strategy of the development of the def-ind sector (eng)

1. September 2016
STRATEGY FOR THE
DEVELOPMENT OF THE
DEFENSE INDUSTRIAL SECTOR
OF UKRAINE
MINISTRY OF ECONOMIC
DEVELOPMENT AND TRADE
OF UKRAINE

2. 1.General review of Strategy
2.Discussion
Agenda
2

3. The Strategy for the Development of the Defense Industrial Sector is a
planning document developed to determine main directions for the
transformation of the defense industrial sector and the allocation of
state funds in support of the defense industrial sector until 2025.
This is the first time in the twenty-five years of Ukraine’s independence
that such a strategy has been developed.
Review
3
STRATEGY FOR THE DEVELOPMENT OF THE STRATEGY FOR THE DEVELOPMENT OF THE СТРАТЕГІЯ РОЗВИТКУ
DEFENSE INDUSTRIAL SECTOR DEFENSE INDUSTRIAL SECTOR ОБОРОННО-ПРОМИСЛОВОГО СЕКТОРУ
OF UKRAINE OF UKRAINE УКРАЇНИ
INTRODUCTION INTRODUCTION ВСТУП
Over the course of 25 years since independence, Ukraine’s
defense industrial sector has developed into a form based on a post-
Soviet model and which is characterized by inadequate
responsiveness to the needs of the defense forces of Ukraine,
significant dependence on state financing, and insufficient
transparency and accountability. Presently, approximately 300
enterprises, institutions, and organizations employing over 250,000
people are licensed to produce arms and military equipment in
Ukraine. Many of these are state-owned enterprises dependent on
subsidies from the national budget.
Over the course of 25 years since independence, Ukraine’s
defense industrial sector has developed into a form based on a post-
Soviet model and which is characterized by inadequate
responsiveness to the needs of the defense forces of Ukraine,
significant dependence on state financing, and insufficient
transparency and accountability. Presently, approximately 300
enterprises, institutions, and organizations employing over 250,000
people are licensed to produce arms and military equipment in
Ukraine. Many of these are state-owned enterprises dependent on
subsidies from the national budget.
Впродовж 25 років з моменту здобуття Україною незалежності
оборонно-промисловий сектор країни поступово набув форми пост-
радянської моделі, ознаками якої є неналежне реагування на виклики
та нездатність реагувати на потреби сил оборони України, високий
рівень залежності від бюджетного фінансування, недостатня
прозорість та недостатня фінансова та виконавча відповідальність.
Сьогодні близько 300 підприємств, установ і організацій, в яких
зайняті понад 250 000 осіб залучені до створення, виробництва
озброєння і військової техніки в Україні. Більшість з цих підприємств
знаходяться в державній власності та залежать від субсидій з
державного бюджету.
This development has been complicated by the politico-military and
economic situation as a result of the armed Russian aggression
against Ukraine, occupation by Russia of a part of the sovereign
territory of Ukraine, the Autonomous Republic of Crimea and the
city of Sevastopol. An armed conflict continues on a part of the
territory of Donetsk and Luhansk regions that is inspired and
supported by the Kremlin and poses a potential threat of escalation
into an overt armed confrontation between Ukraine and the Russian
Federation. The conflict has resulted in the decision of the
government to prohibit defense industrial cooperation with the
Russian Federation, which until 2014 had been the primary
customer of Ukrainian arms exports.
This development has been complicated by the politico-military and
economic situation as a result of the armed Russian aggression
against Ukraine, occupation by Russia of a part of the sovereign
territory of Ukraine, the Autonomous Republic of Crimea and the
city of Sevastopol. An armed conflict continues on a part of the
territory of Donetsk and Luhansk regions that is inspired and
supported by the Kremlin and poses a potential threat of escalation
into an overt armed confrontation between Ukraine and the Russian
Federation. The conflict has resulted in the decision of the
government to prohibit defense industrial cooperation with the
Russian Federation, which until 2014 had been the primary
customer of Ukrainian arms exports.
Розвиток даного сектору ускладнений через військово-політичну та
економічну ситуацію, що виникла внаслідок збройної агресії
Російської Федерації (далі - РФ) проти України, тимчасовою окупацію
РФ частини суверенної території України, Автономної Республіки
Крим та м. Севастополь. Збройний конфлікт триває в окремих
районах Донецької та Луганської областей, де за підтримки РФ діють
терористичні угрупування. Також існує потенційна загроза ескалації
конфлікту та відкритого збройного протистояння між РФ та Україною.
Конфлікт призвів до прийняття Урядом України рішення про
заборону військово-технічного співробітництва з РФ, яка до 2014 року
була основним замовником українських товарів військового
призначення та подвійного використання.
Given the above issues, the defense industrial sector must transform
to meet the current and future needs of the national defense of
Ukraine and contribute to strengthening of the economic potential
of the country. The Strategy for the Development of the Military
Industrial Complex will serve as a roadmap for the reform. This
strategy is an unprecedented transformational document that
provides a framework for undertaking significant reforms within
Ukraine’s military-industrial complex. The changes envisioned in
the strategy seek to introduce efficiencies by dis-aggregating the
166 or so state-owned enterprises that currently exist within
Ukraine’s defense sector. This will be accomplished through
privatization, the disposal of enterprises that are either inefficient or
not value-added, and the introduction of better, modern, and more
agile business practices.
Given the above issues, the defense industrial sector must transform
to meet the current and future needs of the national defense of
Ukraine and contribute to strengthening of the economic potential
of the country. The Strategy for the Development of the Military
Industrial Complex will serve as a roadmap for the reform. This
strategy is an unprecedented transformational document that
provides a framework for undertaking significant reforms within
Ukraine’s military-industrial complex. The changes envisioned in
the strategy seek to introduce efficiencies by disaggregating the 166
or so state-owned enterprises that currently exist within Ukraine’s
defense sector. This will be accomplished through privatization, the
disposal of enterprises that are either inefficient or not value-added,
and the introduction of better, modern, and more agile business
practices.
З огляду на викладене вище, оборонно-промисловий сектор повинен
трансформуватись для задоволення нагальних поточних та майбутніх
потреб сил оборони та безпеки України та зробити вклад у зміцнення
економічного потенціалу країни. Стратегія розвитку оборонно-
промислового сектору (далі - Стратегія) служитиме «дорожньою
мапою» реформ. Така Стратегія є суттєвим планом трансформації для
впровадження змін. Цей план служить основою для проведення
важливих реформ оборонно-промислового сектору України. Зміни,
передбачені Стратегією, спрямовані на підвищення ефективності
оборонної промисловості шляхом реструктуризації державних
підприємств, які сьогодні функціонують в оборонно-промисловому
секторі України. Це буде здійснено шляхом приватизації частини
підприємств, ліквідації неефективних або фактично недіючих
підприємств, а також шляхом впровадження кращих, сучасних і більш
гнучких методів управління на тих суб'єктах господарювання, які
залишаться у власності держави.
English version (Michael)
29/07/2016
Ukrainian version
31.08.2016
LATEST English version
02.09.2016

