Almost all — 95 percent — of the arms and equipment of the Ukrainian military are procured via state defense orders, or SDO.
These are non-competitive single-source contracts with totally classified procedures. This creates impediments for the development of the Ukrainian defense industry, leads to monopolization of the market, and makes the products and services destined for the Ukrainian military low-quality and expensive. Secrecy should not be used to obscure corruption, inefficiency, or the errors of government officials.
A letter with this message about the urgent necessity of defense procurement reform, along with proposed solutions, was recently sent by U.S.-Ukraine Business Council to Ukrainian President Petro Poroshenko.
The defense industry is a complex of many enterprises working in various industries that produce military products. Ukraine was once a major center for the massive Soviet arms industry. The activity of defense enterprises in Ukraine today within the framework of secret state defense orders has an effect on the whole national economy. Ukraine needs to move away from Soviet-style practices of total secrecy. Secrecy hurts the Ukrainian state, and does not serve to protect its national interests. That’s why it is necessary to make a comprehensive review of SDOs and create maximum access to procurement for domestic and foreign manufacturers and suppliers. Revision of secrecy in defense is a logical component of the reforms of the defense procurement system and defense reform in general.
Corruption is unfortunately endemic within the Ukrainian defense industry. For a recent example of a high-level defense corruption scandal, see this report from the Ukrainian magazine Novaya Vremya (English summary here.): It alleges that the head of the Parliamentary Committee on National Security and Defense and the Deputy Secretary of Ukraine’s National Security and Defense Council stole from the state defense budget through multiple schemes, including buying old Czech armoured personnel carriers from a Polish intermediary who bought them as scrap metal for €20,000 each and removed their turrets. The APCs were then imported into Ukraine, re-assembled by a Ukrainian factory, and then sold to the Ukrainian military for €205,000, a 1,025 percent markup! The accusations also include the sale of detonators to Russia through intermediaries and the purchase of sub-standard Turkish radios at inflated prices which can’t even fit inside tanks.
Because of the war with Russia, expenditures on security and defense have increased to 5 percent of the gross domestic product, or about $5 billion.
This spending is mostly secret, done through state defense orders.
In 2018 the amount of money sluicing through these secret procees amounts to about $800 million, a 37% increase from the previous year. It is good that Ukraine is spending so much during a war, but unfortunately there is no real control over the use of these funds. Simultaneously, secrecy prevents any oversight from citizens and NGOs. When serious accusations of corruption surface, anti-corruption groups cannot prove wrongdoing, due to the total secrecy that surrounds these contracts. One recent journalistic investigation that accused people close to the president of involvement in corruption resulted in an investigation against the journalists for prying into state secrets.
In most developed countries, procurement information for conventional weapons is publicly available. In fact, such reforms were already reflected in Ukrainian planning documents – the question is only about the political will of the Ukrainian Government and particular military officials.
The implementation of the relevant legislative changes was stipulated by the Strategic Defense Bulletin (SDB, paragraph 2.5.).
The bulletin laid out the gradual transition of procurement of conventional weapons through State Defense Orders to the area of public procurement through public defense contracts. The Ministry of Defense has to expand the scope of public procurements for conventional weapons and to review the role of State Defense Orders as well as the list of weapons and equipment whose procurement involves sensitive information. The Ministry of Economic Development together with the Ministry of Defense was responsible for the elaboration of such legislative changes, with a deadline that expired at the end of 2017.
On the other hand, the Strategy of Reforming the System of Public Procurement (“The Roadmap” approved by the Decree of the Cabinet of Ministers #175-p, Feb. 24, 2016) implies the adaptation of Ukrainian legislation to European Union rules and standards in defense procurement (according to Defense and Security Procurement Directive 2009/81/EC) with a deadline for implementation of January 2019. The main bodies that have to perform this reform are the same – Ministry of Economic Development and Ministry of Defense (together with the Antimonopoly Committee, the Ministry of Justice and the Ministry of Finance). Again, the question is only about the interest and desire to make real reforms in Ukraine.
Proponents of the existing system of secret procurement argue that it is justified because the details of Ukraine’s military procurement could be more easily acquired by its enemies. In fact, the real sensitive data is not about the supply, timing, cost, or inventory of arms in the Ministry of Defense. In the modern world, such data is usually publicly available one way or another. It is unlikely that information about procurement plans and contracts would provide Ukraine’s enemies with additional useful intelligence. Especially taking into consideration our common Soviet past and close ties throughout all the previous years of independence. The really sensitive information could be about new weapons technology or the distribution of arms and equipment at particular military bases, but not overall budgets and procurement plans.
But national security officials defend the secrecy and the absence of public tenders for most military equipment, as necessary to prevent Russia from sabotaging Ukrainian militaries. The development of business always serves the interests of national security – and it is a direct task of the government to ensure proper coordination between these two sectors. However, Ukrainian officials and businessmen are often the same people. The excessive secrecy leads to losses of the Ukrainian economy from the hindered development of the military-industrial complex, insiders can cut corners and direct contracts to themselves and their cronies.
If we talk about the anticorruption and transparency, along with the reduction of secrecy in the defense sector, it is necessary to increase the efficiency of existing state authorities, such as the Parliamentary Committee on National Security and Defense or the Accounting Chamber of Ukraine. Secrecy increases monopolization and creates unequal access to the market, what as a result, makes the country’s defense base weak.
Therefore, Ukraine needs to make State Defense Order publicly available and open the main quantitative indicators: i.e. what and how much is planned to be procured by the military and how much public money will be spent. This will enable manufacturers and suppliers to get equal and fair access to procurement, and to plan their production activities; these should be domestic enterprises of state and private ownership, as well as foreign suppliers. This will also allow foreign investors to invest in the defense industry of Ukraine and build it up, developing manufacturing capabilities and creating new factories.
Also, Ukrainian taxpayers and public organizations will be able to conduct oversight of defense expenditures, finding out what has been procured, who supplied, the value of contracts, etc. and whether or not a conflict of interests exists for state officials.
In sum: Ukraine must make the following information public:
a) the annual arms procurement plan (state defense orders);
b) information about companies that supply goods and perform work and services in security and defense;
c) information about concluded and fulfilled contracts; and
d) information about planning and budgeting in defense supply and procurement.
The reduction of secrecy will not only help to boost the Ukrainian economy, but also will simplify the involvement of domestic and international experts in the process of the development or adjustment of strategic security documents.
Even while Ukraine obtains military assistance from the U.S. and other allies, its own defense industry and procurement system remain mired in corruption. The government has to declassify procurement in the defense sector and reform the procurement system. But it is doubtful that the presidential team will change anything during the period before the presidential and parliamentary elections.
