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18 January 2024
Newsletter 22

The US and EU macro assistance to Ukraine in limbo

  • The US Congress went on holiday recess without approving President Joe Biden's requested 61 billion dollars to Ukraine. Upon return from the winter recess in January, Congress has agreed on the general budget on January 8, ahead of January 19 deadline, avoiding federal government shut-down. However, military aid for Ukraine and Israel (bundled together) is scheduled for approval at a later date, as negotiations continue.

  • On December 14, as the EU made a historic decision to open accession talks with Ukraine, the Council failed to approve 50 billion euros aid to Ukraine due to the veto by Hungarian Prime Minister Viktor Orban.

  • According to Vice Prime Minister and Minister of Economy Yulia Svyrydenko, Ukraine will have to postpone the payment of 500 thousand civil servants' salaries and pensions to millions of its citizens, if the EU and the US do not provide the promised financial assistance by March 2024.

Bilateral assistance to Ukraine continues from partner nations

  • In December 2023, the Japanese government decided to export PAC-2 and PAC-3 anti-aircraft missiles to the United States to send to Ukraine, which are used by Patriot air defense systems. Currently, missiles of this type are manufactured in Japan under license by Mitsubishi Heavy Industries.

  • In December 2023, Finland announced a new 106 million euros military aid package for Ukraine, a 21st such assistance round from Helsinki since February 2022.

  • Germany has continued unilaterally supplying military aid to Ukraine through 2023. The military assistance package on December 8 included grenade launchers, trucks, and UAVs. The one on December 15, 2023, included a second Patriot air defense missile system, relevant equipment and ammunition, Bandvagn 206 tracked all-terrain vehicles, 155 mm artillery rounds, unmanned vehicles for demining drone detection systems, Mercedes-Benz Zetros trucks, trailers for 8×8 HX81 tractors, Zetros tractors, over 47 thousand rounds of 40 mm ammunition for grenade launchers. Berlin has also announced the start of industrial cooperation and a new round of financial aid. On January 16, 2024, after a phone call with Joe Biden, Olaf Scholz twitted about 7 billion euros worth of addition military equipment from Germany to Ukraine which should be delivered in 2024. On January 17, 2024, Germany has initiated an audit of EU military aid to Ukraine to increase support by member-states. The audit will be done by the European External Action Service (EEAS) on EU countries’ arms supplies, with the results presented at the EU leaders summit on February 1.
In the relentless chatter about corruption staining Ukraine's global image, Kyiv has been busy reforming the frontline of its credibility with Western allies: state procurement system, whose level of transparency for the donors will define the level of long-term trust and commitment they can accord to Ukraine going forward. This newsletter focuses on defense procurement reform, its origins and recent developments, to understand whether it is a cosmetic makeover or an important change in the making.

Procurement reform in Ukraine before the full-scale invasion

The 2015 post-Maidan procurement reform gave birth to the Public Procurement Law, which aimed to prevent corruption through fair competition, efficiency, transparency, non-discrimination and impartiality through transparent procurement procedures (open procedure, restricted procedure, competitive dialogue, and negotiated procedure). As a result, Prozorro electronic procurement platform was created for government tenders, with a monitoring procedure option, which can start at any stage of the process, and the decisions by the monitoring team are binding. This system addressed the public demand for transparency and government procurement needs before invasion. But its limits became apparent after the full-scale war, when state needs in big procurement contracts centered on military equipment deliveries, subject to both speed and secrecy, justified by the conditions of war.

Revolution of Dignity
Source: Апостроф

The fog of war procurement

Since the full-scale invasion, procurement rules were loosened to speed up critical supplies acquisition: Decree 169 (from 28/02/2022) allowed public contractors to award contracts without tender procedures. This decision proved indispensable in the initial weeks of the invasion, ensuring timely access by the state contractors and the army to vital military and related equipment. At the same time, weapons procurement by the Army was made secret for national security reasons from the first date of the invasion.

In October 2022, under pressure from international donors and Ukrainian civil society, the government decided to review the procurement procedure with a Decree 1178, which tried to strike a balance between transparency requirements and national security interests. A public contractor now has three possibilities:
1) if the procurement is not linked to wartime conditions, it shall be done under the Public Procurement Law procedure;
2) if the procurement is needed due to the damages caused by war, it can use simplified procurement methods;
3) if there is a risk of classified or vulnerable information leakage through the procurement procedure, the contract can be awarded directly.

