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26 April, 2023
The authorities decelerate the defense sector reforms again

For many years, high-ranking public officials filed applications on UkrOboronProm state concern corporate governance reform. However, the words remain only words, states Svitlana Musiiaka, Head of Research and Policy at NAKO, in a column for Liga.net.

One of the key reform stages implied turning the UkrOboronProm state concern into Ukrainian Defense Industry JSC. It was personally announced by the Prime Minister this year on March 21, but it has not started yet due to the absence of the published resolution on the government website.

The current structure does not comply with international corporate governance standards, it is not flexible and non-efficient, and it is only a hindrance to investment, as it facilitates abuse and other corruption practices. Meanwhile, corporate governance reform (specifically, in the defense industry) belongs to the international liabilities of Ukraine closely followed up by international partners.

All three strategic directions towards European integration – joining the Organization for Economic Co-operation and Development (OECD), joining the European Union, and IMF cooperation program – rely specifically on the OECD Guidelines on Corporate Governance of State-owned Enterprises in terms of assessing the progress in Ukraine.

What concerns the defense industry, it implies, among other things, the work of corporate entities, a high level of transparency and accountability standards towards the owner (the state) and the society, upholding the guaranteed independence of supervisory boards of the state-owned companies, and introducing an anti-corruption system to prevent the conflict of interests and other violations.

Corporate governance reform has been one of the longest-term in Ukrainian history. The first liabilities to shift the state-owned companies to open joint-stock companies were incurred in 1993. However, when UkrOboronProm concern was established at the end of 2010, the state defense industry corporatization was essentially stopped.

Such a structure does not comply with the international standards for corporate governance, it is not flexible and non-efficient, it is a hindrance for investment, and it facilitates abuse and other corruption practices (NAKO has provided a detailed analysis of the problem and the challenges for UOP corporatization in its 2021 study).

It took ten more years to prepare and promote the new reform stage: in 2021, the Law “On the Peculiarities of Reforming the State-Owned Defense Industry” became valid. It set out the main rules of turning the concern, the public and state-owned companies into corporate entities subject to global corporate governance standards, audit and resource optimization to build a competitive industry attractive for investors.

The full-scale invasion became a new challenge that slowed the processes down but did not stop the developments. According to the concern, 27 corporate members of UkrOboronProm have already been turned from state-owned and/or public companies into corporate entities, with 29 on the way.

However, a delay of 30 years not only limits the reform capacities but also adds the vulnerabilities the enemy strives to use. Inefficient governance, limitation of investments and international cooperation, and the burden of non-profile assets are the issues to be solved as soon as possible for the defense industry state sector to gain the necessary stability and facilitate victory.


Svitlana Musiiaka

Head of Research and Policy, Independent Anti-Corruption Commission (NAKO)
 

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