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Israel Aircraft Industries and Israel Military Industries will not be privatized in the near future, say sources close to the cabinet.

Privatization moves were suspended because of tensions between Defense Minister Amir Peretz, who opposes privatization, and Finance Minister Abraham Hirchson and Prime Minister Ehud Olmert, in the wake of the war in Lebanon.

The sources say that in the interest of preserving the coalition, Hirchson and Olmert are unlikely to open another front against Peretz.

The sources also believe Peretz will continue to oppose the sale of the major defense contractors in order to garner the support of their huge unions in the next election.

Olmert, already on a collision course with the Labor Party chairman for the management and results of the war, will try to preserve his coalition. Hirchson, who should provide a tailwind to privatization agency Government Companies Authority, will likely avoid that role for the same political reasons.

Olmert and Hirchson will attribute the slowdown in privatization to the $150 million bond that IAI is slated to issue this year and that will finance its business activity for the year. Politicians are likely to pressure the GCA not to demand IMI repay a major loan, thus allowing it to continue operating and trying to improve its profitability.

In October 2003, the cabinet decided on a public offering of 33 percent of the defense contractor that was approved by the IAI board. IAI's recovery program has led to profitability in recent years, albeit minor.

Sources close to the company say it needs to be restructured and several hundred layoffs must be implemented to raise its profitability. However, the strong union and former CEO Moshe Keret torpedoed any pink slips. So far, there is an agreement on 150 early retirements, after 147 new hires in 2006.

IMI had been slated for sale to an outside investor, and several Israeli and foreign defense contractors have expressed interest. Reportedly, the state had hoped that Elbit Systems would buy IMI; however, former company chairman Ovadia Eli is believed to have hoped to delay privatization to improve profitability and boost the company's value.

Prior to the last elections, Peretz said he would oppose privatizing major defense contractors. In his first tour of IMI headquarters after the elections, Peretz announced he was reconsidering his predecessor's decision on the matter.