PAVLO BUKIN: STABLE LOADING OF PRODUCTION CAPACITIES DOES NOT DEPEND ON EXPORT, IT DEPENDS ON THE STATE DEFENCE ORDER

As for delay with Oplot tanks manufacture for the Armed Forces of Ukraine, public control in the defense industry, competition with Russia in the arms markets and much more – read in the first part of Obozrevatel interview with the head of the largest defense concern UKROBORONPROM Pavlo Bukin.

– May 21 (conversation held on May 17 – Ed.) the auction on the sale of land and real estate of the SE “Mykolaiv Shipbuilding Plant” is to take place. Does this mean the end of the enterprise? What companies will take part in the auction?

– The executive service was planning to hold an auction using the CETAM electronic platform. But the State Concern never consented plant inventory. Accordingly, we submitted a statement to the prosecutor about the violation of the procedure. As of today, we have all the relevant documents, so I think that eventually this event will not take place.

– Completely or only on May 21?

– Even if somehow it happens, there will be no results.

– If I am not mistaken, wage arrears to the workers of Mykolaiv Shipbuilding Plant are about 30 million hryvnias. What funds will be used to pay their salaries?

– Today the debt is more than 30 million hryvnia. The State Concern will provide assistance in paying part of salaries. This is a long process, and the relevant acts on filling the authorized capital are being prepared. Unfortunately, this process can not be called economic growth. But the state, represented by UKROBORONPROM, will fulfill its obligations.

– You pay a part of the debt, and what about the rest?

– There are plans to restore the production activities of the enterprise. The plant will undergo repair. Valerii Kalashnikov is currently appointed as the new head of the enterprise. There are already first contracts. There are, of course, problems with the fact that the company accounts are arrested, but at the local level, these issues are being solved.

– In June, the first stage of selection among international companies that will carry out UOP audit ends. Is there an understanding when this selection will end, and when will the actual audit start?

The deadline for submitting applications to PROZORO expires on June 11. Before that, there had been talks about requalification, clarification of the technical tasks. All participating companies represent the "Big Five". The State Concern is solving the issue of financing the audit. As soon as we finish the procedure, we will move forward according to the plan. We understand that audit is one of the tools to attract investment.

– It is believed that UKROBORONPROM is actually not interested in conducting an international audit. Therefore, you will delay this process for an indefinite period of time.

– How we delay?

– There are four stages of selection. Each of them can last for months

– Common and professional opinions – these are two absolutely different levels. Let’s talk about the audit levels we need – financial, legal, and technical. As a result, I want to get answers to questions that are of real interest to me, and not those that are well known to me.

There have already been attempts to order a certain audit, providing the conclusion that we have imperfect defense law legislation. We are aware of that. It is important to get the answer to the question where we have an outdated technology, where we are moving in the wrong direction.

This is the most complicated part of the audit, and in general, it is a time-consuming process. If we are talking about UKROBORONPROM, then, unfortunately, in many industries, we stopped in technological development. The reason – prolonged absence of defense order. And today, when it is necessary to make a spurt, I would like these actions to be carried out in accordance with a well-defined technical task. So that we get useful results. Again, the terms of the audit are related to funding. There are certain issues there, but I think we will solve them in the near future.

– UKROBORONPROM has more than 130 enterprises. Do you handle the situation with each of those? And does the State Concern have such enterprises, that are in a dire state just like Mykolaiv plant?

– My goal is to transfer the discussion in the State Concern from the slogans to the professional level. "Dire state" is not an economic category. I will tell you honestly, there are enterprises with salary debts, there are inactive and bankrupt enterprises.

– How many of them?

– It is difficult to tell the exact number. There are indicators of gross income, there are cumulative indicators of net profit. But these indicators do not always accurately reflect the situation. The average temperature at the hospital is not illustrative. We have leading enterprises, we have those, lagging behind, or inactive. In order to deal with this, the state Concern formed a Supervisory Board.

Cluster structure formation is currently in the process. An administrative authority will be created, a division for each direction. We select qualified specialists for each division; they will manage UOP enterprises in the industry. Five production clusters and one commercial division will be created.

– Recently, Obozrevatel interviewed Poltorak. He said that the Ministry of Defense is ready to sign a contract for "Oplot" tanks, but UKROBORONPROM is not ready yet. As if you have a problem with equipping the enterprises responsible for production. What kind of problem?

– There is no particular problem. But the contract with Thailand for the supply of "Oplot" tanks was signed in 2011. Today – 2018 th. During this time technological requirements have changed. Therefore, the Ministry of Defense sets out their technical specifications, which we are to meet. Certain research and development works are assigned.

