Maj. Gen. (ret.) Giora Eiland is warning that the increase in US military aid to Israel, according to an agreement signed in 2016, is an optical illusion and is having a negative impact on small and medium-sized Israeli defense companies. In an opinion commissioned by a forum of the companies liable to be affected by the terms of the US aid agreement, Eiland states, "The agreement is ostensibly a good one, since the amount of aid is $38 billion, an average of $3.8 billion a year, but in practice, the agreement poses problems."
Eiland's opinion is part of the campaign by the small and medium-sized industrialists to bolster their standing under the aid agreement. Among other things, the campaign was sparked by three huge deals between the Ministry of Defense and the US, of which the small and medium-sized companies want a share. These deals involve procurement of a squadron of new warplanes, air refueling airplanes, and transport helicopters. Decisions on the matter are likely to be taken when the next government is formed.
Eiland is assisting and providing consultancy services to a forum of companies that manufacture aviation assemblies and components: Wipro Givon from Kiryat Bialik; Baz Airborne Components and Assemblies and Moked Precision Instruments, which operate from the Bar Lev industrial zone; Fedco Israel from the Emek Hefer industrial park; Cabiran from Kibbutz Cabri; Kanfit from Migdal HaEmek; and FBM Composite Materials from Kiryat Gat. These seven companies have an aggregate total of over 1,000 employees, and supply work to about 1,000 more.
The forum was founded by Wipro Givon VP marketing and business development Goni Letzter in order to achieve understandings with US industries in preparation for the changes in the aid agreement, principally the elimination of Israel's option to convert 25% of US aid money from dollars to shekels. Elimination of this option will substantially reduce the Ministry of Defense's shekel budget for procurement from Israeli companies; the use of US aid will be confined to companies registered in the US.
These changes are arousing great concern among hundreds of other companies throughout Israel, many of which depend on orders from the Ministry of Defense and subcontracting agreements with large companies. An analysis conducted for the Ministry of Defense found that the change in the aid agreement was liable to damage 600 companies, jeopardize 20,000 jobs, and cost the economy NIS 7 billion in GDP.
"Being forced to procure more expensive products"
According to Eiland, US aid is composed of $3.3 billion annually, and includes a $5 billion "gift" to Israel from the US Department of Defense, among other things for financing air defense development and procurement programs: Arrow missiles, David's Sling, and Iron Dome.
"The 'gift' element in the separate agreements was large and fairly significant, because in effect, the US financed a large proportion of Israel's unique technological development," Eiland's opinion states. "This special arrangement is being eliminated. From now on, $33 billion plus $5 billion is treated as ordinary foreign aid, which of course mandates procurement in the US. The previous arrangement, which distinguished between foreign aid for procurement in the US and billions invested by the Department of Defense in Israeli technological projects, was preferable for Israel."
Eiland later warns that the gradual cancellation of Israel's option to convert dollar aid to shekels "will cause significant, even dramatic, damage to local activity by the Israeli defense industry." In addition, Israel's real purchasing power in the US market will be eroded by 25% in comparison with the purchasing power in converted dollars used for procurement in the Israel market.
Eiland states, "Procurement in the US is beneficial, because the money is given as a gift. At the same time, it generates constraints and a need to procure expensive products or products of which there are better versions in Israel or Europe."
The gap between large and small companies is widening
In Eiland's opinion, the vulnerability of the large defense companies - Elbit Systems, Rafael Advanced Defense Systems, and Israel Aerospace Industries (IAI) - is marginal, because they export most of what they manufacture and have close ties with the major US weapons companies. Furthermore, these companies benefit from the Ministry of Defense's policy of making deals with foreign suppliers contingent on reciprocal procurement in Israel. Eiland is also proposing that foreign companies be given an incentive for conducting reciprocal procurement or contracting cooperative ventures with small defense companies. He is suggesting that procurement from and cooperative ventures with small Israeli defense companies be counted as greater than the actual volume. Eiland states that such an incentive is being successfully implemented in many countries around the world.
A senior defense source told "Globes," "There is no chance of the Ministry of Defense changing its policy in this matter, because the aid agreement with the US is signed and sealed, and no one here can force a US company to make reciprocal procurement at a time when we're using US aid to buy from them. This is outside the rules of the game."
The source added that a professional committee headed by Ministry of Economy and Industry director general Shay Rinsky would present its recommendations on a mechanism for aiding industries likely to be damaged in the next decade.
Commentary: The Ministry of Defense can offer only sympathy
Formally at least, Israel cannot force US companies supplying it with $38 billion in equipment and weapons over a decade at US taxpayers' expense to conduct reciprocal procurement. You don't inspect the teeth of a horse given to you as a gift.
The plight facing small and medium-sized defense industries in the coming years as a result of the elimination of the option of converting part of the aid money from the US from dollars into shekels is real and acute. Unlike the large companies, most of the small and medium-sized companies are unable to take measures to cope with the changes in the aid agreement, such as founding subsidiaries in the US or signing cooperation agreements with US industries.
The call by the forum of companies that manufacture aviation assemblies and components for a change in the Ministry of Defense's policy, so that it will require US companies selling weapons to Israel to contract with the Israeli companies directly and to commission work or buy products from them, is being taken seriously by the Ministry of Defense.
Nevertheless, other than sympathy, the professional echelon in the Ministry of Defense directorate of procurement and production can promise the Israeli companies nothing. Any change in the Ministry of Defense's policy in negotiating with US companies involving US aid requires a change in procurement policy, and no such change is on the agenda. Even if someone wants to take practical measures towards such a change some day, the US will have something to say about it.
When a government is finally formed, perhaps this fall, the Ministry of Defense will have to make one of the most dramatic decisions in recent years, with purchases of new airplanes and helicopters amounting to over $10 billion in the wings.
Meanwhile, the small and medium-sized industries are pinning their hopes on competition between US suppliers to sell their wares to the IDF, especially Lockheed Martin and Boeing. Each of these companies is offering Israel an attractive package deal that includes refueling aircraft, fighter planes, and troop-transporting helicopters for the Israeli air force. The small industries hope that competition between the two US giants will make them willing to commit to reciprocal procurement or industrial cooperation with local companies other than IAI, Elbit Systems, and Rafael.
The Ministry of Defense is also trying to strengthen the ties between small industries in Israel and the US giants in an attempt to generate business opportunities for the latter and improve their terms for competing in subcontracting tenders. The Ministry of Defense also admits, however, that in view of its inability to set a new policy that will benefit small and medium-sized companies, any agreement between a small Israeli company and a major US company will be based solely on business considerations.
Published by Globes, Israel business news - en.globes.co.il - on August 22, 2019
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