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17Jan

How to reform state management of defense industry

17 January, 2018

(Viktor Plakhuta: How to reform state management of defense industry, KyivPost, Published Jan. 17 at 9:51 pm https://www.kyivpost.com/article/opinion/op-ed/viktor-plakhuta-reform-st...)

As of today, the activities of the state concern Ukroboronpom and the defense industry in general isn’t coordinated and directed by any government agency. The government bodies in Ukraine aren’t doing anything to develop and implement a unified state policy for the defense industry. Moreover, there is a gap between the development of the policy, or legislation, and its implementation. And the state military-industrial complex itself is divided between the president’s people and the Cabinet of Ministers.

Creating new Ministry of Defense Industry

For a long time, the expert environment has been talking about the need to create a rigid vertical management of the defense industry.

The law of Ukraine “On Management of State Property Objects in the Military-Industrial Complex” defines the Cabinet of Ministers as the agency in control of the defense industry. At the same time, the Cabinet has no real influence and instruments of control.

The Ministry for Economy and Trade is in charge of drafting the legislation for state policy in defense industry, but it is separated from the management of the state defense complex. This was especially evident during the development of the state programs of the defense industry development, when incompetence (https://www.pravda.com.ua/articles/2017/01/24/7133228/), violations and corruption (https://www.pravda.com.ua/articles/2017/10/12/7158080/) manifested themselves.

In accordance with the aforementioned law, the president appoints and fires the general director of Ukroboronprom and three members of its supervisory board. But such functions of the president violates the Constitution and bring disbalance to the management of the defense complex.

Another participant is the National Defense and Security Council. It has in its structure several interdepartmental committees: one focusing on the military-industrial complex, another on the defense cooperation and control of exports. The first deputy secretary of the council heads the committees. The committees take decisions regarding the defense industry and exports. And this is too an interference of the president’s vertical – just like with him appointing the director and members of the supervisory board of Ukrobronprom. These functions of the Council need to be limited and passed to the Cabinet of Ministers.

So all the functions of the stakeholders in the state defense industry need to be reviewed. The Cabinet of Ministers needs to take over all the authority and become the leading force in shaping and implementing state policy in the defense industry. More on this can be found in my earlier op-ed.

As a result, a new executive body must be formed: the Ministry of Defense Industry. It should manage:

1. All the companies of the state military-industrial complex, including

   Ukroboronprom
   other enterprises that are now managed by the Defense Ministry, Economy Ministry, Interior Ministry, State Property Fund for the purpose of their further reforming (liquidation or reorganization) and development

2. State Space Agency

3. State Service for Export Control

The following functions need to go to the new ministry too:

1. Coordination of the preparation of the national economy for a special period and of the reserve production capacity.

2. Sale of surplus property from the Defense Ministry and other law enforcement agencies.

3. Managing the state defense procurement.

Action plan for the new ministry

The first steps of the new Ministry of Defense Industry should be:

 Evaluation of the military-industrial complex of Ukraine (defining if it is ready to satisfy the defense and security sector’s needs for weapons and special military equipment)
Financial, legal, and operational audit of the military-industrial complex
Developing a long-term strategy for the military-industrial complex
Adjustment of state programs according to the strategy
Reforms of the military-industrial complex according to the strategy of the military-industrial complex (structural transformations of the defense industrial complex, technical and technological re-equipment) and the strategy of the state companies (also known as Triage)
Ensuring that the army needs are met
Developing the export of armament and military equipment

Reform of procurement as a necessary condition for the development of the military-industrial complex development

In order to create an effective military-industrial complex and develop it further, it is necessary to reform the system of procurement of military equipment and defense services in the domestic and foreign markets, as well as the system of export of weapons and military equipment.

This is a necessary condition for the reform and development of the defense industry.

The target operating model of the new procurement system is being developed in accordance with the Strategic Defense Bulletin. For sure, there will be difficulties when it comes to its implementation in the Defense Ministry.

This reform is progressing very slowly. Forcing this reform is problematic from the standpoint of the existing system of subordination of the Ministry of Defense of Ukraine (the main agency responsible for the defense reform) to the president.

This reform needs to include:

Creation of an integrated procurement system
Reducing the level of secrecy
Reforming the system of import of weapons and military equipment
Reforming the export system of weapons and military equipment
Changing the process of weapon adoption by the army
Changing the way prices are formed for the production and procurement of weapons
Reforming the cost accounting system and applying different cost-benefit models

Control over budget and use of funds in the defense industry

In my previous op-ed (https://www.kyivpost.com/article/opinion/op-ed/viktor-plakhuta-fix-ukrob...) in the Kyiv Post I proposed to create a position of the General Inspector of Ukroboronprom, or a Comptroller.

But I believe that today it is necessary to create a more powerful mechanism for the independent control over the use of funds in the defense industry in general and the procurement system of weapons and equipment; such a post with its staff should be directly subordinated to the prime minister.

The Economy Ministry is responsible for monitoring the formation and implementation of state defense procurement (but based on the information from the state customers this control exists only on paper). The Defense Ministry doesn’t easily give up to reforms. The state defense procurement needs to be operated by the Defense Ministry, like it is in the U.S. But it is risky given that the Defense Ministry wasn’t reformed and, like the Economy Ministry, is under the influence of the “human factor”.

Therefore, I propose the creation of an alternative control structure – the position of the Comptroller who will have all the rights and access to an independent monitoring of the use of funds in the defense production and procurement and will be subordinated and report directly to the prime minister.

The Comptroller’s functions will include monitoring, preparation of analysis and recommendations for:

budgeting and use of funds
financial operations of the Ukroboronprom, checking contracts, etc.

Conclusion

Putting the Ukroboronprom and the entire defense industry 100 percent under the control of the Cabinet under the newly created ministry will mean taking over all of their problems, such as non-fulfillment of contracts for the Defense Ministry and other security forces, corruption schemes, compromised individuals. The Cabinet will be risking getting a lot of criticism. This can be avoided through reforms and effective external communication.

I think that it will strengthen the Cabinet and allow it to perform its functions and benefit the country. It will significantly increase its defense capability and allow the economy to develop.

The suggested solutions will not be relevant forever and should be adjusted based on the needs of the country.