Ministry of Defense Debt to State Defense Firms Soars to Billions

A newly leaked external audit report reveals that the debt owed by the Ministry of Defense to state-owned defense companies has ballooned to billions of shekels, forcing these firms to shoulder heavy financing costs exceeding half a billion shekels. The report warns that these costs could eventually be priced into products sold to the state, effectively shifting the burden back onto taxpayers.

In August, Israel Aerospace Industries (IAI) Chairman Boaz Levy wrote to senior government officials, warning that the debt stood at approximately 5.4 billion shekels and could exceed 10 billion shekels by the end of the year if payments continue to be delayed. Levy cautioned that the chronic delays create a negative cash flow, impair liquidity, jeopardize banking covenants, and threaten the company's credit rating and relations with suppliers.

Rafael advanced similar warnings earlier this year. CEO Yoav Turgeman noted that Rafael's debt reached 6 billion shekels, representing an acute cash flow crisis since over 68% of Rafael's expected revenues stem from the Ministry of Defense. While tax arrangements regarding VAT delays were reached, the Ministry of Defense debt remains unindexed, and repeated appeals have gone unanswered due to alleged budgetary constraints within the ministry.

According to the external audit conducted by CPA Jacob Ginzburg on behalf of the Government Companies Authority, total debt to Rafael, IAI, and Tomer stood at approximately 14.3 billion shekels at the end of the first half of the year, based solely on approved invoices. Market estimates put the actual figure closer to 17 billion shekels. Financing costs alone have reached 234 million shekels for Rafael and 329 million shekels for IAI.

The audit highlights a systemic structural issue: the Ministry of Defense acts as both the primary client and a major regulator, leaving state-owned defense firms with limited leverage. Unlike private sector norms, the ministry has exempted itself from strict payment discipline and interest clauses. While the companies have faced criticism for withholding dividend payments amid the liquidity crunch, the report underscores the urgent need to overhaul payment mechanisms to protect defense production and supply chains.