80% of Israel’s desalinated water is treated by a single company – IDE, which is using its position to play hardball with the government, turning down an ostensibly profitable offer to increase its output.
By Avi Bar-Eli

While the public is protesting against economic concentration, one highly concentrated area is behaving as if nothing’s changed: the water desalination sector.

One third of the water households use is desalinated. And 80% of Israel’s desalinated water is treated by a single company – IDE, which is controlled by Yitzhak Tshuva’s Delek Group and the Ofer family’s Israel Chemicals.
Hadera desalination plant – Eyal Toueg – 04092011

The Hadera desalination plant. Controlled by IDE.
Photo by: Eyal Toueg

Due to the water shortage expected next summer, the state wants IDE and its partners to increase output.

IDE is using its position to play hardball with the government, turning down an ostensibly profitable offer to increase its output and pushing for a “package deal” to further increase profits. The government rejected IDE’s proposal.

Thus the government is belatedly realizing the price of having such a crucial basic product controlled nearly entirely by one private company.

In June, the government asked the country’s three desalination plants to increase production. This is the third time the government has done so since the plants were built over the past decade.

The plants – in Ashkelon (2005 ), Palmahim (2007 ) and Hadera (2010 ) – were built by private companies through a public tender. The companies won the tenders by offering the government the lowest prices for water, and the government agreed to buy desalinated seawater from the plants for a fixed price over a fixed number of years. All the tenders were competitive processes.

The Ashkelon plant is owned 50% by IDE and 50% by the French company Veolia; the Palmahim plant is controlled 72% by Granite Hacarmel and 28% by the Tahal Group; and the Hadera plant is controlled 50% by IDE and 50% by Shari Arison’s Shikun & Binui.

Over the years, Israel began to need more water, and quickly, in part due to a seven-year drought. So the government asked the plants to increase their output in exchange for higher rates, which would cover the costs of expanding and give them attractive profits.

At this point, the process was no longer competitive – the government was forced to negotiate individually with the existing players. Two years ago, the government announced how much it would pay the plants to increase their output, and let them decide how much water they would produce for that price.

Following negotiations, the three plants agreed to increase their output by an average of 25%, in exchange for a price of NIS 2.60 per cubic meter of water. While this is a low price given the companies’ bids in the tender process, the cost of desalinating water decreases over a plant’s lifespan.

Thus, the Ashkelon plant agreed to increase annual production from 100 million cubic meters a year to 118 million; the Palmahim plant upped production from 30 million to 45 million; and the Hadera plant, which was still being built, increased capacity from 100 million to 127 million.

The process repeated last year, as Israel again found itself lacking water. This time, it was decided to increase the plants’ capacity by increasing their operating hours. Following tough negotiations, the Hadera and Palmahim plants agreed to increase capacity by 15% in exchange for rates of between NIS 1.34 and NIS 3.15 for the extra water, depending on the season and the time of day.

These are higher rates than the government had initially offered, but it had no choice, since the country was facing a water shortage and there were only three players.

In 2011, the government decided to increase desalination capacity again, due to the water shortage expected in 2012. The interministerial tenders committee published another offer to purchase more water from the plants at an attractive price, again letting the companies decide how much water to produce at that rate. The committee offered a different price to each plant, depending how much time was left on its government contract.

Not surprisingly, the three plants said the prices were too low. With no other options, the government was forced to better its offer. A month ago, it offered them rates that were 6% to 7% higher than its initial offer.

The government was expecting to get another 45 million cubic meters of water from Palmahim, another 15 million from Ashkelon and another 25 million from Hadera. Thus, the improved rates would mean another NIS 11 million per plant per year, or a total of NIS 200 million more for the duration of the tenders. This would be covered by increased water prices – namely, your water bill.

The Palmahim plant – the one not controlled by IDE – is expected to accept the new deal and offer to double production to 90 million cubic meters a year, since making this small plant larger would also make it more profitable.

The larger plants, those controlled by IDE, offered the government a “package deal” instead: They would increase production for that price, but only if they could do so through IDE’s new plant being built at Sorek. It is less expensive to increase capacity at a plant that hasn’t yet been built.

The government rejected that offer, not on principle but because the water must be provided by 2012, and Sorek is expected to be completed only in 2013. Once the 150-million-cubic-meter Sorek plant goes online, IDE will produce 75% of Israel’s desalinated water, and 25% of all potable water in the country.

A new plant is also being built at Ashdod.

IDE had submitted a particularly competitive bid in its tender to build the Sorek plant. Some people speculated that one reason may be that it knew the government would be forced to offer better rates for increasing capacity, as happened with the other plants.