The Ministry for Strategic Industries was established on July 22, 2020 to more effectively manage Ukraine’s defence industry. However, did the defence industry really become more effective with its formation? Six months later, NAKO decided to summarize the main results of the institution.
The Ministry of Conflict of Interest
The Ministry for Strategic Industries is the main body of power that forms and implements the state military-industrial policy. It is entrusted with many tasks not only in the defence industry, but also in the aircraft and space industry.
The functionality of the Ministry provides for the formation of the state defence order, but, at the same time, also determines the priorities of scientific and technological developments. Such powers create a certain conflict of interests and, consequently, a number of risks of misuse.
In addition, the Ministry has a fairly broad authority to manage state-owned enterprises in the defence industry, namely the appointment and dismissal of managers of these enterprises. As the Statute of the Ministry for Strategic Industries does not oblige to continue the reform of corporate governance in accordance with OECD standards, such a concentration of power without any protector against misuse may in fact threaten the establishment of manual management on state-owned enterprises.
Later, real attempts to interfere in the economic activities of enterprises were reported by Ukroboronprom. According to the management of the state defence conglomerate, in autumn they regularly received requirements and recommendations from the Ministry regarding the appointment of certain persons to the position of directors of selected member companies. And although the Ministry for Strategic Industries called such a statement a “demarche” of Ukroboronprom’s management, later a public conflict between the parties was settled.
When the Ministry revealed its intention to corporatize a number of Ukroboronprom’s enterprises bypassing the Draft Law №3822, the risk of manual control was publicly discussed at the level of the specialized parliamentary committee. The need to subordinate the six most profitable enterprises, including Antonov and KB Progress, was explained by the Minstrategprom with an extremely tense situation and the need for a quick action to prevent the escalation of the conflict. Currently, the fate of these enterprises is still unknown. Policy-makers are planning to make a decision at the level of the National Security and Defence Council.
The Ministry of Delays
Back in summer 2020, NAKO warned that the full establishment of a new ministry would require significant time, as its effective operation needs regulatory support, resources, and quite a lot of employees. Despite this, recruitment began only in November and by end of 2020, the Ministry’s team had just over 70 employees whereas it could hire up to 333.
As Ukraine’s security and defence sector requires systemic changes, any delays in reforming the defence sector would not accelerate the process. Indeed, with the formation of the Ministry, reforms have slowed down. Despite the lack of its own premises, a sufficient number of employees and a top-secret department required to work with the state defence order, Minstrategprom quickly took over the main tasks in the industry. As expected, this negatively affected the course of reforms and the quality of implementation of the set tasks. For example, back in September 2020, the Ministry of Economy prepared a draft of the Strategy for the Defence Industry – a “road map” for reforms in the industry. However, almost five months later, these documents are still not approved, as the Ministry for Strategic Industries is developing its own Strategy.
A similar situation is happening with the implementation of the Law on Defence Procurement. Due to the lack of coordinated action between the Ministry for Strategic Industries and the Ministry of Defence, 2021 began with the threat of disruption of the state defence order within the deadline. The reason is that the two governmental bodies failed to prepare the regulations necessary for the full functioning of the new defence procurement system. Such significant delays directly affect not only the pace of reform in the defence industry and Ukroboronprom in particular, but also significantly complicate the provision of the Armed Forces of Ukraine with the necessary goods and services.