12:05 24.06.2020

Defense is the most interesting area I've ever worked in. --Svitlana Panaiotidi, Deputy Minister of Economic Development

23 min read
Defense is the most interesting area I've ever worked in. --Svitlana Panaiotidi, Deputy Minister of Economic Development

An exclusive interview with Deputy Minister of Economic Development, Trade and Agriculture, Svitlana Panaiotidi with Interfax-Ukraine.

 

In 2017, as part of a program of corporate reform, the government announced a so-called triage approach—placing state-run enterprises into the categories of 1) those set to be privatized, 2) concessions, 3) strategic enterprises, and 4) those targeted for liquidation. Where does this policy currently stand?

— The course announced by the State remains unchanged: do everything to ensure privatization of large-, medium-, and small-scale concerns.

530 enterprises were transferred to the State Property Fund (SPF). This is the first time that’s ever happened in our history. The most recent proposal from the Honcharuk Cabinet was to transfer an additional 380 companies, but with his resignation that was never ratified. It included the Ukrainian State Food and Grain Corporation (USFG), Artemsil, Ukraine Bread, and the First Kyiv Machine Plant (formerly known as The Bolshevik Plant). Right now, we’re reconsidering whether to adopt this entire list as it was originally drawn up. Because of the quarantine we’ve suspended large-scale privatization efforts so the government may add to the list, but the work of the SPF is ongoing. The prep work for this is complex and time-intensive—requiring months of work with consultants, budgets, contracts, negotiations, and the courts. In light of the global situation, however, our general position on the issue of privatization could very well change.

Has it been decided how those properties that remain under State control are going to be managed? There had been a suggestion to talk of creating a holding- or sub-holding company for them. One prominent example is that of Ukrzaliznytsia (Ukrainian Rail): it’s under the purview of the Ministry of Infrastructure, the Cabinet of Ministers, and also the Ministry of Economic Development. What position does your Ministry or the government in general take regarding what to do with these so-called “strategic companies”?

—What’s important to remember: the standards set down by the Organization for Economic Cooperation and Development must be implemented. Currently, the plan is to adopt an ownership model covering the ten largest State-run enterprises. We plan to adopt these soon. Of the ten, we’ve worked out the policy for three of them—the State Food and Grain Corporation of Ukraine (SFGCU), Ukrydroenerho and Enerhoatom. The ownership policy is a fundamental document in which an owner lays out his objectives: “this company exists to….”

I’ve held a meeting to assess the state of readiness of each of these “Top 10” companies to adopt their ownership models and now with an action plan in place we know what comes next.

So, since you’re working on the ownership model there’s no more talk of holding- or sub-holding companies?

—The first thing to get done is to ratify the ownership models for these ten largest companies—a group which, incidentally, includes Ukroboronprom—and then to connect with the Nomination Committee to choose members of their supervisory boards.

Is the Nomination Committee active now? Some other competitions are being held according to a special “quarantine conditions” procedure.

— That has to do with Category “A” civil servants, but we’re talking about putting together supervisory boards and selecting company executives where there aren’t supervisory boards yet. It’s a separate issue.

International financial partners who are underwriting our economy have raised issues about the statutes of our State-run enterprises.

—That’s the next step: bringing those statutes in line with OECD standards.

Still, shouldn’t supervisory boards have the right to approve an enterprise CEO independently?

— Personally, yes, I think they should, but we’ve got an ongoing debate on corporate management. We’re committed to moving toward implementing OECD standards, and it’s very likely that we’re going to encounter obstacles, but that’s exactly where we need to get.

However it plays out, is there still a general understanding that we’ve got to bring the statutes of our State-run enterprises in line with OECD standards and that we’ve got to endow supervisory boards with greater autonomy?

— Yes, I think so. We are moving toward the implementation of OECD standards and we need to implement them all. There are some issues up for debate, but we are definitely not straying from the overall goal.

Will we be able to see a detailed response in the memorandum with the IMF?

—You will. The OECD does a general overview of countries engaged in corporate reform. This provides us with the country’s level in the current economic environment and an investment projection. Implementing these standards establishes Ukraine as a predictable partner and subsequently an attractive investment opportunity. It means reliability.

There is discussion regarding foreign citizens on supervisory boards, salaries of board members and how this should be regulated. Does the Ministry of Economic Development have an official position?

