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19 August, 2020
NAKO identified corruption risks in the draft of the Decree regulating the MinStrategProm

How will the newly created Ministry for Strategic Industries (hereafter - MinStrategProm) will look like? What sectors of the economy it will cover, and what will be its functions? Which corruption risks does the ministry may include in its current version? 

These were the questions that NAKO’s experts tried to answer by analyzing the draft of the Decree regulating the MinStrategProm. It is planned that soon this draft will be confirmed by the Cabinet of Ministers of Ukraine. According to the draft project, MinStrategProm will have 120 functions, including those which are not directly related to the military and industrial complex. Some of them may come into collision with powers of other central executive bodies responsible for corresponding policies. For example, it is planned that MinStrategProm will get powers in strategic manufacturing industries related to:
  • Import and export;
  • Investment management;
  • Production, science, scientific and technical activity, transfer of technologies;
  • Digital technologies, informatization, e-governance, development of modern information society, implementation of information and communications technologies, building the system of national information resources;
  • Technical regulation, standardization, metrology;
  • Control over targeted and efficient expenditure of budget funds;
  • Ensuring European integration, development of economic cooperation with NATO countries, etc.
In case there is no clear list of industry fields that fall under the responsibility of the newly created Ministry, MinStrategProm can at its own disposal perform the aforementioned functions in any area from this list. It can lead to a discrepancy with the powers of the Ministry of Digital Transformation, the Ministry of Economy, the State Audit Service, etc. The key corruption risks are the following: Risk 1. Possible situations of the conflict of interest that could lead to possible abuse and corruption violations due to the fact that one state body concentrates all the following powers: management of the military and industrial complex, the formation of the State Defence Order, state export control, and definition of priority areas for scientific developments. Thus, the MinStrategProm will manage the full cycle, from defining the need for defence procurement, direct management of entities in the military, and industrial complex that satisfy this need, to performing export control and definition of perspective scientific developments. A combination of powers to define the need in defence procurement and manage state entities in the military and industrial complex which are suppliers of this procurement creates a direct conflict of interest. Risk 2. It is supposed that the Ministry will be conferred broad powers pertaining to managing state-owned enterprises in the military and industrial complex. However, the perspectives of reforming governance according to the European standards are not stipulated in the Draft Decree. This threatens the corporatization of enterprises and can remain in place state of affairs. Ministry's power to manage state-owned enterprises runs contrary to OECD Guidelines on Corporate Governance of State-Owned Enterprises. The Regulation lacks a clear and precise reference to both the implementation of the Guidelines and the necessity to continue the corporatization of the defense industry. It creates a basis for changing the strategy and further relying on current governance practices that have proved ineffective. Risk 3. Imperfect legal regulation which creates conditions for collisions and law violations. Neither current legislation nor the Draft Decree defines which exactly industries are considered strategic. Thus, the powers of the newly created Ministry are not precise. Different parts of the Decree mention mechanic and planes engineering, on the one hand, and textile and glass production, on the other. MinStrategProm can get a decisive impact on any industry by defining it as strategic. Also, the draft document states that MinStrategProm authorizes e-trading platforms. However, it is not defined which electronic platforms are meant here, so it’s not possible to objectively assess such powers. It could be both an offense against the system of public procurement and revival of e-trading platforms which were used as a window dressing for corruption schemes.

Thus, we recommend:

  1. To review the powers of MinStrategProm to prevent their excessive concentration in the single state body and introduction of the checks-and-balance system to avoid possible misuse;
  2. To take into consideration the OECD corporate governance principles for state-owned enterprises when it’s related to powers of MinStrategProm for management of state-owned enterprises in the military-industrial complex;
  3. To encapsulate the course for further corporatization of the MIC enterprises according to the OECD principles for corporate governance;
  4. To clearly state the all-inclusive list of industries that fall under the responsibility of MinStrategProm;
  5. To additionally analyze powers of the Ministry and avoid the functions which are non-relevant, coincide or double the powers of other state bodies.
A detailed analysis will be provided to the state authorities. Read the full analysis in Ukrainian: Photo: 93rd Independent Kholodnyi Yar Mechanized Brigade