(C) ISRAEL CONSIDERS WITHDRAWING FROM GOVERNMENT

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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