The week before last, the Cabinet approved the concept of the State Task Program of Reforming and Developing the Defense Production Complex until 2017. Naturally, the program focuses on procurement of the most up-to-date equipment for the Ukrainian army, speedy development of the research sector, reinforcement of Ukraine’s position on the world arms market, and other rosy prospects. To this end, it is planned to restructure and corporatize defense production enterprises as well as to establish basic vertically integrated associations on a sectorial basis. Emphasis is put on innovational development and investments. It will take more than 10.5 billion hryvnias to modernize fixed assets and introduce new defense production technologies, with only about 3 billion to come from the budget and the rest being the enterprises’ own funds, loans, and investment resources. Moreover, the sources of non-budgetary funds are so far unknown.
Therefore, to find at least a part of the required funds, the Verkhovna Rada may allow selling the real assets of Ukroboronprom state-run company’s enterprises. A draft law to this effect, “On Introducing Changes to Some Legislative Acts to Improve Management of State-Run Facilities in the Military-Industrial Complex,” has already been registered. This applies to the state-run facilities that are not subject to privatization now. In the course of restructuring, the company’s enterprises will be allowed “to alienate, withdraw, and transfer their real estate to the authorized capital as well as to perform other operations that may result in alienation, if the decision to approve the plan of restructuring these state-run facilities has been made by the Cabinet of Ministers of Ukraine.”
According to the bill’s author, independent MP Vitalii Nemilostivy, 58 out of 134 Ukroboronprom enterprises are not subject to privatization and the company has already decided to restructure 43 of them. The book cost of surplus property in the shape of fixed assets is an estimated 911 million hryvnias at these 43 enterprises alone. On the whole, Ukroboronprom is going to reform about 80 percent of its businesses. At the state-run company’s preliminary estimate, about 15 and 60 percent of them are to be corporatized and restructured, respectively, and about 5 percent may be liquidated. The surplus fixed assets are expected to be sold for 2.5 billion hryvnias “at a market value.” The earnings will be used “to fund restructuring,” for reformation of the militia-industrial complex, i.e. Ukroboronprom, until 2017 is estimated at 6,724.5 million hryvnias.
Valentyn Badrak, director of the Center for Army, Conversion, and Disarmament Studies, believes that many defense production facilities have long experienced the need to get rid of surplus areas. “For example, the Malyshev Plant’s management has been saying that a considerable part of the 300-ha area must be alienated. The plant does not work to its full capacity, so it does not need these areas. A similar situation exists at many other facilities,” he says. “Production capacities should be concentrated in a more compact way in order to make it possible to meet market-related or predictable needs. But it is no use holding back unused areas, for this only involves totally unnecessary expenses.”
The bill may be viewed as a stage in the preparation of Ukrainian defense production facilities for privatization (especially with due account of the planned corporatization). The facilities to be sold can thus be valued somewhat cheaper, which is more attractive for the potential buyers who will not have to overpay for the real estate they do not need.
Yet experts have already been saying that private entities will find it easier in some cases to build a defense enterprise from scratch than invest in modernization of the old structures and obsolete equipment. “If it is the question of, say, manufacturing composite materials or new sophisticated items, this can really be launched from scratch. But if a working factory has an aircraft-assembly conveyor belt, it will be unpractical to install a new one,” Badrak says convincingly.
At the same time, the expert emphasizes that it is important for Ukraine to keep the design office intact. “For example, it is necessary to keep the Antonov Design Bureau in state ownership. But still it is quite possible to sell the surplus areas of serial-producing aerospace enterprises in Kyiv and Kharkiv. The same applies to the bureaus that design airplane and helicopter engines as well as warship gas turbines. The missile-producing Artem factory can sell a part of its area. But it is still important to leave as state property the Luch bureau that designs high-precision strike systems,” he says.
“Yes, the Ukrainian parliament may eventually allow privatizing the defense production complex. So, it is vital to preserve the key design bureaus as state property. All the more so that we hold quite a strong position and cooperate with several countries in, say, the aerospace industry,” Badrak says.