The aviation industry's share in the cumulative loss of ImageSat, the operator of the Eros satellite - 36.7 million dollars * The response of the aviation industry: It is natural that in an innovative field such as the satellite photography sales market, the forecasts on which the business plan was based, even though they were prepared in a thorough and thorough manner, were only partially realized
Israel Aerospace Industries Ltd. (IAI) has gained experience and skills in the development and production of observation satellites for military purposes for the IDF. Following this experience, in 1997 the Board of Directors of the IAA decided to establish the project "EROS - Earth Remote Observation Satellite" (hereafter - the project) to sell observation services from civilian satellites to the world market through the WIS company, which changed its name in 2000 to ISI ( Hereafter - the company). At that time, the majority of the company's shares were held by private entities and a minority by the IAA. The goals of the project were to develop the market for observation satellites, and especially the civilian market, to expand the product portfolio, to increase the sales and profit of the IAA, and to maintain a critical mass of work in the field. According to the ITA documents, until December 31.12.04, 36.7, the ITA recorded a cumulative loss in its books for its share of the company's losses amounting to approximately XNUMX million dollars.
In the period between July 2003 and May 2004, the State Comptroller's Office examined the plans of the ITA for entering the civilian observation satellite market, its plans for financing and marketing the project as presented to the ITA board of directors during the years 1997-2004, and the updates and changes as presented in relation to the original ITA plans. In addition, the State Comptroller's Office examined the interrelationships, which emerged over the years of the project's existence, between it and the space programs of the Ministry of Defense (hereinafter - the Ministry of Defense).
The State Audit Committee of the Knesset, in consultation with the State Comptroller, decided not to place this chapter in its entirety on the Knesset's table, and to publish only the main points of the summary and the main points of its summary, in order to maintain the security of the state and to prevent damage to its international trade relations, in accordance with section 17 to the State Comptroller's Law, 1958 [combined version].
Below are the main deficiencies as they appear in the State Comptroller's report:
* The IAA's plans for the sale to civilian parties of observation satellites and satellite observation services were partial and insufficiently substantiated in terms of the nature of the data and the plausibility of the assumptions on which they were based. All this in a market where TEA had no previous experience.
* The ITA management did not take into account the ability of the main strategic partner, which it attached to the realization of the project, to meet its financial obligations, and did not present to the ITA board of directors a due diligence of the partner conducted by an external consulting company.
* The recommendation of the Chairman of the Finance Committee of the ITA from January 1997, that it would deal with the production of the satellite and its launch only (as opposed to its marketing and operation), was not examined and was not presented to the ITA Board of Directors.
* The decisions of the board of directors from February 1997 and October 1998 to realize the project were made based on data presented by the TA management to the board, without checking the sources of capital raising for the overall plan, and the ability of the partner in the project to invest in equity and owner loans. Among other things, the TAA management did not present a comprehensive business plan, including the means to implement it.
* Although the management of the IAEA did not submit to the board of directors a request for credit for the production of a more advanced satellite - "Eros B", as required, the management of the IAEA gave credit to the company without the approval of the board of directors. By the end of the audit, the credit amounted to approximately 39.1 million dollars.
* The business plan that was presented to the ITA Board of Directors in May 2001, after the launch of "Eros A", included a central marketing assumption, regarding two long-term contracts, which was too optimistic. The ITA management presented for the approval of the Board of Directors frequent changes in the scope of the plan, without analyzing the original assumptions and the data that led to previous decisions, and without reasoning why from the ITA's point of view it is worthwhile to continue to promote the business plan, in view of the changes that have been decided on from time to time.
According to the auditor, when the difficulties arose in financing the project, the ITA management demanded from the ITA board of directors to make decisions not necessarily for economic considerations and without presenting him with a practical alternative, but in view of the ITA's contractual obligations towards the company which was at the same time a client of the ITA and also a company held by her hands. This, without the management of the TAA bringing before the board of directors in an orderly and complete manner and with a comprehensive view the situation and the indication of the worsening trend in the conditions for the TAA. From time to time, representatives of her client (the company's CEO and the chairman of the company's board of directors, who also serves as the CEO of the IAA) appeared before the board of directors at its meetings, an unusual thing in itself, and fed him information without reference. The things must also be seen against the background of the fact that the IA is at the same time both the supplier and the holder of the client's shares.
The TAA's decisions to enter the civilian observation satellite market were based on business plans, which did not take into account the limited marketing capabilities of the company it founded together with other entrepreneurs from the field of observation satellites.
The situation in which high-ranking officials in TEA hold high-ranking positions in the company carries with it the inherent problem of fear of a conflict of interest, which cannot be overcome in the established arrangement and deal with its consequences.
The TAA did not conduct a calculation to evaluate the value of the knowledge for which it received shares in the company.
