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The Tricky Nature of State-owned Enterprises: The Impact of Government Ownership

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Regulation in Israel

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Abstract

State-owned enterprises (SOEs) are a well-known form of government operation in the market. Incorporated by the government under the umbrella of private corporate law, they might seem, at first glance, similar to privately owned firms. However, government ownership is not a neutral feature. Understanding its nature and impact is key to any discussion about regulation of SOEs’ corporate governance and activities. In a nutshell, it is all about the delicate balance between public-policy objectives and maximization of profits and shareholder value when combined on a corporate platform. This never-ending inherent contradiction at the heart of an SOE, with its pitfalls and benefits, is the basis for this suggested analysis of the existing regulation of SOEs in Israel and specific SOEs’ corporate governance issues, and for an outline of the path to needed change.

Dr. Avital Birger is a senior deputy legal counsel of the Israel Government Companies Authority. The contents of this article do not constitute the position of the Government Companies Authority and are solely the opinion of the author.

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Notes

  1. 1.

    According to the Government Companies Law, 5735–1975 (GCL), Israeli SOEs are divided into three categories: government companies, in which the state possesses over half of the voting power or the right to appoint over half of the board members; mixed-ownership companies, in which the state ownership does not meet these thresholds; and government subsidiaries, in which a government company—alone or together with the state—possesses over half of the voting power, or the right to appoint over half of the board members. According to these definitions, the SOEs sector in Israel comprises of 69 government companies, 16 government subsidiaries, and 15 mixed ownership (Government Companies Authority 2018).

    It must be noted that in addition to the said SOEs, over 50 statutory corporations operate in Israel, established each by a specific law. These corporations are not subject to the same regulatory framework as are state-owned companies. Because this trend represents a greater preference for organizing as statutory corporations various activities that in most OECD countries would be undertaken by such entities as autonomous public bodies, non-profit institutions, and foundations, and only a few of them engage in commercial operations, for the purposes of this article, we refer to state-owned companies on the basis of the abovementioned categories and regulatory framework (OECD 2011a, p. 36). For possible exclusion from this framework, see High Court of Justice ruling (HCJ) 5684/91 Binyamin Barzilai v. Government of Israel & Ors, P.D. 46 (1) 536 (1991).

  2. 2.

    For example, in the case of several SOEs engaged in activities in the same sector, such as the defense companies; SOEs engaged in housing tasks on behalf of the government; state-owned provident funds; or activities of a monopolistic nature, for which the SOE is the sole or predominant enterprise of its kind, such as several activities of the Israel Electric Corporation Ltd., Israel Postal Company Ltd., Mekorot Water Group, Israel Railways Ltd., Israel Natural Gas Lines Ltd., the Ports companies, which are responsible for a specific part of the infrastructure or operation of a public utility.

  3. 3.

    For more information on this trend and its development worldwide and in Israel, see Aharoni (1979), Eckstein et al. (1998), OECD (2011a), Tevet (2015), and Weinrot (1995).

  4. 4.

    Aharoni (1979, p. 65); Eckstein et al. (1998), Katz (1997, p. 154), OECD (2011a), Tevet (2015), and Zamir (2010, p. 455).

  5. 5.

    Eckstein et al. (1998), Katz (1997), OECD (2010b, 2011a, 2019b), and Tevet (2015).

  6. 6.

    For a deeper understanding of the privatization trend, its place, and its influence interrelated with that of other changes in the economic and social environment, see Eckstein et al. (1998), Katz (1997), Harvey (2007), and Mandelkern (2015).

  7. 7.

    Report of the Committee for Preparation of a Government Companies Bill (1970) (the Barak Committee Report). This report was preceded by the Government Companies Authority in the Treasury for the Management of Business Enterprises—Report of the Commission Appointed by the Israeli Political Science Association (1965) (the Moses Report).

  8. 8.

    The Companies Law, 5759–1999.

  9. 9.

    The option in the last part of section 4(a) has hardly ever been used and is considered an unusual exception to the rule. Almost the sole example its use, and perhaps the most famous one, was a government decision in the 1980s that prevented El Al, Israel’s national airline and carrier, from operating on the Jewish Sabbath. This decision, made prior to the privatization of the company in 2003–2004, expired upon El Al’s privatization. Interestingly, after the privatization, when the decision no longer applied to it formally, the privately owned company continued to adhere to this rule voluntarily, because of business considerations regarding the large share of the company’s customers who are Orthodox Jews. See also The Supervision of Commodities and Services Law, 5718–1957, section 11A; see Wong (2018) regarding general considerations in a government’s direct intervention.

  10. 10.

    For the full list of the specific provisions of the various kinds, see, for example, the prospectus of Mekorot Water Company Ltd.’s tradable bonds (2019), annex A to chapter 6, p. F-156.

