Israeli Defense Contract Illustrates How U.S. Aid Harms American Industries

by Shawn L. Twing

Israeli and Turkish defense officials announced in August that they had concluded a long-awaited defense agreement for modernizing and upgrading Turkey’s aging fleet of F-4E Phantom attack aircraft. The contract, with an estimated value of $650 million, has raised eyebrows not only in Ankara and Tel Aviv, but also in Washington, where more and more U.S. defense officials and private sector defense analysts are beginning publicly and privately to question continued aid to Israel.

At the center of the dispute is the way in which Israel was able to secure the contract. In a last-minute effort said to have involved the personal intervention of Israeli Prime Minister Binyamin Netanyahu, Israeli banks, with guaranteed financial backing from the Israeli government, offered Turkey $600 million in loan guarantees to help it make payments on the contract to Israel Aircraft Industries, the defense conglomerate based in Lod, Israel. These loan guarantees, which provide that the Israeli government will pay for the services if the government of Turkey fails to do so, are similar to the $10 billion in loan guarantees given to Israel by the United States beginning in 1992.

It is ironic that the government of Israel, which is the recipient of an enormous loan guarantee package ($2 billion per year for five years) and annual aid subsidy from the United States ($3.5 billion in Fiscal Year 1996), simultaneously is offering loan guarantees to enable its own military industry to bid successfully against U.S. defense companies. According to the U.S. Department of Commerce, at least one U.S. corporation also had bid for the modernization and upgrading contract. Nor is this an isolated incident. Israeli defense companies routinely bid against U.S. defense contractors for lucrative contracts, including several from America’s armed forces, and many times the Israeli companies win. For example, Israel’s Rafael and the American Lockheed Martin Corporation together bid successfully on a project to supply AGM-142 air-to-ground precision guided missiles to the U.S. Air Force. Israel Aircraft Industries and the U.S. firm McDonnell Douglas together obtained an estimated $425 million contract to upgrade U.S. Air Force T-38 trainer aircraft. In addition, Israel Aircraft Industries recently was awarded a contract to supply passenger troop seats for the U.S. Navy’s CH-53D helicopters.

Another recent example of Israeli competition overseas with U.S. defense firms is a contract with the government of Poland to outfit its S-1W Huzar attack helicopters with air-to-ground missiles. Competing for the contract was Rockwell International of Seal Beach, CA, maker of the Hellfire missile that demonstrated an accuracy rating approaching 90 percent during Operation Desert Storm, when some 4,000 were fired at Iraqi tanks and armored vehicles. The apparent winner for Poland’s estimated $500 million contract is not Rockwell, however. It is a consortium of Elbit and Rafael, both Haifa-based Israeli defense companies. They offered an experimental short-range rocket called the NDT that exists only on paper, and despite substantial pressure on Poland from the United States, these two Israeli companies apparently have won the contract.

Polish officials claim that Rockwell’s bid wasn’t given within the contract’s time frame, but U.S. officials argue that, in the absence of obvious reasons for the choice of an as-yet-non-existent missile over a battle-proven one, other factors must have led to the Polish decision to choose the Israeli NDT over the American Hellfire. One unnamed official quoted in Defense News argued that “You can reject a missile on technical grounds, but we think something is not right with the way tendering and selection unfolded.”

In an August 1995 interview with the French aerospace journal Air Et Cosmos (Air and Space), IAI director-general Moshe Keret said that IAI hoped to boost its U.S. market share from “$500 million to $800-$900 million in revenues in the United States.”

Significant Advantages

It is not clear whether Israel’s enormous clout in Congress is a factor in the Pentagon’s decisions to buy from Israeli firms, but it certainly is a factor in the U.S. government’s lack of response to Israeli competition with U.S. defense firms. It also is clear that the huge U.S. aid package given to Israel confers significant advantage to Israel’s government-subsidized defense companies. One component of that aid package is the provision, applicable only to Israel, that $475 million of its $1.8 billion annual U.S. Foreign Military Sales grant to buy military hardware can be spent in Israel. All other beneficiaries of U.S. military aid must spend the aid money they receive on U.S. products.

This substantial U.S. government subsidy, combined with other Pentagon funding for Israeli companies (e.g., an estimated $50 to $60 million per year to IAI to develop Israel’s Arrow-2 anti-tactical ballistic missile system), uses U.S. taxpayer dollars to help enable Israeli firms to underbid U.S. firms which, unlike Israeli firms, are obligated also to pay U.S. taxes.

Just how outlandish Israel’s requests for U.S. aid have become was illustrated by a recent hint by Israeli officials that they might ask Congress (and not for the first time) to waive the Pentagon’s annual $35 million surcharge for Israel’s $1.8 billion military aid package, a fee that is designed to help offset the Pentagon’s costs for giving Israel nearly $2 billion worth of military equipment each year. This request led to a scathing editorial in the widely-respected U.S. weekly Defense News, which said that it is time to reconsider all of Israel’s aid.

Such a bold statement in an American defense publication reflects the deep discontent within the American defense and intelligence communities. Privately, U.S. officials and defense analysts admit they are continuously infuriated by Israel’s behavior, and even more frustrated by the willingness of the White House and Congress to satisfy Israel’s requests for more aid, all the while ignoring Israel’s flagrant abuses of its privileged relationship with Washington. The editorial in Defense News echoes publicly what U.S. defense and intelligence personnel have been saying for years: “enough is enough.”