April 13, 2018
To the President of Ukraine
Mr. Petro POROSHENKO
Dear Mr. President!
On behalf of the American-Ukrainian Business Council (USUBC) we would like to express our deep respect and address the following questions.
The situation with the aggression of the Russian Federation against Ukraine and the occupation of Ukrainian territories requires significant improvement of rearmament processes in Armed Forces of Ukraine. First of all, it concerns the regulation of procurement of armaments and defense equipment within the framework of the state defense order.
To date, there has been a striking misbalance in the development of the domestic defense industry because of opaque and over-secret procedures. 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 through non-competitive procedures (single-source contracts).
At the same time, the problem of the domestic defense industry is that it is not able to produce significant part of stuff for Armed Forces, and in the most important nomenclature of defense 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 still is not producing) warplanes, air defense systems, naval weapons, combat helicopters etc. The situation has become much more complicated after the breaking cooperation ties with Russia, and setting up production in the country for these products is only planned.
But such situation is reinforced by the fact that in accordance with the requirements of the current legislation (Laws of Ukraine "On State Defense Order" and "On Foreign Economic Activity"), government ministries and agencies are obliged to import defense products solely through special exporters, most part of which belong to State Concern "UkrOboronProm".
According to report of RAND Corp. "Security Sector Reform in Ukraine" (https://www.rand.org/pubs/research_reports/RR1475-1.html) UkrOboronProm, has effective authority over the import of defense items. It has a reputation for excessively marking up import costs by 5–20 percent and even more. Also it 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 (http://www.pravda.com.ua/articles/2017/02/7/7134691/).
Simultaneously with the problems of the unreformed procurement system, Ukraine suffers from large-scale corruption. One of the main reasons for such situation is excessive classification of any information about supplies to Armed Forces.
In most developed countries, procurement information for conventional weapons is publicly available.
We are convinced that during fourth year of war, the procurement system should be improved at the legislative level and ministries and agencies have to obtain possibility to import defense products without intermediation of special exporters.
At the same time, the Government should simplify and standardize procedures for obtaining access to confidential information. This is the key to ensuring that secrecy will be not used to cover corruption, inefficiency and mistakes.
We want to emphasize, that implementation of such legislative changes is stipulated by strategic planning documents, first of all - by the Strategic Defense Bulletin (paragraph 2.5); the Ministry of Defense and the Ministry of Economic Development and Trade are responsible for the elaboration of relative legislative changes until the end of 2017.
We appeal to you, Honorable Mr. President, with a proposal to consider our recommendations for reducing secrecy in defense procurement and providing defense and security ministries with possibility to import without intermediation of special exporters. Our recommendations are drawn up in the form of two draft Laws of Ukraine which are ready to be registered in the Parliament (attached to the letter – Draft Law #1, Draft Law #2). Draft Laws were developed with support of non-governmental organization Ukrainian Freedom Fund, a member of the American-Ukrainian Business Council.
The American-Ukrainian Business Council is a private, nonprofit professional business association that represents the interests of American companies operating in Ukraine and Ukrainian companies that have close business relationships with US business. Our organization promotes bilateral trade and economic relations through regular interaction between business leaders and political elites in the United States and Ukraine. Among the nearly 200 members of our organization, there are world-famous multinational corporations, large American and Ukrainian companies, as well as law firms interested in developing strong business relations between the United States and Ukraine.
Mr. Volodymyr Groysman, Prime Minister of Ukraine
Mr. Andriy Parubiy, Chairperson of The Verkhovna Rada of Ukraine
Mr. Alexander Vinnikov, Head of the NATO Representation to Ukraine
You can download a copy of original letter using this link - https://www.slideshare.net/ViktorPlakhuta/20180413-usubc-defense-procure...