MINISTRY OF DEFENSE

The defense budget for 1998 totals about NIS 34.5 billion.
The sources for the defense budget, unlike the budgets of other government ministries, break down into a local currency budget, a foreign currency budget, and real resources such as conscript soldiers (in pursuance of the Defense Service Law).
The distribution of the budget by types of currency is as follows:

In addition, 1.9 billion shekels are budgeted as revenue- dependent expenditure (from sale of equipment and services - estimate according to the 1997 budget). The income constitutes a source for budgetary expenditure in every sense.
In addition to the above-mentioned amounts, the Ministry of Defense receives in 1998 a NIS 53 million increase to complete funding of the redeployment carried out following implementation of the agreements with the Palestinian authority, and NIS 18 million for purchase of heavy ordnance in TAAS.
In conclusion, in 1998 the Defense Ministry disposes of budgets totaling over NIS 34.5 billion.

Major Provisions of the 1998 Budget

The defense budget is administered on the principle of a framework budget. This gives the heads of the defense establishment the authority to allocate the budget to the different tasks. A basic principle in management of the budget is that resources earmarked for canceled tasks will be transferred to new tasks.
After reductions and additions in accordance with government resolutions are taken into account, the 1998 local currency defense budget is about NIS 410 million higher than the original 1997 local currency budget:
NIS 604 million increase deriving from government decisions and arrangements with the Ministry of Defense in 1997, and application of several inter-ministerial arrangements.
NIS 250 million increase for pensions of career soldiers, given the greater number of retirees in this category.
NIS 54 million increase for the Rehabilitation Division, given the increased number of entitled persons, in accordance with the Rehabilitation Division's compensation arrangement.
NIS 52 million increase for funding costs of retiring middle-aged career soldiers.
NIS 37 million increase for purchase of new liaison equipment required for the army following freeing of communications frequencies for the third cellular operator.
NIS 157 million reduction from the defense budget base following the cutback in all government ministries in 1997.
NIS 430 million reduction from the defense budget base for 1998, by government decision.
In addition, NIS 129 million will be transferred to the defense budget base for adjusting of the employer's costs following the abolition of parallel tax and its inclusion in the employer's National Insurance payments.
The following earmarked budget increases awarded in 1997 will be renewed in 1998:
NIS 1,066 billion for expansion of defense industry projects through an increase in the Ministry of Defense's procurement and equipment budget. NIS 234 million of this sum is spending authorization, for which funding will be transferred in 1999.
NIS 905 million for funding of the increased activity in Judea, Samaria and the Gaza Strip.
NIS 218 million for special defense industry projects.
NIS 74 million for funding heavy ordnance lines in TAAS; out of this sum approximately NIS 55 million in the defense budget and the rest as a participatory transfer during the year.

Personnel Ceiling

Personnel ceiling in the Ministry of Defense for 1998 is 2,001.5 positions, by government decision.

Local Currency Budget

The local currency budget for 1998 totals about NIS 24.5 billion, as shown in Table 1.

Table 1
The Changes Relative to the 1997 Budget in Shekels*
(Millions of NIS)

Development of local currency defense budget from the beginning of the decade:

Analysis of the trends, as shown in the above graph, indicate a moderate increase in the local currency defense budget since the beginning of the decade. For purposes of comparison, the 1998 budget (without pensions and technical changes) is about NIS 550 million higher than the 1990 budget (in fixed prices).

Additional Local Currency Sources

In addition to the direct local currency budget received by the Ministry of Defense, several additional sources are available to the Ministry:

Revenue-Dependent Spending

In 1998 the IDF will sell equipment and services and will receive various revenues of a cumulative scope of about NIS 1.9 billion (forecast on the basis of 1997 budget planning). Most of this income derives from sale of old equipment purchased in the past out of the State budget. It should be noted that accelerated sale of old equipment, no longer in use, will serve for financing of rearmament, new purchases, and will lead to a saving in maintenance costs.

Spending Authorization

In 1998 the Ministry of Defense spending authorization, earmarked for local currency spending, totaled about NIS 17 billion. In addition a spending authorization of about NIS 9.8 billion for expenditure in foreign currency will be budgeted (estimates according to 1997 planning data).

