Friday, Spetember 28, 2001

Marketing arm

In an unprecedented move, Rafael, the Armament Development Authority, has turned over its Indian marketing effort to a private firm. Ha'aretz wonders why a public body would be ready to forgo large commissions in favor of a former employee
By Yossi Melman
David Kolitz
(Photo:  )

In a rather puzzling move, Rafael, the Armament Development Authority, has permitted arms merchant David Kolitz and the companies of his Elul Group to earn tens of millions of shekels in recent years in transactions with India. Rafael has fired hundreds of workers in the past few years, has been in dire straits, recorded heavy losses and needed the injection of government funds. It might have been expected that the company would be ultra-careful about spending public money, not least because it is a government company, like any other unit of the Defense Ministry.

At the heart of the affair is Yisrael Yaniv, who until a few years ago worked for Rafael and is now Kolitz's partner in arms deals. Until 1995, Yaniv was employed in Rafael's marketing department, which is divided according to regional desks that try to sell the company's products within their geographical areas of responsibility. Yaniv was on the Southeast Asia desk, which includes India; India established full diplomatic ties with Israel in 1994, in the wake of the Oslo agreement.

India was a coveted target for Israeli defense exports. All the military industries - governmental, public and private - launched aggressive marketing campaigns for their products. The Israeli companies appointed agents in India and enjoyed the support and assistance of the Defense Ministry's exports unit (known as Sibat) as well as the reputation of the Israel Defense Forces. Within a few years, India (together with Turkey, China and Romania) became important markets for Israeli defense exports. The contracts that have been signed in the past few years total more than $1 billion and include the sale of radar ("Green Pine"), Barak sea-to-sea-missiles, navigation equipment for aircraft, RPVs (remotely piloted vehicles) and more.

At the time this marketing campaign was launched, Yaniv took a year's sabbatical leave and joined Kolitz's Elul Technologies company. Rafael decided not to appoint a replacement for him. Instead, the director general at the time, Giora Shalgi, and the head of marketing, Lova Drori, decided that Yaniv would continue to deal with the India market from his new place of employment. This was an unprecedented decision. Yaniv extended his sabbatical for another year and then asked for and received permission to absent himself from his desk for two more years, during which he was described as being on "leave without pay." Throughout this period, he continued to market Rafael products in India via Elul. In October 1998, he resigned from Rafael, received his full compensation package, and joined Elul.

Yaniv was appointed the CEO of a new company that was established by Elul, Elul Asia, with responsibility for marketing and sales in India, and together with Kolitz was one of the new company's shareholders. According to the Registrar of Companies, Yaniv holds 20 percent of the shares through a company called Yisraniv Asia Investments, while Elul Technologies holds the remainder.

In other words, the top executives of Rafael "privatized" the company's marketing system and awarded it to Kolitz and Yaniv. Calls to Rafael and the Defense Ministry to get an explanation for this decision were not answered. No reply was received to the question of whether Rafael issued a tender to privatize the India market, and why it was decided to award the market to David Kolitz and Elul.

Since then, according to foreign reports, Rafael has concluded two major deals with India. One was for the sale of an aircraft navigation system worth about $100 million, the other for the sale of the Barak sea-to-sea missile, in conjunction with Israel Aircraft Industries (IAI). Rafael's share in the transaction is about $70 million. Elul received a handsome commission for its marketing work, though neither Rafael nor the Defense Ministry is ready to say exactly how handsome. At the same time, a senior source in the Defense Ministry confirmed that the commission totals between 3 and 5 percent of the value of the deal - so that Elul probably earned NIS 20 million to NIS 30 million.

After it received the India market, Elul decided to break off its ties with Rafael's regular agent in India, and appoint a new agent in his place. Recently, after the ousted agent learned how much the latest deals were worth, he demanded that the Defense Ministry pay him the commission he claimed was coming to him. The ministry's legal advisers referred the matter to the attorney general, Elyakim Rubinstein. Those who are familiar with the affair say that the claim of the Indian agent may rest on solid ground and that the ministry may well try to reach a compromise agreement with him. If so, another considerable sum will be paid out, because of the decision to change agents.

Rafael's ties with Kolitz and Yaniv has generated a furor among some of the senior officials in the Defense Ministry. They found it difficult to understand why Rafael decided to stop marketing its products in India by itself, even though it still does so in other countries, and why the territory was awarded to Elul, of all firms. They viewed the move as tantamount to granting Elul a license to make money without any effort. That is because Israel's arms sales are the result of decisions by the two governments involved, and their defense establishments, to cooperate and create a kind of strategic alliance between them.

"Rafael could have continued to be responsible for marketing in India, too, just as it is in many other countries," says a senior official in the Defense Ministry. "Neither I nor some of my colleagues understood the decision then and we understand it even less today." These senior officials tried to interest the Defense Ministry's battery of legal advisers, headed by Zvia Gross, in the affair, as well as top officials in the unit that is in charge of security in the defense establishment, which is also responsible for ethical practices. The senior officials do not understand why Yehiel Horev, who heads the security unit, failed to launch an investigation into the matter.

Horev said in private conversations that he was not aware of Rafael's decision and that he did in fact find it "unusual." As a result, he has now decided to look into the affair.

Joseph Ravkaie, Elul Group vice president for marketing and technologies, confirmed that "The company has had a commercial agreement with Rafael for five or six years." As for the commission received by Elul from each of Rafael's transactions in India, he said: "It's not 5 percent, but I won't tell you the exact figures and I won't elaborate on the subject."

David Kolitz did not respond to calls from Ha'aretz.

Yisrael Yaniv stated: "Regarding Rafael's considerations, you have to ask them. I can only suppose that Rafael made a good deal. When we started to work, the India market was virgin territory for Rafael. When I started to deal with India, Rafael had zero sales there. Nowadays Rafael is selling there very well. On top of which, their connection with us doesn't cost them money. When there is a deal, the client pays for it and that includes our commission, too." (Yaniv apparently means that Rafael and Elul roll the payment of the commission onto the Indian authorities, which of course is liable to up the price and adversely affect Rafael's chances.)

In reply to the question of whether it was accepted practice for an employee of the defense establishment to work for a private company - and in the same sphere, Yaniv said: "When I left Rafael, I didn't engage in marketing [in] India." He declined to say why it was decided to replace the agent in India, saying: "I am not responsible for appointing and dismissing agents."

The head of marketing at Rafael, Lova Drori, did not respond to calls from Ha'aretz, nor did the company's management. The Defense Ministry, through its spokesman, replied to 10 questions in three sentences: "Rafael draws on the help of Elul Asia in obtaining marketing authorizations in the world, as it draws on the help of other companies. That activity is carried out after all the required authorizations are received from all the relevant bodies in the Defense Ministry. All of Rafael's activity and any connection between Rafael and other companies is under the supervision and scrutiny of the Defense Ministry and the State Comptroller."

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