26 March 2021

PRESS RELEASE

On March 26, Unian news agency hosted a briefing by the Independent Defence Anti-Corruption Committee (NAKO), “Corporate governance reform in Ukraine’s defence industry: from initiative to implementation.” NAKO presented an assessment of the state of Ukroboronprom reform and NAKO’s proposals for practical implementation of corporate governance standards at state-owned enterprises in Ukraine’s military-industrial complex.

The importance of implementing corporate governance standards in Ukraine’s defence industry was emphasized by Olexandr Zavitnevych, Chairman of the Verkhovna Rada Committee on National Security, Defense, and Intelligence; Svitlana Panaiotidi, Deputy Minister of Economic Development, Trade, and Agriculture; Yuriy Husiev, General Director of SC Ukroboronprom; Mustafa Nayyem, Deputy General Director for Asset Management at Ukroboronprom; Olena Tregub, Executive Director of NAKO; Hlib Kanievsky, chairman of the expert organization StateWatch; and Oleksandr Lysenko, independent expert on corporate governance.

Western partners gave welcoming remarks – Chargé d’Affaires, a.i. of the United States Embassy in Ukraine Kristina Kvien and James Roed-Moor, First Secretary for Political Affairs of the British Embassy in Ukraine. The discussion was moderated by Brian Bonner, Kyiv Post Editor-in-Chief.

“Over the past few years, Ukraine has shown a general commitment to democratic governance, the rule of law, and Euro-Atlantic values. However, political interference in Ukraine’s defence industry remains its biggest obstacle to further integration with Western countries,” said Chargé d’Affaires, a.i. Kristina Kvien, adding that such interference only increases corruption risks in the security and defence sector. At the same time, she noted the success that Ukraine’s security and defence sector has achieved in recent years. In particular, Kristina Kvien drew attention to the creation of a fundamentally new defence procurement system, which Members of Parliament supported in 2020. “This is the result of successful cooperation between state institutions, non-governmental organizations, and international partners,” she said. Speaking about the development of corporate governance in Ukroboronprom, Ms. Kvien expressed her concern about some provisions of Draft Law #3822 that contradict OECD standards. In particular, the reform of Ukroboronprom supported in the first reading does not solve the problem of political interference in the Concern’s activities, since its Supervisory Board does not yet contain a sufficient number of independent members to minimize this risk.

James Roed-Moor, First Secretary for Political Affairs, British Embassy in Ukraine, stressed the importance of the briefing’s topic not only for Ukraine, but also for Great Britain, which chairs the G7 this year. “Last year, we made public the priorities of our group. One of them, which we emphasized, is strengthening corporate governance in Ukraine’s defence sector as part of broader reform of the military–industrial complex. OECD international standards should be a goal for Ukraine. They are very important for Ukraine, because better corporate governance means better management and better leadership in the organization, which leads to greater innovation and profitability. In this way, state-owned enterprises can contribute to Ukraine’s prosperity and security.”

Chairman of the Verkhovna Rada Committee on National Security, Defence, and Intelligence Olexandr Zavitnevych said that Draft Law #3822, which is actively being prepared for the second reading, contains more than 1,000 amendments. He expressed confidence in the reform’s success and stressed the political will of both the Verkhovna Rada and the President to implement it: “I think we will succeed 101%, but I emphasize: let’s save our strength for implementing this law.”

Corporate governance reform is extremely important for drawing a distinction between political decisions and company management, said Deputy Economy Minister Svitlana Panaiotidi. “We hope that Draft Law #3822 will be adopted in the second reading without harmful amendments. I very much hope that the idea of proper transformation will not be discredited,” Ms. Panaiotidi said, speaking about the danger of establishing direct ministry management of enterprises.

Ukroboronprom CEO Yuriy Husiev has the same opinion. He focused on the critical importance of Ukroboronprom’s reform for Ukraine’s national security. Mr. Husyev noted that reforming Ukraine’s state-owned defence industry enterprises has been discussed for years. However, during this time, the enterprises only accumulated debts – by the end of 2020, the total debt had reached 14 billion UAH. Therefore, the long-awaited corporatization and introduction of corporate governance is a necessary condition for creating a modern defence holding with a fundamentally new management model, for technology transfer and access to international financial markets, as well as for creating joint projects with Ukraine’s international partners in the military-industrial sector. “The OECD Guidelines are a very important foundation for our reform,” said the Concern’s Director General. “We expect that the adoption in the second reading of Draft Law #3822 will create the basis for a new corporate governance system of Ukroboronprom enterprises, which employees and managers of the enterprises have been waiting many years for.”

