How to strengthen the Ukrainian military and defense industry

We are not military experts. Forums alone will not bring our victory closer. However, over the past many months, we have been working and communicating with international and Ukrainian businesses, government officials and military, so we have something to say and offer on this topic.

1. The military-industrial complex should be the top priority of all wartime economic strategies and Ukraine’s post-war recovery plans. We cannot win the war without our own defense industry. We need to significantly increase our defense self-sufficiency to reduce dependence on the political situation of our allies. After the war, the military-industrial complex will help us finally change the structure of our low value-added commodity economy, increasing not only GDP, but also our geopolitical sovereignty. So far, no public program, strategy, or conference has addressed this priority. Furthermore, no defense industry strategy will work without an action plan and sufficient resources.
2. The new military-industrial complex is high-tech, knowledge-intensive, innovative, and digital. The new terms for it are military tech and defense tech (however, let’s not get distracted by the terminological aspects). The required synergy between the traditional “heavy” military manufacturing and innovations in Ukraine is almost guaranteed by the existing powerful IT industry, for the sake of which we again have a chance to switch from the resource and outsourcing model to the product model of the market. Moreover, it should be done in the most advanced way, for example, using artificial intelligence. It is a shift from the systems that collect data from various sources on the battlefield and only help humans make decisions to the systems that make decisions independently. In particular, in a situation when the connection between the drone or other equipment and the commander/operator is lost, and it is necessary to act. Another new term of the American military doctrine—the OODA Loop (observe, orient, decide, act)—describes the decision-making process in combat. The hypothesis that a machine can perform each of the elements of this algorithm faster and better than a human is already being tested on training grounds around the world.
3. For the industry to be scientific-based, it needs science—this is not a quote from a military anecdote, but a task statement. It is necessary to develop R&D centers, train a new generation of military engineers, popularize the profession, and make it financially competitive. Amid a silent competition with our allies for our brainpower and talents, the loud but on-and-off grain scandals look like sandbox fights. There is a need for long-term cooperation between the Ministry of Defense, the Ministry of Strategic Industries and the Ministry of Education.
4. Speaking of sandboxes. Some large local companies want to go into the military-industrial complex. Some of them have already developed something at their own expense, tested it on the battlefield, and received interest from the military. However, the entry point remains unclear. The bureaucrats and law enforcement authorities stand between business and end users—the military. The procedures for approval for use and service introduction are non-transparent and complicated. The Ministry of Defense, the General Staff, Ukroboronprom (UOP), and the units that are willing and able to test weapons—all of them are separate, sometimes very distant stakeholders. We need a military sandbox.
5. A positive and timely example is Brave1. This is a defense tech cluster founded by the Ministry of Digital Transformation, the Ministry of Defense, the General Staff, the Ministry of Strategic Industries, the National Security and Defense Council, and the Ministry of Economy. It has an appropriate level of formalization (a government agency) and governance (by a group of founding regulators), as well as the resources to finance promising developments.
   
   Brave1 is a fast track for Ukrainian developers in the field of innovative defense technologies prioritized by the General Staff. Developments that are not a priority for the cluster, but are also important for the army, may not be included in it. Therefore, there should be more sandboxes that are different, universal, and narrowly specialized.
6. After successful testing, the newly created Defense Procurement Agency could become a single window at the contracting stage. Some global manufacturers have been waiting for a government order to cover urgent needs of the army for quite some time. However, there is no one to place it, let alone to engage for it for many years. As for manufacturers, this is a condition precedent only for starting real negotiations and estimating budgets. The Agency can prove its worth right now, as autumn is the time for planning budgets for the next year.
7. Historically, our defense industry has been monopolized by the state. While offering certain advantages in the war, it also has significant disadvantages on the market. The military industries of some of our allies are 100% private and they are equally successful. We will not be able to survive without private partners, their investments, and technologies. They are slowly lining up to enter our market, which was clearly demonstrated by the Defense Industries Forum. It was attended by more than two hundred specialized businesses from around the world, mostly at the CEO level. Their dreams can come true in Ukraine: allied governments give money, and our military offers a unique opportunity for battle testing.
8. Private partners want to make money, while we want to localize their production facilities and reduce our dependence. This requires various legal forms of cooperation, including private-public partnerships (PPPs), on the basis of enterprises or separate asset of Ukroboronprom in the first place. These are partnership agreements, joint ventures, concessions, lease of state property, privatization, etc. Even the recent non-military PPPs that existed in Ukraine before the full-scale invasion were not appropriate in terms of complexity and timing. During the war, partnerships on such terms look absurd. There is a need for radical liberalization of the defense sector: simplified model concessions based on a standard feasibility study, etc.
9. Another nonsense is the requirement to obtain permits for concentration and concerted actions from the AMCU. Investors in the military-industrial complex will first spend many months collecting documents for antitrust clearance, and then find themselves in a stalemate, where they will not be able to provide the market share calculations and other specific information that is required by the AMCU because of its restricted nature or simply non-existence. In addition, the top officials of the AMCU and defense institutions are changing faster than the first applications for concentration in the industry are being considered. A simple solution to the problem would be the already prepared draft law on the abolition of antitrust procedures in the defense industry for the needs of the Armed Forces, at least for the period of martial law.
10. Removing of the said critical legal obstacles, even with a guaranteed government order in place, will anyway not fully satisfy the investors we need most. They want more: insurance against risks, preferential tax and customs treatment, protection of intellectual property rights. Successful cyber warfare and effective use of big data on the battlefield require adoption of regulations on the use of cloud technologies and modern information security standards for the military. The development of unmanned systems in the sky, on the ground, on water and underwater requires new regulations in the field of robotics and robotization. The good-for-nothing draft laws somewhat distract from the urgent and comprehensive legal reform of the defense sector.
11. VAT in the defense industry. This is an indirect tax paid by the end consumer. If the consumer of defense products is the state itself, the value of VAT is questionable in times of war. In addition, VAT administration requirements complicate relations between the public and private suppliers and may interfere with the choice of military goods. For example, a VAT-paying government agency is not interested in purchasing innovative products from a small “garage” manufacturer that does not pay VAT, as the transaction will not generate a VAT input. Conversely, for a government agency that is not a VAT payer, goods from a VAT payer will automatically be 20% more expensive. The solutions range from the test case (prioritize, for example, drones, and exempt the entire chain from VAT, starting with the import of components) to the radical one (complete tax exemption of value added to defense).
12. Imagine that there is no more corruption in the war-related agencies (it’s easy if you try). The lack of business processes or even an understanding of their need remains a major issue. This directly affects the speed and efficiency of decisions, especially in military procurement, human resources management, and document management. Supply chain management, ERP, EDI, HCAS are routine tasks that the defense authorities of leading countries deal with. In particular, with the involvement of professional consultants, and sometimes fully outsourcing a wide range of functions. To address these challenges, a new type of international technical aid is needed. However, this is usually done not by the international financial institutions that we already know well, and which widely support reforms in Ukraine. Capacity building in the military sphere is in the interest of specialized donors, who are still invisible in Ukraine. The specialized ministries, which have no time for this, should actually work with such donors.

We are not military experts, and none of the points covered in this publication pretend to be an absolute truth. However, the office nerds can and are already doing their part in bringing our victory closer. Ukraine will win!

Source: NV Business