US embassy cable - 05TELAVIV4728

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 004728 
 
SIPDIS 
 
NOFORN 
 
DEPARTMENT FOR NEA/IPA GLOGERFO 
DEPARTMENT PLEASE PASS TO USTR: ESAUMS 
 
E.O. 12958: DECL: 07/06/2015 
TAGS: ECON, ETRD, IS, ECONOMY AND FINANCE 
SUBJECT: (C) ISRAEL CONSIDERS WITHDRAWING FROM GOVERNMENT 
PROCUREMENT AGREEMENT 
 
REF: GENEVA 01508 
 
Classified By: Ambassador Daniel C. Kurtzer for reasons 1.4 (b) and (d) 
 
1. (C) Summary. The Ministry of Industry, Trade, and Labor 
(MOITL) is considering withdrawing from the Government 
Procurement Agreement (GPA) if the GOI is unable to maintain 
offsets at the current level.  MOITL staff claim that 
economic analysis and industry advocacy have made it clear 
that costs of remaining a member of the GPA if offsets are 
reduced are far higher than any benefits that Israel gains 
from the agreement.  Israeli officials are beginning lobbying 
efforts to maintain 30% offset commitments on government 
contracts.  End summary. 
 
2. (C) In a July 5 meeting to discuss WTO issues Yair Shiran, 
Director of International Agreements and Trade Policy, and 
Yoram Zara, Director of Multilateral Agreements Division (and 
primary POC for WTO issues) from the Ministry of Industry and 
trade expressed their view that Israel derives limited 
benefits from being a member of the GPA, and that maintaining 
offset commitments at the current level was the only way to 
assure continued GOI participation.  In addition, Shiran 
commented that the United States "could be of great help" on 
this issue, and that "progress (on offsets) might make other 
issues easier to resolve." 
 
3. (C) The MOITL staff held a high-level meeting with the 
Director General of MOITL the evening of July 5 to discuss a 
negotiating strategy and next steps for the GOI in the GPA. 
 
4. (C) Despite the professed "cost" of the agreement for the 
GOI (if they are not able to maintain offsets at current 
levels), staff at MOITL were unable to answer a number of 
questions posed by Econoff related to their participation in 
the GPA.  The questions included: 
-What have industries that are interested in selling security 
equipment to the Department of Homeland Security said about 
the agreement? 
-What is the total cost to the GOI (budget) from maintaining 
offsets? 
-If the theory behind offsets is to increase the number of 
contacts between Israeli companies and large multi-nationals 
that win government tenders, why is there a need to maintain 
this restriction 10 years after the market opened?  Have the 
business relationships not already been formed? 
-What benefit do Israeli SMEs gain when multinationals are 
allowed to offset their government contracts with investment 
in a local subsidiary? 
 
5. (C/NF) The question of fulfilling offset requirements by 
establishing local subsidiaries has potentially the most 
devastating impact on the GOI justification for maintaining 
offset requirements.  During meetings of the Forum of 
American Companies Procurement Committee (held under the 
auspices of the Israeli-American Chamber of Commerce) post 
first became aware of the use of "umbrella agreements" to 
satisfy offset requirements.  Large American companies that 
won multiple government contracts in 2004 received messages 
in the first quarter of 2005 that they had failed to fulfill 
their offset requirements from the previous year.  In order 
to bid on new government tenders, the companies were 
encouraged to sign umbrella agreements that count planned 
investment in Israeli subsidiaries or manufacturing plants as 
part of the mandated 30% offset requirement on all future 
government contracts.  In a move to extend these guarantees 
the MoF extended the terms of the umbrella agreements over 
the space of 3-5 years.  However, no American company was 
willing to go on the record regarding their umbrella 
agreement with the GOI, in part because of fear of future 
discrimination when bidding on GOI government contracts.  To 
date, however, most of the companies have been satisfied with 
umbrella agreements because many already had planned to 
expand investment in Israel, and this method of accounting 
for offsets simplified their business strategy.  None of the 
companies on the Forum of American Companies Procurement 
Committee seemed to be aware that the GOI had been approved 
for only a one year extension of 30% offsets. 
 
6. (C) When queried about the possible benefit for the GOI if 
they withdraw from the GPA, MOIT's Zara noted that under 
Israeli law the government is allowed to seek offsets up to a 
35% value of many government tenders.  It is possible that 
Israel could actually increase the level of offsets imposed 
on international companies that win government tenders.  The 
GOI's position is troubling given the present negative 
climate for government procurement in Israel. 
 
7. (SBU) Comment. The Forum of American Companies Procurement 
Committee, in coordination with Post economic and commercial 
officers has identified a number of problems that prevent 
fair competition in government tenders in Israel. 
-Lack of a central clearinghouse for publication and 
notification of tenders (similar to FedBizOpps); 
-Lack of an Ombudsman to act as government-wide POC for 
companies with questions and complaints; 
-Unlimited corporate liability clauses that prohibit U.S. 
companies' participation or increase the cost of 
participation through higher insurance costs; 
-Lack of a neutrality policy and use of unnecessarily 
restrictive standards in government tenders. 
 
8. (C) Comment continued.  The Ministry of Finance has made a 
commitment via the Loan Guarantee Commitment Agreement to 
address USG concerns on procurement issues.  The final draft 
of the Loan Guarantees Agreement, Appendix 6, Section 6 
commits the GOI to, "work with the U.S. Government to resolve 
outstanding procurements and standards issues."  This 
agreement was signed less that one week ago by Joseph Bachar, 
Director General of the Ministry of Finance.  To date the GOI 
has made limited progress in resolving USG concerns.  The 
willingness on the part of MOITL staff to consider withdrawal 
from an international agreement may signal a hardening of 
positions that the GOI will adopt on other sensitive trade 
issues.  End comment. 
 
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