The Controversy Over Israel's Business EliteBy and
Israel's economy is widely seen as a high-tech success story. Yet to many Israelis the real players in their economy are not programmers or venture capitalists. Rather, they are the 20 or so Israeli families who control banks, supermarkets, telecoms, real estate, gas stations, and utilities—businesses that underpin much of daily life.
Too much, says Stanley Fischer, the governor of the Bank of Israel, who has sounded the alarm over the power concentrated in the hands of these families. Fischer, a world-renowned economist who mentored Ben Bernanke and who has run Israel's central bank for five years, says the influence these companies wield may undermine Israel's growth by undercutting competition. According to the central bank's annual report, published in May, the top families control 25 percent of the listed companies and 50 percent of the total market share in the Tel Aviv Stock Exchange. The bank warns that this represents one of the highest concentrations of business power among developed economies, posing a "systemic risk" to the financial system and threatening to drag other segments of the economy down should the tycoons falter.
The business elite developed when a few entrepreneurs ended up owning companies privatized by the government in the 1980s, and it has become a hot-button issue in Israeli politics. The government is warning that it will take action. Prime Minister Benjamin Netanyahu told Bloomberg Businessweek:"The Israeli economy has come a long way, but we have a long way still to go. We need to reduce the concentration of power in many key sectors of our economy and promote greater competition."
The same names crop up in many sectors of the economy. Nochi Dankner is probably the most prominent of the tycoons. Although he owns about 3 percent of Credit Suisse (CS) and prized foreign properties from Las Vegas to Manhattan, his real power comes from Israel. Dankner split off from an already influential clan that made its fortune in the salt industry: He now runs a web of companies through his IDB Holdings. All Israelis are touched by Dankner's businesses, whether they use mobile phones provided by Cellcom, the country's top cellular operator, shop at the No. 1 supermarket chain Shufersal, or invest in mutual funds offered by Clal Finance, Israel's largest financial institution outside the banks.
Shari Arison, who became a target of local talk show gibes for claiming to have prophetic powers, owns No. 2 lender Bank Hapoalim and real estate developer Shikun & Binui. Arison, whose brother Mickey owns the Miami Heat and operates Carnival Cruise Lines (CCL) for the family, inherited the investments from her late father, Ted. She's Israel's richest woman. Isaac Tshuva's Delek Group holds two financial companies, Phoenix Holdings and Excellence Nessuah, and has businesses ranging from a gas explorer to an automobile importer. The Ofer family counts among its holdings Israel Chemicals, which makes fertilizer from Dead Sea minerals, and a 20 percent stake in Israel's fourth-largest bank, Mizrahi-Tefahot.
Through their representatives, Tshuva, Arison, Dankner, and the Ofer family declined to be interviewed for this article. A spokesman for IDB, Dankner's holding company, e-mailed Bloomberg Businessweek to say: "There isn't any problem of concentration within the Israeli market. This is a populist agenda which arose as a result of the financial crisis." Pinhas Rubin, a prominent lawyer who represents Arison, the Ofers, and Tshuva, says the families have not done wrong: "Big groups in a small country don't necessarily translate into less competition. The Israeli media, as it often does, is twisting and exaggerating the reality."
Advocates of reform cite several examples of the tycoons' behavior as evidence they must be curbed. When Israeli importers wanted to buy cement from Turkey to compete with Nochi Dankner's Nesher Israel Cement Enterprises, then-Trade Minister Ehud Olmert levied duties of almost $6 a ton on the imports, claiming that otherwise the cement would be dumped at rock-bottom prices. That decision ensured that Nesher would keep its 90 percent control of the industry. The government says it reached an agreement with Turkey to drop the duty on those producers who agreed not to dump.
According to a July report from the Jerusalem Institute for Market Studies, a think tank, units of the Ofers' Israel Corp. get a major chunk of the government grants and tax breaks earmarked for manufacturers and exporters—which in turn makes Israel Corp., and by extension the Ofer family, even more powerful. The report recommends that the government abolish the grants, since its authors say the grants bestow unfair advantages on the largest holding groups. A spokesman for Israel Corp. says the company has acted in accordance with the law.
What also endangers the economy, say critics, is the families' control of many financial institutions. "Influential businessmen such as Nochi Dankner, through Clal Insurance, or Shari Arison, through Bank Hapoalim, can gain clout in other industries by the sheer influence they exercise with their large holdings in the relatively small financial industry," says Miki Rosenthal, a documentary maker whose film on the Ofer family's influence on the government was screened on television only after a legal battle with the family.
On the flip side, an oligarch's woes can turn into Israel's woes. Lev Leviev, a wealthy diamond merchant and developer, borrowed about $2 billion from financial institutions in Israel to acquire property from Russia to Manhattan, including the old New York Times building. Last year he dragged the entire Tel Aviv Stock Exchange down 2.3 percent when he told investors he couldn't pay off the debt on time. Investors feared a default by his Africa Israel Investments would damage every major institutional investor in Israel and eventually hurt the economy. Although Africa Israel restructured its debt and the market has recouped its losses, regulators are still concerned by the damage that one large group can inflict on the rest of the economy.
Now, as Israel gets back to work after its September holidays, pressure on the government to act is likely to pick up. The Finance Ministry is studying a proposal to bar groups that own financial companies from holding industrial businesses. "There is a danger to the economy and we need to make sure we counter-act," Avi Simhon, head of Finance Minister Yuval Steinitz's economic advisory board, said in an interview in Jerusalem. "I would guess we would reach some decisions in less than a year."
A draft law would expand the powers of the Israel Antitrust Authority to act against groups it classifies as oligopolies stifling competition. The bill, now making its way through the parliamentary approval process, would allow the authority to go beyond setting regulations for a particular market. It would be empowered, for example, to reduce or eliminate costs for consumers switching from one cell phone or cable service to another, or to act against cross-ownership of companies that have "a chilling effect" on competition, says Ronit Kan, commissioner of the IAA. Finance Minister Yuval Steinitz says the government will find a solution "gradually." He adds that the government does not want to make things worse by acting rashly.
One more thing about the tycoons disturbs Israelis. It's called hon v'shilton, literally translated as capital and government, an expression Israelis use to describe the rich's influence on government. The top families have been accused by government watchdogs of dishing out well-paid private sector jobs to government officials who eventually end up dealing with their ex-colleagues in the ministries. Nir Gilad, the former accountant general at the Finance Ministry, now works for the Ofer family as chief executive officer of Israel Corp. and as a board member of other Ofer-controlled companies. Arie Mientkavich, who in the 1990s served as chairman of the board of the Israel Securities Authority, the Israeli equivalent of the Securities and Exchange Commission, joined Dankner's company Elron as chairman in January 2007. Yoram Turbowicz, chief of staff to former Prime Minister Ehud Olmert, works for Isaac Tshuva as chairman of Delek Energy Systems. "These tycoons hold more power than the government," Shelly Yacimovich, a member of the Labor party known for her populist outbursts, said at a conference in Tel Aviv in July. "We urgently need to act."
The bottom line: The Israeli government is worried about excessive concentration of economic power in the hands of a few families.