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2 November, 2018
Price for Security: how the Ministry of Defenсe is spending its budget?

The Ministry of Defenсe of Ukraine has tens of billions of hryvnias at its disposal, including for procurement. However, half of the procurement is classified, and soldiers do not receive housing, despite billions are invested in its construction. So, who the Ministry buys from, and for how much? Experts from YouControl and the Independent Anti-Corruption Defence Committee answered these and some other questions. About 5% of GDP, or almost 170 billion UAH. This is this amount of 2018 state budget planned to be allocated to Ukraine’s national security and defense. Just to compare, Britain spends 2% of its GDP on defenсe, Germany 1%, the United States 3%, Russia 4%, according to the Stockholm International Peace Research Institute (SIPRI).
In Ukraine, more than half of this money (170 billion UAH) - as much as 86.6 billion UAH – was supposed to be spent in 2018 by the Ministry of Defenсe of Ukraine (MoD). This sum corresponds to 2,58% of Ukraine’s GDP and exceeds 8% of the total state budget. In other words, it is approximately $ 3.1 billion. This figure, for example, is measured by the wealth of Donald Trump, one of the most famous billionaires in the world and the current president of the United States. Therefore, the scale of financing needs of the MoD and its units is impressive. Taking into account that almost all Ukrainians are "investors" of the budget expenditures, it is interesting to know what for and how much money the Ministry of Defence spends, including its subordinate customers. YouControl experts, with the help of the Independent Anti-Corruption Defence Committee (NAKO), tried to understand the subtleties of the MoD procurement, including the Ministry departments.

Openness VS secrecy

Indeed, the defence sector is very specific in terms of full openness of expenditures. After all, certain information on the implementation of military tasks, updating the weapons arsenal, etcetera is strategically important and should not be publicly available. According to NAKO, currently more than half of the MoD procurement is secret. In particular, according to the experts of this organization, uniforms, medicines, diesel fuel and a lot of other things are procured publicly. However, armaments, military and special equipment, ammunition, as well as the so-called defense works and services are procured within the framework of the State Defense Order (DOZ) without the use of competitive procedures. But which part of the currently classified procurement should become public and why? "This is a rather complex issue, and there are many expert opinions. During one of the meetings between NAKO and Minister of Defence of Ukraine Stepan Poltorak, the Misiter mentioned that in his opinion, 90% of the State Defence Order must be declassified. However, most samples of weapons which are currently in service of the Ukrainian Army were developed in the Soviet times. Thus, Russia also has detailed information about characteristics of this weaponry, "- NAKO experts explained. They also added that according to some analysts it’s necessary to declassify the following items from the procurement list:
  • small arms and ammunition;
  • military and special equipment aimed at transportation of personnel without armaments;
  • armored vehicles which are in service / supply / operation in the Armed Forces of Ukraine (AFS) and / or other military formations for more than 5 years and / or which are exported by appropriate authorized entities outside Ukraine;
  • artillery systems and ammunition for them that are in the arming / supply / operation in the Armed Forces of Ukraine and / or other military formations for more than 5 years and / or exported by appropriate authorized agents outside Ukraine;
  • repair services from the list above and so on.
"Procurement of the high-tech weaponry and inventions that give a significant advantage on the battlefield (high-precision weapons, communication systems, electronic combat systems, air defence systems,  reconnaissance assets, etc.) can remain classified. In addition, the costs of secret operations must remain secret, "- added NAKO experts. Urgency of the defence procurement issue is caused primarily by the war that has lasted for more than four years so far. In this case it is necessary to consider sensibly all pros and cons of the openness of defence procurement. "There is no country in the world which would not be in need to find the balance between the needs of national security and freedom of information. Whereas strict restrictions on access and excessive secrecy of information contribute to corruption and lead to human rights violations, insufficient protection of information, especially during the war, poses a threat to national security". ‘Complete and premature disclosure can significantly harm the state, in particular, its tasks of planning and selecting optimal strategies. When the state finds the optimal balance between transparency and the needs of national security, it immediately raises public confidence in state institutions, and as a result, helps to identify and eliminate the causes of corruption and conflicts’, explained NAKO experts. According to NAKO, under the current circumstances, including the limited financial, human, technological resources, the country should focus on high-quality classification of the critically important data (new developments, critical infrastructure, personal data, etc.). In addition, it is important to introduce rules for the qualitative declassification of information after the expiry date of the secrecy stamp in accordance with the best Euro-Atlantic practices.

MoD public procurement: large-scale construction and transport costs

According to bi.prozorro.org, the MoD and its units held almost 17 thousand procurements for the period from January 1 to October 10, 2018. In fact, they are non-classified. They include reporting procedures (almost 60%), open tenders (about 17%), and negotiation procedures (ordinary, for urgent needs and for defence needs), etc.
 
