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24Jan

Open Letter to Prime Minister Groysman "Concerning the problems of the formation and realization of state policy in the defense industry, critical situation in the sector, the efficiency of the activity of the State Concern "Ukroboronprom" and its reform"

24 January, 2018

https://www.kyivpost.com/article/opinion/op-ed/viktor-plakhuta-situation...

http://blog.liga.net/user/vplakhuta/article/29314

 

Open Letter to Prime Minister Groysman

 

Copy to:

Committee on National Security and Defence, Verkhovna Rada of Ukraine

 

 

Concerning the problems of the formation and realization of state policy in the defense industry, critical situation in the sector, the efficiency of the activity of the State Concern "Ukroboronprom" and its reform

 

 

Dear Mr. Groysman!

 

As a group of independent experts and community leaders dealing with the issues of reforming and developing the defense industrial complex, we would like to draw your attention to the critical situation that has developed in this sector.

Such situation is confirmed by the large amount of information in Ukrainian and foreign mass media in 2017-2018 regarding the ineffectiveness of the activities of the State Concern "Ukroboronprom" and its enterprises, such as following - corruption in the process of developing state programs for the reform and development of the defense industry [1]; lack or no progress in Concern's reform [2]; manipulation of contracts and carrying out of corruption actions related to money of criminal origin ([3],[4]); plundering and misappropriation of budget funds by the concern enterprises [5], failure to  execute state defense order [6], interference with the representatives of the State Audit Service in conducting inspections in Concern [7], transferring tens of millions of UAH of budget funds to fictitious companies [8] etc.

This illustrates the systematic nature of the Concern and problems in its activities, for which society expects and demands solutions.

We consider the following factors for such an unsatisfactory state of the Concern and defense-industrial complex as a whole:

 

1. The State Concern "Ukroboronprom" was created in accordance with the Decree of President Yanukovych with exceeding presidential power during the validity of the Constitution in edition of 1996 (Decree of the President of Ukraine No.1245 / 2010 of December 28, 2010 "On measures to improve the efficiency of the defense industry of Ukraine» [9]). However, since the Revolution of Dignity and the decision of the Verkhovna Rada of Ukraine to return to the Constitution in edition of 2004 in February 2014, the legislation has not been brought into line with the current Constitution of Ukraine.

State management by Concern is split between the President and the Cabinet of Ministers: according to current legislation (Law of Ukraine "On Management of State Property Objects in the Military-Industrial Complex" [10] signed by President Yanukovych and Decree of Cabinet of Ministers #993 dated 31 Aug. 2011 “Some issues of the State concern "Ukroboronprom"” approved by Government of Azarov [11]), the Cabinet is entitled to manage and supervise the concern; herewith, the President appoints and dismisses General Director and most members of the Supervisory Board. Such practice  contradicts to the Constitution and disrupts the balance in the management system.

2. Some functions in decision-making in the defense industry and in Concern management are carried out by the Apparatus of National Security and Defense Council. It has several interagency commissions inside (1 – Interagency Commission for Defense-Industrial Complex [12], and 2 - Interagency Commission on Military-Technical Cooperation and Export Control [13]), headed by the First Deputy Secretary of the National Security and Defense Council and engaged in the formation of decisions in defense industry and arms exports. This is, together with unconstitutional interference of President in UOP management, is an interference with the industry questions, which belongs exclusively to the competence of the Cabinet of Ministers.

3. For more than a year (between Oct. 2016 and Jan. 2018), the Supervisory Board were invalid due to the absence of three of its members out of five. Besides, the quota for the Cabinet has never been filled up.

The Law of Ukraine "On Management of State Property Objects in the Military-Industrial Complex" does not foresee the creation of an independent supervisory board of the Concern, and today’s Supervisory Board was formed in an un-transparent way. In the spring of 2016, the President made his proposals to the Law "On Amendments to Certain Legislative Acts of Ukraine on the Management of State and Municipal Property", according to which the procedure for organizing the activities and powers of the supervisory boards of enterprises of the defense industrial complex is determined by the Law of Ukraine "On Management of State Property Objects in the Military-Industrial Complex" [14]. On June 2, 2016, the bill was passed, what makes impossible today to form independent supervisory boards at defense enterprises. [15]

Such a situation breeds serious corruption risks and makes effective supervision of the concern by the state impossible.

4. There is a conflict of interest in the Concern - not being a central authority, the Concern fulfills regulatory functions in the defense industry that are not natural to this entity (in particular on arms exports), while it also has preferences for the export and import of arms. [16]

 UkrOboronProm has prepared roughly 30 draft bills in recent times, and it lobbies the Verkhovna Rada committees and the Cabinet of Ministers, which is not acceptable from the ethical point of view. Moreover, the UkrOboronProm controls its member enterprises and utterly centralizes the decision-making process, which is harmful to the whole sector.

