Elbit Systems bought IMI at a bargain price because managers made sure the company was poorly run to provide an excuse for privatization, explains TRNN’s Shir Hever.

Shir Hever is an economist working at The Real News Network. His economic research focuses on Israeli occupation of the Palestinian territory; international aid to the Palestinians and to Israel; the effects of the Israeli occupation of the Palestinian territories on the Israeli economy; and the boycott, divestment and sanctions campaigns against Israel. His first book: Political Economy of Israel’s Occupation: Repression Beyond Exploitation, was published by Pluto Press.

TRNN video & transcript:

SHARMINI PERIES: It’s The Real News, and I am Sharmini Peries coming to you from Baltimore. The biggest merger in the history of the Israeli arms industry took place when Elbit Systems bought Israeli Military Industries, known as IMI, from the government of Israel. IMI is also Israel’s oldest weapons company. It was established in 1933, even before the existence of the state of Israel. Elbit Systems paid about $600 million, and a quarter of that amount it will receive in a loan. Back in 1995, the US arms company Lockheed Martin tried to buy IMI, and the Israeli government had refused, claiming that IMI is a strategic asset which the state of Israel cannot sell. Less than 20 years later, in 2013, the Israeli government took the decision to privatize IMI, and for the last five years, tried desperately to find a buyer. And spent hundreds of millions of dollars trying to make IMI more attractive. Nevertheless, Elbit Systems was the only bidder for IMI.On to talk about this move with me is Shir Hever. Shir is a Real News correspondent in Heidelberg, Germany. His recent book, The Privatization of Israeli Security, was published by Pluto Press back in 2017. Shir, good to have you with us.

SHIR HEVER: Thanks for having me, Sharmini.

SHARMINI PERIES: All right, Shir. Tell us the mechanics of all of this. If the Israeli government had refused to sell IMI to Lockheed Martin back in 1995, why did it change its mind? And why is privatization so urgent for the Israeli government?

SHIR HEVER: There was a generational change in Israel. And the old guard of the generals, the top military brass, are not as powerful in Israel today as they used to be. Neoliberal economists and members of the government came up with this idea that any kind of publicly owned government is a bad idea, any public asset is a losing asset. And I think the managers of IMI got that idea very well. They realized that if they managed the company poorly, and drive it down to the ground, they will be rewarded by their future employer. Now that Elbit Systems is buying IMI, the managers of IMI can expect a raise from their new employer because they made IMI into a kind of toxic asset, accumulating a lot of debt on the company. The way that the Israeli government has been talking about IMI, as something extremely unwanted, as a very badly managed company with heavy debt, has really convinced politicians that it would be a popular move to sell the company.

SHARMINI PERIES: Off the top, I said that it took almost five years of efforts by the Ministry of Finance to actually sell IMI. Why did it take so long?

SHIR HEVER: As soon as the Ministry of Finance came out with a statement saying that IMI is a losing company, they scared off a lot of potential buyers. They actually much downed their own asset, and made sure that they’re not going to get very good bids for it, and then started a race to the bottom. On the one side, the Israeli government wanted to put some safeguards that the company will not be bought by foreign agents, because this is a very important company producing ammunition and other weapons for the Israeli military. What happens if it’s somehow bought by some kind of foreign country that will then shut it down or move it to another country? On the other hand, they want to attract potential buyers, so they tried to make the company more attractive.What actually happened during these five years is that the price of the company became negative. They actually sold the company IMI for less than zero dollars if you count all of the money that the government had invested into IMI to make it attractive for Elbit Systems. Elbit Systems got to pay about $600 million altogether, including when they pay back the loan, but the Israeli government has already paid more than that, especially to compensate workers that are going to lose their jobs in terms of pensions, and various benefits and bonuses, to get the union to sign to agree to the privatization. So, that was a very long process.Nevertheless, two years ago, they were very close to signing a deal with Elbit Systems, but then they hired a company to assess the value of IMI and to create an estimate of its value. But as you always have with privatization, they hired a private company to do that, and it became apparent that this private company that the Israeli Ministry of Finance hired is actually a subsidiary of Elbit, the bidder for the company. So, that created an impossible situation. As soon as that was revealed, they had to stop the sale because it would have been incredibly corrupt and they had to find another assessing company. That created further delays.

