Amir Etzioni

None other than Herzl, in his now famous book, Altneuland, mentioned the establishment of a cement factory in the land of Israel, as he envisioned the development of Israel in the years to come. The cement industry has proved to be of great significance to the development of the country and its economy, as it is an important construction material. It represents approximately 5 percent of the overall costs of construction, while 15.3 percent of all structures erected use cement.

A single company called Nesher Israeli Cement Factories, Ltd. has controlled the cement industry in Israel ever since it opened its doors in 1925. All attempts at competition with Nesher by other companies over the years have been unsuccessful, each of the smaller companies either disappearing or being swallowed up by Nesher. The aggressive war waged by Nesher managers against potential challengers has resulted in its complete monopoly of the market. Nesher’s allies in this war are its parent companies, the largest concerns in the Israeli economy, Koor and Clal Enterprises, which control Nesher through a jointly controlled subsidiary called Mashav. Nesher is now the only cement manufacturer in the country, as well as the largest importer of cement from abroad. Ten percent of all cement is imported, with Nesher importing 90 percent of it.

The parent corporations did not decide to take up the battle by chance. Their successful subsidiary performed impressively. In 1997, Koor and Clal received management fees of roughly $6.7 million from Mashav, and Mashav paid dividends of approximately $28 million to each.¹ Nesher was the main source of these funds, enjoying a $500 million sales turnover that year, and estimated profits of $40 million.² The salaries of Nesher employees are approximately twice the national average salary today, despite the low level education of the average Nesher employee, who has less than 12 years of schooling.

Unlike parents who often boast of their successful children, the large concerns kept Nesher’s financial statements and profits under wraps. The reader should not conclude that this was done out of sheer modesty on the part of the parent corporations. Actually, those concerned have simply learned that silence regarding certain matters can be beneficial to their interests. The financial reports of Nesher quickly became one of the most closely guarded secrets in the country. So secretive, that Ohad Orenstein, director of the chemicals and quarries department administration at the Ministry of Industry and Trade, has indicated that even he was not privileged to review the reports in their entirety, when he was responsible for setting maximum prices for cement in Israel.³

Hiding the golden egg-laying hen created the surprising lack of public awareness regarding the company and its immense profits. This lack of awareness is particularly alarming in light of the fact that the monopoly was established and built with the full support of the government and elected officials, and in light of the fact that the company’s huge profits can be traced to the pockets of ordinary Israelis. Someone buying an average apartment must work one to one-and-a-half months to pay for the difference between cement prices in Israel, and prices in such countries as Turkey, Greece, and Cyprus, which are up to 50 percent cheaper. Moreover, higher cement costs figuring in the building of public infrastructure, and direct government subsidies to Nesher, also result in higher taxes.

The author of this paper endeavored to reveal, in a February 1998 Policy Studies of the Institute of Advanced Strategic and Political Studies, the truth about the cement industry in Israel.⁴ This resulted in threats, defamation of character, lies and distortion, all condensed by Nesher into ten pages of a purportedly academic document sent to members of the Knesset, ministers, and industry officials, in an effort to silence the Institute. The IASPS response, which included a press conference, television appearances and op-eds in Israeli papers, only sharpened the rare public discourse that took place this year, which Nesher failed to quash.

In the war against competitors and competition in general, Nesher remains almost undefeated. One battle took place in 1991, when Shaul Raziel, then director of the Ports Authority, dared to issue a tender for land to be leased for the storage of imported cement . In the discussion held on the subject by the Knesset Economics Committee, Mr. Raziel was nicknamed “The Liquidator,” and warned by Nesher’s Haifa representative, Shmuel Belila: “If you hurt my family, I’ll hurt you.” Not even one member of the Knesset dared come to Raziel’s defense. The chief executive of Nesher’s board, Gershon Ehrenthal, spoke of “foreign interests,” and the “importation of unemployment and destruction” and made threats, speaking of “repercussions, not only for Nesher, but the entire economy.”⁵

All of this allowed the chairman of the Committee, MK Shoshana Arbeli-Almozlino, to state resolutely: “all the rationales about efficiency, import liberalization, competition, and price differentials are not appropriate in this matter. This proposal should be rejected categorically, and the government should not allow the construction of such facilities for cement imports.”

There were no righteous men in Sodom. Not one MK stood and asked: “If not in this matter, at this time, then when will it be appropriate to discuss increasing efficiency, liberalization, competition, and differences in prices?”

Judge for yourselves if the time is right for exposure and competition, in light of the following description.

