Identifying and overcoming the problems of corruption in Ukraine’s defence industry
The production and trade of weapons is considered one of the most profitable industries. The rise in terrorist threats and political instability only stirs up additional demand. In 2015, the global arms market showed its highest growth rate for 10 years. According to British research firm IHS, trade was 10% higher than in 2014 and reached US $65bn. Not surprisingly, many want to get their piece of this pie, and often not completely legally.
The weapons market is traditionally one of the most convenient places for corrupt deals to take place. The Ukrainian military-industrial complex is no exception to this. In our country, the most common examples of illegal activity in this area are the use of fictitious contractors to perform works under defence contracts and the inflation of the actual cost of this work or other goods. The State Defence Order (SDO) is a secret document, so it is almost impossible to check what exactly, in which quantity and, most importantly, for which amount the government is planning to make purchases. These restrictions also pose other problems. The management of the UkrOboronProm State Concern, despite its access to state secrets, does not have a copy of the SDO at its disposal. This means that one of the largest weapons producers on the Ukrainian market (in 2016, the concern fulfilled 52% of the SDO) does not have a complete picture of what the state wants. Or who will meet these needs.
The fight against bogus companies remains one of the priorities of Ukrainian defence industry. UkrOboronProm considers that the most effective way to overcome this problem is to launch a transparent mechanism for the selection of suppliers and automation of the procurement process. Since 2014, the concern has been conducting its tenders through electronic systems, namely SmartTender. In 2016, there were 20,500 such tenders, and this made it possible to save more than UAH 375 million (US $14mn). For added security, UkrOboronProm has created a separate unit to monitor procurement and uncover possible violations. The use of SmartTender, a private product, instead of the public ProZorro remains open to question, although according to the Law of Ukraine "On Public Procurement", the production, repair and development of weapons belong to different economic sectors and each have specific requirements for the publication of information about tenders.
The number of potential contractors is also expanding: in 2016, 4,300 companies worked for the defence industry compared to only 502 in 2014. This makes it possible to stimulate competition, diversify production and get better quality at a lower cost. However, such a variety of suppliers requires detailed study of their characteristics. This is somewhat complex, as the State Fiscal Service refuses to disclose tax information about individual businesses. Therefore, it is practically impossible to find out whether a company is in debt to the state or pays nothing into the budget at all. As a result, UkrOboronProm tries to combat financial risks independently. A prequalification system has been introduced for contractors, internal reviews and audits are conducted.
At present, the concern has reported over 150 violations to the police, however almost no investigative work is taking place. The case of former Lviv Armoured Plant director Oleksandr Ostapets, who was arrested for embezzling UAH 2 million (US $75k) of public funds through the fictitious company Pacific-2, is symptomatic. After a short investigation, his actions were classified as "negligence" and it was not ruled out that Ostapets could be recognised as a victim. However, the intervention of UkrOboronProm, the media and activists prevented this from happening. On May 20, 2016, the Sykhiv District Court in Lviv only gave him a suspended sentence – five years of imprisonment with a probation period of three years. Too lenient for a country that is at war. Another scheme is the creation of a private company to compete with a state one. Oleksandr Zhdanov, director of the FED plant in Kharkiv, chose this option. He created an alternative manufacturer using the facilities of the state plant, employing his former workers and diverting orders to his own company. In practice, two identical plants were operating in almost the same place at the same time – while the state-owned one gradually went bankrupt and had no work, the private firm actively filled orders. Some unique machines from the state enterprise were put up for sale as scrap to later be used by the private company. The only thing that UkrOboronProm could do