Armed Forces Support Fund: More Questions than Answers [COMMENTARY]

5 listopada 2021, 12:46
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Image Credit: Polish MoD

Deputy PM Jarosław Kaczynski and head of the Polish MoD, Mariusz Błaszczak presented the assumptions for the bill of the Act on Homeland Defence. The bill is yet to be publicized. It has not been made available via the Governmental Centre of Legislation. Thus, only the presentation shared can be analyzed, along with the statements made during the conference. One of the more important statements is the establishment of the Armed Forces Support Fund at the BGK bank (Bank of National Economy).

Why is the new fund going to be established?

All of the announcements on the changes of the state defence system would entail increased expenditure. The biggest consequences would stem from quantitative expansion of the Polish Armed Forces, and the necessary procurement of military equipment within the modernization process. The announcements made, suggesting that the Polish military would grow to 250,000 men, plus 50,000 troops in the Territorial Defence Forces, have been confirmed. Thanks to the recent response to a parliamentary inquiry, we know how many professional soldiers were serving in the military, during the last decade. The numbers are as follows:

  • 1st January 2010 - 95,439
  • 1st January 2011 - 93,923
  • 1st January 2012 - 95,318
  • 1st January 2013 - 97,055
  • 1st January 2014 - 96,611
  • 1st January 2015 - 96,248
  • 1st January 2016 - 98,586
  • 1st January 2017 - 101,578
  • 1st January 2018 - 104,946
  • 1st January 2019 - 107,704
  • 1st January 2020 - 110,100
  • 1st January 2021 - 112,326

Furthermore, around 23,500 soldiers were serving in the Territorial Defence component on 1st January 2021. The number is constantly growing - now, there are around 26,000 troops in service. One should not forget about several thousand soldiers currently serving as NCOs at military universities. The new system would get rid of the "candidate" service, while NCOs would be counted as a part of the professional troops' pool.

We don't know if, and if so - when - the ambitious plan above can be implemented. Demographics, emigration, and higher attractiveness of other career paths could be all viewed as potential obstacles. Thus, the new Act is to make the military more attractive, financially, as an employer. An increase in troops number from the current level of 120 thousand, to 250 thousand, with simultaneous salaries growth and introduction of financial motivators would require a major increase in the Polish defence budget. The Territorial Defence Forces would also have some needs. The number of troops in this branch of the military is to be doubled, from 26 to 50 thousand. Nonetheless, a single Territorial Defence troop costs less, than a professional soldier. A bigger army also requires a greater number of employees. At the moment we can only speculate about the increase in the number of jobs at the Polish Ministry of Defence. More than 50 thousand employees work at entities subordinated to the Polish MoD. Even if the increase does not entail a doubling of that number, payments funds will need to be expanded anyway. Furthermore, the people working in the military are among the worst paid employees in the budget-funded sphere. The changes proposed, pertaining to the soldiers, will need to be somehow transferred to civil employment as well. The consistent increase in the number of troops also results in an increased number of people entitled to receive retirement pay and allowances. Financing these with the use of MoD's budget is a major burden to carry.

Considering the current number of soldiers and employees in the military, 13.5 bn. zlotys is going to be used to cover salaries, and benefits, with derivative payments included. The retirement pay is going to use up more than 8 bn. zlotys. The doubling of the number of entitled persons would result in doubled spending. And this would also entail a snowball effect, with more expenditure to come. The increased spending would also be needed in the military healthcare, military accommodation subsidies, military garrisons, and also infrastructure maintenance (energy, cleaning, security, maintenance, repairs). The cost of ongoing training would also be higher. Fuel, ammunition, food, medical supplies are also going to be a major portion of new spending areas. More soldiers mean more training, and this would translate into greater repair needs for the military equipment.

The amended 2021 defence budget is as high as PLN 58 bn. The 2022 defence expenditure is defined as PLN 57 bn. If the Polish Ministry of Defence was to maintain an army of 250 thousand soldiers, 50 thousand conscripts, and 75 thousand employees, this would use up the whole 2021 or 2022 budget. Meanwhile, the salaries, benefits, retirement pays, pensions, cost of training, maintenance, overhauls and repairs are not the only spending points in the budget. The MoD also allocates major amounts to procurement and construction works. During a press conference, no specifics were provided, but a military formed by 250 thousand men would require even greater procurement of weaponry. For now, the following costly programmes are underway:

  • F-35 Harpia MRCA (procurement of 32 examples, more may come in the future);
  • Patriot air/missile defence system (procurement of more batteries is planned);
  • M1 Abrams MBTs (250 examples to be acquired);
  • Narew air defence system (27 batteries to be procured);
  • Miecznik multi-role frigates (3 vessels to be acquired);
  • Homar rocket artillery system (with further HIMARS system squadrons to be acquired);
  • Borsuk infantry fighting vehicles;
  • Kruk attack helicopters.

