14 September 2020

The Statute regulating the functions of the newly created Ministry of Strategic Industries (hereinafter – MinStrategProm) was officially published on the website of Ukraine’s Cabinet of Ministers on September 11, 2020. MinStrategProm will be the key body in the system of central executive bodies ensuring formation and implementation of the state military and industrial policy. NAKO has been monitoring the creation of the new ministry during the  summer and has analyzed the initial draft of its Statute in August 2020. We communicated our recommendations to mitigate corruption risks in functions on the new ministry to the government stakeholders. Part of NAKO recommendations were implemented in the final version of the Statute. 

Analysis of the published version of the draft that eventually was adopted by the Cabinet of Ministers on Sept 7, 2020, showed that one of the three risk areas (Risk 3.  Imperfect legal regulation which creates conditions for collisions and violations of the law) identified previously by NAKO was corrected in line with our recommendations. In particular, the authors of the document agreed with the proposal to mention the exhaustive list of strategic industries (military and industrial complex, aircraft and aerospace industries) and refused from the idea to transfer to the newly created Ministry selected powers of the Ministry for Development of Economy, Trade and Agriculture which are not related to the military and industrial complex (e.g., powers in the area of state mines inspectorate and explosives handling). Apart from that, the norms that created risks for independent functioning of the public procurement system were removed from the document.

NAKO’s warnings as for necessity to review the powers of MinStrategProm to prevent excessive concentration in one body were partly taken into consideration. The functions of the new Ministry related to executing the state export control were removed. However, it is not sufficient to create an effective checks and balances system. The Ministry will retain its powers of the key body in defence procurement planning in accordance with the Law of Ukraine ‘On Defence Procurement’. Also, it will manage the legal entities that execute orders related to defence procurement, will be a state customer for scientific, research and engineering works in the area of strategic industries and the military industrial complex.

It’s noteworthy that the draft of the Statute includes powers to manage the legal entities in the management sector which is common for all ministries. This includes the personnel policy related to appointment and dismissal of managers of business entities, creation, liquidation or reorganization of such entities, approval of statutes (terms of reference), control over their implementation, etc.

NAKO’s recommendations as for the need to encapsulate the principle of managing the business entities by the MinStrategProm and their further corporatization based on OECD principles for corporate governance at the state-owned enterprises were not taken into account. Lack of such principles creates the risk of keeping in place the ineffective and outdated methods of managing member companies and regress in corporatization of state defence enterprise UkrOboronProm. The risk is especially high in case the management is replaced and there are delays in consideration of the draft laws introduced to the Parliament.

In the area of export control the Ministry plans to get powers in coordination of executive agencies responsible for ensuring export and import delivery of military or dual purpose goods, works and services; involvement in implementation of the mechanism of state support for export in strategic industries; control over efficiency of use of funds by economic entities in the area of Ministry’s management as for implementation of export programs and projects of highly technological industrial products. Taking into consideration that a definite list of economic entities that are transferred to the Ministry management sphere can be finalized and confirmed later, the fate of special exporters remains indefinite. 

Upon partial consideration of NAKO’s recommendations, the following risks remain unregulated:

  1. Powers to manage (including management of business entities) the military industrial complex, to form the state defence order, to define the priority areas of research and development are concentrated in the single state government body which creates a conflict of interest and can become the foundation of abuse and corruption.
  2. The Ministry has broad powers to manage state enterprises in the military and industrial complex although the perspectives to reform the management according to the OECD principles of SOE corporate governance are not stipulated: this puts corporatization in jeopardy.

NAKO will keep monitoring the establishment of the MinStrategProm to prevent the excessive concentration in the single state government body and assist in implementation of checks-and-balance-system. NAKO recommends to MinStrategProm to consider the OECD Principles for corporate governance at SOEs when it comes to powers of MinStrategProm to manage state owned objects in the military industrial complex (MIC), to encapsulate the course to continue corporatization of the MIC enterprises according to the OECD Principles for corporate governance.  

Read a detailed analysis below: