Prior to the founding of the State of Israel in 1948, public enterprises in the form of departmental undertakings functioned as government departments of the former British Mandate. Other forms of public enterprises, viz. statutory authorities and government-owned companies, were established after national independence to promote economic development in the areas of water supply, electricity generation, mining and transport. As these activities of the new government were capital intensive and yielded only long-term returns, private enterprise found them unattractive as investments. However, the government of the emerging State of Israel had far greater access to funds, particularly from foreign sources, to finance such ventures in the national interest.
Israeli law uses two parameters in determining the extent of government involvement in an enterprise - participation in management and financial support required. Within these parameters, government involvement is either direct or indirect. Accordingly all public enterprises are one of four types - direct or indirect participation, and direct or indirect support by the government - or a combination of these features. Where members of the board of directors are appointed by the government, control over the management of the enterprise is direct. Indirect government participation is exemplified in subsidiary companies where board members are appointed by parent companies directly managed by the government. Support from the government, on the other hand, can be direct where funds are provided from the State budget or indirect where the State arranges financing through commercial banks on preferential terms.
Public enterprises in Israel are diverse in their organisational patterns and types of activity. The only common denominator is the requirement that they operate on a commercial basis. Even non-profit service-oriented enterprises, such as research associations, are obliged to operate according to the commercial norm.
The motives for establishing public enterprises in Israel were two fold -ideological and economic. However, the pragmatic view has been that the development of State enterprises was only slightly influenced by ideological considerations and that, in general, public ownership was not considered to be an end in itself but a means to achieving the goals of economic policies. Accordingly, public enterprises were established mainly for accelerating economic development; guaranteeing credit for financing infrastructural and other basic activities; providing the services necessary for economic growth; and the assimilation of immigrants in the, new State of Israel. Further, in the interests of population dispersal, government corporations were established with the objective of providing employment and promoting economic development in rural areas.
Control over business enterprises was also passed over to the state by private owners who either lost interest in their companies or transferred ownership of them in settlement of the accrued debts. The state took control with the object of developing this sector of the economy and of maintaining continued employment opportunities.
During this period emphasis was also put on state aid for encouraging industry, among other things, a financial institution was set up, under partial control of the government, with the aim of aiding industrial development.
During the 1980s the government began to sell companies under its ownership after they had achieved the main goals for which they were established.
In 1986 there were 189 companies with varying degrees of government participation; of these, 94 were 'government companies' (companies in which the government has over half the voting power); 64 government subsidiary companies (in which a government subsidiary company has over half the voting power); and 31 mixed companies (in which the government has half or less than half of the voting power).
The Israeli Government conducts its commercial activities through three major types of organisations - departmental undertakings, statutory authorities and government corporations established by company legislation. In Israel a departmental undertaking is organisationally similar to a government department. As an integral part of the State administration, it is subject to all Public Service rules and regulations. However, a departmental undertaking of this nature is a closed economic entity with its own budget, experiencing greater operating autonomy and flexibility than in mainstream government departments. However, since the budget of such an undertaking is dependent on funding from its parent ministry, the undertaking is also subject to the budget law. The organisational form of the departmental undertaking is particularly suitable for enterprises which are largely concerned with providing public services and where the profit motive is not of paramount importance, as in the case of the postal and railway services provided by the State.
Statutory authorities - such as the Bank of Israel, Ports Authority and National Insurance Institute - are established by specific laws which define the structure and role of individual authorities. This type of public enterprise, which has more autonomy than a departmental undertaking, is authorised to raise capital through external borrowing by way of bond issues, but not through additional capital by way of stock. The main advantage statutory authorities have over government-owned companies is that they can be granted special powers under their enabling legislation.
Public enterprises are incorporated as limited companies where the State owns part or all of their stock. Such enterprises operate in the same way as any other company and in the process experience far greater autonomy and flexibility than other forms of public enterprise. Judging from their range of activities and economic role, government owned or controlled companies are nationally significant public enterprises, with activities including the exploitation of natural treasures; agricultural and industrial development; tourism; public services; water works and electricity; transportation and communications; oil exploration; factories and services for defence purposes; public housing; and non-profit making undertakings in the areas of education, culture, and research. In 1987 there were 300 commercial public enterprises in Israel which employed some 5 per cent of the country's total workforce and contributed 15 per cent of Israel's total exports valued at 20 per cent of the Gross National Product.
