Ukroboronprom: Reform of Defense Industrial Complex Under Threat of Curtailment
(Source: Ukroboronprom; issued Nov. 18, 2020)
The State Concern "Ukroboronprom" (hereinafter – UOP or Ukroboronprom) is voicing its concern regarding the curtailment of Ukraine’s defense industry reform and interference into its economic activities by the Ministry of Strategic Industries of Ukraine (hereinafter – the Ministry).

A year ago, UOP’s new management team received the mandate of confidence from President Volodymyr Zelensky to stabilize the work of Ukroboronprom and prepare a strategy for reforming it.

Despite all the complications associated with the pandemic, during one-year tenure in the office, management team has fulfilled all obligations under UOP’s existing contracts, kept Ukroboronprom financial performance at pre-crisis level and allowed no untransparent staff appointments, whereas the law enforcement bodies initiated no criminal proceedings against members of the new commands.

The management team put forward the strategy for reforming Ukroboronprom, which was fully supported by the President of Ukraine, Verkhovna Rada of Ukraine, Prime Minister of Ukraine, National Security and Defense Council and international partners. In June of the current year, we filed a bill aimed at launching the groundbreaking reform for the country.

The Ministry was established in July 2020, in pursuance of the Decree of the President of Ukraine №59/2020. Its task is to form and implement state policy in defense industry sector.

The leadership of newly-established Ministry has publicly committed itself to not interfere in the economic activities of state-owned enteprises, in particular, declared it to the Verkhovna Rada of Ukraine, President of Ukraine, National Security and Defense Council of Ukraine, as well as to representatives of the G7 countries.

The Ministry publicly supported the reform concept proposed by the UOP’s management team and familiarized themselves in detail with all strategic documents on the reform of Ukroboronprom.

However, for the third month in a row, the Ministry has been systematically blocking the reform of Ukroboronprom and the defense industry complex as a whole.

In particular:

-- the preparation of the Strategy of the defense industry complex hasn’t started yet;

-- Ukroboronprom’s Individual Ownership Policy, developed at the time of the establishment of the new Ministry and approved by the relevant state authorities, has not been approved;

-- at the insistence of the Ministry, the consideration of bills necessary to start reforming public sector of the defense industry was suspended. At the same time, in four months, the Ministry has not put forward any alternative proposals or systematic comments on bills proposed by Ukrainian MPs;

-- work has still not begun on the preparation of key regulations that are necessary for the implementation of new Law "On Defense Procurement", which is due to enter into force on January 1, 2021. This may pause a threat to stop the entire process of signing contracts with manufacturers of weapons and military equipment for the needs of Ukrainian Armed Forces and other customers;

-- Ukroboronprom’s repeated appeals to solve key producers’ problems with pricing, state guarantees, treasury accounts and others have not been studied and considered;

-- the critical situation with the implementation of the State target program for the creation and development of production of ammunition and special chemicals has not been resolved.

In addition, contrary to current legislation and in violation of state property management standards, from the first day of work, the Ministry, since its inception, interferes in the activities of Ukroboronprom in the form of verbal instructions and numerous insistences.

In particular, we affirm that there are systematic demands and recommendations for the appointment of third persons as directors of UOP’s constituent companies, namely such companies as Ukrspetsexport, Spetstechnoexport, Ukrobronservice, SE Kyiv Armored Plant, PJSC Kyiv Radar Plant, Ivano-Frankivsk boiler house-welding plant and enterprises in Lviv region, etc.

On a separate issue, we draw attention to strong demands for the dismissal of Ukroboronprom employees responsible for security, exports, relations with state authorities and for transformation.

Such methods directly contradict OECD Guidelines on Corporate Governance of State-Owned Enterprises, implementation of which was officially announced by Ukraine (in particular, by fixing them at the level of the Strategy for Improving the Efficiency of Public Sector entities), and may bear the signs of abuse of influence and conflict of interests that lead to corruption risks.

It should be emphasized that according to the current legislation and the Charter of Ukroboronprom, the function of the owner in relation to Ukroboronprom can be performed only by the Cabinet of Ministers of Ukraine through appropriate supervision and control by the Supervisory Board.

In accordance with its regulations, the Ministry performs only the function of formulating state policy and appropriate regulation in the defense industry. The Ministry does not have the authority to manage state-owned enterprises that do not belong to its sphere of management.

We consider such actions inadmissible and undermining the credibility of the declared intentions, goals and objectives set before the Ministry, in accordance with the Program of Actions of the Cabinet of Ministers of Ukraine.

We, therefore, address President of Ukraine Volodymyr Zelensky, Prime Minister Denis Shmygal, Secretary of the National Security and Defense Council Oleksiy Danilov, and Chairman of the Verkhovna Rada Committee on National Security, Defense and Intelligence Oleksandr Zavitnevych with a request to take into consideration the current situation around the reform of the defense industry complex.

We hope for a balanced and active position of the state leadership to ensuring the defense capabilities of a country in war.

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