German Firm That Builds Israel's Submarines Owes Israeli Economy Millions

Defense minister approved purchase of additional submarines from ThyssenKrupp despite its failure to meet obligations to invest in Israel industries.

Chaim Levinson
Chaim Levinson
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Moshe Ya'alon at the annual Herzliya Conference, June 16, 2016.
Moshe Ya'alon at the annual Herzliya Conference, June 16, 2016.Credit: Moti Milrod
Chaim Levinson
Chaim Levinson

Former Defense Minister Moshe Ya'alon approved the purchase of submarines for Israel's navy from German firm ThyssenKrupp, it emerged Monday, despite the fact that the company owes Israeli companies hundreds of millions of euros in purchases it committed to make from Israeli industries.

According to a 2007 law, foreign corporations that win Israeli tenders are obliged to make reciprocal acquisitions in Israel. The rationale is that if Israel is spending huge sums in foreign industries instead of in Israeli ones, at least some of those sums would return to Israel to benefit local production. This applies to deals worth more than $5 million. The reciprocal purchases must amount to 35% of the value of a regular deal and 50% of deals involving the defense establishment.

ThyssenKrupp, like other foreign corporations that signed contracts with the defense ministry, is obliged to make these reciprocal purchases. Estimates are that the requirement involves around half a billion euros, dating back to the first deal signed in 2006. Over the years it turned out that the corporation was not fulfilling its obligations. When in 2015 the defense ministry wished to sign a new deal for buying boats to protect natural gas platforms, the economy and industry ministry objected, claiming that the corporation had not yet met its earlier obligations.

An inter-ministerial dispute developed, which was finally resolved by then Defense Minister Ya’alon. He used a stipulation in the law to allow the tender to go ahead despite the corporation’s failure to make reciprocal purchases. He conditioned his approval on the opening of negotiations regarding making payments the corporation owed.

The economy ministry has a department for international cooperation, which has been negotiating with the German company over the last year. The mediator in these talks was Michael Ganor, the corporation’s consultant, who is now at the center of the submarine affair. The ministry stated that David Shimron, an attorney to Prime Minister Benjamin Netanyahu, was not involved in this affair in any way. At the time, Netanyahu was also the Economy Minster, but he was not involved in this affair either. Shimron told Haaretz that he was not involved in any negotiations between ThyssenKrupp and the economy ministry.

During the negotiations it turned out that the missing required investments amounted to hundreds of millions of euros. Due to the large amount, it was agreed that some of it would not be invested in Israeli industries but as investments in startups. This is much easier for the corporation, since it can make some profits in the future from these investments. A source at the economy ministry said that it was doubtful that the corporation would fulfill its obligations but that it was not feasible to impose sanctions on it. The ministry of defense said that the new agreement stipulates heavier fines if the corporation disregards its obligations for reciprocal acquisitions again.

The economy ministry said it doesn’t have figures indicating how much ThyssenKrupp has purchased in Israel so far and what it still owes. “According to the tender laws, the corporation from which Israel purchased submarines and other boats must make purchases worth hundreds of millions of euros here. We are in touch with them in an effort to make them abide by their commitment,” said ministry sources.

The defense ministry responded by stating that it tries “to obtain these reciprocal agreements more than other ministries, for the benefit of local industries. With regard to the boats for defending gas platforms, the ministry negotiated with the corporation, with the full participation of the economy ministry. Then-minister Ya’alon intervened when there was concern that the contract signing and delivery dates would be postponed. This included the commitment to make reciprocal purchases or pay enlarged compensation amounts. Negotiations are continuing in order to reach some understanding regarding compensation, in case obligations aren’t met.”

With regard to earlier deals, “the defense ministry did not intervene in order to make things easier for ThyssenKrupp, contrary to some reports. If the corporation doesn’t abide by the agreement it will compensate Israel.”

Ya’alon responded by saying that: “Former minister Moshe Ya’alon accepted the recommendations of professionals in his ministry as well as legal opinions, and was obliged to use his legal authority in order to enable the signing of the deal with the German dockyard for buying the defense vessels, out of concern that the deal would be postponed, harming the navy’s operational capabilities, as well as future reciprocal purchases by the Germans in Israel, which would severely harm Israeli industries. The minister insisted on this and conditioned the signing of the deal on these acquisitions, under contractual obligation. Any deviation will result in enlarged compensation, larger than in earlier agreements.”

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