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UAV (archives) Photo courtesy of IAI
UAV (archives) Photo courtesy of IAI
 
 

World divided between IAI, Elbit

Calcalist obtains recommendations made by Harari Committee which examined defense exports: Ministry of Defense to divide export between security companies. Ministry may determine, for instance, that Israel Aerospace Industry’s UAVs, and not Elbit's, will be sold to Brazil

Naaman Sikuler, Calcalist
Published: 07.23.10, 12:30 / Israel Business

Last March, shortly after he was appointed director-general of the Ministry of Defense, Udi Shani had to leave urgently for Colombia to try to pacify the local Defense Ministry, which was threatening to cancel a contract that Elbit Systems had won two months earlier.

 

This happened after the large newspapers in the country published a series of unsympathetic articles about the company and how it had allegedly won the tender. An inquiry at the Ministry of Defense found that the anonymous letters that were sent to the newspapers’ editorial boards and the negative briefings about Elbit likely came from the Israel Aerospace Industries (IAI) – the Israeli competitor that lost the tender. This caused a great embarrassment.

 

But the unmanned aerial vehicle (UAV) contract with Colombia is not the only case in which aggressive, and even ugly, rivalry between the security industries has been exposed – a competition that led Shani’s predecessor, Pinchas Buchris, to establish the Harari Committee in June 2009, to look into the defense export policy and the defense-related competition. The conclusions of the committee were published by Calcalist on Wednesday for the first time.

 

Buchris was made aware of the harsh competition two years earlier, in April 2007, when the Ministry of Defense selected Rafael’s Iron Dome system to lead Israel's defense against the rocket threat. IAI had developed a parallel system called Steel Curtain, and was disappointed when they lost the contract which was estimated to total NIS 1 billion (about $260 million).

 

It began putting pressure on the Ministry of Defense via the press, as well as through the state comptroller. Buchris was irate at the company’s conduct and ordered it to stop developing the system and the negative lobbying, saying he would otherwise revoke its export licenses that enabled the company to work with defense ministries worldwide.

 

In the report, obtained by Calcalist, the Harari Committee determines the rules of the game, according to which the defense industries are required to work in Israel and abroad. While it forbids them to have unjust competition, it also tries to settle the balance in the playground of the defense sector in general, as well as attempting to significantly expand the power of the Ministry of Defense over the relevant departments (SIBAT – Foreign Defense Assistance and Defense Export, and the Defense Export Control Department) in regards to activity with the defense companies in order to deal with what the ministry is calling "wild competition".

 

In fact, the committee gives the Ministry of Defense extensive authority and determines that the ministry’s decisions and considerations have priority over free competition.

 

“The Ministry of Defense has respect for the principles of business competition of the defense industries” the report says. However, it also says that “matters of national security might have precedence over the idea of free competition.”

 

And so, in the name of national security, the Ministry of Defense, via the committee, has given itself greater authority and jurisdiction than it had before.

 

The report is signed by the committee's chairman, Ovadia Harari, who was chief engineer of the IAI Lavi project and recipient of the Israeli National Defense Award, former Rafael CEO Giora Shalgi, former Director-General of the Ministry of Defense Aharon Beit Halachmi, and Attorney Dudi Tadmor, former director-general of the Israel Antitrust Authority.

 

The conclusions were recently presented to chairman and CEO level officials in the main Israeli defense industries and were confirmed by the Ministry of Defense's director-general.

 

The Ministry of Defense already oversees defense exports through the export licenses it issues to the companies. The logic behind the licensing is based on the desire to supervise the identity of the countries that the Israeli companies deal with, in order to prevent military secrets from getting out, as they also sell their technologies to the Israel Defense Forces.

 

Thus, a company that wishes to export products from an Israeli company needs the approval of the Ministry of Defense for every such deal.

 

Calcalist has learned that the committee’s report says that from now on, the Ministry of Defense can use these licenses to regulate the overseas competition between the defense companies by deciding which countries each company can work with.

 

The ministry can decide, for instance, that the IAI RPVs will be sold to Brazil or Canada rather than those manufactured by Elbit, and that Elbit, on the other hand, will be the only company to work with Germany. This power enables the Ministry of Defense to regulate and define the entire defense market and raises much objection within the defense industries.

 

The report also determines that the Ministry of Defense will give priority when providing export licenses to a company that provides a similar system to the IDF in Israel. So, for example, the ministry could decide that Rafael will be the only company to sell missile interception systems to other countries, based on the Iron Dome that it manufactures for the IDF, and that the IAI, with its similar system, will not be able to sell abroad whatsoever, which could put an end to entire markets for certain companies.

