HOUSING CODE OF UKRAINIAN SSR

Document 5464-Х, effective, current edition - The latest edition dated 25-07-2018, rationale 2443-VIII

As a result of the victory of the Great October Socialist revolution in our country, the necessary prerequisites for the resolution of one of the major social problems - satisfaction of need of workers for housing were created.

Appreciating the Leninist ideas of creation of communist society and raising the material and cultural standards of living of the people, the Soviet State is gradually realizing the housing development programme developed by the Communist Party.

The high rates of development of the state and public funds, based on the state plans, manners used by the state promoting cooperative and individual housing construction, create the necessary conditions for providing citizens’ right for housing guaranteed by the USSR Constitution and the Constitution of the Ukrainian SSR.

An important task for the state is to ensure housing safety, increase the term of its service, increase the quality of housing. To achieve this goal, active participation is taken by public organizations and citizens. POOR GOVERNANCE AND CORRUPTION IN UKRAINE’S DEFENCE HOUSING SYSTEM:

RISKS AND RECOMMENDATIONS The Independent Defence Anti-Corruption Committee (NAKO)

©2018 Transparency International Defence and Security and Transparency International Ukraine. All rights reserved. Reproduction in whole or in parts is permitted, providing that full credit is given to Transparency International Defence and Security and Transparency International Ukraine and provided that any such reproduction, in whole or in parts, is not sold or incorporated in works that are sold. Written permission must be sought from Transparency International De- fence and Security or Transparency International Ukraine if any such reproduction would adapt or modify the original content. Author: The Independent Defence Anti-Corruption Committee/Nezalezhny Antikorruptsiynii Komitet z pytan oborony (NAKO) Committee: Lt. Gen (ret.) Timothy Evans, Drago Kos, Sevgil Musaieva, Oleh Rybachuk, Volodymyr Ogryzko, James Wasserstrom NAKO Staff: Olha Asadcha, Emiliia Dieniezhna, Dmytro Khutkyy, Lada L. Roslycky, Olena Tregub, Taras Yemchura. © Cover photo: edited by NAKO Every effort has been made to verify the accuracy of the information contained in this report. All information was believed to be correct as of May 2018. Nevertheless, Transparency International Defence & Security and Transparency International Ukraine cannot accept responsibility for the consequences of its use for other purposes or in other contexts. With thanks to the Ministry of Foreign Affairs of Sweden, the Ministry of Foreign Affairs of the Netherlands, and the Department for International Development (DFID) for its generous support. The contents of this publication are the sole responsibility of Transparency International Defence and Security and Transparency International Ukraine and can in no way be taken to refect the views of the Ministry of Foreign Affairs of Sweden, the Ministry of Foreign Affairs of the Nether- lands or the Department for International Development (DFID).

2 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

TABLE OF CONTENTS

INDEX OF ABBREVIATIONS 5 INDEX OF IMAGES 6 EXECUTIVE SUMMARY 7 INTRODUCTION 8

PA RT ONE Defence Housing in Ukraine - Poor Governance and Corruption Risks

Section 1: Defence Housing Backlog and Waiting Lists 12 1.1 Background Information and Current Problems 13 1.2 Waiting List Dynamics 13 1.3 Financing and Resolution of Defence Housing Issues 15 1.4 Waiting List Registration 16 1.5 International Practices 17 1.6 Corruption Risks and Practices 20 Section 2: The Current Defence Housing Management System in Ukraine 22 2.1 The Main Quartering Directorate and Subjugated Bodies 22 2.2 Other Structural Units within the Ministry of Defence Involved 26 in Defence Housing 2.2.1 MoD Finance Department 26 2.2.2 MoD Department of Public Procurement 27 2.2.3 MoD Internal Audit Department 28 2.2.4 Main Directorate of the Defence and Mobilization Planning J 28 2.2.5 The Housing Conditions Inspection Committee 28 2.3 Corruption Risks and Practices 29 Section 3: Construction, Reconstruction, Major Renovations 32 3.1 Mechanisms for Meeting Needs 32 3.2 Tendering 33 3.3 Capital Construction Planning 34 3.4 Contractor Agreements 37 3.5 Participation of Military Servicemen/women 37 3.6 Corruption Risks and Practices 38 Section 4: Purchasing on the Secondary Market and through Capital Participation 40 4.1 Corruption Risks and Practices 40 4.1.1 Application for the Procurement of Apartments 40 4.1.2 Apartment Procurement Plans 41 4.1.3 Tender Documentation 41 4.1.4 Procurement Items – Lots 41 4.1.5 Price Monitoring 42 4.1.6 Selection of Winning Tenders 42

