ISRAEL'S 2007 ECONOMIC ARRANGEMENTS BILL A MIX OF

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 003958 SIPDIS NEA/FO FOR DANIN; NEA/IPA FOR WILLIAMS, WAECHTER; EB/OMA FOR GARRY; NSC FOR WATERS; TREASURY FOR HIRSON E.O. 12958: DECL: 10/06/2016 TAGS: ECON EFIN IS PGOV SUBJECT: ISRAEL'S 2007 ECONOMIC ARRANGEMENTS BILL A MIX OF OLD AND NEW REFORMS Classified By: Economic Counselor William Weinstein for reasons 1.4 b a nd d -------------- SUMMARY -------------- ¶1. (U) Israel's 2007 Economic Arrangements Bill includes both new reform initiatives and attempts to enact several old programs from previous years. (Note: The Economic Arrangements Bill, which typically moves through the Knesset approval process in tandem with the state budget, outlines the economic reforms and budget procedures planned for the upcoming budget year. End Note.) The bill, passed by the Cabinet on September 12, seeks to continue previous privatization efforts and initiate new ones, while also opening up the Ministry of Defense (MOD) budgeting process to increased oversight by the Ministry of Finance (MOF) and the Knesset. In addition, the bill calls for the government to continue its efforts to increase Israel's labor force participation rate and to encourage competition in the aviation sector. While some of these initiatives will be relatively uncontroversial, others - such as the proposed privatizations of the Israel Electric Corporation and Israel Military Industries, which have been strongly opposed by their well-organized labor forces in prior years - remain deeply contentious. End Summary. -------------- PRIVATIZATION EFFORTS CONTINUE -------------- ¶2. (U) Chief among the reforms being considered again for 2007 is the restructuring and partial privatization of the Israel Electric Corporation (IEC),an initiative originally scheduled for implementation in March 2006 but delayed to March 2007. If the GOI does not submit to pressure to remove the privatization plans from the Arrangements Bill, the legislation will call for the company to be divided into separate units for electricity production, transport, and distribution. Each of those units would then be split into individual companies that would compete against each other and be partially privatized. IEC Ltd., would become a holding company wholly owned by the GOI. ¶3. (C) Opposition from IEC's well-organized labor force has hamstrung previous attempts to implement the reforms planned for the company and is threatening to do so again. To protest the Cabinet's approval of the 2007 Arrangements Bill in mid-September, for example, the IEC workers' union stopped the distribution of bills to customers and froze the collection of debts owed to the company. The union argued that the reforms included in the Arrangements Bill would lead to a reduction in electricity reserves in Israel and endanger union members' employment and pension benefits. In response, the GOI, in exchange for the union's pledge to halt the work stoppages, is considering removing the IEC reforms from the Arrangements Bill. The government instead may attempt to implement the privatization via separate legislation following negotiations with the Histadrut labor federation. ¶4. (U) The bill also calls for the restructuring and partial privatization of Israel Military Industries (IMI),a defense company the GOI has been trying to sell off for more than a year. If the reforms are implemented, IMI will be split in two, with one half being merged with GOI-owned defense company Rafael and the other half being privatized. The Arrangements Bill also includes plans to initiate the privatization of the Israeli postal authority and complete the sale of Israel oil refineries by issuing stock for the Haifa refinery. (Note: The controlling stake in the Ashdod refinery, the other half of Israel's oil refining capacity, was sold via private tender earlier this year. End Note.) -------------- DEFENSE BUDGET TO BECOME MORE TRANSPARENT -------------- ¶5. (U) In addition to the privatization initiatives, the 2007 Arrangements Bill includes plans to increase Knesset and MOF oversight over the defense budget. The GOI aims to separate the Israel Defense Forces (IDF) and civilian MOD portions of the defense budget, with the goal of publishing the civilian portion of the budget in the government register, as is the practice for all other ministry budgets. (Note: The civilian portion of the defense budget amounts to about NIS 11 billion (USD 2.5 billion),a third of the total defense budget. It includes funding for the seamline fence, pensions, rehabilitation, IDF museums, defense delegations outside of Israel, and military transportation. End Note.) -------------- OTHER LIBERALIZING REFORMS ON THE TABLE -------------- ¶6. (U) The 2007 Arrangements Bill also outlines plans to encourage "open skies" aviation agreements with the European Union, restructure the Israel Airports Authority, consolidate and streamline the operations of local authorities, and reform the Israel Lands Administration. It continues the GOI's efforts to increase participation in the labor force, particularly among mothers, by expanding day care services and improving professional training. The bill also calls on the GOI to continue its policy of reducing the number of foreign workers in Israel. ¶7. (U) In addition, the bill will change the annual date that the state budget must be approved by the Knesset. Current law calls for the budget to be passed by December 31 of the year preceding the budget year, but in reality the government has until March 31 of the budget year before it must pass the budget or face new elections. If implemented, the new legislation would require each budget, beginning with the 2008 budget, to be passed by December 31 of the year preceding the budget year. If the budget is not passed by December 31, the government will be dissolved and new elections held unless a different governing coalition can be formed. (Comment: Completing negotiations on the budget before the start of the fiscal year, concurrent to the calendar year in Israel, will serve to reduce instability within financial markets. End Comment.) -------------- FINAL MINIMUM WAGE INCREASE POSTPONED -------------- ¶8. (U) During Cabinet debate over the budget and Arrangements Bill, the GOI succeeded in postponing the third phase of the minimum wage increase agreed to by the Olmert government in its coalition agreement with the Labor Party. The first wage increase was implemented on July 1, and the second phase will take place in April 2007 as planned. However, the third phase will be postponed from June to December 31, 2007, though the minimum daily wage will increase by NIS 140 (USD 32),instead of the originally planned NIS 125 (USD 30). Labor Party Chairman and Defense Minister Peretz abstained in the Cabinet vote to protest the postponement. -------------- COMMENT -------------- ¶9. (C) The government's continued efforts to sell IEC and IMI, the last of the significant privatizations the GOI hopes to complete, signals its dedication to continuing its policies of reducing government intervention in the economy and encouraging competition. These two privatizations, however, remain politically contentious and may require lengthy negotiations before they can be completed. The GOI's recent consideration of plans to remove the IEC reform from the Arrangements Bill could further delay the privatization process and may make it easier for the politically powerful Histadrut to again scuttle the initiative. End Comment. ********************************************* ******************** Visit Embassy Tel Aviv's Classified Website: http://www.state.sgov.gov/p/nea/telaviv You can also access this site through the State Department's Classified SIPRNET website. ********************************************* ******************** CRETZ