Israeli Defense Sector Breathes Easier After New U.S. Military Aid Pact

Local procurement will only start to fall in year six; in the meantime, Israel will have more money to spend domestically.

Elbit Systems

Israel’s defense industry breathed a sigh of relief Thursday after the new and enlarged U.S. military aid package showed that allowances for Israeli spending at home won’t decline until year six of the 10-year agreement.

On Wednesday, Israeli and U.S. officials signed the deal that boosts annual aid starting in 2018 to $3.8 billion, from $3.1 billion under the current agreement.

While Israel’s Defense Ministry is looking forward to the extra largesse, Israeli defense companies feared they would be the big losers because Washington insisted that as a condition for the heftier aid, Israel would have to give up its right to spend up to 26.3% of the aid locally.

The final agreement indeed phases out the local-procurement feature, but under far easier terms than defense industry leaders had expected. The draft agreement had called for the phaseout to begin in year one and be completed by year six, but under the final agreement the process won’t begin until year six.

“During the first six years of the agreement, Israeli industry will be even better off than in the previous one, relatively speaking,” said an Israeli government source who requested anonymity. “Now they’ll be getting 26% of a bigger aid pie – $3.8 billion instead of the $3.1 billion of the last few years.”

In dollar terms, that spells annual local procurement of nearly $1 billion starting in 2018, compared with about $815 million now.

Still, the increase in U.S. aid, which came after months of negotiations between Washington and Jerusalem, isn’t as dramatic as the headline figures suggest. In recent years, Israel has been receiving supplements of $600 million and $730 million to develop anti-missile and anti-tunnel technology.

But the timetable will also give Israeli defense companies time to adjust to the new situation; for instance, by setting up U.S. subsidiaries that will be considered American companies in terms of procurement, the source said.

According to defense industry experts, Israel’s biggest contractors like Elbit Systems and Israel Aerospace Industries, which have the resources to set up U.S. operations or already have them, won’t be affected by the winding down of the local-procurement clause.

The real problem is for the scores of midsize and small defense companies that don’t have that option, said Ziva Eger, responsible for foreign investment and industrial cooperation at the Economy and Industry Ministry.

To help them, she said, her people will be approaching big U.S. companies to buy Israeli defense goods or even intellectual property from smaller ones, since so many of Israel’s defense contractors specialize in electronics, communications and cyberwar.

Since the money comes from U.S. aid, Israel can’t require these big companies to offset the value of their Israeli contracts by buying or investing in Israel. But Eger said she’s counting on the Defense Ministry’s cooperation to coax companies into doing so.