It has already been almost four months since a new Ministry for Strategic Industries (MSI or Minstrategprom) was set up and it’s high time to draw first observations on the effectiveness of the new agency. The Ministry was established, inter alia, with the aim of improving governance in the defence industry. It appears, however, that reforms have been put on hold or even stalled. So the question is, aren’t we coming back to old, soviet-style management practices in the defence sector?
What Do We Know About Minstrategprom
Minstrategprom is the central government agency responsible for the development and implementation of state policy in the military-industrial complex. The agency’s status and powers are defined by the Statute adopted by the Cabinet of Ministers of Ukraine. As early as in summer NAKO reviewed the draft Statute. Back then we identified a number of risks. As we can see now, most risks appear to be materializing. In particular, Minstrategprom has received significant powers in governing the defence industry. It entails a potential conflict of interest as Minstrategprom has powers both to coordinate State Defence Order and set the priorities for further scientific and technological research and development.
Furthermore, Minstrategprom Statute is written in a way that it does not provide any grounds, or obligations, for the Ministry to continue implementing reforms in accordance with the OECD principles of corporate governance of state-owned enterprises. It threatens the corporatization plan of Ukroboronprom which was supported by a competent parliamentary Committee, civil society and Ukraine’s international partners. What’s more, the Ministry is vested with vast powers in those state-owned enterprises that are designated under the management Ministry. E.g. it has significant control over state companies through appointing and dismissing their top management. This entails the Ministry's excessive control over state-owned enterprises in the absence of appropriate safeguards against abuse. Currently, due to the fact that the MSI is not fully operational, there are no enterprises under it, but there are numerous attempts of the Ministry reported to acquire those (e.g., Antonov, Pavlograd Chemical Plant).
Another weak point in the Ministry’s work is timing. In our summer brief, we did warn that it would take time before the MSI gains its operational capacity, which may cause delays in crucial reforms in the defence sector and state defence order execution. This is exactly what is happening now. As of the end of November, the Ministry has not been equipped with the appropriate offices, funds, or staff. From what we know, currently, officially there are around six people on the Ministry’s team, including the Minister, several Vice Ministers, and a secretary. They started recruiting over 30 people at the end of October. Prior to that, they relied on assistance from numerous volunteers, according to the Minister. Nobody at the Ministry has access to the state secrets, which means that de facto the Ministry of Economy needs to continue managing everything that requires access to classified information, including the State Defence Order (SDO).
Information like the Ministry's staffing or structural updates usually comes from the Cabinet of Ministers and mass media, not the Ministry itself. It has been reported that a document governing the Ministry's structure and staffing plan had been adopted, however, we have not been able to locate any such document. Indeed, it is challenging to monitor Minstrategprom’s activity as they do not have any official website, Facebook page or email address available to the public. To compare, a newly established Ministry for Digital Transformation has launched its website within a month. MSI is not transparently and proactively informing the public about its work.
Reforms Put on Hold: Why This Is Dangerous?
According to the Vice-Minister of Economy Svitlana Panaiotidi, it is very likely that the execution of the State Defence Order will suffer as her Ministry cannot hand over defence-related functions to Minstrategprom due to lack of a secrecy department within the latter. Despite an obvious lack of sufficient resources and capacities, Minstrategprom attempted to take over Antonov and five more aircraft plans. These are million-worth enterprises with thousands of employees. There is a significant delay in reforming the framework in the defence sector. This includes draft law on UOP corporatization # 3822, draft Strategy for the Development of the Military-Industrial Complex, Property Policy for UOP and subordinate legislation implementing the Law on Defence Procurement. All of these documents had been developed by other government stakeholders with support from Ukraine’s international partners and independent civil society organizations, including NAKO, before the MSI was established.
Draft law # 3822 is a prerequisite for Ukroboronprom’s corporatization. The law offers a new system for corporate governance at state-owned defence enterprises in accordance with international standards. That includes introducing supervisory boards and appointing independent top management. Draft Law was introduced to the Parliament by MPs from the security and defence committee this summer even before Minstrategprom was set up. Currently, the legislative process in Ukroboronprom’s reform was taken over by the Ministry which took the lead in further elaboration of the law #3822. Mr. Urusky, Minister for Strategic Industries, makes public statements in support of the corporatization of Ukroboronprom. However, there has been no official position of the Ministry to explain why the draft law is currently on hold and how it should be changed.
At the September 15 meeting, in the parliament, a working group on defence industry reform led by MSI was formally established. No civil society organizations or independent experts have been invited to join that group. Previously, NGOs, such as NAKO, were actively participating in working groups on defence procurement reform and on UOP corporatization.
An open dialogue and transparency are needed
An open and transparent dialogue between the Ministry of Strategic Industries and other key stakeholders including Ukroboronprom is needed to unpause the defence industry reform. The Ministry should also become more open to civil society. In particular, civil society experts and NGOs involved in the process earlier should be invited to contribute to working groups responsible for finalizing key legislative documents mentioned above. MSI should adhere to the Euro-Atlantic democratic standards of governance and communication with society.