Conversions of Foreign Currency from US Aid

In 1997 the Ministry will convert about 457 million dollars into shekels, to serve for development of technologies and purchase in the local industries. Another 18 million dollars will be converted to European currencies, for expenditure in Europe.

Reserve-Duty Savings

In 1985 an agreement was made for saving in reserve duty days. The increase in the number of conscript soldiers and the steps for increased efficiency carried out by the establishment, led to a reduction of over 50% in the number of reserve duty days. The amounts saved, over one billion shekels, are transferred to other items in the defense budget.

Foreign Currency Budget

The foreign currency budget constitutes about 25% of the defense budget and serves mainly for equipment, developing weapons and funding Ministry of Defense activities abroad.

Foreign Currency from US Aid

As stated, the defense budget includes $1.8 billion in US military aid. Of this sum about $457 million are earmarked for conversion for expenditure in Israel, about $18 million for expenditure in Europe and $1.325 billion for purchases in the USA.

Unrestricted Foreign Currency

In the 1998 budget year, the defense system will be given a sum of $170 million dollars from domestic sources for expenditure abroad, chiefly for procurements in Europe and for the upkeep of emissaries and attach?s abroad.

Defense Budget Exchange Rates

NIS 3.68 to the dollar - representative rate for conversions in Israel and services abroad.
NIS 4.3056 to the dollar - exchange rate including VAT (17%) for procurements abroad both in foreign currency from aid and in unrestricted foreign currency.

Review of Trends in Foreign Aid

The changes which have occurred since the early 1980's changes have affected the amounts of foreign currency sources available to the Ministry of Defense.
All the aid, since 1985, is in the form of a US government grant (with no loan components).
United States aid has increased to $1.8 billion. In 1996 and 1997, a further grant of 50 million dollars yearly was accorded as aid for war against terror.
The amount approved for conversion to shekels increased from 250 million dollars to 475 million dollars.
There was a decline in the purchasing power of the dollar.
The Defense Ministry has been given a larger cash allocation in foreign exchange.
The form of the military procurement arrangements in the USA has been modified, resulting in higher purchasing power of the foreign currency from aid.
Other Foreign Currency Sources
Interest on advance deposit: Since 1991, the United States aid is deposited in an account in the name of the State of Israel. This cumulative interest income on this account, which is estimated at about 100 million dollars in 1998, is added to the aid. (This sum is included in the revenue-dependent expenditure budget.)
Improved procurement arrangements allow reduction of Ministry of Defense expenditure on purchase of weapons and development and management expenses. In 1998 these savings are estimated at scores of millions of dollars.
Sale of equipment abroad: The Defense Ministry sells equipment purchased with funds from United States aid or the local budget. In 1996, these exports are estimated at $90 million.

Real Sources in the Defense Budget

In addition to the sources specified above, other real resources are available to the Ministry, for instance the conscripts and additional aid from foreign countries.

Additional aid from the USA and Germany

Since the 1991 Gulf War, the Ministry of Defense has received weapons from American army surplus and from Germany - in addition to the defense aid (the aforesaid $1.8 billion dollars). In this framework the IDF received in the years 1991-1995 planes, helicopters, submarines, Patriot batteries, armored personnel carriers, ordnance, and other items worth approximately NIS 8 billion (according to the Ministry of Defense and Pentagon estimates).
This additional aid, in addition to procurements in foreign currency from defense aid funds, allows the Ministry of Defense to do the following:
To save costs in purchase of spare parts. For instance, the dismantling of hundreds of armored personnel carriers and several F15 planes increased the levels of the spare parts inventory and saved budgets earmarked for this purpose.
To strengthen the armed forces by effecting system improvements. For instance, the acquisition of F16 planes makes it possible to take old planes out of service.
To effect savings in project budgets and to transfer the money to other projects (for instance, the acquisition of "Black Hawk" helicopters made it possible to transfer the budget earmarked for them to the procurement of advanced combat aircraft).
It should be noted that the Defense Ministry had to allocate resources for the absorption and routine maintenance of the equipment received.

