Post-Election Defence Funding Landscape in Poland

According to final results, while PiS has earned the largest percentage of voters (35.38 percent) it is unlikely to form a majority in Polish parliament, and most likely three opposition parties: Koalicja Obywatelska - Civic Coalition (30.70 percent), Trzecia Droga - Third Way (14.40 percent) and Lewica - the Left (8.61 percent) will aim to form a coalition government.

Regardless of who stays in power in Poland - that political entity would need to answer the question of the future of defence expenditure. The data published by the Ministry of Finance shows that the forecast so far included budgetary expenditure at the level of 3% of GDP, as the Act on Homeland Defence requires, along with large loans, drawn for the Armed Forces Support Fund.

Even though the Fund«s debt in late 2022 was less than PLN 10 bn., it was expected that it would go up by 30-40 bn zlotys per annum (around 1% GDP equivalent) in 2023-2024 and 70-80 bn. zlotys per annum (1.5-2% of GDP) in 2025-2027. Notably, the issuing of bonds and other debt-based instruments is not the sole source of funds for the Fund, as it may also receive a subsidy from the state budget, but the assumption is to use the market to support the modernization of the Armed Forces. And that process is happening at an unprecedented scale, and it entails gigantic costs.

Only during this year«s MSPO event, and only in the air defence domain, agreements worth more than PLN 100 bn. were concluded. And further ones are waiting for relevant signatures. The task list is gigantic. Contracts pertaining to Borsuk IFV, and heavy IFV can be listed among the projects underway (where framework agreements that do not entail any financial commitments have been signed, but without performance contracts with an estimated value between PLN 60 and 100 bn., with the scope declared by the Polish Ministry of Defence), or the projects tied to Rosomak and Serwal APCs. The above also includes the equipment procured abroad, or manufactured via the means of industrial cooperation: HIMARS MLRS, Apache gunships, the second round of procurement planned in South Korea, or many other key acquisitions, such as EW assets, individual kit elements, communications, logistics, anti-tank weapons, and so on. The value of those contracts would be expressed in hundreds of billions of zlotys.

Due to the unfinalized procurement, the debt plan for the Armed Forces Support Fund is so broad. Every performance contract is already covered - either in loans (as it happens in the case of most of the Korean procurement in 1st stage) or in the state financial plan.

The question that needs to be asked, is about the financing and contracting after the election. Some of the opinionmakers suggest that the financing of modernization may collapse, after the election, starting from 2024. Such a scenario is, however, less than plausible. The Polish state budget is secure enough to maintain the defence spending level of 3% of GDP, using the state budget, and to pay back the loans already drawn to form the Armed Forces Support Fund. Especially with the full-scale war going on in Ukraine, and with global threats on the rise.

Even though financing of the concluded contracts and further procurement is rather certain, regardless of the election results, the situation related to the new loans for the Armed Forces Support Fund is not that clear. If PiS retains the lead, post-election, we would probably see the continuation of the action plan adopted so far. The question is - how would the market react, especially if the ruling party is forced to establish a minority government? If the cost of financing the public debt goes up, using loans of that scale may be impossible. On the other hand, if the Poland-EU relations get stabilized, and the State Recovery Plan (KPO) is used to obtain money, the loan credibility levels for Poland would go up, which would allow for further financing.

And what if the opposition wins? The representatives, led by the former head of the Polish Ministry of Defence Tomasz Siemioniak, repeatedly stated that no defence expenditure cuts shall be expected and that the contracts would still be pursued. Considering the current levels of threat, these declarations need to be considered credible, regardless of the steps that the given political circle would take in the defence domain 10-15 years ago, when joint exercises involving the USA and Russia (for instance the Renegade scenarios in the air domain) were a norm, while a full-scale war was one of the least probable scenarios.

What about the financing for the Support Fund then? The opposition representatives have been criticizing this solution. It may be assumed then that using financial market loans to finance new procurements may come to a halt and be audited, while the procurement scope may be limited for some contracts, especially when it comes to the equipment acquired abroad. The said halt will not mean that „outside-budget” instruments would no longer be used to finance the modernization. Let us recall, that the F-16 procurement was the first programme financed in that manner - with Leszek Miller acting as the PM. The US granted a very good loan to Poland. If the opposition manages to secure EU funds through the National Recovery Programme, financing further procurement loans may become less costly. However, a political initiative needs to exist, to use those loans - and here we can experience less enthusiasm, than in the case of the PiS-led government.

As we can see, there are plenty of defence financing scenarios possible, in the post-election reality. That would depend on the shape of the future ministerial cabinet, and the actions that would be taken by it. For now, we can risk stating that hampering the modernization, and the related financing is less than probable. On the other hand, full implementation of the program envisaging annual loans exceeding 1.5% of the Polish GDP in the upcoming years may face some roadblocks, both due to the policy, as well as the nature of the stock market. Finally, the emerging threats would be a key factor shaping the financing for the Armed Forces. We see today that Russia, despite the tactical or operational failures in Ukraine, remains aggressive, continuously reinforcing its Armed Forces, while the support for Kyiv is becoming less and less coherent. Former Chief of the General Staff of the Polish Armed Forces, General Rajmund Andrzejczak said, back in September, that if Ukraine lost the war, and Russia continued its integration with Belarus, the Polish plan to establish an Army of 300 thousand men and set the defence expenditure level at 5% of GDP, may not be sufficient, given the growing level of threat. And everyone, both the decision-makers and the opinionmakers, even today, need to remember that - even with the post-election emotional burden placed on us.