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No. 32

The Israeli Cement Industry by Amir Etzioni

February 1998

INTRODUCTION An average Israeli wage-earner who wants to buy a house worth $200,000, has to work for a month to a month-and-a-half to pay the difference between the price of cement in Israel and in surrounding countries like Egypt, Turkey or Cyprus. This fact cost Israelis $80-$140 million dollars in 1996. The main reason for these high cement prices in Israel is the monopolistic structure of the industry which is totally controlled by one company: Nesher, Ltd. Since the late nineteenth century, cement has been a major component of the building process. For example, Theodor Herzl wrote about building a cement plant in Altneuland.(1) Since then, cement manufacturing has been part of the fulfillment of the Zionist dream. Nesher, Ltd. dedicated its first plant in Haifa in 1925. Today, the company makes 100 percent of Israeli cement and more than 90 percent of the quantity sold in both Israel and the Territories -- more than six million tonnes (metric tons), judging by the annual average of the past few years. Nesher is also the largest importer of cement, bringing into the country the remaining small proportion of cement that is not already manufactured in Israel. Israel's cement prices, at $70-$75 per ton, are much higher than the $40-$60 per tonne charged in surrounding countries, such as Jordan, Turkey, Egypt and Cyprus. Nesher's prices generate enormous profits which are estimated at 12 percent of the net turnover of Nesher, and which provide handsome profits for Koor and Clal, the two conglomerates that jointly control it.(2) Nesher's employees also benefit from these profits, their average wage having climbed to twice the national average.(3) Apart from the profits earned from the high prices of cement, Nesher also earns lavishly through a sibling company named Touval Hovalot, Ltd., which enables it to dominate the cement-haulage system. This sibling company regulates the distribution of jobs among the haulers for a 30 percent commission or more. Thus, hauling cement generates annual profits of NIS 40 million.(4) These profit figures raise the question of how Nesher has managed to maintain its monopoly for so many years, with no enterprising industrialist standing up and building a competing plant or even importing cement in commercial quantities. The answer lies in a variety of factors: first and foremost, a surfeit of government connections which have resulted in ramified import protection, red tape, and extraordinary government aid. Nesher has backed these with various strong-arm tactics that have defeated every attempt to open up the market and, especially, to build cement unloading facilities at the ports. Such facilities are essential for large-scale imports, and Nesher alone owns them. Nesher's pressure includes threats against its customers lest they dare buy cement from the small importers who have tried to penetrate the market. Customers who "misbehave" subsequently encounter mishaps and delays on Nesher's part.(5) This Policy Studies is comprised of five parts, including an historical account of how this industry arrived at its present condition; considerations of Nesher's monopoly for the community of Israeli taxpayers; an assessment of trends in the cement industries of several countries; and comparisons. Proposals to improve the situation are made at the conclusion. SURVEY OF THE ISRAELI CEMENT INDUSTRY This section describes Israel's present day cement industry, including a historical review. The following account describes the major factors behind the current situation in which Nesher is Israel's only cement manufacturer. Theodor Herzl had good reason to mention the establishment of a cement factory in Altneuland. Cement is a crucial commodity in the development of every country and has been especially important in Israel with its massive waves of immigration. Cement is a major component both in infrastructure (roads, bridges, tunnels, sewage pipes, etc.) and in other types of building, such as residential and industrial shelters and floors. The cement industry is one of the mainstays of the Israeli economy, built by means of approximately NIS 20 billion in investments -- more than 14 percent of Israel's Gross Domestic Product.(6) Cement accounts for five percent of the construction input in housing and an even higher share in municipal infrastructure. Thus, cement is perceived as an immensely important strategic commodity in advancing the economy. As such, every country wishes to maintain a domestic core capacity in cement manufacturing in order to reduce its dependency on other countries for ongoing construction and development costs. Indeed, cement is manufactured in more than 120 countries worldwide.(7) In order to assure regular domestic manufacture of cement, the governments of several countries, including Egypt and Turkey, went out of their way to create cement plants under their ownership. The Palestinian Authority is also demanding permission from Israel to set up a cement enterprise in the territory that it controls, both for political reasons and because of its desire to create a domestic cement industry. How Cement is Manufactured The process of manufacturing cement was invented in Great Britain in the late nineteenth century. Researchers called the new substance "Portland" -- which has remained a standard name for cement to this day. Cement is made of natural quarry stone, which is plentiful in Israel. Since its major component is limestone, efforts are usually made to establish cement plants near limestone quarries. Three methods are used to produce cement. The first and oldest is the "wet method" in which crushed and ground limestone, clay and water are mixed in set proportions. The resulting slurry is taken to kilns for incineration. After incineration, the resulting material known as clinker, is ground together with plaster and sometimes charcoal, and gray cement is produced. Since this process involves a large investment of energy to dry the mixture, a "semi-dry" method was developed early on, using a smaller quantity of water and producing a more consistent raw material before the incineration stage. This is known as the "regnant method" in Israel. The third waterless method -- the "dry method" -- is the most economical in energy costs. In this method, the raw materials are ground and dried and taken afterwards to be incinerated in a kiln. In Israel, only the Nesher factory in Ramle uses the "dry method." Cement powder is used mainly as a raw material for the manufacture of cement dough and concrete. Cement dough, made by adding water and sand, is manufactured into concrete by adding raw aggregates such as gravel. Cement powder + Water = Rough Cement + Sand = Finished cement + Raw aggregate (gravel) = Concrete There are two types of cement: gray and white, depending on the ingredients used. Only gray cement is manufactured in Israel. Although many companies import white cement, this paper will focus only on the gray cement manufactured by Nesher. White cement is used less than gray cement, and is popular among tile makers who need it to color the top of their tiles, and among companies such as Thermokir, which import particularly strong cement for their own use. Cement in Israel Israel's cement industry is totally controlled by Nesher Ltd. As mentioned above, this monopoly accounts for 100 percent of domestic manufacture and most imports, which amount to less than 10 percent of the total quantity sold. Cement hauling has also always been controlled exclusively by Nesher; however, while cement prices were controlled because the product was made under a monopoly, prices of cement hauling were not regulated. The following section reviews the historical development of cement manufacturing and hauling in Israel, from the establishment of Nesher in the early twentieth century to the present. Plans to manufacture cement in Israel date back to the arrival of the first immigrants in the early twentieth century who aspired to build a local facility for this purpose. In 1911, a Russian immigrant named Nahum Wilbush began to investigate the possibility of forming a local enterprise. In 1918, Wilbush applied to Yehoshua Henkin, the famed "redeemer of the land," and asked him to buy land at Yagur that would be suitable for the cement industry. Subsequently, Baron Rothschild and Dr. Chaim Weizmann entered the picture and encouraged the eventual founder of the first cement plant in Haifa, Michael Pollak, to undertake this enterprise. (8) Nesher's first twelve shareholders received their shares in 1923.(9) The founders, apart from Pollak, included several prominent names in the world economy at that time, such as Lord Melchett of Great Britain; Walter Samuel, director of Shell Oil Company; Sol Jaul, the owner of gold mines in South Africa and one of the world's wealthiest men at the time; and Arkadeus Rappoport, director of the European Shipping Company, Ltd. These men were fully aware of the potential of a cement factory. The issue of shares brought in an immense sum of money for that time -- 225,000 pounds sterling, more than all of the Zionist institutions raised from world Jewry that year. As the shares were being allocated, Pollak hunted for a professional to build the plant. He discovered construction plans that had been drawn up by a chemical engineer named Bela Spiegel for the Portland Cement Syndicate in Palestine, and subsequently named him as Nesher's first chief executive officer. Spiegel supervised the construction of the plant in a part of Haifa that subsequently became the town of Nesher. In October 1925, after two years of draining swamps, preparing the land, and building the infrastructure and the plant itself, Nesher Ltd. began to produce cement. Production that year amounted to 40,000 tonnes. At first, the company delivered cement to the growing domestic market and exported to several neighboring countries, including Syria, Egypt and Cyprus. Exports were transported by a ship that Nesher purchased in 1927, which had a capacity of 200,000 tonnes of cement. In 1945, Nesher workers staged a 72-day strike against the company. The strike was prompted by demands for wage increases, with the workers arguing that only the shareholders had benefitted from the company's immense profits.(10) In response, the management claimed that its wages were among the highest in the country. After persistent negotiations backed by the Histadrut, Nesher workers emerged with most of the benefits they had sought. The shareholders lost virtually nothing by the compromise agreements; cement consumers paid for them since the British authorities subsequently authorized a sharp increase in cement prices. In an editorial, the newspaper Haboker, on October 16, 1945, accused Nesher workers of having improved their standard of living at the expense of the public, which would henceforth pay more for its cement.(11) On May 22, 1945, a day before the strike ended, the newspaper Hamashkif alleged that the strike had been prompted by the desire of Solel Boneh, Ltd., the Histadrut-owned building company, to take over Nesher.