Defense Ministry's Billions in Debt to Defense Firms Creates Financial Strain

A new external audit reveals that the Ministry of Defense's debt to state-owned defense companies has ballooned to billions of shekels, creating significant financial repercussions. The companies are forced to finance this debt themselves, incurring costs exceeding half a billion shekels, which raises concerns about these expenses being passed on to the state through inflated product prices. The report also highlights unaddressed claims and unenforced directives.

He alerted government officials to the negative impact on the company's cash flow, liquidity, ability to meet financial covenants with banks, and timely payments to suppliers, potentially threatening IAI's credit rating.

Earlier this year, Rafael Advanced Defense Systems also approached the Ministry of Defense. Director General Yoav Turgeman noted that the debt, then at 6 billion shekels, represented a substantial cash flow event for Rafael, as over 68% of its expected revenue comes from the ministry. While a deferral of VAT payments was arranged, the amounts were indexed to inflation, unlike the Ministry of Defense's debt, which is not indexed.

Documents obtained by Globes indicate these appeals have gone unanswered, with the ministry citing a lack of budget for current needs, despite a significant increase in the defense budget since the war began. By the end of the first half of the year, total debts to Rafael, IAI, and Tomer amounted to about 14.3 billion shekels, with market estimates suggesting the actual debt could be at least 17 billion shekels. This marks a shift from previous years when the ministry settled debts by year-end.

The audit, commissioned by the Government Companies Authority, found that financing costs for the debt reached 234 million shekels for Rafael and 329 million shekels for IAI. The report emphasizes that payment delays transfer financing costs from the ministry to the companies. The problem is systemic, as the Ministry of Defense is both a major client and a regulator, limiting the companies' leverage. While a payment ethics law exists, ministry procedures and agreements with these companies omit provisions for interest and late fees, effectively exempting the ministry from these obligations.

Although the companies are not expected to face immediate financial distress or liquidity crises, the prolonged and growing debt could impact their borrowing terms, credit ratings, and ability to meet financial benchmarks. Companies reportedly fear this uncertainty may lead them to reduce R&D activities and avoid new projects. The audit also criticizes the companies for withholding declared dividends from the state due to the outstanding debt, creating an improper link between commercial relations and shareholder rights. International comparisons show other countries have mechanisms like automatic interest charges for late payments to incentivize timely settlement.

The Ministry of Defense stated that the debts are the state's responsibility and that all government bodies should help resolve them, adding that they are working on solutions for financing costs. The Ministry of Finance noted that defense industries have received tens of billions in orders since the war began, along with significant advance payments, and that focusing solely on the outstanding balance presents a narrow view.