4. Defense industrial policy
Constitution
of Ukraine
Law on
Principles of
National
Security
Law on State
Target
Programs
Law on
Defense of
Ukraine
Law on State
Defense Industrial
Policy
Strategy of
sustainable
development
"Ukraine - 2020“
Military Security
Srategy of Ukraine
(Military Doctrine)
(24 Sept 2015)
Strategy of National
Security of Ukraine
Until 2020
(7 May 2015)
Strategic Defense
Bulletin
(July 2016)
Program of the
Cabinet of
Ministry Ukraine
Annual plan for
maintenance and
development of the
Armed Forces
State Defense Order
President
of Ukraine
Guarantor of
the Constitution
State Program for the
Development of Armed
Forces
The
Budget
Code
Law on State
Defense
Order Policy
Concept of development
the Security and Defense
Sector of Ukraine (14/03/16)
Strategy of
development of
the Defense
Industrial Sector
Legislation
Long-term planning
Medium-term planning
Short-term planning
Concept of State
Program for the
Armament
Development
Concept of State Program
for the development of the
Defense Industrial Sector
of Ukraine
State Program for the
Development of the
Armaments & Mil/Equipment
Untill 2020
State Program for the
development the Defense
Industrial Sector
of Ukraine Untill 2020
Concept of State
Program for the
Development of
Armed Forces
4

