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30 March, 2020
NAKO to Suggest Solutions to Reduce Corruption Risks in MoD Five Priority Areas
The results of the audits of the Ministry of Defence over the last three years revealed the loss of more than UAH 1 bln and 70% of this sum has not been compensated. To compare, this amount could be used to procure about 1000 apartments for servicemen/women and their families. Alternatively, it could be spent to buy food supplies for 252 military units during the year. How to prevent the violations and such budget losses before they actually lead to loss of lives, resources and reputation? NAKO experts - Iryna Loiuk, Olha Bukreieva, Lubomyr Ferens, Hlib Kanievsky, Svitlana Musiiaka and Anna Kalynchuk - together with the Ministry of Defence looked for the answer to this question within the project supported by EUACI (European Union Anti-Corruption Initiative). The aim of the project was to develop solutions to reduce corruption risks in 5 priority areas of the Ministry: procurements, construction and housing, state enterprises, land and fuel. As a result of 2-month work, NAKO experts produced the following outputs:
  • systemic violations have been defined in line with concrete violations of the law and policies;
  • road maps to eliminate opportunities for corruption within the priority areas have been suggested;
  • draft regulations have been developed. 

Defence procurement

Within this area the general procurement processes in MoD's system have been analyzed, both public ones and those classified. It is generally assumed that all classified procurement goes only through the State Defense Order (SDO) system. However, during interviews with the Ministry's officials, NAKO's expert received exclusive information that a different type of state-secret procurement also exists, which is not included in the SDO system. This refers to procuring some repair services for weapons and military equipment. According to the received information, in 2019 approximately UAH 1,1 bln has been allocated to this type of procurement, while in 2020 this will be twice as big. A more detailed analysis of this process is impossible as it is classified, and the regulated rules and procedures are missing as well. For instance, it was not possible to identify a specific procedure for pricing or selecting contractors.  The analysis of the public information, received data and MoD’s documents helped identify a list of 15 most common risks in public procurement, such as:: 
  1. There are no criteria to define if procurement should be centralized or decentralized, or to select the most effective procedures. For example, in 2018 Ivan Kozhedub Kharkiv National Air Force University has procured a simulator of an anti-aircraft gunner for MANPADS “Igla” at UAH 839,900 per unit using the open tender procedure. That year the same simulator was purchased for UAH 1,4 mln per unit, but within the SDO system. 
  2. The real need for the subject of procurement is poorly identified. Тhus, the audit of the purchased fuel in 2018 revealed the discrepancy between the accounting data of the MoD's Department of Finances and the military unit. In particular, as of the 1st of April, 2019, the volumes of fuel (kept on the records of 6 military units all totaled) were UAH 209,000 less than in the records of the MoD’s Department of Finances.  
  3. There is no unified approach to market research and calculation of the expected value of the procurement item. The Department of State Procurement has approved the Recommendations to price monitoring and calculating the expected value of the procurement item for centralized procurement in the area of logistics support. However, this procedure does not apply to other types of procurement such as procurement in the “open procedure” or procurement due to decentralized calculations. 
The other problems also include: lack of general rules and procedures for MoD’s decentralized procurement; technical specifications which can be written poorly or to fit the requirements of a specific manufacturer; issue of the manufacturer's integrity; conflict of interest, collusion between participants of the procurement process, etc. We recommend:
  1. To improve the legislative framework of procurement procedures, particularly the decentralized ones:
  • changes to the Tender Committee regulations have been developed by our expert;
  • it is necessary to unify the approach to the regulations on both centralized and decentralized levels: usually centralized regulations are not applied locally, on a military base; thus we recommend to implement the unified approach for all levels; 
  • as there is no information of any preparatory work being in progress now, we recommend to start developing the legislative framework for the new procurement procedures: this refers mainly to the changes to the Law “On Public Procurement” (the introduction of a simplified procurement procedure and change of timing within such a process) and to drafting secondary documentation due to the upcoming voting on the Law “On Defence Procurement”.
  1. To take measures to make procurement more professionalized, this also refers to decentralized procurement: to build up the capacities of the Center for Defence Procurement, to introduce the institution of authorized persons.  
  2. To review the quality control system for a procurement item: to differentiate procurement items by groups, to develop high-quality technical specifications and to use the system of quality assurance;
  3. To align procurement of repair services for weapons and military equipment, classified as a state-secret, with the current legislation. As an option, we recommend to possibly include such type of procurement to the SDO system. 
According to the expert, implementation of the Strategic Defence Bulletin and adoption of the Law “On Defence Procurement” may also positively affect the situation and minimize some of the risks.

