Israel Mulling Infrastructure Aid for Struggling Telcos

(Bloomberg) -- Israel is considering using some of the fees telecommunications companies pay it to upgrade the country’s internet infrastructure, a move that could boost the industry’s flagging profits without hurting costumers, according to the communications minister.

Ayoob Kara, who assumed the post in May, said he told staff to study the impact of redirecting hundreds of millions of shekels each year. Israeli telecom companies have slashed spending on infrastructure in recent years as their revenue from mobile plans has shrunk due to competition. 

"The companies are screaming about the infrastructure, that it’s being overloaded, and we are afraid that if a new phone comes out no one will be able to use it," Kara said in an interview in his Jerusalem office. "They say there’s no profit – that’s a problem."

Once dominated by three companies churning out rich profits and fat dividends, Israel’s telecommunications sector has been roiled by a price war since the government opened the market to two new players in 2010. Consumers have been the big winners, seeing their monthly bills reduced by as much as 90 percent. But with companies cutting back on spending, the country is at risk of falling too far behind advanced economies in terms of Internet speed and connectivity, which would put local businesses at a disadvantage.

Cellcom Israel Ltd., the nation’s largest mobile provider, posted 4 billion shekels of revenue last year, a 40 percent drop from 2010. Profits fell 88 percent.

Kara aims to have all telecom companies offer bundled services -- cellular, television, Internet and fixed line -- at prices no higher than 150 shekels ($42) a month, in effect capping the revenue companies can reap from the local market. By shouldering the load on capital expenditure, the government would ease some of the pressure on the companies to grow profits, Kara said. Still, he says he thinks prices have fallen “too much.”

"In practice, that destroyed the market," Kara said. "We can’t lower prices any more."

Government investment in Internet infrastructure is sorely needed, said Chen Herzog, chief economist at BDO Ziv Haft, who is advising Israel Broadband Company Ltd. on its search for a strategic partner to expand the country’s fiber optic network. 

Losing Competitiveness

“Government policy was focused on reducing costs for consumers, which was successful, but at a high cost to the economy. In a sense, the government is responsible for the fact that we lost our competitive advantage,” he said. “We sacrificed the long term for short-term cost reductions.”

Kara’s proposal would reverse the ministry’s previous stance, which put the onus of investment on the companies. In discussions last year with Bezeq Israeli Telecommunication Corp., the country’s biggest telecom company, the ministry required a 5 billion shekel ($1.4 billion) investment in infrastructure over a number of years as a condition to remove "structural separation" of Bezeq’s business units, something that could save the company about $100 million a year in operating costs.

"Bezeq today doesn’t earn what it used to," Kara said. "It got a big hit already with our recent decisions; they don’t have profits to invest." 

He was referring to ministry directives to allow rivals to compete with Bezeq using the company’s own Internet and fixed-line infrastructure.

Rapid Turnover

Kara is the third person to head the communications ministry this year. Prime Minister Benjamin Netanyahu resigned the post in February amid accusations of a conflict of interest over his personal ties to Shaul Elovitch, Bezeq’s controlling shareholder. Kara, a Netanyahu confidant and the only Arab member of the cabinet, denies he’s doing the prime minister’s bidding and says he won’t bend regulations in Bezeq’s favor.

Kara said there’s "no connection" between an ongoing securities probe into Elovitch and the ministry’s progress on industry reforms, including the removal of structural separation. Last month the Israel Securities Authority opened an investigation into whether Elovitch and other top executives at Bezeq’s Yes television unit falsified financial reports to justify the price Bezeq paid to Elovitch’s Eurocom Group Ltd. in the merger with Yes last year.

"What the law finds, if someone did something wrong – it doesn’t relate to the matter" of structural separation, Kara said. "Our job is to enact reforms that help the public."

He declined to discuss the investigation further, saying he’s still studying the case.

While he settles into the nuances of his role, Kara is pushing ahead on infrastructure investment.

"Everything will be based on the Internet," he said. "It’s cheaper than anything else and when you have a good enough infrastructure, that will lower the prices and people will move toward those services."

To contact the reporters on this story: Yaacov Benmeleh in Tel Aviv at ybenmeleh@bloomberg.net, Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Stefania Bianchi at sbianchi10@bloomberg.net, Michael S. Arnold, Amy Teibel