State-owned Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) spent NIS 56.5 million in 2010-2013 on 42 external marketing strategy consultants. The consultants were hired using a faulty procedure, without publishing tenders or explaining why they had been selected, and without the required competitive procedure between bidders on an equal footing. IAI did not examine their activity and contribution to the company in exchange for the large sums they received.
In a wide-ranging chapter from his report, the State Comptroller Joseph Shapira points to management failings at IAI in the employment of external consultants at the company, writing, "This conduct is irregular and unacceptable." According to the report, IAI paid NIS 17.8 million to 23 consultants in 2010, NIS 15 million to 29 consultants in 2011, NIS 11.3 million to 32 consultants in 2012, and NIS 12.4 million to 32 consultants in 2013.
IAI hired the consultants for its staff units, divisions for missile and outer space systems, warplanes, and its Elta Systems radar subsidiary. In all the contracts with these consultants, the State Comptroller's report indicates an absence of documentation that the responsible parties at IAI tried to obtain bids from other consultants, or at least explanations for the absence of queries made to such consultants for the purpose of obtaining such bids. "The result was that preference was given to contracts with specific consultants whose services were preferred by IAI over other potential consultants. Consequently, there is concern that IAI violated the principle of equality and fairness between potential competitors," the State Comptroller declared in his report. "IAI selected its consultants without a tender, and without requesting an exemption from a tender, as required, and did not comply with the provisions of the Mandatory Tenders Law and the regulations."
The report on IAI's consultants refers to the period when Yair Shamir was chairman of IAI and Yitzhak Nissan was CEO. It also deals with the following period, when Dov Baharav was chairman and Joseph Weiss was CEO. The company's current chairman is Rafi Maor.
The report shows that some of the consultants received exceptional bonuses that were not always directly connected to good performance. In 2006, Nissan signed a contract to pay one of the consultants NIS 35,000 a month, which was later doubled to NIS 70,000 a month. Just over a year after the beginning of this contract, the same consultant was awarded an exceptional bonus by IAI: NIS 500,000. After months of investigation into the reasons for this bonus, the State Comptroller is still trying to understand why it was given. According to the consultant, he was paid the bonus for his successful efforts "in a certain matter" he was assigned. A senior IAI official explained in her response to the State Comptroller, "A bonus doesn't have to be for a particular transaction." IAI claimed that the reasons that the "extraordinary efforts" could not be put in writing was concern that such documentation could be leaked, thereby preventing the company from making further use of the consultant's services. Nissan argued that the consultant's actions "led to a breakthrough and change in IAI's business concept," and that company management knew about the bonus and the reason for it.
NIS 500,000 is mere pocket money in comparison with the "success fee" received two years later by that same consultant, referred to in the State Comptroller's report as "consultant B." In mid-2010, the consultant was awarded a NIS 4.6 million success fee, after an agreement was concluded with him in advance on a success fee "under certain conditions." The State Comptroller found that payment of this huge sum to the consultant was never brought to the relevant parties for authorization, who in any case did not approve it. "In this state of affairs, IAI paid NIS 4.6 million without the required authorization, and without adequate oversight from management, in violation of the rules of proper administration," the report complains.
In response, then-CEO Nissan told the State Comptroller that the agreement with the consultant had been signed with the knowledge of the relevant parties, and that even if they had not been formally convened before the success fee was paid, this should be regarded as merely a technical fault. The State Comptroller wrote, "IAI paid a consultant a success fee that was significantly higher, double or more, the rate reported to the relevant parties in management and the Ministry of Defense, without the revised figures being presented to the Ministry of Defense, and without having them approved by the parties in the company."
Published by Globes [online], Israel business news - www.globes-online.com - on October 28, 2015
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