Am; Lek
The allegations of financial fraud on the part of those who now own the port of Haifa are troubling, but there are those who believe that our troubles are over, since Israel has insured itself sufficiently even for a scenario in which Adani’s enterprises collapse and a trustee is appointed in his place. What are the security mechanisms at the port’s disposal and can they be calm there?
It seems that the storm surrounding the billionaire Gautam Adani, an associate of the Prime Minister of India and until recently the third richest man in the world, stopped at the entrance of the passenger terminal of Haifa Port. A solemn ceremony was held there on Tuesday last week for the transfer of ownership of the port from the State of Israel to a group consisting of the Adani Ports Company (70%) and Gadot Israel (30%). It was the end of a successful sale process for the port, a significant milestone in the reform that began at the beginning of the millennium and aimed at increasing competition in seaports. No echoes were felt there that the Adani group and its leader deleted about half of the values that week, in light of allegations of stock manipulation made by the American investment company Hindenburg Research.
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Adani was received in the hall together with Prime Minister Binyamin Netanyahu, Minister of Transportation Miri Regev and Minister of Energy Israel Katz, during whose time the port reform was driven. Adani’s move to the port is an unequivocal expression of confidence in the Israeli economy. The ministries of finance and transportation do not officially comment on the latest developments with the port owners, but government officials are not disturbed, many of them still continue to celebrate the achievement and others hope that the crisis will pass.
Gautam Adani. Great hopes / Photo: Reuters, Amir Cohen
“This is not the first time that the state has done business under such conditions, were there no Israelis here who engaged in leveraging their companies?” said a senior government official. “It’s not pleasant and not in the same proportions of course, but the bottom line in the foreseeable range the port will not be harmed, it will be strengthened, even if the privatization is not successfully defined as we hoped for with the opening to other markets due to the decline of Adani’s fund, but even that is too early to tell.”
The Adani-Gadot group outsold its competitors by a margin of over one billion shekels. No one imagined that Haifa Port would be priced at NIS 3.9 billion – to which NIS 200 million was added as a bonus to the offer, due to the group’s being a strategic investor in the eyes of the state.
Between the group’s winning and the transfer of the funds to the state, suspicion arose among some industry officials that the deal would not be completed, after a Credit Suisse report warned against over-leveraging the group. But the purchase was completed, even though NIS 1.1 billion of it was brought in a short-term loan of two years and with an interest rate of about 8%. The high interest rate also led to raising eyebrows, but this is about a quarter of the port’s purchase amount. Recent developments raise concerns, even with a relatively minor one, regarding repayment capabilities.
Beyond the geopolitical premium of Adani, which expands its areas of activity through Haifa, the group gave two reasons for the high offer. The first, an amount of approximately NIS 1.5 billion that is in the port coffers, because the state did not withdraw a dividend from it prior to the sale. The second is the real estate project included in the port, on the sea front of Haifa.
Adani passed the tests
An official in the industry said that “the story should be taken in proportion: it’s not that Adani was competing against international corporations. In the final stage, all the remaining players are Israelis, some of them businessmen who are involved in the local shipping quagmire. Therefore, from the state’s point of view, both the timing, the identity of the winner, and the price are gold.” Another source mentioned that the Companies Authority decided not to choose a second winner in case something in the deal goes wrong and this is to convey to the local market that pressures and manipulations will not help and if the deal falls through – the sale procedure will be reopened and there will be no other winner in his place.
In the first stage of the bids in the tender, the investors were examined economically and legally, as well as the financial stability of the corporations – including the equity capital, the market value, the absence of going concern notes and criminal aspects or situations of insolvency of the company or its officers. In addition to this, the companies were examined in accordance with the national interests decree approved by the Knesset, by virtue of which, for example, the Turkish Yalport company was disqualified, and it was decided that the officials at the port would be Israelis – a fact that caused the Emirati DB company to withdraw from the process. In the second stage, the quality and amount of the bids submitted in the tender were examined. Quality was a basic condition and Adani’s being a major player in the world in the field of ports also gave it a bonus in the competition.
In all these tests the Adani Group passed successfully and with an advantage over its competitors. These included mainly players from Israel: a group led by Rami Unger, a group led by the Israel Shipyards of businessman Shlomi Fogel and a group led by the Shapir company. Adani’s advantage was both in the quality of the offer and its height, Adani’s relevant businesses examined are the 13 ports and terminals that the group operates and position his company as an international player in the field.