The employees of government companies and state enterprises represent in effect a cross-section of employment in the overall economy. Included among these employees are academics in the various professions such as engineers, scientists accountants, economists and political scientists together with electricians, painters, welders, foremen, book-keepers, various administrative personnel and others.
To maintain and foster the professional level of employees, training units in the various public enterprises organise courses in-house. External courses are also arranged and often enterprises assist their employees in acquiring a university education by providing financial aid or study leave with pay.
In the private sector, supply and demand are the main factors determining wage levels. In the public service, social and administrative conceptions are the main determinants while status, job security and a sense of mission serve as a counter balance against the more modest levels of income. The government companies stand in between these two positions. The position of each government company on this continuum cannot be determined by simplistic notions concerning desired wage levels, but must be arrived at through proper consideration of both the business and public aspects of each case.
The government companies employ about 70,000 workers (about 6 percent of the workforce). Since government companies fulfil national functions,, there are those who believe that their employees' wages should be equal to those of civil servants - otherwise the state will be competing with itself in recruiting highly qualified employees. Others take the position that the government company should peg its employees' wages to those of the private sector so as to attract higher qualified manpower. This question has been debated frequently ever since government companies were established.
An additional question regarding wages is whether - as in the private sector - directors should also be paid bonuses for superior performance in addition to their salaries.
In Israel, claims are continually raised for equalizing the wage levels and benefits of senior employees in the civil service with those who serve in companies under government ownership. Despite this, the terms of employment in most companies are not equal and there are significant differences in wages. The wage levels are higher than those granted in the civil service and in some companies, significantly more so. In discussions of the Finance Committee of the Knesset (Israel's parliament) reservations were expressed regarding the significant differences in wage levels. The Committee recommended that in cases where companies require expert staff who cannot be recruited on the basis of conditions of the civil service, special agreements should be concluded with them, placing them outside the regular wage scales.
Most of the state's investments in government companies were in the basic branches of the economy - electricity, water, minerals and transportation. This was because, private enterprise in Israel showed no interest in such investment partly because of their special character, but mainly because the return on investments was low and expected profits in the short-term uncertain. Private enterprise also lacked the ability to handle such investments from the organizational point of view and in terms of raising the required capital. In contrast, the government had substantial financial resources, in large.part from abroad. Also, most of those employed by government companies are concentrated in these branches of the economy.
The source of most government company financing, particularly in the basic industries, is the state budget in the form of share capital or preferential and long-term loans. Financial resourcing sometimes included the raising of bank loans and capital from the public through the issue of both shares and bonds. Another source of financing, mainly for companies operating in developing regions, was in the form of earmarked grants whose purposes were specifically defined. Over the years, some of the government companies have achieved a strong financial position, even to the point of accumulating profits and declaring annual dividends to the owners including the government, which has largely precluded the need for government financing.
Government investment is mainly in share capital and the proportion of investment usually ensures voting rights in the company's management. The percentage of share capital held by the government in each company varies between 5 percent and 100 percent. Where the government's rights are less than 51 percent, it has naturally, little influence on the activities of the company. Nevertheless, when the government joins a company, even as a minority partner, in the eyes of the public it becomes accountable for the company's activities. It must be aware of this fact and must, from the very beginning, justify the reasons and special aims for investing in the company and must make sure that these aims are realized even though it is only a minority partner.
Because public enterprises in Israel are established to undertake various activities for national social and economic development, government control over these enterprises is designed in the interests of public accountability. While control is complete in the case of departmental undertakings, control over statutory corporations depends largely on the provisions of the particular legislation involved in each case.
The extent of government control over companies, the main form of public enterprises, is related to the equity participation of the government. Where the shareholding of the government in a company is less than half, government control is limited. The Government Company Law 1975 has defined the powers of the Government Companies Authority, established under the Ministry of Finance, to control companies in which the government shareholding is not less than half. Accordingly decisions of a government-controlled company - in matters such as change of objectives; increase in registered capital; change in the holding rights of shares; winding up or amalgamation with another company - all require the approval of the government. Further, the tariff rates of most of the enterprises which are the sole suppliers of essential services in the areas of power generation, posts and telecommunications, port and airport facilities, and transport are regulated by the government.
In Israel departmental undertakings, such as the railways and postal services, are supervised by the responsible Minister in the same manner as other administrative units under his control. The Minister concerned has also the right to appoint the director of a departmental undertaking, but ministerial control in the case of statutory corporations is usually limited to matters of policy.