 

Fear of information leaks

The report explains that the ministry could decide that a specific company, and not another, will sell a specific technology abroad, to maintain a mass of minimal production of systems that the same company manufactures for the defense system.

 

Additionally, the Ministry of Defense uses other rationales to explain the new policy including preventing leaks of sensitive information and a fear of Israel’s image being damaged.

 

Regarding the overseas competition, the report attempts to make rules that will force fair competition on the companies. The report determines, for example, that the Ministry of Defense might revoke an export license from a company that takes unfair steps regarding its competitor abroad, and forbids a company that loses a tender to act against an Israeli company that won that same tender.

 

The report determines that any company working abroad will have to introduce an enforcement plan by January 2011, and conduct internal employee training to ensure that the report’s directives are fully enforced.

 

A breach of the export license or the terms thereof is a criminal offense of the corporation and its functionaries. Besides the criminal actions taken in severe cases, the Ministry of Defense also maintains the right to enforce financial sanctions on the companies, pending a hearing.

 

A senior official in the field of defense exports told Calcalist that the Ministry of Defense has decided that it must deal with the harsh competition between the various defense industries. The ministry regards the competition as harming the interests of the State of Israel and giving it a bad reputation. It is also worried that security secrets could leak in the excitement of the competition, or a technological leak might occur.

 

According to the official, “There is a free market all over the world, but not free defense export. The State of Israel must protect its interests just as other countries do in regard to their defense exports. The Ministry of Defense takes active steps in certain cases to encourage defense export and to provide it with a safety net, and therefore must ensure that the competition between the companies remains sane.”

 

He added, “The Ministry of Defense aims for minimum interference in the business competition and will chose to intervene only in cases of significant damage to the national interest.” The official said that the Ministry of Defense was avoiding making public statements on the matter due to the criticism it was causing in some of the companies.

 

The idea that national security has precedence over considerations of competition, and the fact that the Ministry of Defense maintains the right to determine where and when each company can work, is also raising some questions at the Israel Antitrust Authority. The Authority was not represented at the committee meetings, but it has recently been introduced to the conclusions. The person who should have represented the interests of free competition is former Antitrust Commissioner David Tadmor.

 

However, although there were those in the IAA who called to oppose the report, Antitrust Commissioner Ronit Ken decided not to officially object to it. The authority has clarified that the report is outranked by the antitrust regulations, and therefore does not give the Ministry of Defense superiority over the law. The authority will intervene and prevent Ministry of Defense decisions made on the basis of the committee’s report if they oppose the laws of the antitrust authority, the authority made clear.

 

The report also determines that the Ministry of Defense can force companies to cooperate overseas, an act that today would require the approval of the Antitrust Commissioner. Such an exempt from a binding arrangement has been given on occasion in the past, and this is the gateway through which Ken might be able to prevent full implementation of the Harari report in the future.

 

The Authority has also clarified that they will not automatically approve collaborations. The reason that overseas competition worries the Antitrust Commissioner is that the Authority is worried that such cooperation overseas could pave the road for similar collaborations in Israel, going as far as obliterating the identity of one company or another.

 

The Authority explains that this policy also safeguards the interests of the Ministry of Defense, as if the lines between the various defense companies would begin to blur too much, they could cooperate and raise their prices on contracts with the Ministry of Defense too, and then it would lose power with companies in the Israeli market.

 

Legally problematic

Over the last few weeks, the report has been introduced to the chairmen and CEOs of the defense companies, where it is causing large disputes. According to a senior official in one of the large companies in the industry, “the Ministry of Defense is trying to regulate overseas competition and divide the market between us and our competitors, which we think of as very problematic. We have made it clear to the officials of the Ministry that it would be more fitting that the laws of the market determine the outcome and not a clerk sitting in the Kirya base.

 

"We are also troubled that the management of the Ministry will determine when and where a commercial company with an independent board of directors can operate. They ridicule the accepted and well known regulations of regular commercial activity and legitimate competition."

 

Another official said that “the Ministry of Defense has been given an important tool – to determine export policy – for one purpose only: to prevent security information leakage. Now, the Ministry of Defense is saying that it plans to use this tool that it has been given was given for an entirely different objective – to direct the competition. This is a problematic declaration."

 

The Ministry of Defense offered the following in response: "The dialogue between us and the defense industries is managed in a direct manner and not through the media."

 

 

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