A key NIS 1 billion project being carried out by Israel Military Industries (IMI) for Israel’s land forces is plagued with severe financial irregularities. State Comptroller and Public Complaints Commissioner Eliezer Goldberg reported today that these irregularities have cost the state tens of millions of shekels.
Irregularities began even before IMI signed a contract with the Ministry of Defense in July 1998. IMI’s management did not submit the contract to the company board of directors for approval; approval was granted only after the fact. Nor did IMI’s management report its request for added budget to the company board.
Under the agreement, IMI undertook to provide the Israel Defense Forces (IDF) with initial operation capability by a specific date, but is more than two years behind the stipulated timetable. IDF pointed out the failures in the project at the very beginning, but both IMI and the Ministry of Defense ignored their warnings.
In June 2002, IMI demanded an additional NIS 100 million for the project from the Ministry of Defense, following a similar demand made to IMI by an important subcontractor for the project. IMI passed the demand along without checking the subcontractor’s figures.
Goldberg’s most serious finding was a report by IMI to the Ministry of Defense of 99,000 work hours, for which it demanded NIS 50 million. IMI said that this was the extent of its deviation in the project. The comptroller’s audit, however, discovered that two thirds of these work hours were never carried out. IMI consequently received over NIS 30 million in unearned payments from the state.
At the same time, IMI did not disclose to the Ministry of Defense a NIS 14.5 million gross profit on the project. IMI included in its request only parts of the project on which it was in deficit, and concealed both the profitable parts and the general picture. Goldberg says that IMI apparently misled the Ministry of Defense.
The State Comptroller’s Office also found that IMI reported a NIS 50 million operating loss for the project for 2001, after including in its calculation NIS 43 million in R&D expenses that were unrelated to the development of the system in question.
The Ministry of Defense’s supervision of the project was also neglectful. The ministry’s staff for the project examined the budget demands for the project by IMI and the subcontractor solely from an engineering standpoint, and failed to consider the budgetary aspects. The Ministry of Defense also refrained from deducting from the supplementary budget the expenses caused it by the delays in the project for which IMI was responsible.
As a result of this faulty procedure, Ministry of Defense director general Amos Yaron approved in October 2003 an additional NIS 32 million and $9 million for the project, while foregoing NIS 37 million in penalties for lateness. Goldberg recommends that Yaron now order a thorough budget check for the project, “in order to prevent use of defense budget funds without a proper founding.”
The State Comptroller’s Office also found fault with the IDF’s actions in the project. The most serious defect was that the IDF formulated its operation concept for this key system only after the project was well underway, and not in the initiation stage, as military regulations require. “Even at this stage, the operating concept lacked key elements,” Goldberg adds.
Published by Globes [online] - www.globes.co.il - on October 10, 2004