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In view of the events in the east of Ukraine, the state, in the person of the Ministry of Defense, must change its attitude towards private manufacturers of military products.

In view of the events in the east of Ukraine, the state, in the person of the Ministry of Defense, must change its attitude towards private manufacturers of military products.

We cannot say that private companies have been entirely neglected. However, government orders were granted primarily to state-owned enterprises, including members of Ukroboronprom State Conglomerate. This remains the case even in situations where private companies are the only Ukrainian manufacturers of fairly specialized products. For example, in Ukraine, only private companies manufacture radio locating equipment operating in the meter and millimeter wavebands, and there are no alternatives to them in the state-owned sector. While this fact may have been neglected in the past, today our heads of state cannot afford to ignore such issues.

In general, current relations with the Ministry of Defense are showing some positive trends. However, some promising directions for development of cooperation remain unrealized.

For example, both the Ministry of Defense and the Ministry of Economy have gaps in the production process planning. However strongly we might wish to do more, it is not possible to shorten the production cycle, for example, from six months to two months, even if we work five shifts per day.

Amendments to the state defense order for this year have not been adopted yet. There is no state defense order for 2015, either. This once again creates a situation that prevents companies from ordering parts and components. All components we use are imported, with a minimum delivery term of 90 days. Therefore, it takes approximately three months just to prepare the production process. Only after that the production cycle can actually start. At the same time, in a scenario where I am the director of a company that has a state defense order, with specific product amounts and clear financing terms, I can afford to risk and order components ahead of time, and increase production rates. Therefore, theoretically, my company can manufacture the necessary products more quickly, and deliver them at the required rate of regularity. But in a situation that exists today, I cannot afford such risks. Therefore, the approach must be changed here, because otherwise, progress becomes impossible.

The Ministry of Defense also clearly lacks information about private companies, their capacities, designs, and finished products. This results from the fact that Ukroboronprom State Conglomerate, being responsible for its member companies, understandably chooses to inform the Ministry of Defense of such member companies first, and continues lobbying their products.

Furthermore, contracts concluded by companies with the Ministry of Defense do not create partner relations, but rather, give the dominant role to the defense authority and somewhat infringe on the rights of the performers. Changing this dynamic would open up numerous opportunities. For example, companies should be allowed to obtain loans, which they would use to manufacture and market their products. In such a situation, the Ministry of Defense, being interested in purchasing new designs, could compensate borrowing expenses – in particular, loan interest. Companies would use their own funds, or, when necessary, borrowed funds, to manufacture new products that would be promptly tested and marketed. This would allow stepping away from costly R&D projects that are financed for years, only to produce zero results.

We have observed the above scenario in many cases. In fact, we have followed it ourselves, when developing the Malachite radio location system. We have conducted state tests, and are now successfully supplying this product to various markets. The same goes for other products. We should also note that the company does not always have sufficient working capital – which is where loans are necessary. Personally, I believe that the state should be interested in this scenario, since it results in ready-made state products without constant inflows of budget funds. But implementing this scenario requires a dialogue, so that companies can understand that they would not become hostages to the situation, and that their expenses would be subsequently compensated. This method is standard practice abroad.

To make the above scenarios viable, it is imperative to create at least a two-year, or, better yet, a three-year state defense order, as is done in many countries. Because if we are signing the state defense order for 2014 as late as in October 2014, and still don’t have one for 2015 – then how, pray tell, can we deliver on it?

Overall, the existing problems in our relations with the Ministry of Defense are not always related to the fact that our company is private. Often these problems are present in the relations of the Ministry of Defense with all companies of the defense sector, and they should be resolved comprehensively, and not only pertaining to the private or state-owned segment.

When it comes to private companies, I believe that they deserve more attention in the current situation. Today, private manufacturers of military products are not standing still, but constantly moving forward. Why? Because they lack the bureaucracy that plagues the state-owned sector. They are faster at making decisions. They are faster at reaching mutual agreement. They are faster at setting up production cooperation. They have a wider communication circle in the international market. And if Ukraine is to enter the European market, we must remember that the products of private companies are largely manufactured to NATO standards.

In state-owned companies, all of these processes are much more complicated. They have a huge management vertical, which requires getting approval even for the smallest purchases, and these approvals take months to procure. We can feel that especially strongly when we work with exporters and need to approve the documents for supplies of some products we are unable to procure. The procedure takes months. Sometimes, our partners lose interest in cooperation because of that. And in the case of state orders, we are losing more than the interest of partners – we are losing speed of supplying the products required for the ongoing war.

Because of this, I believe that all contacts with the Ministry of Defense must be direct. Direct communication makes production faster and products cheaper. For example, participation of Ukroboronprom in the cooperation process between the Ministry of Defense and private companies with appropriate licenses only makes this process more complicated and more costly. We always operate directly. We have no internal contacts with the Ukroboronprom conglomerate, even though we closely cooperate with various companies included in it. At the same time, Ukroboronprom is important for us, in the role of a unifying party that is aware of the key trends, informed about the development direction of the defense sector, etc. We are always happy to take part in their conferences, trade shows, and other events that are important for us. Thus, I believe that all companies of the Ukrainian defense sector – both private and state-owned – should communicate freely and should not be artificially divided. That would only harm our common cause – the work we do to strengthen and protect our state.

Vera Koshevaya,

 Chairman of the Board

Ukrspetstekhnika Holding Company JSC