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23 February, 2020
What Happened and Is Happening in the Defence Industry?
More than a year and a half has passed since adopting the plan to reform the defence industry. During this time, the President, Parliament, and Government changed. However, has the military-industrial complex of Ukraine changed? StateWatch gave the answer to this question on December, 23 during the presentation of the results of monitoring the implementation of the relevant decision of the National Security and Defense Council. The event was attended by the leadership of Ukroboronprom, representatives of the executive branch, the Verkhovna Rada, experts and public activists, including NAKO.

What tasks have already been completed? 
  • a review of the defence industry was conducted;
  • created a central executive body responsible for policy in the field of defence industry;
  • The Law on Defence Procurement was adopted;
  • The list of state-owned enterprises of Ukroboronprom for privatization was formed;
  • The peculiarities of transformation of state enterprises of the defence industry are determined.
The following tasks remain unfulfilled: ·
  • the issue of involving representatives and partners in the work of the supervisory board has not been resolved;
  • the procedure for importing components for defence products has not been simplified.

Review of the military-industrial complex

Last year, the first review of the defence-industrial complex in the history of Ukraine started. Its purpose is to assess the capacity to meet the security and defence sector's needs, and as a result, a number of strategic documents are being developed. For the first time, non-governmental organizations, including NAKO, were involved in the work on the non-secret part of the review. The review is currently complete, but it has not yet been approved by the National Security and Defence Council. Deputy Minister of Economy Svitlana Panaiotidi shared the public part of the results of the review. She informed that the analysis confirmed the Ukrainian defence industry's ability to meet the basic needs of the Armed Forces, but it still needs significant optimization to increase efficiency.

Audit of Ukroboronprom

The need for an audit arose in 2019 after the publication of journalistic investigations into thefts in the concern. Such an assessment of Ukroboronprom’s financial activities with the involvement of international experts began last year, but, as StateWatch Chairman Hlib Kanevsky noted, its results are still lacking. Ukroboronprom Director-General Yuriy Husiev noted that the audit is still ongoing and will be terminated soon. According to his statement, in January 2021 the supervisory board of the concern will consider the results of the assessment and publish them. At the same time, the issue of an independent inventory of the concern remains open. In particular, NAKO Executive Director Olena Tregub expressed concern about the assessment of assets, property and intellectual property rights of Ukroboronprom enterprises without the involvement of international auditors. Such an inventory carries corruption risks, as it does not guarantee the veracity of the information provided by the directors of enterprises regarding the presence or absence of certain assets. In response to this concern, Yuriy Husiev expressed readiness to consider involving external consultants in the inventory.

Reform of Ukroboronprom and the future of its enterprises

The Director-General of the concern assured that Ukroboronprom is determined to transform and corporatize. He said that more than 40 enterprises of the concern would be transferred to the State Property Fund and other authorities, and the other 65 would be grouped into sectoral sub-holdings and merged under a new state holding. The draft law №3822, aimed at transforming the concern, is under close public scrutiny. In particular, StateWatch warns about a number of management risks that may hinder the adoption and implementation of this draft law ab. In particular, it is essential to finalize it and, as a result, delay consideration, which may negatively affect the speed of reform. The Secretary of the Verkhovna Rada Committee on National Security, Defence and Intelligence Roman Kostenko expressed hope that this bill's consideration in the first reading will take place in January 2021. He drew attention to the key role of the Ministry of Strategy in this reform, which may affect the quality of transformation of the concern. According to him, the Ministry of Strategy and Industry leadership holds alternative visions of the reform, that is to provide for the direct subordination of defence companies to the ministry. However, the MP assured that the Committee would not support such alternatives. Separately, the participants of the event discussed the issues of the supervisory board of the concern and the independence of its members. Over the last year, the composition of the boards has been constantly changing. According to StateWatch, such staff instability negatively affects the supervisory board's ability to ensure proper control over the concern. The Director-General of Ukroboronprom assured that this body is already actively working and may soon be replenished with new members.

What will happen to the SDO?

The future of the State Defense Order is the most painful issue. In the summer of this year, the Verkhovna Rada adopted the Law on Defence Procurement, which will enter into force on January 1, 2021. However, a number of regulations still lack in order to make this law fully functioning, threatening to disrupt the SDO next year. To prevent this risk, the MPs initiated a postponement of the law, but this has not yet been reviewed in the parliament. According to Artur Pereverziev, if the MPs do not consider the postponement at the Verkhovna Rada's extraordinary sitting until the New Year, the law will be in a “legal vacuum”. He drew attention to the lack of coordinated action between the Ministry of Defense and the Ministry of Strategy and Industry, which caused a delay in the process. MP Kostenko said that even if the responsible ministries can develop the necessary documents by the end of February next year, the state will still suffer significant losses.