The Ministry of Defense's uncharacteristic laconic announcement in early April provided the information tensely awaited by many defense companies in Israel and overseas. Ministry of Defense director general Maj. Gen. (res.) Udi Adam endorsed the recommendation by a special committee of the Administration for the Development of Weapons and Technology Infrastructure to equip the IDF with hundreds of 155-mm self-propelled cannon made by Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT).
Aware of the discontent aroused by the controversial decision among several important defense industry players, Ministry of Defense sources hurried to make it clear that "The committee to select the developers in the Administration for the Development of Weapons and Technology Infrastructure received many professional opinions from all the relevant parties in the defense establishment." The sources added, "The committee's recommendation and its approval by director general Adam were according to law."
This declaration followed a series of allegations, prior to the publication of the decision, about the propriety of the procedure followed by the Ministry of Defense without transparency, without publishing a regular tender that would summon other companies to offer cannon meeting the operational needs specified by the IDF, and without providing the defense establishment with a better deal based on competition. The monetary amount of this controversial decision is believed to be at least $1.5 billion, to be received by Elbit Systems over the years of the project. Elbit Systems is a public defense companies controlled by Michael (Mickey) Federmann. Its president and CEO is Bezhalel Machlis. The company's market cap is $5 billion, and it is currently celebrating the 50th anniversary of its founding.
The company finished the fourth quarter of 2016 with a NIS 77 million profit, and its orders backlog was $6.9 billion. The secrecy with which the selection of a supplier for the IDF's future artillery was decided raises the question of why the Ministry of Defense gave no explanation of its considerations in the matter: why did it prefer the cannon offered by Elbit Systems, part of which are still in the development stages? Did it examine in depth the possibility of procuring already existing cannon in the market offered to Israel by other companies from Germany and South Korea? Why was no competitive process held, such as a tender, which could have significantly brought down the cost of the giant deal? There are also many other questions, but the Ministry of Defense or parties on its behalf are absolutely refusing to answer then, or to make any explanations, claiming that the matter is sensitive and classified.
Some background: the IDF Artillery Corps has been based for four decades on US-made M-109 cannon. These cannon were aimed at targets over the border during Israel's wars. They were used for attack, to create buffer zones, and for artillery bombardment. The army has been hungry for new cannon for years.
"Our artillery system is falling apart. We have reached a situation where we are cannibalizing existing cannon: taking parts from one cannon in order to allow another to operate. This system has to be upgraded, and fast," says a defense source deeply involved in the forlorn state of the IDF artillery system. Over the past decade, decisions about the procurement of new cannon were postponed again and again, mostly because of money. During this time, the IDF and the Ministry of Defense spent billions on procurement. They bought rockets, missiles and bunker penetrating bombs, stealth aircraft, new APCs, expensive tank armor packages, training and transportation aircraft, surface ships and submarines, cyber systems and intelligence tools. They built ultra-smart fences on the country's borders and invested in classified solutions for the tunnel threat from the Gaza Strip. No money was left for artillery. In the past year, the Ministry of Defense finally stopped hesitating, thinking, and talking, and lurched into high gear towards a giant deal for procuring new cannon for the IDF in future wars.
Elbit Systems regards itself as a natural player on the cannon field. Its 2010 acquisition of Soltam gave it unique expertise in this area, and its cannon were sold to a series of countries around the world. Its major competitor in Israel is Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), which saw an opportunity for a giant deal, and did not sit idly by. It combined with German concern KMW and Israel Military Industries Ltd. (IMI) to offer the IDF and the Ministry of Defense a German cannon with a barrel made by Rheinmetall Defense. This cannon is used by many armies in Europe and other areas around the world. South Korean company Hanwha Techwin is also convinced that that it has something to offer Israel where self-propelled artillery is concerned. Through its representative in Israel, it sought to offer the IDF and the Ministry of Defense its own semi-automatic cannon, if and when the Ministry of Defense published a tender for such procurement. The German concern, together with IAI, IMI, and the South Korean company, are convinced that the cannon they wanted to offer the IDF meet all the operational requirements specified by the professional echelon: self-propelled cannon with a firing rate of six shells a minute at a range of 40 kilometers. According to sources in these companies, the cannon's capabilities are proven, which will enable the IDF to absorb these systems fairly quickly, with the first ones being delivered within 12-18 months.