The prevailing position in Israel is that the state has insured itself sufficiently even in the worst case in which Adani’s enterprises collapse and a trustee is appointed in his place. The moral issue and according to which Adani is now in possession of the Haifa port while there are allegations of financial fraud is confusing but in Israel they are more busy understanding the new situation and its effects, and minimizing damages as much as necessary.
The state’s agreement with Adani and Gadot was signed on the basis of the procedure for the sale of the port, which states that one billion shekels will go into the port’s coffers for investment in infrastructure and the balance will be transferred to the state. This amount is in addition to the one and a half billion shekels that, as mentioned, were already in the coffers on the eve of the transfer of ownership, so that the port is rated relatively high and has cash for investment in the infrastructure sector and for carrying out various structural reforms that could lead to an increase in its profits.
These investments are necessary to deal with the intense competition that is taking place in Israel’s northern maritime space against the Gulf port operated by the Chinese SIPG company – which a year and a half after the start of its operations has already picked up cargo in the container sector as well as the small and efficient port of Israel’s shipyards that specializes in general cargo. The agreement also includes a pre-definition of the infrastructures required for the investment; limitation of the ability to use the amount accumulated in the cash register; The obligation to have senior Israeli officials; Appointment of external directors and employees as observers; Prohibition on transferring ownership during the first three years, except with the approval of the government ministries; and the ability to nationalize the port and its seller if proper port work is not done or there is suspicion of crimes. Distribution of profits, including loans to owners, was also limited – to profits accumulated since the last financial statement approved before the date of sale.
Another mechanism available to the state is the Vital Interests Order which anchors the state’s interests in society from a security point of view, ensuring the existence of continuous port services, promoting competition and preventing centralization, maintaining the character of the society as Israeli, and more. As part of the order, changes in the group’s control structure are subject to the approval of the government ministries and most of the company’s directors and the chairman of the board are required to undergo security clearance. The CEO, some of the vice presidents and the gatekeepers are required to be Israeli citizens with security clearance.
Other obstacles to success
In Israel it is estimated that even if there is a complete collapse in Adani’s business, it will not permeate the port of Haifa. As mentioned, the port itself is a separate company in good condition and with surpluses in the coffers. According to estimates, the high interest loan taken by the buyers is not threatening at the moment as the port company continues to bring in money.
Another source in the industry said that “the port economy does not live from the state budget or the owners, but from the income from port activity and capital raising, and in view of the increase in population and consumption and the fact that 98% of trade to Israel is carried out by sea, even if there are crisis years, the port will be able to overcome them. The fear for the port’s success is Not because of Adani’s story but because of the intense competition he has to face against the Chinese.”
2022 ended as a very bad year for the port in view of the bites of the technological and sophisticated Chinese Gulf port in terms of containers in front of the tired Haifa port. And also in view of the recession that resulted in a significant decrease in the scope of marine transportation as well as the full warehouses of the importers from the Corona period. The coming years are also expected to be bad for the port, which still needs to streamline its workforce and change its strategy. In the estimation of many factors in the industry, if the port succeeds in the first few years, it can lead over its competitors in view of its size and the budget for its development.
And yet, in the worst-case scenario that Adani could reach, there are many questions about the functioning of the port in the interim period in the event that a trustee is appointed. Who will be represented in the management of the port and how will the state respond to this type of development, will Adani’s share be sold and in what manner and how will the port be operated at this time even though it is actually managed by the skilled and respected Israeli company Gadot, and will the state have to launch a new tender in such a situation. But despite the whirlwind that Adani got into and the rapid cut in value in the stock market, this doomsday is still far away.
And yet, despite the sigh of relief heard in Israel in view of the fact that the Adani group paid and completed the deal before the affair exploded – the story casts a shadow over the phenomenal success of the privatization. The expectation was that joining an international strategic investor with an impressive track record would be able to attract shipping companies and establish relationships with parties for whom the ports in Israel had not previously been a focal point. The hope was that in this way it would be possible to increase the competition pie and perhaps even develop railways between Israel and its neighbors and the Gulf countries. Beyond the high financial offer, this is actually Adani’s distinct advantage over its competitors in the Israeli tender. But all these may, if there is no turnaround, sink together with the shares and the reputation of Gautam Adani and his companies.
The Adani-Gadot Group stated: “The financial strength of the Adani-Gadot Group was rigorously tested by the government, and in every respect the group was ranked the highest among the participants and compared to the other contenders for the purchase of the port.”