Western businesses are not inclined to cooperate with, or invest in, the Ukrainian defense industry particularly due to the concern’s opaque structure. [17]

5. A question of reforms at the Concern deserves a special mention: the tender initiated by the concern to provide services for conducting strategic, operational, technological, financial, legal, forensic review/due diligence of the SC “Ukroboronprom” and its participants, improvement of the developed strategy of corporate and industrial restructuring of the SC “Ukroboronprom” and subsidiaries, support of practical implementation of the recommendations developed by the specialists

It is important to note that the information on the tender [18] was published on the procurement website on Nov. 13, 2017. As of today, the Concern has canceled and renewed the tender, repeatedly altered the technical inquiry, the tender terms, and deadlines of filing for participants, which looks unprofessional and suspicious. Analysis of the tender documentation indicates that there are contradictory provisions and requirements in it  [19].

We hold the view that the Concern in its present condition cannot reform itself - can not be “initiator” of Concern’s reform and cannot initiate the reform of defense industry in general. The inquiry in the tender papers demonstrates contradictory provisions and requirements.

We believe that it is the government that must be organizer of such a reform, while the Concern, similarly to industries from other sectors, must be totally accountable to the Cabinet and stay free of any attempts to use it as an instrument of political influence and a source of illegal benefits. An independent and professional Supervisory Board must be responsible for results of the implemented reform.

6. The Cabinet of Ministers, which according to the Constitution is the highest body in the executive branch [20], develops and implements national programs of economic, scientific and technical development,  effects management of the state property,  takes measures to ensure the defence potential and national security of Ukraine, organises and ensures realization of foreign economic activity.  However, the CMU does not have a mechanism for the coordination and influence both in the defense industry as a whole, and Concern in particular. As of today, there is no Central executive body responsible for establishment and realization of defense industry policy.

The Concept of development of security and defense sector (approved by presidential order #92/2016 dated 14 Mar. 2016 [21]) stipulates creation the central executive agency that ensures the development and implementation the state military industry policy. The draft law of Ukraine “On the National Security of Ukraine» (development of such draft law is defined by National Security Strategy) also defines creation of such central executive agency. This new executive body defined as one of the components in security and defense sector. It is responsible for establishment and realization of defense industry policy, determination of priorities for the development of the defence industrial sector, insurement of regulation in this area, analysis the condition and trends in the development of the defence industrial sector of Ukraine, development and organization of the implementation of the state programs for the development of the defence industrial sector etc. Function of such executive body will enable to ensure operational capabilities of the forces and means of the security and defense sector.

 

The above-mentioned problems and, above all, the Concern's specific preferences, corrupt practices within the Concern and its participants, and a lack of regulation of the sector by the Government give rise to clientelism and anticompetitive behavior to the detriment of Ukrainian manufacturers, including those in private sector. This also discourages foreign investment in industry, and accordingly, slows down the development of the industry as a whole. All this leads to losses for the State budget and damage to the country's defense capability.

 

We appeal to you, dear Mr. Groysman, to promptly resolve the issues specified in this letter, and publicly express an official position regarding the issues and the suggested recommendations raised in this letter.

Also, we suggest holding a common meeting to discuss matters of reforming the Concern, as well as present issues of development and implementation of state defense policies, and development of an effective mechanism for solving existing problems.

 

In the end, we would like to stress the fact that the suggested recommendations are crucial primarily for the state, its defensive capacities, and economic climate.

The public and international attention are focused  on corruption in our country, as well as to how Ukraine deals with its problems. At a time when Ukraine hope to receive lethal weaponry from the US to boost its defensive capabilities, this will not only enhance the nation’s defense but also its political and business image at the international scale.

Dawdling on resolving this issue will aggrieve not only the concern’s image but the nation in general, which will eventually have a negative effect on decisions by Western governments and companies on cooperation and support towards Ukraine.

 

With respect,

 

Valentyn Badrak, Director of Center for Army, Conversion and Disarmament Studies (https://www.facebook.com/valentyn.badrak)

Anatolii Pinchuk, President of the All-Ukrainian NGO “Ukrainian Strategy” (https://www.facebook.com/anatoliy.pinchuk.5)

Yury Kasyanov, Co-founder of Matrix UAV, ex-volunteer (https://www.facebook.com/brtcomua)

Glib Kanevskiy, Chairman of NGO StateWatch (https://www.facebook.com/prostokanevskiy)

Viktor Plakhuta, CEO of Ukrainian Freedom Fund (https://www.facebook.com/viktor.plakhuta)

Jan 24, 2018

 

Annexes:  Recommendations concerning the problems of the formation and realization of state policy in the defense industry, critical situation in the sector, the efficiency of the activity of the state enterprise "Ukroboronprom" and the process of reforming the Concern

