Is the Israeli defense industry ready for the new framework?
By MEITAL STAVINSKY, RON KLEINAn Israel Defense Force soldier from the 401th Brigade(photo credit: IDF SPOKESMAN’S UNIT)
In recent years and under the radar, the Israeli defense industry has undergone some impactful changes. Such changes, so it seems, might not be given full attention by the Israeli ecosystem: phasing out the ability to convert US Foreign Military Financing (FMF) for Offshore Procurement (OSP) into shekels for local defense research, development and procurement of Israeli manufactures equipment.Israel is the largest cumulative recipient of US foreign assistance. As of August 2019, the US has provided Israel $142.3 billion in bilateral assistance and missile defense funding. The US Congress has throughout the years demonstrated a bipartisan broad support for the US-Israel bilateral relationship, including for US aid to Israel. In recent years, however, there has been a change of the terms of such support.The FMF has been serving a pivotal role in the funding and supporting of breakthrough military technological developments. This advantage and value has been shared by the US and Israel.In 2016, the US and Israeli governments signed a new 10-year Memorandum of Understanding (MoU) on military aid, covering FY2019 to FY2028. Under the terms of the MoU, the US pledged to increase aid to Israel over a 10-year period to $38b. ($33b. in FMF grants plus $5b. in missile defense appropriations). This MoU replaced a previous $30b., 10-year agreement which ran through FY2018. The new MoU undoubtedly represents the highest and most generous FMF pledged to Israel by the US to date. However, it also contained a substantial revision to the previous MoUs.Since the mid-1980s, different from most countries which are the recipients of US foreign aid assistance, the US Congress has permitted Israel to spend a part of its military assistance locally. This OSP policy has enabled Israel to buy and maintain systems uniquely suited to Israeli defense requirements, helping Israel to maintain its regional qualitative military edge.Under the previous MoU, Israel was explicitly permitted to spend up to 26.3% of US assistance on OSP on Israeli-manufactured equipment. The new MoU allowed Israel to retain 24.7% in the first year (FY2019), which represents a sum of $815.3 million OSP. This percentage will be further reduced this year and in the following years until it reaches 0% in fiscal year 2028.At that time Israel will no longer be able to convert FMF funding into shekels. In other words, all security assistance will need to be spent in the US. The gradual phasing out of OSP was designed to enable Israel to make the necessary budgetary and industrial adjustments to accompany this significant change in the FMF program.In light of Israel’s relatively positive economic situation, the desire of the US government to promote its own domestic defense industry, and the US administration’s “America First” policy, it is unlikely that further revisions will be made to the terms of the MoU.The ramifications of the new framework could be disruptive on many levels, to Israel’s economy, employment, security and defensive industry base. Pursuant to the new framework, the Israel Defense Forces could only use FMF funding for procurement of military equipment in the US or from Israeli companies operating in the US.The result may be that the expense for purchase of equipment by the IDF will be higher since local procurement in shekels is considered to be cheaper for the same line of products. This change could result in the closure of local production lines and defense factories. Ultimately, this outcome might also pose a threat for Israel’s technological defense independence.A well thought-out plan and advanced preparation is essential for local defense industries and businesses that are dependent on selling products under the FMF. In order to secure both employment in Israeli defense factories, and the continued growth and excellence of Israeli defense technology research and development, they must take action.Some of the leading Israeli defense companies have already taken measures to establish operations in the US However, many mid-size and smaller Israeli defense companies have yet to follow suit. Ways in which Israeli companies can continue to participate in the FMF are as follows: establish a US subsidiary for operations and manufacturing; enter into a joint venture with a US strategic partner; or license its technology to a US company.In summary, the Israeli defense companies must evaluate and make decisions to include and move forward in finding ways to continue sales of their products to the IDF.Meital Stavinsky and Former US Congressman Ron Klein, Esq. are co-chairs of the Israel Practice at the US law firm of Holland & Knight LLP.
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