28 July 2020

The Law on Defence Procurement which was adopted by the MPs on the last day of Session III, is a clear victory of the Parliament, the Armed Forces, and Ukraine. This law comprehensively changes the legislation in the area of defence procurement from the Soviet one to European. It brings us closer to the standards of EU and NATO member countries.

This document is also an obvious achievement of Ukraine’s civil society. For the first time in the history of Ukraine’s defence sector, the legislative process was transparent, involved all the key stakeholders, and was coordinated by the civil society.

Now I will focus on the benefits and drawbacks of the law and on the further steps needed to make it work effectively.

The President’s Promise

The law which was supported by Verkhovna Rada generally corresponds to the promises of Volodymyr Zelensky which NAKO received from him as a presidential candidate more than a year ago within the Presidential Questionnaire project, ‘Seven Questions on Defence’.

In March 2019 during the election campaign, he promised to reform defence procurement. Among other things, he promised that the new law on defence procurement (was mentioned there as the Law on State Defence Order) would be adopted to tackle a number of burning issues. The new legislation was supposed to:

1)  regulate pricing of goods procured via the State Defence Order;

2) introduce competitive procedures to procure defence-related goods, services and works which make up a state secret within State Defence Order;

3) cancel the closed registry of defence-related producers and providers whose goods, works and services make up a state secret and create the open registry of defence producers.

Why is This Law So Important?

So far, defence procurement has been regulated by several laws including the Law on State Defence Order which is 20 years old and the Law on State Secret which is 26 years old and also requires serious changes. Until recently, the regulatory framework in this sector has not properly changed, and the philosophy and principles of defence procurement remained critically Soviet. By this, we mean the approach to classify everything.

Apart from that, defence procurement reform is one of Ukraine’s obligations concerning harmonization of defence procurement with the standards of NATO and the EU member countries when it comes to the EU Defence and Security Directive 2009/81/EC and is included in the implementation part of the EU Association Agreement.

Ukraine’s authorities have for many years claimed that defence procurement had to be classified to protect state secrets and avoid the information leak which could be used, for instance, by the Russian secret services. However, this argument was often used only to conceal the corruption schemes and ineffective use of state funds.

Herewith, a big part of this ‘secret information’ was not simply known to the Russian secret services but if needed it could be found using the public sources. Thus, the approach of total classification negatively influenced Ukraine’s defence capabilities and threatened the country’s security and defence in general. Various examples of such abuses can be found in NAKO’s research on corruption risks in defence procurement.

The Law on Defence Procurement adopted on 17 July aims to minimize corruption risks in Ukraine’s defence sector: it ensures transparency of defence procedures, considerably increases the transparency of planning, provides effective democratic and civil control and oversight. Due to this, state funds for defence-related goods, works, and services will be used more efficiently.

Head of Parliamentary Defence Committee Olexander Yavitnevych also stressed that the law would increase competition in defence procurement.  He says that it will be good both for the state budget and the servicemen in the crisis zone as those who need equipment or technologies the most will get the best goods at the optimal cost.

Deputy Head of state defence enterprise Ukrobornorpom for Government Relations Mustafa Nayem thinks that the most important achievement of the law is the cancellation of the old corrupt Soviet pricing system called RKM. It will be replaced with a new one which has to be developed by the Cabinet of Ministers of Ukraine and implement with the secondary legislation.

Apart from that, the draft law stipulates the opportunity to create the Centralized Procurement Organization for the Ministry of Defence which will be able to save the funds and minimize corruption risks for the ministry.

Meanwhile, an especially important achievement for the civil society is that all key stakeholders partook in the legislative work: the access was open, and the process transparent.

The working groups included MPs from the Parliamentary Defence Committee, the representatives of the Ministries of Defence and Economy, the President’s Office, the Secret Service of Ukraine, state defence enterprise Ukroboronprom, the League of Defence Enterprises, the Association of Defence Producers and Military Equipment, and Ukraine’s Defence and Security Industry Association. The Independent Defence Anti-Corruption Committee was actively involved in this process as the coordinator from the civil society.

Drawbacks of Declassification and Other Problem Areas

Despite the significant advantages of the Law on Defence Procurement, it has several problem areas.

One of the goals of the law was declassification of contracts within the State Defence Order (SDO). This information is important for the society and the citizens of the country which is involved in the armed conflict with the foreign state.

Thus, provisions which allow classification of SDO plans, content, volume, financing, and implementation will be taken away from the Law on State Secret. In future, there will be no automatic classification of the SDO.

But what should be done with the contracts which have been already executed? The authors of the law suggested a specialized detailed procedure to declassify such documents. It was supposed that an inter-agency expert commission had to be created under the umbrella of the Cabinet of Ministers, and this commission was supposed to decide which contracts could be declassified without the damage to the national security, and which of them not.

NAKO supported such a collegiate approach as it allows finding an optimal balance between protecting the state secret where necessary and the right of the society to know where the money goes.

Sadly, the deadline to make such a collegiate decision for every contract within 6 months was excluded from the final text of the law. This clearly challenges the implementation of the norm. At the same time, the law now stipulates that declassification can be done not only by the commission but also by individual experts, without clear explanation who exactly needs to do this. In our opinion, it brings a serious legal uncertainty risk.

It means that the SDO contracts made during the years of Russia’s armed aggression are at risk to remain classified for an indefinite term whereas the original version of the draft law included the clear powers of the Cabinet of Ministers to declassify selected SDO contracts within a fixed time limit.

There are some other contradictory issues that NAKO has called attention to.  One of them is that the names of the international procurement organizations were removed from the text of the law. Another one is the increase of powers of the National Defence and Security Council as for approval of procurement plans of state customers. We think that it can infringe the checks and balance system established by Ukraine’s Constitution.

What’s Next?

Now the law needs to be signed by the President. How effective it will be in practice, depends predominantly on the secondary legislation and its implementation. Preparation of regulatory acts is usually not an easy process and according to the law, it can last for half a year.

In fact, there is even less time, as the majority of the norms of the new law will come into effect already on 1 January 2021. In its turn, NAKO is ready to support the development of regulatory acts and check them for corruption risks as well as monitor the process of the law implementation.

Emiliia Dieniezhna, NAKO’s Communications Manager, specifically for Ukrayinska Pravda