Israel is preparing to sell stakes in some of its largest state-owned weapons manufacturers as it looks for ways to plug a widening fiscal gap caused by two years of sustained conflict. Senior government officials say the move is driven by the sharp rise in defence expenditure since the Hamas-led attacks of October 7, 2023, which forced Israel into multi-front military operations across the region.
Yali Rothenberg, the finance ministry’s accountant general, confirmed that preparatory work is already under way to partially privatise Israel Aerospace Industries (IAI), one of the country’s flagship defence firms and a key producer of missiles, drones, and the Arrow air defence system.
Which Defence Giants Are on the Chopping Block?
Beyond IAI, the government is also examining the feasibility of privatising Rafael Advanced Defense Systems, the state-owned company behind Iron Dome and David’s Sling. However, officials cautioned that Rafael’s status presents greater political, legal, and security sensitivities.
Rothenberg said the government was weighing
“partial privatisation of certain defence-related assets”
to meet what he described as
“the additional resources required for defence.”
Gil Pinchas, who spoke to the Financial Times shortly before stepping down as chief financial adviser to the Israeli military and defence ministry, echoed the assessment but warned that Rafael would be far harder to open up to private investors.
How Severe Is the Financial Strain from the War?
The scale of Israel’s war-related spending has been immense. The finance ministry estimates the direct security cost of the conflict at $62bn over two years, a figure that excludes broader economic damage such as lost productivity, investor uncertainty, and declining growth.
Israel’s defence budget surged to 8.3 per cent of GDP in 2024—double its level just two years earlier—as the country engaged in military operations on at least seven fronts, including Gaza, Lebanon, Syria, and Iran. During the same period, the United States provided at least $21.7bn in military assistance, according to the Quincy Institute for Responsible Statecraft.
Will Defence Spending Actually Come Down?
With US-backed ceasefires now in place in Gaza and other theatres, Israel expects defence spending to ease. Rothenberg said the budget is forecast to fall to about 5 per cent of GDP in 2025—roughly $35bn—and remain at that elevated level for the medium term.
Even with this decline, the legacy of war spending has already left its mark. Economic growth slowed sharply in 2024, while the budget deficit widened to 6.8 per cent of GDP, intensifying pressure on public finances and fuelling debates over how the defence establishment should contribute to fiscal recovery.
How Much of IAI Could Be Sold—and When?
According to Rothenberg, the government’s “working assumption” is the sale of a 25 per cent stake in IAI, with the possibility of increasing that to as much as 49 per cent depending on cabinet decisions. Pinchas separately estimated the initial sale at between 20 and 25 per cent, predicting it could take place “within a year or two.”
While it is too early to assign a formal valuation, Rothenberg pointed to IAI’s nearly $30bn order book as an indicator of the company’s scale and market appeal.
Why Are Defence Firms Suddenly So Profitable?
Israel’s defence companies have enjoyed record financial performance amid the conflict. IAI reported $6.1bn in sales in 2024 and net income of roughly $493mn—up 55 per cent from the previous year. Rafael saw similar gains, with revenue rising more than 25 per cent to $4.8bn and net profit jumping 64 per cent to $257mn.
Israel’s defence exports reached a record $14.8bn in 2024, even as the country faced mounting international criticism over its conduct of the war in Gaza.
What Makes Rafael More Difficult to Privatise?
Unlike IAI, Rafael’s flagship systems carry unique political and strategic sensitivities. Iron Dome, developed with US funding and technical support, has never been sold to third countries despite repeated international interest. Any move to dilute state control over Rafael could raise concerns about technology transfer, export controls, and Israel’s strategic autonomy.
Pinchas stressed that these factors make Rafael “a much more complicated case” for privatisation than IAI.
Can Asset Sales Ease Tensions Between Ministries?
Proceeds from an IAI stake sale would help both state finances and reinvestment into the company, Pinchas said. But the move also reflects longstanding friction between Israel’s finance ministry and defence establishment over budgets and spending priorities.
Beyond privatisation, the government is exploring other ways to monetise defence assets. Rothenberg confirmed discussions about relocating major military facilities—such as the Kirya headquarters in central Tel Aviv—to lower-cost areas, potentially unlocking valuable real estate in some of the country’s most expensive districts.
Is This a One-Off Fix or a Long-Term Shift?
Rothenberg said such measures are intended to offset the “long-term fiscal and financial implications” of heightened defence spending. Yet the scale of the war’s economic impact suggests privatisation alone may not resolve Israel’s structural budget pressures.
As defence spending remains historically high and geopolitical risks persist, Israel’s turn to selling stakes in its arms industry raises deeper questions about how the costs of prolonged conflict are being redistributed—and how much of the defence sector the state is ultimately willing to let go.