(12) Menahem Aviram referred to this story in his 1976 book and denied its veracity. However, Pollak, who had refused to sell the plant before the strike, subsequently sold it. On January 1, 1946, the Portland Cement Syndicate in Palestine ceased to exist and was replaced by a company named Palestine Portland Cement Enterprises, Ltd. (The name "Nesher" was subsequently added.) The new owners were the "Central Company" with 50 percent of the shares, Solel Boneh, which had 45 percent of the shares, and Hamashbir Hamerkazi Israel Coop. Wholesale Society, Ltd., which had 5 percent of the shares. Since Hamashbir was represented by Solel Boneh, the shares were equally divided between private and Histadrut players (the latter, who were active participants in the strike). It was decided that the Central Company would be responsible for cement sales, but that Solel Boneh would be allowed to buy whatever quantity it needed for its own purposes. In April 1952, Paper Products Industries (Taman), Ltd., owned by Nesher, began to manufacture paper sacks. In an interview in the Nesher Bulletin 29, (Sept. 1996), Meir Zur, Taman's director, said that the company held an 80 percent market share in industrial sacks and other paper bags. Nesher's new factory in Ramle was set up in response to the wave of immigration that followed the War of Independence, which caused the demand for cement to increase sharply. It went into operation in August 1953 and eventually became the largest cement plant in the country. In the late 1950s, Solel Boneh split into three companies at the initiative of the secretary-general of the Histadrut, Pinhas Lavon. Control of the industrial division, including Nesher, was handed to Koor, which, in turn, answered to the Histadrut-owned Hevrat Ha'ovdim. In 1963, the company underwent several additional changes. A new firm called Nesher Cement (Ownership), Ltd., was formed. Koor and the Central Company transferred their shares to this company, together with additional investors headed by Clal Ltd., a conglomerate controlled by South American Jews. The Central Company subsequently forfeited its right to sell cement, and a subsidiary called Nesher Trade (Cement Sales) Ltd., was formed in its stead. In May 1969, a month after it established its head office in Tel Aviv, the company acquired Shimshon Cement Enterprise in Hartuv and became Israel's sole manufacturer of cement. In September 1974, the third factory in Hartuv went into operation. Nesher has been controlled jointly by the two conglomerates, Koor and Clal, since 1971, when the Central Company handed its shares to Clal. In 1975, the company was reincorporated as Nesher Israel Cement Enterprises, Ltd. and has been known by this name to this day. Nesher continued to build up its investments and manufacturing capacity steadily, spending lavishly on kilns, production lines and mills. In October 1995, a $120 million "dry-process" line, the country's first, was dedicated at the Nesher plant in Ramle. This investment was financed largely by the taxpayer. Today, Nesher, the country's only cement manufacturer, is owned jointly by Clal and Koor. Its annual production capacity is 7 million tonnes, of which 1.5 million are earmarked for export to the Palestinian autonomous areas. As Table 1 shows, cement imports are negligible and generally fall short of 10 percent of countrywide sales. However, apart from being the sole manufacturer of cement, Nesher is also Israel's largest cement importer, accounting for 50 percent of this activity. Nesher's production capacity has grown more swiftly than Israel's population. In 1922, when planning for the first factory began, the country had a population of 750,000 as compared to more than 5,000,000 today. In 1925, production capacity was 40,000 tonnes, some of which was reserved for export. Thus, per capita production has expanded by a factor of more than twenty. Table 1 shows the steep growth of cement sales between 1985 and 1995, prompted partially by immigration from the former Soviet Union. Nesher's only competitor was a company named Shimshon, which Nesher acquired and replaced with the plant in Hartuv. Shimshon was founded by a Jewish-owned British company and began to operate in 1937.(13) In 1939, the plant stopped working after most of its assets were looted by Arab rioters. It resumed operation in 1946 but was forced to shut down again during the War of Independence. It resumed production for a third time in 1951, this time with assistance from Solel Boneh (which, together with Hamashbir Hamerkazi had a 50 percent stake in Nesher). In 1968, after seventeen years of steady losses, the plant was finally shut down and was later acquired by Nesher. At its peak of activity, Shimshon produced eight percent of all cement manufactured in Israel and therefore posed no real threat to Nesher. Table 1 Cement Sales and Nesher's Share Thereof Year Quantity of cement sold in Israel (thousands of tonnes) Sales per capita (tonnes) Percent of imports in total sales Share of Nesher (percent)   Total Cement sales Total imported Total domestically manufactured     In domestic manu- facture In imports 1985 2,058.5 38.5 2,020.0 0.48 2 100 0 1986 2,095.3 37.6 2,057.7 0.48 2 100 0 1987 2,367.5 60.6 2,306.9 0.54 3 100 0 1988 2,361.6 36 2,325.6 0.53 2 100 0 1989 2,309.5 - 2,309.5 0.51 - 100 0 1990 2,879.5 28.9 2,850.6 0.6 - 100 100 1991 3,903.5 516.5 3,387.0 0.77 13 100 93.1 1992 4,391.1 433.1 3,958.0 0.85 10 100 87.5 1993 4,667.5 173.5 4,494.0 0.88 4 100 60.2 1994* 5,051.4 373.4 4,678.0 0.92 7 100 73.6 1995 6,263.5 577.5 5,686.0 1.11 9 100 48.7 Source: Ministry of Construction and Housing, Information and Economic Analysis Center, Monthly Information (Jerusalem: Ministry of Construction and Housing, 1996), pp. 48, 52. All Israeli government documents in Tables are taken from the Hebrew. * Since October 1994, the data have not included sales to the Gaza District, which have accounted for 7 percent of total cement sales in the past two years. Cement Haulage Cement is delivered to consumers in Israel in two ways. The first is in sacks (30 percent of the market), which requires no special equipment but is poorly suited to large quantities of cement. The second and main method is bulk haulage, which requires special containers costing about $250,000. Taavura, Ltd., which specialized in hauling oversized cargoes such as conveyances for power plants, bridges, concrete beams and private cars, was the principal hauler of bulk cement and handled 90 percent of such haulage. Taavura, established 40 years ago by the Livnat family, owned about 140 containers in 1995. The remaining 10 percent was hauled by Solel Boneh for its own use and for Even Vasid Ltd. (a sibling company of which Shikun Uvinui, a homebuilder, owns 50 percent), and by the Kefar Giladi Quarry, for its own use. The remaining cement consumers avail themselves of Taavura. For many years, cement haulage was managed by Touval, Nesher's sibling company, owned by Koor and Clal. Nesher Trade's director, Mr. Moshe Ben-Ner, is also the director of Touval. Touval functioned as a job allocator, chiefly in haulage of cement in sacks. When an order for cement came in, the company consulted a permanent list of twenty subcontracting haulers, checked which hauler was available, and arranged haulage. Customers who wished to come and pick up the sacks themselves were not allowed to do so. Touval arranged the work of Taavura, which also functioned as a sub-contractor, in a similar fashion. The system worked in the following way: customers paid Nesher for cement and haulage, the hauler was then paid by Touval, which skimmed off a high commission for itself -- as much as 30 percent of the haulage charge, according to various estimates.(14) In the past few years, several cement haulers or prospective haulers expressed resentment of the practice of confining cement haulage to the few members on the list. For example, in 1995, a company called Meir A.D.R. Haulage and Trade sued Nesher in the Tel Aviv District Court after Nesher refused to allow it to purchase cement and do its own hauling. When Nesher explained that similar grievances filed with the director of antitrust had led to concurrent legal claims in Antitrust Court, the judge, Uri Goren, suspended the court's discussion of the suit. Indeed, similar grievances submitted to Yoram Turbowicz, the Director of Antitrust (subsequently Head of the Antitrust Authority) by early 1997, prompted him to apply to Antitrust Court. This application was preceded by a 1994 research study that examined the state of the cement and cement haulage market in Israel. Attorney Irit Hod, the Antitrust Authority official in charge of the cement industry, did not allow this author to read the study.(15) However, on March 24, 1995, Globes ran an article by Shmuel Deklo, in which he claimed that the study had asserted that haulage using the method of the time was contrary to the rules of a free market. The main conclusion recommended the gradual introduction of competition in the market, in which Nesher and other related companies would be barred from hauling more than 30 percent of manufactured cement. Finally, the study recommended that every Nesher customer who bought 6,000 tonnes or more of cement per year in sacks or 100,000 tons in bulk, be allowed to do its own hauling. Deklo noted in his article that the proposed reform, if applied, might lower cement prices by 30 percent. Touval began to lower its prices even before it was subjected to restrictions of any kind -- actually, coinciding with the beginning of Turbowicz's involvement. The price of haulage has remained constant in nominal terms over the past three years, meaning a real price decrease of more than 30 percent. In 1996, in view of disagreements in the Livnat family, 50 percent of company shares were put up for sale and Abraham (Bundi) Livnat retained the rest. When Mashav tried to acquire this 50 percent from Taavura for NIS 87 million,(16) the director of the antitrust authority "attached strings" to his approval of the acquisition by forcing Nesher to agree to several changes in the haulage market. First, haulage was taken out of Taavura's operating domain. A new company called Taavura Tifzoreth, Ltd., not part of the consolidated company, was established to handle cement hauling. However, Bundi Livnat -- co-owner of Taavura along with Mashav -- retained a 66 percent stake in the new company. Second, Nesher, or any company related to it as well as the Koor and Clal groups individually, were forbidden to haul more than 30 percent of the cement sold all over the country. Furthermore, the market was opened up to anyone who wished to do his own hauling, as long as they met several basic conditions, primarily in safety. These agreements were given court endorsement in early 1996, and the changes went into effect in June of that year. This decision prompted Taavura Tifzoreth, Ltd., and Touval to lower their prices for large customers even further than the real price decrease mentioned above. This offer was indicative of the steep profit margins that these companies enjoyed until 1994. Nonetheless, the requirements that customers handle a minimum amount of cement and that they insure transportation in sacks and in bulk for $2 and $5 million dollars respectively, (in case of damage done to Nesher's facilities) imposed artificial difficulties on the competition in the industry. As a result, smaller customers continued to require the services of wholesalers in order to haul cement. The Industry The factors that brought the industry's current infrastructure into being may be divided into two groups: one, comprised of objective geographic and economic motives; the other stemming from Nesher's aggressive policies on the one hand, and the high level of government involvement in the cement market on the other. First, however, we should understand the hierarchical structure of control in Nesher and its integration through large Israeli banks and major concerns which dominate it and other companies dealing with related fields, such as concrete, blocks, paint, haulage and conveyance, storage, construction, tubing, explosives, paper and sacks. As already stated, Nesher is jointly owned by the country's two largest conglomerates, Koor and Clal. As Table 2 indicates, Israel's three largest banks -- Hapoalim, Discount (IDB Investments, controlled by the Recanati family) and Leumi -- are major principals in these companies. Table 2 1. Ma'ariv, 7 July 1997. 