  11. 11.

    Part C of the GCL: The Government Companies (Rules Regarding Remuneration and Expenses for the Public Director in Government Companies) Regulations, 5754–1994.

  12. 12.

    Government Decision No. 3849: The Appointment of Directors in Government Companies, Government Subsidiaries and Mixed Companies (2008, July 27).

  13. 13.

    Government Companies Authority: Directors (2019).

  14. 14.

    Sections 18a, 18a1 and 18a2 of the GCL.

  15. 15.

    Section 17(c)(3) of the GCL, implemented by Government Companies (Rules for Prescribing an Elected Representative from among the Employees of the Company as a Director) Regulations, 5737–1977 and section 18d of the GCL.

  16. 16.

    For example HCJ 4566/90 Dekel v. Minister of Finance, P.D. 45 (1) 28, HCJ 6777/98 Rosenberg v. Appointments Review Committee PD 52 (5) 721; HCJ 932/99 Movement for Quality Government in Israel v. Chairman of Appointments Review Committee PD 53 (3) 769.

  17. 17.

    Sections 33(a)-34a, 44–46, 47, 48–49a of the GCL and the relevant regulations, for example, The Government Companies (Additional Report Regarding Acts Done and Representations Given in Assurance of the Correctness of Financial Reports and the Board of Directors’ Report) Regulations, 5765–2005 and The Government Companies (Additional Report Regarding the Effectiveness of the Internal Control of Financial Reporting) Regulations, 5767–2007, regarding financial statements.

  18. 18.

    Section 32(a)(3a) and (4), The Government Companies (Rules Regarding the Method of Election of Senior Officers) Regulations, 5765–2005, The Government Companies (Rules Regarding the Employment of Relatives) Regulations, 5765–2005.

  19. 19.

    For the importance of the ownership function, see OECD (2018a, 2019a), and Wong (2018); The Supreme Court recently clarified the GCA’s roles and functions in HCJ 3396, 2000/19 CPA Kobi Navon & Ors v. The Director of the Government Companies Authority & Ors (Nevo, November 18, 2011).

  20. 20.

    For example The Mandatory Tenders Law, 5752–1992 and the regulations thereof, The Budget Basics Law, 5745–1985, The State Comptroller Law [Consolidated Version], 5718–1958, The Freedom of Information Law 5758–1998, The Woman’s Equal Rights Law 5711–1951 ; For the full list of the relevant provisions, see Mekorot Water Company Ltd.’s prospectus, ibid., foot note 11.

  21. 21.

    HCJ 1703/92 KAL Freight Airlines v. The Prime Minister & Ors, P.D. 52 (4) 193 (1992).

  22. 22.

    HCJ 7871/07 Rafael Armament Development Authority Ltd. v. The Minister of Finance & Or. (Nevo, February 6, 2011).

  23. 23.

    HCJ 731/86 Micro daf v. Electricity Company Of Israel Ltd., P.D. 41 (2) 449 (1986).

  24. 24.

    For the development of this approach in the Israeli legal landscape, see Barak-Erez (2013, pp. 492–507), Peleg (2005), Weinrot (1995), and Zamir (2010, pp. 527–537).

  25. 25.

    For example, HCJ 3817/18 The State of Israel v. Hasan & Or (Nevo, December 3, 2019); Gannon (2014), (Senyor 2015), Maanit (2015).

  26. 26.

    See also OECD (2016a, 2018b); Wong (2018).

  27. 27.

    Aharoni (1979), Weinrot (1995), and Zamir (2010).

  28. 28.

    OECD (2011b, 2019a).

  29. 29.

    OECD (2015a).

  30. 30.

    OECD (2010a, 2012, 2013, 2014, 2015d).

  31. 31.

    Azoulay and Barkat (2019).

  32. 32.

    “Would you tell me, please, which way I ought to go from here?”

    “That depends a good deal on where you want to get to,” said the Cat.

    “I don’t much care where–” said Alice.

    “Then it doesn’t matter which way you go,” said the Cat.

    “– so long as I get SOMEWHERE,” Alice added as an explanation.

    “Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.” (Carroll 1865, ch. 6).

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  1. Israel Government Companies Authority, Jerusalem, Israel

    Avital Birger

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  1. Avital Birger
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  1. Open University of Israel, Ra'anana, Israel

    Eyal Tevet

  2. The Van Leer Jerusalem Institute, Jerusalem, Israel

    Varda Shiffer

  3. The Van Leer Jerusalem Institute, Jerusalem, Israel

    Itzhak Galnoor

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Birger, A. (2021). The Tricky Nature of State-owned Enterprises: The Impact of Government Ownership. In: Tevet, E., Shiffer, V., Galnoor, I. (eds) Regulation in Israel. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-56247-2_3

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