The same decree provides that monitoring applies to tender procedures as much as to directly awarded contracts. That measure guarantees transparency even in wartime period.

Now the government is working to align Ukraine’s procurement system according to the NATO guiding principles of the Partnership Action Plan on Defense Institution Building (PAP-DIB), the NATO Program for the Development of Integrity, Transparency, and Reduction of Corruption Risks in Defense and Security Institutions. In addition to the NATO guidelines, some EU member-states defense procurement experts are advising their Ukrainian counterparts on the concrete steps of how to transform the state procurement system, with road maps, action plans and KPI for 2024.

Within the Defense Ministry, the establishment of the State Logistics Operator (DOT) to systematize the procurement, of the Change Support Office, and of the Civil Society Anti-corruption Council (with 15 civil society members elected to it) help monitor and reform the processes from inside.

As a result of these steps, Defense Minister Rustem Umerov's team has redirected near 70% of non-military spending to the Prozorro electronic system and claimed 3.5 billion UAH (about 90 million euros) of savings in logistics procurement within four months in 2023. By the end of 2023, as a result of a growing number of open tenders, procurement activities more than tripled year-on-year.
Volodymyr Zelensky and Rustem Umerov

Source: Главком

New State Logistics Operator (DOT)

The Ministry of Defense will complete the logistics procurement reform, started under Oleksii Reznikov’s tenure as Defense Minister, and continued by his successor Rustem Umerov, by transferring the logistics procurement function to a new Defense Procurement Agency, the "State Logistics Operator" (DOT), specialized in logistics procurement to be launched in 2024. DOT aims to centralize and streamline logistics procurement processes for the Armed Forces, including essential items such as food, clothing, fuel, body armor, and helmets. Headed by Arsen Zhumadilov, the agency has adopted international standards and NATO principles.

Ministry of Defence and DOT present new procurement model for the Armed Forces Final control
Source: State Watch

Public case of procurement corruption prosecutions

2024 started with a major public scandal over procurement contracts, which was a first challenge for Umerov's team: Lviv businessman Ihor Hrynkevych, who was a contractor for the supply of clothes, food and construction materials for the Armed Forces of Ukraine, was accused of failing to fulfill the terms of contract. The Ministry responded by terminating the contracts with Hrynkevych companies and seizing their property in a very public case. The "public punishment" of corrupt actors is a signal by Kyiv to international partners about Ukraine's determination to combat corruption.

Ihor Hrinkevich
Source: Pro Гроші

Civil society as a watchdog

In response to the secrecy surrounding defense procurement for national security reasons, Ukrainian civil society has emerged as a watchdog, contributing to the development of anti-corruption architecture in the defense industry. Civil society actors such as the Independent Anti-Corruption Commission (NAKO) and the Center for Integrity in the Defense Sector (CIDS) (both part of the Civil Society Anti-corruption Council under the Ministry of Defense) have played pivotal roles by monitoring defense procurement activities. Additionally, the corporate reform of Ukraine Defense Industry JSC, now with a Supervisory Council comprising a mix of Ukrainian and foreign business and government leaders, further enhances oversight and accountability.

The Cabinet of Ministers has approved the composition of the Supervisory Board of the Ukrainian Defence Industry.
Source: Ukrinform
Arsen Zhumadilov is appointed to head of the future logistics-focused Defense Procurement Agency State Logistics Operator (or DOT), which should begin its work in 2024. He is a Crimean Tatar and former head of the State Enterprise Medical Procurement of Ukraine. In 2022, he joined the Armed Forces of Ukraine, where he was responsible for the procurement of the military medical service. Also he was the Chairman of the Board of the Crimean Institute for Strategic Studies and a senior lecturer at the National University of Kyiv-Mohyla Academy. He has not been involved in any corruption scandals.

In April 2023, he was selected by Reznikov’s Ministry of Defense to head the defense procurement reform team within the Change Support Office at the Ministry of Defense of Ukraine as the head of the future State Logistics Operator (DOT). In this role, his main task will be to ensure timely and continuous supply to the Armed Forces of Ukraine (including food, clothing, fuel, body armor, and helmets), build trust in the MoD supply system among key stakeholders, and build a sustainable institution. The DOT has to start operations in 2024.
Arsen Zhumadilov
Source: Апостроф

This newsletter was prepared by Daryna-Maryna Patiuk and Yevhen Shablii

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