Polish Ministry of National Defence did not make use of PLN 10 billion. Most of payment for the F-16 is to take place in 2015

15 września 2014, 11:27

Taking into account the context of the Ukrainian crisis the Polish authorities decided to raise the defence budget up to the level of 2% of GDP. What is more, additional PLN 5 billion is to be used to pay for the F-16 jet fighters. It turns out though, that no budgetary funds were used to pay for the F-16 fighters throughout the last few years. The share of the defence spending in the GDP within the period of 2008 – 2013 was significantly lower than in the period of 2002 – 2007. If the Polish MoD used all the funds in accordance with the rule of using 1.95% of GDP to create the defence budget,  the defence expenditures in the recent years might have been increased by over 10 billion zlotys.

In the light of the Ukrainian crisis the Polish authorities decided to increase the defence spendings from 1.95% up to 2% of GDP in 2016. Next year over 5 billion zlotys are going to be used in order to pay for the F-16 jet fighters. We decided that we are going to clarify the shape financing of the F-16 looks like. At the same time, we are going to check whether the 1.95% GDP plan has been realized, in line with an Act on modernization and enhancement of capability of the Polish Armed Forces.

F-16 – Most of it has been financed after 2010

According to the information obtained from the Polish Ministry of Finance, total cost of financing the multi-role fighter jet programme was a bit higher than 3.25 USD billion. The programme used 3 sources of financing: deferred payments (so called B vouchers), in case of which the payment deadline is in 2015 (USD 1 833.8 million),  USA Foreign Military Financing loan (FMF – USD 1 337.8 million) and by issue of bonds (USD 81.81 million) with a maturity date in 2015. Additionally almost a billion zlotys (until the 2nd quarter of 2014) was included in debt servicing costs.

FMF debt has been fully paid before deadline back in 2010. However, the B voucher payments were not executed at all. In practical terms it means that most of the fighter programme cost includes the deferred payments, which are to be realized fully in 2015. You may find a detailed overview of the F-16 payments within the time-frame between 2003 and 2014 in the table below, prepared by the Ministry of Finance:

 

Year

Payment – financing the F-16 acquisition programme

National Budget Expenditures covering the costs of servicing the financing of the F-16 programme (section 78 of the budget – Foreign debts)

 

USD millions 

Execution – USD millions 

Execution – PLN millions

Plan – PLN millions 

2003

124.9

10.8

41.2

80.0

2004

123.5

4.9

17.5

30.0

2005

320.7

9.2

29.8

50.0

2006

438.9

31.4

94.9

143.1

2007

207

77.5

210.9

353.6

2008

79.6

100

246.2

340.5

2009

0

35.9

115.1

115.4

2010

125.1

16.5

50.0

141.5

2011

0

25.3

78.9

85.9

2012

0

17.3

55.5

118.8

2013

0

8.6

27.5

35.3

2014

0

4.9*

15.0*

53.0

Total

1419.6

342.3

982.5

-


*execution for two quarters of 2014
**Payments financed with FMF loan, total value – USD 1 337.8 million, and with bonds with a total value of USD 81.81 million (these payments are not included in budgetary expenditures).

(Table: Ministry of Finance)

It is worth to remind the readers that in accordance with the Act from June 22. 2001, regarding a long-term programme of “Equipping the Armed Forces of Republic of Poland with multi-role jets” and the conditions of execution of the programme it was assumed that within the period between 2002 and 2010 no more than 0.05% GDP was to be used within the scope of the programme, and in the following years the expenditure was to be set “in accordance with the budget act”.

It should be noted that the modernization Act that was undertaken on May 25. 2001 assumes that no less than 1.95% of GDP shall be allocated to the defence spending each year, excluding the expenditure related to equipping the Armed Forces with multi-role fighters.

That in turn means that within the last decade, in total, within the period of 2002 – 2010, 2% of GDP could have been allocated to the defence budget. Practically – in accordance with the NATO requirements, even though the Polish regulations refer to the GDP from the preceding year, and not to the forecast GDP for the fiscal year described by the act. Within the period of 2011 – 2014 the assumed indicator of defence spending in the GDP did not exceed the value of 1.95 % due to lack of funding of the multi-role jets, while in the years 2011 – 2013 the actual amounts of spending were lower than those assumed in the initial plan.

Decrease of average contribution of defence spending in GDP within the period between 2008 and 2013

In order to have a look at a full image of the Polish defence expenditures within the recent years we decided to collect the information regarding the planned and realized defence spending that are provided for by the requirements of the Act on modernization and enhancement of capabilities of the Armed Forces from May 25 2001 (excluding the multi-role jet fighter programme). The overview is presented in the table below:

Year

Defence spending - planned (PLN thousands )

Defence spending - realized (PLN thousands)

Contribution of the defence spending to GDP (planned)

Contribution of the defence spending to GDP (realized)

