Defence firms pile in for Poland’s multi-billion defence spending spree

By bne IntelliNews May 13, 2015

Andrew MacDowall in Warsaw -


Some call it the “tender of the century”: Poland’s massive multi-billion defence modernisation programme is taking shape in the face of what Poles see as the very real threat of Russian expansionism.

Originally reported as a $42bn scheme to 2022, the retooling takes in land, sea and air equipment. Major international players are vying for landmark deals for their products, tried and tested or brand-new. But the Polish government also wants to ensure that its spending spree benefits and strengthens local players, enhancing local defence industry self-sufficiency and building a national champion with the capacity to export around the world.

On April 21, Poland announced that it would be acquiring Patriot missiles manufactured by US defence player Raytheon in one of the first tenders of the modernization programme, seeing off competition from a consortium of France's Thales and European group MBDA, as well as Lockheed Martin. The contract to supply missile defence batteries is worth an estimated $5.6bn. At the same time, the Polish government announced that it had provisionally selected Airbus for a $3bn contract to supply helicopters, disappointing other bidders Sikorsky and AgustaWestland.


The investment drive has been in the works for some time: in June 2013, then-prime minister Donald Tusk announced that Poland would spend over €31bn on the technical modernisation of its defence forces over the following decade. This followed Poland’s first National Security Strategic Review, which concluded the previous year. By October 2013, defence magazine Concordia was reporting the $42bn figure in an article cited on the National Security Bureau’s website.

In February, AFP also reported that Poland had kicked off a $42bn defence upgrade, but sources differ on the amount and the source of the cash. “The $42bn is a figure cited by AFP – according to official statements, the outlay on defence modernization by 2022 is to amount to approximately $35bn, although domestic defence experts expect the spending at a level of approximately $23bn,” one Warsaw-based defence industry source tells bne IntelliNews. “The government has revealed little in terms of details on how it intends to finance this ambitious plan. Already 2% of Polish GDP is spent on defence.”

Analysts tell bne IntelliNews that the spending programme to 2022 included PLN91.5bn set aside for key armament programmes, with PLN16bn to be allocated by 2016. Any money not spent as planned in a year will be returned to a reserve fund for future use, ensuring that programmes are not scrapped under possible future austerity measures.

Push comes to shove

The missile defence and helicopter deals are significant not only for the substantial sums involved, but also due to the technical and political issues that lie behind them. Lockheed Martin had hoped that the Poland contract would allow it to break its new medium-extended air defence system (Meads) onto the global market, in which Raytheon’s Patriot is one of the established names. Meads has a considerably broader field of coverage than Patriot, which famously had mixed success during the First Gulf War when deployed in Israel and Saudi Arabia. However, the US was able to offer the loan of a Patriot battery to Poland, as well as the increased presence of US troops (albeit temporarily, in modest numbers) in Poland.

Defence analysts note that reports have suggested the choice of Patriot may have been political rather than military, following suggestions that neither it nor the Thales-MBDA system met the Polish Armament Inspectorate (AI) requirements. Poland has tended to prefer US to European suppliers in the post-Cold War era, partly because Washington is seen as the country’s most reliable and powerful ally. “Poland has been a traditional supporter of US policies. Likely its politicians are feeling the heat from the US and seeing media reports of a positive public reaction to the presence of US troops in Poland – the Dragoon Ride exercise,” the defence sector source says. “So US efforts are effective and built up Raytheon’s bid. [There is] massive diplomatic pressure being applied openly by the US – the ambassador supports the Raytheon bid – and European producers who have unofficially hinted that the [European Commission] may look into Polish defence procurement on grounds of non-competitive tenders if it went to the US.” Another defence source confirms that US lobbying had been intense.

The first source adds that the US had hoped to “come from behind” and win the helicopter tender as well. Again, there are politics at play. The US bidder was Sikorsky, part of United Technologies Corporation, while AgustaWestland, owned by Italy's Finmeccanica, was also a bidder. Both have factories in Poland. But Airbus and its Caracal EC725 may have been chosen partly on the strength of its promise to “polonise” production, assembling the helicopters and their engines in Poland, providing substantial technology transfer and a boost to employment. Airbus has said that Poland could have “fifth country” status, joining France, Germany, Spain and the UK. There have also been suggestions that France-based Airbus may have been favoured following Paris’s decision to freeze the construction of two warships for Russia.

But technical considerations were undoubtedly a major factor, with Airbus offering a single platform, armed model, while AgustaWestland’s offer was unarmed, and Sikorsky had two separate platforms. Furthermore, Poland has its eye on longer-term European military cooperation, in which interoperability will be advantageous.

Senior defence consultant Marek Matraszek, of CEC Government Relations, tells bne IntelliNews that Poland’s modernisation programme amounts to a multi-faceted overhaul of the armed forces and the defence sector comprising four pillars.

First and most obviously, strengthening the forces themselves, with a focus on heavy weaponry suitable both for territorial defence – a pressing concern for Poland to an extent that Western Europeans often find hard to fathom – and expeditionary tasks. The retooling includes investment in armoured equipment “perceived by some European states as a hulking, overpriced holdover from a bygone era,” says one analyst, including tanks and armoured vehicles that will render Poland’s “the heaviest in either Central or Western Europe”. Poland’s geography makes this central to the country’s defence strategy.

