"It's not every day that the chairman of Israel Electric Corporation approaches the prime minister," Gen (Res.) Yiftah Ron Tal wrote, emotionally, to Prime Minister Benjamin Netanyahu three weeks ago, adding, "Israel Electric Corporation does not at present have the wherewithal to cope with the crisis, without immediate government aid."
The price of electricity has soared 25% in the past year, but Israel Electric Corporation (IEC) is demanding billions more shekels in aid to prevent its collapse. The World Bank report found that the company was in need of a NIS 6 billion capital injection, and that was before the gas crisis broke. However, the public is doubtful whether the company's position is really so difficult. IEC is perceived as rich in spare fat and assets, and as an entity that awards its employees enviable salaries and benefits.
"Globes" checked and found that there are indeed plenty of pockets of fat at the company that could be trimmed, but each involves conditions and limitations that make it hard to do so.
Salaries and conditions: excess salaries in the millions
Any public discussion about IEC starts with the high salaries of the employees and the benefits they receive, headed by free electricity. The average gross monthly salary of IEC's thirteen thousand workers in 2010 was NIS 21,354, 6% higher than in 2009, according to the Ministry of Finance high earners report. In the last couple of years, IEC has lost it place at the head of the salaries ladder to the ports companies, but the pay is still high there by any measure.
The World Bank found that salary costs at IEC were 38% higher than the average for similar power companies around the world, and recommended a 25% cut in salary costs, but that is not the magic solution that will make it possible to reduce the price of electricity and put an end to the company's financial woes. Salary and manpower costs at IEC are estimated at NIS 4 billion annually, about 20% of the company's expenditure budget. According to this rough calculation, the cut that the World Bank proposes could save NIS 1 billion a year at best, which translates into a cut of just 5% in electricity prices. In any case, in practice, no such cut could be implemented without a head-on confrontation with the company's workers, whose salaries are protected by collective wage agreements.
Between 1,500 and 2,000 workers are scheduled to leave the company in the future, as part of its reform. These layoffs will be very costly. IEC will have to pay at least NIS 6 billion in severance pay to those who leave and benefits to those who remain. This amount is supposed to be paid back within five years through lower wage bills.
In the immediate term, salary overpayments at IEC can be eliminated, as the Ministry of Finance Director of Wages is trying to do. As reported in "Globes", IEC workers enjoy excess benefits such as inflated travel allowances, unauthorized raises, and the inclusion of overtime in the calculation of pension contributions of senior managers. Abolition of some of these excesses will save tens of millions of shekels a year.
Another pocket of fat is overtime and "encouragement payments". Each of these amounts to hundreds of millions of shekels annually in wage supplements, which IEC management pays its workers, without adequate controls. The "encouragement payment", for example, is a monthly supplement amounting to hundreds of shekels paid to outstanding employees. However, whereas in government ministries it is usual to examine the entitlement of workers to such payments, at IEC they are paid almost indiscriminately. The same applies to overtime payments: IEC employees receive regular supplements to their salaries for "global" overtime, without having to prove that they indeed worked those hours.
Equipment: trigger happy procurement
The huge scope of IEC's activity obliges it to invest billions of shekels in buying equipment such as computers, telephones, walkie-talkies, and vehicles for its employees. The company's car fleet, consisting of abut 4,000 cars, is valued at NIS 700 million, while its computers are worth some NIS 1.5 billion.
Sources who were involved in standardization of the company's equipment claim that it buys vehicles and communications equipment for its workers very readily, with insufficiently clear criteria. IEC spends vast amounts on renewing equipment, spending that could be cut or frozen in the light of its difficult financial situation. In 2011, IEC invested NIS 146 million in renewing its vehicle fleet, NIS 60 million in new computers and office equipment, and NIS 50 million in communications equipment. Freezing of spending on non-vital equipment could save tens of millions of shekels. In the longer term, IEC could save a great deal of money by outsourcing its vehicle fleet to a leasing operator. Experience shows that the leasing companies ultimately charge full price or even more for vehicles, but procurement through leasing makes it possible to spread the investment over several years.
Real estate: dozens of assets could be sold
The biggest pot of fat at IEC is real estate. Its real estate portfolio comprises assets that have been accumulated in the 85 years of its activity, some of them in extremely attractive locations. The best known is the Reading Power Station, a Tel Aviv icon. Acting director-general of the Ministry of Finance Doron Cohen recently estimated that about 1,000 dunams (250 acres) of land at Reading Power Station could be sold. The value of such a piece of land could be hundreds of millions of shekels. The only problem is that metropolitan Tel Aviv very much needs its own power plant, and there is almost no realistic possibility of constructing a replacement plant. For this reason, the Ministry of the Interior decided in 2006 that the Reading Power Station should not be taken out of the city.
Besides power plants, IEC holds dozens of assets that are not vital for its activity. Among them are the office and logistics buildings in Hahashmal Street in Tel Aviv, the Southern Region offices in Kremnitsky Street, and the logistics center not far from the Azrieli towers. Outside Tel Aviv, IEC owns large areas of open land, such as the land of the Rogozin plant north of Ashdod Port. This is a 400 dunam (100 acre) site bought in the mid-1990s for $62.5 million, for a power plant that will not now be constructed on it. There are other plots are in the Haifa Port area, which Israel Ports Company has expressed interest in buying in the past.
A precondition for selling off real estate is a comprehensive survey, which for some reason has not been carried out up to now. The most up-to-date valuations were made in the mid-1990s, twenty years ago, and they are no longer relevant today. As long as the status of the assets remains unclear, as far as building rights and restrictions are concerned, there is no way of valuing them. Initial rough valuations indicate that selling real estate assets could bring the company hundreds of millions of shekels, up to a few billion.
Raising capital: the government holds things up
The main solution that IEC management is currently promoting for improving the company's financial position is raising cash through a share offering on the stock exchange. Despite its debt mountain, which will exceed NIS 70 billion this year, IEC still has shareholders' equity of NIS 17 billion. Selling a minority stake on the stock exchange will enable the company, theoretically at least, to raise several billion shekels. However, the state refuses to allow the company to start the process of an offering, because such a step would make structural change very difficult. And what about the reform, you ask? That's a good question. The workers committee wants reform and is more ready for it that ever, but the state has yet to decide who will negotiate on its behalf. The prime minister and other government ministers apparently do not have the time to deal with reforming IEC; they are up to the neck in solving more urgent problems, such as the jump in electricity prices.
Workers' pensions: the court will decide
One pocket of fat that the state has already exploited is a trustee account holding NIS 2 billion for financing free electricity, holiday grants, and other benefits for IEC pensioners. The state seeks to withdraw NIS 600 million from the account this year, and to empty the account almost completely in the longer term. The National Labor Court has approved this move, but the workers committee has appealed against the decision.
The matter of the free electricity fund is currently being heard in the Tel Aviv District Court, in an application for a class action filed by lawyers Michael Bach and Gilad Markman. They claim that IEC should return to consumers the money spent on salary excesses and the free electricity fund, to the tune of NIS 5 billion. They further claim that there is another NIS 5 billion pocket of fat, in the shape of the excess funds IEC has provided for the employee pension fund. This is money put aside over the years on the basis of an error in calculating future workers' pensions. Following the discovery of the error in 2009, the Israel Securities Authority instructed IEC to restate its financials from 2006. According to Bach and Markman, the money is still sitting in the pension fund, and it should be returned immediately to electricity consumers, through a price reduction.
Published by Globes [online], Israel business news - www.globes-online.com - on April 5, 2012
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