5. Defense industrial policy
Military Security Srategy of Ukraine
(Military Doctrine)
(24 Sept 2015)
Strategy of National Security of Ukraine
Until 2020
(7 May 2015)
Strategic Defense
Bulletin
(July 2016)
State Program for the
Development of Armed
Forces
Concept of development
the Security and Defense Sector of Ukraine
(14/03/16)
Strategy of development
of the Defense Industrial
Sector
State Program for the
Development of the
Armaments &
Mil/Equipment Untill
2020
State Program for the
development the Defense
Industrial Sector
of Ukraine Untill 2020
5
Interconected mechanisms

6. Structure of the Strategy
Introduction
1. Main provisions
2. Management of the defense industry
3. Implementation mechanism for defense reform
4. Purpose and strategic goals of the reform
5. Ways to achieve strategic goals
Consist of 5 strategic goals. Each strategic goal is divided into
3 operational objectives
6. Key performance indicators of the Strategy implementation
7. Conclusions (final provisions)
6

7. The purpose of the defense industrial sector reform shall be achieved through
the implementation of the following strategic goals outlined by their priority
order taking into account the current and projected resource constraints:
1) Systematic and rationale reform of the structure of the defense industrial
sector.
2) Implementation of market mechanisms for interaction between defense
products customers and defense industries.
3) Support innovative technology development of Defense Industrial Sector.
4) Integration into world market of armaments and military equipment.
5) Increasing investment attractiveness and improve the financial condition
of enterprises of Defense Industrial Sector.
Strategy: Purpose and Strategic Goals
The aim of the Strategy is to transform the Ukrainian defense industrial
sector to better meet the needs of the defense and security forces to face
the challenges to Ukraine`s security and sovereignty in a manner that
promotes and develops Ukraine`s economy.
7

8. Priorities of Defense Policy
• Management improvement
• Market competition mechanism
• Support of innovations
• Transition to NATO standards
• Quality improvement
Needs of the
Ukrainian defense
and security forces
Defense
Industry
Export
Components
for
improvement
of export
potential
MAINPRIORITY
8

9. GOALS OF THE REFORM:
1. Elimination of unproductive and inactive defense
enterprises.
2. Privatization of public enterprises considering the
interests of national security.
3. Corporatization of public enterprises.
Expected result: The Ukrainian defense industrial sector is more appropriately
balanced between public and private enterprises, and the public enterprises are
streamlined and managed by modern, efficient, corporate standards.
1. Reform the structure
of the defense industrial sector
9

10. 92*
UDI
MEDT
SSAU
MIA
MOD
Other
166
Public sector Private sector
133
4
12
2
8
7
SOE of the Ukraine’s
Defense Industrial Sector
*no official statistics available
10

11. GOALS OF THE REFORM:
1. Increased use of public procurement and e-
procurement.
2. Improved procedures in procurement.
3. Simplification of procedures for the import of arms and
military equipment for government customers.
Expected result: The list of open procurements is expanded and e-
procurement widely used. All suppliers of military and dual-use production
have equal, fair, open, and competitive access to participation in the State
Defense Order. The access of foreign companies in the Ukrainian armament
market is simplified.
2. Reform of the
state procurement system
11

12. NSDC
(Decides on State Budget Act
Draft articles connected to
providing national security and
defense of Ukraine;
coordinates NSD activity)
State regulation of
defense procurement
Verkhovna Rada of Ukraine
(Passes a budget)
Ministry of Economic
Development and Trade
(The authorized body on State defense order coordination)
 provides clarifications legislation of in defense
procurement;
 drafts of regulations for the defense procurement.
 coordinates and supervises the activities of state
customers during the placement defense orders and
execution of public contracts;
 provides methodological and consulting help for for
a state customers on the organization of
procurement procedures;
Cabinet of Ministers of Ukraine
(Adopts State defense order Regulation)
Public contracting authorities (15 bodies)
Drafts proposals on SDO Core Indicators Draft
SDO
executors
Ministry of Finance
(Informs public contracting authorities
about state budget spending thresholds)
Government
contract
12

