New law makes business ‘pyramids’ history

Knesset rules Israeli conglomerates, that have limited competition and led to high prices and tight credit, must be broken up

Nochi Dankner, left, and Shari Arison, in 2007 (photo credit: Moshe Shai/Flash90)
Nochi Dankner, left, and Shari Arison, in 2007 (photo credit: Moshe Shai/Flash90)

The Knesset on Monday night passed new legislation that could profoundly impact Israel’s economy in years to come by increasing competition and sharply limiting the power of “big players” that have dominated Israel’s small but robust economy for decades.

The government-sponsored Law to Advance Competition and Limit Monopolization — popularly known as the Anti-Conglomerates law — was passed on its second and third readings by a wide margin, with 72 MKs voting for the legislation, and only one MK abstaining.

As a result, the country’s large financial-industrial complexes, which include large banks, holding companies, and investment firms that have majority or large interests in cellphone service providers, gas stations, supermarket chains, food production companies, and other such “real economy” businesses (as the law terms them) will have to sell off some of their assets.

The law consists of three distinct sections, each of which will have a major effect on how business is done in Israel.

Starting immediately, government offices and ministries will have to take into consideration the level of competition when contracting with a company for services in areas such as road work, gas and oil exploration, communications services, and so forth. Companies that are part of the “pyramids” of Israeli business — meaning that they are subsidiaries of large firms that are in turn owned by holding companies that have wide business interests — will lose points in the bidding process.

Those pyramids — often privately owned large conglomerates that are under the control of one individual or family — will have to be broken up under the new law.

A holding company will be allowed to own two “levels” of subsidiaries. Anything beyond that will have to be sold off. A 2010 Bank of Israel study showed that a full 30% of the businesses in Israel were part of such pyramids, and that their existence had a negative impact on everything from prices (which are artificially high because of a lack of real competition) to credit (with the holding companies’ subsidiaries getting far better terms on loans than independent businesses).

According to the 2010 study, 10 business groups own banks and holding companies in Israel which among them control 41% of the market value of all public companies.

Israel, according to the study, has the most concentrated economy in the western world. Most of the holding companies have controlling interests in banks or large financing companies, and these, too, will have to be spun off.

A committee will be tasked with developing a full list of the pyramid conglomerates in Israel, naming the companies and subsidiaries that will be affected by the new law. Holding companies will be given between four and six years to spin off their assets. Similarly, directors of financial institutions or investment funds may no longer be employed by or have an interest in the holding companies.

Although there are numerous culprits here — for example, Yitzhak Tshuva’s Delek Group Ltd. owns the Phoenix Insurance Company, and Sherry Arison owns a large interest in Bank Hapoalim — the “poster boy” for Israeli economic pyramids has long been Nochi Dankner, head of IDB Holdings (although after a vote Sunday by its board of directors, it appeared that Dankner was to be ousted from that position in the near future). The company owns well-known brands such as the Cellcom mobile service provider and the Supersol supermarket chain, by far Israel’s largest, with nearly 300 stores.

Speaking after the vote, MK Zahava Gal-on (Meretz) said that the law was Dankner’s comeuppance for the many years that he “milked” the public.

“Dankner should have gone a long time ago,” she said. “He milked the public for years, and by passing this law we are saying that not everything is permitted. Economic concentration has distorted the economy, and these tycoons do not contribute anything to the economy.”

MK Reuven Rivlin (Likud-Beiteinu) said that he was “not happy about Dankner’s fall,” but added, “I hope that in the wake of this law, that he and others like him will realize that things are now different. This may not be the best law we could have passed, but it will profoundly change the Israeli economy.”

MK Nissim Smoliansky (Jewish Home), chairman of the Knesset Finance Committee, called the law’s passage “an important development that will greatly advance Israel’s economy. We are radically changing the structure of the country’s economy, tailoring it to the needs of the public. Until now, the public’s money was used by a small number of wealthy people to advance their own profit, but from now on, the profits generated by the public’s money will return to the public. From now on, we will see pyramids only when we go to Egypt,” he said.

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