Time is flying, the world is getting modernized, but the issue of effective management of state enterprises of the Ministry of Defense is still unsolved. After it became known that more than a hundred of enterprises owned by the Ministry of Defence are, in fact, bankrupt, it is difficult to find arguments to support the point about effectiveness of the military establishment when it comes to business management. It worth reminding that the Ministry of Defence has its own construction companies, hotels, concrete products plants and other assets commercial success of which has not been heard of for a long time. Instead, following the exposed violations at such enterprises, one can write a manual on how not to manage state property. However, the authorities do not take any decisive steps to get rid of this burden, which inflicts multi-million losses, once and for all.
At the beginning of November, StateWatch expert organization published information about violations exposed by auditors of the Accounting Сhamber at enterprises owned by the Ministry of Defense. Later, we made an inquiry with the Ministry of Defense to know what measures had been taken to eliminate those violations and received answers which gave rise to even more questions. For example, the auditors of the Accounting Chamber found that the whole property complex of Viysktorhservis, which consisted of 12 buildings with total floor space of 12.4 thousand square meters, was uncontrollably used by private structures. They unlawfully transferred them to one another, did not pay any money for their operation and even did not admit representatives of the concern to the territory of the property complex. It took 15 years to eventually return the property to the concern. However, according to the auditors, the leadership of Viysktorhservis did not take any effective measures in regard to the renting out of the property under the current legislation, with the state budget continuing to receive less money than due.
The Main Department of Property and Resources at the Ministry of Defense informed of an internal investigation initiated by the Director General of Viysktorhservis concern in 2018 which established facts of unlawful activities of the previous leadership of the concern characterized with negligence (Article 367 of the Criminal Code). Accordingly, the concern submitted a crime report to the police, with no investigation-related notifications received in two years. Moreover, the police ignored the second claim filed last August or in two years after the first report. Information of the criminal offence was not entered into the Register of Pre-Trial Investigations. The concern appealed such inactivity on the side of the police to Shevchenkyvskyi District Court of Kyiv. The latter ruled to grant the appeal and obliged the investigators to enter information about the criminal offence to the Unified State Register of Pre-Trial Investigations. As a reminder, both the Ministry of Defence, and police are government structures which are supposed to work together for budget money for the benefit of the state.
Nevertheless, the aforementioned crime is not the only one. For example, as far as non-negotiable assets of Viysktorhservis are concerned, the auditors of the Accounting Chamber found two property objects in the amount of 925.9 thousand hryvnas missing, namely service space (office with a storage closet) in Kharkiv and a concern-owned two-room apartment in Kyiv 916.9 thousand hryvnas worth which was bought by the concern in 2009 for the-then director general of Viysktorhservis.
According to the Ministry of Defence, in September of 2020 the concern filed a lawsuit to have a certificate of title for the apartment deemed invalid and nullified. Let us remind that it has been 11 years since the concern bought the apartment.
According to the auditors, similar situations related to accounting of residential premises privately owned by persons who have nothing to do with the concern also happened at some branches such as Odesa Department of Military Trade (one-room apartment in Odesa) and Department of Trade of Western Operational Command (tree-room apartment in L’viv). The Main Department of Property and Resources at the Ministry of Defence informed that analogous steps were being taken in respect of those apartments.
Apart from this, we decided to figure out what was going on with companies Kanon and Pivden-Olvia the location of which officers of the Accounting Chamber failed to establish while auditing enterprises owned by the Ministry of Defense. According to information available on YouControl portal, the former specialized in construction of residential and non-residential property, with the latter selecting and recruiting personnel. We addressed the Ministry of Defence to provide financial plans of the both ghost companies. The military establishment answered that they had been in the process of being liquidated since 2015.
Unfortunately, such curious incidents are not isolated. These are figures which year on year indicate the need to reform the whole management system at state enterprises of the Ministry of Defence.
In the last four years, the state companies managed by the Ministry of Defence have been reporting only on aggregate losses.
According to reports on completion of financial plans, the total net loss of enterprises of the Ministry of Defence came to 22.3 million hryvnas. The financial indicators of 2018 showed losses in the amount of 8.2 million hryvnas. Losses peaked in 2019, when their amount reached 38.7 million hryvnas.
It was only in the first quarter of 2020 when the Ministry of Defence reported on 9.9 million hryvnas of losses. Given economic restrictions in connection with Covid-19, it is not difficult to predict quite gloomy prospects of such a ‘business’ of the military.
As usual, economic achievements of companies are indicated by salaries. In the first quarter of the last year, expenditures for labor remuneration at enterprises of the Ministry of Defence, being allocated to 2 910 employees, reached 77.6 million hryvnas. The average monthly salary of one employee made up 8 054 hryvnas, with the administrative and managing officer receiving 10.5 thousand hryvnas and the director receiving 12.4 thousand hryvnas. At the same time, the average salary in Ukraine in 2020 was 12.4 million hryvnas.
Recently, the Ministry of Defence declared its intention to resolve the situation around its state enterprises. The establishment says that 42 state enterprises of the Ministry of Defence will have been reorganized by 2020, 5 will have been selected to be transferred to the State Property Fund of Ukraine for privatization, with 44 state enterprises of the Ministry of Defence being subject to liquidation.
Along with it, as it was mentioned at the beginning, 55 out of 103 companies subordinate to the Ministry of Defence were bankrupt. So, 5 enterprises selected for privatization are unlikely to significantly change the situation.
As of today, only 3 companies have been transferred to the State Property Fund (to tell the truth, unlike the aforementioned 55 enterprises, none of these companies is being terminated). This is Druzhbivka Quarts Quarry of Non-Metallic Minerals, 417 director’s offices, 209 director’s offices. However, we have not seen on the list the Kozatskyi Hotel, which, being located in the very heart of Kyiv, is… unprofitable! It is doubtful that a private investor would have paid more than one billion hryvnas for the neighboring Dnipro Hotel, if he knew that hotel business in the center of the Ukrainian capital is unprofitable.
The team of the Minister of Defence, Andriy Taran, has put the reform of management of state enterprises into cold storage rather than proposed its implementation. In particular, there was not a single mention of bringing the model of management of state enterprises into compliance with the generally applicable standard i.e. guidelines of the OECD regarding corporate governance at government-owned enterprises. It means that it will not be possible to finally resolve the problems of ineffectiveness and negligence.
At the same time, the financial indicators of state enterprises require drastic changes, with the practice when it takes years or even decades to eliminate local violations at such enterprises not standing up to any criticism.
As far as the very privatization is concerned, the StateWatch expert organization has repeatedly provided its recommendations, namely to hold audits – strategic, financial and legal – upon which to make up a list of enterprises subject to further privatization. It is obvious that the most of the present-day companies of the Ministry of Defence, which, generating losses, are of no value for the Armed Forces, must be sold. As a reminder, losses at such enterprises will be covered at the expense of shareholders or, in other words, from the budget of Ukraine tax payers fill from their pockets.
The column has been coauthored by StateWatch analyst, Anastasia Khymychuk, and StateWatch intern, Sophia Zhuchyk.
The material has been drafted within the project “Privatization + demonopolization = economic growth”.