De­fen­sive treat­ment

Iden­ti­fy­ing and over­com­ing the prob­lems of cor­rup­tion in Ukraine’s de­fence in­dus­try

The Ukrainian Week - - POLITICS - Yuriy La­payev

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

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