PRIVATIZATION IN NACC COUNTRIES Defence Industry Experiences and Policies and Related Experiences in Other Fields COLLOQUIUM 1994 ********* COLLOQUE 1994 PRIVATISATION DANS LES PAYS DU CCNA Experiences et politiques des industries de defense et experiences comparables dans d'autres secteurs Colloquium 29-30 June, 1 July 1994 Brussels -------------------------------------------------------- OWNERSHIP CHANGES IN THE POLISH ARMS INDUSTRY: SECURITY ISSUES Katarzyna Zukrowska and Leon Turczynski Because many of Poland's arms producers were also producing civilian goods, they had a relatively easy switch to consumer market production. But the bigger companies had bigger problems. Economically, they face the same difficulties as their civilian counterparts, with demand shrinking at home and abroad. Politically, they need to cope with the changes in the international scene, and their implications for national security. Katarzyna Zukrowska and Leon Turczynski are clear as to what their country's long-term aims are: full membership of NATO, and closer co-operation in arms manufacture so that the east and west European defence systems can be fully compatible. The key to it all, they say, is patience and planning. Katarzyna Zukrowska is a Senior Researcher at the Institute for Development and Strategic Studies, Central Office of Planning, in Warsaw. Col. Leon Turczynski is a Senior Researcher at the Central Office of Planning in Warsaw. Ownership changes in the arms industry cannot be studied apart from the ownership changes in the whole economy. They are also closely interlinked with structural changes of the industry, which are introduced in the framework of macrostabilization, liberalization of prices and international turnover, institutional changes and macroeconomic restructuring. National security is one of the aspects that has to be taken into consideration in defining the strategy of structural changes (both in macro and micro scale) in the arms industry. The period of transformation in Eastern European countries brings about new threats for internal and external stabilization of a country, that derive directly from the scale of changes introduced in the region. They cover such issues as controversies in the socio-economic sphere, political sphere and the national sphere. Despite the fact that such problems do not occur equally in all the countries of the region, their repercussions can be felt also outside the borders. International economic cooperation is one of the main tools fostering a dynamic development in economic relations between countries. The effectiveness of this instrument depends on the number of disciplines it embraces. Military production cannot be left out of this cooperation. Arguments supporting this concept cover such issues as the idea of creating a European Security System, demands of standardization of military equipment in national armies and the creation of compatible defence systems. Catching up with the army structures and equipment of NATO partnership countries also matters and can gain momentum in international cooperation of the arms industries. The internationalization of defence industry should be accompanied by the construction of a pan-European international security infrastructure. This concept will have a doublefold influence on the improvement of international security in Europe. Generally such a development would have a direct and indirect impact on security issues. On the one hand it will create new opportunities of employment for the manpower released from the military production and increase effectiveness of utilization of financial resources. While on the other hand direct linkages between the industries will bring closer together cooperating producers, which in turn would help to eliminate all the existing prejudices among them. Structural Changes in Poland's Arms Industry -------------------------------------------- Structural changes in the arms industry began in the second half of the 1980s as a result of improvements in international relations and the diminishing intensity of the East-West confrontation, that was followed by a qualitatively new stage in disarmament negotiations. Since that time, things have happened at an accelerated speed and what took place five or more years ago seems to be ancient history. It is impossible to show in detail how all the events occurred and in what sequence. We concentrate therefore on the latest series of events with small comments that throw some light on what has happened in the past. Arms production in the late 1980s could be characterized by reduced military spending (Table 1), limited scope of arms production and shrinking export markets.(1) The role of government intervention in this sector has totally vanished. All that was followed by an increase in unutilized capacities of the producers, significant lay-offs, and a reduction of the number of enterprises engaged in arms production. Industrial potential were utilized by 10-30%. The number of enterprises engaged involved was reduced from 120 final producers to 90. It is planned that at the end of the restructuring process the Polish arms industry will consist of 28 enterprises, organized in a set of four branch holdings. Poland's arms industry experienced a market-driven strategy of structural changes with all its consequences. Government policy towards arms producers in the period of 1989-1994 could be labelled as contradictory. On the one hand, producers were told that their production is needed and they have to survive; on the other hand they had difficulties in adjusting to new unfriendly conditions (shrinking orders, limited credits and independence in decision-making) as well as to unknown market conditions. Although there is no one universal pattern of transition from one system to another, some results and findings deriving from the Polish experience could be interesting for other countries from East Central Europe (ECE), which are following the same path.