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DEFENCE I OFFSET

Jarosław Kruk 

TRANSFORMATION OF THE POLISH ARMAMENT INDUSTRY –THE SHOW IS GOING ON. SOME ASPECTS OF THE ARMED FORCES MODERNIZATION PROGRAM.

04/06/2013

The recent weeks have brought a number of events on the battlefield being a consolidation of the Polish armament industry. On Friday, Prime Minister Donald Tusk announced that he would address the Ministry of National Defense, the Ministry of Economy and the Ministry of Treasury with a request for urgent information on the progress of the armament industry reform. Prime Minister also announced that the government would be ready with a communiqué. Time will show the value of the communiqué and whether indeed a firm decision will be made.

The Saturday’s edition of “Gazeta Wyborcza”, presented the already known division favored by the government, where the Ministry of Treasury and the Ministry of Economy opt for Bumar,whereas the Ministry of National Defense for HSW (Huta Stalowa Wola) (but does the whole Ministry opt for it?). “Gazeta Wyborcza” bets that the Polish Defense Holding (Bumar) will not be the winner.

By the way, what a curious expression one could notice on the face of the President of Huta Stalowa Wola when he learned during the European Economic Congress that Deloitte, commissioned by the Treasury, prepares concepts of the armament industry consolidation, involving also his company.

Earlier Bumarchanged its name to Polish Defense Holding (PHO) and announced that from now on the subsidiaries would be more self-dependent, and the company would be fully holding. This is a very interesting idea, but a little more difficult to implement for legal reasons. In Poland, unfortunately, we still don’t have modern holding regulations, and each subsidiary will care about their duties in the law – mainly about their own benefice, and to a lesser extent about the interests of the group. But perhaps there is some interesting solution? It is equally interesting that the name change, which has not yet been disclosed in the National Court Register (KRS), entails the exchange of licenses, certificates, etc. And this is a lengthy and costly process. However, it is also possible that PHO is the trade name, and the Bumar name will not be struck off the registers. If so, it’s a very smart trick, especially in the international arena, where the Bumar brand’s overtones are far from positive.

Now, let’s move on to the news from abroad. In the report of May, Mr Tomasz Hypki, Chief editor launched an attack on Bumar, and more specifically on its export. I regret to say that I have to agree with the majority of the theses in the article. An overview of activity of “outstanding young professionals” in the years 2007 – 2008 makes specialists from the 27 Stromynka Street smile blissfully and the accountant in this great company – satisfied, such big funds for combating the Polish competition were saved thanks to those young people. In my opinion, it would be a rationalizing step on the part of those specialists to apply to their authorities for awarding those young professional the Friends of the Nation Order or a similar one.

I truly admire the activity of the President, Mr. Nowak. The stories he tells about the soon to be increasing export at the occasion of successive Kielce Trade Fairs have no equals.

As for the contract for WZT-3 consulting services, one should indisputably agree with Mr. Dogra that was also very professional and the company he represented showed a remarkably“big” capital. Regarding the success of the investigation conducted by the Warsaw District Prosecutor’s Office in the case of the contract for WZT-3, I am still very skeptical.

The current Management Board of PHO had to clean up the mess the predecessors left. It was better to show a large accumulated loss for the year of 2011 and choose a different strategy. It may indeed be better to focus on own army and on developing several cutting-edge products and leave some distant markets, and leave the entire foreign trade to e.g. Cenzin or Cenrex that may choose the staff as they like. The only thing is to beware of the situations that may result in PHO (Bumar) being entered in the black list. In several more distant countries they are well aware of the transitions and that if they decide to enter the PHO (Bumar) in the black list, then it would apply to all of its subsidiaries. This, in turn, is some argument against consolidation of the entire defense industry under the banner of PHO. In this situation, there is some legal solution. It’s enough that PHO has less than 50% shares in Cenzin. The remaining 51% can be under the control of another company eg ARP or its funds.

On the other hand, HSW is having equally interesting adventures. I wonder if the consortium headed by HSW has a chance to make an overhead remote controlled weapon station

within the time-limit set by the Defense Ministry. The signals coming from the market show that the consortium may not be able to do this in time, unless someone can help. I am ready to bet a box of top quality champagne that the “someone” will most likely be HSW’s new partner in the development of a wheeled howitzer. This excellent company with no spectacular success so far, still has a chance to shine on our market – but more on that later if the situation allows.

It’s good to know how the world views us. In the report of an excellent Washington consulting firm Avascent “State Ownership in the European Defence Industry: Change or Continuity” (www.avascent.com) Bumar is listed at the 24th position in Europe among defense companies. The criterion used was that of the military sales volume in 2011. HSW is not listed at all. There are interesting findings in the report which show that the companies fully controlled by the State are less active and innovative, their sales volume drops and they have worse access to capital markets. Moreover, it is interesting to note that private capital operating in the armament industry accepts the specific safety, maintenance and military infrastructure development requirements of the State. In light of the above, Bumar’s plans of going public in 2015 appear very interesting.

The recently publicized WB’s offers of HSW acquisition are no less interesting. I think it would be worth considering, or Siemianowice and Poznan could be included. However the IPO requirement should remain and the interests of the State should be adequately secured by provisions in the sales contract and articles of association of that company. If the situation evolves in this direction we could have two companies listed on the Stock Exchange with a huge potential that could be really innovative.

There is a legal problem. Securing vital interests of the State in certain areas, such as national automated systems of combat means management and control, etc. seems to be particularly important. Sometimes it is reasonable that the general contractors of such solutions for the Ministry of National Defense should be with the exclusive or dominant Polish capital. I believe that this solution can fully be defended even in new contracts, as proved in the Article 346 of the Treaty.

In the issue related to the execution of contracts already underway, the question of the defense of such a solution does not even arise. But it may be that a company which is responsible for the implementation of such key projects for the national security will go directly or indirectly under the control of another company or funds acting on its behalf, not necessarily coming from the country “with not the most friendly relationships”, but from a country with which we cooperate in the military field. The interests of the state when granting such special contracts should be protected at least by contractual regulations, if not by the legislative ones. And is this the case?

And a few words about the Armed Forces modernization program. The more reputable media report on the sums which we plan to spend and consider who will win and how the Polish economy will benefit, etc. Unfortunately, the state budget makes me more and more concerned about the implementation of these ambitious plans. It seems that the Minister of Finance will cut spending already this year. The Armed Forces and their development is in this case are naturally exposed to this risk of those cuts. I’m concerned that the cuts will be every year, especially when we arrive at around 55% debt to GDP. Thus, the basis for the development and modernization of the Armed Forces is the economy and its good condition. Unfortunately, in the recent actions of the Ministry of Defense you can discern hardly any concern about it. The Ministry of Defense not only has unlawfully resigned from offset in the tender for JET, which may in the future lead to unpredictable legal consequences, it also waived the requirement of servicing JETs in Poland. This was discussed by “Gazeta Wyborcza” in the edition of May 24, 2013. The explanations the Ministry of Defense offers are strongly unconvincing, because even following the provisions of the public procurement law, these changes could have been made in the tender conditions. It is worth comparing this attitude with the press news that EADS offers to South Korea $ 2 billion investment, if it selects Typhoon. Maybe it would be good to rethink issues related to the modernization of the Armed Forces, whether this should be decided by the military men exclusively?

 

 

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