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Treasury attacks Electric Corp: Huge wage costs keep yield on equity low

Bloated IEC employment terms costing nation $524 million a year, says economist

The total monopoly the Israel Electric Corporation has over power production in Israel costs the nation $524 million a year, estimates treasury economist Dr Eldad Shidlovsky.

More specifically, the damage is caused by the bloated workforce that IEC can afford to keep, due to the absence of competition.

The main problem is the high cost of wages at the government company, Shidlovsky writes in a report. The IEC also bears a bloated workforce, inflated by no less than 3,000 gratuitous workers. Instead of cutting back, it rolls the excess costs over onto consumers, he wrote.

Regarding another monopoly, the ports, Shidlovsky wrote that surplus costs incurred by exporters and imports due to inefficient port workers cost $108 million from 1995 to 1997.

Shidlovsky's survey is part of a general treasury plan to privatize the ports and open the electricity market to competition. To counter intense union opposition, the treasury has been publicizing a series of reports on inefficiency at the monopolies and its cost to the economy and to taxpayers.

The treasury's central claim, presented in its reports, is that wage costs at the distended, inefficient government monopolies is two to three times the average wage.

The treasury estimates that not only is the IEC providing salaries to 3,000 superfluous workers, but that its staff is exploiting the company's monopolistic status to gouge perks and, mainly, inflated wages. The average wage cost at the IEC, in 2002, was NIS 18,300 a month, roughly double the average wage at the time.

Over and above their salaries, the IEC workers also receive free power, the treasury notes. That alone costs Israel $8.5 million a year, at least. In fact, the treasury believes the cost to be higher, as the estimate is based on average household power usage, while the IEC workers are famously wasteful of the free electricity they receive.

Pension terms are also excessive at the IEC, the treasury continues its attack. IEC retirees continue to get "promoted" in rank after retirement, making their pensions climb 2% more than the CPI in any given year. No other workers get such benefits, the treasury says. They also get higher yearly provisions from the company and get to retire at 55, as opposed to 65 in other sectors.

The treasury calculates that the inflated pension terms cost the Israeli population an extra $167 million a year.

Power tariffs are based on IEC reports. To avoid the need to cut back, the IEC simply rolls the cost onto consumers. The IEC's fudging is facilitated by its failure to break down its expenses in its reports. It does not differentiate between the cost of production and transport, for instance, and the labor representatives refuse to allow information to be disseminated without their say-so.

Compared with the extent of investments and risks involved, from 1992 to 1997 the IEC's profits were negligible, the treasury adds.

From 1992 to 1999, the IEC's average return on equity was 3.1%, and in 2000 it was all of 1.7%, according to the company's 2002 financial statement. In 2001 and 2002 it was negative. In those two years the IEC lost NIS 289 million, in December 2002 prices.

The low yield on equity is due to the high cost of wages, which ate up 17% of the company's revenues in 2002, the treasury says. The company's outlay on salaries compared with its income is high by international standards, and its return on equity is commensurately low, again by international standards.


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