During his presidential campaign Volodymyr Zelensky made a commitment to fight corruption in Ukraine’s defence sector and specifically mentioned the steps he was planning to take if elected. He made this commitment to our organization answering the seven questions of the Questionnaire which was sent out to all the presidential candidates. Later on, when NAKO organized the talk show to discuss corruption in defence with the presidential candidates, these steps were also announced by Ruslan Riaboshapka, the then representative of Volodymyr Zelensky.
Thus, Zelensky planned to review the existing defence procurement policies and practices, mitigate corruption risks in the Ministry of Defence land management, fundamentally change the defence housing system, introduce a brand new legal framework to protect State Secrets, and implement a profound reform of the state defence enterprise “Ukroboronprom”. How much do the intentions of the-then candidate coincide with the real actions of a now President? NAKO team has summed up the first year of Zelensky’s presidency.
Tackling Corruption and Euro-Atlantic Integration
A year ago in his answers Zelensky confirmed that to him fighting corruption in defence was one of the key prerequisites for Ukraine’s Euro-Atlantic path:
It is unclear what kind of program was meant here, but no such program has been adopted on either governmental or ministerial level so far. Honcharuk’s government developed its Activity Program with a specific focus on Euro-Atlantic integration (goal 15.2: Ukraine’s defence forces have reached the new capabilities in accordance with the necessary criteria for NATO membership) and anti-corruption (goal 15.5: The level of corruption within defence forces has significantly decreased). The aforementioned goals were also stipulated by the MoD’s Action Plan when the ministry was under the leadership of Andriy Zahorodnyuk. However, the new Shmyhal Government developed the new Activity Program which has only 5 sentences about the defence and security sector and doesn’t mention the Ukraine-NATO issue or anti-corruption activities at all. Moreover, most Parliamentary Committees have returned the Program for the follow-up revision.
The MoD 2018-2020 Anti-corruption Program approved by the decree of the Ministry of Defence is still in force. To say the least, it is already outdated and only partially covers all the anti-corruption priorities articulated by both Honcharuk and Shmyhal. In April, the Head of MoD Anti-Corruption Department announced the new Anti-corruption Program which would be developed by the Ministry. Therefore it is unclear what kind of anti-corruption program or plan Zelensky was talking about.
As for cooperation with NATO, enhancement of Ukraine’s integration into the Alliance was blocked by the Hungarian veto in the educational legislation conflict during Poroshenko's term. The first-ever NATO Parliamentary Assembly Spring session, scheduled for May, which had to take place in Kyiv, has been delayed for an indefinite period due to COVID-19 pandemic. Ukraine has regularly assured the international community in the stability of its Euro-Atlantic way. However, any signal like that must be accompanied by real actions. The Ukraine-NATO Annual National Program (ANP) for 2020 has been signed by the President only on May 26, whereas it is usually approved in March or April at latest. This delay itself is not a serious problem. ANP is supposed to be the key instrument for implementation of reforms in Ukraine, in order to eventually prepare the country for NATO membership, but in practice the level of its implementation is quite low. Apart from transition to NATO standards, the most crucial aspects of Euro-Atlantic integration are the comprehensive domestic reforms expected by the NATO partners and stipulated by the Law “On National Security”. To name a few, these are the reforms of defence procurement and the military industrial complex as well as the reforms of the Security Service of Ukraine, the system of secrecy, and strengthening the democratic oversight, namely the creation of the new Parliamentary Committee on Intelligence Oversight.
A much bigger issue is the delay in signing the National Security Strategy by the President. The Strategy is the foundation necessary to develop all the strategic defence planning documents within the sector of national security and defence. These documents include the strategies for military security, development of the military-industrial complex, foreign policy security, counterintelligence and counter-terrorism, target programs etc. Probably, the Strategy has been waiting in the Presidential Office to be signed since February 18, because the Office is working on the new COVID-19 chapter. But it is important to understand that the lack of the Strategy approved by the President restrains the development of further important documents in the defence sector, and thus delays quite urgent reforms.