2. Koor Website: www.koor.co.il. 3. Israel Business Connection website: www.ibc.co.il. This kind of control structure raises serious questions about the extent of competitiveness of the companies owned by the conglomerates and provides an expedient environment for the consolidation of Nesher's monopoly. After all, the companies mentioned would presumably choose to work with Nesher even if other cement makers were available. Sammy Nahmias, the official from the Ministry of Industry and Trade in charge of industrialized building, remarked that one of the major aims during the existence of Israel's cement monopoly was to reduce the number of quarries.(17) "Green" organizations allege that cement plants are severely damaging to the environment. Therefore, any company attempting to acquire land for quarry use and to obtain the appropriate permits would meet with stiff resistance from nearby municipal authorities and the "greens" themselves. For example, these organizations defeated Nesher's plans to build a cement plant in Arad, and the same would probably happen in any attempt to construct any new cement factory. The obstacles would be especially daunting to anyone attempting to build a cement factory in the central and northern parts of Israel. These areas have few locations which are suitable for quarries and are more densely populated than the rest of the country, a factor which would toughen public opposition. Finally, Nesher's existing plants in these parts of the country already cover local needs. In Nahmias's opinion, the south is the only place where there is any likelihood of building a new plant. However, this area is sparsely populated and cannot compete with Nesher's plants, which are situated in key locations in the center and the north of the country. The high costs of overland transportation would make cement haulage from the south to the center and north unprofitable and would leave cement manufacturers in the south with a relatively small share of the market. Furthermore, large manufacturers of concrete countrywide would presumably shun the competing plant even for jobs carried out in the south. Also, Nesher might treat them as second class customers, when they seek to buy cement from them for their activities in areas where Nesher has a geographic edge -- areas where these concrete manufacturers carry out most of their activity. No large manufacturer can take this chance. The investment needed to build a cement plant is very high, estimated at nine digits in dollar terms. According to the American Cement Association, it takes an estimated investment of $3 to generate $1 in annual output.(18) This investment is only worth making when the expected future cash flow, calculated from the day of investment, minus the necessary investment, exceeds alternative investments such as bonds. Amnon Dotan, Chief Executive Officer of Israel's largest cement consumer, Readymix Industries (Israel) Ltd., explained that it does not pay for his company, (which buys 1.5 million tonnes of cement from Nesher per year), to invest $200 million to build its own cement facility, because the investment would take twenty years to recoup, assuming that the company operates under competitive conditions.(19) For the time being, the shareholders of Readymix Israel's parent company, based in the United Kingdom, prefer more attractive investment options. Cement is considered a commodity of low international tradability, i.e., one in which inter-state commerce is difficult to conduct. The difficulty originates in the cost of haulage, which can approach or exceed 30 percent of the price of cement. Additionally, bulk imports of cement require shipping in special cargo vessels, as well as special unloading and storage facilities at the port. Since these facilities are so costly, only Nesher can afford to own them and cement is imported to Israel in sacks. However, this form of maritime transportation, which requires unusual and expensive packaging to prevent contact of moisture in transit, raises the price of the cement by $4 per tonne. Furthermore, cement in sacks is less suitable than bulk cement as a raw material for Israel's main cement customers, the large concrete manufacturers. Therefore, these customers prefer to buy bulk cement from Nesher. In contrast, small importers purchase cement in sacks only and therefore struggle to compete with Nesher. Strong-arm Tactics Political pressure. In order to increase its own strength, Nesher pressures politicians. The following examples create the impression that this pressure has become a matter of routine and is meant to throttle any other initiatives to open another local plant or admit competing imports. The purpose of these efforts, and the government's response to them, can be adduced from remarks by the chief executive of the Nesher board of directors, G. Ehrenthal, to the Knesset Economics Committee on November 25, 1991, in the course of a debate on preventing cement imports. It's in Nesher's interest to prevent imports of cement, Ehrenthal declared. Nesher wants to prevent the import of clinker. We're in the final phase of [procedures] with government agencies in the matter of establishing a production line that will prevent imports in all respects. (20) The main effort to bar the entry of competitors was orchestrated in the 1970s and 1980s by Menahem Aviram (Mann), chief executive officer of Nesher at the time. The former CEO of Clal, Aharon Dovrat, expressed satisfaction with Mann's work, noting that: "It is part of his job to keep others out of the industry. Mann is not in charge of freedom of trade."(21) The CEO of Koor, Benny Gaon, explained Aviram's success in his contacts with the governing apparatus: "Mann has earned himself a respectable status in the governing apparatus." (22) Nesher's executives have operated with great success over the years, as indicated by the absence of any real competitive threat to the company's status. The modus operandi is elaborated below: Nesher is backed by very powerful entities. Nesher is owned by Mashav, which in turn, is jointly owned by the country's two dominant conglomerates, Koor and Clal. Importantly, Bank Hapoalim is one of the largest shareholders in both companies. In the past, the Histadrut was also involved in the ownership of Koor. In summary, Nesher's activity receives powerful economic and political backing. Israel's economic agreements with the Palestinians reflect the efficacy of the pressure applied by the executives of Koor and Clal. On January 9, 1994, the chairmen of Koor, Clal and Nesher -- Benny Gaon, David Winshall and Yossi Rosen, respectively -- wrote to the incumbent prime minister, the late Yitzhak Rabin, with copies to the minister of industry and trade, and to the minister of finance, stating the following: "It is our apprehension that if certain agreements with the Palestinians are not concluded, substantive damage will be caused to the State of Israel and, especially, to Nesher." The three executives had a specific motive in writing this letter and in warning the prime minister of the "substantive damage" that the State of Israel might incur. They feared that the Palestinian Authority would import cheap cement from Egypt or Jordan -- cement that could undermine Nesher's position in a market to which it supplied 1.5 million tonnes per year. Nesher was also afraid of the establishment of a competing plant in the Territories that might undercut its monopoly. The executives' appeal did the trick. Only one week later, then minister of construction and housing, Binyamin Ben-Eliezer, was quoted as saying: If a cement factory is built in Hebron, it will deal Nesher a blow by selling its output at one third Nesher's price. (23) The economic agreements with the Palestinian Authority reflect the successful outcome of the pressure by the three companies on the Israeli political echelon(24). The agreement that deals with policy on imports to the Territories from Arab countries entitles the Palestinians to import "in quantities agreed upon by the two sides up to the Palestinian market needs" as estimated according to the agreement.(25) The "Palestinian market needs" in cement are estimated at 150,000 tonnes per year, about one tenth of actual consumption in the Palestinian autonomous areas. The Palestinian Authority purchases cement from Nesher at a reduced price. Orna Raviv, writing in Globes of September 20, 1995, notes that "[Nesher also] threw the Israeli merchants out of the Territories" by selling cement to the Palestinian Authority at a price 20 percent lower than that charged in Israel, in return for the Palestinian Authority's consent to these terms. Ron Eilon, deputy budget director at the Finance Ministry, says: "It is most probable that the price of cement charged the Palestinian Authority is cheaper than in Israel, but the cost to the consumer is similar to that in Israel, because the Authority makes huge profits from this situation and it stands to reason that these profits are enough to silence the Authority's demands for the freedom to import cement or build a plant for local production. This is despite the fact that the ability to produce cement is considered a sign of independence." (26) Government ministries assist Nesher lavishly for two reasons: because of pressure applied by Nesher, and politicians' fear of a cement shortage, which has led them to conclude that supplies can be assured only by "persuading" Nesher to step up its production capacity. In the early 1990s, Nesher's $120 million investment in the new production line in Ramle was given Approved Enterprise status and the attendant tax benefits, even though the project failed to meet the prerequisites for such approval, i.e., location in a development area and export orientation. Furthermore, on top of being a monopoly, Nesher benefitted at that time from high tax barriers against competing imports. These rationales aroused the resistance of professionals at the Investments Center. On November 6, 1990, they turned down Nesher's application for tax benefits for the "dry-process line" "...because [the applicant] is a monopoly that manufactures for local consumption with no prospects of export." Nesher appealed