- In my opinion, the discussion should be about effectiveness: what results did we see both before and after implementing corporate reform? In general, it should reflect the shareholders communicating directly with the supervisory board, who, in turn, bring these to the CEO who’s working to carry out the company’s mission as laid out in its ownership model. Once we start moving from general principles to specifics we can have a more fruitful discussion about this.

When can we expect a decision from the Nomination Committee?

— The change in government leadership has affected the effort, but the new government is at work. We’ve had a general meeting, interviews for Ukrkhimtransamiak, established that an open-call that didn’t get done will be renewed. We approved the necessary conditions for it and announced an open-call for candidates for the Board of Directors for “Highways”—a State-run enterprise. Still on the agenda; Boryspil Airport, Energoatom and many other matters.

Does the ministry plan to keep large enterprises under its management?

— Ministries should be working to formulate policy, not manage enterprises. Enterprises not subject to privatization need to implement corporate reform themselves. For all the rest, we will be following the established policy for their privatization. We are oriented on privatization—to make it a reality as much as is possible.

This past autumn there was a lot of talk about reform at the Anti-Monopoly Committee (AMCU). Where does that stand now?

— We’re working Liudmila Buimister, MP from the Servant of the People Party, who has concentrated on this and will continue in that capacity. We’re working directly with the AMCU on propositions associated with their charge. The reform effort comprises two parts: bolstering the institutional capacity of the AMCU and addressing internal administration—rights and obligations of parties, defining procedures in detail, like deadlines and so on. We’re committed to working through it with them, to listening to their recommendations and taking them into account for the reforms to be implemented.

From your own experience working at the AMCU: does the body truly lack the procedural heft necessary to get results in high-profile cases?

— I am a government official and any answer I give would be perceived as undue influence on the AMCU so I’ll just stick to the thought that everyone involved just needs to do their jobs.

There are any number of issues that lack clarity as to whether they are matters for the AMCU or something that should be handled by an independent regulator from energy, transport, and even finance.

— The AMCU should work as an antitrust authority, not a broad, quasi-national commission.

As one example: MP Andrey Herus addresses the State Security Service (SBU), and AMCU instead of to the National Commission for State Regulation of Energy and Public Utilities (NKREKP) with questions concerning price manipulations in the energy market.

— We don’t have a general "staff" for state bodies or a well-established understanding of where the jurisdiction of one body begins and those of another end.

Our government agencies are slapped together quickly, and their areas of authority are outlined without any real careful consideration to detail. The situation would be completely different if we had institutional stability.

And how quickly can this issue be solved? Does the bill on the AMCU that you are writing provide clarity on who handles which issues—whether the committee, the regulator, or the State Service Of Ukraine On Food Safety And Consumer Protection?

— I believe that this is all outlined in the bill.

Recently, there has been significant discussion on banking law, but the concerns are similar to those that come up with the AMCU: that the courts have a better grasp of the cases than State commissioners or even the AMCU or NBU (National Bank of Ukraine).

— Antitrust case law has a great deal of complexity that needs to be dealt with. I think we need to provide joint training sessions for commissioners and judges to develop a unified understanding of the application of anti-trust legislation to specific cases.

So, this is more a question of practice of whether judges face legal limitations in adjudicating anti-trust cases? For example, banking legislation places limitations on judicial authority: they are obligated to consider the professional judgement of the NBU regarding financial decisions.

— This bill doesn’t contain that provision.

Do you plan to include a provision in the new bill that allows business inspections to be carried out by the committee only with court approval?

— What we envisioned was that there should be another level of protection against possible abuse before the committee commences the kind of inspection you’re talking about. We’re talking it over now. The business community likes it—they see it as adding a necessary element of predictability to our work.

But to repeat: we’re faced with the question of how the court’s powers will be defined in the law, and on that we still don’t have a final decision.

Do you have a deadline in mind for when you can expect Parliament to consider this bill?

— Last autumn, I had hoped that the AMCU would be reformed by the end of the year. I wanted it done in that six-month window of opportunity that typically follows an appointment to a post. So, this winter I started working on having it ready by spring. Now, I’m hopeful we can get it done by the end of this year.

Does the Ministry’s Directorate for Competition, established on your arrival there, duplicate the work of the AMCU?

— Adopted legislation on the Protection of Economic Competition indicates that we need a State policy on the development of economic competition. The AMCU secures that. So, now we’re getting back to returning competitive development to the government's agenda. In no way are we duplicating the AMCU’s charter.