These are among the most expensive undertakings underway, or soon to be launched. Apart from the above, there is a great number of other, relevant programmes in play.
Even considering the current shape of the Polish military, and the defence budget, the Polish Ministry of Defence is facing major challenges in military procurement. Thus, to implement the major expansion plan of the Polish military, a new procurement financing scheme is needed.

Armed Forces Support Fund

Each of the state budgets needs to be used up within the given year. Only a small portion of the budget, referred to as the continuous expenditure, can be spent during the upcoming year. The aforesaid mechanism is not valid for funds. Currently, the Polish Ministry of Defence is using the Armed Forces Modernization Fund. According to the amendment of the FY2021 state budget, the aforesaid fund is to be increased by PLN 6.3 bn., via payment from the MoD's budget. The above means that at the beginning of 2022, 10 bn. zlotys would be available within that fund. No serious spending involving that fund has been planned so far, for the year 2022. The PLN 191 million of planned spending would be almost entirely covered by PLN 161 million of planned income. That means that 9.97 billion zlotys would remain within the fund, at the end of 2022. The announcements made suggest that this money is prepared to finance the M1 Abrams MBTs acquisition. The whole Abrams procurement programme (250 MBTs, support vehicles, training package) is said to have a price tag of 23.3 bn. zlotys.

We do not know now, whether the Armed Forces Modernization Fund would still exist in the future. This will only become clear after the Homeland Defence Act (Ustawa o Obronie Ojczyzny) is adopted. One may only guess, that the fund in question will cease to exist. The reason for that is simple, as the list of Acts that would be contained within the Homeland Defence Act would also include the Acts amending the Act issued on 25th May 2001, on Reconstruction, Technical Modernization and Financing of the Polish Armed Forces. The information on the planned inception of the Armed Forces Support Fund is even more important. The new fund is to be established alongside the state BGK bank (Bank of National Economy). It is possible that placing that fund there would take it out of the Parliamentary jurisdiction. However, it remains unclear whether the financial plan of this new fund would act as an attachment for the annual budgetary act, or not.
The new fund is to have sources of financing different from the ones associated with the current fund. The announcements suggest that these would be:

  • Income, from the treasury securities;
  • Assets from the bonds issued by BGK, that come with a treasure guarantee;
  • Payments from the state budget;
  • Payment from the potential profit gained by the NBP (National Bank of Poland).

The financing of defence spending with the use of loans or bonds has been in place for decades now. Some of the proposed solutions may be quite attractive for the financial markets. The long-term guaranteed bond may meet some international demand. If the interest is good (along with the timeline), these may become a solid place where financial assets could be 'stored'. We do not know now, however, whether the acquisition of those would be subjected to any limitations. Would a list of countries exist, where the capital would not be permitted to procure bonds as such? Nations excluded via a means of list could attempt to purchase bonds as such, using "loopholes", via international investment funds, where a nation as such would own/acquire shares.

The mechanism of payment from the budget, to the fund, is already well known. It has been used for a few years now, in the case of the Armed Forces Modernization Fund. Sending potential profits gained by NBP to the fund is a novelty. Profit gained by NBP is a profit within the budget. In the case of the new solution, we do not know yet, whether all of the NBP profit would go to the Armed Forces Support Fund (or just a part of it would). The treasury bonds have been a way to obtain money to cover ongoing expenditure for many years. In the case of the new fund, it would most probably receive money gained through the issuance of treasury bonds, not treasury bills. By default, the bonds have longer buyout terms than the bills - the latter are usually short-term.

Chances

Creating the Armed Forces Support Fund may create an opportunity to fund several very expensive defence procurement programmes. Once Poland regained its sovereignty, Warsaw was introducing defence cuts, while technical modernization was only limited to systematic withdrawal of the legacy equipment. Then, new procurement programmes were being launched, over several years. However, the scale of needs in the Polish Armed Forces, and the high price associated with modern equipment, cannot be handled within the current budget of the Polish Ministry of Defence. Even the Act on Reconstruction and Technical Modernization, and Financing of the Polish Armed Forces, guaranteeing spending at the level of 2% of the GDP of the previous year, with 20% spent on modernization, does not create an opportunity to implement all of the programmes expected to be finalized. In recent years, the aforesaid Act that became valid in 2001 (and further amendments) made the procurement funds available much greater.