(2) The importance of the Polish experience is growing when one has to take into account the fact that ECE countries very often are facing the complexity of decisions of choice that have to be taken on both levels: by the government and the enterprise. More often those choices are influenced or even forced by newly born interest groups. In the transition period contradictions and paradoxes could be found everywhere in each single field of the economy. As far as the arms producers are concerned - most of the contradictions concern difficulties in reconciliation of short and long term goals. The second group embraces choices between social goals and security goals. Although choices are never made between sharply divided alternatives, most of the time it is necessary to meet partially two ends at the same time. A paternalistic approach of the government towards the arms industry in the short term could ease the burden of transition - but at the same time it could prolong the transition period. Protection could facilitate the financial standing of companies and their workers in the short run, but in a longer perspective this would mean bigger problems for the future. In practice this would only be a postponement of reaching aims with growing competition and burdens. Moreover, protection is not conducive towards restructuring what undoubtedly becomes a necessity in all ECE economies. Lack of protection does not mean lack of control but it needs to be done with new instruments and specific institutions which are being developed.(3) Arms production is the most politicized field of the economy. This meant that political decisions about the future of Polish arms producers were postponed several times. The government made decisions to give help to the arms producers but the budget constraints did not allow the plans to be carried out. Enterprises left in a state of suspension had to find their own way in the new conditions. Finally in May 1993, after several sittings, the Economic Committee of Council of Minister's (KSERM) decided that all the arms producers have to change their ownership status, according to a following schedule: - One-holder stock companies owned by the State Treasury. This group will consist of ten enterprises being the most important in Polish arms industry. The following companies will fall into this category: Zaklady Metalowe MESKO in Skarzysko Kamienna, and Przemyslowe Centrum Optyki in Warsaw. - Joint-stock companies with majority of shares controlled by the State Treasury. This group will consist of 18 enterprises including 6 main Polish aircraft producers. Such enterprises will fall into this category: WSK PZL Mielec, Bumarkabedy, PZL Warszawa Okecie and WSK Swidnik. - Private enterprises and limited liability companies. The rest of the companies, representing five different branches can proceed with their own restructuring without any interference from the government. The outcome of their production will be created by market demands. This category will encompass such enterprises as those specializing in: transport, communication, anti-chemical defence, logistics and engineering works. Table 1 Polish Military Expenditure, 1986-1994 Figures in billion zlotys, and constant prices ---------------------------------------------------------- | | | Dynamics in percentages | | | |--------------------------| | Year | Military expenditure | Change | Change | | | | compared to | compared | | | | the previous | to 1986 | | | | year | | |--------------------------------------------------------| | 1986 | 110,1 | NA | NA | | 1987 | 106,9 | 2,9 | 2,9 | | 1988 | 99,6 | 6,8 | 9,5 | | 1989 | 89,7 | 10,0 | 18,6 | | 1990 | 80,7 | 10,0 | 26,7 | | 1991 | 52,5 | 35,0 | 52,4 | | 1992 | 50,4 | 4,0 | 54,5 | | 1993 | 48,8 | 3,2 | 55,7 | | 1994 | 47,9 | 1,8 | 56,5 | ---------------------------------------------------------- Source: M. Perczyski, P.Wieczorek, K. Zukrowska, The Current Situation in Polish Arms Industry, manuscript Warsaw 1994. Table 2 Value of Polish arms exports, 1984-1993 (in million rubles and million dollars) --------------------------------------------------------- |Exports| 1985 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993| |-------------------------------------------------------| | rules | 100,5| 113,6| 992,5| 768,2| - | - | 50 | | US$ | 118,4| 258,2| 188,3| 64,9| 386,2| 60,0 | 60 | --------------------------------------------------------- Source: as in Table (1), based on estimates from CENZIN. In parallel with the reduction of the number of enterprises engaged in arms production, changes will also include a new organization of the sector. The change in the structure of the arms industry will be conducted in two stages. In the first stage all the enterprises will be transferred into one-holder stock companies owned by the Treasury. In the second one, newly-born companies will be organized into four following holdings: - Conventional weapons