In the case of government companies directors are appointed by the responsible Minister and the general managers with his approval. The Minister must be kept informed of the decisions of the Board of Directors for each company.
The extent of ministerial powers varies widely. Although the two large housing corporations, viz. Amidar and the Housing and Development corporation of Israel, act almost as an extension of the Ministry of Construction and Housing, in contrast the state-owned banks and companies in the energy sector are only subject to the broad guidelines of public policy laid down by the particular Minister involved.
Central agency controls over Israeli public enterprises operate as follows:
In Israel departmental undertakings have more flexibility than other government organisations. Statutory corporations are free from government intervention in day-to-day administration, and can raise capital by means of bonds but not through shares. Government companies enjoy autonomy in matters such as budgeting arrangements, appointments, dismissals and conditions of service of personnel, subject to the general policy guidelines of the government.
Statutory corporations and government companies normally have boards of directors which include government representatives. Each board of directors is responsible for the general policy, corporate plan and annual budget of the particular enterprise.
Reports on the performance of individual enterprises are submitted to the relevant board of directors and the government. Computers are used for generating data for financial management and other aspects of the information system.
Departmental undertakings operating within the broad framework of government departments follow the accounting system used by the particular department. The accounts for each enterprise are maintained on a modified cash basis, income being recorded only when actually received but expenditure recorded as incurred or accrued. Full accrual accounting, however, is used in statutory corporations and government companies. In both cases the standards prescribed by the Institute of Certified Public Accountants of Israel are followed.
The form of the financial statements of public enterprises in Israel is not formally approved by the SAI or other authority external to management. However, authoritative guidelines are provided by the SAI in his publication titled "State Comptroller's Directives to the Auditor of an Association". Beyond this, the SAI does not participate in the preparation of the financial statements of public enterprises.
The Israeli Knesset (Parliament) has set up committees to oversee accountability of public enterprises. It also uses customary parliamentary procedures - such as of question time, motions on points of order, and full discussions on the floor of Parliament - as an integral part of accountability.
The Knesset does not exercise any budgetary control except in voting government subsidies to statutory corporations whenever needed. Borrowings, however, are controlled through the Finance Committee of the Knesset.
Reports of the State Comptroller are considered by the Knesset Committee on State Control. Although the proceedings of this committee are not open to the public, a press communique is issued by the Chairman of the Committee after the conclusion of the proceedings in each case. The summary of the Committee's findings is tabled before the full forum of the Knesset for consideration and endorsement.
Under the provisions of the State Comptroller Law 1949, as amended, every organisation in which the government has any financial or managerial interest is subject to audit by the State Comptroller of Israel. Thus all public enterprises, with varying degrees and forms of public ownership, come within the authority of the SAI which carries out comprehensive audits without any limitations and exercises discretionary powers over the timing, scope, reporting and other pertinent issues relating to each audit.
The SAI does not act as consultant or adviser to management in any formal way. However, the advice of the SAI may be sought by individual enterprises on an informal basis.
Similarly, the SAI has no authority to correct decisions of management, or to give management instructions on any matter. Deficiencies in financial administration are corrected in a number of ways. At the grassroots auditing level, technical defects - such as mistakes in accounts and shortcomings in contracts - are immediately brought to the attention of the staff of the enterprise involved in order to give them the opportunity of correcting obvious defects. At the next level, there is continuous dialogue between the SAI and enterprise management - especially regarding policy matters which can be settled through good working relations. Atthe next higher level, there are official representations by the SAI to the ministers involved with the public enterprises under scrutiny. Remedial action may also be obtained through publication of the relevant audit reports of the SAI and publicity through wide media coverage. Controversial matters arising from alleged weaknesses in financial administration may be ventilated in the State Control Committee of the Knesset, a parliamentary committee occupied exclusively with audit reports. Also, follow-up machinery has been established by Cabinet in the form of a special unit in the Ministry of Economy and Planning which monitors the correction of weaknesses published in the audit reports of the SAI.
The SAI of Israel undertakes a wide range of audits. These include financial and compliance audits; economy, efficiency and effectiveness audits; policy audits; and audits of the moral integrity of public administration. Such audits are undertaken to ensure public accountability.
The authority for the audits of the SAI originates in the State Comptroller Law 1949, as amended. The authority of the SAI applies not only to government corporations as defined by the Government Corporations Law, but also to bodies in which the government has either a financial interest or participates manageri-ally irrespective of the extent of government ownership or voting power.
