GOI APPROVES REFORM OF ELECTRIC COMPANY DESPITE

UNCLAS SECTION 01 OF 03 TEL AVIV 000762 SIPDIS SENSITIVE SIPDIS NEA/FO FOR DANIN; NEA/IPA FOR WILLIAMS, SHAMPAINE, BELGRADE; NSC FOR ABRAMS, DORAN, WATERS; TREASURY FOR HIRSON E.O. 12958: N/A TAGS: ENRG ELAB PGOV KPRV IS SUBJECT: GOI APPROVES REFORM OF ELECTRIC COMPANY DESPITE STRONG EMPLOYEE OPPOSITION Sensitive but unclassified -- please protect accordingly. ¶1. (SBU) SUMMARY: On February 18, the cabinet approved a proposal by Minister of Finance Abraham Hirchson and Minister of National Infrastructure Benjamin Ben-Eliezer to reform Israel's electricity market. The reform plan is to be phased-in starting in 2008 and envisions dividing the Israel Electric Corporation (IEC) into three functional units: production, transportation, and distribution. While GOI officials and press hailed the long overdue reform efforts, the IEC labor union protested with strikes and other unilateral measures. The Labor Court subsequently issued an injunction temporarily prohibiting union sanctions and instructing the state to freeze the drafting of planed reforms in the energy sector. The GOI and the IEC union will resume negotiations to discuss the workers' rights in the reform plan, but the IEC threatened to strike again as early as March 11 if no agreement is reached. Critics maintain that despite the cabinet's smooth passage of the reform plan, the GOI is still too weak to impose its will on the IEC. They claim it is a bloated and inefficient entity controlled by its 13,000 employees and by retirees receiving generous pensions. Hirchson suggested that the parties would reach an agreement "within the next few months," and promised that Israeli citizens would "not be held hostage" by IEC employees. While passage of the reform plan is a major accomplishment for the GOI, pursuing meaningful privatization and keeping electricity prices in check will be even more difficult without the support of the IEC union. END SUMMARY. -------------- MAIN ELEMENTS OF THE REFORM PLAN -------------- ¶2. (U) The Israel Electric Corporation (IEC) will be divided into three functional units: -- Electricity production. In 2008, the electricity production unit will be split into four companies, determined by their use of coal or natural gas, which will begin operating in January 2009. -- Electricity transportation. The electricity transport company will be established by the end of 2009, and begin operating by the end of 2010. According to Gabby Levy, International Relations Director at the Ministry of National Infrastructure, because of Israel's small size, only one electricity transport company needs to be established. Within a year from the date of establishment, the cabinet can decide whether this company will remain a subsidiary of the holding company, or become a separate state-owned company. -- Electricity distribution. Four or five electricity distribution companies will be set up by January 2009, similar to the current regional distribution network, and will begin operations in January 2010. Similarly, other subsidiaries for planning and building power stations, logistics, the purchase of fuels, and other functions will be established by January 2009 and will begin operating in 2010. According to the approved plan, at least 49 percent of production and distribution facilities would be privately owned by 2013. -------------- GOI ACTION LONG OVERDUE ... -------------- ¶3. (U) Calls for reforming the electricity sector are not new. Since the early 1990s, management experts -- including KPMG, an international consulting firm hired by the Ministry of Finance (MoF) to evaluate Israel's inefficient energy sector -- have recommended splitting up the IEC. In 2001, a panel of experts headed by Avi Ben-Bassat, then MoF Director General, also concluded that the IEC needed to be re-structured. However, in each instance, the IEC employee union staunchly opposed the recommendation, arguing that the IEC should continue to be one unified company. The GOI has made several attempts to reach an agreement with the union. In September 2006, for example, the GOI decided to restructure the company by including appropriate legislation TEL AVIV 00000762 002 OF 003 in the Economic Arrangements Law. The plan was to be implemented after negotiations with the workers assured them of proper compensation. However, after a series of brutal strikes, the workers forced the GOI to eliminate the restructuring clause from the Arrangements Law. ¶4. (U) In press statements following passage of the reform plan, Finance Minister Hirchson referenced the IEC's substantial debt and emphasized the need for reform, adding, "The citizens of Israel cannot be held hostage to the employees of the company." He promised