Thursday, April 7, 2011 will be etched forever in the memories of engineers at Rafael Advanced Defense Systems. That evening Iron Dome successfully withstood its first challenge by intercepting eight of nine Grad rockets fired at Ashkelon from the Gaza Strip. For a moment anxiety gave way to national pride.

The event received broad media coverage, including video clips on the internet. But this was just one milestone in Israel's arming itself against rocket attacks. By 2015 Israel's sky will be the world's costliest for its size in terms of active defenses. This dubious distinction is a result of political and security realities that the country faces, but also stems from a series of strategic decisions with far-reaching economic implications.

Open gallery view A battery of Iron Dome missiles by Sderot. Credit: Eliyahu Herskhowitz

Continued firing from Gaza, Hezbollah arming itself with long-range rockets, and the Iranian threat don't only fuel public anxiety, they also provide the security establishment grist for the mill in battling budget cuts. Fiscal problems have caught the security establishment in a race to develop systems for defending the country's skies.

The cost of developing defenses and integrating them into the Israel Defense Forces is estimated at upwards of NIS 20 billion, with the U.S. footing half the bill.

The defensive umbrella over Israel's skies is composed of four levels: Iron Dome, against short-range threats of four to 70 kilometers; Magic Wand - also called "David's Sling" - currently under development, intended for a range of 70 to 250 kilometers; the Arrow 2 missile defense system - in operational use and deployed in two batteries - addressing threats from a distance of 600 to 1,000 kilometers; and the Arrow 3 system - under development - for the exo-atmospheric interception of longer-range ballistic missiles. In addition there have been Patriot missile batteries deployed in Israel since the 1990s.

Nearly NIS 1 billion has already been invested in developing Iron Dome and deploying its two operational batteries. A special U.S. grant of $205 million was recently awarded for the procurement of four additional batteries. Ultimately the system will include as many as 13 batteries and the project's total cost will exceed $1 billion.

Another NIS 10 billion is being invested in the Arrow 2 project, with continued U.S. support. U.S. investment in Israel's defense systems has risen steadily, from $35 million in the mid-1990s to $200 million annually in recent years. This is in addition to roughly $100 million from the U.S. Defense Department budget.

All this is meant to provide Israel with a missile defense system ready for action. But if Israel needs to make intensive use of these capabilities, the cost of defending its skies will grow much larger - and not just because of the need to replace every missile launched. The cost of a missile ranges from $70,000 for Iron Dome to between $700,000 and $1 million for Magic Wand, and up to between $2.5 million and $3 million for each Arrow 2 missile.

Wars tend to be progressively more expensive. In the next war Israel won't settle for the passive protection afforded by reinforced safe rooms and bomb shelters: The country is expected to bear the cost of expensive home front missiles, which will drive up the war's price tag.

To avoid bankruptcy in the next war, Israel can't ignore economic considerations.

A manifestly uneconomic battle on terror

Israel's war on terror is manifestly uneconomic: Iron Dome launches a $70,000 missile against every $200 Qassam fired. This celestial confrontation between cutting edge technology and a primitive pipe was preceded by hundreds of millions of dollars, invested in development and operational implementation.

"These systems are constantly being developed against the changing threats," says Arie Herzog, head of the Defense Ministry's Homa Missile Defense Agency. "For one thing, human life is most important and doesn't have a price," states Herzog. "The basic economic equation is wrong: The cost of the missile should be compared with the cost of direct and indirect damage that would occur if it reached its target. From this viewpoint it is economically logical."

However, since 2007, when Israel decided to equip itself with the Iron Dome system, there has been controversy over investing billions in protecting Israel's skies. The system inspires a sense of security, but to what extent is it justified, and at what price?

"No system can provide full protection - not Iron Dome, Magic Wand, or any other alternative," explains Yiftah Shapir, a senior research fellow at Tel Aviv University's Institute for National Security Studies (INSS ). "If rockets are shot, some will reach their targets. If you look at it in a military or economic context you'll see it isn't logical to spend a penny on a system like this, but from a political vantage point the money isn't wasted."

"The damage from each rocket isn't great," Shapir claims. "In Sderot, for instance, the physical damage doesn't match the disruption of life and the impact on daily routine. We aren't talking just about Sderot anymore, however, but about larger cities like Be'er Sheva and Ashkelon, and even Rishon Letzion. In this sense a defensive system won't do anything."

The security establishment is criticized for instilling in the public a greater sense of security than it can promise. The Israeli public, especially in areas where the threat draws steadily closer, is convinced the multi-level defense system will protect it. But no security official is rushing to admit that Israel can't afford the luxury of a blanket missile shield.