And what are the issues on the government agenda regarding economic competition?

— State subsidies, for one. We’re analyzing the regulatory framework that is being developed to foster compliance with legal requirements. This work applies to the new "5-7-9%" business loan program, too.

The department deals with economic competition policy formulation, regulatory analysis, and verifies documentation for State aid. We wanted to make this a large-scale effort that analyzed the effect of State regulations on economic competitiveness.

What markets are the Ministry and the AMCU looking at in the task of determining the monopolization assessment index?

— Alongside the AMCU and international consultants, we’re developing an index to monitor the state of competition in Ukraine. Right now, we’re putting together its method for calculation that will be used to monitor annually how competitive markets actually are. The index should also help define priorities in sector policy and a mechanism of response for violations of economic competition law. Currently, we’re looking at what quantitative and qualitative factors will inform index calculations.

The quantitative bloc will contain indicators like the number of enterprises in a market, its import share, its export share, an industry’s profitability dynamics, its price dynamics, its level of capital investment and so on.

The qualitative bloc is still early in its development, so there’s not much to talk about yet.

The job of identifying the highest priority markets will involve the consideration of factors like market size, product social significance, consumer impact.

Ukraine has never had this kind of index before, but in places like Romania and the Netherlands it has served as a solid indicator of market competitiveness.

To this point, only quantitative indicators have been developed. A meeting with Romanian specialists in the field experts had been planned at the AMCU as part of the TAIEX program. It had to be postponed with the onset of the quarantine, but the AMCU is currently working with the State Tax Service to crunch the data for index calculations. We will do our best to introduce it next year.

Has the new procurement law overwhelmed the AMCU's appeal mechanism?

— We’re monitoring the situation, but right now it’s too early to talk about its effect. A significant number of procedures were announced before the law came into force in an effort to avoid being adjudicated under the new law. The new policy works but hasn’t provided relief to the old caseload. Its effect should be more visible in about three months. We have begun to monitor the situation monthly with the change in the number of appeals being processed.

Is there any relevance to the AMCU’s change of status?

— The legislation on the AMCU defines it as a state body with special status. Nothing has changed with that status.

Court decisions on the unconstitutionality of a number of NKREKP regulations come to mind: couldn’t this happen with other regulatory bodies? Are additional legislative amendments to the Constitution necessary?

— From my point of view, regulatory bodies shouldn’t take the executive seat in a government. They should provide checks and balances to the executive, Presidential, branch. Since we’re talking about constitutional reform, this is something that needs to be addressed. And it is being addressed, albeit slowly.

How does this bill on the AMCU address the issue?

— Generally, we need to understand whether there is any intention to alter the Constitution. If, say, the appointment of the director of an independent regulator is made by the Prime Minister, the question arises: will that regulator be independent of the executive branch? For me, the answer seems obvious.

But if that director is appointed by the executive branch, then he’s not a regulator. This is the executive branch of government operating by its own set of rules.

In your opinion, is a National Commission on Transport Regulation needed?

— In my opinion, we need to establish he National Commission on Transport Regulation as a regulatory organ, but not one that functions as an executive body.

And who could potentially serve as arbiter for, say, tariffs: The Ministry of Infrastructure?

— I don’t think the Ministry can serve as arbitrator since it’s part of the executive branch.

When putting together a new department it’s imperative not to create, again, a department that lacks bite because it was put together sloppily—another exercise in absurdity. The authority of public bodies should be clearly delineated. Any ambiguity stokes public distrust of government because we’ve come up with another department that fails to meet expectations.

What can you tell us about the inaugural review of the defense industry?

— We’ve conducted a review of the defense-industrial complex for the first time in this country’s history. The approach is methodical: we analyze the state of the industry, its capacity, its human resources, and its institutional objective and purpose. The study is a necessary thing if we hope to update our defense development strategy. We’re currently shaping a working Strategy for defense industry development through 2028.

What share of the defense industry is held by Ukroboronprom?

— Altogether, Ukroboronprom comprises 137 companies, 21 of which are located in the occupied territories. So, maybe 30-40%. We have a large number of private companies. But here it’s important to consider what you mean by “share” – revenue, or industrial capacity?

And what did your study define as “share”?

