On January 29, 2021, Ukraine’s Parliament supported in the first reading the draft law #3822 ‘On the reform of state enterprises in the military-industrial complex’. 227 MPs voted for the document.
MPs from Sluha Narodu, Holos, deputy group Dovira, and 4 independent MPs cast their votes for the draft law. Representatives of ‘Opposition Platform - Za Zhyttya’, ‘European Solidarity’, ‘Batkivshyna’ and ‘Za maybutnie’ cast a negative vote.
The reform provides for corporatization and introduction of corporate governance standards at the enterprises of the military-industrial complex. It enables reducing corruption risks for enterprises and protects from conflict of interest and direct political influence.
Legal entities of the military and industrial complex will be transformed into LLCs and JSCs. The state defence conglomerate Ukroboronprom as it is today will be liquidated. Instead, a JSC with a Supervisory Board will be created.
Undoubtedly, supporting this draft law is a key condition to start the reform of state-owned enterprises in Ukraine’s defence sector. However, NAKO calls attention to the fact that the draft law is not yet in line with the OECD standards and amendments are needed.
In particular, we call attention that the draft law stipulates the management entity to be the Cabinet of Ministers or an authorized governmental authority responsible for forming and implementing the state military and industrial policy (in practice, it is the Ministry for Strategic Industries). This goes against the OECD Principles of Corporate Governance. In particular, this directly contradicts articles D and E, Section IIof the OECD Principles: there should be only one management entity and it should be clearly defined. Also, it causes the conflict of interest: in case the powers are transferred to the Ministry for Strategic Industries, it will be the only body combining the functions to form the policy, as a regulator which adopts the rules for all entities, and the owner body which will manage Ukroboronprom.If the Cabinet of Ministers doesn’t clearly define which exact functions to be transferred to the Ministry for Strategic Industries, to Ukroboronprom, it will cause collisions and grounds for abuse. If the Ministry for Strategic Industries receives all the powers, as a management body it will be able to adopt all decisions single-handedly without taking into consideration the position of other ministries.
Other areas that require improvement concern the lack of independence of the Supervisory Board, risks associated with transfer of assets during the corporatization, etc.NAKO’s experts regularly provided MPs with their suggestions and recommendations to the draft law when the document was being developed and were part of the corresponding working group under the specialized parliamentary Committee. We are committed to be further engaged in the process to enhance the document and to advance the effective corporate governance reform of state-owned enterprises in Ukraine’s defence industry.
Our detailed recommendations can be found here.