The companies interested in selling cannon to the IDF made their attentiveness to the looming Ministry of Defense procurement plan clear already in 2014. Sources familiar with these companies asserted that they asked senior Ministry of Defense officials and IDF personnel about their plans in the matter, asked about the timetables for publishing a tender for buying new cannon. The answers, however, gave them the impression that the matter was not currently on the agenda.
"Only in retrospect did we realize that they were lulling us to sleep. While we were sleeping the Ministry of Defense went forward on a secret channel with the Elbit Systems proposal," one of the sources claimed. In recent months, those companies became uneasy and anxious, because they felt that the decision was being made in secret, behind their backs. They warned already months ago that the Administration for the Development of Weapons and Technology Infrastructure committee intended to recommend to the Ministry of Defense director general an agreement with Elbit Systems as a sole supplier of the cannon: without a tender, without competition, and according to some of the sources, also without any special superiority of the Elbit Systems bid over that would have been put on the table, had a fair competitive procedure been held.
A party familiar with Elbit Systems strongly rejects the allegations by competing parties that the Elbit Systems' cannon was only on paper.
Contribution to outlying areas?
While the Ministry of Defense was going forward with the decision to select the Elbit Systems bid, the companies left out in the cold were left with the impression that the committee had left no stone unturned to find reasons to refrain from publishing a tender. One of these was the insistence that production take place completely in Israel by local industry. "What happened all of a sudden? After Israel has been here for 70 years already, it's important that self-propelled cannon be Israeli-made?", a source at one of the competing companies wonders.
The Ministry of Defense has made no explanations of the considerations that guided it in selecting Elbit Systems. Nevertheless, sources on its behalf cited the socioeconomic contribution of such a decision to the outlying areas with the expected opening of a production line for the new cannon in the Soltam plant in Yokneam that will employ 1,000 workers. Incidentally, for its part, IAI spoke of setting up a similar production line in its Ramta plant in Beer Sheva that would employ a similar number of workers, should its bid be selected, while relevant knowledge would be transferred from Germany.
An examination by "Globes" showed that Elbit Systems' cannon, which was selected following staff work in the Ministry of Defense, will have to undergo adjustments to the specifications given by the IDF. In effect, the company will develop different cannon than what it previously sold to other armies around the world. The cannon made by KMW and Hanwha Techwin, on the other hand, are already operational and firing.
According to parties familiar with the matter, the statements about Israeli-made products "do not hold water." They assert that neither manufacturing in Israel nor workers in outlying areas are a valid reason. They say that Israel does not have enough money to pay by itself for procurement of these cannon, and will in any case outsource their production to the US in order to buy them with US aid money. It cannot use US aid money to pay for cannon produced in Israel, especially after the new aid agreement signed late in ex-President Obama's term (in September 2016) eliminated the possibility that Israel previously had of converting a quarter of US aid from dollars into shekels.
In the end, Elbit Systems will also send production of the cannon to the US. According to the Ministry of Defense's controversial decision, the future IDF cannon will be Elbit Systems' ATMOS model. The Ministry of Defense did not state how much money it would allocate to this plan, or the timetables that it had set for developing the cannon and procuring it for IDF artillery batteries.
A few months ago, defense sources argued that Elbit Systems was working hard to develop part of the systems for the cannon selected by the committee. The same sources said that a firing trial of these systems would be conducted in May. According to a source familiar with the matter, the company already conducted such a trial several weeks ago, and another trial is set to take place soon.
Although Ministry of Defense decision makers are clamming up about the considerations that led to their decision in this matter, a document signed by a senior Administration for the Development of Weapons and Technology Infrastructure figure explains, at least to some extent some of these considerations – the patent rights Israel will have for using its future artillery battery under any type of warfare, including the freedom to fire different types of shell without any restrictions. Another concern expressed in the document concerns a possible future weapons embargo on Israel following a political imbroglio or an anti-Israel political atmosphere.
"In the event of an embargo against Israel, the cannon are the least of our problems," a senior defense source familiar with the defense establishment and the defense companies inside and out said. "In this case, the Ministry of Defense should have published a tender – it's as simple as that."
