Israel’s Next Satellite Will Be Locally Made, but That Will Come at a Cost

Awarding Israel Aerospace the contract will cost $50 million more than an off-the-shelf satellite made abroad. Was Likud politics or national security behind the decision?

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An illustration of an IAI satellite
An illustration of an IAI satelliteCredit: IAI
Hagai Amit
Hagai Amit

State-owned Israel Aerospace Industries said Thursday it would design and build Israel’s next communications satellite, the Dror 1, which will be completed in the next three years and handle Israel’s satellite communications for the next 15 years. Almost symbolically, at virtually the same time IAI released its statement, Gideon Sa’ar held a celebratory gathering in the town of Or Yehuda to thank his supporters following his failed bid to lead the Likud party.

The Likud event was hosted by the mayor of the nearby town Ramat Gan, Carmel Shama Hacohen, and Knesset members who supported Sa’ar offered a few words. But the senior MK who supported Sa’ar, Haim Katz, didn’t come onto the stage. Neither he nor another Sa’ar supporter, MK Etty Atiya, were there to accept Sa’ar’s deep gratitude.

Katz merely went through the motions during Sa’ar’s campaign to unseat Benjamin Netanyahu as Likud leader. He supported Sa’ar, but only unofficially. One reason was that the week before the vote on December 26, Netanyahu met with Katz’s son, Yair, who took over his father’s job as chairman of the IAI workers committee. Netanyahu hoped to dissuade IAI workers from backing Sa’ar.

Note that the same Yair Katz had this to say about Dror 1: “I want to congratulate all those officials who are helping to keep satellite manufacturing alive in Israel. Among other things, it’s because of our ability to reach the country’s decision makers. If they disappoint us, it’s fair to assume that these decision makers won’t enjoy the continued trust of the [IAI] workers in Likud primaries.”

Yair Katz, son of Likud minister Haim Katz and influential union boss at Israel Aerospace Industries, December 17, 2019Credit: Reuven Kopitchinski

Yair Katz may have been bragging when he said this, and the timing of the IAI announcement over the weekend may have been a coincidence. Still, the government’s decision to order the satellite from IAI can’t be justified on financial grounds.

Sources at the company say that the government will be spending $200 million. But this figure is misleading because before the satellite begins to serve its function there will be the costs of launching and insuring it, so the real cost is more likely to be $300 million.

And even that estimate is far from final. The history of satellite building in Israel shows that the final costs often exceed the budgets of tens of millions of dollars, and the completion time often takes many months longer that targeted.

Israel could have ordered a satellite from abroad for a lot less money. At a time when IAI is making one satellite every few years, foreign companies like Loral Space & Communications, Thales Alenia Space and Airbus have production lines that turn out six to nine every year.

That lets them build the same satellite for $50 million less than IAI. So instead of buying a cheaper off-the-shelf satellite the government has opted for a bespoke one that will cost it a lot more with the hope it will exactly match its needs.

In pure business terms, the project isn’t all that attractive to IAI. It won’t be very profitable – certainly not as profitable as the state-owned company needs to move ahead with a plan to float shares on the Tel Aviv Stock Exchange this year.

Still, it’s a project that over the course of its construction and operations employs hundreds of workers IAI employees.

The government’s decision also involves national security considerations that haven’t been fully disclosed, but based on the strategic imperative of IAI’s continued development of satellite technology, ensuring Israel’s complete self-reliance in the field. The same technology is used for spy satellites and other defense applications, and enables Israel to preserve what people in the industry refer to as more “intimate communications.”

“The government’s decision was made from the understanding that this is a vital capability of the State of Israel and it requires ensuring complete independence in the field, while preserving the knowledge and expertise accumulated over the years in Israel,” IAI said in a statement, without disclosing financial details.

A technician stands in front of the all-electric Konnect communications satellite, at the Thales Alenia Space plant in Cannes, France, November 22, 2019Credit: ERIC GAILLARD/רויטרס

The question about who will pay for the high-cost satellite remains an open question. Officially, the science and communications ministries are leading the project, but if you combined their annual budgets you wouldn't get a sum that could cover the satellite’s costs. So you have to factor in the national security considerations behind the order and the fact that Avigdor Lieberman, when he was defense minister, spoke about the need to build the satellite in Israel.

The decision to have the science and communications ministries formally make the order for Dror 1 is linked to economic strategy. The amount the government spends on it hinges on the extent it can perform private-sector functions such as television broadcasts or internet communications. For that to happen, it’s better for the project not to be identified with the Defense Ministry.

The catch is that this leaves unclear where the budget for the Dror 1 is coming from and risks the possibility that defense-related costs will end up being subsidized by two civilian ministries. Those national security considerations were behind the decision to offer the contract to IAI without any competitive bidding.

In addition, there’s no guarantee that the nonmilitary uses of Dror 1 will suffice to subsidize its costs. As of now, the satellite is designated for government use only. The possibility that the private sector will take an interest depends on negotiations IAI holds with Spacecom, the Israeli satellite operator.

There was a time when Spacecom planned to contract construction of a satellite to be called Amos 8 with a foreign company. Instead, it has been preoccupied with building satellites to replace its aging Amos 3 and 4 satellites and later its Amos 7 and 17 satellites, all of which provide services for the private sector in Israel and abroad. So far, it has failed to reach an understanding with IAI about Dror 1.

By deciding to produce Dror 1 at IAI, its launch is being delayed by several years. In March 2018, when Spacecom awarded a contract (since canceled) with Loral, the delivery date was set for 2020. Now, in the best-case scenario, Dror 1 won’t be ready to go before 2023.

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