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Industrial dispute endangers the entire Polish air defense program

This post was published in Defence24. The point of view expressed in this article is authorial and do not necessarily reflect BM`s editorial stance.

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WARSAW, (BM) – PGZ and the Ministry of National Defense officially confirm that talks with the American concern Raytheon regarding the finalization of the agreement on the contracts for the performance of offset obligations related to the purchase of the Patriot system are being continued. In reality, however, there was another deep deadlock – Defence24.pl found out unofficially. The bone of contention is not technical, but business and legal. The prolonged industrial dispute endangers the entire Polish air defense program.

Defence24.pl’s unofficial information shows that the negotiations are at the next turn. At the beginning of August, Raytheon sent a letter to the Polish side, in which it declares that it does not see the possibility of continuing negotiations with PGZ in the current formula. Does this mean that the Americans have broken negotiations?

Formally not, but according to unofficial information, they rejected the proposals submitted by PGZ regarding, inter alia, financing, licensing and auditing. As a result, since its appointment at the beginning of this year. the negotiating team that was to work out the annex No. 1 to the offset agreement, no agreement was reached.

This team was established to finalize the talks with Raytheon, started in the first half of 2018, after the main supply contract for the Vistula was signed. The subject of the dispute, however, is not the technical issues (as these have already been agreed in the draft annex to the contract), but the conditions for the licenses and audits granted.

In other words, the dispute is not about what technologies are to be transferred to the Polish side or how to technically implement this transfer, but about the business conditions – money. And they are the reason for the current impasse in the negotiations lasting almost two and a half years in total.

However, the protracted negotiations on the PGZ-Raytheon line have their consequences for the entire process of building Polish air defense. Although the main supply contract for the first phase of Wisła sets was signed in spring 2018, the offset obligations performance contracts with one of the offset providers – Raytheon were still not finalized (the second contract package, with Lockheed Martin, was finalized in March 2019).

This state of affairs has an impact on the implementation of Polish air defense programs. The offset agreement assumes the establishment of capabilities that will be useful in the entire Wisła program – and thus also in the second stage of this project, as well as in the Narew short-range air defense program.

These capabilities relate to the management of air defense programs or the integration of command systems with IBCS (the latter is provided by Northrop Grumman, as is the Bushmaster II 30mm cannon also covered by the contract, but Northrop Grumman’s obligations have been included in the offset agreement with Raytheon).

Completion of all contracts is therefore necessary to start the process of building the potential in the Polish industry as needed to support the Vistula, especially in its subsequent phases, but also other air defense systems. This also applies to the launch of the Narew short-range air defense program, expected by PGZ, with high hopes of the national defense industry, because at least most of the elements of the program worth over PLN 20 billion were to be created in Poland. Raytheon, on the other hand, is making more efforts for the Ministry of National Defense to start the second phase of the Vistula first, because at this stage it will provide the most components of the Patriot system.

Our interlocutors emphasize that the protracted negotiations are in the hands of Raytheon, which will benefit most from the implementation of the second phase of Wisła. On the other hand, the Ministry of National Defense wants to first fully finalize the first stage of the Wisła program, which is already under way, and only then take steps on subsequent projects, so that its negotiating position on the offset is not weakened.

As Defence24.pl informs unofficially, the Ministry of National Defense has once again postponed the decision on the directional recommendations for the Narew system, which are to what the command system (C2) should look like and which are the basis for choosing its final configuration (including the effector). Previously, it was assumed that such recommendations would be issued in the first half of this year. Let us add that in 2014 it was assumed that the deliveries of Narew would start in 2019. Today, the program is still in the analysis phase, which means it is delayed by at least five years (and possibly more).

The ongoing deadlock is unlikely to affect the deliveries of the first Wisła batteries and their initial operational readiness, because Poland is acquiring IBCS-Patriot batteries in a version similar to the American one, adapted to some extent to Polish needs (e.g. vehicles). But most of the Vistula’s capabilities, including the integration of Polish early warning sensors, omnidirectional fire control radars and a fully compliant configuration, were to be introduced in the second phase. The second phase of the Vistula River was “ahead” of the F-35 fighter program – only that it was carried out without an offset.