The State Comptroller Law stipulates the scope of the audits conducted by the SAI. In the exercise of its function the SAI is empowered to examine the legality of the financial and administrative activities of public enterprises, the accuracy of their accounts, the handling of funds, the safeguarding of assets, and budgetary matters. A more general provision empowers the SAI to audit the economy, efficiency and moral integrity of relevant activities, but no limitation is placed on the auditing activities of the SAI which is specifically empowered to examine "any such matter as it may deem necessary". Accordingly the scope of the audits conducted by the SAI is not confined to these aspects of public enterprise activities of interest to a private shareholder, but extends to matters of public interest including administration (such as public tenders and personnel management), economy efficiency, effectiveness, and the relationship between individual enterprises and the Government.
The scope of the audits of the SAI also covers the manner in which the audited enterprises have conducted their affairs to ascertain whether or not they are "moraHy irreproachable". This would appear to be a unique provision unparalleled elsewhere in formal prescriptions of duties of the SAI. Although ethical norms may be discernible, the detection of deviations from these norms is frequently difficult in the absence of written evidence attesting moral shortcomings in the conduct of particular enterprises. In practice the SAI may have to rely on indirect information obtained through complaints and interviews.
Since law enforcement agencies in Israel have the legal authority to investigate criminal offences, the SAI is obliged underthe State Comptroller Law to bring instances of suspended criminal breaches by enterprises to the attention of the Attorney-General. In those cases where suspicion relates to offences in fields where special supervisory agencies operate (tax evasion, illegal foreign currency transactions and company frauds), the relevant agency is informed of the SAI findings in order to enable it to undertake the necessary investigations.
An important auditing element, aimed at preserving moral integrity in the audited entities, is the examination of the effectiveness of internal controls -including internal audit. Strong internal controls are one of the most useful deterrents against offences by employees, while an assertive internal audit is indispensable in detecting irregularities and checking the adequacy of the internal control system. However, these internal elements cannot serve the objectives of the SAI's internal audit where offences perpetrated by the entity itself - against fiscal or other laws and regulations - are involved. Moreover, the effectiveness of internal control is very limited when offences are committed at the higher management level which supervises the operation of these controls and is empowered to authorise exceptions from the rules. Accordingly the scope of the SAI's audit covers not only the operation of internal controls and internal audit, but extends to higher management echelons and the conduct of the enterprise.
A difficult subject in this area for the SAI are package deals, where several aspects of both the public and private interest may be involved. In these transactions different assets and liabilities may change hands and diverse rights may be accorded. Further, compensation may take the form of credit at special terms, of rights to acquire shares at specific prices, or of exclusive marketing rights, price agreements and other concessions. The analysis of the intricacies of package deals and their implications for the public interest may prove to be quite complex, as their terms may conceal inequitable or irrational arrangements inimical to the public interest. Similarly, package deals may reflect inferiority in bargaining power or moral defects in tine management of the public enterprises involved. Accordingly the SAI carefully reviews all relevant decisions from the viewpoint of public accountability. In particular, the SAI insists that negotiations on behalf of public enterprises are not conducted by a single person; that all steps undertaken, all decisions made and all meetings held are fully documented; and that all documents are available for inspection.
There is a statutory requirement, in para. 48 of the Government Companies Law, for the Board of directors of government companies to appoint an internal auditor for the company unless the Government Companies Authority certifies that the volume or character of the companies activities does not necessitate an internal audit function. Although not required by statute, other types of public enterprises employ internal auditors as a matter of good management. Most of these internal auditors are employed on a permanent basis as an integral part of individual enterprises, but some are commercial auditors retained on ad hoc contracts with particular enterprises.
The internal audit function, although not completely effective, is improving in response to experience and training in this area. Initially there was some reluctance among public enterprises to introduce such a function in the absence of a specific statutory requirement for those forms other than government companies. Most of the internal auditors involved are university graduates who attend in-house training courses conducted by individual enterprises. The SAI reviews the internal audit function of all public enterprises under his jurisdiction.
Although audit committees are not common, there are quite a number of public enterprises which have audit committees. Experience in Israel has shown that the establishment of audit committees by public enterprises can serve as an important stimulus to the effectiveness of the internal audit function.
The use of commercial auditors for undertaking audits of public enterprises is strictly limited. Individual enterprises do not have the power to appoint a commercial auditor rather than be subject to audit by the SAI. Similarly, the SAI is not empowered to engage commercial auditors on contractto carry out various audits. However, the SAI has engaged private audit firms in rare cases and has relied on their auditing. Such firms are chosen carefully and their work supervised by qualified accountants in the employ of the SAI.
