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Israel MoD Suspends Procurement Contracts

Threatens System Crash in Escalating Battle With Treasury

May. 31, 2014 - 03:45AM   |  
By BARBARA OPALL-ROME   |   Comments
Funding Crisis: Israel's Defense Ministry has threatened to drastically reduce operations due to budget cuts. (ABBAS MOMANI/AFP/Getty Images)
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TEL AVIV — Israel’s Defense Ministry has suspended planned procurement contracts, slowed work on major research and development projects and warned of a wave of industry layoffs to come from programs it will be forced to ax due to budget shortfalls.

In its escalating battle with the Finance Ministry over supplemental funding for 2014, the MoD imposed a two-week freeze on planned military modernization contracts pending a bottom-up review of all non-fixed expenses.

In parallel, MoD has threatened to halt, by June 1, all Army, Air Force and Navy training and to drastically reduce ongoing operations.

The contract suspension follows a procurement slowdown in place since January, which MoD claims has halved the number of new orders compared with this time last year. After years of operating without the budget authority to support multiyear investment spending, the MoD warned of a full crash of its procurement system by the end of this year.

“[It has already been] four years now, the defense establishment is operating without a multiyear plan, which means suboptimal exploitation of resources and damage to force buildup and force structure planning… [It means] that in 2015, a complete inability to start the year,” Dan Harel, MoD director general, said in a May 26 statement.

Without the necessary plus-up to its approved 2014 budget, Harel said, “The defense industries will have to fire this year thousands of people as a result of canceled procurement projects.”

Conflicting Numbers

MoD is demanding an extra 2 billion shekels ($US 570 million) in 2014 funding.

Depending on whom you ask, Israel’s government-approved top line defense budget is either 51 billion shekels by MoD’s calculation or 57.7 billion shekels, as claimed by the Treasury. The MoD uses net figures after myriad deductions while the treasury’s gross figures appear in official budget documents approved by the government.

Both topline budgets include $3.1 billion in annual US grant aid, some 26 percent of which Israel is allowed to convert into shekels for local research, development and procurement spending.

In addition to the annual aid, which Israel receives in one lump sum at the beginning of the year, the MoD stands to receive another $200 million-plus this year for cooperative missile defense programs, including Arrow, David’s Sling and Iron Dome. Those funds are not included in either MoD or Finance Ministry top line budget figures, experts here say.

Orna Simchoni Ofer, MoD spokeswoman, insisted that suspended procurement contracts and halted development programs pertain only to the shekel portion of Israel’s defense budget.

“We stopped blue-and-white programs and contracts that are paid in shekels; not with US dollars coming from US aid,” Simchoni Ofer said, referring to the color of the flag invoked here to describe locally funded spending.

However, other defense and industry sources insist funding instability has already reduced or stretched major programs supported by dollar-based annual aid, including US-based production of Namer heavy armored troop carriers.

Defense Minister Moshe Ya’alon said he hoped the Israeli Cabinet would convene soon to make the decisions needed to avert a system shutdown. Ya’alon said he warned the government last May, when it approved the 2014 budget, that it would not be enough to carry the military throughout the year.

“Both the chief of staff and I warned that the budget was enough to preserve a level of training more or less until these months, April and May. And now here we are in these months and a decision must be taken.

“I hope the Cabinet will ... take the appropriate decisions in order that the defense establishment and particularly the Israel Defense Forces, will continue to function at a reasonable profile,” Ya’alon said.

Surge Instead of Promised Cuts

In response to mass social protests in the summer of 2011, the Israeli Cabinet approved an annual 3 billion shekel drop in defense spending, beginning in 2012. At the time, Prime Minister Benjamin Netanyahu scored political points from a restive public by his ostensible brass-tacks determination to tamp down the defense budget.

“I promised and I delivered [a response to social protests],” Netanyahu boasted of the mandated defense spending cuts.

But Treasury officials say successive MoD budget boosts approved by Netanyahu since that October 2011 Cabinet decree have actually resulted in a steady increase in defense spending. According to treasury data, MoD received an additional 4.2 billion shekels in 2012 and another 2.8 billion shekels in 2013.

“The defense budget over the years continues to grow,” a Finance Ministry official said. “It’s growing less than MoD demands and what they claim they need ... But the fact remains that one out of every four or five shekels the government spends is on defense.”

In a May 28 interview, the official noted that since May 2013, when the Cabinet approved the defense budget for 2014, MoD received an additional 3.75 billion shekels. “Part of it they got at the end of 2013, but it was for this year, then they got another 1 billion shekels this year ... and now they’re demanding more,” he said.

“Other ministries can’t come to the prime minister in the middle of the year and ask for more. And once they get it, it’s never enough,” he said.

Simchoni Ofer, the MoD spokeswoman, noted that nearly half of the ministry’s annual defense budget goes to fixed costs such as taxes, pensions and veteran benefits and rehabilitation.

“These are costs we can’t change,” she said. “So now the government needs to decide if they’re willing to bear the consequences to industry and to overall readiness due to no more money for training.”

The treasury official credited MoD with improving efficiency in its effort to squeeze more spending power from the non-fixed portion of its budget. Nevertheless, he insisted that MoD could and should reform procedures governing the amount of money it spends on pensions and rehabilitation.

“They claim these are fixed costs, but they are not taking steps to make it less fixed. It’s not a simple change, but these [are] things they have to do. The problem is there is no will to do it,” he said. ■


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