local authorities a means, perhaps the best means, for independent survival.

Not only that, but larger municipal size does not necessarily make privatization better, while we know that it usually makes civic life more difficult. Thus, the use of municipal government to foster a better civic life, made necessary by the growing size and complexity of the state, is much enhanced when privatization and outsourcing offer ways for cities, including small cities, to live within their budgets.

Outsourcing may be through traditional forms of privatization. It may be through allowing the present employees of a local authority to organize privately to take over the delivery of the services they have been providing governmentally in the past. Thus, outsourcing and privatization can not only help in those areas where they are most efficient, but can relieve local authorities so that they can concentrate on areas where they are.