Summing Things Up. A Fresh Start for a new State Ministry
Svitlana Panaiotidi, Deputy Minister of Economic Development, Trade and Agriculture of Ukraine
On Wednesday, July 22, 2020, the decision to establish a ministry to handle Ukraine’s strategic defense industries was taken. As has been previously stated publicly, this ministry will oversee State military-industrial policy, handling activities previously managed by the Economic Development Ministry where I serve as Deputy Minister. Considering the importance of the specific responsibilities handed off to the the newly formed Ministry, we thought it would be useful to summarize the work we’ve been doing over the last ten months, and provide a detailed outline of the primary challenges set before the new Ministry and its head.
The issue of Ukrainian defense industry reform is not a new one. With the emergence of the private sector as a powerful competitor to the State as a result of the war effort, any reform has to factor in the current situation in the domestic arms market. But to transform the public sector from its current inflexible, Soviet-era model to something modern and efficient is formidable task, part of a complex public conversation. Everyone needs to be on board for the the corporatization, privatization, and liquidation of enterprises that have existed for years only on paper. We also have to take into account our foreign policy—specifically, our involvement with an aggressive neighboring state. All this while identifying our potential for the development of our export market and while meeting the needs of our Armed Forces.
What follows are our results, to date: key areas of development that we are passing on to the new ministry.
1. Review of the military-industrial complex of Ukraine. This was the first such review in the country’s history. The review will serve as a core policy guide for defense, providing as it does a comprehensive assessment of defense sector security readiness in terms of armaments, ammunition, military, and other special equipment.
2. Drafts of new strategies for defense industry development and for the development of the arms and military equipment export markets. The current defense sector development strategy was approved in 2018—a strategy whose implementation we actively pursued. Then, working from this new sector review, we wrote a new draft of the Defense Industry Development Strategy which identified specific industry policy objectives to be realized by 2028. The review also indicated the need for growth in the area of arms exports, which led to the drafting of a new strategy to develop our arms and military equipment export sector.
3. The State Aerospace Program. We’ve written a concept draft for a targeted Ukrainian State Scientific and Technical Aerospace program covering 2019-2023. This is a strategic aerospace industry draft designed to provide justification for budgetary support for sector development.
4. Missile program. This sector has not merely been preserved but significantly enhanced. Government support has been secured for an addition 700M Hryvnia to the Ministry of Economy budget for the development of our missile production capacity. A preliminary draft has also been drawn up for the corporatization of the aerospace industry, resulting in corresponding legislation. We have addressed pressing issues facing both the Pavlograd Chemical Plant and aerospace manufacturer Pivdenmash. The Government allocated funds from State reserves for the secure storage and disposal of solid rocket fuels and for unsymmetrical dimethylhydrazine (or, Heptyl), an expenditure which will stabilize the environmental situation and create new jobs.
5. New Defense Procurement legislation. We started working on this back in September 2019. It involved a lot of meetings where we encouraged open discussions. We haven’t had that kind of transparency in this sector prior to this and I’m hopeful that we can continue it. The resulting defense procurement legislation closely reflects NATO and EU provisions, ensuring open competition in procurement procedures subject to democratic civil sector controls. The Parliament adopted the legislation on July 17, 2020, providing us with a good starting point for further sector development.
6. Eight Vital Pieces of Legislation Developed. These bills will allow Ukroboronprom to form joint ventures that will attract foreign investment and introduce a system of metrics to assess the impact of foreign investment. Also in the works are plans to enhance our system of export control to make it compliant with national strategic interests, and to establish a 0% import duty on weapon and special equipment production components for use by our Armed Forces. We’ve written reorganizational structural policies for the aerospace industry, and secured State support for Pivdenmash to cover employee salary arrears.
7. Resolution on the de-monopolization of arms exports. The entire arms and military equipment markets have been in need of these reforms for years. We’ve abolished the provision requiring exporters to confirm their participation in the market and their foreign pricing policies with Ukroboronprom. This will help de-monopolize arms exports, create a level playing field for independent foreign economic activities, and remove artificial barriers that resulted in resource and time inefficiencies in the defense industry.
