The PLN 130 billion dillemma

On one hand, experts are saying that it is not enough and we need to be spending more. On the other, so far Poland has only spent a portion of the funds earmarked for this objective

By Jacek Ciesnowski

When, a few years ago, the Polish government announced the new army modernization plan worth PLN 130 billion, arms producers worldwide immediately saw dollar signs. With recent geopolitical changes in the region, the need to increase spending is socially accepted and justified. According to a recent survey by the Boston Consulting Group, 24 percent of Poles feel that conventional war is a valid threat, while 26 percent are afraid of hybrid war. Only 27 percent of respondents think that Poland is prepared for military conflict.

In such an environment it’s a big surprise that Poland is lagging behind when it comes to actual spending. The biggest tender to date, for helicopters, even though it was decided in 2015, is still being negotiated and looks like the tender process will be issued again.

Still, many, including the current leadership, have called for an even bigger increase in spending and are labeling the current plan as insufficient and chaotic. “We combined all the different plans together, for choppers, tanks, missile defense system and others. We added up the figures and the result was PLN 130 billion,” said Krzysztof Krystowski, the President of the Board and the Managing Director of PZL-Świdnik.

Too many cooks

Despite all of that, the Polish Army can’t even spend all the funds they currently have. In the first three years of the current modernization plan, only 70 percent of the earmarked budget was allocated. And that’s only providing that the expenses for 2016 are fully covered.

The reasons for such a delay are multiple. First and foremost it’s bureaucracy and a lack of manpower. “The French Agency responsible for buying military equipment has 1,500 workers, the Polish one has only 400,” said Wojciech Pawłuszko, an expert from the Lesław A. Paga Foundation. The same conclusions were presented in the recent report “Strategy of the Polish defense industry,” compiled by the National Centre for Strategic Studies. “The number of administrative organs involved in acquiring military equipment makes managing and coordination very difficult,” the report read, mentioning a staggering 15 bodies that can be involved in the process. On top of that, the whole process takes ages, each step of the tender procedure can take up to 18 months according to Polish law and with the seat of the minister of defense changing hands every 18 months on average, the delays can be even longer.

Another fault of the system is the lack of a coherent, well-thought out plan on what the army actually needs. Very often the description of the equipment in the tender looks like a patchwork of ideas from different departments, often impossible to fulfill. “I understand that the army might have different needs when it comes to equipment. They can write it down in the tender process, but you can’t order producers to include every single thing in the finished product. We have to prioritize and the army should choose a producer which can implement most of the things. Sometimes it’s impossible to have everything,” said Krystowski.

Past burdens

While many things have changed in Poland since the fall of communism, the defense sector is still dragging its feet. Until 1989 Poland mass produced various military equipment, mostly based on Soviet Union licenses. The bulk of production was sold to other member states of the Warsaw Pact. In 1987 there were as many as 250,000 people employed in the sector. The restructurization process continues to this day. Currently, the biggest state-owned defense group Polska Grupa Zbrojeniowa (PGZ) encompasses 64 companies with 20,000 employees, which seems too big for such small demand.

Innovate and create

The sector is one of the last few that still remains in Polish hands, whether state or privately owned. It also allows for some state protectionism and security against foreign takeover. This all makes it a perfect candidate to boost the whole economy. Unfortunately one key component is missing – technology. Only 2 percent of R&D military projects are implemented. There’s a lack of funds earmarked for investment in innovative technologies, and there is no long-term cooperation with universities. On top of that there is significant bureaucracy involved which hampers R&D. The process from concept to execution in this sector takes years. This deters many investors from entering the industry and keeps spending on R&D below 1 percent of GDP.

All of this marginalizes Polish companies. Even though they receive preferential treatment in tenders, they don’t even participate in them, because there are no Polish-made planes, tanks or submarines.

The answer to this might be offset (arrangements in which the seller of a product or service agrees to buy products or services from its client as an inducement). But with limited innovations, it’s often difficult for Polish companies to bring anything else to the table but servicing, refurbishing or assembling services. Transfer of technology, as part of the offset agreement, will be hard to enforce, making such agreements more of a marketing tool rather than a crucial boost to the military sector.

After the fall of communism, the country was left with huge production facilities, but no products and markets for them, as all countries in the Eastern bloc wanted to obtain more modern weapons from the West. After Poland joined NATO, the Polish Army had no other choice but to replace outdated Soviet equipment with that which met Alliance standards.

This is a unique point in Polish history, Warsaw has money, ambitious plans and high demand. Now it’s time to reform the aspects that stand in the way, and the road to modernization can become an open highway.