Procurement and Consumption of Fuel and Oil

Supply of the army with fuel and oil (later on mentioned as fuel) is a difficult process which includes planning, procurement, supply, storage, and consumption. Budget expenditures on fuel reach billions of hryvnyas. Within this project stream experts analyzed all the stages of the process and revealed a number of typical violations. The following risks and violations are consistent at the procurement stage:
  • tender documents and request for tender are specific supplier tailored,
  • tendering procedure on Prozorro is avoided by referring to the so-called ‘emergency’ procurement when contracts can be signed at an extremely short notice on terms and conditions disadvantageous for the Ministry of Defence;
  • the cost is reviewed due to market fluctuation of prices (always upwards, never downwards);
  • signing contracts with unreliable contractors that don’t fulfil their obligations or do this poorly and at a bad time. 
When the fuel procured in the centralized manner is being transported to the fuel supply centers and further to military bases, no software solutions are applied to calculate the best possible route. This explains why the losses are so big, and the transportation costs get pricey. On military bases the fuel is often simply stolen, by means of charge-off (with no good reason). Often it can be charged off for transport which hasn’t left the military base or which can even be nonexistent. Within the fuel stream we have developed solution concepts which are necessary to eliminate the aforementioned loopholes and typical violations. For instance, the fuel consumption control problem can be solved via an automated consumption control system with daily tracking and GPS-trackers which should be installed to military vehicles.  