- to create the central executive agency that ensures the formation of and implements the state military industry policy according to the Concept of development of security and defense sector [22], with subsequent transfer under its subordination of enterprises of the Ukroboronprom, State Space Agency and other defense industry enterprises of the state form of ownership with the following powers, which include, inter alia:
1) the formation and implementation of state defense and industrial policy,
2) the formation, coordination and control over the execution of the state defense order,
3) coordination of the mobilization preparation of the national economy for a special period,
4) formation and implementation of state policy in the field of export control,
5) transparent and efficient sale of surplus property from the Ministry of Defense and other law enforcement agencies;

 

- to fulfil a comprehensive review of Law of Ukraine "On Management of State Property Objects in the Military-Industrial Complex" and Decree of Cabinet of Ministers #993 dated 31 Aug. 2011 “Some issues of the State concern "Ukroboronprom"” in order to bring them in line with the Constitution of Ukraine;

- Cabinet of Ministers to change  Decree of Cabinet of Ministers #993 dated 31 Aug. 2011 “Some issues of the State concern "Ukroboronprom"” regarding the order of appointment of the General Director of the Concern and to determine that the General Director is appointed to the post and dismissed from office by the Prime Minister of Ukraine;

- to amend the Law of Ukraine "On the Management of State Property Objects" and to determine that the procedure for organizing the activities and powers of supervisory boards of enterprises of the defense industrial complex is determined by the Law of Ukraine "On the Management of State Property Objects";

- to limit the functions of the NSDC Apparatus in decision-making in the defense industry and management of the Concern, ensuring that the respective functions are performed solely by the Cabinet of Ministers;

- develop and approve the Strategy of Development of Ukraine’s Military-Industrial Complex as stipulated in the Concept of Development of Ukraine’s Security and Defense Sector [23]. This Strategy must serve as the guideline for reform and development of the country’s defense industry over the long term (no less than 12 years);

- to make public the content of the State Target Program for the Reform and Development of the Defense Industrial Complex of Ukraine 2021, which was publicly announced on the web-side of the Government Portal [24]

- the Cabinet of Ministers to publish a clear plan for the reform of the Concern, including the timetable and responsible persons;

- create the position of Inspector General who will have all rights and access to monitor independently all spending in defense industry and arms procurement and will be subordinated and report directly to the Prime Minister.

- to create a non-governmental military-technical commission (Council of Experts), which would be an independent body with the right to vote at the Cabinet of Ministers and provide a real mechanism of influence on decision-making in the defense industry;

- the level of secrecy concerning procurement contracts and financing in security and defense sector must be lowered. To that end, the principles of secrecy in defense sector must be revised, and the Law of Ukraine On State Secrets and the Order 440 of the Security Service of Ukraine of 08.2005 on the approval of the Code of Information Classified as State Secrets must be amended accordingly.

- to accelerate the reform of the system of procurement of weapons and equipment for defense purposes in the domestic and foreign markets, and the system of export of weapons and military equipment, which is the NECESSARY condition for the reform and development of the defense industry.

 

 

[1] https://www.pravda.com.ua/articles/2017/01/24/7133228/

[2]https://www.kyivpost.com/ukraine-politics/anti-graft-watchdog-halts-coop...

[3]http://foreignpolicy.com/2017/12/21/ukraines-anti-corruption-agency-alle...

[4] https://www.epravda.com.ua/news/2017/12/26/632519/

[5] https://www.epravda.com.ua/news/2017/08/18/628180/

[6] https://ua.censor.net.ua/n461490

[7] https://www.pravda.com.ua/news/2017/10/25/7159613/

[8] https://www.pravda.com.ua/news/2017/10/24/7159458/

[9] http://zakon2.rada.gov.ua/laws/show/1245/2010

[10] http://zakon0.rada.gov.ua/laws/show/3531-17

[11] http://zakon5.rada.gov.ua/laws/show/993-2011-%D0%BF

[12] http://zakon2.rada.gov.ua/laws/show/329/2015

[13] http://zakon2.rada.gov.ua/laws/show/180/2007

[14] http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=56416

[15] http://zakon3.rada.gov.ua/laws/show/185-16

[16] https://www.rand.org/content/dam/rand/pubs/research_reports/RR1400/RR147...

[17] https://ukrainesecuritysector.com/wp-content/uploads/2017/11/2017_DCAF_c...

[18] https://prozorro.gov.ua/en/tender/UA-2017-12-20-003453-c

[19] http://ukrfreedomfund.org/ua/news/shcho-vidbuvayetsya-z-reformuvannyam-o...

[20] http://zakon0.rada.gov.ua/laws/show/254%D0%BA/96-%D0%B2%D1%80/print

[21] http://zakon3.rada.gov.ua/laws/show/92/2016

[22] http://zakon3.rada.gov.ua/laws/show/92/2016

[23] http://zakon3.rada.gov.ua/laws/show/92/2016

[24] http://old.kmu.gov.ua/kmu/control/uk/publish/article?art_id=250010686&ca...