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<TITLE>Czech First Deputy Minister of Defense Petr Necas: Changes and
Growth in the Czech Defense Industry</TITLE>
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<CENTER><FONT SIZE="+4">Changes and Growth in the</FONT></CENTER>
<CENTER><FONT SIZE="+4">Czech Defense Industry</FONT></CENTER>
<CENTER><FONT SIZE="+3">Czech First Deputy Minister of Defense Petr Necas</FONT></CENTER>
<CENTER><B><FONT SIZE="+1">INTRODUCTORY REMARKS</FONT></B></CENTER>
<P>Along with the political and economic changes that took place in
Czechoslovakia in 1989 has come a radical change in our defense force
strategy, military doctrine, and objectives. This change has led to
considerable cuts in defense spending, which resulted in the cessation of
armed forces development and modernization between 1990 and 1994; most
expenditures during that time were swallowed up in the operation of large
forces that no longer met requirements. This situation had an immediate
impact on our domestic defense industry. </P>
<P>I would like to share with you now my views on the state of that
industry. I will focus on three main issues: the past, present, and future
of the Czech defense industry and its conversion; the rebuilding of the
Czech armed forces; and control of armament exporting. </P>
<CENTER><B><FONT SIZE="+1">PRE-1989 ARMAMENT PRODUCTION</FONT></B></CENTER>
<P>In order to gain an overall picture of the Czech defense industry, it is
necessary to take a short look into its past. After the end of World War
II, our armament production was almost nonexistent. However, the early
1950s gave rise to a new industrial base, but on a completely different
footing. The dominant part of the industry consisted of Soviet-designed
arms and technologies. For example, between 1954 and 1962 the former
Czechoslovakia produced more than 3,400 Soviet MIG-15 fighter aircraft. In
the 1960s, under the uncompromising control of the former USSR, we were
forced to adopt a specialization, as were other Warsaw Pact countries.
Czechoslovakia was "assigned" the production of aircraft and
armored vehicles. </P>
<P>Despite this enforced specialization, Czechoslovakia managed to continue
development and production of certain articles of Czechoslovak design. We
were one of the few countries of the former Warsaw Pact whose armed forces
exclusively used small weapons manufactured in their own country. However,
the Soviets maintained control over our exports and introduction of
important weapons and forced de facto compulsory technological transfers
to the other so-called socialist countries. Such efforts of the former
USSR were not always unselfish. Until 1989, Czechoslovakia also maintained
excessive armed forces and spent excessive funds on research and
development of new weapons. </P>
<CENTER><B><FONT SIZE="+1">POST-1989 DEFENSE INDUSTRY CONVERSION</FONT></B></CENTER>
<P>There were many reasons for converting this disproportionate defense
capacity in the early 1990s. Until that time, Czechoslovakia had produced
great quantities of heavy military equipment such as battle tanks, armored
combat vehicles, artillery systems, and ammunition. The major customers
for these products were the countries of the Warsaw Pact and the so-called
friendly countries of the Third World. The production of these heavy
weapons, demanding in terms of material and energy resources, put a heavy
burden on our economy and the environment. </P>
<P>With the disintegration of the Warsaw Pact, our essentially predictable
and centrally planned economy disintegrated as well. Even exports to
Third-World countries raised problems. We respected armament embargoes
against states supporting international terrorism, and chronically
insolvent customers had debts that were practically uncollectible. </P>
<P>In addition to these problems, most heavy weapons produced under the
Soviet license were becoming outdated. Modernization did not seem
appropriate, since the worldwide slump in arms trading in the early 1990s
did not guarantee marketability. </P>
<P>While all of these factors spoke in favor of defense industry
conversion, many issues were bound up with the speed, depth, and methods
through which it would be realized. In 1994, the armament production in
the Czech Republic achieved approximately 15-20% of its 1987 volume in
comparable prices. The decline differed among the individual fields of
production, from a slight decline in aircraft production to practically a
complete stop of the manufacturing of small weapons and ammunition. But a
general conversion of armaments-related research and development and
production facilities actually did take place. While it cannot be claimed
that conversion was successful, positive aspects of the process have been
manifested in the expansion of a number of non-military production
facilities to fill the gaps in our market. And all of this came about
without any manifest social upheavals. </P>
<P>These early conversion efforts have stimulated further efforts in
forming a new Czech defense industry structure. While these efforts have
not yet been completed, the industry has already achieved some success.