the decision to the Appeals Committee which advises the ministers who sign the final decision. The appeal was based on the following computation that purports to show how assistance to Nesher is actually good for the state: If this project is not carried out, a million tonnes of cement may be imported each year for the next few years at a cost of $65 million per year. The cost of the imported components for the manufacture of a million tonnes of cement is $21 million per year. Thus the state saves $44 million per year. (28) The director of the Investments Center at the time, Moshe Teri, who held observer status at the Appeals Committee and provided the committee with its main professional competence, responded to Nesher's application in the following way: My attitude is negative. This is a monopoly, and to the best of my understanding, monopolies should not be encouraged....I am not sure that imports would be more expensive; they may be less so....The expansion will not bring down the price of cement. [This company] is a monopoly that should not be assisted. (29) However, the Appeals Committee rejected Teri's view and approved the Nesher application. The committee membership included representatives of the large banks, which, as stated, are the principal shareholders in Koor and Clal, the owners of Nesher. Their involvement in issuing this approval unquestionably verges on an acute conflict of interests. Now it was time to secure the signatures of then minister of industry and trade, Moshe Nissim, and the minister of finance, Yitzhak Modai. Tremendous pressure from the heads of Nesher, Koor and Clal, including threats to petition the High Court of Justice, induced the two ministers to affix their signatures to the application.(30) Governmental involvement in attempts to build a fourth Nesher plant in Arad, in the early 1980s, might have turned the construction of this plant into one of Nesher's best investments, had the plans not been torpedoed by the "greens" and the mayor of Arad at the time, Avraham (Baige) Shohat. After the negotiations of the 1979 Camp David Agreement with Egypt and the ensuing final withdrawal from the Sinai Peninsula in the early 1980s, Israel had to build new army bases and airfields in the south. Officials at the Ministry of Industry and Trade began to predict a looming cement shortage, expected to rise from 200,000 tonnes in 1980 to 1,000,000 tonnes in 1985.(31) These forecasts encouraged the ministry administration to pressure Nesher into building a fourth cement plant near Arad.(32) This pressure was apparently necessary because, outwardly, Nesher expressed a lack of enthusiasm about the idea -- a reluctance that prompted the government to try and entice Nesher with a string of benefits should it decide to go ahead. The intended site of the facility was part of a Class B development area, in which investors were eligible for a government grant of 15 percent of the approved investment and a partially indexed loan of 40 percent of the investment. To bring Nesher aboard, it was proposed to gerrymander the Class A development area to include the proposed site. Finally, it was decided that Nesher would cover only 15 percent of the $90 million investment from its own resources. The taxpayer would put up the rest -- part of it in the form of a grant, another portion in loans under extremely easy terms, and the rest by raising the controlled price of cement by 10 percent over the original plan.(33) The plan to build the facility in Arad fell through. However, this had nothing to do with rational economic considerations; rather it stemmed from public pressure that inspired the district zoning board to rule against the project by a vote of four to three. The Arad plan was replaced by a scheme to renovate the Ramle factory and build a new facility there at an investment of more than $40 million. This time, too, then minister of industry and trade (1982), Gideon Patt, announced with alacrity that the state would fund 40 percent of the development plan.(34) As a condition for Approved Enterprise status for the "dry-process" line in Ramle, Nesher undertook not to interfere in attempts to open the market to competition. The letter of approval, dated March 2, 1992, stated the following: Nesher's output will be totally exposed to competing imports, including imports from `third countries.' In other words, cement imports shall be exempt from tariffs and taxes of all kinds. (35) Despite its promise, Nesher lobbied aggressively among various government ministries and members of Knesset to withhold approval of projects that might result in competing imports. These pressures persisted during discussions of Approved Enterprise status for the line in Ramle and even after Nesher had agreed to open up the market. The most blatant example of this kind of pressure occurred in 1991, in the middle of deliberations concerning the offer of assistance to Nesher. After prospective cement importers such as Pioneer and Raybo applied pressure and submitted applications to the Ports and Railroads Authority, the Authority issued the following notice: "The Ports and Railroads Authority invites bids in the leasing of four parcels for cement-storage facilities on the premises of Kishon Port in Haifa."(36) The Nesher people swiftly forgot their promise of non-interference with unrestricted imports and launched an all-out war against the new initiative, especially against Raybo, which believed it could import cement at 60 percent of Nesher's price.(37) The pressure was directed mainly at the Knesset Economics Committee, the Ministry of Transportation, the Haifa Labor Council, and the Ports Authority. The pressure paid off: the Authority's plan was scrapped and the Raybo people were quoted (in the article referenced above) as having stated that they were "fleeing." The discussion which took place in the Economics Committee on November 25, 1991, illustrates the brutality of pressure by Nesher executives, including physical threats, political intimidation, and presentation of bleak and distorted scenarios that influenced the parliamentarians. The 19 people invited to the discussion included six high-ranking representatives of Nesher (including the CEO and the chairman), the mayor of the town of Nesher, and four representatives of Haifa and Ramle labor councils. The other eight were civil servants. Not even one representative of the prospective cement importers was invited, nor a representative of a consumers' association or anyone else who might have expressed considerations in favor of unrestricted imports. The secretary of the Haifa Labor Council, A. Agami, explained why they had come to the Economics Committee: We will not stand idly by as the government intends not only to approve the construction of these facilities but also to give out licenses for cement imports. We ask the committee to help in two respects: 1) preventing the construction of permanent cement importing facilities, and 2) taking our side in the dispute with the Government of Israel and the Ministry of Industry and Trade against the issue of licenses for cement imports. The chairman of the board at Nesher, Menahem Aviram, added his own rationale for the necessity of intervention by the Economics Committee: It's inconceivable that the Knesset or the Economics Committee wouldn't intervene in a matter that might cause the plant to shut down. Non-intervention is tantamount to intervention of sorts in favor of the strong side. This isn't a backward industry, but you'll cause it to become one if you don't intervene in time. The chief executive of Nesher's board, G. Ehrenthal added: The construction of this terminal will impact not only on Nesher but on the entire economy: 1) The plant will shut down because of a concentration of imports in a certain area, 2) Income will be lost. G. Ehrenthal then elaborated: One should agree to imports, fair competition, and fair trade. One should not agree to encouragement of foreign interests, importation of unemployment, and destruction of the domestic industry. After the Nesher executives spoke of "economic" considerations and "concern for the economy," the representative of the Nesher Works Committee in Haifa, Shmuel Belila, expressed himself in much blunter language. His utterances and threats against the director-general of the Ports and Railroads Authority, S. Raziel, and against the mayor of Nesher, D. Amar, illuminated the fate that awaited anyone who dared to rile Nesher Cement. Mr. Raziel explained to the Economics Committee that anyone who imported cement through the area made available to him by the Authority, would have to pay leasing fees and royalties, "as do those who import fuel or gasoline through us." In response, Mr. Belila informed the committee, "That's how families in Israel die."(38) Afterwards, the Chair of the Committee, MK Shoshana Arbeli-Almozlino, asked Mr. Belila to state his case. Mr. Belila made the following remarks: Not long ago we were told that they were about to close Nesher...and here, out of the blue, comes another `liquidator,' Mr. Raziel of the Ports Authority, who wants to liquidate Nesher-Haifa. In response to Mr. Raziel's attempt to defend himself -- the Ports Authority director-general threatened to leave the room -- Mr. Belila stated: "I can say anything I want. It isn't the government that brought this about [the shutdown of the plant] but you. If you hurt my family, I'll hurt you." Following these remarks, Mr. Belila added: "We're asking for development, and people come around to shut down the factory....If the factory is closed, we'll take the mayor with us. The workers and those people won't sleep well at night." The pressure paid off. The committee chair, MK Arbeli-Almozlino, wound up the discussion with the following statement: Competing imports will threaten the company for no purpose. This isn't a floundering company, and 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. The committee chair then urged the ministers of transportation, and of industry and trade to act if the government were to discuss the issue, "to prevent a binding or favorable decision in this matter." After this, she called on the Investments Center "to approve Nesher's application so it can build the facilities," i.e., the facilities of which Ehrenthal spoke, those meant to prevent all imports. As this pressure was being applied to the Economics Committee, so was pressure invoked against the ministers of transportation, and industry and trade. This elicited a letter from the minister of transportation to the director-general of the Ports and Railroads Authority, instructing the latter to suspend all action toward concluding a contract in the matter of cement imports.