2002

14 304 321

14 654 932

1.96 %

2.03%

2003

15 176 600

15 368 365

1.98%

1.99%

2004

16 045 926

16 318 232

2.00%

2.03%

2005

17 239 972

17 615 476

1.95%

1.99%

2006

18 064 279

18 530 358

1.95%

2.00%

2007

20 294 330

21 107 793

1.96%

2.04%

2008

22 681 595

19 769 547

1.96%

1.71%

2009

24 938 550

23 025 378

1.96%

1.81%

2009 – amendment

24 763 322

23 025 378

1.93%

1.81%

2010

25 718 989

25 269 381

1.95%

1.88%

2011

27 536 242

26 720 631

1.95%

1.89%

2012

29 489 956

28 105 131

1.95%

1.84%

2013

31 447 486

28 124 358

1.95%

1.76%

2013 - amendment

28 252 277

28 124 358

1.77%

1.76%

(Data: Ministry of Finance) 

It turned out that within the period of 2002 – 2007 average contribution of the defence spendings in realized GDP of the preceding year was higher than 2% and it was at the level of 2.01%. However, in the period between 2008 and 2013 the GDP contribution was lower, at the level of 1.81 %. That means that the indicator was decreased by ca. 10% within the last 6 years, in comparison with the 2002 – 2007 period.

This data does not take into account the direct spending used to execute the program of equipping the Armed Forces with multi-role jets. In accordance with the overview above, within 2003 – 2008 and in 2010 spending not allocated in the MoD budget were incurred. Additionally these funds increased the defence spending contribution in the Polish GDP overally. That means that the cuts in the period between 2008 and 2013 might have been deeper that they seemed to be.

On the flip-side, using larger amounts of money that the budget suggested between 2002 and 2007 raises some questions about the quality of the financial planning itself. However, this does not change the overall, critical assessment of the budget cuts in the recent years.

MoD "lost" at least one modernization programme

It should be noted that the implementation of the budget is a bit varied in comparison to the plan within the years 2010 or 2011,  when the economy was in a bit better condition than it had been for example back in 2009. At the same time, taking into account the modernization arrears of the Polish Army, which are dated to the days of the Warsaw Pact, limiting the defence spending did slow down the process of acquiring modern equipment and armament.

If we assume that the defence spending is realized at the level of 1.95 % of GDP, the government, and MoD in the first place, had not used some funds, amounting to more than 10.5 billion zlotys, in comparison with the funding that was to be allocated to the defence according to the initial assumptions. That means that, as a result of the budget cuts, the MoD lost an opportunity to carry out at least one modernization programmee. Amount of PLN 10 billion was mentioned in the context of acquiring 70 utility helicopters. The detailed overview of the defence budget is presented in the table below.

 

2008

2009 (after the amendment)

2010

2011

2012

2013 (initially)

TOTAL

Defence spending – planned  (thousand zlotys)

22 681 595

24 763 322

25 718 989

27 536 242

29 489 956

31 447 486

161 637 590

Defence spending – realized (thousand zlotys)

19 769 547

23025378

25 269 381

26 720 631

28 105 131

28124358

151 014 426

Difference (thousand zlotys)

2 912 048

1 737 944

449 608

815 611

1 384 825

3 323 128

10 623 164

(Created by: Defence24.pl on the basis of the Ministry of Finance-supplied data)

The Ministry of Finance states that the rule of allocating 1.95 % of GDP from the last year is a guideline for design of the defence spending in the budgetary act projects, but it is not related to realization of this spending, however, the natural aim of proper budgetary planning is to create a realistic image of state expenditures, that would be as close to the reality as it is possible. Thus, such budget would make it possible, to a maximum degree, complete the tasks of the authorities. It is difficult to realize the MoD budget not to an extent that was planned, especially when equipment of the Polish Armed Forces does not provide proper capabilities (e.g. it lacks anti-missile defence systems).

What’s next?

Increasing the defence spending in 2015 up to the level of more than 38 billion zlotys will not make it possible to reverse the results of the cuts from the period between 2008 and 2013, because the additional funds will be used to cover the expenses related to the F-16 jet fighters. At the same time, in accordance with the assumptions of the modernization Acts, acquisition of the fighters was to be financed with the funds beyond the scope of 1.95% of GDP, and it was the scope of 1.95%, where the cuts took place. In order to reverse the consequences of the cuts it is still of key importance to transfer more funds to the MoD, than it is indicated by the regulations of the modernization act.

In order to limit the consequences of the budget cuts implemented in the period between 2008 and 2013 it should be considered to maintain the level of the nominal defence spending at the same level as the one planned for 2015 (ca. 38.3 billion zlotys, 2.27 % of 2014 forecast GDP), until the moment when it gets lower than the NATO recommended 2% of GDP. This will make it possible to accelerate the individual modernization programmes and increase the combat readiness of the armed forces. On the other side it is difficult to expect excessive turbulence in the public finances, since in 2015 such level of defence spending is contained within the assumptions of the approved budget.

 

The author is an economist, graduate of the Cracow University of Economics.

CommentsComments: 1
Miki
piątek, 12 lutego 2016, 19:05

I enjoyed rieadng this. What a wonderful thing to do to help so many people in this Christmas season, to give them a bit of joy. I think I would have cried too when presenting the gifts to the families you chose. Very worthy venture!My most humbling experience, going to feed the homeless on the streets of San Diego. Not in a shelter or soup kitchen, but direclty on the street with them, offering them what we had and having them pick what they want. Their gratitude for what I take for granted was so overwhelming and humbling. betty