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Cablegate: Goi Approves Reform of Electric Company Despite

VZCZCXRO3942
RR RUEHROV
DE RUEHTV #0762/01 0721427
ZNR UUUUU ZZH
R 131427Z MAR 07
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC 9930
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RUEHBR/AMEMBASSY BRASILIA 0049
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHNSC/NSC WASHDC

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

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