The recent personnel policy within the defence and security sector has been quite chaotic. As a result, it is natural that after a year of presidency, Zelensky who is also the Chief Commander responsible for the sectoral reform is late with producing strategic documents which serve as road maps for the most important reforms.
To Classify Transparently: Mission Possible?
“A new draft law on state secrecy will be among the first the President will introduce to the Parliament” - this commitment of Volodymyr Zelensky has failed so far. The law has not even hit the first wave of the famous “turboregime”. Moreover, there is still no such a draft law.
President himself mentioned that the level of classifying information was unjustifiably high, and that this was one of the reasons for corruption. Thus, he said, the Ukrainian State Secret legislation needs to be significantly updated. Indeed, the new Law “On State Secret” could have been already developed and voted on, but in reality, the system still functions in the best traditions of Soviet-style transparency. A new concept of protecting the State secret was already worked upon during Poroshenko presidency, under the leadership of the SSU. President Zelensky committed himself to adapting the secrecy legislation to NATO and EU standards; introducing the new grounds to classify and declassify information; introducing the concept of the “presumption of public information”; and reviewing the procedures regulating access to the state secret, especially for foreigners (for example, NATO military advisors).
The work on a new draft law “On protection of secret information” is currently in progress. It is being developed under the auspices of the specialized Committee of Verkhovna Rada. NAKO is involved in this process. The SSU still plays the key role. As for now it is too early to make conclusions as the only version of the document is a working one. The aforementioned points are somehow mentioned in the draft law, however there are certain risks which may significantly complicate access to restricted information or lead to the unbalanced role of SSU in this process. Therefore, to bring the legislation to the Euro-Atlantic norms, it is important that the draft law should be developed not only by the “classifiers” themselves, but also in coordination with civil society experts.
NAKO will monitor closely the developments around this process and will pay special attention to the final version of the draft law and how it reflects the President’s commitments, providing a better balance between transparency and secrecy. Obviously, such a complex and comprehensive draft law requires the whole public policy cycle, including the involvement of experts and usage of all the necessary resources. Meanwhile, it’s obvious that Zelensky’s commitment to introduce this draft law among the first ones was far from realistic.
Will There Be a Defence Procurement Revolution?
Defence capability of any state depends directly on its capacity to effectively supply its army. In Ukraine a highly corrupt State Defence Order (SDO) system is in place. Therefore, sadly, our country is not able to supply its own servicemen/women properly and guarantee the effectiveness of funds allocated to defence needs. Secret procurement is often publicly explained by the “national security interests”. In practise, this excuse is usually used to conceal the real business interests of political elites, broad opportunities for corruption, violations and lack of healthy competition. Solving corruption issues within the procurement system was and is one of the most important conditions necessary to enhance Ukraine’s defence capabilities. No wonder that a defence procurement reform is not only supported by Ukraine’s key Western partners but also became one of the main conditions to get the US military assistance.
The President previously said that to solve this issue a new law on State defence order aimed at changing the whole system of defence procurement should be developed and adopted. A year ago in his answers Volodymyr Zelensky clearly outlined his vision of the law’s content. For instance, he stressed the importance of competitive procurement procedures, the need to solve the pricing issue, and urgency to decrease the level of secrecy.
The work on the new corresponding draft law started soon after Zelensky came to power. Quite a revolutionary document being developed under the auspices of the specialized Committee of Verkhovna Rada not simply changes the SDO, in fact it eliminates the SDO concept as such. The representatives of the Ministry of Defence, the Ministry of Economy, the President’s Office, the Security Service of Ukraine, state defence enterprise “Ukroboronprom”, the League of Defence Enterprises, the Association of Arms and Military Equipment Producers, the Ukrainian Defence and Security Industry Association partook in the development of the draft law “On defence procurement”, which is supposed to replace the Law “On State Defence Order”. NAKO as the coordinator representing the civil and expert society was also actively involved in the process. NAKO’s recommendations on reducing corruption risks of SDO which were published in our research in 2019 have been taken into account.
