DRAFT LAW ON REFORMING STATE ENTERPRISES IN UKRAINE’S DEFENSE INDUSTRY: WHAT DOES IT CHANGE?

5 facts why the state defense industry is doomed without the adoption of the draft law # 3822 on reforming state enterprises in Ukraine’s defense industry. And thus our victory over the occupier.

Fact 1. Out of 24,000 items of various weapons, military hardware and components, now manufactured at Ukroboronprom’s enterprises, not every item is of use today. For example, we have companies that produce components for Soviet submarines. The boats we don’t have.

Fact 2. While successful world’s defense industry companies spend up to 25% of net profit on the development of new models of weapons, in Ukraine this estimate is not more than 2 — 3%. That is why, the repair and modernization of existing (mostly old Soviet) military makes about 80% per year in the pattern of army needs.

Fact 3. State defense enterprises are now deprived of long-term planning. That is, if today we decide to equip our army with a batch (and not with one item) of high-precision "Neptune" ASCM systems, combat tactical vehicles "Dozor" or "Oplot" tanks without a single cog of Russian manufacture, then we can produce not more than our state orders. In other words, if there is one item of "Oplot" in the State defence order, then the Malyshev Plant will not be able to produce two items. At the same time, every year the share of state defense enterprises in the state defence order is steadily declining: if in 2017 our enterprises accounted for 67% of all needs of the Ukrainian army in the manufacture, modernization and repair of weapons, in 2020 — it’s only 36%.

Fact 4. Only 28 enterprises out of 118, which are part of Ukroboronprom, generate 98% of revenue. The rest live in debt, including unpaid wages. Most of our enterprises are actually surviving, or even dying.

Fact 5. The average age of design engineers working at our enterprises is 65 years. Outflow of young professionals from the state defense also foredoom the industry to extinction.

Reforming Ukroboronprom by adopting the draft law #3822 is the only opportunity not only to protect country’s borders, sovereignty and integrity, but also to win the war over the occupier.

One of the major myths about the reform of Ukroboronprom is that the draft law 3822 provides for "hidden" or "explicit" privatization of defense enterprises.

We emphasize: draft #3822 defines a legal framework for the reorganization of the Concern’s enterprises into companies with 100% of the shares belonging to the state of Ukraine.

In simple terms: 100% of the shares of the future modern defense holding, which is going to replace the Concern, will belong to the state represented by the Ukrainian government. Period.

The most sensitive myth-manipulation about transformation of Ukroboronprom is that allegedly the reform will stop the work of the entire state defense industry, which, of course, is unacceptable in wartime.

In fact, the draft law #3822 “On reforming the enterprises of the defense complex under public law” provides for continuous implementation of production operation at enterprises during their reorganization.

Otherwise stated: the reform shall not stop operation of our defense complex.

Why corporatize the state defense complex, in other words, turn state-run and state-owned enterprises into companies?

And because it is a multi-layered system of continuous prohibitions and restrictions, when it comes to managing state-owned enterprises it is often more "safe" to ruin enterprises than to develop their research and production potential.

Ukroboronprom manages 99 state unitary commercial and 7 state-owned enterprises. These include plants, design engineering bureaus, and special exporting companies. The Concern also manages state-owned stakes in 12 joint-stock companies.

And if you are Elon Musk, a progressive company manager who thinks in terms of quantum leaps in the development of his business, then you are at risk getting a summons for questioning. At least when it comes to Ukraine.

What are these prohibitions and restrictions?

1️⃣State enterprises are deprived of attracting any investment. One should agree that when is not possible, the company is not interested in working on its investment attractiveness in the eyes of investors, including international ones. Transparency, openness, accountability and good governance will never be a priority for the top management of these companies.

2️⃣It is very difficult for state-owned enterprises to take a bank loan, for example, for research and development of the latest models of armaments and military equipment (weapons).

3️⃣State enterprises (except for aircraft construction enterprises) can not establish joint ventures with foreign companies. If such enterprises emerge, the foreign partner will have a smaller share under any circumstances, regardless of the volume of investment.

4️⃣It is difficult for state-owned enterprises to combine their property, resources and technologies. Just imagine: defense companies that are part of one Concern — Ukroboronprom — are deprived of the opportunity to achieve synergies and better results in the production of weapons by exchanging, for example, their technologies. At the same time, these companies work for the defense potential of a single country — Ukraine.

And by no means this is an exhaustive list.

What are these prohibitions and restrictions?

1️⃣State enterprises are deprived of attracting any investment. One should agree that when is not possible, the company is not interested in working on its investment attractiveness in the eyes of investors, including international ones. Transparency, openness, accountability and good governance will never be a priority for the top management of these companies.

2️⃣It is very difficult for state-owned enterprises to take a bank loan, for example, for research and development of the latest models of armaments and military equipment (weapons).

3️⃣State enterprises (except for aircraft construction enterprises) can not establish joint ventures with foreign companies. If such enterprises emerge, the foreign partner will have a smaller share under any circumstances, regardless of the volume of investment.

4️⃣It is difficult for state-owned enterprises to combine their property, resources and technologies. Just imagine: defense companies that are part of one Concern — Ukroboronprom — are deprived of the opportunity to achieve synergies and better results in the production of weapons by exchanging, for example, their technologies. At the same time, these companies work for the defense potential of a single country — Ukraine.

And by no means this is an exhaustive list.

In general, such kinds of organizational and legal forms are not in the nature of world’s successful defense companies. The latest walked their way of corporatization 20 — 30 years ago. For example, the Italian company Leonardo, which last year topped the ranking of transparency of world’s defense companies, introduced a corporate governance model back in 2003.

Corporatization today is an opportunity to restore the health of enterprises both financial and economic; to make production more technological; to attract investments; to increase competitiveness; and, finally, to introduce an effective model of governance in state defense industry.

All this is provided in the draft law #3822, which is waiting for the second reading in Ukraine’s parliament.