The conclusion from the auditor’s report from Netanyahu Engelman on the activities of the government defense industries (IAI, Elta and Rafael) is the urgent need to disconnect their decision-making system from the government bodies above them, which make their work cumbersome and very difficult to compete in global markets. Most of the criticism is borne by the Companies Authority and with it the Ministry of Defense and the government on bureaucracy and cumbersome approval processes for various actions that make it very difficult for companies to deal with business in the competitive market.
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For example, the audit shows that the average time that elapsed from the date of approval by the IAI Board of Directors to establish companies or invest in existing companies until the approval of the Companies Authority was about 4.5 months, and until the government received approval – about 16 months. The average time that elapsed from the date of approval of Rafael’s board of directors to establish companies or invest in existing companies until the approval of the Companies Authority was about 6.5 months and until the approval of the government – about 10 months.
In addition, it emerged that from July 2019 until the end of the audit, August 2021, for about a year and a half to about two years, the Companies Authority was unable to submit to the Ministerial Committee on Social Affairs and Economy the decision to establish IAI subsidiaries in certain European and Asian countries. Did not allow IAI to implement its business development strategy effectively. As a result, IAI has changed its business plans regarding these countries and is working to establish companies in them through foreign companies (indirect ownership), although from the beginning it planned to establish government subsidiaries (direct ownership) in them.
And this has direct damage, due to the reluctance in 2017-2020 IAI was unable to acquire a company in the United States (USA) intended to expand IAI’s presence in this market.
Relatively low efficiency for IAI workers
State Comptroller Engelman noted in the report that IAI, Elta and Rafael must carry out mergers, acquisitions and ventures efficiently and in short schedules in accordance with market requirements, inter alia to break into new markets, acquire missing technologies, take advantage of size and even reduce threatening competition.
In relation to the aerospace industry itself, the auditor states that the average gross and operating profit rates from the company’s revenues in the five years (2015 – 2019) were about 14% and about 1%, respectively, low profitability rates. IAI’s operating profit rates are also relatively low compared to competing companies in Israel – Rafael and Elbit Systems Ltd. (Elbit), and its EBITDA rates are also low relative to competitors in other countries. However, the average operating profit rate from military revenues in 2016-2019 And the EBITDA rate in 2019 in IAI’s military field was relatively large compared to Elbit and Rafael.
The data on gross profit per employee in these years were relatively low for Elbit and Rafael at an average rate of about 54% and about 48%, respectively. A figure that indicates a relatively low efficiency for IAI workers and possibly an excess of manpower – an important figure in negotiations with the workers on a new collective agreement and the consideration for the IPO.
Regarding research and development (R&D) expenses and investment in subsidiaries and affiliates, it was found that IAI’s investment rate in its own R & D of all its revenues in the years 2016-2019 was smaller than that of competing companies Rafael and Elbit by 38%, and also the rate of R&D. Its invited P. was smaller than that of Rafael. Also, in the years 2016-2019 IAI did not implement its plans to invest in companies that were there to assist it in “inorganic growth”, including assisting it in penetrating new markets, product lines and complementary technologies. . In front of a cumulative budget for investment in companies for the years 2016-2019 in the amount of hundreds of millions of dollars, the execution was about 11%.
IAI responds that the State Comptroller’s report relates to the company’s average financial results from 2015 to 2019. In 2018, the company formulated a new strategy, implemented significant efficiencies, and underwent a sharp business transformation. Since the upheaval, the company has achieved tens of percent growth in revenue and reached record profitability, the highest in its history. The company says that “IAI continues to operate systematically and consistently to improve its business performance and achieve aggressive profit and growth targets, while opening new markets and increasing the company’s order backlog. While presenting a profit that meets the criteria in the defense market. “
The response of the Finance Minister in charge of the Companies Authority: “We have received the final report of the State Comptroller, we will study its conclusions and treat accordingly.
Regarding IAI’s financial statements, it is important to note that in the last three years the company has made a dramatic change in business goals as well as meeting them and reached record profits. The State Comptroller’s report covers previous years until 2019.
“Regarding the process of acquiring the companies and the length of time it takes to approve the acquisition of a company by the government, even before the report is published, under the Arrangements Law and the approval of the state budget for 2021-2022, the Ministry of Finance passed a government decision (decision number 238). Among other things, it was decided to amend the Government Companies Law so that the provisions of section 11 (a) (9) thereof, regarding the need for government approval for a company decision to establish or purchase shares in an existing company will be amended in a way that facilitates bureaucracy on this issue. For discussions in the Knesset during the next session. “