Establishment of a defence fund will enable effective financing of strategic and important projects in the future

 22. 02. 2022      category: Army of the Czech Republic
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The Ministry of Defence carries out purchases of military equipment important for ensuring national defence. The process of implementation of strategic and important projects is usually multi-year, and due to the high acquisition costs spread over years, it is practically unrealistic to plan the allocation of funds in a specific budget year and in the medium-term outlook. Each year, the Ministry of Defence is faced with the need to reallocate funds in response to the instability of spending frameworks in individual years, the results of procurement procedures for strategic and major projects, and the requirements of contractors who have set their financial policies which cannot be predicted at the beginning of project implementation.

It follows from the above that in the current legislative environment, strategic and major projects cannot be implemented in such a way that the financing parameters are fixed at the beginning of the project implementation without any changes, as they change over time. The practical consequence is that the projects implemented subsequently have to be changed so that the primary spending is in the budget year.

fond_TITPicture: Defence Minister Jana Černochová said the fund is important because it will bring greater predictability, ensure sufficient funding in each year and greater flexibility. Each year, funds should be allocated to the fund for strategic modernisation projects of the Czech Armed Forces, especially multi-year ones. (illustration photo) | major Ladislav Kabát

The aim of the proposal is to allow the MoD to use funds operationally for strategic and important projects regardless of their initiation over time. In particular, the Fund should provide stability for the financing of strategic and important projects by approving their total expected resource framework and allowing the financing of selected investment needs of the Ministry of Defence regardless of their allocation to the MoD chapter by the State budget for a specific year. This should create a legal framework that would allow the MoD to finance multiannual armaments projects more flexibly and reduce the share of investments financed through advance payments. The Fund should, inter alia, contribute to ensuring a stable resource framework and to meeting the Allied commitment to allocate 2 % of GDP to defence expenditure.

The Ministry of Defence will consult in particular with the Ministry of Finance on this matter, as it will be necessary to align the linkage of the new law with the budgetary rules of the State in order to meet both the requirement of the budgetary policy of the Ministry of Finance and to ensure the need to finance multiannual strategic and important projects of the Ministry of Defence through the Defence Fund.

The funds allocated in the defence fund will not have a practical impact on the state budget, as it will only be an allocation in the fund and will not be a request for an increase in the budget chapter of the Ministry of Defence or for the benefit of the fund. The establishment of the defence fund will in future allow for effective financing of investments in the context of a 2 % of GDP allocation for defence expenditure. Moreover, in a treasury environment, it will be possible to use the fund's resources to partly influence the cash flow of the State.

Thanks to the defence fund, a positive impact on the security and defence of the state is expected, as the establishment of the fund will ensure a stable financial framework for strategic and important projects, enabling their continuous financing, thus ensuring the necessary equipment and technology for the Czech Army.

The Ministry of Defence is expected to submit a draft bill on the Defence Fund to the Government in September this year.

Jana Černochová: The Fund is important because it will bring greater predictability, ensure sufficient funding in individual years and greater flexibility

We asked Defence Minister Jana Černochová to comment on the defence fund and she told us the following: "The Fund is important because it will bring greater predictability, ensure sufficient funding in individual years and greater flexibility. Each year, funds should be allocated to the Fund for strategic modernisation projects of the Czech Armed Forces, especially those multi-year projects that could not be invested for objective reasons. This will ensure that they can be used in the following period. As regards changes in the area of procurement, in order for higher defence spending to be used effectively, it is necessary to improve planning processes and simplify legislation and internal processes at the Ministry of Defence."

 Author: Jan Zilvar