September 2016

STRATEGY FOR THE DEVELOPMENT OF THE

DEFENSE INDUSTRIAL SECTOROF UKRAINE

MINISTRY OF ECONOMIC DEVELOPMENT AND TRADE OF UKRAINE

1.General review of Strategy2.Discussion

Agenda

2

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

Defense industrial policyConstitution 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 developmentthe 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

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 developmentthe 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

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 reform5. 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)

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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.

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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

MA

IN P

RIO

RIT

Y

8

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

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

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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

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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

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Procurement system reformState 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

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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 sector3. Reductions of the barriers between civil and military

technologiesExpected 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

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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

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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

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Mechanism of reform implementation

Advisor 1 Advisor 2 Advisor 19

…

Chairman of Advisory Board

Defense Industry Advisory BoardMinister of Economic Development and Trade

Reforms

Inde

pend

ent a

dvis

e an

d op

inio

n

Reforms Leadership

Cabinet of Ministers

Ref

orm

s im

plem

enta

tion

Reforms monitoring

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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

September 2016

STRATEGY FOR THE DEVELOPMENT OF THE

DEFENSE INDUSTRIAL SECTOROF UKRAINE

MINISTRY OF ECONOMIC DEVELOPMENT AND TRADE OF UKRAINE