“It is very nice to hear that our international partners and representatives of the state have a common vision on this issue and agree on what corporatization and corporate governance should be. Our report shows that this was not always the case,” said Olena Tregub, Executive Director of NAKO, presenting the results of the study. She said that only three years ago, the introduction of corporate governance standards was vetoed by President Poroshenko, as it “contradicted the interests of Ukraine’s national security.” “It turns out that transparency and corporate governance only contribute to national security, not undermine it,” Tregub said.

The NAKO Executive Director said that currently Draft Law #3822 is not perfect and does not fully meet OECD standards. In particular, since the transformation of such a large number of enterprises is a complex and lengthy process, and the draft law proposes to significantly simplify them, it is necessary to provide for a number of additional mechanisms to ensure transparency in this process so that many valuable assets of Ukraine’s defence industry are not lost. In addition, the draft law does not yet establish the new supervisory board’s guarantees and powers, which poses the danger of political dependence. This can be avoided by improving the text and increasing the number of independent council members. An equally important issue is the potential conflict of interest caused by the presence of two management entities for the Concern – the Cabinet of Ministers and the Ministry of Strategic Industries. In order to prevent the combination of policy-making and management functions, NAKO recommends leaving the powers to manage the Concern in the Cabinet of Ministers’ area of responsibility.

“The correct answer as to who should be the subject of management is in the OECD Guidelines, which clearly state that the ownership function should be separated from the regulator and policy developer function,” continued Oleksandr Lysenko, an independent corporate governance expert. He noted that according to the regulation, the regulator and policy developer is the Ministry of Strategic Industries, and therefore combining this function with direct management directly violates OECD standards.

Hlib Kanevsky, chairman of the expert organization StateWatch, gave examples of a number of state-owned companies that have introduced corporate governance, whose shortcomings and problems should be taken into account during the reform of Ukroboronprom. In particular, a number of high-profile scandals in Ukrzaliznytsia and UkSATSE indicate that these companies’ supervisory boards are not very effective. He also noted that the fight against corruption in state-owned enterprises cannot be called effective in the modern Ukrainian reality. As an example, he cited the dismissal of the director of one of the Energoatom state departments: “If you believe various independent practices and assessments, he was almost the best compliance officer in Ukraine. He was dismissed due to the fact that he provided the NACP with information about certain risks in the management activities of Energoatom. As a result, there is a judicial information war between the dismissed anti-corruption officer and the management, which definitely does not positively affect Energoatom’s reputation.”

A similar opinion was expressed by Deputy Director General of Ukroboronprom Mustafa Nayyem. He noted that if Ukroboronprom was headed by Elon Musk, then “somewhere in about three months he would have been in criminal proceedings, and in another couple of years he would have been in prison, because the current legislation does not allow for working effectively in the public sector of the economy.”

Mr. Nayyem also remarked that the basis for corporatization had been laid out a long time ago, but has not yet begun, as the main thing was missing – the draft law. He explained that corporatization without the relevant document would contribute to a number of problems and risks that are taken into account in the proposed draft law. In particular, 3822 contains safeguards for the “cascading bankruptcy” of all financially unstable enterprises, which can begin as a result of court appeals over decades of more than 12 billion in accumulated debts. In addition, due to the lack of procedures in Ukrainian legislation for transforming state-owned enterprises, the corporatization of this part of Ukroboronprom may get stuck in limbo. Draft Law #3822 also takes this into account, making it impossible for the transformation to stagnate. In addition, corporatization requires assessing enterprises’ existing property and re-registering all permits, which requires money and time. Since Ukroboronprom does not have the funds for such a large-scale assessment, and long-term re-registration and licensing would actually stop work at enterprises, the draft law introduces exceptions and allows automatic transfer of property and documents to ensure continuous operation during the transformation. “Draft Law #3822 is a matter of survival, not some kind of cosmetic reform,” Mr. Nayyem summarized.

Presentation of the results of NAKO’s brief:

CorpBrief-Presentation

NAKO brief: “Corporate governance reform in Ukraine’s defence industry: from initiative to implementation”

Engl web