Offset power in the hands of the polish Ministry of National Defence

  • Przygotowania do startu rakiety Proton-M z satelitą Blagovest 11L. Fot. Roscosmos/ESA
    Przygotowania do startu rakiety Proton-M z satelitą Blagovest 11L. Fot. Roscosmos/ESA

The new offset law significantly increases the powers of the Polish Ministry of National Defence (MON). This is not only the result of the transfer of the right to conclude offset agreements and supervise their implementation from the Ministry of Economy to the Ministry of National Defence. Also the new offset structure puts more power in the hands of MON when it comes to deciding whether offsets will be used at all, and determining the shape of offset obligations.

The Act of 26 June 2014 on selected agreements concluded in connection with the performance of contracts of primary importance for the security of the state came into force on 30 July 2014. It replaced a previous Act on compensation agreements, in which the conclusion of offset agreements remained within the sphere of competence of the Ministry of Economy. According to the new law, offset agreements shall be concluded by the Minister of National Defence, who shall also supervise their implementation. The foregoing shall not apply only to those agreements managed by the Ministry of Economy, for which the procedure aimed at their conclusion was initiated before 30 July 2014. However, it is not the only change expanding the powers of MON in relation to the content of the previous act.

First of all – according to the new offset law, a competent state authority, i.e. in most cases – MON, by assessing whether the essential national security interests exist, shall decide whether a procurement will be accompanied by the conclusion of an offset agreement at all.

Under the previous legal framework, the offset was automatic for every contract which met the criteria set out in the act. The change in this respect stems from the European law, according to which the automatic application of the offset is unacceptable.

Second of all – the elimination of the minimum offset value results in a situation in which the guidelines for the offset offer prepared by MON will be critical for the scope of the offset.

As a result of the structure of these guidelines – the Polish defence system and the defence industry may not profit from some procurement, despite the formally existing offset obligations. Two threats should be paid attention to:

- the only entities which will benefit from the offset are those which, after the supply, will fail to fulfil the hopes pinned on them when it comes to maintaining the capacity necessary from the point of view of national defence, while the concluded agreements will not allow the enforcement of obligations in this regard;

- if the ordering party transfers the required documentation, tools or licenses to the Treasury, it will be technically impossible to implement the provision of services on the basis of such documentation, equipment and licenses in the entity to which the aforesaid assets will then be transferred by the Treasury – due to the technological barrier and the lack of know-how.

In this situation, the key document, i.e. the guidelines for the offset offer, should precisely specify what production, maintenance and repair service capacity should be established in Poland, where exactly should it be established, on what dates and in what manner, taking into account the support of the supplier.

Third of all – the Act contains a number of vague expressions, which automatically extends the powers of the decision-making body.

 "Foreign supplier", the key term in the Act, can serve as an example. Pursuant to Article 3, Section 1 of the Act, a foreign supplier is obliged to conclude an offset agreement. Therefore, this concept is of fundamental importance in determining the subjective scope of application of the Act. According to the statutory definition, the term foreign supplier means a party to a supply agreement or other entity that performs an offset agreement for a party to a supply agreement, including a consortium, a government of a foreign country or a government agency, which applies for the award of a contract aimed at the protection of the fundamental national security interests, and has made ​​an offset offer.

The term supply agreement means an agreement concluded between the ordering party (i.e. a state entity) and the contractor, aimed at the delivery of the order for the production of or trade in arms, munitions and war materials, constituting a measure referred to in Article 346, Section 1 (b) TFEU, the execution of which requires an offset .

When attempting to summarize the foregoing definition from the linguistic point of view only, the following conclusions inevitably come to mind:

- the obligation to conclude an offset agreement applies to the party to the supply agreement ... which is concluded after the conclusion of the offset agreement,

- the obligation to conclude an offset agreement applies to ... the entity performing the offset agreement.

The foregoing conclusions, demonstrating the existence of internal contradictions in the provisions of the Act, do not pose a threat, because linguistic interpretation is corrected by other interpretation methods. This brings us e.g. to the conclusion that the quoted definition refers to a future party to the supply agreement registered outside the territory of the Republic of Poland, or to an entity other than the future party to the supply agreement, which will perform the offset agreement on behalf of the party to the supply agreement. This does not, however, resolve all doubts.

While the aforesaid defect of the Act does not pose a serious threat, yet another slip is of far greater importance. In Article 3, Section 4 of the Act it is stated that: Supply agreements concluded by the parent company or subsidiaries of the foreign supplier shall be deemed to be concluded by the foreign supplier. The purpose of this provision is to limit the possibility to evade the application of the Act by foreign suppliers by submitting supply tenders through their Polish subsidiaries. However, whether this goal was achieved is questionable, for a supply agreement is in fact concluded once, either by an entity registered outside the territory of the Republic of Poland, or by a Polish entity, e.g. being a subsidiary of a foreign corporation. In the light of the definition of “foreign supplier”, one should reflect on when Article 3, Section 4 of the Offset Act will actually apply. A simple interpretation, according to which a Polish subsidiary of a foreign corporation is a foreign supplier only because its parent company is seated outside the territory of the Republic of Poland would lead to the erroneous conclusion that, e.g., PeGaZ, which at some point in the future is likely to be a parent entity to foreign companies – will also be obliged to conclude offset agreements.

Therefore, what is necessary is further interpretation or the use of measures other than offsets, allowed by Article 346 TFEU, which will also fall within the scope of responsibility of the Ministry of National Defence.

The foregoing interpretation doubts confirm the thesis that very extensive powers have been vested with MON, since it is the body which uses the law in practice that determines the manner of its interpretation. The more extensive powers of the Treasury, however, represent a much greater responsibility, which MON will probably have to face when assessing the effects of offsets under the new law.

Filip Seredyński