Defence construction and housing 

In 2017 the Ministry of Defence started a UAH 3 bln construction project for military barracks of enhanced planning. Since then, the project has turned into a series of corruption schemes. According to the preliminary plan, 184 barracks had to be constructed and put into commission within 3 years. However, by the end of 2019 only half of them had been built and put in service. However, most funds had already been spent. For instance, a criminal proceeding has been opened against the director of an enterprise that performed barracks construction works: presumably, he seized more than UAH 6.2 million of public money. Corruption schemes and malpractice by the Ministry of Defence officials in the construction process include the following ones: 1) the winners of the tenders were the organizations that didn’t meet  the requirements and should have been rejected; 2) the conditions were formulated to sign contracts with the contractors that were not properly equipped with the equipment and personnel and thus were unable to perform construction works; 3) the expected spending and the cost of construction was increased for no good reason (in fact, the cost of every barrack went up twice), 4) the contracts were broken without a reasonable basis, 5) the terms of contract were postponed several times which increased considerably the cost of the works performed.  These ‘golden barracks’ is only one of the examples which clearly illustrates the scope of corrupt practices in defence housing and MoD construction. In general, the problems in this area could be divided into the following aspects: reimbursement for the housing guaranteed by the state, procurement of permanent housing, provision of service housing, and construction. These were the directions that the research within this NAKOs project was based on. The directions were selected as each of them is regulated by a separate system of regulations.   The typical violations within reimbursement include: 1) reimbursement for the housing to the relatives of a serviceman and 2) reimbursement to the employees of the Main Intelligence Directorate (called GRU in Ukrainian) without preliminary check if they are not included into the separate waiting list with special funding for intelligence agencies.  Thus, to calculate the reimbursement amount, numerous relatives could be taken into account (for example, parents, grandchildren, daughters-in-law, sons-in-law, etc) who should not be included due to the Budget Code. For example, there were cases when the Main Housing Directorate (called GolovKEU in Ukrainian) improved the housing conditions not of the servicemen but of the families of children of military retirees. For instance, in 2016 – 2017 the Ministry of Defence compensated to this category (which makes about 60 people) the cost of about 800 square meters for UAH 6.4 mln. Likewise, in 2015 the Kyiv Housing Directorate (Kyiv KEU) reimbursed UAH 5.4 mln to reserve officers of the Main Intelligence Directorate. This was done despite the law which stipulates that the expenses for the needs of intelligence services are covered by a special budget line.   To solve some of these issues, we recommend resolving the ambiguity of the family and its members, as it influences the calculation of the reimbursement. We also recommend to exclude the opportunity to obtain permanent housing by the employees of investigative agencies using the two different state programmes.    Currently, it’s in the MoD full power to decide on procurement of permanent housing, mainly which defence housing to procure for servicemen and women. As a result, very often this housing is overpriced, of poor quality, doesn’t reflect the servicemen’s and women's needs, is located in remote areas, and lacks the necessary infrastructure. This was the case in 2017 when the Main Housing Directorate signed a sale and purchase contract for 90 apartments in Kamyanets which is in Dnipropetrovsk region with two entrepreneurs Kyrychenko and Klymenko for the total sum of UAH 80 mln. The Ministry didn’t receive half of these apartments which had to be passed on to the MoD as well as didn’t pay for them and didn’t hand over for allotment. The Ministry also couldn’t explain why this became possible. At the same time, the Ministry registered the right to possession to another half of apartments. But within 4 months they were not allocated to servicemen or women as there were no volunteers to obtain this housing. The reason is that it was situated too far from military bases, so servicemen and women would not be able to quickly reach their duty area in case of necessity. The strategic solution offered in the area of permanent housing is to stop the old-style procuring by MoD and instead to pay for the housing chosen by the servicemen and women themselves. This should also include the opportunity to compensate for the housing as it has been previously arranged by the Ministry of Social Policy. Another way which is less efficient is to change the procedure thus ensuring the definition of what the servicemen and women really need.  The typical risks in provision of service housing include: allotment of service housing in a fast track manner, with no good reason; manipulation with the list of a serviceman/woman family members, procurement of low quality or inappropriate apartments on the secondary housing market, and manipulations with the housing rent cost. For instance, a serviceman or woman can obtain service housing in a fast track manner if he/she is presented as a person who defines the operational readiness of the military base. But there are no clearly specified criteria for such a person.   In this sphere we support the efforts to change the service housing to the duty housing. This will ensure that the MoD will not lose its property as a result of the so-called “de-servicing” (a typical situation when the service housing is removed from the MoD’s possession to make the further privatization by servicemen and women possible).  Project construction includes two directions: signing construction contracts and signing investment contracts (construction by investors on the MoD land). Most problems are associated with the illegal change of the signed contracts which takes place without the procurement procedures clearly defined by the legislation. For instance, the following conditions could be changed: the cost of the construction contract, the total construction area on the MoD land without the recalculation of the housing are to be transferred to the MoD, transfer of apartments in the remote areas which is often different to what is written in the contract.  An example of this is the contract between the MoD and Energobudleasing JSC (legal successor is Miskbudinvest JSC) which has been executed for the last 16 years. The Ministry handed an investment-attractive plot of land on Peremohy Ave 55 in Ukraine’s capital over to this company. After that the company has repeatedly tried to transfer to the MoD the housing in the other towns where its cost is considerably lower than in Kyiv. But even under such conditions the company hasn’t fulfilled its obligations. For instance, in 2016 Miskbudinvest had to transfer to the MoD 125 apartments with the total area of 5900 square meters in Makariv town, Kyiv oblast. However, by 2018 only 36 apartments with the total area of 1770 square meters had been transferred. This being said, the Ministry of  Defence didn’t lodge claims or go into court against this company. It is necessary to close the door to unjustified changes of contracts, provide control over their execution ; support criminal investigation of the cases which have been filed. We also recommend regulating the registry of unreliable contractors and all persons connected to him. It is necessary to make impossible contracts between the MoD and companies/persons without unchallenged reputation or those ones that are almost bankrupt or financially unreliable.

