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Monday, November 12, 2012
Israel Leverages Local R&D for Overseas Buys

Israel Leverages Local R&D for Overseas Buys
Nov. 12, 2012 - 12:15PM By Barbara Opall-Rome Defense News
http://www.defensenews.com/article/20121112/DEFREG04/311120011/Israel-Leverages-Local-R-D-Overseas-Buys

TEL AVIV — The $3.1 billion Israel receives in annual U.S. military aid,
plus hundreds of millions more in U.S. funding for cooperative missile
defense programs, guarantees that Washington’s special partner in Jerusalem
will remain a hot market for American defense firms for years to come.

Under U.S. law, Israel must spend 73.7 percent of congressionally
appropriated foreign military financing (FMF) funding in the United States.
At $1.5 billion, this represents about 20 percent of Israel’s overall
defense budget and some 60 percent of modernization funding.

The Lockheed Martin F-35 Joint Strike Fighter leads the big-ticket programs
funded by annual FMF, followed by ongoing purchases of the firm’s C-130J and
a recently inked $735 million contract for Honeywell engines used to power
Israel’s new fleet of Alenia Aermacchi M-346 trainer jets.

But Israel also is allowed to convert the remaining third of its annual FMF
into shekels for domestic modernization spending, and officials and experts
here say a growing amount of U.S.-origin funding is making its way back to
the U.S. market once locally developed systems are ready for production.

The latest example of FMF flowback to the U.S. market is the Israeli Namer,
a heavy troop carrier based on the hull and other components of the
indigenously developed and produced Merkava Mk4 main battle tank. Under a
contract to be funded by U.S. FMF aid, General Dynamics Land Systems will
produce hulls and materiel kit sets for up to 600 Namers over the next eight
years at its Lima, Ohio, facility.

The bulk of early development funding for this mega project came from
so-called Offshore Procurement (OSP), the portion of annual aid that Israel
was allowed to convert into local shekels for modernization projects.

The Color of Money

In Israel, the distinction between direct FMF funds to be spent in the
United States — so-called green dollars — and OSP aid convertible into
shekels is known as the color of money, with the latter coined
blue-and-white dollars after the colors of the Israeli flag.

And while the color of money has long influenced Israel’s program, planning
and budgeting process, government and industry are becoming increasingly
adept at leveraging the investment of blue-and-white development dollars
into U.S.-based procurement programs financed through direct FMF green
dollars.

Government officials and industry executives cite Israel’s Tzayad Digital
Army Program (DAP), developed by Elbit Systems, as a classic example of FMF
flowback to the benefit of Israeli and U.S. industry. Over the past decade,
Israel has spent billions of shekels on this centerpiece program to connect
all elements of Israel’s ground forces and other service branches into a
single, secure C4I network.

Multiyear plans through 2017 call for investing several hundred million more
shekels in DAP-related development, but actual production will take place at
Elbit USA, Elbit’s wholly owned U.S. subsidiary employing hundreds of U.S.
citizens and subject to U.S. laws. Funding for mass production of multiple
elements of Israel’s DAP network will come from direct FMF, or green
dollars.

Plan Oz

Israel’s upcoming 2013-2017 spending plan, dubbed Plan Oz, was approved in
early September but remains on hold due to protracted budget disputes
unlikely to be resolved until after Israeli elections scheduled for Jan. 22.

Nevertheless, military officers here point to a considerable increase in
funding earmarked for local development of sensors, munitions and unmanned
systems that can be transitioned to FMF-funded U.S.-based production.

“A large focus of the [Israel Defense Forces] Ground Forces’ force buildup
goals … is augmenting primary platforms with an emphasis on the continued
integration of the Merkava tank and the Namer APC,” Israel’s military
spokesman told Defense News.

In parallel, Israel plans to expand procurement of the locally developed
Trophy active protection system for armor and the Iron Dome active defense
system against rockets and short-range missiles. Both systems are developed
and produced by Rafael.

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