A variety of audit methods and techniques are used. The methods and techniques are based on either the examination of systems and/or of documents and transactions, in order to assess compliance with and propriety of internal controls.
The financial and compliance audit generally includes analysis and enquiries into any material movements of items in the financial statements compared with previous years and the budgeted figures, and the evaluation of trends disclosed by the accounts. These audits are generally systems-based, suitably modified to meet the needs of the particular enterprise being audited. Where computerised accounting systems are involved, computer assisted auditing techniques are employed.
The SAI operates a special staffing group for the audit of public enterprises. In addition, some audit staff engaged in the audit of ministerial departments also carry out audits of public enterprises as the need arises.
Specific audit guidelines are issued for the audit of public enterprises. A new auditing manual of the SAI includes a special chapter on public enterprises. The SAI has also issued directives for Auditors of Associations (i.e. enterprises, institutions and funds).
As indicated previously, most of the SAI personnel engaged in the audit of public enterprises are university graduates - with degrees in economics, business administration, accounting or law. Special training in the audit of public enterprises is provided from time to time.
There is no requirement for the SAI to audit and report on the financial statements of public enterprises annually. Similarly, there are no requirements for the SAI to conduct audits of particular enterprises progressively throughout the year or only after the signed statements are received from the auditor. In law and in fact, the discretion of the SAI is absolute in these matters. The SAI of Israel conducts audits of public enterprises as and when it decides to do so.
The SAI carries out a variety of audits - including performance audits - of public enterprises. The results of these audits are included in the annual reports of the public enterprises involved. In addition, the results of SAI audits of public enterprises are submitted to the Knesset, either as special reports or consolidated in the Annual Report of the SAI.
Reports of the SAI are made to a Minister or to the Head of Government, as distinct from being sent directly to the legislature, only in very special cases. Thus, para. 14 of the State Comptroller Law provides that, where an inspection has revealed defects which have not been explained or infringements of any law, of the principles of economy and efficiency or of moral standards, the SAI is obliged to communicate to the inspected body the results of the inspection and his demands for the rectification of the defects. In these circumstances, if deemed necessary by the SAI the matter is brought to the knowledge of the Minister concerned and of the Minister of Economy and Planning. Further, para. 17 of the State Comptroller Law provides that, having regard to the necessity of safeguarding the security of the State, the SAI may, if the government so requests on grounds which it is satisfied are reasonable, give a limited report or refrain from giving a report on a branch or unit inspected by it.
The law does not specify dates for the publication of audit reports on public enterprises and in practice such reports issue at various times. The law merely requires that the reports be submitted to the State Control Committee, the Minister of Finance, the responsible minister and the audited enterprise. There is no requirement for the Knesset Committee or the Knesset as a whole to discuss the reports, but the Knesset Committee does tend to discuss reports on the more important public enterprises. There is also no legal requirement for enterprises to respond to audit findings.
The audit findings and reports of the SAI are followed up in several ways. At the parliamentary level, the Knesset Committee on State Control convenes a meeting attended by the chairman of the board of directors of the audited company, the general manager, the representative of the relevant government ministry, and representatives of other relevant bodies are invited. Usually at the conclusion of the meeting the Committee prepares a summary which, if it finds necessary, may table in the Knesset's full forum, and even request the Knesset's endorsement of its conclusions and recommendations. In recent years the Committee has insisted in its report on a follow-up report on the rectification of shortcomings by a specified date.
The Government Companies Authority has established rules for dealing with the State Comptroller's reports and for following up his recommendations.
According to the guidelines, responsibility for dealing with the SAIs reports lies with various internal and external agencies. Within the government company itself, responsibility rests with the boards of directors, management and internal audit. Management is obliged to call a meeting of the board within sixty days from the date of submission of the audit report. This meeting discusses audit findings and the steps proposed by management to rectify reported shortcomings and prevent their recurrence. The external agencies involved in follow up action will include the Government Companies Authority and representatives of the responsible ministries. The SAI itself has instituted an automatic follow-up procedure within a reasonable period of time on all findings included in annual audit reports. In those public enterprises where findings are usually published in special reports, each cycle of SAI auditing activity starts with a review of the steps taken by the particular enterprise to remedy the shortcomings mentioned in the last report. Where no remedial action has been taken by the enterprise, the relevant matter is again included in the next report.