This can be seen in its participation in the rearming and modernization of
the Czech armed forces, in its investing resolutely in its future, in
attracting new customers, and in the establishment of contacts and
cooperation with foreign companies. </P>
<CENTER><B><FONT SIZE="+1">THE CURRENT POSITION OF AND FUTURE PLANS FOR
THE CZECH DEFENSE INDUSTRY</FONT></B></CENTER>
<P>As our defense industry works on its new structure, we have already
begun to produce many top-quality products. These include: </P>
<UL>
<LI>Pilot training systems (L-39 and L-59) and light fighters</LI>
<LI>Small transport aircraft</LI>
<LI>Airport radar and radio target identifiers</LI>
<LI>Radio communication, VHF, and aircraft radio stations and
telecommunications complexes</LI>
<LI>Infantry and army engineer ammunition</LI>
<LI>Heavy-duty trucks</LI>
<LI>Means of personal protection against nuclear and chemical weapons</LI>
<LI>Explosives, powders, and solid fuel for missiles</LI>
</UL>
<P>Some of the Czech companies engaged in this work include Aero Vodochody,
Tesla Hloubetin, Synthesia Pardubice, Ceská Zbrojovka Uhersky Brod,
Zbrojovka Brno, Zbrojovka Vsetin, and Policské Strojirny Policka.
Affecting this work and the future work of the Czech defense industry are
the fundamental and irreplaceable importance of the Czech armed forces,
and the export policy, extent of international cooperation, and
competitiveness of Czech companies in research, development, and
production. </P>
<P>A principal change has taken place in industry management because of the
abandonment of individual manager material and budgetary authority and
because of the start-up of a planning and budgeting system. In 1995, for
the first time, the Ministry of Defense's chapter of the state budget was
prepared to cover recognized threats to state security and efforts leading
to their elimination. Costs were budgeted for each element. The ratio of
investment and operating expenditures have also been decided on, with
significant emphasis placed on investments. These decisions have
inevitably required a substantial reduction in operating costs, as well as
a narrowing of the program structure. However, long-term plans for
reduction in resources, including financial, material, and human ones,
have been prepared, discussed, and approved by the Ministry of Defense
through the year 2006. The 1995 and 1996 budgets as well as the Ministry
of Defense's state budget chapter for 1997 are based on these long-term
plans. The long-term requirements of the Czech armed forces have also been
identified and the "Acquisition Plan" for developing and
modernizing projects between 1995 and 2005 has been completed. </P>
<P>It should also be emphasized that a number of principal organizational
changes have been implemented. A public tendering system is being applied
to selecting business partners for both supplies and disposals, and the
double-entry accounting system has been introduced, enabling the
monitoring of all costs associated with individual assets and their
changes. </P>
<CENTER><B><FONT SIZE="+1">REBUILDING THE CZECH ARMED FORCES</FONT></B></CENTER>
<P>At present, the Czech armed forces are at the end of the first phase of
their transformation period. This first period can be characterized as one
of predominantly quantitative changes in personnel numbers and in the
numbers of weapons systems and equipment. External factors affecting this
period have been the process of dividing the former Czechoslovak army and
the implementation of the Conventional Armed Forces Treaty in Europe. The
dominant internal factor was a quantitative change in the financial
management system of the Czech armed forces and the Ministry of Defense.
</P>
<P>To continue the rebuilding of the Czech armed forces and to further its
modernization and development, 743 investment projects have been defined
for the period 1995-2005 with a calculated expenditure of 209 billion
Czech crowns. To date 151 projects have begun with total investment
expenditures of 55 billion Czech crowns, or $1.96 billion U.S. The
priority of these projects is to achieve compatibility with the NATO
armies. </P>
<P>The Ministry of Defense expects that most of these modernization steps
will be provided for by domestic producers, whom we consider potential
suppliers of most of the important commodities for the Czech armed forces.