MoD’s State Enterprises

As of January 2020, the Ministry of Defence manages 114 enterprises, 15 of which are located on the temporarily occupied territories. This number changes constantly as some of the enterprises are going through the processes of liquidation and reorganization.  State Owned Enterprises (SOE), managed by the MoD, operate with such activities as construction, logging, hospitality services, nutrition, trading, manufacturing the ferro-concrete structures, etc. 90% of them do not play even the slightest role in enhancing Ukraine’s defence capabilities. Over the last three years, nearly a hundred of those enterprises were operating at a loss. In 2016 they made an annual profit of merely UAH 136,000, while in 2017 the profit turned into a loss of UAH 22,4 mln, and the annual loss of 2018 was UAH 9,4 mln.  The analysis of SOEs activity revealed a number of typical violations in the context of management, including the following: 
  • accumulation of credit and debit debts, as well as the multi-level tax debts and wage arrears etc;
  • loss of movable and immovable property, accounted by the enterprise; 
  • illegal transfer of property (and even parts of a property complex) for rent on a cash basis;
  • illegal usage of the main funds and personnel of SOEs in favor of private enterprises;
  • loss of SOEs’ founding and financial documents.
Given the current state of affairs, the Ministry of Defence as an authority is not capable of providing effective control over its own enterprises. Thus we recommend the Ministry to review its own policies pertaining to management of the enterprises. In the last three decades both the government and the Ministry of Defence did not pay a decent attention to the reform of its SOEs. Now due to the independent assessment of the problems,  it became possible for the first time ever to develop a roadmap on how to reform the management of defence SOEs. This map shows clearly how to make an inventory of enterprises, which ones to privatize or leave to the Ministry, and how to ensure effective management over these enterprises. Implementation of the expert’s recommendations will also increase the effectiveness of such SOEs.

MoD Land Management

According to figures of 145 audits in 2014-2019 the MoD lost 259 buildings and 278 plots of land for the cost of UAH 62,3 mln and UAH 332,3 mln respectively. For comparison, for this money several dozens of thousands of tons of diesel fuel could be procured.  Military bases, establishments, military and educational institutions, enterprises, and Ukraine’s Armed Forces organizations can be located and permanently function on the MoD land. Thus, these could be all those things which should ensure and develop national defence capabilities. But in practice it happens differently: private houses, garages, parking spaces are built etc. are built on the MoD land. One of the key reasons enabling this is that not all MoD land is registered. So far, the right to usage of land plots is registered for 25% of their total amount, which makes up 30% of the total area of military bases.  This explains why according to the figures of the audits, most losses of land, buildings and structures happened by the decision of local authorities without MoD sanction. Expert analysis within this project area was aimed to help the Ministry of Defence and the Armed Forces to audit the situation and develop realistic action plans to fight corruption and improve management of land, state real estate, construction of defence housing and military objects.  The identified systemic problems and corruption risks include the following ones: 
  • Some documents for selected land plots in the usage of Ukraine’s Armed Forces  are not properly done. The discrepancy between information in the documents and the StateGeoCadastre’s data creates additional difficulties in attempts to identify illegally alienated land. 
  • In practice, despite the legislation according to which the defence land can only be state-owned and shall not be privatized, numerous cases of unauthorized occupation of the land have been recorded. 
  • The ownership for selected land plots, which belong to the MoD land, has been transferred to unauthorized persons without a properly processed Ministry's refusal to its own right for permanent use. Such cases became the reason for some rejections to allow developing the land management documents by the Quartering Directorates’ bodies.
  • There is no specialized structure for defence land and real-estate management as well as its specialized training units. 
  • No comprehensive policy and institutional support for systematic management of real-estate has been developed. 
Based upon the analysis of structural units and algorithms, used to enforce the ownership of military assets and Ministry’s lands,  and considering the foreign experience, we propose the new approaches. In particular, we recommend creating an integrated system for land and property management. NAKO suggests to start the development of such a system with draft of the Terms of Reference regarding works execution and launch of a pilot project within a part of territory, used by the MoD or the General Staff. 

Concrete solutions

Project’s legal expert has developed more than 25 of different draft regulations in order to solve particular issues in the five above mentioned areas. This includes contract templates, SOEs optimization algorithms, improved procedures of building and providing housing for servicemen/women etc. There also have been developed draft laws, regulations and orders, draft amendments to the existing regulations and some methodological recommendations. All the outputs of the project including the draft regulations will be officially submitted to the Ministry of Defence and presented for the general public.  NAKO expresses our gratitude to EU Anti-Corruption Initiative (EUACI) for generous financial support of this project and to Olexandra Drik, the former advisor to the Minister of Defence, who initiated and coordinated the project.