Government Companies Authority vs. Water Authority: Threatening Mekorot's Board of Directors, concerns over financial stability

The tension between the Government Companies Authority, Mekorot, and the Water Authority is escalating. The source of the conflict is a new accounting method between the regulator and the state-owned company Mekorot. The Water Authority has implemented new rules intended to streamline Mekorot's operations; however, critics argue that these rules force the company to invest in development plans while incurring financial losses. Even before the rules were adopted, the Government Companies Authority warned that the company would be forced to record an accounting impairment of 1.95 billion shekels out of a total of just over 3 billion.

The director of the Government Companies Authority, Roi Kahlon, wrote to Energy Minister Eli Cohen late last year:

"In the Authority's position, recording an impairment of this magnitude is expected to have an immediate and material impact on the perception of the company's risk in the capital market, including a real fear of damage to its credit rating, an increase in the risk premium, and an increase in financing costs. This damage to the company's financial stability is expected, with high probability, to eventually roll over into an increase in water tariffs and damage to the water sector as a whole."

Last March, Mekorot petitioned the Supreme Court against the decision, challenging the change in the Water Authority's compensation mechanism. These rules significantly reduce compensation for fixed capital investments, such as pipelines, while increasing rewards for maintenance and efficiency. The company expects to record an impairment of 1.3 billion shekels.

The Incentive System Dispute

One of Mekorot's most significant income sources is capital investment, funded by bond issuance. Previously, the Water Authority compensated the company at the bond interest rate plus 4.8%. The regulator now intends to reduce this supplement, shifting incentives toward maintenance, operations, and international consulting.

The Water Authority maintains that there is no logic in viewing Mekorot as a public company with shareholders seeking profit. As a regulated entity, its revenues are determined by the regulator, and the Water Authority argues that accounting impairments do not impact the company's actual business. The regulator insists that the current framework improves cash flow and includes mechanisms to ensure debt coverage.

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Mekorot's Board of Directors is currently reviewing its multi-year investment plan in light of these constraints. The Water Authority has responded by declaring that failure to meet at least 95% of the water sector development plan will lead to a 7% reduction in the recognition of the company's costs.

In a letter sent today, Deputy Director of the Government Companies Authority Roi Yaniv Adri described this threat as "adding insult to injury," noting that the company is already facing a complex financial situation, including negative cash flow and a working capital deficit.

"An Impossible Managerial Dilemma"

Adri emphasized that the Government Companies Authority views the Water Authority's actions as an attempt to interfere with proper corporate governance and pressure the Board of Directors. Such sanctions place the Board before an impossible dilemma: either adjust investments to match cash flow and face sanctions, or continue investing despite financial indicators, risking excessive leverage.

According to financial reports for the second quarter of 2026, Mekorot's net profit rose to 243 million shekels (compared to 62 million in the same quarter last year), but the new regulatory system eroded 83 million shekels from assets. Net profit for the first half of the year reached 110 million shekels, down from 244 million in the same period of 2025.