The draft law includes Zelensky’s commitments mentioned above. It excludes the principle which allows to classify the information about SDO plans, contents, amounts, finance and implementation, thus making automatic classification of such information impossible. But declassification of fullfield contracts will not happen quickly. A special clear order of declassification for such documents has been suggested. It includes the establishment of the inter-agency expert commission under the leadership of the Cabinet of Ministers to review the contracts and decide which ones could be declassified as they don’t pose a risk to national security. NAKO has supported such a collegiate approach, as it allows to find a proper balance between a justified protection of state secrets and the inalienable right of the civil society to know how the state funds have been spent and whether there are grounds for a criminal proceeding in case of violations. Unfortunately, such a principle has not been included in the final version of the draft law and the process of declassification will be supervised by the state experts themselves, namely, when the terms of classification expire (Editor’s note: since the article was published, the final version has changed and now it includes the inter-agency commission). In addition, the state customers will officially publish their three-year plans to procure defence-related goods, works and services.
The draft law also takes into account the President’s commitment regarding elimination of the closed registry of defence producers and establishment of the semi-open online register. However, the power to decide the order of how it should be established and maintained is given to the Cabinet of Ministers.
New procurement procedures will allow not only to increase the competition within Ukraine, but also create conditions for the state customers to procure defence-related products abroad without any intermediaries. The draft law also specifies the implementation of the 4 procurement procedures, both closed and open ones. The type of the specific procedure will define a pricing order and the level of secrecy.
In December 2019 Verkhovna Rada adopted this draft law in the first reading. On May 13, Rada considered the draft law in the second reading but after the voting the MPs returned it for completion.
The draft law is a progressive one, harmonizing our legislation with the EU one and reflects Zelensky’s commitments. However, it is complex and contains some half-baked issues. NAKO experts have analyzed corruption risks and pitfalls present in the second reading version and sent our recommendations regarding its improvement to the parliamentary Committee. So far, it is unknown which amendments will be taken into account, since the debate on certain political issues continues. For example, concerning the question who should have more control over procurement: NSDC or the parliamentary Committee (undoubtedly, the Euro-Atlantic standard means parliamentary oversight).
It is expected that the law will be adopted in June. However, even then it will be too early to celebrate the defence procurement reform. To make this law and the new system work, 15 different decrees should be adopted, and the Ministry of Defence needs to build its defence procurement capabilities. An innovative law needs to be tested, then, most probably, it needs to be polished and amended. However, now the direction of the developments is a positive sign.
Ukroboronprom : ‘’A Fully Ready Reform?’
At the press conference after a year of his presidency Volodymyr Zelensky said that ‘Ukroboronprm’s reform is fully ready. Fully’. What it means is unclear but let’s see how the reform correlates with what he promised as a candidate.
Answering NAKOs Questionnaire, the President shared his plan for Ukroboronprom related to the comprehensive reform of the military industrial complex in general. Although we see the movement towards fulfilling these promises, this path is not structured and inconsistent. When strategic decisions and documents are delayed, only technical, isolated steps take place which lack the strategic direction.
Since the beginning of his term the President banked on staff changes. Thus, in June he renewed the composition of the Supervisory Board of Ukroboronprom. Aivaras Abromaviciusm Andriy Zahorodnyuk and David Arakhamia became the members of the board. The new Board defined the first international financial audit in the history of Ukroboronprom as the priority task. Later Aivaras Abromavicius took the lead of the state defence enterprise, and the Supervisory Board was renewed again. Assistant to the president Andriy Yermak, Head of Ukrposhta Ihor Smilyansky and Executive Director of Naftohaz Yuriy Vitrenko got the seats in the Board. Former Chairman of Ukrgazvydobuvannya Oleh Prohorenko also became the Member of the Supervisory Board, due to the quota of the Cabinet of Ministers. Thus, the Supervisory Board was full and was able to confirm the corporatization strategy and the plan of financial restructuring of the member companies. However, the Supervisory Board members work on a volunteer basis and thus they have more important priorities than Ukroboronprom and thus, its compositions still remains transitional. It is more formal than a proper Supervisory Board, if compared to the OECD standards of corporate governance of state enterprises.
After the change of the General Director and the full change of the top management of the state defence enterprise, we have seen quite a serious reform-oriented and anti-corruption activity. The state defence enterprise has become more transparent. By this we mean selected positive changes.
For instance, the correspondence of the international standards in the issues of regular internal and external audits. Let me remind you that NAKO was fighting for the international financial audit at Ukrobornprom for more than two years. Its beginning was artificially blocked and delayed due to the lack of political will in the team of the former President Petro Poroshenko. At the same time, serious work has been done to develop the terms of reference and the tender documentation to procure the auditor’s services. This was done with active participation of NAKO and international donors. In his answers, President Zelensky promised that such an audit will take place. Indeed, the newly appointed management of Ukroboronprom solved the two-year-long issue in two months. The competition was over with a definite result, and in September 2019 the contract for audit was signed with the international company Baker Tilly. The audit will be finished at the end of 2020, and as we were informed in March, it’s not the end. The next stage is to do the forensic audit, a necessary component of the UOP’s anti-corruption policy which takes place due to support of the government of France. For instance, it includes complex criminalistics examination with the aim to reveal the hidden fraud schemes and malpractices with the contracts that are hidden behind the seemingly legal operations. The first results of the forensic audit are expected already in summer 2020.
Another example of the positive changes in UOP is transferring most procurement to Prozorro system. NAKO was involved in the reform of UOP’s procurement when the defence enterprise was headed by Abromavicius predecessor, Bukin, but then the defence enterprise refused to use Prozorro explaining the decision with the national security reasons and insisted to use commercial platforms such as SmartTenderBia where the result of the tender is archived once after its finalization.
Recently, the practice of transparent appointments to the positions of member company directors has been launched too. In November and December 2019 the Nomination Committee which selects the directors of UOP member companies was actively working. In May 2020, it resumed its work. Apart from UOP management, it includes the representatives of Verkhovna Rada, National Defence and Security Council, Embassies of the USA, France, Great Britain, and the civil society. Civil society monitoring was provided by NAKO and StateWatch.
However, one cannot say that the reform is ready, as the strategic question remains: What to do with Ukroboronprom? Since the end of Poroshenko’s cadence, there have been attempts to liquidate the defence enterprise (e.g., Pashynsky’s draft law). Three similar draft laws during the last months have been registered by the MPs of the 9-th convocation. None objects that UOP should not exist in the way it is, now its structure is definitely transitional. The question is, if the transition will be towards the neo-Soviet system where the new Ministry will exist instead of UOP and this ministry will manage all the defence enterprises, or it will turn to the Western market corporate model.
Since 2017, NAKO has advocated for international corporate governance standards at UOP. In his answers, Zelensky admitted that such a reform is needed. For example, corporatization of the state defence enterprise on the OECD standards was included in the priority agenda. The President promised to introduce this draft law as urgent. Now that draft law ‘On corporatization’ is developed in the Verkhovna Rada committee but it is far from being finalized.
Indeed, over the last year, the new management of the defence enterprise and the Supervisory Board managed to get things moving and start moving towards corporatization. The results of the triage analysis, the complex assessment of 137 UOP member companies, showed their real condition. Out of 116 working companies, only 33 are financially stable. 27 companies are financially unstable, and 56 are in bad financial condition.
Based on the results of the triage analysis and the work of independent experts who were involved at the financial support of Great Britain and France, UOP developed and presented the new model of corporate governance with the detailed plan of its transformation and the draft laws needed for that. The state defence enterprise also announced the start of restructuring 50 member companies and suggested launching the Fund of Defence Rehabilitation. The latter should restructure and financially rehabilitate the problem companies and sell the excessive property. 28 more ineffective companies which are involved in executing the State Defence Order should be transferred to the State Property Fund, the State Space Agency, or liquidated. The funds received after sale of the excessive property should be directed to production modernization and transformation of Ukroboronprom. So far, Ukroboronrpom suggests creating 6 sectoral holdings as a result of the corporate governance reform: missile, aviation, aircraft-repair, armored, radar, and the sea systems ones. Meanwhile, Ukroboronprom in its current condition should be liquidated.