8. The Corporatization of Ukroboronprom. We’ve conducted a comprehensive audit of all Ukroboronprom concerns and developed a structure for the creation of industry clusters. We’ve also developed and submitted for approval an ownership policy for Ukroboronprom, as well as a phased plan for its transformation. Developed alongside our international partners, this plan provides a new model for state-run enterprise management as well as an outline for a workable approach for implementing a corporate governance model.
9. Automation of the State Export Control Service. We’ve been working on introducing the Stratlink electronic licensing system in Ukraine since 2017. In 2020, with funding from the Ministry of Economy budget, this effort is ready to bear fruit. Stratlink automates the process of data exchange and communication among government agencies involved in the monitoring of exports and the companies involved. Everything from filing an application and obtaining a permit to reporting on the international transfer of goods will be subject to State export control. This is, without exaggeration, revolutionary. I’m looking forward to finalizing the necessary permits and getting the system up and running. This will reduce corruption and significantly increase the transparency, efficiency, and predictability of the State Export Control Service.
10. Interdepartmental Commission on Defense. This commission was set up and charged with areas of oversight formerly handled by the Cabinet’s National Security and Defense Council. It is an advisory body that coordinates the actions of central executive bodies on defense industry issues. A change in its composition is reflected in its inclusion, for the first time, of representatives of both the public and private sectors. The Commission functions as a platform for the discussion of strategic issues and for interagency cooperation among bodies involved in the security and defense sector.
11. The Offset Commission. We revived the work of the Offset Commission under the Cabinet of Ministers to update the current state of preparedness of offset agreements attached to foreign trade agreements. We also worked out all the corresponding changes in legislation.
For reference: offset (compensation) agreements are agreements in which a portion of the funds allocated for the purchase of imported products are to be returned to Ukraine in the form of investment or technology. Legal conditions for the approval of offset agreements are set by the Offset Commission working under the Cabinet of Ministers.
12. Cooperation with NATO. In December 2019, a meeting of the NATO-Ukraine Joint Working Group on Defense and Technical Cooperation was held. Then in January 2020, I represented the Ministry of Economy at a meeting of the NATO-Ukraine Commission. This was my first opportunity to attend discussions involving NATO member-state ambassadors headed by the NATO Secretary General—Ukraine’s highest level political interaction with the North Atlantic Treaty Organization.
NATO representatives also participated in a seminar on the development of Ukraine’s national defense industry, discussing cooperation between the industry and NATO Centers of Excellence (COEs). A follow-up seminar was arranged to discuss the potential for registering Ukrainian defense enterprises in the NATO Catalog of Defense Producers. This event will raise awareness among the NATO community of Ukrainian defense industry potential and should provide a boost in opportunities for domestic industries to pursue NATO contracts.
I worked to ensure that the entire process of decision-making and the development of policy drafts was transparent, fully accessible to public oversight.
What challenges face the new Ministry for Strategic Industries?
● The adoption and update of strategic documents for the security and defense sector;
● The update of government programs;
● The ensuring of the delivery of the most contemporary weaponry and military equipment to the Ukrainian Armed Forces;
● The completion of the corporatization of all defense and aerospace enterprises;
● The development of a new legal framework to foster the implementation of legislation approved by Parliament entitled "On Defense Procurement";
● The establishment of a level legal playing field for public and private defense enterprises;
● The restoration of Ukraine as a Top-5 international exporter of armaments and military equipment.
The creation of a new ministry means the drawing-up and ratification of regulations, internal documents, outlining of positions and their obligations and interdepartmental agreements, and only then access to the internal workings of the State. This takes time. I know from experience that it’s a difficult path. No transition period is ever easy. I’m hopeful that we can get through it quickly and without any of the kinds of consequences we typically see in the autumn resulting in adjustments to State defense contracts or to the drawing up defense agreements for the coming year.
I’m convinced that effective public administration is possible only if it is carried out in a way that reflects the principles of institutional memory. I’m following the international practice of creating transfer books to ensure a comprehensive handover of these affairs and related information that the work can continue uninterrupted and as efficiently as possible. I also want to be among the first to celebrate real defense reform and industry-led accomplishments. I hope only for the best as they pursue considered, sensible policy.
Let’s get this done!