There is an ongoing discussion, as they want to buy more and pay less. This is a working process, to be resolved in the near future. We will definitely find the arithmetic mean. A detailed description of the project is being formulated, in accordance with the requirements of the Ministry of Defense.

– Is UKROBORONPROM satisfied with "Oplot" contract with Thailand? After all, we delayed delivery for three years. Have there been any penalties and has the State Concern earned a profit?

– We did not  publicize these figures for a long time, but if we talk about Malyshev plant net profit – in the first half of 2017 it amounted to 500 million hryvnia. That is, thanks to the export contracts, the enterprise operated without a large defense order. Both Thailand and Pakistan provided the vast part of the working load. The delay occurred due to the loading of the enterprise during the ATO. We explained it to the Thai partners, they understood it. Today, the final batch of "Oplot" tanks has already been shipped.

– What are the chances that we will continue to cooperate with Thailand? Have we lost this market?

– In June, the Minister of Defense of Thailand will pay a visit. There will be talks in Kharkiv, where we will discuss this issue as well. I would not want to go into the details. These are complex issues. Including competition.

– Are there any new foreign markets that UKROBORONPROM can get into in the near future?

– We plan to conclude contracts to replace of Russian Federation products. There are markets where Russia has a great advantage, but because of sanctions, working with RF is complicated. And these processes play into our hands.

– Can you give an example of such a substitution?

– If we talk about bright examples, then our "Skif" may replace the Russian "Cornet". We also have other developments.

– Tell us how it works. Here is the country that bought the "Cornet" in Russia. How do you convince them to work with Ukraine?

– We conduct an appropriate marketing analysis. Based on the marketing grid – UOP authorized special exporters have – we make an offer and negotiate. Integration of our products into a defense foreign complex is always about a dialogue. It is necessary to show not only price advantages, but also tactical and technical, to conduct live demonstrations. We haven’t talked about it, but several presentations have already been held in the Middle East. In particular – products of DB "Luch".

– And for whom exactly?

– For Saudi Arabia and UAE. Again, it’s about support at the state level. It can be observed from the dynamics of international visits of the head of state and the minister of defense. There have recently been visits to Qatar, the Emirates, Kuwait.

– Is the Middle East our most promising direction? Are there others?

– The countries of the Middle East, for example, Saudi Arabia, are now creating their defense complex. Gradually, they are moving to the localization strategy. Ukraine’s experience in the hybrid warfare shows that in a difficult situation, one shouldn’t depend on one supplier only. In general, the products, the military need, should be at hand.

The best way to do this is to manufacture those or to locate most of the imported production. Cooperative chains are to be created to ensure the stability of supplies in a combat situation.

The countries of the Middle East pay close attention to this. Due to the logic of the location, international politics, of course, they are our closest partners. This can be seen in the ranking of countries that are purchasers of weapons and military equipment.

Again, we have strategic partners in Southeast Asia, the same Thailand that we mentioned. 50 tanks is a big contract today, really big. We also shipped there about 200 armored personnel carriers. We have worked and we will work in the export markets – it is one of the mechanisms of development of our industry.

– What about work in the domestic market? In January, UKROBORONPROM reported having transferred more than 3 thousand units of military equipment to the state. What about this year?

– This is a complex issue. The increase in government procurement is one of the components of saturation of the domestic market and the country’s GDP growth. In 2017 – we had about 15% domestic order and 85% – external for all UOP enterprises. Saturation of the domestic market is a common task, not only for the State Concern, but also for the state.

– How will saturation take place?

– We associate this with changes to the law "On State Defense Order." I am convinced that the state defense order should provide for market elements. There is a system under which the production cost is controlled, a profit margin is established, at the same time we have a state enterprise – so salaries of key employees are regulated by various industry standards. This system is not market-oriented, it does not help to increase the supply, development, increased production volumes.

There is, of course, a working Israeli model, according to which the internal defense order is less than their exports. But I would call it an exception. In most countries, defense orders are the locomotive of the defense industry, forming "defense" trends.

– So, you are advocating that the state order is bigger than the products imported. Are there any changes in this issue? Can you give examples?

– Yes, this shift is slowly taking place. The state order is our priority, regardless of economic component. We talked with enterprises, manufacturing special equipment, radar and air defense cluster. The state pays more attention to these issues. And as for air defense, we observe an increase of the domestic order, which, of course, is positive.

When you deal with a domestic order, you see the consumer. I do not even mention the state security factor. Talking economic categories – you have a possibility to see the customer. You understand that this order is stable, there will be funding. If we talk about exports, then … There is such an expression – "the legs feed the wolf."