Fort Nesher – The protective wall that Nesher has built around itself is worthy of the title Fort. The fact that not one crack has been made in the wall, makes the Fort [Nesher] a shining example to those wishing to learn from the behavior of monopolies. Here are some of the stones in Nesher’s “wall.” The would-be importer of “Portland” cement has to package the product in sacks printed in Hebrew. This task is especially difficult, since “Taman,” the only cement sack factory in Israel, is owned by Nesher. The production of such sacks abroad would entail establishing a separate line for printing in Hebrew, which would only be financially worthwhile if done by a large company; Nesher being the only one.

Cement is also imported in large bulk quantities and delivered as such. In essence, most demand is for cement in bulk. However, meeting the demand for bulk is also a difficult task, since only Nesher has the apparatus required for unloading the cement from ship to port, and even Taavura, Ltd., which holds a monopoly on cement haulage, is closely connected to Nesher.

The hardship only begins here. After this problem is solved, the daring importer finds himself confronting Israeli import regulations. These regulations are unique, and are applied only to imports of Portland cement, the type produced by Nesher. Other kinds of cement are not imported, not because of substandard quality, but because there are no regulations. Israel’s Standards Institute personnel claim that the problem is that regulations in Israel are based on the current system, and updating them would be too costly.⁶ They do not cite the fact that the experts committee setting standards includes high level representation of Nesher and its associates. Assuming there are no conflicts of interest, the only remaining possible explanation for our unique regulations is a desire to maintain separate standards from European countries (which share a single standard), which apparently do not fully comprehend the complexities of cement regulations.

The brave importer soon discovers that he must wait three days for Standards Institute inspectors to approve the unloading of his container. The cost of this wait may be thousands of dollars, making the cement a losing proposition. More economical methods of winning approval do exist, but are available only to especially large importing companies, such as Nesher.

Until August 1993, import permits were required, but were not issued, excepting during temporary shortages. When permits were issued, importers were charged customs of 25 percent and up. Thus the government solved the problem: without import permits, there is no need to wait at the port or to have sacks printed in Hebrew, etc. The mass immigration from the former Soviet Union, and the pursuant increased for demand for cement, caught Nesher unprepared, and the government was forced to allow competing imports.

A company like Nesher does not let an enemy win that easily. And if our persevering importer is not yet deterred, he must then find a customer who is willing to risk facing the strong arm of Nesher in the future. If he does market his cement, he may find cement prices “coincidentally” plummeting at that very moment, and in that very part of the country, where he wants to sell his product.

This is the melancholy state of the cement industry in Israel. The time has come to ask what, if any, policy changes have been made.

Grades for Awareness

“A righteous man knows the soul of his beast” (The Talmud). In order to know if we are speaking of righteous men, we need to determine if Israeli policy makers are aware of the seriousness of the situation. To solve a problem, one must first be aware of it. The level of awareness will therefore factor into the grade being given policy makers.

We will begin on an optimistic note, and recognize that a dramatic improvement has recently occurred. The director of the State’s antitrust authority at the Ministry of Industry and Trade, and the director of the Budget Department at the Ministry of Finance, have formed a joint task force to examine the cement industry. This author’s discussions with these officials have convinced him that they understand the problem and the importance of reducing government involvement, as well as opening the market for competition.

It seems that talk of economies of scale, natural monopolies, fantastic efficiency, and protecting the interests of the State will no longer suffice to convince policy makers of the necessity of a cement monopoly such as Nesher. This writer also made his modest contribution, in providing research to the above-mentioned officials. Budget Department personnel understand the importance of opening any market to competition, and specifically the cement industry in this case. They say they want reduced government involvement, and real competition. Therefore, these policy makers deserve the grade of Very Good in the awareness category.

Awareness and understanding are also necessary at the Standards Institute. The work being done in changing Israeli standards, and conforming to European criteria, while retaining Israel’s unique inspection methods, reveals a lack of understanding on the part of Standards personnel regarding the seriousness of the problem. They receive the grade of Failing in the awareness category.

Political figures also need to be aware. Policy Studies No. 32 included an example of Nesher being awarded recognition, and state subsidies, as an “approved enterprise,” contrary to professional advice; this showed a lack of awareness among the cabinet ministers who decided for Nesher. Although the current prime minister instructed the Budget Department and antitrust officials to examine industry policies, his political involvement seemingly ended at that point.

Grades for Policy

Even though a righteous man knows the soul of his beast, not everyone who knows the soul of his beast is a righteous man. In order to be a truly righteous man, he must also treat what ails, and improve the lot of, his beast. In this case, policy makers barely get a passing grade for this year’s policy work. Awareness of the seriousness of the issues is simply insufficient. Furthermore, while it is difficult to make accusations of negligence and inaction against those who are unaware of the seriousness of the issue, the situation is much worse when those who are aware do not lift a finger to find a solution to the problem. We must therefore examine the steps taken by policy makers in the last year toward improving conditions in the industry.