The chairman of the company, who is the CEO of the IAA, presented to the finance committee a situation of no return regarding the company, while representing, according to his testimony, the interests of the company, even though he is committed, at the same time, to the interests of Shani the bodies. This is an example of the conflict of interest in which the CEO of the IAA is subject to in his position as chairman of the company's board of directors, a conflict of interest inherent in the multiplication of his duties.
Moshebat did not establish standards for anchoring its property rights in relation to the knowledge and resources it accumulates within the framework of the contracts with the TEA to carry out defense projects, and allowed the company, the majority of whose shares were held by private entities for most of the years, to enjoy the fruits of the state's resource-rich investment, without receiving a return or Adequate compensation.
The management of the TAA did not present to the TAA board of directors the full detail required regarding the terms of the project's approval, even though it was significant for the success of the project.
The supervision and control of the IAA as the main shareholder of the company was loose, especially in the years 1997-2000.
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The Israel Aerospace Industries Ltd. (IAI) invested approximately 42.3 million dollars in establishing a company with other entrepreneurs, with the goals of the investment being the development of the market for civilian observation satellites, the expansion of the product portfolio and the increase of IIA's sales and profits. In addition to being an investor in the project, the TAA was the executive contractor of the civilian satellites, and for this purpose used the knowledge it had gained from the production of military observation satellites. The TEA's expectations upon its entry into the project to launch a number of satellites were realized by the time the audit ended with the launch of only one satellite, "Eros A", in December 2000. The investment in the conversion program caused TEA losses totaling approximately 36.7 million dollars due to its relative holding in the shares of the company it founded. The operations of the TEA as the manufacturer of the satellite that was launched, contributed to its profits about 4.4 million dollars.
After about eight years of activity, the substantial gap in the realization of the project in relation to the expectations from it resulted from the plans outlined by the TA, which were not based on Dayan - in the analysis of the ability to integrate into the market, the development of the project and the way in which funds can be raised to finance it. The TAA actually failed in recruiting a strategic partner with proven financial capabilities, who would be willing to enter the field and bear the risks involved. In addition, the State Comptroller's Office raised deficiencies concerning the failure to present essential business details to the Board of Directors of the TAA, and the failure to check the feasibility of implementing the plan from time to time as the data presented to the TAA management changed.
The report reveals a number of deficiencies that also came up during a previous audit conducted by the State Comptroller's Office in the field of space regarding the "Amos" project. Among them we can mention: a business plan that was partial and insufficiently based; revenue forecast data that was lacking; and running the project without first agreeing on the sources of funding, its terms and cost - something that resulted in considerable losses.
In view of the findings of the report, the business results of the investment in the venture and the losses from it as an investor, the TAA must draw the necessary lessons from the deficiencies described in the current report, which relate to the strategic and business planning for entering innovative business areas.
The auditor also adds that it is appropriate for the Ministry of Defense to establish standards for anchoring its property rights in relation to the knowledge and resources it accumulates as part of the engagements with the IAA to carry out security projects, and that these standards should also refer to security aspects. Moshebat must outline a policy that regulates the conditions for commercial marketing to the various countries.
IAI's response to the State Comptroller's report on:
The aerospace industry's investment in civilian observation satellites
At the end of the 90s, Israel Aerospace Industries established, together with partners, a company to provide satellite observation services using satellites manufactured in Israel. The company's activities, ISI (ImageSat International) began to generate income starting in 2001, following the launch of the Eros A satellite (EROS A). ISI was established against the background of circumstances that allowed IA and its partners to initiate business moves in order to leverage its capabilities in the field of observation satellites, to sell observation services in the global market.
Since the launch of the satellite, ISI has been providing observation services to a number of clients and generating significant amounts of revenue from this activity. At the same time, five years after the launch of the first satellite, the company is still in the phase of investing in the array of satellites. According to ISI's business plan, the array will include several additional satellites besides the Eros A satellite. The launch of the company's second satellite is planned for early 2006.
Before the decision was made by the ITA to establish the project, ISI's business plan was thoroughly examined. The program was based on an innovative marketing model in a market that was just beginning to develop and is still in its infancy.
It is natural that in an innovative field such as the market for sales of satellite photographs, the predictions on which the business plan was based, even though they were prepared in a thorough and thorough manner, were only partially realized. At the same time, it should be noted that the IAA, together with its partners, located additional investors who invested considerable sums in order to build the company's satellite system, at the same time as the start of providing the service to customers.
The assessment of the ITA and its partners is that in the long term the investments made, and are being made, in ISI will yield a handsome return.
Regarding the auditor's comment about a conflict of interest between the positions of the chairman of ISI and the director general of the ISA:
IAI wishes to clarify that in order to avoid a conflict of interest, the CEO of IAI transferred his powers regarding ISI to the VP, legal advisor of IAI, and the VP of Finance of IAI.
