MoD offset novelties and what it is all about

PUBLISHED AT: Monday, 27 October 2014, 14:25
Jarosław Kruk

Almost two weeks ago, the Polish Armaments Group organised a seminar entitled Offset as a way of safeguarding the vital security interests of the State, during which I had the pleasure of sharing a few observations about practical issues underlying offset deals for the Polish arms industry.

The most notable, however, was the talk given by General Butlak, who spoke about the actions the Ministry of Defence (MoD) is currently taking in connection with the offset deals related to "Wisła" - a programme of developing a medium-range air and missile defence system. Meticulously prepared, General Butlak's lecture left no doubt that he is willing to cooperate with the industry and is taking the bids of the national producers very seriously. It seemed as though the Ministry's preparations were at an advanced stage and the cooperation with home industry was bound to be fruitful. Most of the seminar's participants emphasised that the offset opportunities arising (mainly) from the "Wisła" programme (and also a few others) are the domestic industry's last chance of survival, following the successful overhaul. Scuppering this chance would be the last nail in the coffin of our defence industry.

The question remains as to whether General Butlak can succeed. Some of the circumstances suggest that he may not. A week ago, on Tuesday, I took part in the Polish-American defence forum. Politically, it was spot-on; among the speakers were Czesław Mroczek and Steven Mull, the US ambassador to Poland. What surprised me, however, was that the forum was organised not by the Embassy - as is customary - but by the MoD. From the opinions voiced during the forum as well as in private conversations I inferred that Raytheon is absolutely confident of winning the "Wisła" tender. The official discussions focused exclusively on potential cooperation within the framework of the "Narew" programme (short-range air defence), as if the winning bid for "Wisła" had been announced and no further discussion was necessary. One thing seems clear, though: Raytheon maintains a 'brash' attitude vis-a-vis the national industry. Most of the latter's representatives believe that the letters of intent signed by the Americans are pure courtesy. Unfortunately, I'm afraid, the MoD is doing a lot to foster Raytheon's belief in their absolute superiority. The political pressure in favour of this producer is enormous. Officially, Raytheon's plans include reinvesting 50 percent of the contract's value back in Poland. This is humbug which the media were quick to pick up. In reality, Raytheon is not promising to reinvest 50 percent of the bid value as offset, but rather to subcontract 50 percent of the order to Polish companies. No ones has so far specified whether what is being meant is 50 percent of the order's value or maybe 50 percent of the sum total of man-hours. It is obvious that a 1000 man-hours spent building a missile abroad is not equal to a 1000 spent in Poland carrying boxes and putting together Jelcz chassis. My informants at Raytheon's headquarters maintain that in the first 7 years of the programme the company is planning to invest in the Polish industry no more than 3-5 percent of the contract's value, which may rise to about 20-25 percent in subsequent years. Could this be true? Well, given the MoD de facto indicating the preferred supplier, it leaves the 'winner' with no motivation to offer the home industry anything but the bare minimum (and, frankly, any negotiations handbook would teach you that!). Another potential supplier, MBDA/Thales, has (through the highest political channels) offered to produce some of the substantial elements of the system in Poland. What has not been guaranteed, however, is access to source codes, and this despite the French ambassador indicating that no "black boxes" would be installed in the supplied product. This remark notwithstanding, it is far easier to negotiate access to source codes from the position of producer. Among the industry's representatives the French bid has ranked highest, with MEADS and Raytheon outdistanced by a mile. It's worth emphasising that from the legal point of view the recommendation of the Armaments Inspectorate's is not binding. (In parenthesis, I can't help the feeling that the forum was orchestrated from the back seat by the otherwise highly likeable .... ....... .)

Given the circumstances, I'm not an optimist. It seems that the Polish arms industry will end up in shatters, unless the top MoD decision-makers realise that to spend more than a dozen billion zloty without safeguarding a reasonable return in foreign investment in Poland's defence potential would be tantamount to squandering the taxpayers' money.

I once heard a wise man say that, as far as purchasing of arms is concerned, the following hierarchy of scenarios applies (beginning with the most beneficial):

  1. Polish technology, Polish ownership, Polish product, and Polish jobs;
  2. foreign technology, Polish ownership, Polish product, and Polish jobs (vide: Rosomak/Patria);
  3. ...
  4. foreign technology, foreign ownership, but the product produced at home; Polish jobs, and often Polish subassemblies (e.g. Sikorsky in Mielec)
  5. ...
  6. ...
  7. foreign technology, foreign ownership, no possibility of modernisation, and no Polish jobs (e.g the F-16s)

I regret to say that, but I'm afraid that the purchase of the air defence units will enact the worst-case scenario. Based on previous customer experience, the product's maintenance costs will be very high, leaving us with the question: can we afford it whilst countries much wealthier than ours are abandoning this costly technology?

All of my fears seem only to be confirmed by an ongoing review of the research projects initiated on behalf of the MoD. Carried out by General Gocuł and on Mr Siemoniak's initiative, the review seems to be designed so as to gather evidence in support of the thesis: the Polish industry is not capable of producing equipment which would satisfy the needs of the Armed Forces. This, in turn, is allegedly supposed to help push through some 'easy' purchases (first and foremost within the framework of "Wisła"). Like a true soldier, General Gocuł would like to buy 'horses' for the army, but seems not to be cognizant of the fact that even horses need to be taken care of properly (fed, groomed, inseminated, etc.), so that their numbers may be sustained. From the legal perspective, it is worth remembering that if the review reveals that the money has indeed been spent ineffectively, we may reasonably expect criminal charges to be filed under Articles 231 and 296 of the Criminal Code (inter alia). After all, our brave prosecutors have a lot of experience in pursuing similar cases (lack of supervision and squandering subsidies money). But here, we are best to pause and consider who gave the money for the research in the first place, and who was supposed to supervise it.

Jarosław Kruk
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