As noted, the increased awareness of the Finance Ministry’s budget director and antitrust supervisor did bear fruit, but not enough. On June 27, 1998, a decision was made, together with Nesher personnel, to lower cement prices in dollar terms, by over 14 percent over the next four years.⁷ The significance of this decision is a direct savings of more than $50 million a year to Israeli consumers, and an overall savings of much more.

Over the last two years, first steps toward an improvement in port policy regarding unloading cement imports have also been taken. Under pressure from the antitrust personnel, the Ports Authority issued a tender for the construction and operation of additional unloading equipment. Was the director of the Antitrust Authority surprised when the winning bid came from Taavura, Nesher’s sister company, owned by Mashav? Taavura suddenly decided to expand into an area it had not been in before...and was awarded the tender for the job.

In March of this year, the director of the Antitrust Authority and Finance Ministry officials announced cancellation of the tender, and their intention to issue a new tender, this time excluding bidders connected to Nesher.⁸ The Ports Authority is now in the final stages of review, before choosing the successful bidder for the new tender.

Another subject deserving attention is that of the system of credit used by Nesher. In June 1998, following the publication of this author’s findings, and criticism of Nesher’s unusual credit system, the Contractors Association complained to the Antitrust Authority that Nesher was exploiting its monopolistic status (which it gained through government support and subsidies). For the sale of cement on credit, Nesher demands an immediate payment and the rest within 16 days. Nesher itself pays according to accepted credit practice in the construction industry, with a credit period of at least 60 days.⁹

We have seen an increase in the attention devoted by policy makers to problems in the industry, and the importance of public pressure and awareness has been proven. However, in spite of increased attention and good intentions, policy makers have not instituted any real policy reform. Such reform would affect each of us over the long term, and substantially improve the functioning of the industry.

Real reform does not entail agreements with Nesher regarding cement prices, or state involvement in the credit system. Real reform will result, as a matter of course, in Nesher lowering its prices and improving its treatment of its customers. Real reform will create a market open to competition, free of anachronistic import regulations, without preferential treatment by means of which the government helps Nesher to maintain a monopoly in the industry. Indeed, once the market is fully free, Nesher can be expected to remain Israel’s largest manufacturer and marketer in the industry, but the very existence of a free market open to trade will be the deciding factor, ensuring much lower cement prices than today.

Actions taken by the state budget director and the antitrust supervisor were positive, but analogous to giving an aspirin to a patient with a severe illness. The situation may appear to be temporarily better, but aspirin treats the symptom and not the real problem, is effective for the short term only, and leaves the patient to face the reality of his illness. Less than six months has passed since the agreement to lower cement prices in U.S. dollar terms. During these six months, the Israeli currency, the New Israeli Shekel, has decreased in value by 20 percent in relation to the dollar. The devaluation means that the shekel price of cement has remained unchanged.

It can be concluded that the necessary actions to allow competition and open the market are not being carried out. Certain steps have been taken to repair some of the damage already done, but this is insufficient. Therefore, if policy makers are to be graded in their area of expertise, that is actual policy making, they deserve the grade of Unsatisfactory.

Final Grade

At year’s end, the beginning of policy changes and action can be seen in some policy makers; and inaction in others. If the reform ends where it is now, some policy makers will undoubtedly feel “We have done our bit,” while in reality, nothing has been done. If reform ends here, Nesher will grow ever bigger, the largest state-backed cement monopoly in the world.

Next year will witness the real test of the policy makers’ seriousness. One litmus test will be their approach to the establishment of alternative equipment for unloading cement. In the critical areas of import inspection procedures standards, the work is entirely ahead of them.

The overall grade given to policy makers for their performance over the past year, regarding the cement industry in Israel is Unsatisfactory, despite the fact that some of them deserve a higher grade. This grade indicates that the industry is in danger. Without further reform, consumers will continue to face higher prices and lower quality.

Amir Etzioni is an IASPS Koret Fellow at the Institute for Advanced Strategic and Political Studies in Jerusalem and Washington, D.C. He is the author of IASPS Policy Studies No. 32, “The Israeli Cement Industry.”

Notes

1. Figures are based on an exchange rate of NIS 3.536 to the dollar at the end of 1997.

2. Ha’aretz, March 29, 1998.

3. Ohad Orenstein, Interview, August 7, 1997.

4. Amir Etzioni, “The Cement Industry in Israel,” Policy Studies No. 32 (Jerusalem: IASPS, 1998).

5. Twelfth Knesset, fourth session. Economics Committee. Minutes 339 (25 November 1991).

6. Daniel Schneider, deputy technical director of the Construction Department of the Standards Institute, interview with author, October 15, 1997.

7. Globes, June 28, 1998.

8. Yediot Aharonot, March 4, 1998.

9. Etzioni, “Cement” and Ha’aretz, June 7, 1998.

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