"To protect Be'er Sheva alone you need to deploy dozens of batteries and, still, life will be disrupted," claims Shapir. "The Grad rocket is cheap and simple, and therefore easy to make and launch on a large scale."

Former security officials counter that the acquisition of defense systems is mainly to provide the political echelon with room to maneuver: It can mean the difference between being dragged into an expensive war and the possibility of minimizing damage, exercising restraint, or reacting in various other ways.

Uzi Rubin, one of the developers of the Arrow program, says Israel's enemies have no fewer than 13,000 warheads capable of hitting the coastal cities, including 1,500 that can target Tel Aviv. He claims the IDF has never completely come to terms with the need to defend against rocket attacks.

Israel received a small taste of the evolving nature of warfare in the Second Lebanon War, when Katyusha rockets rained down on Haifa. Separation between the front line and the home front is a thing of the past.

Home Front Defense Minister Matan Vilnai said in June that the next war will last at least a month and will entail daily barrages by hundreds - even thousands - of missiles with half-ton warheads on the country's center.

Defense by lasers

Brig. Gen. (res. ) Tzvi Shor, a former financial adviser to the Chief of Staff and head of the Defense Ministry's budget division, is president of the Magen Laoref (Home-front Shield ) non-profit organization. He insists that it will be impossible to implement the multi-level defense system in a regional war from an economic viewpoint - as long as it's just based on missiles against missiles. If Israel tries to intercept every projectile launched in its direction it will collapse economically, according to his calculations.

In a letter to the Prime Minister, Shor wrote: "The investment required in planning for 10 days of warfare will reach $27 billion. The cost of a month's warfare will approach $50 billion. These are fantastic sums that have never been allocated and this is the unavoidable breaking point. The implication is that Israel will remain defenseless after several days."

Supporters of the defense system counter by saying defensive zones will be predefined and missiles will be fired selectively, depending on where the incoming weapon is headed. So even if Israel is bombarded with 1,000 rockets a day, the system will launch intercepting missiles at a fraction of these.

But the defense establishment still estimates it will cost tens of millions of dollars a day. This doesn't take into account using other systems against medium- and long-range threats that involve much costlier missiles. Even the defense establishment agrees that economic considerations will need to be taken into account in the next war.

Magen Laoref was founded in 2008 by Dr. Oded Amichai, an expert on laser systems who has worked at Rafael. One of the organization's goals is to promote the introduction of laser missile intercepting systems into the multi-level defense formation, alongside Iron Dome.

Almost five years after Iron Dome was chosen, the organization continues to insist that without laser systems Israel's defensive screen won't adequately protect its citizens.

Laser systems appear to be a cost-effective solution compared with other systems. In a letter sent by Magen Laoref in July to the prime minister and to heads of the defense establishment, the organization claimed the cost of destroying a threat using the U.S. Skyguard laser system would be just $2,000 to $3,000. It claimed that eight laser systems stationed around the Gaza Strip with a $500 million investment would provide surrounding communities with blanket protection.

"The system will intercept the rockets and shells before they leave the Gaza Strip," says Shor. "This means having a protective wall making normal life possible, without Color Red alerts."

Laser defense development began with the United States and Israel signing a cooperative agreement in 1996 following sustained attacks on Kiryat Shmona by volleys of Katyushas. Northrop Grumman led the Nautilus project, which involved Israel Aircraft Industries, Rafael, Elbit Systems, and Tadiran Electronic Systems as subcontractors.

The idea was to produce an operations system to intercept - at the speed of light - every Katyusha fired from Lebanon at communities in the Galilee. Israel and the U.S. invested about $400 million in the initiative. Between 2001 and 2004 there were 46 trials for shooting down various sorts of rockets and mortar shells in White Sands, New Mexico. The trials registered complete success.

"The range was up to five kilometers and Nautilus worked right from the outset," says Yossi Arazi, who served until 2007 as Northrop Grumman's representative in Israel. "The Americans received money to plan the next step - an improved system with a 10 kilometer range with an airborne version - on the basis of this system."

The laser beam zeros in on the warhead, pierces it, and blows it up in the air. It takes just one second to reload for the next shot.

In 2004, before trials were performed on the Skyguard system, the defense establishment decided to quit the project and stop funding its development. Following this, the Americans decided to freeze the project and wait for the maturation of a new laser technology based on crystals known as solid-state laser, which was hailed as the weapon of the future. Solid-state laser is in its formative development stages and faces as yet unsolved physical challenges.

The people at Magen Laoref, for their part, think the Skyguard system would provide a complementary solution to Iron Dome, whose capabilities are limited, at a much lower economic cost.