SHARMINI PERIES: All right. Tell us about Elbit Systems and what kind of company is it. And what kind of company is IMI now?

SHIR HEVER: Elbit Systems is a very fast growing arms company. It became the second biggest arms company in Israel and the biggest private arms company in Israel. In fact, the biggest arms company in Israel, IAI, Israel Aerospace Industries, is owned by the government, but it also has a civilian department to it. If you disregard the civilian department, that makes Elbit the biggest arms company in Israel. They are actually driving forward the whole idea of privatization of security in Israel more than any other company.They are working in very close association with American arms companies because what Elbit specializes in is in modules or technologies that fit into US-produced weapons. For example, they produce optical systems that are then installed in drones produced by other countries or they produce helmets that are worn by pilots of fighter planes produced in the United States. So, there’s a kind of symbiosis there. Elbit tries to brand itself as a high tech company producing cutting-edge technology. In fact, they’re extremely dependent on US companies and work with them.Their business model is to constantly go deeper and deeper into debt and buy more and more companies. That’s why they’re buying IMI. IMI is a very different kind of company. It’s a very old and traditional company. It’s quite famous for building the infamous Uzi submachine gun, which was at some point used by the Israeli military forces. I think there has not been a single Uzi machine gun produced by IMI in the last 30 years. Now, the Uzis are produced in China, if at all. But IMI also have a few of these high-tech technologies, but most of their products are very down to Earth and very unexciting, things like ammunition.Actually, these things like ammunition or engines for rockets are things that are quite essential for the Israeli military. And so, Elbit understands that by buying IMI, they’re going to control the market. They’re going to have the supply chain. That’s also the reason that they were the only bidder because every other company that thought, “Maybe we should buy IMI, but then we’re going to come into direct competition with Elbit.” The only company that wouldn’t is Elbit Systems itself. The biggest customer of Elbit Systems and the biggest customer of IMI is the Israeli Ministry of Defense. Now Elbit Systems is going to control that market. And the fact that they asked that a quarter of the sale price would be in the form of a loan means that they still need more cash because they’re planning further purchases down the road.

SHARMINI PERIES: All right. Shir, what does this merger mean for sales of Israeli weapons to the rest of the world? I mean, Israel does a lot of sales of weapons. So, what does it mean?

SHIR HEVER: Both IMI and Elbit have one thing in common. They don’t reveal the full extent of their customers because after there was an appeal to the Israeli Supreme Court, it was revealed that Israel is selling weapons to 160 countries around the world. I should emphasize there are no 160 democracies in the world. There are also no 160 countries in the world that have diplomatic relations with Israel. They’re selling weapons virtually to anyone who would pay for them.One of the things that Israeli arms companies constantly complain about and they keep on going to the press with these complaints, is that, “Why are we competing against each other? Why are different Israeli arms companies trying to outbid each other in international contracts? Shouldn’t we merge and get just one bid, and then win more contracts for the Israeli arms industry as a whole?” This is, of course, an idea which is completely contrary to the idea of a capitalist competition, but this is exactly what’s going to happen when Elbit is now able to not only produce drones in terms of their electronic and optical systems but also equip them with the propulsion system that is proposed by IMI. They’re going to be a much bigger player in the global arms trade and that is probably going to increase Israel’s overall arms exports, especially to areas of conflict.

SHARMINI PERIES: And of course, the big question is, what does this merger mean for the Israeli security policies and the regular attacks they carry out on Palestinians in the occupied territory, and of course neighboring countries as well? Drones are one, but there are a lot of other equipment in the territories and in bordering countries. So, what does it mean?