Material provided by domestic companies tends to be cheaper than foreign
imports, and is therefore advantageous and desirable. </P>
<P>International participation in providing supplies is, however, being
realized or envisaged for a number of projects, since there is no
appropriate domestic production base for some of these materials. In
addition, practically no project can be economically successful for any
producer if the products are sold only to the Czech armed forces.
International cooperation in production and sales therefore brings about
salability in other markets and thereby economic advantages. In this
respect the Ministry of Defense and the Czech armed forces envisage
supporting the penetration of foreign markets with quality products. We
also realize that the sale of any domestic product to the armed forces is
an important pro-export factor. </P>
<CENTER><B><FONT SIZE="+1">ARMAMENT EXPORT CONTROL</FONT></B></CENTER>
<P>In the field of armament export, the Czech Republic has created an
effective system of controls based on legislation in three relatively
independent areas: </P>
<UL>
<LI>Equipment for military use</LI>
<LI>Goods and technologies of a dual nature</LI>
<LI>Weapons, ammunition, and explosives of a non-military nature (e.g.,
sporting and hunting guns, industrial explosives)</LI>
</UL>
<P>In the area of international control of armaments production and export,
the Czech Republic is cofounder of the so-called Wassenaar Arrangement and
a member of the Nuclear Suppliers Group. We have also expressed our
interest in taking part in activities related to control of missile
technologies, and are a signatory to the Nuclear Nonproliferation Treaty.
We fully respect our obligations under the Convention on Banning and
Destruction of Biological and Toxic Weapons and signed, in 1993, the
Chemical Weapons Ban Convention. The principles and commitments ensuing
from these international documents and conventions constitute an integral
part of the Czech legal order. </P>
<P>The actual export of armaments involves applying licensing procedures
laid down by the Czech Licensing Office of the Ministry of Trade and
Industry in direct coordination with the Foreign Ministry, Ministry of
Defense, and Ministry of the Interior. It is a two-tier process controlled
by the Government: once a general license is granted for trading in
military equipment, a trading license is then issued for each approved
export transaction. Without the general license and the trading license,
no Czech company can offer any military equipment, promote its sale,
purchase it, or sell it. </P>
<P>In the field of dual technologies, the current national system is also
based on individual review of every export transaction, with licenses
issued after prescribed terms have been met. Export of weapons,
ammunition, and explosives of a non-military character are also handled on
a case-by-case basis. </P>
<P>Particular attention is now being paid to the issue of military
commodities export. Legislation is expected to regulate existing
procedures according to the following principles: </P>
<UL>
<LI>Achieve greater responsibility by exporters in the verification of
documents concerning the final use of military products</LI>
<LI>Introduce new types of licenses for individual export transactions
(open individual license, general open license)</LI>
<LI>Introduce the possibility or the obligation to apply in advance for
permission to participate in a transaction with a foreign partner</LI>
<LI>Reinforce the control of customs and state nuclear safety agencies</LI>
<LI>Modify national control mechanisms to be compatible with those of the
European Union</LI>
</UL>
<P>In 1995, the Czech Republic exported $153 million worth of military
equipment to 58 countries on all five continents. The main share of this
equipment was aircraft technology, although its value declined compared to
1994. On the other hand, the share of mobile ground technology almost
doubled, and the share of small handguns almost quadrupled. </P>
<P>The total value of military material imported to the Czech Republic
reached $49.7 million in 1995. The main import items were aircraft
technology components, particularly aircraft engines and aircraft cannon.
Communications equipment represented another significant import item.
Traditional imports of spare parts for mobile ground technology also
continued. </P>
<CENTER><B><FONT SIZE="+1">CONCLUDING REMARKS</FONT></B></CENTER>
<P>The defense industry in the Czech Republic is being fully privatized.
Newly born companies generally are taking the form of joint stock
companies and their owners are usually institutional investors. In the
aircraft industry, the state is also a shareholder. </P>
<P>I would like to conclude by expressing my conviction that the time has
come to develop mutual defense industry activities among the member-states
of NATO and Partnership for Peace. I am certain that the Czech defense
industry has much to offer in that regard and is able to contribute its
share to international cooperation </P>
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