STATUTORY AND POLITICAL CONSTRAINTS ON POLISH

C O N F I D E N T I A L WARSAW 000014 SIPDIS EUR/CE FOR MORRIS, PM/RSAT FOR BAME E.O. 12958: DECL: 01/05/2019 TAGS: PGOV PREL PMAT PL SUBJECT: STATUTORY AND POLITICAL CONSTRAINTS ON POLISH DEFENSE ACQUISITION REF: IIR 6 878 068 09 Classified By: DCM Quanrud for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY. Statutory limitations and a general political culture that straightjackets large-scale military acquisition projects are impeding the GoP,s ability to advance its defense modernization program. The Polish Ministry of Defense (MoD) was obligated to return approximately USD 350 million allocated for defense modernization to the Polish Treasury at the December 31 close of FY 2008 (reftel),resulting in the loss of substantial funding for clearly articulated national defense priorities. The GoP understands its budget laws are too restrictive, and is looking at ways to fix them. The government is reportedly working in parliament to develop multi-year budgeting authority for all ministries, but new budget laws will likely not be in place before 2010 at the earliest. In the interim, Poland will need to enact special legislation on a case-by-case basis to execute multi-year acquisitions outlined by the joint Polish/U.S. Defense Modernization Working Group. END SUMMARY. ¶2. (C) Two aspects of Polish budget law restrict GoP defense acquisitions. First, because there is no multi-year budgeting in Poland acquisition contracts must be initiated and executed in the same fiscal year (which is the same as the calendar year). For example, the GoP was ultimately unable to procure three Israeli-built Elbit Hermes 450 Unmanned Aerial Vehicle (UAV) systems because the purchase could not be realized by the end of FY 2008. Second, Polish law does not permit up-front payments before delivery, which makes it very hard for defense suppliers, who may need initial money to launch large procurement projects. A USD 220 million project to acquire ship-board fire control systems was suspended because MoD could not disburse interim payments to the Dutch contractor. In the past, the MOD has gotten around these problems in different ways. A specific law was passed just for the funding of the F-16 purchase, and other major contracts have been executed by using a leading defense supplier as a middle man. ¶3. (C) The GoP understands its budget laws are too restrictive, and is looking at ways to fix them. The fact that MOD officials in the past have leaked information about the returned monies is an attempt to show how cumbersome the current budget laws are. The government is reportedly working in the Sejm to develop multiple year budgeting authority for all ministries, not just defense, but new budget laws will likely not be in place before 2010 at the earliest. (NOTE: Multiple year authority is critical for major construction projects for which the EU provides a large part of the funding. END NOTE.) A key stumbling block is the Finance Ministry, which prefers the current arrangements whereby unspent monies are applied to reducing the budget deficit. When we raised the issue January 6, MFA Deputy Security Policy Director Marek Szczygiel expressed frustration with the legislative requirements for acquisition programs. While he saw little prospect of serious reform in the near future, he suggested that the Sejm would be able to enact special legislation -- on a case-by-case basis -- to cover financing for complex programs as it had with the multi-year F-16 acquisition. ¶4. (C) Compounding these legislative restrictions are rules governing offsets that require on-the-ground legwork for non-Polish contractors. Such requirements are generally difficult to satisfy within the single fiscal year timeframe. New legislation requires that an offset agreement be signed at the same time as the purchase contract. Poland's political establishment has historically been suspicious of any large acquisition and has been reluctant to temper this suspicion with intermediate, non-judicial oversight. In December 2008, for example, MoD purchased M28B Bryza aircraft from PZL-Mielec (owned by Sikorski-United Technologies). A single negative press account following the acquisition was sufficient to prompt Polish legislators to call for prosecutors to investigate Defense Minister Bogdan Klich. This atmosphere of political distrust has had a chilling effect on acquisition reform. ¶5. (C) COMMENT. The loss of substantial modernization funding in FY2008 notwithstanding, Poland continues to allocate a minimum of 1.95% of GDP on defense spending, 20% of which is earmarked for modernization. In this respect, it remains a model for other NATO allies. Poland is working to develop legislative solutions to address defense procurement inefficiencies and, in the interim, implementing (when feasible) stopgap measures for high priority acquisitions. We should discuss Poland's legislative plans in the bilateral Finance Working Group and press the Poles to provide realistic predictions of how much of their defense budget they will be able to spend in CY2009 and beyond. As Poland pursues expensive acquisition programs like the Patriot PAC3 system, we should continue to encourage efforts to reform the defense acquisition process but also be prepared to accept special legislation as a fallback option. In the interim, U.S. FMF/IMET and other forms of assistance will prove even more crucial. END COMMENT. ASHE