(39) As stated, the plan fell through. Later on, Aviram Mann argued that: "The terminal would have wiped Nesher out. The international cement sharks would have flooded us with cheap cement. Who would have profited from that? The importers, who would have aligned [their prices] with us." (40) Nesher did not place all its bets on the government; it took actions of its own to prevent competing imports. The following examples illustrate the type of aggressive tactics that Nesher used when it sensed a potential threat to its status and indicated that "unrestricted imports" were unrestricted only to the unaided eye. As stated, imports of bulk cement entail special unloading and storage facilities at the port. Israel has such facilities at Ashdod port only, and they are owned by Nesher. Gold-Bond, Ltd., a publicly traded company controlled by Shlomo Meltzer and Shlomi Fogel, operates bonded warehouses and a cargo terminal at Ashdod port. When Nesher became apprehensive that Fogel might go into competition with it by using Israel Shipyards, Ltd., which he had purchased, as the port of destination for unloading cement, and by using his Gold-Bond facilities, it acted swiftly to defeat any such intent. Thus, in January 1996, Nesher's parent company, Mashav, acquired a 24 percent stake in Gold-Bond for NIS 120 million, a price 35 percent higher than the company's market value at the time; indicative of a value seven times higher than the company's equity, and fifty times higher than its net profit.(41) On January 23, 1996, the business editor of Ha'aretz, Nehemia Strasler, commented on Nesher's actions: "Nesher made the owner of [Gold-Bond] an offer it could not refuse, because Gold-Bond had intended to use Israel Shipyards as the port of destination for unloading cement." Gold-Bond's share price plummeted from NIS 30 to NIS 9 between the time of the acquisition and early April 1997, but Nesher met its goal: thwarting construction of the facilities, and ensuring that Gold-Bond would not remain active in importing cement. Notably, the director of the Antitrust Authority crimped Mashav's steps and forbade it from acquiring a 35 percent stake in Gold-Bond, as it had originally wished. As if this were not enough, Nesher is continuing to make a further effort in the direction of Israel Shipyards. After Mashav's acquisition of 50 percent of Taavura, the latter bought up three percent of equity in the Shipyards and, according to Ha'aretz of March 27, 1997, Mashav itself intends to acquire another 10 percent of the Shipyards in the near future. Thus, Nesher is limiting future possibilities of import liberalization. In May 1996, the Ports Authority invited bids for the construction of an unloading facility for imported bulk cement at Ashdod port. The invitation was made after the director of antitrust at the time, Yoram Turbowicz, intervened in the belief that the absence of such a facility thwarted competition in this industry.(42) The winning bidder was...Taavura. However, the new director of the antitrust authority, David Tadmor, sent a letter to the Ports Authority urging it to halt construction of the unloading facility, because he found it irregular that a sibling company of Nesher -- and the country's largest cement-haulage company -- won a bid that was supposed to bring competition to the market.(43) Nesher's financial statements are not released to the public for good reason. As we shall see at length below, Nesher's profits are very high. Nehemia Strasler, in Ha'aretz of January 23, 1996, estimated Nesher's net profits in 1995 at NIS 160 million, or 12 percent net on turnover. This is quite a generous margin, especially since the shareholders are at such little risk. Mashav's financial statements are also kept under wraps in the hope of not exposing them to the public. In Ha'aretz of March 27, 1997, Galit Hami and Zvi Rabin, addressing themselves to the Executive Review in which the statements of Koor and Clal were released, noted that, "The dizzying pace of development of Mashav in the past year stands in contrast to the attention this division has been receiving from its owners." The two correspondents noted that, to judge by the quantity of verbiage expressed in the Executive Review, Mashav ranks rather low in the order of importance of Clal's and Koor's holdings -- "even though it is the main profit center of each of these concerns." The statements of Nesher, Mashav's most substantial asset, are buried deep in the statements of the parent company. There are several purposes in not releasing information on Nesher's profits. First, the number of potential competitors decreases in the absence of eye-popping profit data. Second, without official figures, it is difficult for a prospective competitor to judge his ability to survive in the market and estimate the profits he may expect. The principal motive, however, is probably the wish of Nesher and its owners, Koor and Clal, to avoid media criticism and public pressure against one of Israel's most conspicuous monopolies. It is important to bear in mind that the company generates an assured and stable profit for Koor and Clal, and is actually one of these companies' main sources of gain. However, the data are concealed not only from the public. The director of the chemicals and quarries administration at the Ministry of Industry and Trade, Ohad Orenstein, noted that even he has never seen Nesher's profit data -- even during the 1980s, when he was in charge of setting maximum prices for cement.(44) He explains that his ministry had to estimate Nesher's profits by itself. Further pressure has been applied by fomenting a climate of intimidation among importers and consumers of cement. A cement importer from Jordan, asked by this author to be interviewed on January 21, 1997, refused for fear of the repercussions on his business. Consumers are also afraid to irritate Nesher, lest their purchases from another source prompt Nesher to make difficulties in future deliveries. Edna Iss of Yedioth Aharonoth (November 17, 1992) quoted "a well-placed source in the market" who described the situation as follows: This is a very aggressive monopoly, which reaches even the small customer and reminds him of his dependency on Nesher. It follows every movement of cement and every means of haulage. It won't hesitate to flood a certain area with cement if it discovers a cement ship approaching the country. Nahum Shimshoni, CEO of Isra-Concrete Ltd., the third-largest concrete manufacturer in Israel, described the situation, noting that today there is tough competition in the concrete industry. It is possible to import cement, but the costs of shipping from Europe are exorbitant. Furthermore, there is a risk of irregularity in supply. In such a situation, Isra-Concrete has to go back to Nesher and buy on certain occasions, but now it does so as a "problem customer." Today, Nesher makes sure to give top service. For example, if something goes wrong at the plant in Ramle, they immediately supply cement from the plant in Haifa. If a company angers Nesher, it may find itself in a problematic situation. So even if a company can trim the price by a few dollars, it is not worth the risk. It should be emphasized that the other competitors in the concrete industry are charged exactly the same price for their cement, and Nesher knows exactly how high it can go before they would unite and fight her. As long as one's competitors are not benefiting from cheap cement, one's company's problem is less serious. For the time being, it does not pay to make strenuous efforts that may eventually hurt one's company. (45) Market-control. In the week after Nesher's application for the factory in Arad was rejected, the media began to run gloomy items about the state of the cement industry. These reports were all part of a campaign of pressure that Nesher had begun to apply before resubmitting its Arad application. On May 26, 1980, newspapers carried headlines such as "Cement Shortage Paralyzes Housing and Defense Construction in the North,"(46) and "Grave Shortage of Cement Sends Prices Skyrocketing."(47) "Senior economic circles"(48) warned of a serious shortage of cement and were puzzled by the decision rejecting construction of the factory in the south, a venture which they characterized as "crucial for the economy." Several months earlier, the media ran items of a totally different nature, suggesting that the current level of demand not only argued against the need for cement imports but might even allow Nesher to export to Egypt.(49) The change that occurred in those two months may be explained by a chain of production mishaps and strikes at the Nesher factories. At a press conference called by cement consumers in the north, Ehud Becker, manager of the Kefar Giladi concrete works at the time, pointed an accusing finger at Nesher, arguing that this company had created the shortage by taking one of its three factories out of production.(50) Nesher executives were also accused of setting quantities for consumers according to their own yardsticks and irrespective of realities in the field. Becker proposed that a State Commission of Investigation be set up to probe the reasons for the prolonged mishaps at the cement factories, that a regulatory commission for cement sales be established, and that a fourth factory in the north be authorized to compete with Nesher. Needless to say, these requests fell on deaf ears. After the Arad application was turned down, a serious shortage of cement had immediate effects on the consumer public and led to a flourishing black market in which the commodity went for 6,000 Israeli lira per sack as opposed to the official price of 3,500 lira.(51) The pessimistic forecasts did not come to pass. The Arad factory was shelved and replaced by plans to overhaul and expand the facility in Ramle. Nesher's press releases revised their expectations, the estimates which spoke of the company's "meeting all countrywide consumption at its cement facilities in 1985."(52) To deal with the threat of competition, the managers at Nesher developed the capacity to foresee growth in demand. As a result, additional production lines were set up in advance, the executives knowing that it would be easy to penetrate a market with excess demand and hard to do so in a state of excess supply. Thus, on August 10, 1997, Nesher laid the cornerstone for a second "dry-process" line at the Ramle plant, at an investment of $180 million. The new line, which will increase production capacity by 1.5 million tons per year,(53) is to be completed in late 1999. Concurrently, the Nesher board of directors approved the construction of another "dry-process" line in the town of Nesher, to begin working in 1999. Aviram Mann characterized this situation as follows: "It's hard to expel whoever enters the market first." (54) Another kind of action aimed at preserving Nesher's monopolistic strength and protecting its status through government action, is comprised of tariff and non-tariff barriers against imports of cement. Prospective cement importers must comply with a singular Israeli standard. Some cement contains additional ingredients which are not in use in Israel (Russian Federation states, for example, have cement rich in pozolnium) and in the absence of set Israeli standards, importing such cement is totally forbidden. Most imported cement comes from Greece, Cyprus and Turkey, where the British standard is applied. Until August 1993, cement importers also required import licenses. Such licenses were almost never granted until the early 1990s, and imports were allowed only in the event of a local shortage. The Israeli standard is laid down by a committee of experts from Israel at Israel's Standards Institute, composed of two representatives from Nesher and one representative apiece from Readymix, Solel Boneh, the Technion-Israel Institute of Technology, and the Standards Institution staff. The minutes of committee meetings are confidential, and the considerations that underlie the committee's decisions are not made public. Nonetheless, the actual decision is made by a 12-member professional committee with 12 members who better represent the different interests in the sector. Economies of scale exist for importing and unloading cement, which put smaller importers at a disadvantage vis-a-vis Nesher. The difference between the Israeli and European standards (55) create extra cost for importers; while large importers (i.e., Nesher) manage to reduce these costs, smaller importers must bear their full burden.