Return to news
12 October, 2020
NAKO Calls for Reform of MOD State-Owned Enterprises
Press Release. 

2016 was the last year when the consolidated report of 114 state-owned enterprises (SOE) of Ukraine’s Ministry of Defence (MoD) demonstrated any profit. Then, they all together earned for Ukraine only UAH 136 thousand (about USD 5 thousand). After that, the aggregate financial results of MoD enterprises have worsened year by year, and now suffer millions of hryvnias in losses.  
This data was revealed during the preparation of the brief by the Independent Defence Anti-Corruption Committee (NAKO), ‘MoD State-Owned Enterprises: How to Overcome Corruption and Inefficiency?’ and presented by a researcher Hlib Kanievsky on October 12.

Representative of the specialized Parliamentary Defence Committee Ihor Kopytin and the Committee’s consultant Yuriy Fedorenko, MoD Deputy Head of Anti-Corruption Directorate Viktor Osadchuk, Head of the Organization of SOE functioning Yevgeniy Shatkov and expert on state property Dmytro Yablonovsky also joined the discussion. The event was moderated by NAKO’s exeсutive director Olena Tregub.  

Currently, the MoD lacks the strategy of effective management of its enterprises. Apart from that, reorganization and liquidation of enterprises have lasted for years, and often is still not finished. Combined with the ineffective human resources policy all this has led to debt accumulation, loss of resources and active assets. Now the debt of the MoD state-owned enterprises has reached more than UAH 630 mln. This being said, most SOEs of the Ministry of Defence are unable to satisfy the needs of Ukraine’s Armed Forces. According to the Accounting Chamber, in 2019 only one MoD state-owned enterprise out of all performed the statutory tasks of the Ministry and the Armed Forces. 

Member of the Parliamentary Defence Committee Ihor Kopytin thinks that audit is the priority in solving the problem of state-owned enterprises. He stressed that such an audit had to be carried out with the involvement of international partners for a bigger objectivity and transparency of the process. In his opinion, after the audit has been finished, the corresponding authorities have to decide the fate of the SOEs. ‘To launch the reform, I have suggested creating the corresponding working group under the Rada Defence Committee’s umbrella and invite NGOs, including NAKO’, said Kopytin.  

MoD Deputy Head of Anti-Corruption Directorate Viktor Osadchuk admitted that the MoD system of managing its state-owned enterprises is outdated and needs to be changed. He assessed highly the quality of NAKO’s report and agreed with its recommendations. He informed that the report conclusions would be taken into consideration while preparing the new Ministry’s Anti-Corruption programme. ‘SOE’s work and activity is not the function of the Ministry of Defence’, said Osadchuk. In his opinion, management of state-owned enterprises should be taken away from the Ministry and transferred to the State Property Fund, whereas non-recoverable debts to the state should be written off.  

Expert on state property Dmytro Yablonovsky thinks that all enterprises that don’t provide for the needs of the Ministry of Defence and Armed Forces have to be privatized, liquidated, or reorganized. He stressed that liquidation had to be conducted without the former directors’ involvement in the process. Also, Yablonovsky mentioned that if there were any criminal violations, all the judicial cases had to be finished, and the stolen property returned to the state. 

Consultant of the parliamentary specialized Committee Yuriy Fedorenko paid attention to the caveat that some state-owned enterprises can be quite profitable and own huge land assets despite appearing unprofitable on paper. He mentioned that some enterprises could be sold at an extremely low price (without any reason), and as a result the state would receive less than due. In answer to that, Yablonovsky said that it was one of the tasks of the State Property Fund as a body which is directly responsible for organizing auctions to ensure the maximum transparency and competitiveness of the privatization. Also, Fedorenko raised the issue of the potential workload upon the State Property if it needs to solve the problems of more than 100 enterprises of the MoD and to find possible mechanisms to optimize their work.

Olena Tregub mentioned that Kozatsky hotel is one of the brightest examples of ineffective management of SOEs by the Ministry of Defence. It’s difficult to believe but although the hotel is situated in the city centre, it is embroiled into lawsuits and criminal investigations and incurs losses year by year.  Only in 2019 the SOEs of the Ministry of Defence suffered damage for more than UAH 39 mln. But even these showings are not precise, said Hlib Kanevsky. In the process of writing the report, it was revealed that at many SOEs financial statements were not produced at all or produced much behind schedule. Officially, the explanation to this is that there are chronic financial problems at all SOEs, some of the enterprises don’t have the appointed directors and at some SOEs, the founding and bookkeeping documents were lost. 

Based on the findings of the brief, NAKO found the following red flags in the activity of the MoD state-owned enterprises. The key ones are as follows:
  • a SOE is headed not by a proper director but by an acting director whose interim status is prolonged year by year without definite tasks and responsibilities;
  • SOE liquidation and reorganization committees are headed by the directors of these SOEs who are interested in hiding the results of their own ineffective activity;
  • movable and immovable property owned by a SOE is lost;
  • SOE property or some parts of the integral property complex are illegally rented out for cash; 
  • SOE capital assets and the human resources of the SOEs are illegally used for the benefit of selected business owners. 
Thus, NAKO recommends:
  • To audit the real business situation at the MoD state-owned enterprises (triage);
  • To find the operating enterprises which ensure statutory activity of the Ministry of Defence and the Armed Forces. All the other enterprises should be transferred for privatization;
  • To develop the new and update the old MoD regulatory acts related to management of the SOEs. Here the best world practices should be taken into account, in particular, the OECD principles;
  • To financially revitalize those enterprises which remained under the MoD management.
 The representatives of the specialized Parliamentary Committee and the Ministry of Defence in general agreed with NAKO’s recommendations mentioned in the report and expressed their willingness to cooperate to solve the issue of MoD state-owned enterprises. NAKO's team hopes that the relevant working group will be launched soon, and that the independent experts will be invited to contribute as announced. We also hope that our recommendations will be included in the corresponding government programs and strategic documents and finally implemented. 

You can read the full report on NAKO's website.

Below you can find the summary of the report in Power Point-format:

The Video of the press-briefing is here (in Ukrainian)