13. Procurement system reform
State procurement
State Defense Order
(Goods of military and
dual-use)
Competitive procedure
Paper-based On-line
Without the use
of competitive
procedures
REGISTER
of
manufacturers
of defense
products
CLASSIFIED
5%
of items
95%
of items
13

14. GOALS OF THE REFORM:
1. State support for the research and development of key
defense-related technologies.
2. Fostering the adoption of advanced technologies in the
defense industrial sector
3. Reductions of the barriers between civil and military
technologies
Expected result: The industrial and scientific base of public and private
enterprises of the defense-industrial complex is significantly updated.
Enterprises are capable to produce high-quality and high-tech samples of
weapons, equipment, and components for them. Development and production
of new weapons designs are characterized by a high level of civil-military
integration.
Strategy of Development of High-Tech Industries until 2025 developed by
MEDT (is according to the Plan of the priority actions of the Government in
2016 (approved by the Cabinet of Ministers 27.05.2016 №418-p).
3. Support innovative technology
development
14

15. GOALS OF THE REFORM:
1. The transition to NATO standards
2. Enhancement of Export Control System
3. Support export and diversification of markets
Expected result: The main types of weapons and equipment that are used by
the Security and Defense meet NATO standards. Products of Ukrainian
Defense Industry is compatible with the products, units and components
manufactured by enterprises of NATO. Production of armament and military
equipment is not dependent on supplies from Russia. Ukrainian enterprises
integrated into the production chains of the world defense market.
4. Integration into world market of
armaments and military equipment
15

16. GOALS OF THE REFORM:
1. Improvement of legislation in terms of attracting and
protection of internal and foreign investments
2. Providing government guarantees in order to attract
credit resources
3. Develop industrial security policy and procedures
Expected result: Enterprises of the defense industrial complex have become
an attractive object of investment for Ukrainian and foreign investors.
Developed mechanism for attracting investments into the defense industry,
which will protect the rights of investors, while taking into account the interests
of national security and defense. Created legal instruments for the effective
functioning of private-state partnerships and joint ventures in the defense
sector.
5. Increasing investment attractiveness and
improve the financial condition of enterprises
16

17. Mechanism of reform implementation
Advisor 1 Advisor 2 Advisor 19
…
Chairman of Advisory Board
Defense Industry Advisory BoardMinister of Economic
Development and Trade
Reforms
Independentadviseandopinion
Reforms Leadership
Cabinet of Ministers
Reformsimplementation
Reforms monitoring
17

18. Key Performance Indicators by 2025
• The criteria for determining of defense enterprises for strategic category are accepted
• Transfer of all enterprises which are unprofitable or ineffective and not defined as
strategic to the holding agency for privatization.
• The regulations of corporate governance are extended to all state enterprises defense
sector.
• Corporate governance is implemented to all enterprises in the industry and independent
supervisory board is introduced.
• Revised and reduced lists of goods on which procurement attributed to the secret,
according to national security interests.
• Over 2/3 of the state defense order procurement is made through electronic
procurement platform.
• Implementation of over 600 critical technical NATO standards
• More than half of armaments and military equipment produced at the defense sector
enterprises meet NATO standards.
• The average application response time for the export/import of military and dual use
goods amounts to 10 days
• The degree of depreciation of capital assets of enterprises is less than 30%
• Innovation activity of defense enterprises has reached 30%
• Full independence in the production of military and dual use goods from the Russian
Federation is reached. 18

19. September 2016
STRATEGY FOR THE
DEVELOPMENT OF THE
DEFENSE INDUSTRIAL SECTOR
OF UKRAINE
MINISTRY OF ECONOMIC
DEVELOPMENT AND TRADE
OF UKRAINE