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07Aug

Ukrainian Freedom Fund developed Draft Law of Ukraine in order facilitate defense imports outside of UkrOboronProm by granting explicit authority for foreign procurement to the Ministry of Defense and other security agencies

7 August, 2017

The situation with the aggression of the Russian Federation against Ukraine and the occupation of Ukrainian territories requires significant improvement of rearmament processes of the Armed Forces. First of all, it concerns the regulation of procurement of armaments and military equipment within the framework of the state defense order. Thus, Ukraine needs simplification of procedures for import of defense products that are not produced in country and critically needed to withstand aggression and to strengthen Ukraine's defense capability.

 

To date, there has been a striking disbalance in the development of the domestic defense industry. The most negative consequences of this is unattractiveness of the Ukrainian market for foreign companies. According to the Ministry of Economic Development and Trade of Ukraine, 95% of the armaments nomenclature is procured within the framework of the state defense order without competitive procedures (single-source contracts) (http://glavcom.ua/pub/pdf/49/4935/doslidgennya0117.pdf).

In particular, it is noted that as a result of the ongoing military conflict, the Ukrainian defense industry had to invest billions of dollars in two years. However, contrary to the logic, no real steps were taken in Ukraine to form a new system of military-technical policy. The Ukrainian system of procurement of weapons has significant limitations that include:

- restraint of foreign (in particular, Western) companies on technology transfer and sale of weapons to Ukraine;

- partial willingness of Ukrainian authorities to develop military-technical cooperation with foreign states and to import weapons.

Consequently, because of the above restrictions, Ukrainian procurement system is based on deliveries only that what can be produced by the national defense industry.

 

At the same time, the problem of the domestic defense industry is that it is not able to provide significant part of the needs of militaries, and in the most important nomenclature of military equipment and services (in monetary terms it is estimated approx. 60-70 %, according to the Center for Army Research, Conversion and Disarmament). The reason is that Ukraine has never produced (and is not producing) warplanes, air defense systems, naval weapons, combat helicopters, etc.

According to experts, Ukraine is able to satisfy itself in military equipment only about for one-third of defense needs. In practice, this means that Ukrainian military units will receive armored vehicles, some high-precision defensive systems, artillery systems, but there is no chance to receive new combat aircraft or upgraded air defense systems. The reason is clear: Ukraine has never produced such weapons.

 

According to report of RAND Corp. "Security Sector Reform in Ukraine" (https://www.rand.org/content/dam/rand/pubs/research_reports/RR1400/RR147...), UkrOboronProm, the state owned defense consortium, has effective authority over the import of defense items. Its decisions over imports may be swayed by its role as the primary domestic supplier of military equipment.

In accordance with the requirements of the current legislation (Law of Ukraine "On State Defense Order" and "On Foreign Economic Activity"), the procurement from foreign suppliers (import) is substantially limited by the fact that government customers are obliged to carry it out solely through special Exporters, which are part of State Concern "UkrOboronProm". This is problematic for at least two reasons:

1. Some potential suppliers have legal frameworks that make it difficult to contract with UkrOboronProm. In the case of the United States, for example, Foreign Military Sales (FMS) can only be concluded with a procurement authority under the MoD of the receiving country, not a state-owned enterprise. While direct commercial sales of military items from U.S. defense companies are theoretically possible, in practice, U.S. firms in the short term would likely only consider selling weapons or military equipment to Ukraine through FMS, given the significant political and economic risks, as well as concerns about fulfilling strict U.S. regulations about the transfer of high-technology equipment abroad. Hence, under current circumstances, most transfers of U.S. equipment and weapons are limited to assistance, rather than sales.

2. UkrOboronProm has a conflict of interest. Its subsidiaries manufacture equipment for the Ukrainian military. Consequently, it has a disincentive to import items that might be supplied by its subsidiaries.

Also UkrOboronProm has a reputation for excessively marking up import costs by 5–20 percent or more. By making it more difficult to import items, UkrOboronProm may hope to develop Ukraine’s own defense industry. While this may be an understandable if not strategically optimal prioritization during peacetime, during wartime it prevents Ukraine from acquiring needed equipment. Some Individuals with a conflict of interest can influence on procurement processes: military officials negotiate contracts with representatives of state suppliers with whom they have long-term relationships, thus creating favorable conditions for corruption”, - underline the authors of the report (http://www.pravda.com.ua/articles/2017/02/7/7134691/).

 

Under such circumstances, the procurement system for weapons should be improved at the legislative level in order to facilitate defense imports outside of UkrOboronProm by granting explicit authority for foreign procurement to the Ministry of Defense  and other security agencies.

According to the Center for Research on Army, Conversion and Disarmament, granting the right to state customers to complete the procurement without involvement of intermediary companies, will decrease cost of goods to 40%.

It should also be noted that the development of such “direct” procurement is linked to attraction of investment to the Ukrainian economy – in form of offset (compensation) agreements. Such countries as Kingdom of Saudi Arabia, Turkey, Poland, India, etc. use quite effectively offset (compensatory) agreements for the implementation of related tasks.

 

So, UkrOboronProm’s effective exclusive control of imported defense items has prevented Ukraine from purchasing critically-needed items, has increased costs, and by reducing competition has likely decreased the quality of items available to the MoD and GS.

The MoD should be given explicit authority to conduct foreign procurement in an expedited process for all items, including armaments, which are of immediate need, within a specified budget. While the MoD has already adopted streamlined e-procurement processes for supplies required for the current conflict, these processes do not apply to armaments, and regulatory requirements continue to make it impractical for foreign companies to bid on military tenders. By adopting a streamlined process that applies to armaments, the Ukrainian government would be able to buy from abroad the critical military equipment and weapons it needs, such as secure radios and equipment for improved reconnaissance, without delays or “surcharges” placed on it by UkrOboronProm. Facilitating foreign procurement would also force the defense firms subordinated to UkrOboronProm to be more competitive, more efficient, and better at meeting Ukraine’s military needs.

While some may argue that procurement of defense items should be left to organizations with close ties and knowledge of the defense industry, such organizations are far more likely to have conflicts of interest that prevent the efficient, affordable, and rapid fulfillment of Ukraine’s defense needs.

 

In addition, the adoption of proposed bill will create favorable conditions for the substantial expansion of the military-technical cooperation as a way to form allies from Western partners, and will also facilitate the attraction of foreign investment in Ukraine through the establishment of licensed production of modern weapons in Ukraine and the conclusion of offset agreements.

 

The draft Law envisages to amend the Commercial Code of Ukraine, the Laws of Ukraine "On Foreign Economic Activity", the Law of Ukraine "On State Defense Order" and "On State Control over International Transfers of Military and Dual-Use Goods".

 

Full text of Draft Law you can find following the link:

http://issuu.com/viktorplakhuta/docs/170807_uff_direct_import_contracts_

https://www.slideshare.net/ViktorPlakhuta/170807-uff-direct-import-contr...

 

Draft Law is ready to be registered in Parliament, to go through consideration of relative parliamentary committees and be adopted by Parliament. Please support this initiative.

 

Ukrainian Freedom Fund implements projects, which aim to eradicate government corruption, strengthen the rule of law and build democratic institutions. The publication of these materials should serve the promotion and support of major reforms in Ukraine.