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DEFENCE I OFFSET

Jarosław Kruk 

CONSOLIDATION OF DEFENSE INDUSTRY – A TRIUMPH OF GENERAL SKRZYPCZAK’S CONCEPT? DIFFERENTAFTER-FAIR NEWS

04/10/2013

Last Monday the Prime Minister announced a creation of Polish Arms Group, in other words a consolidation of all the state-owned assets. It’s a fine gambit from a political point of view – setting aside the differences between HSW and PHO and building something new.

Unofficially, Department’s busybodies report that the consolidation shall be carried out as follows: HSW will be merged with all WZRPunder the auspices of  ARP, which has already prepared 2-3 billion zlotys for this purpose. Ultimately there’ll be created one economic entity, which means PHO (Bumar) shall be united with it – for the sake of convenience I’m going to call this new entity PAG. However, such an outcome seems not very believable – in reality, it’ll go completely differently. The tastiest bits – PCO, Mesko, etc. – are going to be taken out of PHO and the General Meeting of Shareholders will contribute the shares and interests of those companies to the new entity in exchange for its shares, while ARP will throw in some funds in order to weaken PHO’s input. As for the rest, meaning PHO (Łabędy and neighborhoods), an application for bankruptcy will be filled so that no ghosts nor any debts from the past will hover above PAG. Among the candidates for the president of this new company current heads of HSW or PCO are mentioned, but there’re also some talks of General Skrzypczak.

The Minister of Treasury announcethe process will be concluded in June, 2014. In Polish realities June 2015 is optimistic. And one more tiny piece of advice for intrepid civil servants preparing the transformation: one of the keynotes of this endeavor was to prevent Polish-Polish competition on the foreign markets. But what matters there are credentials, which for the brand new company are going to be hard to come by for the next few years. Which will make it difficult to avoid merging – with whom? PHO, most likely, as it is the only entity with necessary credentials. Unless, of course, all talks about foreign markets are nothing but sham.

The Minister of National Defense is supposed to be the one exercising the rights attached to PAG’s shares. That’s the argument used by a part of the Ministry’s directorship, saying presidents of arms companies that, when the MON will take over them, it’ll be ordering from them, too. Asked to form an opinion on the subject of legitimacy of such affair, distinguished lawyer from The European Commission ascertained that the Ministry of National Defense ordering from and exercising the rights attached to shares of the same company may be recognized as unlawful according to European law and each such order will be submitted to a throughout audit by EC.

Proposed course of action – filling the application for bankruptcy of PHO, which actually means diverting the best assets – will surely be meet with resistance of the company’s creditors, who immediately after official announcement of such concept should fill suits, motions to set conciliatory hearings, etc. Fortunately, Polish law knows actio pauliana and other regulations that assure creditors’ protection. PHO is Limited Liability Company, so after announcement of arms industry transformation program only homeless people unafraid of Article 299 of Commercial Companies Code should apply for a position at PHO’s board of directors. In this situation they can earn something. Others should steer clear of managing PHO. Aren’t there provisions in the contracts with the Ministry of National Defense that assure ordering party’s consent is required to implement the changes in the contractor’s capital?

Then, who gains in this situation? WB, HSW’s partner in many enterprises, will be satisfied for sure. Big or very big HSW surely will cooperate with WB more often, their consortia will be beneficiaries of more orders for the Ministry of National Defense and value of the company willincrease substantially. It’s an exceptionally good business arrangement. Probably, there also will be an opportunity to buy some things from PHO’s bankruptcy estate. Just WB is not enough, so another partner of HSW, well-known Mediterranean company, which name begins with an E, will have a chance to derive some profits from this situation. The company didn’t exhibit anything particular on the Polish market, however, this gives it a possibility to grow wealthy significantly. I’m thinking, if I was in E’s shoes, I’d try to purchase WB’s shares – directly or by proxy – more so, because UOKiK’s permit is not necessary, I believe. The press informs that WB’s sales for 2012 amounts 134 million zlotys (so they doesn’t exceed 50 million Euro). Are there provisions in contracts with the Ministry of National Defence that assure the consent of ordering party is required to change capital structure of system supplier? It seems slightly doubtful to me, that nothing stands in a way of profitable transaction. Anyway, WB is becoming export magnate, its contracts in one of South-African countries look impressive.

Previously mentioned company “E” has some kind of bonds of understanding with our strategists. Some even claim it’s an acknowledgement of its global achievements. According to some notes in Yiddish these bonds may be made of steel – I’m not sure, I’m translating the adjective correctly. In the notes are some numbers, names, dates, but…

But maybe it’s the other way around. Very reliable people tell, that General Skrzypczak’s concept lost – because he’s the one pushed for WB having over 25% of PAG’s shares. WB is supposed to be left out of this transformation. Pity, I’ve always liked the idea of cooperation of private and state capital. Pity, because General Skrzypczak’s concept was very interesting and far-reaching.

HSW is to buy from “E” 20 or 30 barrels for 155 mm howitzers and publiclly boasts that it’s going to obtain the technology to produce them. I do not know how it really is, but unofficially one may hear that that the technology could be obtained only after purchase of 70 ore even 90 barrels. If that’s true, it’s a wonder where the additional technologies will be sold. In my opinion, there are “interesting export contracts” already “waiting” somewhere.

The fair was marked by Turkish industry and thus new chasiss for AHS Krabare going to be bought from Turkish supplier. I’m keeping my fingers crossed for HSW’s constructors – may they make necessary calculations of construction’s durability this time. For the HSW itself potential flaws connected with Krabs’ breakdowns may equal a fine of 15 to 30 million zlotys. Nevertheless, in view of such a decision regarding consolidation of arms industry no harm will come to HSW.

Recently, a group of army officials from one or two East-Asian countries, that previously purchased considerable amounts of our armament, came to Poland. Soon after their visit I was called by a person who is a recognized authority figure over there, and who told me that the army officials reported our country unable to manufacture equipment that was previously sold to them. They based their assessment on talks with foreign counterparts of Polish companies. I replied that, to the best of my knowledge, the abilities of ours arms industry and variety of its offer increased significantly. I also mentioned, that currently the fate of Polish arms industry is disputed, but I cannot imagine anyone in Poland saying anything like that. My interlocutor stated though, that according to this countries’ altered legislation, during a significant tender it is made a public knowledge, that e.g. the data from twenty or so countries was gathered and some of them refused sharing it due to various reasons. He also added, that Polish side didn’t restricted this information and so it will be revealed what exactly our representatives said on the matter.

Mr. Hybki, a journalist, in the after-fair report launched an attack at PHO (Bumar), which is restricted by the penalties for the Indian contract for WZT-3. Mr. Hybki, who is by the way very opposed to the consolidation of arms industry under the PHO’s name, probably supports the idea of big HSW, but unfortunately he seems not to check his sources of information very thoroughly. I don’t doubt the welfare of Polish arms industry worries him, but he is likely aware of the realities of the Indian market. He surely knows that the default result of using any agency services at the Indian market is being entered on the black list of foreign suppliers. In practice, Bumar’s enter will reflect on Cenzin, HSW, WB and entire Polish arms industry, PAG included. Simply, we’ll completely lose the Indian market. What’s left is hope the contract Mr. Hybki writes about is unreal, ineffective, deceptive or signed for criminal purpose. And, unfortunately, once again the opportunity may arise to celebrate at Rosoboronexport at 27thStromynki Street.

While summarizing, I’d like to mention one more thing – in Brussels there are unofficial talks about European Commission causing an annulment of tender for 70 helicopters. Using the decision of Minister of National Defense from 2006 as a basis for the tender for 26 choppers and then – just before the amendmentof Public Procurement Actbecame effective – increasing the number to 70 is, in the opinion of prominent members of EC, obvious violation of European law and elementary principles of European integration. Additionally, Terms of Reference were based directly on those from one of non-European producers. Personally, I’d rather Polish Armed Forces finally got to be equipped with modern helicopters. However, it seems that the European Commission will accomplish its goal.

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