Such orders can be called “systemic”. Export does not provide a constant workload for enterprises. At the same time, it is difficult to plan production cycles. Accordingly, there is a staff turnover, other moments, adding complexity to the production cycle. Therefore, we are interested in increasing the state defense order.

First of all, I associate this with the country’s budget improvement, and secondly – with the change in the system of state defense order. The State Concern decided to create a working group to develop a new version of the law "On State Defense Order." Our customers, experts, social industrial organizations will be involved in this work.

– So you are ready to cooperate with the same public activists? For example, they are now trying to impose public control over the Armed Forces. This is required by NATO, some public activists want this. But the Ministry of Defense resists in full force. If tomorrow it will be decided to impose public control over the production of weapons – how do you react to this?

– Public control is a democratic mechanism, but if it is carried out in the form of a household supervisor’s visit to Professor Preobrazhensky – it is unacceptable.

We can sing together "rough years have come", but it will not change anything. I am for public control, but there are aspects, especially in the system of state defense order, which can not be public.

– For example?

– The Ministry of Defense buys our products at a cost price. If I show the price I sell at, then, to put it mildly, I will reduce the margin in the export order. There are economic issues that can not be publicized. That is, I am for public control, but it is necessary to establish general rules and follow them to avoid chaos.

– Let’s talk about your appointment to the post. On February 13, Romanov (former director of the SC"UkrOboronProm" – Ed.) was dismissed from the post and the same day UOP press service announced that the selection of candidates was almost completed. Well, after a week Poroshenko signed an order. It might have been the impression that there was not really a competition. And your candidacy has just been approved above. Tell us how your appointment was going on? From whom did you find out that you can take a post?

– The process has continued since last year. I had several interviews with the Prime Minister, meetings with the President. The result was the President’s decision, after which I am here, giving an interview.

– What are your relations with the President? For example, Poroshenko promised that "Vilkha" will be launched in batch production this year. Suppose you are out of time. What will this result in? Will you be called onto the carpet, fined or will the President call you?

– Why do not we meet the deadline with "Vilkha"?

– This is an example. Maybe any other.

– If you still put a specific question about "Vilkha", it comes under control of the National Security and Defense Council. Working meeting are periodically held. Such a meeting was held a week ago (the conversation took place on May 17, – Ed.) on the progress of the tasks set. If you do not do them, then at some point you are asked to leave the office you are occupying, and not disturb people with your incompetence.

As for "Vilkha", you have seen that the tests were conducted. This year there are state orders for this product and enterprises are ready for production. Of course, there are some minor issues, but in general – completely ready. "Vilkha" is a tool that can cause heavy losses to the aggressor. They will understand that they can attack, but will receive a powerful blow in response.

– Are there other cool weapons that you haven’t told anyone about, but now you can?

– Yes. We are currently testing a cruise missile. You’ve seen the results using Israeli cruise missiles on Syria’s sites. This missile is difficult to capture by air defense systems, as it does not follow the ballistic trajectory. It can change the direction in the air, having a massive destruction force.

We are trying to focus on areas that cause the enemy maximum losses in the short term. It is unwise to expect that we will press Russia with the number of soldiers. Therefore, we will press the aggressor with the quality of weapons.

– How do you build your relations with Western partners? How important is the opinion of Anthony Tether (UOP Supervisory Board member, a former US military official – Ed.) when it comes to making key decisions?

– If we talk about state mechanisms, Ukraine has long been heading for membership in the EU and NATO. There are already certain worked-out mechanisms for interaction. So that at the right moment we are technically ready and all we need is legal implementation.

Of course, this process is not that simple, but if we choose such a priority, we must take into account the opinion of our partners, and this is what we do. And this process is implemented through the Supervisory Board and international mechanisms.

– Can you imagine how many billions of Ukrainian hryvnia will cost transition to NATO standards?

– It’s a huge amount. Therefore, it is important to determine the stage. I’ve just returned from France, where we discussed certain issues. Let me give you one example so that you understand how the budget is formed. French Armed Forces introduced the Combat Intelligent Soldier Program. Approximately 25,000 of 80,000 infantrymen participate in it.

– What is kind of system is this?

– For example, there is a division of 10 people. Each of them has a personal computer on the chest that receives and gives commands. A microphone is on, spare batteries available. When a fighter gets into an IFV, he charges batteries. The cost of such a kit is about 25 thousand euros per soldier.

We were told that even in the French army there were cases when the command of the units said: "Get it back to the warehouse. You will use it when I retire, because you will lose everything." And this is not even the first necessity.

Therefore, it requires a lot of money. Accordingly, the dialogue on the transition to NATO standards must be economical. And the Ministry of Defense plays a leading role in it. If they say that they need something – we manufacture it, though it is not always backed up with the money.