— The analysis is complex. If we’re talking about State defense contracts, this is one figure, but if about exports, then another number, or about potential defense contracts, yet another. There isn’t a single, comprehensive answer. However, the private market sector is quite large.

What are the dynamics of private business development within the defense industry?

— Recent years have brought change: the private sector share increases and Ukroboronprom declines.

Do you, in your capacity in the Ministry, support this? The creation of a competitive defense industry?

— In general, I’m for systemic change in the defense industry. First, though, we need to corporatize state-run enterprises. That’s the key to the development of this sector. It’s a dilemma: on the one hand the State sector is inflexible, and the private sector highly flexible. But the private sector lacks the State’s capacity.

What we need is to combine military-industrial and military-technical policy. This Ministry is responsible for the first part, and the Ministry of Defense for the military-technical part. We are currently analyzing the Ministry of Defense’s long-term requirements that they provided us with so we could complete the Defense Industry Review. We need another month yet to analyze all the information and to draw up our recommendations about which products and areas are in greatest need of development.

What changes in defense procurement procedures can we expect from this model?

— If bill 2398-D is adopted, it should completely change the system from a post-Soviet ideology to that of market demand and competition. At present, the customer chooses the provider in conditions of total secrecy. Top secret. Our proposal will alter this approach. Somebody needs “X”. There are three, four, five potential providers. These can and should compete to provide “X”. But here we face an issue: is the State prepared to see this sphere operating in a competitive, open market?

Considering the existence of a solid private sector, you still think it might not be ready?

— Certainly. But is the State prepared to admit this? To move away from this controlled mode to something transparent and competitive? The change could very well mean that those currently winning contracts won’t anymore. Still, more is needed. In addition to privatization, we need to establish a public-private partnership in defense. We need to foster the potential to attract foreign partners, and that of our private companies engaging in joint efforts to enter international markets. This all needs to change so that we can be competitive both domestically and in foreign markets. Get ourselves ready to be active in what is an intense technological competition.

There’s a discussion that sprang up on social media on competition for defense exports and reforms at the Institute of Specialist Exporters—its actual size and exclusivity. Can you comment on this?

— The discussion that went public wasn’t about the number of special exporters but applied to Resolution 1228, which allows a State concern to negotiate pricing and marketing terms internationally. In other words, how much they can sell and where they can sell it. It’s a debate about export liberalization and it’s ongoing.

So, we’re still waiting for reforms for Special Exporters?

— Yes. We still need to get there. We need to separate regulation from reform of exporters, deciding what system it should follow, how many companies it should encompass and its overall structure.

So, the first stage of this reform makes it simpler for a private company to sell its defense production domestically, but to get into exports necessitates yet another stage of reform?

— When it comes to economic development and exports, we have solid regulations at work in State Export Control Service and the Interdepartmental Commission on Defense Technical Cooperation and Policy working under the National Security and Defense Council.

These controlling bodies are involved at each stage of the process. For a producer to export its own product (it’s a State monopoly so there are no intermediaries), it needs to spend about a year’s effort to obtain the right. Following that, you still need to negotiate prices internationally. It’s not about a loss of control—Ukraine has international obligations that we adhere to—but about efficiency, competitive conditions that take into consideration legislation on the preservation of economic competition.

About the reform of Ukroboronprom: they have prepared a project that Mr. Saakashvili has said he would consider in the Reform Council. Are you prepared for this meeting? Do you have a position?

— The work being presented implements the Strategy for Defense Industry Development through 2028 that we had drawn up. Reform projects were prepared to put its provisions into force including the delimitation of policy formation and enterprise management; corporatization; international cooperation; and the creation of vertically integrated clusters.

Regarding my own position. Sure, I can talk about that. We have a package of bills, a transformation plan, a draft ownership policy and a guide to step-by-step implementation. In the near future, I’ll be sending the bill on corporatization for interdepartmental approval. I am in favor of accepting corporatization. We are ready for detailed discussions on the Ukroboronprom reform project and transforming the defense industry in general. But corporatization, international cooperation, the opportunity to create joint ventures - this is all part of our Strategy for Defense Development.

As part of the reform, state-owned enterprises that are part of the Ukroboronprom will be reconfigured as joint-stock companies and limited liability companies, and then grouped in clusters matching their target markets and industry characteristics.