Second, Poland is accelerating its PLN10bn naval modernisation programme, which runs to 2030. The navy is in urgent need of upgrading; 17 of its 41 vessels are due to be decommissioned by 2022. Third, strengthening the most modern section of the armed forces, the air force. This includes the concluded helicopter tender, as well as sourcing new attack helicopters to replace the Russian-made Mi-24s currently in service. Fourth, the government aims to overhaul the local defence industry, which “could play the role of a vital linchpin in the modernisation effort”, says Matraszek. This involves the consolidation and modernisation of the fragmented state-owned arms manufacturing sector.

It’s a substantial shopping list: as the first source says, “very large procurement programme: big prizes”.

The next purchasing round should include 77 Poprad unmanned aerial vehicles (UAVs) and the Orka submarine programme. The latter will see up to three submarines equipped with tactical missiles; the first and second will be delivered by 2022, the third by 2030. Also on the list for the army are 128 new Leopard tanks (as well as the modernisation of 128 Leopards already operational), as well as mortars, armoured vehicles, and light and heavy artillery. The navy is seeking three mine destroyers, three coastal defence vessels and three patrol vessels with mine-destroying capability, while the forces will also bolster their airlift capacity – important for overseas deployments.


Coverage has focused on the big foreign players descending on Poland to compete for large contracts. But again, this is far from the whole picture. “The chief theme of the modernisation plan is ‘polonisation’ or, through foreign help, having [the Polish defence sector] participate in armed forces modernisation contracts to bring it up to 21st century standards,” says the first source.

One of the big winners is Huta Stalowa Wola (HSW), a majority state-owned company. HSW is supplying the army with equipment including its Homar rocket-launcher system, KRAB howitzers, as well as its Rak mobile automatic mortars. These operate on the chassis of the Rosomak armoured vehicle, which another state arms company, Wojskowe Zaklady Mechaniczne, makes under licence from Finland’s Patria. The relationship with Patria is one of the most successful examples of 'polonisation'. “The Rosomak is without question one of the best vehicles in its class,” Christopher Kline, executive vice-president of Hawkwood, an international strategic advisory group, tells bne IntelliNews. “The Poles shopped very carefully, and chose what they felt was really the best-proven advanced system on the market, and struck a deal with Patria for it to be produced, improved and modified in Poland itself. It absolutely fits in with the Polish perspective of self-sufficiency.”

Kline says that the Polish armaments sector is delivering both quality and value, whether manufacturing under licence, adapting existing designs, or producing original weaponry. Examples include the MSBS rifle made by the Łucznik arms works in Radom, a robust assault rifle. “The Polish army and particularly special ops have seen a lot of action [in Iraq and Afghanistan] and have been able to bring back a lot of experience in a way that shapes the Polish arms industry,” says Kline. “The Ministry of Defence deserves respect for listening to soldiers and putting that feedback from the field into the industry.”

The Leopard tank project involves Zakłady Mechaniczne Bumar-Lobed. And the first source highlights Mesko, a rocket technology producer, and Pit-Radwar, a radar company, as two examples of Polish state-owned arms companies that have carved out niches. However, overall the source strikes a more sceptical note. “Through very substantial spending Poland stands to receive not only the technical knowhow to produce modern armaments, but also the IT needed to ensure full control of modern systems,” he says. “However, it is an open question if Polish firms will be able to fully absorb and benefit from the source codes – we’re talking about a generational leap and high risk, and it may appear simpler and less risky to buy off the shelf rather than tinker with the equipment.”

He describes the Polish defence industry as possibly “the last example of the Communist business model in Poland – protected because of its strategic importance and non-competitive in international markets”.

The Polish ministries of defence and treasury (the latter overseeing state enterprises) are trying to remedy this by sector consolidation. In 2014, the government founded Polska Grupa Zbrojeniowa (PGZ), a holding company bringing together 30 state-owned companies with total turnover of PLN5bn and 19,000 employees.

The self-sufficiency drive entails not only local production, but Polish ownership of source codes for equipment operation. The US has traditionally not provided source codes to end-users, which is another reason that procurement may have started to tilt towards Europe. While the Polish Air Force is happy with the 48 Lockheed Martin F-16s delivered from 2006, defence sources and Kline highlight Poland’s disappointment with offset programmes around the procurement, especially the lack of technology transfer and the US control over black box systems. One source called it a “fiasco”.

Poland’s wariness was sharpened by events in the 2008 war between Russia and Georgia, when Israel reportedly traded source codes for Israeli-made Georgian UAVs for Russian source codes on equipment sold to Iran. “These sorts of issues over sovereignty are very real, and almost harder on a political level than they are on a technical level,” says Kline. “The Polish Armed Forces may be happy to go for piece of kit, but the Ministry of Defence wants to be sure they own it and can explain they own it.”

Poland has earned the nickname “European India” in some quarters because of its slow decision-making process in defence procurement. Heavy diplomatic pressure from certain quarters also complicates the picture. But its massive military overhaul is grinding forwards nonetheless. The visceral sense of threat from Russia has cemented political consensus behind the spending programme, at least from Poland’s two main parties.


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