producers, which would embrace producers of ammunition, missiles and explosives. They will include 14 enterprises, employing about 32,000 people in all. - Aircraft producers, embracing 5 enterprises "PZL", employing about 24,000 people. - Producers of radar equipment, opto-electronics and electronics, which will consist of 5 enterprises, employing about 10,000 people. - Armoured vehicles producers, consisting of 5 enterprises, employing 22,000 people. Primary changes in the Polish arms industry were possible mainly thanks to the low involvement of the producers in arms deliveries. In other words the reduction of number of arms producers was conducted mainly by switching into civilian deliveries. This was possible only in the companies with high share of diversified production, where military production was only a small fraction. Conversion or further changes in the arms industry are limited mainly by lack of available financial resources that could be utilized for such purposes. Those limits are the result of poor financial standing and often a lack of financial liquidity; limited options for self-financing (shrinking domestic and foreign markets); difficulties in obtaining credits for restructuring;central budget limitations; and limited demand on the civilian market in the first period of transition. In an open market economy survival of the producers is no longer solely defined by domestic orders. This rule does not concern only civilian production, where it was proven in full. The Ministry of Defence (MoD) and other central institutions are marking out only the required shape of the production but the survival of each of the enterprises heavily depends on external relations, both in production and exports. Such are the tough rules of the open market economy. This finding is clear in civilian production and it happens also in the military sphere, whether we like it or not. In the new conditions the role of the government in Poland was limited to such fields as initiating changes, preparing legal infrastructure, working out political climate for launching the worked out strategy and intervention only where it amounted to fire-fighting. The government was no longer able to support the enterprises financially. This role was taken over by the developing banking system. Money was given to enterprises only in drastic situations and such a solution became a rule while the political and economic system was transformed. Security Questions in the Transition Period ------------------------------------------- Historic changes that have taken place in the late 1980s in European and international politics have decisively influenced (improved) the state of security in Poland. The security concerns have shifted from external to internal dangers, although one cannot say that external threats were fully eliminated.5 Despite the fact that the transformation period has eliminated some old threats, at the same time it created some new ones. Those threats are rather complex and are differently rooted. It is rather difficult to predict all of them and estimate their consequences. Moreover, ways of reducing the newly-born tensions are not only limited but also time-consuming. A successful attempt to present this issue can be found in one of the latest SIPRI publications on ECE countries, entitled Central and Eastern Europe The Challenge of Transition, edited by Regina Cowen Karp.6 It is said there that: "The picture that emerges does not suggest an easy or short path to building security in Europe. The continent is in the midst of historical changes. Relationships between countries are unsettled as are domestic relations between rivalling political groups. There is continuing danger of states breaking apart and ethnic tensions escalating into open conflict. Collective security offers the only means of encompassing the whole of Europe and integrating its still disparate parts. Collective incrementalism as currently practised is unlikely to lead to collective security proper. It raises expectations for a security order that states are not yet willing to adopt. Without a clear recognition that peace in Europe is in the national interest of each and every state, sceptics concerning the notion of a collective security order will be proven right and the concept will remain a desirable but unachievable objective." Into trying to throw some light on new security threats in ECE countries, it would be wise to distinguish external and internal dangers and political, economic, national and social tensions. There is no need to characterize more closely the external threats of ECE countries as they are obvious and well known to all economists and political scientists. The most complex example comes from the separate republics of former Yugoslavia. Still more examples on this specific issue are produced by the events taking place in the republics of the former USSR. No-one knows how internal tensions in Ukraine, Azerbaijan, Georgia, or Kazakhstan will finally develop. It is clear that if they do lead towards some kind of explosion of civil war, the results of it could overpass all the startling events that happened in former Yugoslavia. The external security of a country is not only defined by political factors; the economy also matters. Several economic determinants have influenced the transformation process of each ECE country. - The rise in prices of raw materials, including especially oil prices. - The disintegration