The U.S. is looking to alter current agreements with Israel that allow the Defense Ministry and the Israel Defense Forces to spend near 40 percent of annual military aid from the American government on fuel and goods from the security industry within Israel, according to senior government sources in the U.S.
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The current agreement, undergoing scrutiny as part of negotiations to reach a new 10-year deal for military aid to Israel, no longer serves the interests of either the U.S. or Israel, said the sources, specifically citing the allowance for the purchase of Israeli military equipment as inefficient.
Israel has signed military aid agreements with the U.S. since the 80s, all of which included an "Off Shore Procurement (OSP)" clause, allowing Israel to exchange 26.4 percent of the aid money from dollars to shekels, which were then spent on military equipment from Israeli companies rather than purchasing American military goods. This deal has effectively meant that the U.S. has subsidized Israel's military industry by hundreds of millions of dollars yearly for nearly three decades.
In 2007, Israel and the U.S. signed a military aid agreement that is due to expire in 2018. As part of this agreement, Israel receives an average yearly amount of $3 billion in military aid from the U.S. including some $800 million of which Israel has been able to spend on local security products annually.
According to the American sources, Israel has also spent some 13 percent of the aid, or $400 million, on various types of fuel for the IDF during the last few years, particularly jet fuel for aircraft. Israel is the only country in the world that is allowed to use American aid money in local markets and on fuel.
"We believe this arrangement, which is unique to Israel, no longer serves Israeli or U.S. interests," one senior American source told Haaretz. "We would like to modify it." The source is involved in negotiations over the new aid package, but requested to remain anonymous due to the sensitivity of the issue.
The source said that when aid began in the 80s, the logic behind the special allowances was to help Israel develop a strong and advanced security industry. One of the central projects funded by U.S. aid packages was the development of the Israeli-built "Lavi" jet fighter that was eventually scrapped before entering service.
According to the source, there have been dramatic changes in an Israeli economy that grew significantly and an industry that made Israel one of the top 10 weapons exporters in the world since that time. The source said that the original goals of the special arrangements had been reached, leading to a rethink on how Israel should be allowed to spend American aid funds.
"Between the Off Shore Procurement (OSP) and fuel purchases, Israel is using $1.2 billion annually to directly support its domestic budget rather than building its arsenal of U.S. equipment," said the source. "We do not view this as the best way to use U.S. assistance ... For every dollar not spent on fuel or OSP, it is an extra dollar spent on the purchase of advanced military equipment that only the U.S. can provide."
One of the main reasons the U.S. is demanding that the agreement be changed as part of the current negotiations is economic. The Americans don't want to continue subsidizing an Israeli security industry that competes globally against American security firms for military-related contracts including the sales of weapons and military technology.
The American sources explained that because of the old agreements, billions of dollars are effectively lost to the Israeli security industry. "It doesn't make sense from a U.S. perspective," said the source. "We want more of the assistance to be spent in the U.S. on U.S. companies helping to support economic growth and jobs creation here at home."
Current negotiations over the new aid package have been ongoing between Israel and the U.S. since November 2015. Jacob Nagel, Israel's acting national security adviser, leads the Israeli delegation to the talks while Yael Lampert, an Israel adviser in the White House, is acting as his counterpart. U.S. National Security Adviser Susan Rice has overseen the process and has also taken an active role in discussions.
There still remain differences between the two sides but talks are ongoing in an attempt to reach a final deal before U.S. President Barack Obama leaves office in January, 2017.
"We are going to continue working on this for as long as it takes because we both have the same goal," said the American source. "Our discussions are very positive and constructive. We are going to continue the discussions until we have an agreement. Our goal is that we would like to sign a new MOU [memorandum of understanding]. We stand ready to do it."
Largest U.S. military aid package to any country, ever
On Friday, National Security Adviser Rice sent a joint letter to Congress with the director of the Office of Management and Budget, Shaun Donovan, updating the lawmakers on the talks with Israel regarding the aid package. The communiqué was in response to a letter sent to President Obama three months ago from 83 Democratic and Republican senators calling on the administration to expedite the process and sign an aid agreement.
In their letter, Rice and Donovan stressed that the Obama administration is prepared to sign a deal that would include a never-before seen monetary amount of military aid to Israel as well as an "unprecedented multi-year commitment of missile defense funding." Rice and Donovan said that the aid agreement that the U.S. is proposing to Israel is the financially the largest that the U.S. has ever given to any country in history.
"Our commitment to Israel's security is such that we are prepared to provide a substantially increased assistance package, even though we are operating in an especially challenging budgetary environment, with the harmful spending cuts known as sequestration set to return in fiscal year 2018," they wrote in the letter. "We are offering Israel a package that represents a substantial increase over the current MOU in both nominal and real terms, even while the overall Missile Defense Agency budget — one of the two accounts from which assistance to Israel is drawn — has declined 7.5 percent from 2006 to 2015.
"Our offer also exceeds the growth in the global base FMF account, the other account from which assistance to Israel is drawn, in those same years," the letter continued. "Israel already receives over 50 percent of all U.S. foreign military assistance worldwide; under the U.S. package on offer, Israel's share of global FMF funding would grow even higher."
Another issue still to be agreed upon involves funding for Israeli missile defense systems. Up until now, Israel sent an annual request to the U.S. administration and to Congress to receive funds to use in the development of missile defense systems like the infamous Iron Dome. Each year, negotiations would be held until the White House and Congress would agree on an amount also acceptable to Israel — an amount that would then be transferred to Israel to be used in the development of missile defense systems.
However, as part of negotiations for the new aid package, the Americans have requested that this process also be changed so that missile defense funding would be included in the base military aid budget. The administration has insisted that Israel promise not to open simultaneous channels into Congress in an attempt to increase aid. Israel has reservations on the issue and it remains one of the conflicts preventing the signing of the new aid package.
Senior American sources say that their proposed change to the process in which missile defense funds are transferred is a big benefit to Israel as the U.S. currently has no obligation to give special funds for these projects. According to the new proposal, said the American sources, this would change.
"Under our offer, Israel can count on substantial U.S. assistance to missile defense for a 10 year period, which facilitates long-term planning and provides predictability," said the source. "It is substantly different from previous years."