Israel's Government Companies Authority has recommended that the government "puts on the table" the option of nationalizing troubled private companies that need rescuing because of the coronavirus pandemic.
A positon paper presented to Minister of Finance Moshe Kahlon by Government Companies Authority manager Yaakov Kvint says there is room to consider injecting government money into private companies subject to setting an exit strategy and taking steps to ensure the public's interest in the company.
The position taken by the Government Companies Authority will be relevant in any negotiations involving demands by El Al Israel Airlines Ltd. (TASE: ELAL) to receive hundreds of millions of dollars in assistance from the State. In the talks so far the possibility of nationalization has not come up because the airline has asked for aid from the government in the form of guarantees that will allow it to obtain credit. The longer the crisis continues, more companies in the aviation and other sectors are expected to approach the government for a rescue package.
Kvint wrote to Kahlon, "There is room for the question of whether it is the right thing for the government to intervene through nationalization only where the service is vital or also as assistance for businesses."
The Government Companies Authority emphasizes that there is no change in the basic approach in which the direction is privatization of government companies that have business operations. The Government Companies Authority was promoting privatization efforts until the outbreak of the Covid-19 pandemic. However, the Government Companies Authority believes that government intervention might be justified in this period of unprecedented crisis, which jeopardizes companies in essential sectors or endangers critical numbers of jobs.
In some cases, Kvint argues that an exit strategy can be set such as a timetable for selling the government holdings and other limitations to ensure the aims of the nationalization. In other cases, government assistance can be tied to imposing limits on workforce reductions, distributing dividends and senior executive remuneration.
In the US a range of such strategies was used following the 2008 financial crisis when the government bailed out companies. Usually it was not through direct nationalization but rather financial measures such as loans that could be converted to shares. The most outstanding such example was General Motors, which received a large government loan that was converted to shares when the carmaker failed to repay debt. The US government re-privatized General Motors between 2010 and 2013 after implementing streamlining. The US government actually made a $39 billion profit on the entire process.
Another such example was the giant AIG insurance company which could not meet its debt in 2008. By 2012, the US government had raised its stake in AIG to 92% and eventually sold its holdings at a profit of $22.7 billion.
Israel is best remembered for nationalizing the big banks in 1983 during the bank shares crisis and it was not until 2018 that the privatization process wasw completed when the government sold its remaining 5.4% stake in Bank Leumi (TASE: LUMI) to Citibank for NIS 1.9 billion.
The Government Companies Authority is not yet recommending any model for managing companies that would be nationalized but is just suggesting that different models should be mulled. Kvint writes, Use of this tool requires preparing a plan of action including not only the method and type of nationalization but also the future aim and public influence. For sure, a general framework should already be formed, and guidelines for an ewxit strategy. In addition, it is important to make certain wqhen 'rescuing' the company that there is an agreement with the employees to ensure the government's exit."
For the time being the three most prominent companies seeking government assistance are Israel's three airlines - El Al, which is seeking guarantees for a $400 million loan and Arkia Airlines Ltd. and Israir Airlines and Tourism Ltd., which each seek loan guarantees for $25 million.
Published by Globes, Israel business news - www.globes-online.com - on April 12, 2020
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