Wojciech Kosc in Warsaw -

Spooked by Russia's role in the crisis in Ukraine, Poland is preparing to boost military spending. On August 19, it accelerated efforts towards building a consolidated state arms manufacturer, Polska Grupa Zbrojeniowa (PGZ).

The plan to consolidate the Polish weapons sector under the flag of a newly founded centralized arms group has been around for close to a year. On August 19, anti-monopoly office UOKiK cleared PGZ to take over eight companies specializing in the design, manufacturing and servicing of military equipment, including munitions and missile manufacturer Mesko and tank producer Bumar-Labedy. 

The move came a day after local press reported that the government is working on legislation that will increase military spending to 2% of GDP, which will boost the defence budget by PLN800m annually. Defence budgets in Central and Eastern Europe have come into the spotlight this year, in particular since Russia annexed Crimea in March. Alongside raising its profile in the region, Nato has complained that many countries are lagging in spending.

The ruling of the Polish anti-monopoly office gives the green light for a third and final round of takeovers of defence companies by PGZ. Once completed, the state holding will have absorbed 24 state-controlled companies in the course of the last 12 months and PGZ will have an estimated value of PLN 6.5bn (€1.55bn) and annual revenue of PLN6bn.

The feverish activity is the realization of a strategy for the sector announced by Prime Minister Donald Tusk in September 2013 as part of a revised defence strategy that will see total spending PLN130bn in the coming decade as the army is modernised and the command system reformed.

In April, in the first round of the consolidation effort, PGZ took over 11 companies, including HSW, a designer and manufacturer of artillery equipment, special armoured carriers and engineering equipment. A second round took place the same month, when PGZ took over naval research and development company CTM. Four tech companies previously managed by the Industry Development Agency were also added.

Fragmented

According to Jedrzej Graf, editor of Defence24.pl portal that specializes in military and security issues, the consolidation of Poland's previously fragmented arms industry is a key element of the country's effort to improve security. "In the fragmented Polish sector, resources spent on R&D were reduced, and the resulting products were of lower quality," he says. 

"That didn't help the Polish army too much," Graf continues. "Nor were they a match for international products." In other words, with the rising domestic defence budget set to offer the R&D effort support, the next obvious target will be exports. 

However, Graf notes that it is only now that the government has started considering the domestic arms industry an element of national defence. It's an issue that hadn't come to the fore a year ago when a new defence strategy was written, he claims, but events in Ukraine have changed that. Ukraine is a pivotal country for Polish foreign policy, with the view being that a safe and prosperous Ukraine is the best buffer before an unpredictable Russia. 

"The consolidation means that over 17,000 jobs will be retained in the sector and a further 40,000-50,000 in related industries," Treasury Minister Wlodzimierz Karpinski - who oversees state companies - said in June. "First of all, however, it's important for the security of our country. Events in Ukraine are making it clear for everybody that Poland must have a strong arms industry." 

That's a new line of thinking, Graf says. "Polish decision makers used to think that as long as you can contract supplies of modern equipment, it doesn't matter much where it comes from. They're acknowledging now that in a time of crisis and insecurity, it's best to be self sustainable."