that the government would not "surrender to any ultimatum" and suggested that the GOI is likely to reach an agreement within the next few months with IEC employees on preserving their rights in the framework of the plan. Kobi Haber, MoF budget director, acknowledged that the proposed legislation was more complicated than the MoF had previously envisioned because Minister Ben-Eliezer had insisted that the workers be involved in negotiations throughout the process. Striking a more cautious tone, Ben-Eliezer clarified that for the time being the reform plan would involve "reorganization," instead of a complete privatization of the IEC. He claimed that the GOI cannot take too many risks and must move slowly on the project in order to ensure that there are no further power outages at the hands of the labor unions. -------------- ... BUT CAN THE GOI REIGN IN THE IEC? -------------- ¶5. (U) A large cabinet majority passed the proposal: 16 in favor, two abstentions (Minister of Transport Shaul Mofaz and Minister of the Environment Gideon Ezra, both of Kadima),and one opposed (Labor Party chairman and Minister of Defense Amir Peretz). The concession held by the IEC was slated to expire in March 2006, but, in the absence of agreement with the union, it was extended to March 2007. The cabinet decided to extend the franchise by an additional four months, and made clear that any future extensions would require approval from the Ministers of Finance and National Infrastructure. ¶6. (U) The IEC's critics maintain that despite the cabinet's smooth passage of the reform plan, the GOI is still too weak to impose its will on the company, which they claim is controlled, de facto, by its 13,000 employees -- 9,700 of whom are permanent employees -- and retirees who receive generous pensions. -------------- MORE UNION STRIKES LOOM ON THE HORIZON -------------- ¶7. (U) As expected, following the GOI approval of the reform plan, the IEC protested by launching a series of unilateral actions. These included blocking the transfer of information to IEC's board and government agencies and ministries, cutting off electricity to users in arrears, suspending training courses, and refusing to load coal at power stations during non-regular working hours, which triggered numerous blackouts in the south of the country. The Labor Court subsequently issued an injunction temporarily prohibiting union sanctions and instructing the state to freeze the drafting of planed reforms in the energy sector. On February 21, the chairman of the IEC workers union, David Tsarfati, and the Histradrut labor union said they would abide by the court ruling and refrain from going on strike until after March 11. -------------- ELECTRICITY PRICES BOUND TO RISE -------------- ¶8. (U) IEC employees argue that re-structuring the company would lead to a hike in electricity prices. However, as Haber pointed out, the price of electricity has been kept artificially low. Without reform, rates are bound to increase even more because of excess costs associated with an oversized work force (comprising an estimated 2,200 superfluous employees),inflated salaries, and wasteful management policies. Moreover, breaking up the company into TEL AVIV 00000762 003 OF 003 logical components -- production, transportation, and distribution -- and encouraging competition among five production companies and four distribution companies would promote efficiency, save money, and ultimately lower prices, he said. (Note: The GOI supports a policy of privatization of government bodies and aims to allocate up to 20 percent of the IEC's generation capacity to independent power producers. This is meant to promote competition and maximize the economic efficiency of the electricity market. Privatization of the main oil refineries -- Ashdod and Haifa -- has already begun. End note.) -------------- COMMENT -------------- ¶9. (SBU) The relatively smooth approval of a plan to reform the electricity sector and restructure the IEC represents a major accomplishment for the GOI -- Hirchson and Ben-Eliezer in particular -- at a time when ongoing investigations of political and corruption scandals have eroded the Israeli public's confidence in its leadership. The GOI has up to eight months in which to reach an agreement with the IEC employee union on the restructuring plan before implementation begins on parts of the reform. However, without union buy-in, promoting badly needed reforms and pursuing privatization while also ensuring that the lights stay on will prove to be a formidable challenge. ********************************************* ******************** 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. ********************************************* ******************** JONES