SHIR HEVER: Yeah, we have to talk about artillery, because both Elbit Systems and IMI produce artillery. In the last attack on Gaza, or the last large attack on Gaza of 2014, Israeli forces used heavy artillery against a civilian neighborhood, killing hundreds of people in a very indiscriminate way.After every attack on Gaza, ever since 2006, there’s immediately an arms fair held in Israel, where the Israeli arms companies show their wares. Their main marketing technique is to say, “Our technology, our weapons have already been tested in battle, tested against actual human beings, tested on Palestinians.” So, that gives them an advantage when they’re competing with international companies, because not every country in the world has their own backyard where they can test their weapons on human subjects. That kind of advantages makes a lot of scholars and journalists speculate that the Israeli attacks on Gaza, and also on cities in the West Bank, and on Lebanon are motivated partially by business interests, because these arms companies, they want to be able to show that they tested the weapons. They have an economic interest that the Israeli army will attack.I think one of the flaws of this argument, one of the things that makes it not very convincing, is the fact that the biggest arms companies in Israel used to be state owned. Why would a state owned company influence government policy in order to increase its profits? Because increasing profits is not such an important thing for a state owned company. Elbit Systems changes that, because it’s a purely private company. They are only interested in making as much profit as possible. In fact, the owner of Elbit Systems, Federmann, is closely related to Israeli politicians, especially to Ehud Barak, who used to be the prime minister and the minister of defense, so he has some influence with them. And now that he’s going to have such a big company and such a monopoly, it is possible that when he sees his sales going down, he will ask for a specific kind of weapon or system to be tested on behalf of his company by the Israeli military. That’s, of course, something that we should all be worried about, because it really turns war into a profit making business.But there is also a silver lining, and I would like maybe to end on that point of the silver lining. By becoming this big monopoly, and the main customer as I’ve said is the Israeli Ministry of Defense, Elbit Systems will now control 80% of the market for the Israeli land forces, all of the military, the artillery, the armor divisions. All their supplies, 80%, will be controlled by Elbit Systems, and that means that the prices are going to go up. The Israeli defense budget is already stretched because a lot of people in Israel realize that there is a direct conflict between the standard of living and their defense budget. Defense spending comes at the expense of people’s quality of life. So, this means that every bullet, every cannon shell, every rocket is going to cost more to the Israeli army to use because of this monopoly situation. So, actually, there is a chance that the Israeli military will have to ration the use of its violence just a little bit more because it will have to buy all of its weapons from one supplier.

SHARMINI PERIES: Shir, finally, if there are so many exports to other countries, in terms of weapons, did the public treasury in Israel depend on these exports and the revenue generated from that for its own public spending? And will that be affected by this sale?

SHIR HEVER: This is a very difficult question to answer because we don’t know all the facts. Many of these sales are hidden. When the Israeli government is selling weapons to countries like Rwanda, or like Nigeria, or like Uganda, these deals are kept secret. We only hear about them indirectly.Nevertheless, we can estimate that about 11% of all Israeli exports are arms exports. 11% is more than any other country in the world. There is no country in the world that 11% of their exports are military exports. But on the other side of this, 89% of the exports are not military. So, we have to look at this in the right proportion. I wouldn’t say that the Israeli Ministry of Finance depends on that income.Another problem is that the Israeli Ministry of Defense has a lot of autonomy. The revenue generated from arms exports doesn’t go directly to the Israeli Ministry of Finance or even to the companies, but is rather controlled and managed by the Ministry of Defense. The Ministry of Defense has a very free hand to use that revenue to finance research into new weapons and things like that, or to buy expensive weapons systems. In fact, this makes the Israeli Ministry of Finance very weak in its ability to influence how that revenue money is used, and very little of that money actually gets into the Israeli economy and into people’s quality of life.

SHARMINI PERIES: All right, Shir. We’ll leave it there for now. And I thank you so much for joining us. A very interesting story of privatization. I thank you so much for joining us today.

SHIR HEVER: Thank you, Sharmini.

SHARMINI PERIES: And thank you for joining us here on The Real News Network.

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