MoD procurement: general information for January-September 2018

We were quite astonished by the big demand of the MoD and its departments for certain goods, services and works. So, the largest part of procurement - more than 3 thousand - concerned the purchase of constructions and construction materials for construction. On the second place: construction and repair works, on the third - repair and maintenance services, on the fourth - architectural, construction, engineering and inspection services, and on the fifth - transportation equipment and accessories. Thus, three among the first five categories in terms of the number of purchases are related to the construction sector. The distribution of the expenditures of individual customers proves that the lion's share of the budget allocated to the MoD and its subdivisions goes to construction. After all, only 29 subdivisions, namely, housing and operations departments and regional departments signed contracts for almost 5 billion USD from January 1 to October 10, 2018. This is more than 32% of the total amount of contracts signed by the MoD units during the specified period. However, we have to admit that on the first place there is the Department for Preparation and Procurement of the logistics and medical supplies (with the amount of almost UAH 8 billion), the MoD Department of Public Procurement and Supply of Material Resources.


Distribution of MoD expenditures in June-September 2018 
 
However, there is one more question in the context of the MoD construction. Recently, NAKO presented the report, "Poor Governance and Corruption Inside Ukraine’s Defence Housing System: Risks and Recommendations". As NAKO states 47 thousand families of servicemen and women are currently waiting for housing. According to NAKO’s preliminary calculations, under the current conditions, it will take more than 600 years to provide housing to everyone in the queue. So why is the money allocated, procurement takes place, and even the contracts are signed, but the defence housing problem is not being solved? “There are many serious problems here. Firstly, the list of residential facilities which have to be financed at the expense of the budget program of the CPCWC 2101190 is formed in the opaque way. Also there is the lack of coordination between the Main Housing Directorate (GolovKEU) with the territorial departments and divisions. Secondly, when annual plans are being developed, funds are distributed in small amounts to a large number of unfinished construction projects. This delays the construction process and creates the long-term construction. For example, in 2016-2017, 173 million hryvnias were used, and only one house for 70 apartments in Kropivnitsky was built. Also, the Accounting Chamber has identified another planning problem, namely, the MoD budget requests differ significantly from actual use of funds. In the beginning of the year, the MoD plans to allocate significant resources for construction or reconstruction, but changes are made during the year, with the aim to redistribute funds for the purchase of apartments on the secondary market. In general, as a result of problems within GolovKEU, actually half of the money is spent inefficiently’, says NAKO expert. At the same time, if you look at the TOP-50 most expensive lots (the total sum of these contracts was almost UAH 4.8 billion) in MoD and its units procurement, you can find even more interesting facts. Thus, the biggest contract – for UAH 471 million - was signed in the period from January 1 to October 10 for the purchase of military transportation services by rail. But the most expensive items out of the TOP-50 concerned procurement of aviation kerosene. 21 lots out of 50 (worth over 1.37 billion UAH) were related to kerosene. 19 lots from the TOP-50 were announced for the procurement of the diesel fuel, although the total amount of contracts signed here amounted to 2.26 billion UAH. Just to compare, two lots for the procurement of shoes that hit the TOP cost 178 million USD.


 
It is also important to pay attention not only to the total value of the procurement by the MoD and its subdivisions but also to which suppliers most actively co-operate with these customers and earn the most money on this. One can consider this question from two sides. On the one hand, there is the TOP-list of the participants of procurement process with the biggest number of victories. The leaders among them are Chernihivtorg LLC (416 offers one with the contract value of about 2.5 million USD), FOP Furs (239 offers won for UAH 1 million) and FOP Semenov (210 offers won for UAH 2.6 million). However, despite the large number of victories, these participants are not really indicative in terms of finance. It is more interesting to analyze which companies signed the largest contracts with the MoD and its divisions.


So the leader in terms of the total sum of the signed contracts was the "Okko Contract" company. It signed with the Ministry of Defence and its subdivisions agreements for more than UAH 1.7 billion during the period from January 1 to October 10, 2018. Yaking into consideration the high volumes and the big costs of the MoD furel procurement, it is quite logical that namely this supplier was chosed for such a big job. On the second place there is the "Firma Fideya" LLC, whose main activity is "Wholesale trade of chemical products ", and on the third – PJSC "Ukrainian railway . The fourth and the fifth places are held by Torum LLC and "Trading house "Sokar Ukraine" LLC which also sell fuel. The TOP-suppliers according to financial indicators include also the aforementioned company Talanlegprom LLC, after having earned 259 million USD on the MoD procurement during only 10 months of 2018. And a few more facts. We were informed by NAKO that according to the TI Government Defence Anti-Corruption Index Ukraine is a member of the D Group, along with the countries such as India, Ghana and Turkey. In this case, the armies of most European countries are placed in groups B and C. "Such information shows that effectiveness, transparency and accountability of the budget by our defence department is not at the level of the Euro-Atlantic community, where we seek to integrate. Therefore, we always emphasize the need for greater transparency and budget specification, which will allow strengthening parliamentary oversight and public control", - emphasized NAKO experts.

YouControl to help the government customer

According to the Law "On Public Procurement", a state customer has the right to disqualify a bidder, for example, if the latter appeared to be bankrupt or there was an open liquidation procedure or a tax liability. However, the procurement organizer can not require the participant to submit documents to confirm information which is freely available in open public registers. So, to quickly check this information, the customer can use the YouControl control. In particular, information about the company's legal status and its debts will be indicated in the express analysis and in the company's dossier.

This material was prepared by YouControl in cooperation with the Independent Defence Anti-Corruption Committee (NAKO). Source: https://bit.ly/2PAH0dn