Grossly underestimated costs

In the Second Lebanon War 56 people were killed; 44 by Grad rockets. "After 44 deaths [finding defensive solutions] couldn't be avoided anymore," says Uzi Rubin.

In early 2007, then Defense Minister Amir Peretz appointed the deputy director of the Defense Ministry's Administration for the Development of Weapons and Technological Infrastructure ("Maf'at" ), Brig. Gen. (res. ) Jacob Nagel, to head a committee to examine various anti-ballistic systems. The committee was presented with 14 options for dealing with high-trajectory fire, including the Skyguard system. Iron Dome was chosen, and in April of that year an agreement was signed between Rafael and the Defense Ministry for its development. But the Israel Air Force hadn't yet completely and formally addressed Iron Dome's technical nature and work plan, which was part of the agreement.

"The agreement approved by Maf'at wasn't based on the IAF's operational specifications," the State Comptroller subsequently wrote, adding that the lack of coordination between Maf'at and the IAF led to "an underestimate of hundreds of millions of shekels in Iron Dome's costs. Within just eight months the estimate ballooned by 40%."

In January 2007 Northrop Grumman wrote to the director of Maf'at, Brig. Gen. Shmuel Keren, offering three initial Skyguard systems within 18 months for $310 million, followed by additional units for $40 million to $50 million apiece. The offer didn't elicit any response.

'Played for suckers'

Local leaders from the communities surrounding Gaza began to push for laser systems when they realized that Iron Dome wouldn't protect them against shelling.

"For the communities around Gaza who are without a solution, it's like being a bedridden patient while two doctors argue over a cure," says Alon Shuster, head of the Sha'ar Hanegev Regional Council. "We had no way of fully understanding all the considerations, I pressed for public figures to meet with Maf'at and opponents of the system, but they only agreed to one-sided talks. Pinhas Buchris, who was then director-general of the Defense Ministry, said: 'If the laser is accepted I'll resign.' We failed to hold a meeting between the two sides and reached an impasse."

"Despite this behavior," continues Shuster, "I reached the conclusion that I can't presume the Defense Ministry has jurisdiction over the production process and defense industries. I'm not saying that there aren't special interests, but I don't think that a passion for lying or any conspiracy is what motivates this system. We - the leaders of communities neighboring Gaza - petitioned the High Court and were rejected. The feeling overall is that we were played for suckers, at the very least. The Rafael people received permission from the rabbis to work around the clock. But the bottom line is that it doesn't protect us."

Israel invested NIS 1.5 billion so far in passive protection for communities around Gaza. According to Rubin, it would be cheaper to invest in missiles instead of laser until solid-state laser technology is developed. He says there are several considerations to take into account: "One is using Israeli technology. We have already been developing anti-missile missles for 20 years, since the Arrow, and are the world leaders. Laser is a foreign technology, and even when Israel was a partner, we were left on the sidelines and not given access to the core information. The Americans suspect us of stealing their technology. We still don't know what a Patriot missile looks like inside its crate - when repairs are needed, the missile is sent to them in a closed container. Therefore, in some cases there is a political stipulation that development, upon which future improvements can be made, should be Israeli. Another consideration is export potential: There are many IDF weapons systems funded by the profits of our companies from exports."

Brig. Gen. (res. ) Uzi Eilam, who served as head of the Israel Atomic Energy Commission in the Prime Minister's Office and as the director of Maf'at until 1997, says Iron Dome, despite its success so far, still hasn't fully proven itself and is still being integrated. "The politicians say everything is alright, but a weapons system requires operational testing. And from my experience, there isn't a system that doesn't require improvements, manpower training, and increasing the number of batteries," he explains. "Three batteries aren't enough. When there are enough batteries they can be concentrated in places where action is expected and provide balance."

Eilam says Israel was mistaken for a long time in not treating Qassams as a problem that requires a solution. "There is constant debate over which systems to develop - and at what price," he notes. "All in all, there wasn't any solution quite like Iron Dome or Magic Wand, and the Americans admire both. They also adopted some of the Arrow's technology for a system they're developing. We've attained better results for a tenth of the money they invested, if you look at it from an economic perspective."

Meanwhile, expenses for protecting the home front, through both passive and active means, continue rising. Everyone hopes we won't need these defensive systems. But if heaven forbid they need to stand the test of a regional war, then Israel will have its answer for how effective they are in relation to their cost. A senior official in the defense industry says, "Israeli systems are advanced and at the cutting edge of technology, but I have no doubt that, in case of war, the defense establishment is counting on U.S. assistance for additional missile systems."