The fact that Ukroboronprom itself presented its reform strategy to the different government bodies such as the Office of the President, the Security Service of Ukraine, the Cabinet of Ministers, the National Council for Reforms, and the specialized Parliamentary Committee excited petulance of Olexiy Danilov who already publicly showed that Ukroboronprom itself should not decide its strategy for reform and has to wait till his fate is decided by the profile Ministry or the Cabinet of Ministers. Namely, they widely discuss now the creation of the central executive body that will be responsible for developing and implementing the state military industrial policy and managing the objects of state property in the military and industrial complex.
The Central Executive Body responsible for the military industrial policy is stipulated by the Law ‘On National Security’. This body was also mentioned by Zelensky in his answers. But this concept gives a broad range of opportunities with absolutely different solutions. It could be the body based on the Ministry of Defence, or the Ministry of Economy, or another ministry. For our partners from NATO it seems more logical to have such a body on the basis of the Ministry of Defence. However, in Ukraine the issue of the potential conflict of interest at MoD. The argument here is that the ministry is both the customer of weaponry and thus is interested to procure at the lowest possible price without investing the money in development and also limiting profit of the military industrial companies. On the other hand, the Ministry for military and industrial complex can lead to the serious imbalance when the army will be dictated to procure not what she needs but what is currently produced and what one needs to sell. It's noteworthy that NATO countries such as the USA with the powerful military and industrial complex don’t have such a ministry.
Currently the views of the officials who were appointed by the President and are now responsible for UOP reform do not coincide. Clearly, suh conflicts are caused by Zelensky himself who thinks that it’s good to mix appointments of the so-called ‘Sorosyata’ (the term used to describe supporters or those who are funded by George Soros) and ‘anti-Sorosyata’ (those who are against him), to achieve balance. Although none objects the need for corporatization, the fight has begun as for who will get the control over this process. If this process is controlled by the MIC people of Yanukovich and Poroshenko times with the corruption tail, there will be a low level of trust to such a reform. Moreover, if the control over the MIC companies will be transferred to the Ministry, it will be the Soviet atavism and the window for corruption and inefficiency.
The lack of a joint vision of the reform like this one can negatively influence the much-awaited results. It can cause its delay in the best case, and its failure in the worst case. Apart from reaching the concensus, the reform of Ukroboronprom also lacks the higher-level documents. Namely, the confirmed National Security Strategy and and the Strategy of the Military Industrial Complex Development which needs to be prepared on its basis.
Illegal Trade With Donbas
System-related illegal trade with the occupied territories in Donbas damages Ukraine’s defence capabilities, increases the interest of selected people in delaying the war, and leads to serious economic and image losses. The President stated that ‘one of the reasons for that is the lack of political will to solve the problem’. By saying this, he accentuated that he had this political will.
Zelensky also stressed the important role of the selected law enforcement bodies, namely the Security Service of Ukraine in tackling crime and corruption. In his opinion, honest and respectable professionals should take charge of the system of institutions responsible for crime control. Thus, the success of the fight against corruption and crimes in the area of illegal trade depends directly on the reform of SSU reform itself. Following the example of Petro Poroshenko, Volodymyr Zelensky committed to reforming this difficult system and releasing the institution from the non relevant functions. However, the reform has not started yet while illegal trade didn’t finish.
The Endless Defence Housing Queue
“The existing system of defence housing is ineffective and corruptogenic”, announced the President a year ago in his answers to NAKO. To reduce corruption in the existing system, he suggested its audit. The results of the audit were supposed to help eliminate the corruption risks. Namely, he spoke about investment construction and the need to return the land plots where investors don’t meet their commitments to the Ministry of Defence. A year ago the President’s team thought that the defence housing system should be changed: privatization of the service housing should be replaced with the social protection system for servicemen and women and their families. For instance, Zelensky mentioned the new mechanism of personalized monetary cumulative retirement benefit.
The reform of such a complicated system required a lot of time as it goes about not simply transferring from one system to another but about the solution of the existing problems which accumulated for many years. Ukraine’s defence housing queue is one of such problems. Currently, about 48 thousand servicemen and women are waiting for the housing guaranteed to them by the state. Many of them have remained in the queue for more than 20 years, and without success.