(56) This difference entails huge costs for cement importers. Any importer who does not have storage facilities near the port, must keep his boats at the port for the entire period that his cement is being checked by the Israeli authorities. The importer can have a sample of the cement tested abroad, but according to Daniel Schneider, the technical deputy to the director of the Standards Institute's Construction Department, the cost of this test is about the same as the cost of a boat waiting in port.(57) According to Schneider, the European standards have been adopted by the Israeli Standards Institute, except for the requirement that the strength of the cement be tested after two days. He says that changing the current requirement would necessitate changes in all of the professional literature produced on the basis of the current requirement. (58) Imports of cement in sacks are allowed in only if the markings on the sacks are in Hebrew. Taman Ltd., which manufactures cement sacks, is owned by Mashav. Thus, importers must have cement bags with Hebrew inscriptions prepared -- a requirement that obviously inhibits small-quantity imports, also since Taman, the manufacturer of sacks, is owned by Nesher. Nesher has benefitted from import protection by means of tariffs since its infancy. The first tariff, applied by the British when the plant began to produce, was about nine percent (59) (200 mils per ton of cement, whereas Nesher's price was 2.4 Palestine Pounds per ton). However, this tariff was still too low to assure Nesher's control of the domestic market. In early 1927, the founder of Nesher, Michael Pollak, contacted the High Commissioner, Lord Palmer, and vehemently accused the Mandatory Government of unwillingness to protect local manufacture. Pollak also appealed to highly influential British Jews in London who owned shares in the company and, through their good offices pressured the British government. The tariff was raised late that year to 25 percent of Nesher's sales price. In 1928, Nesher supplied 77 percent of all cement sold in Palestine. However, the pressure did not abate. Since it was being argued that imports from Yugoslavia might harm Nesher, the tariff was raised at the end of that year to 35 percent (60) of Nesher's sale price, helping Nesher meet 88 percent of local consumption in 1929. In the late 1930s, Nesher lowered its prices because of an economic crisis in Palestine, and the tariff was upped to 40 percent. Since the "dry-process" line was being recognized as an Approved Enterprise under the Encouragement of Capital Investments Law, it was agreed to open up the market gradually and eliminate the tariffs within three years of the start of production at the new facility. The tariff on imports fell from 25 percent at the first stage to zero at the end of the process.(61) Today, anyone may import cement customs-free but, as clearly shown, the entry barriers elaborated above have throttled nearly all imports. In addition to its representation on the committees setting standards, Nesher has tried to influence policy. For example, Itzhak Davidi, deputy director of Nesher, wrote to Ohad Orenstein of the Ministry of Industry and Trade in 1990: "From the study [Orenstein's study of the cement industry in Israel] it is not clear that samples will be taken from boats in Israeli ports....The points that must appear in the summary are: setting a 30-40 percent tariff, and a set tax, and testing the strength of cement by taking samples from shipments reaching the ports."(62) IMPLICATIONS OF NESHER'S MONOPOLISTIC STATUS What are the implications of Nesher's monopolistic status for taxpayers on the one hand and for cement consumers on the other? In fact, all Israelis are consumers of cement, and a large majority of them are taxpayers. In other words, there is no citizen in Israel who does not suffer, directly or indirectly, from the absence of competition in the cement industry, except for a very small group of workers, executives and shareholders in Nesher, who benefit at everyone else's expense. Table 3 below shows that cement prices are significantly higher in Israel than in nearby countries such as Turkey and Cyprus. Over the years, Nesher has exploited its monopoly status to charge dearly for cement and to command an especially fat commission for apportioning haulage work among the transport companies. Table 3 Cement Prices in Various Countries (At Factory Gate) State Price $ per ton Turkey1 $30-$50 Egypt 2 $39 Cyprus3 $50 Greece4 $70-$75 Jordan5 $60 Israel $70-$75 These numbers are based on data from various surveys in the cement industry, and relate to the following quoted rates; $26-$29, $44 (with a discount of 25 percent available), $50. Data supplied to the Israeli Embassy in Egypt on August 20, 1997, based on Statistical Abstract of Egypt. Data supplied by Moshe Ben-Ner, director of Nesher Trading, by telephone, November 23, 1997. Data provided by Shaul Sasson, commercial attache, Embassy of Israel in Jordan, in a letter dated August 6, 1997. While cement prices are controlled, even these controlled prices exceed those in neighboring countries. On December 17, 1996, this author asked the Controller of Prices for permission to study the method of computing the maximum prices, but was turned down. The prices are set on the basis of cost computations that the Controller obtains from Nesher. Nesher's prices are actually lower than the maximum prices set by the Controller. The prices of cement haulage, unlike those of cement, have never been controlled. Thus, Touval charged commissions in excess of 30 percent of haulage price for its services in handing out the work among the cement haulers. Of course, these commissions, too, were ultimately rolled over onto the taxpayers and housing purchasers. Since 1994, as stated, haulage prices have been declining following the intervention of the director of the antitrust authority. The high prices of cement leave no citizen of Israel unscathed. The damage occurs in several forms: direct damage, manifested in payment for the purchase or rental of buildings; and indirect damage, manifested in higher taxes to finance infrastructure. When non-dwelling structures such as offices and industrial buildings are at stake, the price of cement is higher, meaning higher operating expenses. These expenses are rolled over onto consumers, who must pay more than they would for each and every product in a rational economy. This damage is manifested in the price of dwellings and non-dwelling buildings, and, also in rent prices for every Israeli citizen. According to G. Ehrenthal, chief officer of the Nesher Board of Directors, who spoke before the Knesset Economics Committee in 1991,(63) cement used for building accounts for four percent of construction costs. Part of the payment for a dwelling originates in fees, charges, and duties earmarked for development of regional infrastructure. The share of cement in these payments is one percent of the structure's cost. The total share of cement in the price of a dwelling is two-and-a-half percent. Consider also the implications of this situation for housing purchasers. The average cost of a dwelling in Israel was $165,000 in the second quarter of 1997.(64) In accordance with Table 3 above, if Israeli cement prices were similar to those in Cyprus, home buyers would save 30 percent in the cost of cement. In such a case, the price of the dwelling would fall by about $1,250. The average national gross wage for a full-time position in early 1997 was NIS 5,000 per month.(65) Hence, every wage-earner who buys a dwelling has to invest about a month's labor just to pay for the high price of cement. Of course, if we were to compare the price of Israeli cement with that of Egypt or Turkey (from which the potential for imports is greatest), the potential savings for Israeli home buyers would be even greater. The taxpaying public suffers from the high cost of cement in several ways, both because the government itself is a cement consumer and because of money forwarded directly to Nesher. First, the government is a consumer of cement just like any citizen. The high cement prices in Israel also inflate the prices of buildings and products charged to public consumption. This, of course, also aggravates the tax burden. Second, it is the government that is responsible for building the infrastructure in Israel. Cement is an important component in roads, tunnels, ditches, bridges and other structures. The high price of cement inflates the cost of these infrastructures, and again, the taxpayer foots the bill. Third, the Finance Ministry's assistance to Nesher for the company's expansion exacerbates the tax burden. Ohad Orenstein, director of the Chemicals and Quarries Division at the Ministry of Industry and Trade, performed the following computation: The "dry-process" line in Ramle increased Nesher's production capacity by about 2 million tonnes. The company earns about $10 per tonne, or $20 million in all, from this quantity.(66) The tax benefit amounts to 30 percent on average. Therefore, the benefit is worth NIS 7 million per year for seven years. Israeli citizens make up for these lost revenues by remitting more taxes. In 1996, Nesher sold approximately 6 million tonne of cement to Israel inhabitants. The sales turnover, at $70 per tonne on average, was $420 million. If the price of cement to the consumer were lowered by 20 percent (i.e., if Nesher charged Israelis what it charges Palestinians) or by 40 percent (which would still be higher than the price in Egypt or Turkey), bringing it on par with the accepted level in our region, Israel's inhabitants would save between $80-$160 million per year. These are the profits which accrue to Nesher because it faces no competition from local producers or importers. Nesher's monopoly status allows it to apply a credit policy that is unacceptable in the Israeli economy in general and in the construction industry in particular -- a method that further inflates the direct prices of cement. Nesher is parsimonious in customer credit, customarily charging in cash and sometimes up front. Especially large customers are given credit that may amount to "current plus 16," meaning that payment is due sixteen days after delivery. These consumers use the cement to manufacture raw materials for construction (chiefly concrete) which they sell on the conventional credit terms of the construction industry, ranging from 60 to 90 days. This method heaps additional costs onto the direct price of cement. Middlemen who buy cement from Nesher, give it added value, selling it to their customers who have to pay interest for at least the 45 days that pass from the time they pay Nesher to the time they are paid by their customers. The cost of these credit differentials is ultimately rolled over, via the construction companies, onto home buyers, whose purchases become more expensive in order to finance Nesher's rigid credit policies. Environmental impact. Cement factories cause grave damage to the air quality in their vicinity. Among all man-made environmental blights, cement factories are the third most important (after fuel combustion and deforestation) in creating carbon dioxide. In the process of converting limestone (CaCo3) into the main raw material for cement (CaO), carbon dioxide gas (Co2) is emitted into the atmosphere. Cement plants generate two-and-a-half percent of all Co2 produced by industry worldwide.