of the old economic ties. - The collapse of trade with former COMECON countries. - The increased competition on internal and world market. - The economic slow-down in all partnership countries (old and new customers). As was mentioned at the beginning of this chapter the accent on the security issues has been moved from external factors towards internal ones. In such circumstances there is no need to comment closer on the external security determinants as their meaning is minor and temporary. Their impact is strongest at the beginning of the transformation process and with time passing and advancement of the reforms the weight of enumerated factors fades. The growing significance of internal factors merits closer examination. Factors that can undermine internal security embrace such issues: - Unemployment. - National tensions in multinational countries and in countries with national minorities. - Economic and social costs of the transition. - Political tensions. - Costs of emigration and immigration. - Hyperinflation. The list of external and internal factors that determine security of each ECE country shows that both market economies and economies in transition are facing similar problems but the scale of the problems is different. Although we can speak with the same language about our economic problems the difference lies in the fact that some of the phenomena did not appear in those economies in the post-war period, and ECE countries in many cases do not have the tools to master them effectively - or when they do have them they are too weak to act in a desired direction. The transformation period generated a conflict between macro-and microeconomic policies, with the microeconomic policy reducing the macroeconomic effectiveness. All this increases frustration and produces political duels. Often the lack of proper information in the mass media increases the possibilities of manipulating the society. These problems are being overcome with the advancement of the reform, when problems are removed and attempts made to fulfil the existing gaps. Nevertheless, it is necessary to notice that such problems do exist in early stages of transformation and it is necessary to overcome them. Very often overcoming them requires direct support from the outside (international institution or foreign experts), but as the Polish experience shows this can not be done without the agreement of the government. Security and the economy are closely intertwined. Linkage between them gains importance in the transition period and depends heavily on the strategy applied by a country. The Role of the North Atlantic Cooperation Council (NACC) and the Partnership for Peace (PFP) -------------------------------------------------- Most of the ECE countries try to get under the security umbrella created by NATO membership, fulfilling thus the security vacuum that emerged after the end of the Cold War and the decision to dismantle the Warsaw Pact. It is clear that before obtaining full membership they have to adjust their defence systems towards the requirements of NATO. This will embrace all the quantitative changes within the CFE Treaty, alongside qualitative changes that will lead towards closer compatibility of defence systems. The argument of ECE countries supporting the idea of NATO membership is well known and there is no need to repeat it here. On the other hand Western countries say that NATO is in the process of restructuring, that both sides are still not ready for the enlargement, that security architecture in Europe is in a flux, etc... In other words it is clear that the would-be members have to proceed through a transition period almost like a quarantine during which they will restructure their defence systems, bringing them closer to the NATO requirements. Such adjustments need time. They are not only limited to technical replacement of one system by others but, more importantly, require deep mental changes on both sides. Both NATO and Cooperating Partners are in the process of accepting that they are not enemies any more. They have to weed out the old habits of being too suspicious. This does not eliminate national interests, although in some specific cases international interests can override national ones. Moreover, it is necessary to understand that European security in the future relies deeply on political and economic cooperation from which defence industry cannot be excluded. NATO has prepared an expanding program which could be compared to a corridor leading towards full membership for ECE countries. This program embraces the NACC and the PFP. These initiatives are the result of evolution in perception of the processes of systemic changes in ECE commenced after 1989. NATO has followed carefully all the events taking place in the ECE countries, as is reflected by declarations in official documents beginning with the Brussels Declaration dated 30 May 1989. All official documents and declarations from NATO that appeared since that date show the responsibility of NATO for the course of events in Eastern Europe. The best proof for that can be found in the following quotation from the "Rome Declaration on Peace and Cooperation": "We have consistently encouraged the development of democracy in the Soviet Union and other countries of Central and Eastern Europe". and further in the same point "...We will support all steps in the countries of Central and Eastern Europe towards reform and will give