Establishing a new fund, that would receive money from the aforesaid, proposed sources would make it possible to consequently pursue operational programmes and procurements remaining outside of the operational programmes. At the same time, if the Armament Inspectorate is reformed successfully, along with the Bureau of Offset Agreements, and Inspectorate for Implementation of Innovative Defence Technologies, and all of those bodies are fused into the Agency of Armament that would be more efficient, the head of the Polish Ministry of Defence would receive two, efficient tools. Armament Agency would be proceeding with the procurement, while the Armed Forces Support Fund would be used to finance that procurement. Some of the acquisitions would still be made, with the use of the MoD's budget though. However, one cannot predict the proportions here. It depends on how fast the Polish MoD's budget (a part of the state budget) would grow. It would also depend on the tempo at which the ongoing spending would grow, caused by the quantitative expansion of the army.
The stable system for financing the procurement would, at last, make it possible to logically plan the procurement size and deadlines. It is also possible that the processes in which implementation of some programmes is excluded would be smoother. In practical terms that may make it possible to plan to finance for procurement of Miecznik Frigates and Orka submarines for the Navy simultaneously. Considering the current budget of the MoD, and the current procurement needs, the launch of the Miecznik programme would practically replace any brand-new submarine procurements for many years. It seems that the launch of the Orka programme would only be possible once the Miecznik programme comes to an end (or after a major cost portion of that programme is finalized). Thus, if Poland wants to retain the capability of undersea warfare, then it is probably limited to second-hand submarine options. However, as the current situation shows, it is still a challenge to acquire second-hand submarines, at a reasonable price.

The new Armed Forces Support Fund, with major financing, is to act as a remedy addressing such dilemmas - as the ones faced by the Navy. Is it better to own frigates or submarines? Similar circumstances pertain to many other domains. Air defence requires major financing efforts. The procurement of two Patriot batteries is only a good start of the investment. Numerous, further batteries are needed, along with many Narew batteries. The obsolete helicopter fleet is a problem that has not been resolved at all. The procurement needed here includes Kruk attack helicopters, transport/utility helicopters, reconnaissance helicopters, liaison rotary-wing aircraft, and other, specialist helicopters as well. The primary inventory of the land forces is another example. There is a major danger, that with the current budget, the procurement of M1 Abrams MBTs could hamper other programmes. BWP-1 IFVs, light BRDM-2 APCs, and many other vehicles also need to be replaced. Borsuk infantry fighting vehicles are still awaiting the order, the same goes for the remote control turret systems for the Rosomak APC. Even acquisition of two F-35 squadrons is not sufficient. 32 aircraft, along with 3 F-16 squadrons, would form only 5 squadrons in total. In the early 21st Century, the air force expressed the need to own 9 squadrons. Now, Poland operates only 7. And the list goes on.

Dangers Involved

Loans that would need to be paid back would remain at the foundation of the Armed Forces Support Fund. They would need to be paid back someday. It seems that bonds of the BGK band would be the most suitable form of financing. These would not be treasury bills, but the associated guarantee would be founded within the state treasury. Not paying those back is impossible. Unless the state finds itself in a dramatic situation or falls into bankruptcy. However, even in case of critical circumstances, should any recovery proceedings be launched, the commitments made by BGK will need to be accounted for. It is certain that issued state bills, or bonds, will need to be paid back.

As for now, we do not know when the Armed Forces Support Fund would be established. Another, serious question here, is how a fund as such would be treated by new governments, following the election. One could imagine that the succeeding government would not want to maintain such a mechanism. The Fund may be, consequently, liquidated.

Other, grand needs of the state are a threat to the fund. Polish healthcare, education, retirement, and social security system, especially support for the physically and mentally challenged, are all requiring greater outlays. One needs to maintain independence and external security, for the citizens to be able to learn or live using retirement pay or allowances. The balancing of the expenditure is still a problem, especially given the fact the resources remain limited. Establishing the Armed Forces Support Fund, without addressing other needs of the society, may result in a negative reaction of the opponents of increased defence expenditure.

Summary

The establishment of the Armed Forces Modernization Fund alone is not a remedy that addresses all of the pain points. Not only would stable financing be required here, as political approval of all of the major stakeholders is crucial for the fund to exist and be financed. If the fund is liquidated and established, following the subsequent election, this would not result in the so-desirable stabilization. The number of troops and quantity of military equipment that Poland needs shall stem from a diligent analysis of threats, and diligent analysis of methods and means required to counter those threats. The analytical material in question, alongside the detailed, confidential section, shall also feature quite a specific, publicly available portion.

Clear, and comprehensive clarification of defence spending is a must, in a democratized society. One does not need to reinvent the wheel, it would be enough to use the modus operandi adopted by the "old" NATO member states. The military procurement system should be transparent and clear. We shall hope that this would be possible thanks to the establishment of the Armament Agency. The procurement priorities need to be clear and publicly stated. One cannot use specific circumstances to make sudden acquisitions that are not well-thought-over. These may be dubious - and whether they are required by the military, or by the politics/in the context of international relations remains unclear. It remains quite important for the Support Fund procurement to be made in Poland, or, if a foreign acquisition is required, a major portion of manufacturing should be taking place in Poland. Should the Polish defence procurement be loan-based, the loans shall be used as a stimulus for the Polish economy, as the future revenue should be used, with the Polish economy and taxes being a part of that revenue, to pay back those loans in several years. The money within the Armed Forces Support Fund cannot be received, mostly, by the foreign economies.

Jarosław Ciślak

Defence24.com
Defence24.com
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