Conscript Soldiers

In the last decade, as a result of the increase in new recruits and the intensified immigration, the number of conscript soldiers rose considerably. Since the defense budget is a budget framework, with great maneuverability within it, it has been possible to replace expensive manpower (career soldiers, civil IDF employees and reserve soldiers) by less expensive manpower (conscript soldiers). This process frees internal defense budget sources of a cumulative amount of over a billion shekels yearly.
As stated, the defense budget sources are made up of local currency, foreign currency and real resources.
A review of the overall framework of the resources available to the Ministry of Defense points to an increase in their total in the last few years. An analysis of the budget targets over time shows that despite the manpower cutbacks in the regular army and civilian IDF employees, there was a constant increase in the current cost of existence components in general, and in the wage and service condition costs in particular. On the other hand, procurement and equipment allocations decreased, despite earmarked supplements granted for these ends from 1992.
Development of the local currency budget breakdown in the last decade is shown in the following diagram:

Structural Changes in Defense

In recent years several economic agreements were reached between the Finance Ministry and the Defense Ministry, with a view to moderating trends which had appeared through an increase in the procurement and rearmament budgets.
Changes in the Technology and Logistics Division, with a view to increased efficiency, raising of fitness and increase in the level of inventories.
Changes in research and development.
Freeing of frequencies.
Removal of army camps from urban areas.
Indemnification of the Rehabilitation Division for the increase in the number of entitled persons and the price rises in rehabilitation.
Retirement of middle-aged soldiers.
Reductions in manpower costs.
Details of some of the agreements are presented below:

IDF Technology and Logistics Division

Ordnance and spare part inventories have fallen in recent years. A plan has been implemented to rectify this situation and to improve the level of readiness and fitness of the field forces through the following steps:
Increase of operational fitness for military war equipment.
Increased efficiency renovation of the ordnance and spare part inventories.
Increasing the level of economies and non-economic systems.
NIS 263 million will be allotted in a multiannual deployment to this plan, which is designed inter alia to improve economic efficiency and to bring about budgetary savings.
In 1998 about 85 million shekels will be allotted to implementation of this plan.

Freeing of Frequencies

In the past, communications frequencies were not used extensively in the civilian sector, but were used extensively by the IDF for its needs. Following the technological developments of recent years (cellular telephones, etc.) use of the communications frequencies has grown and they have become a "scarce product".
Given the projected expansion of the cellular telephone market and the opening of the local telephone market to competition, the IDF is obliged to free some of the communications frequencies which it uses, and accordingly, a plan for freeing of frequencies for the third cellular operator was formulated. In exchange for freeing of frequencies, the IDF will receive a NIS 249 million budget increase, to be deployed over the years 1997-2002, and earmarked for purchase of advanced alternative communications equipment to be operated in another frequency range. The increase for 1998 is 37 million shekels.
The ministries will continue to work together in order to free additional frequencies for civilian needs.

Indemnification for Cost Increases at the Rehabilitation Division

The budget of the Defense Ministry Rehabilitation Division has grown substantially in recent years due to the increase in the number of entitled persons and the price rises for various rehabilitation expenditures. In the past this increase was absorbed by the Defense Budget. In 1994 the Finance Ministry and the Defense Ministry agreed to indemnify the defense budget for the mounting rehabilitation costs - both for the growth in the number of persons entitled to rehabilitation and for the increased cost of rehabilitation.
This agreement brings a NIS 54 million budgetary increase to the Ministry of Defense in 1998. It should be emphasized that since the agreement was reached in 1995 and until 1998, the Defense Ministry has received a total budgetary increase of approximately 238 million shekels in the budget base. The Ministry also received a NIS 43 million increase in the 1997 budget base for non-recurring compensation (instead of current pensions) to disabled persons with degrees of disability ranging between 10% and 19%.

Financing Retirement of Middle-Aged Career Soldiers

Since career soldiers aged over 30 will almost certainly choose to remain in the army until retirement age, the defense establishment often finds itself with surplus manpower resources.
In order to allow the IDF to effect organizational changes and to increase manpower efficiency, it was agreed to offer increased severance pay to career soldiers aged 32-37, whom the army wishes to discharge. In addition to the organizational advantages, the plan will lead to savings in overheads and in the wage budgets.
The cost of the plan at this stage (for a quota of 300 career soldiers) is estimated at about NIS 97 million. Of this sum about NIS 65 million shekels will be given as a budget increase to the Ministry of Defense.

