State-owned defence and aerospace enterprises will be transformed into companies, while Ukroboronprom itself is to be eliminated. After the law comes into force, the Cabinet of Ministers of Ukraine (CMU) must adopt a decree on Ukroboronprom’s reorganization within three months. A joint-stock company (JSC) with a new charter, approved by the CMU, and a supervisory board consisting of state and independent members will be established.
What changed in the second reading?
NAKO analyzed corruption risks in the draft law that the Verkhovna Rada supported in January 2021. We submitted nine proposals with amendments to the specialized parliamentary committee before the second reading. The vast majority of our recommendations were supported.
NAKO recommended the committee minimize conflicts of interest, defining the CMU as the only “subject of management” of the transformed enterprises. The law avoids conflicts of interest between the policymaker, the Ministry of Strategic Industries (MSI), and the owner, the CMU.
We also insisted that there should be guarantees for the supervisory board’s independence and that at least one-third of supervisory board (SB) members should be independent. These recommendations were followed, thus establishing safeguards against conflicts of interest and direct political influence over the activities of the state defence industry.
The CMU will approve the newly-established JSC’s charter, which is essential for an effective corporate governance system. For instance, apart from the SB’s exclusive competencies, it will contain a list of requirements for its candidates. Thus, it is crucial to monitor and oversee the new charter’s development and approval.
At the same time, the best international practices stipulate that at least half of the SB members should be independent. The law now states that at least one-third and no more than one-half of the SB are independent members. The MSI will submit the state’s representatives to the board for CMU approval. In addition, the procedure for selecting SB members cannot currently ensure compliance with OECD Guidelines. There is no well-structured, transparent process to nominate SB members, which should ensure the SB’s professionalism and independence - this is one of the OECD key recommendations regarding the management of state-owned enterprises (SOEs).
In particular, the OECD Guidelines provide for creating a specialized commission or “public council” that should oversee the nomination of SOE SB members. Such a council can significantly increase SOE supervisory boards' level of independence and professionalism. In order to ensure the SB’s independence and ensure that it is filled on the principle of professionalism, NAKO calls for civil society and international partners to be involved in the process of selecting and appointing board members.
The law also stipulates a special regime for UOP and its subordinate legal entities during corporatization, including a procedure for optimizing the property and resources of UOP enterprises. It provides for significantly simplifying the procedure for transferring property from one enterprise to another, replacing encumbered property by a UOP decision without obtaining the consent of the State Property Fund of Ukraine.
Given this, NAKO recommended ensuring transparency in the transformation process, first of all, in matters of defenсe enterprise property and resources. The parliamentary committee also supported this recommendation, thus obliging UOP and the JSC to publish their decisions on replacing encumbered property or free transfer of property on the official website in compliance with legislative requirements on the protection of state secrets. This will enable oversight of property-related processes during the transformation.
In the context of such a special legal regime for defence SOEs, NAKO calls on MPs to oversee the property transfer process. From the moment of the law coming into force until the date of the new JSC’s state registration, Ukroboronprom’s current supervisory board and Director General will continue to perform their duties according to the charter. In other words, the SB will perform an exclusively controlling function in matters of property, whereas the Director General will make key decisions on the alienation, write-off, use, and transfer of state-owned defence industry objects.
It is noteworthy that civil society made a considerable contribution to this law. NAKO has been actively involved in developing it since early 2020. As a part of the working group, our experts regularly provided proposals and recommendations to MPs before both the first and second readings. Now, detailed monitoring of the corporatization by civil society and international partners is key to the reform’s success. To minimize possible corruption risks, NAKO plans to intensify oversight over the transformation of SOEs and Ukroboronprom’s liquidation.
NAKO’s further steps include:
- oversight over the process of selecting Supervisory Board members and the the new JSC’s key bodies;
- introducing corporate governance standards in the new JSC’s statute;
- oversight over moving property and assets during corporatization.
The success of reforming Ukraine’s state defence industry lies in the proper and accountable implementation of the law. Adopting Law #3822 is only the start.
NAKO's Analysis of powers of the SB in a period of transformation:
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