171027 Directory Tyvanchuk 0The state defense capacity and the success of military operations are directly connected with the accessibility of modern weapons and military equipment to the Ukrainian Army as well as the absence of problems with their maintenance.

 

The comprehensive approach is the only way to optimize the management of the supply of the Armed Forces. Such an approach includes effective use of resources of all components of the defense and security sector - both state institutions that shape the sector policy and direct suppliers of arms.

 

Within the last years, private sector has grown considerably, both in the production of military equipment and in the provision of related services. This is quite natural: non-state-owned enterprises have always played the role of driving force of economic development. They are more flexible than state-owned ones, more adaptable to changes, free from bureaucratic restrictions, and are open to innovations.

 

At the same time, their potential is not disclosed to full capacity. Today, Ukrainian arms market is a competitive environment. It is represented by strong players from the public sector, including leaders of defense industry, associations and companies with many years of successful experience in supplying products for the needs of the army. Unfortunately, sometimes, even with ideas and production opportunities, private companies cannot close a profitable deal.

 

There are several reasons, and the first one is the specifics of the defense sphere. For decades, the ideology of the non-publicity of the armed forces was built. Thus, we had to change radically the orientation towards the "main strategic partner” as well as the partner. As a result, the industrial cooperation in the Ukrainian defense complex had to be restored from scratch.

 

In this regard, we highly appreciate the initiative of the State Concern "Ukroboronprom" to form the Nomenclature Catalog of Defense Products that require import substitution or diversification of procurement. Over the last years, we have been able to achieve significant results, and, most importantly, not only for the Concern enterprises. Hundreds of private companies have established successful cooperation with state-owned enterprises, receiving an opportunity to obtain new orders. While state-owned companies were able to overcome the dependence on critical imports.

 

Recently, the Ministry of Economic Development and Trade has launched a National Register of Importation Substitution and Cooperation. The goal of this pilot project is to gather information about all producers not only of products requiring import substitution, but also of components, with the implementation of which companies have problems. This pilot project aims to create a basis for further cooperation of the public and the private sector.

 

The second obstacle on the way of private companies is the search for an optimal production cost between the state customer and the producer. All state-owned buyers operate within a limited financial resource, trying to meet the needs of military formations as much as it is possible. It is nonsense, but before 2016, the customers formed prices by ministerial regulatory acts, among which - methodological recommendations, developed by the Ministry of Industrial Policy which does not exist any longer.

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It was necessary to create common approaches to the forming prices for products, work and services for defense purposes, and our Ministry implemented the first anti-crisis measure, determined by the leadership of the state - has developed a procedure aimed to balance the interests of the parties of the contract.

 

Changes that we suggested have made the process constructive. Now by the Government decision, the process of allocating costs (general production, administrative expenses, sales costs) during the formation of the cost of production is normalized, while determining the cost of production (in particular, the cost of paying interest for using loans borrowed under a state guarantee), the financial losses of enterprises and currency are taken into account fluctuation. Each type of work under a state defense order has its own specifics of costing, and the price of the product can be reviewed even after the prepayment.

 

But the most important thing is the possibility to negotiate the increase of the profit from 1 to 5 percent of the enterprises' expenses for the purchase of components and works (services) from other companies, as well as from 20 to 30 percent of the remaining costs in the production cost of products (works, services).

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Of course, the practical application of such approaches will eventually make adjustments to the existing model, and we have already begun the optimization, taking into account the practices of the private sector.

 

Regarding the specifics of defense procurement, we need to revise the approaches to ensure its transparency.

 

Over the past few months, we have met with representatives of the North Atlantic Treaty Organization, discussed the prospects for the development of the Ukrainian defense-industrial complex. These meetings have proved that the issues of transparency and competition in the execution of the defense order are particularly acute for the world community.

 

In addition, the role of civil society in the process of equipping the army is increasing, which also drives the public demand for transparency of government activities.

 

The introduction of transparent defense procurement and clear principles for the allocation of the defense budget will ensure both the development of healthy competition and the increase of trust from international partners and Ukrainian society. This reform should be implemented in the near future.

 

However, it is vital to admit that the regime of secrecy is not a whim of state institutions, but a compulsory necessity. Not always the risks are compensated by the benefits gained after declassification of the relevant information. That is why the process of declassifying information must be balanced and take into account the interests of national security.

 

Indeed, the mechanisms by which Ukraine has been planning public procurement over the past decades, require significant changes. And these changes are only a matter of time: for redefining the methodology, for developing new approaches, assessing the threats to economic security in the event of the discovery of certain data. However, nowadays half of the companies contained in the Register of Manufacturers of Products, Works and Services for Defense Purposes, the purchases of which constitute state secrets, are private. One third of procurement for state defense orders is made using the Prozorro system, and half, as is known, is a non-state-owned enterprises.

 

 

Changes in the planning of defense procurement are already taking place - 2017 was the first year when the country received a three-year state defense order. The field of defense has become one of the first, which went into mid-term planning. This allows the state customers to determine their need for the near future, and for enterprises to plan their economic activity, capacity utilization and development.

 

This reform is particularly important in the context of transition of the state as a whole to mid-term budget planning. The implementation of the last one has already begun by approving the state budget for a three-year period.

 

All current state governance tools and the ones to be implemented within the frame of the reform are aimed at building the Ukrainian defense industry as a whole, and create favorable conditions for the production activities of both the state and private segments. At the heart of such an ideology are long-term landmarks, determined by the leadership of the state.

 

Personally, I would like to add that during the difficult time for Ukraine, the time of the armed conflict in the East, the Ministry as the coordinator of the reform of the Defense Industrial Complex will use all its capabilities so that the Ukrainian defense industry develops sustainably.

 

ANDRII TYVONCHUK,

Head of the Department of Strategic Development of Defense and Security Sector, Ministry of Economic Development and Trade of Ukraine

 

PS: This article was published in “UKRAINIAN TECHNOLOGY: UKRAINIAN PRIVATE-SECTOR DEFENSE INDUSTRIES” DIRECTORY 2017, which was presented at XIV INTERNATIONAL SPECIALIZED EXHIBITION ARMS AND SECURITY '2017

 

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