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