Who will reform the bloated, unwieldy and many say corrupt UkrOboronProm, Ukraine’s state-owned defense industry concern with more than 130 companies and 85,000 employees?
Pavlo Bukin, the new director general on the job since Feb. 21, says he can.
In an interview with the Kyiv Post, Bukin promises to make “unpopular decisions” to whip UkrOboronProm into shape.
He’s already made decisions that top staff won’t like. Bukin says he intends to shed a “substantial part” of UkrOboronProm’s top managers soon, and to also privatize dozens of de-facto bankrupt and inoperative firms in order to stop supporting them in vain.
He said that UkrOboronProm has as many as 286 administrators. It’s too many.
“On the one hand, this prevents us from offering competitive wages for high-profile specialists,” Bukin says. “On the other hand, I look at those numbers and see the space for optimization.”
The money saved from reducing staff could be used to boost reserve capital and fund research.
Despite having more than 130 Ukrainian state-run defense enterprises that dominate the country’s military production and arms export sector, as many as 30 of these enterprises are not active and exist only as “legal bodies and some assets,” Bukin said. “I don’t want to divert state resources to expenditures that are not used to develop defense production. If an enterprise has no vital trade cycles, no vital technologies and it is not an active part of the defense industry or a producer of components or end products,” it should not be part of UkrOboronProm, he said.
Bukin said he wants to transfer unwanted businesses to the State Property Fund, after an audit, and then have them privatized to any investors who think they have value.
The newly appointed director general of the UkrOboronProm concern Pavlo Bukin listens to a speech by Ukraine’s president Petro Poroshenko at the Presidential Administration in Kyiv on Feb. 21. (Lazarenko Mykola)
Heavy criticism
A former director general of the UkrOboronProm’s subsidiary exporting company UkrSpetsExport, Bukin succeeded Roman Romanov, who had held the office since July 2014 and who was dismissed by Ukrainian President Petro Poroshenko on Feb. 12.
The dismissal followed months of pressure from Prime Minister Volodymyr Groysman, who had been publicly seeking Romanov’s ouster since late December over the failure to pay $2.1 million in wage arrears at the Mykolaiv Shipyard.
Romanov’s performance drew heavy criticism due to the lack of progress in reforming the concern, which has remained a Soviet holdover — an over-bureaucratized, ineffective, non-transparent and superfluous intermediary between the government and the defense industry.
Under Romanov, the concern saw a number of corruption scandals.
In one of the worst ones, top officials at Lviv Armored Plant were detained by Ukraine’s National Anti-Corruption Bureau (NABU) in July 2017 for allegedly embezzling Hr 28.5 million ($1.1 million), while purchasing defective engines for T-72 tanks.
The State Audit Service of Ukraine in August 2017 reported that after a comprehensive review of UkrOboronProm’s activities between 2014 and 2016, it had detected financial abuses and violations worth a total of Hr 557.8 million ($20.8 million).
In their defense, UkrOboronProm officials say that since 2014 they have helped initiate 42 criminal cases on corruption, and also dismissed 28 directors and punished more 70 officials for various abuses at defense sector enterprises.
Speaking of his plans to fight corruption, Bukin said that he doesn’t “want to be a spammer, and load the law enforcement agencies with spam.”
“However, if there really is wrongdoing, then the concern is ready to provide all information,” he added. “And secondly, we need to prevent this from happening at all. That’s what I was appointed for, and that is my basic task.”
Production prospects
Hitting back at critics, UkrOboronProm officials claim that since 2014, the defense production giant has managed to improve its performance from a Hr 920 million ($34 million) loss in 2014, to a Hr 1.5 billion ($55.6 million) profit in 2017.
Besides, they say, the concern delivered over 18,000 repaired and new vehicles and weapons to Ukrainian military for the war against Russian-led forces in the Donbas. In 2017, the global military broadsheet Defense News ranked UkrOboronProm 62nd among the world’s biggest defense producers, with $1.075 billion in revenues in 2016.
However, aссording to Bukin, today’s state-run defense industry in Ukraine “ekes out a living only by exporting.”
“Talking about gross income — 85 percent of it comes from export, while another 15 percent is the state defense order and fulfilling weapons contracts for the General Staff as part of state procurement,” Bukin said. He said that in the future the concern would have to maintain a delicate balance between earning revenues from exports and performing state defense contracts.
However, UkrOboronProm will soon start to focus more on producing armored vehicles, and will place an even bigger emphasis on aircraft production, Bukin said. The concern hopes to strike cooperation deals with the world’s biggest manufacturers, such as Boeing.
He also confirmed that by late March or April Ukraine would deliver a final batch of Oplot-M tanks to Thailand, completing a repeatedly delayed contract to supply 49 of the main battle tanks to the Asian nation.
Supervisory Board
Since 2014, UkrOboronProm officials have promised that they would completely restructure the concern and turn it into a powerful, modern, and globally competitive defense industry holding company.
Among the goals set to achieve this was the creation of a five-member Supervisory Board, which would oversee the concern’s top management, conduct an independent international audit of the concern’s activities and structure, and arrange the concern’s main assets into specialized industrial clusters.
However, UkrOboronProm’s management only succeeded in launching the Supervisory Board in early 2018, and even then only with four out of five members. The board is headed by the president of the Kyiv Polytechnic Institute, Mykhailo Zgurovskiy.
Notably, Anthony Tether, a U.S. citizen who had served as Director of the Defense Advanced Research Projects Agency (DARPA) at the U.S. Department of Defense, also took a seat on UkrOboronProm’s Supervisory Board on Feb. 21 – the same day Bukin was appointed.
Bukin said one the first tasks of the newly-formed Supervisory Board would be to start restructuring the concern into specialized industrial clusters – a task UkrOboronProm’s leadership first set itself way back in October 2016.
In all, five industrial clusters are envisaged – to produce armored vehicles, aircraft, ships, high-precision weapons, and radar equipment.
Bukin he was now starting to build an “administrative skeleton” for the restructured concern, and would probably complete it by the end of 2018.
Meanwhile, the new UkrOboronProm head said, the new Supervisory Board would have the last word in setting his own salary. As director of UkrSpetsExport, in 2017 Bukin declared an annual salary of Hr 6.42 million ($242,000), or some Hr 535,000 ($20,100) a month.
From now on, his salary will be based on the Supervisory Board’s assessment of the concern’s performance, measured according to annual profit, the total amount of production, and the fulfillment of the state defense order.
“I plan to take measures soon to optimize (the business) and to carry out certain reforms, and report to the board, showing the general situation before and after,” Bukin said. “Then they’ll take the decision (on my salary) that I deserve.”