Many models of weapons and ammunition are created by the enthusiasm of authorized exporters when there was no state defense order: BTR-3, BTR-4, missiles "Neptune" … In percentage – 70% of the products were made for the needs of foreign markets. Of course, we have expertise, and we understand how to move to NATO standards, but to do this step by step and in accordance with the technical task, determined by the Ministry of Defense.

– Do you have the opportunity to debate? Here you come to the meeting, where you say that the army needs certain products. You can say, "Guys, if we do that, then we will get horrible disadvantages. We do not want this."

– If the Ministry of Defense gives us a task – we fulfill it. Agree, there can be certain nuances, associated with the state system of enterprise management. The task accomplished can lead to a negative financial result. It’s hard to understand the private business. But if we receive the state order, it must be fulfilled, doing everything possible to ensure a decent economic result.

It is difficult to set tasks for private businesses. Therefore, all over the world, part of the defense industry is owned by the state. So that in the time of need the required number of weapons and military equipment can be released in a short time. Regardless profitability analysis.

– And yet. What is your priority – turning UKROBORONPROM into a cool corporation that will bring billions, or fulfilling all state orders?

– First of all, we must ensure the efficiency of the corporation. If we do not provide it, then there will be no one to analyze profitability. Profitability goes in the second turn, although these things are interconnected.

– What about corruption in UKROBORONPROM? From time to time, your press office reports that someone got caught, but it seems that this is not the whole picture.

– I want to say that catching corruptors is not my job. The UKROBORONPROM task is to manufacture high-quality products, providing jobs and decent wages. As for our assistance to law enforcement agencies, we are always ready for this. There was a recent case in Kharkiv. There were other cases, when we informed the law enforcement agencies, but I never do this for PR. It should be done in working order. If someone breaks the law, they must be held accountable. No hysterics on all sides.

– You have your own security service. How does it catch corrupt officials?

– Of course, the State Concern has a security department. There are mechanisms used to control counteragents – working with UOP enterprises, – to control the actions of managers. There are processes of qualification of suppliers, control of financial and economic activity of enterprises, post-control, audit, – all of these are carried out. I control these things, but I try not to suppress excesses. Such measures should be objective and lead to a clear statement of facts: there is a violation or there is no violation. No personal relationships or some other issues.

– If tomorrow someone from the deputies, who came with you to UKROBORONPROM, will be caught red-handed, will you bring him to law enforcement officers?

– We have done this already and will continue this practice.

– By the way, after your appointment you said that you are going to reduce the number of management personnel. At the same time you have new deputies, and the old ones are not diminished. What’s up with staff rotation?

– It is in progress. We have statutory deadlines for staff cuts. According to the law, the term is two months, and under a collective agreement – three. Here you can count.

– That is, in summer it is necessary to wait for resignations.

– It turns out, in the beginning of July. The Board has set limits on the number of staff – 180 people. Today we have 326 people. That is, 40% reduction.

– Has certification been conducted or are you choosing for economic reasons?

– A qualification commission was created. Heads of the divisions immediately went through it. There are a number of requirements that they must necessarily meet. Unfortunately, there is not much choice of specialists. Especially in those areas where we had no competence even during the Soviet Union times. We are searching for people, but first of all we are guided by the available staffing. We try to choose the best ones, and then to pick from the outside.

– This is about the State Concern. And what about personnel at UOP enterprises?

– If we talk about shortages of personnel, then these are traditionally scarce occupations for machine building. There is always a shortage of skilled operators of a CNC machine, a turning, milling machine. The problem is that factories often use obsolete equipment. It is difficult to find specialists to operate it. No one can make you operate Sinclair now. Do you remember such a computer?

– No, I started with Pentium II computers.

– You see. There are some difficulties, associated with a temporary rupture. The Soviet Union has constantly updated its production facilities, renovated its infrastructure. And then the money for it ceased to allocate. And now we see the result.

– How much money is needed for UOP enterprises modernization?

– Modernization is not an end in itself. You can build a beautiful company, and then start thinking on what to do with it. Modernization is carried out if we see that the enterprise is loaded 80%+, and we do not meet the terms of orders. Then we upgrade to increase the volume.

It happens that government orders are given. That is, we are told that we need some products of certain quantity. We understand that we cannot provide a full load of the enterprise, but it needs to be done. By the way, now this process is in progress. There are corresponding programs, contracts are concluded. But again, mass modernization is not an end in itself.

– Putting your hand on your heart, can you call the situation inside the State Concern healthy?

– We return to Bulgakov again. We are fine and we must think positively. Otherwise we will sit together and cry.