During the first 6 months of Zelensky’s presidency the MoD managed to audit the existing queue and to publicize the queue list and develop the concept of transfer to the fully electronic queue system till the end of 2020. These steps were supposed to minimize the human impact on providing housing to the servicemen and make these processes more transparent. In parallel, they planned to introduce a deposit and monetary program. This program was supposed to provide the service people with the opportunity to accumulate money to buy the housing later or to use it for the mortgage.
This year the money allocated to construction and procurement of housing reached the record sum of 1,2 bln UAH. But even this amount is not enough to close the decades-long defence housing queue. Thus, there is a problem of searching for alternative sources of funding. According to the MoD estimate, if land plots are exchanged with the apartments within investment construction, the queue could be closed in 5 years. To compare, NAKO has previously calculated that if the current system is in place, it will take more than 600 years to close the queue.
However, in the process of concluding investments contracts, possible corruption risks can again harm these plans. Exchange of the land plots with accommodation units has regularly been characterized by intransparent procedures. For instance, over the recent years such transfers of land plots to private companies for building construction have caused losses for at least UAH 73 million. Thus, one of the biggest challenges for the Ministry is its capability to prevent corruption schemes and provide efficiency of funds allocated for the servicemen/women needs.
Fighting for the Land
After the collapse of the USSR, Ukraine’s MoD inherited approximately 600 000 hectares of land. Because of corruption and mismanagement it has lost control of over 100 000 hectares. Infrastructure facilities that provide defence capability were located on these lands. But as a result of illegal alienation and self-occupation, instead of military units there are private houses and sunflower fields on these territories.
The President’s team said that the priority on solving this issue should be given to inventory of defence lands and the further creation of the e-register for all the MOD land and
real-estate. According to the plans of the Ministry, it may happen within 3 years. During this time the Ministry plans to return the illegally allocated and alienated lands and real-estate to the government property.
According to the results of a recent audit, only in 2014 - 2019 the MoD lost 278 of land plots worth more than UAH 330 mln. Moreover, it turned out that in many cases the Ministry got to know about that loss post factum. The results of the analysis show that more than half of the land plots were not even registered, so the decision regarding their alienation was taken by local authorities without any consent from the MoD’s side.
Meanwhile the parliamentary Committee on National Security, Defence and Intelligence has initiated a working group to develop the draft law “On providing housing to servicemen/women and members of their family, using non-governmental funds, allocation of lands for rent and alienation of property”. As for now, it is too early to speak about the results of this group, however NAKO is involved there and closely monitors the legislation process.
Thus, the first steps of the anti-corruption plan have been taken, but there are more objectives to come. To name a few, property rights to all the land needs to be registered, an e-register for land needs to be created, inventory of the real estate objects has to be conducted, and eventually all the illegally lost assets need to be returned to the state.
Therefore, we can make a conclusion that despite the fact that Zelensky did not create “his own Svynarchuk”, he also failed to significantly move the defence anti-corruption agenda forward. The first months of work of the President’s team demonstrated the political will to fight defence corruption. A number of ambitious projects within the defence and security sector were initiated, however now it looks like there is no energy and resources to actually finish them. As for April 2020, the percentage of land plots which are still not registered properly is almost 44%, more than 13 thousand hectares of them are squatted ones or those which were transferred as a result of illegal decisions.
Although we didn’t realistically expect that such complex problems would be fully solved within a year, it was quite legitimate to expect that the President would make a deep look into the sector and would start solving its issues. In February 2019, when SvynarchukGate broke out, all Poroshenko opponents including Zelensky used it as an instrument of political fight. During his election campaign Zelensky emphasized the fight against corruption in defence. Unfortunately, now it seems that the President has not been very interested in this strategic sector, as he delegates this work to “sorosiata” and “anti-sorosiata” who are supposed to fight each other. Still, we cannot blame him for doing something opposite to what he promised.
After all, there have been no sentences and imprisonments in the most publicized cases. For instance, Svynarchuk-Hladkovsky himself who is now a symbol of Ukraine’s defence corruption, is still out of prison. We must admit, however, that this is beyond the President’s mandate.
NAKO continues to monitor which steps the government will take to fight corruption in defence, and we will also follow up the developments in the most top defence corruption cases.