Regular Army Pensions

The short period of army service combined with the wish to guarantee retirement at the end of the service generate an ever growing budget. In 1997, the State allotted some NIS 2.35 billion to financing of the retirement and pension conditions of career soldiers. In 1986, in comparison, the State allotted about NIS 996 million shekels (in 1998 prices) to this item.
According to the Central Bureau of Statistics estimate, in order to guarantee the pension conditions granted along the present retirement lines in the framework of an external pension fund, about 57% of the regular wage should be set aside (an updated Finance Ministry calculation shows that the required allocation for funding retirement is about 62% of the current wage).
The development of the career soldier pension budget execution is presented below

The trends shown in the above diagram indicate that the pension budget will rise from about NIS 2.25 billion shekels in 1997 to over NIS 4 billion in the long term.
Service in the regular army is short, about 23 years on average, and is based on the assumption of two careers: army for about 20 years and civilian for about 20 years. Payment of the pension continues for an average of about 34 years, in return for a period of work of some 23 years. In comparison, in the other economic sectors, pension payments last about 18 years on average for a period of work of about 35 years.
When skilled manpower is retired at a young age, the duration of execution of the functions in the establishment is extremely short. This means that the system does not fully exploit the resources available to it, but discharges the professional, skilled manpower which it trained before it benefits from all the abilities latent in it.
It is logical to renew the ranks in combat forces, where the service is difficult and the erosion great. However, less than half of the career establishment serves in such units while all the rest serve in professional fields, in which professional experience is extremely important. Their occupations are similar to those practiced in the public sector.
The present pension system does not allow flexibility in manpower management. In order to achieve this flexibility, structural changes are required, primarily transition to a cumulative pension track. In addition to the organizational advantages, such a step will lead within a few years to a more moderate increase in the resources for career army pensions.

Demobilized Soldiers Absorption Fund

The Demobilized Soldiers Absorption Fund for 1998 amounts to NIS 841 million.
The Absorption of Demobilized Soldiers Law, first applied in 1994, prescribes the following benefits for demobilized soldiers and women who have completed national service:
A financial grant at the time of demobilization;
A deposit fund in each soldier's name, usable for tuition, vocational training, purchase or rental of housing, or opening of a business. A demobilized soldier who did not realize the entire personal deposit fund during his period of entitlement will receive, after five years, the entire balance of the money accrued to his credit.
Special assistance for indigent soldiers, usable for vocational training, pre-academic studies, and other support according to criteria determined.
In 1998, the law grants financial rights on the basis of a monthly accrual (according to the number of months of service)as follows:

Demobilization Grant* :
A male soldier will be entitled to about NIS 3,500
A woman soldier will be entitled to about NIS 2,300.

Deposit Fund*:
For soldiers discharged in 1998 the following sums will accrue in the deposit fund:
Men - approximately NIS 13, 400
Women - approximately NIS 8,800.

*Assuming that full entitlement was accrued (male soldiers: 32 months, women soldiers: 21 months).

Details of the Budget Components

The deposit fund budget for 1998, including surpluses, is based on the following assumptions:
Full cumulative realization of the deposit fund by soldiers discharged in 1995.
Cumulative realization of about 85% of the deposit fund by soldiers demobilized in 1996.
Cumulative realization of about 60% of the deposit fund by soldiers demobilized in 1997.
Cumulative realization of about 40% of the deposit fund by soldiers demobilized in 1998.
The estimated balance of liabilities in the deposit fund for 31.12.98 is NIS 775 million.

The Government Defense Industries

The prolonged process of change, which commenced in the world defense industries in the mid-1980's, reached its peak in the early 1990's and is still underway.
These changes, expressed in lessening of demands and increased competitiveness, adversely affected the business results of the companies: from growth until the mid 1980's to cutbacks and decline subsequently.
The main reasons for the crisis are as follows:
Decreased demands in the world for defense products as a result of political and geopolitical changes.
Cutback in the defense budgets earmarked for procurement in the defense industries.
Increased competitiveness: issuing of tenders, changing of the system of contracts (from cost+ to a fixed price) and funding of R&D by suppliers.
The unstable business environment highlighted the need to be able to adjust rapidly to changes in market conditions and in the business cycle.
The crisis of the 1980's in the world defense industries led to far-reaching deployment and changes in the organizational structures of the companies in the branch. The main steps taken in face of the crisis were:
Focusing on the business core.
Increased efficiency and cutback of costs.
Purchases, mergers and a variety of activities.
Reduction in the number of companies in the branch and exploitation of the advantages of size.
These steps were taken as part of the long-term cutback process, with preserving of a critical mass in every item remaining in the business core. In consequence, the major companies in the branch were able to stabilize their business activity and to show profits, and improved equity capital.

