New financial instruments for financing military expenditure

In the context of the increase in defense spending at the European level and the need to quickly equip the Romanian armed forces with the latest equipment and technology, compatible with those of NATO allies, in order to ensure the stability of the defense of the Eastern Flank, the Ministry of Finance wants to diversify the instruments of financing so that the Government and state-owned companies can access the specific funds made available by other states and government entities for the realization of projects of national strategic interest, including defense and national security. That is why the Ministry of Finance has put in decision-making transparency a project of an emergency ordinance for the amendment of GEO 64/2007 on the public debt, a normative act that would create the necessary conditions for accessing the funds from the American Foreign Military Financing mechanism.

According to the Founding Note, this normative act is necessary "for the elimination of all operational limitations, because the needs to equip the force structure with military technique and equipment are great and generate a significant budgetary effort, thus leading to the need to mobilize the most advantageous sources of financing budgetary needs, which could be identified for such purposes".

In this sense, in order to ensure the urgent needs of military capabilities, it is necessary to identify and diversify the financing instruments for the purchase of military technique and equipment.

The quoted text specifies: "In the context of the development of endowment programs with the US Government with a significant impact on the development of military capabilities, in conjunction with the current regional security situation, representatives of the US Government informed the Romanian side about the possibility of accessing funds, under advantageous conditions , through the FMF (Foreign Military Financing) mechanism for the financing of procurement contracts for military purposes concluded with departments/agencies coordinated by the US Department of Defense. Within the FMF mechanism, funds available up to 4 billion dollars are approved for direct loans, with the possibility of repayment in 12 years, after a grace period of one year from the date of the first withdrawal, at an advantageous interest rate (close to the cost of US financing, respectively the interest rates of the bonds issued by the US Treasury to which a margin is added), as well as funds of up to 8 billion dollars, attracted by contracting loans from the financial markets, guaranteed by the US Government. The availability of these amounts changes as loan agreements are concluded with partners. Poland was the only state that previously benefited from this program. The FMF financing mechanism offered by the US Government is thus an efficient and advantageous way of diversifying the financing sources of the Romanian state, from the perspective of maturity and the costs associated with this financing compared to other financing sources used by the Romanian Government, simultaneously with the development of some strategic military capabilities".

According to the Ministry of Finance, in addition to the contracts for the purchase of military technique and equipment of the Ministry of National Defense, other contracts carried out by state companies were identified, which are part of the country's National Defense Strategy and which, according to the discussions held with the partners from the US, could be eligible for funding under this mechanism.

The adaptation of the legislative framework provides for:

- including the possibility of using specific financing mechanisms made available by other governments and/or other governmental entities, for the financing of contracts/acquisition agreements/projects of national strategic interest;

- the regulation of specific elements related to the development of these financings;

- ensuring the possibility that such financing contracted by the Government of Romania can be sub-loaned to the relevant state companies and/or they benefit from the state guarantee for such loans contracted in their own name, in compliance with the legislation on state aid.

The Foundation Note also shows that through a memorandum from July 2024, the Government approved the initiation of steps to use the FMF financing mechanism offered by the USA for the purpose of financing some contracts to ensure military capabilities for our country. In order to be able to use the direct loan facility offered by the US within this mechanism in 2024, the signing of the loan agreement between the two governments must be completed by September 30, 2024, and that is why the Executive resorted to the emergency ordinance procedure .