(68) A further environmental hazard is caused by the combustion of hazardous substances used for incineration in the kilns. However, the main problem is caused by dust emissions. It takes 1.6 tonnes of limestone and clay to manufacture 1 tonne of cement, and these minerals are ground to dust as they are fed into the process. This means that a cement plant that produces a million tonnes per year, grinds up, conveys, and packs about 6,000 tonnes of especially fine particulate matter each day. The main casualties of this activity are the residents of the towns nearest the cement plants: Ramle, Haifa, and Beit Shemesh. Dr. Eliahu Yahav of the Environmental and Occupational Medicine Unit at the Hebrew University of Jerusalem, claimed in Navit Sommer's article on Nesher (Yedioth Ahronoth, January 28, 1997) that: "The dust particles may irritate the upper respiratory tract, the skin, and the eyes." In the same article, residents of Beit Shemesh presented a medical report showing "higher incidence of respiratory diseases among children in Beit Shemesh than among children in nearby areas." Eli Vaanunu, a member of the Beit Shemesh town council, cited the damage caused to residents' property as an indication of the harm caused to their health: "It's enough to see what the dust does to our cars, solar water heaters, blocked-up roof gutters, furniture, and terraces to understand what may be happening to our lungs." On several occasions, the Ministry of the Environment has also considered the pollution created by Nesher and noted the high concentrations of sulfur dioxide and dust found in homes 800 meters away from the Nesher plant in Haifa. The tests pointed to Nesher as the source of the pollution.(69) Who gains from the monopolistic structure of the cement industry? The main beneficiaries are those associated with Nesher in one way or another. The high prices of cement allow several groups, first and foremost, the company's shareholders and employees, to enjoy terms of employment and returns on capital that rank among the most lavish in the country. The average wage of Nesher employees is much higher than the Israeli norm, according to their level of schooling, beyond that in the construction industry, of which Nesher is a part. An indication of the wage terms at Nesher may be gleaned from an article by the company's vice president for Human Resources, Yossi Bar-Or, in Nesher Bulletin 29, (September 1996): The average income at Nesher is twice the national average wage. The pension wage today, including wage components, is higher because of wage component income for which contributions were not made before the most recent labor accords. The social benefits include contribution to pension fund, advanced-training fund, health insurance, accrual of sick days, vacation days increased by 75 percent, transport of workers to work and back, breakfast and lunch in well appointed dining rooms, clothing, towels and soap, and participation in school tuition from kindergarten to university. The company's social benefits are among the finest and include annual recreation, payment for children's summer camps, distribution of textbooks, parties and events for employees' children, and ramified sports activity. These details point to Nesher as one of Israel's leaders in employment. The national average wage in 1996 (not including labor from the Territories) was NIS 4,908 per month.(70) According to Bar-Or's remarks, the average wage at Nesher was NIS 10,000. This exceeds wages at the Israel Electric Company and in the water industry. The average wage in these sectors, NIS 9,630 in 1996,(71) was considered among the country's highest and commands much public attention. Nesher also pays its employees more than the norm in the construction and civil engineering industry to which it belongs -- a norm that came to NIS 4,250 per month in 1996 (not including labor from the Territories). Nesher's high pay policy is especially salient considering that the average employee at its three cement plants has less than twelve years of schooling. Other industries with a much better educated work force, fall short of Nesher's pay scale. For example, the average monthly gross wage in 1996 was NIS 4,305 in education and NIS 7,706 in research and development. As the graph shows below, Nesher generates high monopolistic profits that surpass NIS 100 million per year or 12-14 percent of turnover. Nesher's shareholders are undoubtedly the main beneficiaries of the prevailing situation in this industry. In 1995, Koor and Clal divided up NIS 75 million in management fees -- an expedient way of milking money from the company without incurring tax liability.(72) In view of these data, it is only natural that everyone who benefits from these profits would spare no effort to keep the situation just as it is. Nesher Profits in the First Half of the 1990s (NIS Millions) Source: Ha'aretz, 18 January 1996 * (1995) Estimate These immense profits enable the parent companies to finance money-losing investments. It is doubtful whether the investment in Gold-Bond, which saddled Mashav with a NIS 21 million loss, could have been made were it not for Nesher's mammoth profits. However, if we regard this investment as a means to protect Nesher's monopoly, it was a small price to pay. Controversy about the company's huge profits began in 1938,(73) when Nesher benefitted from import tariffs of more than 40 percent. Although the Palestinian economy was engulfed in crisis at that time, and although Nesher slashed its prices by 20 percent, the company ended 1937 as the country's most profitable company. INTERNATIONAL SURVEY As stated, cement is manufactured in more than 120 countries, at more than 1.5 billion tons per year.(74) Since it is costly to haul cement overland, this commodity is usually purchased from local manufacturers, especially in locations far from ports. In countries that have ports, the component of international trade in cement is rising, since cement transportation is much less costly by sea than overland. There are no benefits to an economy of scale in cement production beyond one to two million tons a year. The exact amount depends on the population around the plant; at higher levels of production, the larger the plant, the less economical it is, because of hauling costs to faraway customers. A look at the markets in Europe, the United States, Canada and the Mideast shows that no other monopoly the size of Nesher exists. The Scandinavian monopoly does not produce more cement than the economy of scale (under two million tons). Holland is the one exception, where a monopoly produces five million tons. In countries which produce amounts comparable to Nesher, such as Belgium and Greece, there is competition among a small number of companies. The U.S. is the world's third-largest cement manufacturer, after China and Japan.(75) The American cement industry is intensely competitive, with 50 companies operating 118 cement plants in 38 states. The largest company has a 12.5 percent share in the quantity manufactured (75.3 million tonnes in 1995), and the five largest companies have a combined share of only 40 percent. The ownership of these companies is also highly diverse. Only 35 percent of the companies are American-owned; the remaining 65 percent are owned by foreign investors in more than ten countries. This brisk competitiveness has revolutionized the industry over the past twenty years. Production capacity has risen by 66 percent. Most of the kilns have gone over to the "dry method"; today, 71 percent of the plants use this method, which is considered the most efficient and economical. The number of employees has contracted by 43 percent, the cement industry carrying 17,800 people on its payroll as of 1995. In 1995, 89 percent of the cement manufactured was hauled in containers, in most cases at distances of up to 500 kilometers. The rest of consumption that year, (13.8 million tonnes or 15 percent), was imported from several countries, including Canada, Venezuela, Spain, and Greece. Cement in Jordan is manufactured by Jordanian Cement Enterprises Co., Ltd. (est. 1951), which employs 2,780 workers today. In 1996, the company produced 3 million tonnes of cement, of which 1 million tonnes was exported to Syria, the Gulf states, and the Palestinian Authority. Although the price of cement in Jordan is much lower than Nesher's prices ($60 per tonne), Jordan does not export cement to Israel. In a letter to this author dated August 6, 1997, Israel's commercial attache in Jordan, Shaul Sasson, cited the cost of standards testing as the main reason for this. Egypt is the largest manufacturer and consumer of cement in our region. While the annual domestic production capacity ranged from 17 million to 19 million tonnes between 1994-1996, the actual domestic production ranges from 16 million to 18 million tonnes. However, per capita consumption of cement is much lower in Egypt than in Western countries, at 0.3 tonnes per person (as compared with 1.1 tonnes in Israel). The reason for this is Egypt's large population, which is in excess of 60 million. Egypt imports cement in order to make up the shortfall in domestic production. In 1996, Egypt imported more than 2 million tonnes of cement in bulk, mostly from Greece and Romania, but also from Turkey and Denmark. The average price of the imported cement was $39 per tonne, 45 percent lower than Nesher's sales price. The price of domestically manufactured cement is also in this price range. Egypt has several cement companies, most of which are in various stages of privatization.