Most of the weapons systems on which the IDF's power depends are imported. The navy uses the German-made Dolphin submarine. For decades, all of the aircraft and assault and transportation helicopters used by the air force were made in the US. IDF armor uses tanks made in Israel, but their transmission systems were made by Renk, a German company.
"Why do cannon have to be made in Israel, while attack aircraft do not?" a senior source wonders. Parties who tried to convince the Ministry of Defense to publish a regular tender discovered another cause of anxiety: that the authorities in Germany will refuse to approve the export of the cannon to Israel, or alternatively, obtaining such authorization will require a process taking years that the IDF cannot afford, due to the poor state of its cannon. The Administration for the Development of Weapons and Technology Infrastructure does not believe that IAI and its German partner, KMW, are capable of obtaining export permits for the proposed cannon from the German authorities without restrictions on their use, while the IDF is seeking to avoid such restrictions.
A source familiar with the two companies objects to this reasoning, saying that the defense establishment is aware that the authorities in Germany, or anywhere else, will not grant exit permits unless a tender has been published. "The demand for showing the possibility of obtaining an export license, which can be obtained only after a tender has been held, as a condition for holding a tender, is illogical, and cannot constitute grounds for an exemption from a tender or a competitive process," an informed source said.
Other sources familiar with the process have expressed surprise in recent weeks concerning the forum in which the Ministry of Defense made decisions in the matter - an Administration for the Development of Weapons and Technology Infrastructure internal developers committee, rather than an agency with procurement expertise and authority, such as the Procurement and Production Directorate (PPD), whose job it is to consider the proposed alternatives, the price of each alternative, the supply timetables for the product, etc.
"The decision in principle to grant the project to Elbit Systems as a sole supplier is based on inadequate and inaccurate presentations," it is alleged. Hanwha Techwin's semiautomatic cannon, called K-9, has been in Israel for seven months. This fact has no connection to the saga that has been unfolding until recently in the Ministry of Defense towards a decision on the selection of the IDF's future cannon. IMI is selling shells to the South Korean ground forces, and has to adjust them to the firing systems used by South Korean forces. It is doing this at the Shdema testing field in southern Israel.
"This cannon meets all the specifications set by the IDF: it fires six shells a minute at a 40-kilometer range. It is semiautomatic, but Hanwha Techwin notified the Ministry of Defense that it will be willing to produce a fully automatic version," a source familiar with the South Korean company told "Globes." Like the Germans, IMI, and IAI, the South Koreans very much wanted the cannon deal with the IDF.
After all, such a deal is considered rare for cannons, because armies procure these systems only once in several decades, and not being prompt means that you miss the boat. In a sale of such cannon to the IDF, there is another and no less important element of prestige that can open doors for companies in trying to sell the system to other armies around the world. They think that if an army as busy and challenged as the IDF assessed a weapons system and found it good for its needs, it amounts to a quality certification worth its weight in gold. There is a good reason why another South Korean company, KAI, the South Korean equivalent of IAI, fell all over itself a few years ago trying to sell a plane to Israel for training Israel air force pilot course cadets. At the end of tumultuous competitive process, the Ministry of Defense selected airplanes offered by Italian company Aermacchi, and the South Koreans were greatly insulted.
"This was an opportunity to repair relations between Tel Aviv And Seoul," a source familiar with Hanwha Techwin says. "The company was willing to undertake to open a production line for these cannon in Israel, or anywhere else in the world that Israel wanted, including the transfer of know-how. It invited Ministry of Defense representatives to get an impression of their capabilities in the framework of an actual exhibition in South Korea. They didn’t come. We offered to come to Shdema in Israel, and they wouldn't go there, either."
The same complaint was heard from a source close to the group of companies led by IAI and KMW. The source asserted that the German company wanted to send the cannon it was offering the IDF for a demonstration of its capabilities in Israel, including presenting it with an operational scenario selected by field commanders. The Ministry of Defense politely declined the offer, saying that the cannon's capabilities were known to it. Before the cannon agreement with Elbit Systems as a sole supplier was decided, senior KMW executives wanted to come to Israel to appear before the Administration for the Development of Weapons and Technology Infrastructure committee, but this request was also rejected.
Published by Globes [online], Israel Business News - www.globes-online.com - on May 15, 2017
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