practical assistance to help them succeed in this difficult transition. This is based on our conviction that our own security is inseparably linked to that of all other states in Europe." The same declaration has introduced a closer institutional relationship in consultations and cooperation on political and security issues, proposing the following activities: - Annual meetings with the North Atlantic Council at Ministerial level, called the North Atlantic Cooperation Council. - Periodic meetings with North Atlantic Council at Ambassadorial level. - Additional meetings with the North Atlantic Council at Ministerial and Ambassadorial level as circumstances warrant. - Regular meetings, at intervals to be mutually agreed, with NATO subordinate committees, including the Political and Economic Committees, the Military Committee and under its direction, other NATO Military Authorities".(8) In a short time, these proposals were put into life in the North Atlantic Cooperation Council Statement on Dialogue, Partnership and Cooperation, signed in Brussels on 20 December 1991. With time passing, simple institutions were supported with new initiatives of more sophisticated character, giving new momentum to the cooperation and mutual alliances. On 10 January 1994, Heads of State and Government participating in the Meeting of the North Atlantic Council held at NATO Headquarters, issued an "Invitation to Partnership for Peace", in which we read that "...the Alliance, as provided for in Article 10 of the Washington Treaty, remains open to the membership of other European states in a position to further the principles of the Treaty and to contribute to the security of the North Atlantic area." and further "...we therefore invite the other states participating in the NACC and other CSCE countries able and willing to contribute to this program, to join with us in this partnership.Ó9 The new initiative did not meet fully the desires of the ECE countries, but finally they accepted it as it brought them closer towards NATO than all the former offered steps. Within the framework of the PFP, subscribing countries will cooperate with NATO in pursuing the following objectives: facilitation of transparency, ensuring democratic control of defence forces; readiness to participate in operations under the UN or CSCE authority; and the development of cooperative military relations. Participation in this program is financed by the partner country, but in specific areas support can be available from NATO. What good is the PFP? The most interesting thing in the program is that it gives each country the opportunity to work out its own path leading towards NATO membership, which can be done at a speed set by the country itself. The bad side of the PFP concerns its costs. The shorter the route, the higher the expenses of covering the distance towards full membership. Within the framework of the PFP each country has to prepare its presentation document in which it will state how it wants to fulfil the objectives defined in the document and in what time this has to be done. Such a document is a preliminary step in getting acceptance for the program from NATO. Table 2 Chronology of signing the PFP program by cooperating countries --------------------------------------------------------- | Date | Country | Who has signed | |-------------------------------------------------------| |26 January | Romania | Min. of Foreign Affairs: | | | | Teodor Viarel Melescanu | |-------------------------------------------------------| |27 January | Lithuania | President: | | | | Algidras Brazauskas | |-------------------------------------------------------| |2 February | Poland | Prime Minister: | | | | Waldemar Pawlak | |-------------------------------------------------------| |3 February | Estonia | Min. of Foreign Affairs: | | | | Juri Luik | |-------------------------------------------------------| |8 February | Hungary | Min. of Foreign Affairs: | | | | Geza Jeszenszky | |-------------------------------------------------------| |8 February | Ukraine | Min. of Foreign Affairs: | | | | Anatoly Zlenko | |-------------------------------------------------------| |9 February | Slovakia | Prime Minister: | | | | Vladimir Meciar | |-------------------------------------------------------| |14 February| Bulgaria | President: | | | | Jelu Jelev | |-------------------------------------------------------| |14 February| Latvia | Prime Minister: | | | | Vladis Birkavs | |-------------------------------------------------------| |10 March | Czech Republic| Prime Minister: | | | | Vaclav Klaus | |-------------------------------------------------------| |16 March | Moldovia | President: | | | | Mircea Snegur | |-------------------------------------------------------| |23 March | Georgia | Prime Minister: | | | | Alexander Chikvaidze | |-------------------------------------------------------| |30 March | Slovenia | Prime Minister: | | | | Janoz Drnovsek | |-------------------------------------------------------| | 4 May | Azerbaijan | President: | | | | Geidar Aliyev | |-------------------------------------------------------| |10 May | Turkmenistan | Deputy Prime Minister: | | | | Boris Shikmuradov | |-------------------------------------------------------| |27 May | Kazakhstan | Foreign Minister: | | | | Kanat Saudabaev | |-------------------------------------------------------| | 1 June | Kyrgyzstan | President: | | | | Askar Akayev | |-------------------------------------------------------| |22 June | Russia | Foreign Minister: | | | | Andrei Kozyrev | --------------------------------------------------------- Source: NATO Review, June 1994, and NATO Press Service. (The table does not contain Sweden and Finland which also have joined the PFP). History is happening just now and we are creating it. It is very difficult to comment on latest events without having a distance towards them but for sure NACC and PFP means more confidence not only among former enemies but also among former allies. One of the goals is being reached. What Can be Done - a Model of Recommended Solutions --------------------------------------------------- The beginning of the 1980s has marked a new turning point among the European nations. What are the new factors that describe contemporary relations between Western and Eastern countries? - New relations could be described as cooperative instead of antagonistic deterrence from the past. - The new period is characterized by breaking divisions and building bridges. - The newly-built ties are increasing international interdependence among two groups of countries which in turn has its impact on redefining of national interests. All those processes are complicated and time-consuming. Moreover they cannot be carried out without a wide variety of costs embracing not only finances but also social and psychological burdens which are beyond simple estimation. As was said, national security in ECE countries heavily depends on the development of events inside each of the countries, while increasing interdependence changes the role of the international environment in the security question. What can be done and which path should we follow in order to increase security in Europe? There is no doubt that the direction pointed out in NACC and PFP is a correct one and leads us in a desired direction. All the partnership countries can choose between different speeds and paths, which they define on their own. This idea gets to the point, but it is necessary to accept the fact that newly born democracies are impatient. This impatience is caused by the eagerness to cover the development and civilization gap. It is also deeply rooted in the past when all plans had to be fulfilled on time, no matter what were the costs of such an undertaking. We have to follow the idea of defining long-term goals. - NATO membership. - Closer cooperation in arms production that will lead towards an international military complex. - Building an international net for security infrastructure. - Fulfilling the ideas presented in NACC and PFP. - Bringing defence systems closer to each other by increasing their compatibility. How can this be done? This question has to be answered by the specialists: politicians, military and scientists from different disciplines. Our aim is to formulate ideas and create a climate in which those ideas can mature and be brought to life. Such ideas as the NACC and the PFP are creating conditions in which the desired goals can be fulfilled, but we cannot stop at this stage. We have to go further, widening our horizons. Notes ----- 1. A. Falkowski, National Economic Development and Defence Budget of the Republic of Poland, paper prepared for Economic Committee Meeting with Cooperation Partners, Budapest, April 1994. 2. D. HŸbner, Transformation and Growth 1990-1993, IRiSS Working Papers 1994. 3. A. Falkowski, Control of the execution of the Defence Budget, paper prepared for the Economic Committee Meeting with Cooperation Partners, Budapest, April 1994. 4. For details look: W. Karpinska-Mizielinska, T. Smuga, Zmiany stosunkuw wlasnosciowychow procesie tworzenia strategii gospodarczej, IRiSS, Raporty, Studia nad strategia 1994. 5. J. Walker, Security and Arms Control in Post-Confrontation Europe, SIPRI, Oxford University Press 1994, p. 14. 6. Central and Eastern Europe The Challenge of Transition, ed. R. Cowen Karp, SIPRI, Oxford University Press 1993. 7. For more details look: NATO -1990-1992. Otwarcie Sojuszu na Wschud. Dokumenty przygotowane w ramach Zespolu analiz strategicznych,PISM, lipiec 1992. 8. Rome Declaration on Peace and Cooperation, Issued by the Heads of State and Government participating in the meeting of the North Atlantic Council in Rome on 7-8 November 1991. Signed at Rome on 8 November 1991. Quoted after: J. Walker, Security and Arms Control in post-confrontation Europe. SIPRI, Oxford University Press 1994. 9. NATO Partnership for Peace. Brussels, 10 January 1994. Press Service. ---------------------------------------------------------- Copyright 1994 NATO All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from the copyright holders. Authorization may be requested for redistribution of the text on a non commercial base by research and educational services. Requests should be addressed to the Economics Directorate, NATO, via e-mail 'scheurweghs@hq.nato.int'. First edition 1994 ISBN 92-845-0079-6 This is the latest in a series bringing together papers presented at the NATO colloquia organised by the NATO Economics Directorate and Office of Information and Press on economic issues in the former USSR and Central and East European countries. For further information please write to the Director, Office of Information and Press, 1110 Brussels, Belgium. The articles contained in this volume represent the views of the authors and do not necessarily reflect the official opinion or policy of member governments or NATO.