Funding Problems Delay Israeli-German Sub Deal

2005-02-08

Barbara Opall-Rome

Defense News, 17 Jan 05

www.ussvi.org/webmastr/2005/Sonar-05-002.htm

Hopes here that Israel's Ministry of Defense soon would sign a contract for the acquisition of two new Dolphin submarines from Germany have proved premature, due to snags associated with financing of the estimated $700 million deal.

In Dec. 10 editions of In the Camp, the Israeli military's official weekly newspaper, Vice Adm. David Ben-Bashat, commander of the Israel Navy, was quoted as saying that Israel would sign a contract to acquire two additional Dolphin submarines by spring 2005.

Speaking at an Israel Navy Association event, Ben-Bashat was quoted as saying, "Next year [2005], a great window of opportunity will open with regard to the political situation with Germany and Europe. I hope then we will sign a contract with the Germans that will enable the induction of the two additional submarines to the Navy."

However, Israeli and German sources said they did not anticipate the near-term conclusion of any agreement, due to delicate and protracted financing arrangements under discussion between the two governments. In interviews here, Israeli government officials said they are working with their German counterparts on a possible financing package that does not involve grants or direct subsidies from Berlin - as initially requested by Israel - but could involve some type of German government-backed loans.

"We're working on a potential solution, but we don't anticipate closure on this complicated issue in the near term," an Israeli defense official said Jan. 13.

Cmdr. Rainer Kumpel, spokesman for naval affairs at Germany's Federal Ministry of Defence, said Germany's Ministry of Economics was taking the lead in German government discussions with Israel on the submarine purchase program. Officials at Germany's Ministry of Economics declined to provide details of the prospective financing package.

The German government of then-Chancellor Helmut Kohl provided nonrefundable grant financing for the construction of two of the three vessels in Israel's Dolphin diesel-powered submarine fleet, while costs for the third vessel were shared by the two countries. The German decision to underwrite the lion's share of Israel's Dolphin program stemmed from the 1991 Gulf War, when Israel's population faced the risk of chemical attack from Iraqi Scud missiles thought to be equipped with warheads developed, in part, by German firms.

Shortly after the Israel Navy declared all three submarines operational in October 2001, Israel's Ministry of Defense began exploratory discussions with Berlin for an additional two vessels. And while Israeli purchase plans initially were based on expectations of receiving additional government grants from Germany, Berlin made it clear that it would not underwrite further transactions. That message was formalized during a mid-2004 visit to Israel, when German Defense Minister Peter Struck informed Israeli Defense Minister Shaul Mofaz that Berlin would favorably consider the sale of the additional vessels, but only as a direct economic transaction.

Source: IMRA – Independent Media Review and Analysis