(76) The leading company is Helwan Cement Co. Additional companies, some of which are traded on the Cairo Stock Exchange, are located in Tura and Omariyya. SUMMARY AND RECOMMENDATIONS The principal measure needed to bring about real change in the structure of the Israeli cement industry is to remove practical barriers to imports. Officially, any citizen may import cement, but various constraints come into play when this entitlement is invoked. Every Israeli citizen pays for this -- in taxes and in payment for housing. Importantly, the very possibility of importing cement creates a natural impediment to exploitation of consumers. Fear of loss of market share will cause Nesher to lower its prices (pursuant to an increase in the quantity manufactured and in head count), or streamline its production processes. In either case, the Israeli public will benefit even if actual cement imports do not occur. Although it is argued that the European standard for strength-testing of cement is not applicable in Israel, the assumptions underlying this belief do not stand to reason. It is clear that the Israeli standard should be harmonized with the European one. There is no justification for the existence of a specific Israeli standard in cement imports. Permits should be issued more liberally and other countries' standards should be recognized when the cement to be imported is known to meet the Israeli standard. Testing of cement shipments at recognized standards institutions overseas should also be recognized. This reform would obviate unnecessary demurrage and significantly lower the costs of standards testing. This is said with specific reference to cement from Jordan, Turkey and Cyprus. Incoming shipments of cement from plants whose last three shipments passed the standards testing, should be cleared for unloading and distribution immediately, on the basis of a declaration by the importer and his guarantee of the soundness of the cement. The standards in effect until the early 1990s were meant solely as import barriers. As evidence of this, the cement-testing procedures were eased significantly in the early 1990s to facilitate imports (mainly by Nesher), with no protest from this company to date. Experts from academia and importers' representatives should be given a stronger voice on the committee of experts. All prospective cement importers should be allowed to build unloading facilities at the ports of Haifa and Ashdod. Priority should be given to those interested in building facilities that would serve all importers, not only one. Any importer should be able to conclude agreements with the ports for the unloading and storing of cement, directly and without the government intervention that has occurred in the past. These arrangements should be based on economic considerations only. The main impediment to cement imports thus far has been the absence of unloading and storage facilities for bulk imports. It is important to re-emphasize that large-scale importing cannot be done with sacks. Given that the Ports Authority is fully government-owned, action should be taken to ensure that considerations regarding the construction of these facilities reflect economic motives only, rather than the surrender of politicians to pressure by Nesher. The objections by the Ports Authority and the government to the construction of such facilities have not been traceable to economic motives. The possibility of harm to the livelihood of 200 employees of Nesher in Haifa, or to those of Nesher in Ramle, does not justify egregious overcharging for cement that affects all inhabitants of the country. Moreover, there is no reason to assume that lower prices would actually harm Nesher's employees. Nesher's business might very well expand. A situation in which Nesher, or a company affiliated with it, tenders the winning bid for the ownership of import facilities should not be allowed. A situation that permits Taavura to become the sole possessor of unloading facilities is illegitimate. Anyone who meets the standards that Nesher has to meet should be allowed to build a cement factory. A scenario that may occur if unrestricted imports are allowed is the formation of enterprises that manufacture cement from clinker, either imported or purchased from Nesher. It is simpler and cheaper to import clinker than to import cement. Furthermore, a clinker mill causes less pollution than a cement plant that manufactures clinker. The obstacles to independent cement hauling are puzzling. The Antitrust Authority in the Ministry of Trade and Industry should drop the regulation requiring a minimum of 6,000 and 100,000 tonnes for hauling in sacks and in bulk, respectively. Unrestricted imports -- in the practical sense, not just hypothetically -- will create a natural barrier against overcharging by Nesher. Cement prices would be set by the market as an outcome of supply and demand. Price control has in any case failed to protect the public thus far, since Nesher has maximized its profits at prices lower than those stipulated by the Controller. The fact that Nesher has managed to reap high and risk-free profits while paying twice the national average wage, aided by high cement prices, makes the Price Controller's actions ridiculous. The government should avoid offering economic assistance of any kind at the expense of the Israeli taxpayer. Future government assistance for Nesher's plants is unwarranted. This aid merely reinforces the Nesher monopoly and clashes with the goals of the Encouragement of Capital Investments Law, itself an impediment to freedom. The Palestinian Authority should not be prohibited from importing or even manufacturing all the cement it needs. There is no justification for a political agreement that creates cross-subsidization -- in which the high prices of cement in Israel subsidize sales to the Palestinian Authority at prices that verge on losses -- just to keep Nesher's monopoly safe and sound. This reform would force Nesher to lower its prices in order to avoid being stuck with excess unused production capacity. The trend of adopting stringent international standards in cement manufacturing processes should continue. These standards would protect quality of life in the vicinity of cement plants as the market is opened to competition. The executive branch should take punitive action against anyone in the cement industry who issues overt or covert threats against those liable to infringe on Nesher's status. There is no doubt that the path to a truly competitive cement industry is strewn with difficulties and will encounter resistance from those who benefit from the current situation. Even after the recommendations are fully applied, Nesher will presumably remain Israel's largest manufacturer and marketer of cement. It stands to reason, however, that the price of cement will fall steeply, thus creating large savings for Israelis both in their housing purchases and in their taxes. Amir Etzioni is an IASPS Koret Fellow in the Institute for Advanced Strategic and Political Studies, Jerusalem and Washington, D.C. NOTES 1. "[We are] advised that a brick factory using a new method and a cement factory will open in Haifa in March..." As quoted in Nesher Bulletin 28 (December 1995), p. 2. [Hebrew] 2. Ha'aretz, 23 January 1996. 3. Nesher Bulletin 29 (September 1996), p. 28. [Hebrew] 4. Ha'aretz, 23 January 1996. 5. Ibid. 6. Ministry of Construction and Housing. Information and Economic Analysis Center, Monthly Information, November 1996 (Jerusalem: Ministry of Construction and Housing, 1996), p. 53. [Hebrew] 7. Information Unit on Climate Change (IUCC), UNEP, "Why Cement Making Produces Carbon Dioxide" (Information Unit on Climate Change: Chatelaine, Switzerland, 1 May 1993). 8. Nesher Bulletin 28, p. 23. 9. Ibid., p. 24. 10. Menahem Aviram, Cement and Its Creators -- Nesher at Fifty ("Nesher" Portland Cement Enterprises Israel, Ltd., 1976), pp. 92-100. [Hebrew] 11. Ibid., p. 98. 12. Ibid., p. 100. 13. Nesher Bulletin 12 (December 1984), p. 8. [Hebrew] 14. For example, see Nehemia Strasler, Ha'aretz, 23 January 1996. 15. Irit Hod, interview with author, 15 January 1997. 16. Ha'aretz, 27 March 1997. 17. Sammy Nachmias, interview with author, 13 April 1997. 18. Portland Cement Association (PCA), "The Cement Industry," http://www.portcement.org/indecom.htm 19. Amnon Dotan, interview with author, 2 March 1997. 20. Twelfth Knesset, fourth session. Economics Committee. Minutes 339 (25 November 1991). [Hebrew] 21. Yedioth Ahronoth, 17 November 1992. 22. Ibid. 23. Hagai Golan, Voice of Israel, Second Programme, 17 January 1994. [Hebrew] 24. Agreement on the Gaza Strip and the Jericho Area, 4 May 1994, Annex 5, p. 212ff. [Hebrew] 25. Ibid., III.2.a(1). 26. Ron Eilon, interview with author, 29 October 1997. 27. Ministry of Industry and Trade, Investments Center, Executive Decision No. 994(b)9 (6 November 1990). Minutes of Appeals Committee of the Investments Center Council, 14 January 1991. [Hebrew] 28. Ibid. 29. Ibid. 30. Ma'ariv, 28 January 1992. 31. Yedioth Ahronoth, 25 April 1980. 32. Ibid. 33. Ibid. 34. Ha'aretz, 19 October 1982. 35. Quoted in Itzhak Davidi to Yossi Shneer, 18 July 1994. 36. Yedioth Ahronoth, 17 November 1992; Economics Committee, Minutes. 37. Yedioth Ahronoth, 17 November 1992. 38. Economics Committee, Minutes. 39. Minister of Transportation Haim Corfu to the director-general of the Ports and Railroads Authority, Shaul Raziel, 24 November 1991: "In view of the economic and social implications of imports of cement to Israel, and in view of the state of employment...you are hereby asked to suspend procedures toward the conclusion of a contract in the matter of cement imports until the principled attitude of the Ministry of Industry and Trade on cement imports policy is obtained." [Hebrew] 40. Yedioth Ahronoth, 28 January 1997. 41. Ha'aretz, 21 January 1996. 42. Yedioth Ahronoth, 1 July 1997. 43. Ibid. 44. Ohad Orenstein, interview with author, 7 August 1997. 45. Nahum Shimshoni, interview with author, 2 February 1997. 46. Davar, 26 May 1980. 47. Ma'ariv, 26 May 1980. 48. Ha'aretz, 29 May 1980. 49. Ha'aretz, 17 March 1980. 50. Ma'ariv, 26 May 1980. 51. Ibid. 52. Ma'ariv, 19 October 1982. 53. Ha'aretz, 11 August 1997. 54. Yedioth Ahronoth, 28 January 1997. 55. Daniel Schneider, deputy technical director of the Construction Department of the Standards Institute, interview with author, 15 October 1997. 56. Ibid. Also, Orenstein, interview. 57. Schneider, interview. 58. Including the European method (EN-196) which is fully implemented. 59. Aviram, Cement and Its Creators, pp. 59-60. 60. Ibid., p. 64. 61. Yedioth Ahronoth, 28 January 1997. 62. Deputy Director of Nesher Isaac Davidi to Ohad Orenstein, 1 October 1990. [Hebrew] 63. Economics Committee, Minutes. 64. Globes, 18 August 1997. 65. Ministry of Construction and Housing, Information and Economic Analysis Center, Monthly Information, May 1997 (Jerusalem: Ministry of Construction and Housing, 1997), p. 45. [Hebrew] 66. Orentstein, interview. 67. Ministry of Construction and Housing, Monthly Information, May 1997, p. 52. 68. IUCC, "Why Cement Making Produces Carbon Dioxide." 69. Hadashot, 27 July 1993. 70. Israel. Central Bureau of Statistics, http://www.cbs.gov.il/lmsh.cgi [Hebrew] 71. This is the highest average wage shown in the industrial classification system of the Central Bureau of Statistics. 72. Ha'aretz, 23 January 1996. 73. Aviram, Cement and Its Creators, p. 81. 74. Ohad Orenstein, Voice of Israel, First Programme, 13 January 1994. [Hebrew] 75. PCA, The Cement Industry. 76. Privatization, Middle East & North Africa, 23 October 1995, http://www.multitasking.com/back.htm IASPS Policy Studies are published by the Institute for Advanced Strategic and Political Studies in Jerusalem and Washington, D.C. Nothing written here is to be taken as necessarily representing the views of IASPS or as an attempt to aid or hinder legislation in Israel or the U.S. Contact IASPS for reprint permission. Additional copies of IASPS Policy Studies can be obtained from IASPS head office in Jerusalem or from IASPS office in Washington, D.C., at $2.00 each (plus postage).

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