In response to Defence24.pl’s questions, Hubert Stępniewicz, Member of the PGZ Management Board, commented on the delays in finalizing the contracts for the performance of the offset obligations:

“The talks are conducted, we strive for the best protection of our interests, which is not always in line with the interests of the offset providers. From the point of view of PGZ, the key is to achieve an appropriate return on investment, which we must make as a consequence of the offset agreement between the Ministry of National Defense and Raytheon. Offset is associated with high costs on the part of PGZ without any guarantee that we will be able to use the established competences, products and services obtained. Negotiations require some flexibility on both sides, we hope to find a satisfactory solution soon” Hubert Stępniewicz, Member of the Management Board of PGZ said.

The statement of the PGZ authorities’ representative indirectly confirms the information provided by Defence24.pl, which indicates that strictly business (and not technical) issues are the bone of dispute. It is known, however, that regardless of the implementation of the offset agreements, Raytheon concluded other business agreements with Polish producers regarding the Wisła program. One of them is the contract under which 16 M903 launchers will be manufactured at Huta Stalowa Wola for the Polish Wisła systems.

The scope of this agreement, however, is different from that included in the offset agreement and therefore it can be implemented before the finalization of the agreements for the performance of the offset obligations. Another similar agreement with Wojskowe Zakłady Elektroniczne concerns DLTM electronics modules, which are part of the M903 launcher. One of Raytheon’s suppliers is also the private Polish company Teldat, which is a supplier of routers for Patriot systems offered around the world and received awards from Raytheon as an exemplary sub-supplier of components.

However, all this does not change the fact that the agreements regulating the establishment of capabilities recognized as crucial from the point of view of state security, resulting from the offset, could not be finalized – not because Polish or American partners do not have specific capabilities, but they were unable to agree on what to the terms of cooperation. The question arises – why, since the “twin” package with Lockheed Martin was signed over a year ago?

The deadlock in the offset negotiations, for the reasons described earlier, somehow automatically delays the implementation of the next phase of the Vistula, or at least to some extent also the Narew. Therefore, it creates a risk for the process of building the entire Polish integrated air defense.

And its modernization is becoming an increasingly urgent need. Shields will be required, for example, by installations developed at several points in Poland as part of the Polish-American agreement, as well as many other elements, including military groups – protected mainly by Narew – at the forefront. The modernization must therefore proceed.

Defence24.pl interlocutors emphasize that it is time to engage at the highest political level, on both sides, so that the impasse is finally overcome. And this cannot mean striving to buy “off the shelf”, but finalizing the executive contracts, because it is required in the interest of state security.

In order for the Wisła system to meet the requirements of the Polish battlefield, it must meet the assumptions prepared by the military, eg the integration of Polish “silent” radars, adapted to national conditions. Without an offset it will be difficult, if not impossible. The assumptions underlying the decision to modernize air defense must be implemented.

Offset in the first phase of the Wisła program – basic information

The main intergovernmental agreement for the first phase of the Vistula River was signed on March 28, 2018 for the amount of USD 4.6 billion, and the entire program is worth approximately USD 4.75 billion. As part of it, two Patriot batteries of the latest version, integrated with the IBCS command system (four fire units) were ordered. Payments for the first phase of the Vistula have been spread over the years 2018-2022. The signing of the contract was accompanied by the signing of two offset agreements concerning 46 liabilities, which were to be performed within 10 years, worth PLN 950 million.

They were concluded with the manufacturer of PAC-3 missiles, the Lockheed Martin form (15 offset liabilities valued at PLN 725 million) and the system creator – Raytheon Company (31 offset liabilities valued at PLN 224 million). The Lockheed Martin offset is to enable the production and servicing of PAC-3 MSE launcher elements, the production of selected missile components, the construction of a missile testing laboratory, and an increase in the maintenance capabilities of the F-16 aircraft.

In turn, the agreement with Raytheon Company is to enable the acquisition of command and control capabilities based on the IBCS module, production and servicing of launchers and transport-loading vehicles, the creation of a certified Administration and Production Management Center, adaptation, servicing and repairs of the Wisła system and other defense programs anti-aircraft and air defense. Part of the contract with Raytheon Company was also the acquisition of production and servicing capacity for 30 mm Bushmaster II cannons (including for the ZSSW-30 turrets). The Polish industrial side of the offset projects is to be the companies of Polska Grupa Zbrojeniowa, for which it is an opportunity to acquire modern technologies.

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