28.03.2023 Aviation law and defence

Leasing in defence procurement


On 23 April 2022, the long-awaited Homeland Defence Act, a comprehensive legal act regulating all aspects of country defence, came into force. The Act includes two provisions which significantly change the defence procurement system.

Acquisition of military equipment in the form of leasing

The new regulations introduced the possibility of leasing military equipment (Articles 51 and 52).

This is not a novelty in Europe or even in our region. Similar solutions are already in place in Germany (Heron UAVs), Great Britain (C-17 transport aircraft), the Czech Republic and Hungary (JAS-39 Gripen fighter aircraft). In recent years, leasing has been and still is considered as a model for acquiring modern military equipment, for example by Bulgaria or Austria.

Lease agreement

Without going into details and theoretical considerations, leasing is an agreement under which the financing party (lessor) undertakes to purchase a specific thing from the seller and give it to the user (lessee) for use for a specified period of time in exchange for payment of remuneration split into instalments.

The obligations of the financing party under the agreement include the purchase of the thing (in this case military equipment) and its release to the user. On the part of the user, there arises, on the one hand, an obligation to pay remuneration to the lessor in the form of instalments, and on the other – to use of thing in the manner specified in the agreement (or in the manner corresponding to the purpose and intended use of the thing).

Leasing of military equipment

This new concept in Polish law was defined in two, seemingly short, articles of the Homeland Defence Act. Their content is quite general, but it allows us to get an idea of what the mechanism will look like.

The financing party, or the lessor, are the companies of industrial defence potential:

·         Industrial Development Agency,

·         Polish Development Fund,

·         executive agencies (including the Armament Agency),

·         other state legal entities.

These entities will be able to acquire military equipment or weapons from both domestic suppliers and foreign entities. This also applies to international agreements (G2G), including, agreements under the US Foreign Military Sales (FMS) program. The purpose of such acquisition will be solely the leasing of military equipment to the Armed Forces.

In other words, the Armed Forces in this legal relationship will act as a user (lessee).

Importantly, the Act excluded the possibility of direct leasing, i.e. an agreement in which the roles of the seller of military equipment and the financing  party are combined. In simple terms, in the case of direct leasing, it would be the equipment manufacturer who would give it to the Armed Forces.

Therefore, a go-between is necessary in the form of a separate financing entity, which is not a manufacturer/seller of military equipment.

Example:

A Polish company from Siemianowice Śląskie cannot lease modern wheeled armoured carriers directly to the army. It will first have to sell them to another entity listed in the Act, which then will transfer them to the armed forces for use.

Leasing instalments for military equipment

Leasing instalments will be covered from the state budget or from the Armed Forces Support Fund established at Bank Gospodarstwa Krajowego. This fund is to enable an increase in financing of expenditures for modernization of the Armed Forces and other tasks resulting from the development program of the Polish Armed Forces established by the Ministry of National Defence.

In the first case, the purchase of military equipment itself, as well as the amount and repayment dates of leasing instalments will depend on the approval issued by the Minister of National Defence.

The acquisition of military equipment is a very serious financial investment. It is no different if its purchased by the lessor with an aim to lease it. Entities which, according to the new regulations, are to purchase equipment in order to lease it to the army may have insufficient capital to finance the transaction. For this reason, the legislator provided for the possibility of recapitalizing them by other public entities defined in the public procurement law.

The recapitalisation may take the form of:

1. acquisition of shares in companies of the Polish defence industry, or

2. making donations and payments to executive agencies, the Industrial Development Agency and the Polish Development Fund, defence sector companies and other state legal persons.

Temporary nature of military equipment leasing

The lease agreement is concluded for a definite period. However, the Act does not define the duration of leasing of military equipment, so it is part of the freedom to conclude contracts.

The leasing of military equipment should not be treated as a fundamental means of increasing the combat potential of the Armed Forces, but rather as a bridging or temporary solution with the following objectives:

·         temporary increase in the army combat potential,

·         getting to know the equipment that has already been ordered by the armed forces as part of traditional procedures,

·         development of necessary logistic and maintenance procedures and tactics of use.

Such a solution is to enable rapid delivery of available military equipment, in particular when other procedures aimed at purchasing the target equipment are underway. For example, the British leased 4 C-17 transport aircraft, treating it as a temporary solution until the target aircraft intended for them are ready.

When the lease is over, two solutions are possible:

1. return of equipment, or

2. purchase of equipment from the lessor.

Legal fiction

It is worth paying attention to the legal fiction introduced by the new regulations, according to which it is assumed that military equipment acquired in the form of leasing is the property of the Polish Armed Forces. The purpose of such regulation is to facilitate the implementation of all procedures and procedures ensuring the proper operation of equipment, such as registration of vehicles or aircraft, admission to travel on public roads, enabling and organizing maintenance and repair works.

The first leasing agreement in Poland

In October 2022, the first lease agreement was concluded, under which the Polish Armed Forces will be able to use MQ-9A Reaper unmanned aerial vehicles belonging to the US Air Force, until delivery of MQ-9B drones ordered as part of traditional procurement procedures.

In the coming months, we can expect another leasing agreement, this time for AH-64E Apache combat helicopters, which will also serve as a bridging solution until the target helicopters are received under the Kruk program.

Does leasing military equipment have a future?

Although the leasing of military equipment is not and should not be treated as the main and fundamental source of new equipment of the Armed Forces, its introduction into the legal order should be assessed positively. This form of acquiring armaments can make the entire technical modernization program of the Armed Forces more flexible, streamline and shorten the process of implementing new, target equipment.

Leasing can also serve as a way to quickly acquire additional armaments available on the market in the event of a sudden need to rapidly increase the defence potential, e.g. in the event of a serious international crisis.

In my opinion, in the coming months, after the already mentioned Reapers, we will see another examples of purchase of military equipment in order to lease it to the army, especially since in the near future we will face large defence purchases, mainly in the USA and the Republic of Korea.

Aviation law and defence – see how we can help:


Piotr Dudek Director of the New Technologies, Defence & Aerospace Department, Advocate
TGC Corporate Lawyers

See also

14.12.2023 Aviation law and defence
14.07.2023 Aviation law and defence
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