The Defense Industries in Israel

Other factors specific to the defense industry crisis in Israel were:
The labor and wage agreements in the defense industries, which are characterized by rigidity, and linkage to the public sector, without relation between the size of the wage and the business results.
Decreased procurement by the Ministry of Defense from the national defense industries.
Duplicate infrastructures: surplus of capital and labor production capacity.
A business and organizational culture which is not suited to a business company.
From the mid-1980's the managements of the companies worked to adjust the production capacity and the number of employees to the level of sales and the market conditions.

The Recovery Plan in the National Defense Industries

The recovery plans formulated in the national defense industries were based on manpower cutbacks. Retirement of surplus workers was effected with granting of improved conditions, and the costs were financed principally by the State.
The local recovery plans carried out in each industry separately, with overall State aid totaling approximately 3 billion dollars (from 1992 to 2000, including 2 billion dollars in direct budgeting) led to partial business stabilization, but did not solve the basic problems of these industries:
Rigid employment structure and labor relations, high wage costs.
Excess capital and labor production capacity, duplicate infrastructures

State Assistance to the Defense Industries, 1992-2000

(Millions of dollars)

GOVERNANCE AND ADMINISTRATION

The group of administrative ministries includes the Office of the Prime Minister and the Ministries of Finance, Internal Security, Justice, Foreign Affairs and Quality of the Environment.
The budget of the administrative ministries is characterized by plentiful manpower and rigidity of the purchase budgets, earmarked mainly for operation of the ministries.

Ministry of Finance

In the framework of the Finance Ministry's annual program of work special emphasis will be placed on increasing efficiency in the tax divisions (the Customs and Value Added Tax Division and the Income Tax and Land Tax Division).
These plans will be based on combining and merging of like functions in order to increase efficiency and reduce expenses. The Ministry will also implement a plan to cut back ministry delegations abroad.
Ministry of Internal Security
In recent years the Ministry for Internal Security budget has increased considerably, partly due to the deployment for implementation of the interim agreements and to the increased activity in internal security matters. In the 1998 year of work, the Ministry will implement a program for transfer of certain jobs which were carried out in the past by policemen to civilian employees. Application of the program will reduce costs and increase efficiency in allocation of the Ministry's budget.

Ministry for Foreign Affairs

With the progress in the political negotiations and the first results of the peace process, Israel was able to establish diplomatic and other ties with countries which in the past did not maintain relations with Israel. 35 new representations have been opened around the world.
Modern transport means and technological progress in communications and computers lay a base for changing the system of Israeli representation abroad. In the 1998 year of work the Ministry will commence execution of plans to merge representations and to go over to regional representation, instead of a larger number of representations with a broad deployment. This will increase efficiency in allocation of funds for representation of Israel abroad.
Ministry of Justice
Recently a multiannual plan for the court system has been applied, in view of the need to cope with the expansion of activity and to improve service. The major manifestation of the plan is physical improvement and construction of new courthouses.
The load on the courts continues to increase. As part of the Ministry's plan of work, emphasis will be placed on institutionalization of alternative processes for clarification of disputes, such as mediation, compromise and arbitration. Institutionalization of such processes will reduce the number of cases filed with the court system, thereby providing better service to the citizen

The Central Bureau of Statistics

The Central Bureau of Statistics is the main body for collection and processing of statistical data. The Bureau will move to modern, permanent premises, and computer systems will be introduced for more efficient and improved systems of work. The transition to collection of data with computerized tools will be examined and regular household surveys will be carried out once yearly.

Ministry of the Environment

The Ministry for the Quality of the Environment will continue to work in 1998 to improve handling of solid waste, and will handle nuisances and pollution deriving from industrial activity. The Ministry will also institutionalize the handling of quality of the environment standards and business licenses.