Editor’s note: This is the English translation of the open letter from several defense industry experts to Ukrainian Prime Minister Volodymyr Groysman. It was published in Ukrainian on Jan. 24. The full text in Ukrainian can be found here.
Dear Mr. Groysman!
We, a group of independent experts and community leaders dealing with the issue of the reform and development of the defense industrial complex, issue this appeal to you with regard to the critical situation that has developed in this sector.
Such a situation has been confirmed by the large amount of information published by Ukrainian and foreign mass media in 2017-2018 regarding the ineffectiveness the state concern UkrOboronProm and its enterprises, such as the following: corrupt practices in establishing state programs of reform and development in the defense industry, inadequate or non-existing progress in the concern’s reforms, manipulation of contracts and corrupt practices related to funds of criminal origin, plundering and misuse of budget funds by the concern’s enterprises, failures in the fulfillment of state defense contracts, interference in inspections conducted by the State Audit Service, the transferring of tens of millions in budget funds to fictitious companies, etc.
This demonstrates the systemic nature of the problems in the concern’s activities, the resolving of which society expects and demands.
We consider the following factors the causes of this unsatisfactory state of activities of the concern and defense industrial complex, within which the concern is an important component.
The state concern UkrOboronProm was created following President Viktor Yanukovych’s decree, signed exeeding his presidential powers under the 1996 Constitution (Decree of the President of Ukraine No.1245 / 2010 dated Dec. 28, 2010 “On measures to improve the efficiency of the defense industry of Ukraine”). However, after the Revolution of Dignity and the decision of the Verkhovna Rada of Ukraine to return to the 2004 Constitution in February 2014, the legislation was not synchronized with the current Constitution of Ukraine.
Mechanisms of the concern’s management are parcelled out between the president and the Cabinet of Ministers: according to the current legislation (the law “On Management of State Property Objects in the Military-Industrial Complex” signed by former President Yanukovych and the 2011 decree “On some issues of the state concern UkrOboronProm” approved by the former Prime Minister Mykola Azarov’s government), the Cabinet is entitled to manage and supervise the concern; herewith, the president appoints and dismisses the director general and most members of the Supervisory Board.
Such practices contradict the Constitution and disrupt the balance of the management system.
Some functions in decision-making in the defense industry and in the concern’s management are carried out by the Apparatus of the National Security and Defense Council. It include several interagency commissions: (1) the Interagency Commission for the Defense-Industrial Complex, and 2) the Interagency Commission on Military-Technical Cooperation and Export Control), chaired by the First Deputy Secretary of the National Security and Defense Council, and which are engaged making decisions for the defense industry and arms exports. This is, along with the president’s unconstitutional meddling in UkrOboronProm’s management, interference in the industry, which is under the exclusive competence of the Cabinet of Ministers.
For more than a year (between October 2016 and January 2018), the Supervisory Board was invalid due to the absence of three out of five of its members. Besides, the quota for the Cabinet has never been filled.
The act “On Management of State Property Objects in the Military-Industrial Complex” does not provide for creating an independent supervisory board of the concern, and today’s Supervisory Board was formed in an untransparent way. In spring 2016, the president introduced 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 act “On Management of State Property Objects in the Military Industrial Complex”. On June 2, 2016, the bill was passed, which now makes it impossible to form independent supervisory boards for defense enterprises within UkrOboronProm.
Such a situation breeds serious corruption risks and makes effective supervision of the concern by the state impossible.
There is a conflict of interest within the concern – without there being a central authority, the concern fulfills regulatory functions in the defense industry that are unnatural for this entity (particularly concerning arms exports), while it also has its preferences in exports and imports of arms.
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 an ethical point of view. Moreover, UkrOboronProm controls its 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 untransparent structure.
The question of reforms at the concern merits special mention, specifically in terms of a tender initiated by the concern to procure services in strategic, operational, technological, financial, juristic due diligence of the UkrOboronProm’s and its member enterprises, as well as in enhancing a developed strategy of corporate and production overhaul of the concern and its subsidiaries, and in support of the implementation of recommendations.
It is important to note that the information on the tender 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 details, tender terms, and deadlines for participants, which looks unprofessional and suspicious. Analysis of the tender documentation indicates that there are contradictory provisions and requirements in it.
We hold the view that the concern in its present condition must not and cannot be a consumer of both specific inspections and diagnostic services and reform in general. The tender documents have contradictory provisions and requirements.
We believe that it is the government that must be the consumer and coordinator of such a reform, while the concern, similarly to industries from other sectors, must be totally accountable to the Cabinet and stay out 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 the results of the implemented reform.
The Cabinet of Ministers, which according to the Constitution is the highest body in the executive branch, in particular develops and implements national programs of economic, scientific and technical development, manages state property, takes measures to enforce Ukraine’s defence potential and national security, organizes and ensures realization of foreign economic activity, but at the same time has no leverage for coordination and influence in both the defense industry and the concern in particular. Because, as of today, there is no central executive body liable for the establishment and realization of defense industry policy.
The Concept of development of the security and defense sector (approved by presidential order #92/2016 on March 14, 2016) stipulates establishing a central executive agency that ensures the formation and implementation of state defense industrial policies. The same thing is defined by the act “On the National Security of Ukraine” (development of such a draft bill is defined by the National Security Strategy). This executive body is defined as a security and defense sector component and is responsible for the establishment and realization of defense industrial policy, the determination of priorities for the defense industries, enforcing legal regulations, analyzing the condition and trends in Ukraine’s defense industries etc. Creating such an executive body would boost the necessary capabilities in defense and security and improve its qualitative indexes.
The mentioned problems and mainly the concern’s specific preferences, harm from corrupt practices in the concern and its enterprises, and the lack of regulation of the sector by the government, lead to non-competitive environment and discrimination of Ukrainian manufacturers, including those belonging to the private sector. This situation also restrains foreign investment and correspondingly leads to the deceleration of the industry’s development in general, with following loses for the state budget and damage to the country’s defense potential.
We appeal to you, prime minister, to promptly resolve the issues mentioned in this letter, and publicly express an official position on them and the suggested recommendations.
Also, we suggest holding a meeting to discuss reforms at the concern, as well as present issues of development and implementation of the state’s defense policies, and finding an effective mechanism for solving existing problems.
In the end, we would like to stress that the suggested recommendations are crucial primarily for the state, its defensive capacities, and economic climate.
The public and international attention are glued to corruption in our country, as well as to how Ukraine deals with its problems. In its turn, this will not only enhance the nation’s defense but also its political and business image at the international scale.
Hesitating to resolve this issue will damage 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.
Considering this, we anticipate your understanding and cooperation.
Yours, with respect ,
Valentyn Badrak, Director of the Center for Army, Conversion and Disarmament Studies
Anatolii Pinchuk, President of the All-Ukrainian NGO “Ukrainian Strategy”
Yury Kasyanov, Co-founder of Matrix UAV
Glib Kanevskiy, Chairman of NGO StateWatch
Viktor Plakhuta, CEO of the Ukrainian Freedom Fund