We aren’t discussing the second part yet—about the number of holding companies or which clusters we’ll need—their creation is spelled out in the 2028 Strategy Policy, but this is an important preliminary stage taken on by Ukroboronprom. We’ll start with our priority—the adoption of the strategic documents, starting with our National Security Strategy.

The Ministry of Economic Development has prepared a bill restricting foreign investment in the sector.

This is about vetting investments—an international practice in the security and defense sector. We already have the example, somewhat unique—or, at least, it’s all we know about—of the Motor Sich situation. Screening, for the partners we’re currently working with, is a normal part of doing business. We’re learning from the experience of our international partners on how screening and interagency cooperation work in their decision-making. Globally speaking, the idea is that if we open our market to a partnership, we need to know whether it’s financed by an aggressor nation or sanctioned territories. This is necessary to avoid violating international agreements. So far, any additional control mechanisms provoke resistance—there is no institutional trust. But we have to build it by enacting consistent and transparent policy solutions.

When the shouting dies down, we see that screening/vetting is a normal global practice. For example, in our discussions on export controls and the international transfer of goods this February with our US partners, they expressed concern that our new private space law did not contain mechanisms for the prevention of technology transfer—a restriction that’s a necessity in the security and defense sectors.

Only security and defense? There are other examples: the Mykolaiv aluminum plant, banking.

— In the USA they vet everything. You can get into that kind of discussion even talking indirectly, like about infrastructure or telecom services. We had a lively discussion on financial sector regulation. We’re ready to discuss everything. The objective is to write agreements that allow us to eliminate any bias. What’s more, this assures a potential investor that there is no unreasonable risk in an investment with us.

Does the bill deal exclusively with security and defense?

— Infrastructure too. When it was first developed there was no mention of security and defense. Later on, we put the emphasis on them in the text. Now, we’ll have to take into consideration what we learned in our discussions and rework it to give it the proper focus.

What stage is the bill at now?

— The first draft came out in December, but it didn’t cover security and defense. Then we had talks with our international partners and agreed to refine it and put security as its main focus. When we had completed it, we took further comments and posted these for public discussion. We got several meaningful comments. We will rework it again and open the new version up for discussion.

Whose experience does the language about screening drawn on?

— It draws on the experience of NATO member-nations.

Does NATO have a common framework? The USA, for example, sets much stricter regulations…

— America is the most strict, yes. Restrictions do vary among nations but there are some basic principles. There is a general framework as you’d expect, and then, depending on local conditions, each nation determines its specifics. We are adhering to the general scenario so far. We will not be able to adopt the American experience fully. Our mindset won’t allow it.

Is Ukraine subject to any restrictions under the Free Trade Agreement?

— Not at all. This has all been resolved.

How did you first become involved in defense work?

Tymofiy Milovanov (ex-Minister of Economic Development in the Honcharuk Cabinet) first brought up working on the development of the defense sector. He discussed it with his deputies at the time to see who would take on this difficult job. In the end he offered it to me.

The Norwegian ambassador was happy with my appointment—they are providing significant funding for our efforts in the area of gender equality—and for them it was a "wow moment”. This utterly “masculine” sphere led by a woman.

It’s the most interesting area I’ve ever worked in. We are at the stage of transforming things—a tremendous and fascinating challenge.

It is interesting to see how this sector functions internationally. I was part part of a Ukrainian delegation to a meeting of NATO ambassadors in January and that made a mindboggling impression. I’m grateful to the Deputy Prime Minister at the time (currently, Foreign Affairs Minister) Dmytro Kuleba, who invited me to join the delegation. He introduced me to the NATO Secretary General and that made a lasting impression. You need to take a broad view of a host of issues in order to work in security and defense. And these are unusually broad-minded people, knowledgeable in a range of sectors, areas that impact security and defense.

As a practical experience it’s interesting, even though I’ve worked on transformations before, and especially fascinating given the kind of situations we’re working with.

An example: at long last we’re automating our export control service. We’re transforming from paper forms to an electronic system that tracks every application, export histories and risk factors. This is nothing less than a revolution. An automatic process, not manual, dependent on human whims. It was talked about for years but nothing was done. We’ve got the funding finally and we’re going to implement the electronic system.

What’s your top priority? What goals do you set for yourself? And what can you say about the success you’ve experienced in your new role?

— First on my list is focusing as much as possible on bringing about change: Security and defense sector reform, privatization, and corporate reform, and effective state property management count as my current priorities—effort that will contribute to positive change in Ukraine.

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