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PART TWO – Recommendations 1. Guiding Documents: The National Security Strategy, Concept and the Bulletin 46 1.1 National Security Strategy of Ukraine and Defence Housing 46 1.2 Proposals Concerning Changes in Planning Method 48 2. Waiting lists - Recommendations to Resolve Problems and Eliminate Risks 50 Stage 1.1 Optimization of Waiting List Management 51 Stage 1.2 Introduction of Alternate Housing Supply Mechanisms 52 Stage 2 The Development of New System of Social Protection for Service- men/women 52 Stage 3 The Implementation of a Transition Period 53 Stage 4 Abolishing the Law Permitting New Additions to the Waiting List 54 3. Recommendations to Reform the Defence Housing System 56 3.1 Defence Housing Management System – Recommendations 56 3.2 Construction, Reconstruction, Major Renovations - Recommendations 57

CONCLUSION 58 ANNEX 1 60 ANNEX 2 68

4 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

INDEX OF ABBREVIATIONS

Main QD – Main Quartering Directorate of the Armed Forces of Ukraine HDDMP – Head Directorate of Defence and Mobilization Planning SE – State Enterprise AFU – Armed Forces of Ukraine CPCEF – Code of Program Classifcation of Expenditures and Financing of the National Budget QD – Territorial Quartering Directorate and Kyiv Quartering Directorate HMU – Housing Management Unit MoD – Ministry of Defence of Ukraine NAKO – Independent Defence Anti-Corruption Committee (Natsionalnyi Antykoruptsiinyi Komitet z pytan Oborony) SDB – Strategic Defence Bulletin of Ukraine CCMD – Capital Construction Management Directorate

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INDEX OF IMAGES

6 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

EXECUTIVE SUMMARY

Problems in Ukraine’s defence housing are • Prioritise the delivery of projects over the costly to Ukraine’s societal and political secu- full expenditure of budgeted funds. rity. Unless changes are made to the current • Utilise, and implement where unavailable, conditions, it could take over 600 years for the electronic systems including “Maino,” “Zhyt- Ministry of Defence to resolve its defence hous- lo,” and “proZorro” to increase transparency, ing problem and provide housing for personnel accountability and effciency in the areas of waiting for homes. Moreover, damages incurred infrastructure, waiting lists and procure- to Ukraine’s budget, as a result of ineffciencies ment processes. and subjective decision-making power, run into many billions of hryvnas. From its outdated • Increase the quality and delivery standards Soviet promise of providing permanent housing of defence housing by engaging more deep- to its servicemen/women to its current planning ly with the public and the servicemen and system, Ukraine’s approach to defence housing women for which such housing is procured. violates international best practices, and enrich- • Develop and implement, in line with inter- es corrupt criminal networks. national best practices, alternative solutions The Independent Defence Anti-Corruption Com- for the social protection of servicemen/wom- mittee (NAKO), a joint initiative of Transpar- en, including preferential rents, mortgag- ency International Defence & Security Pro- es, monetary compensation and retirement gram and Transparency International Ukraine, packages. has analysed the issues of defence housing in • Abolish the Law Permitting New Additions Ukraine. It recommends the Ukrainian govern- to the Waiting List once alternative solutions ment develop a new defence housing strategy have been found. and adopt the necessary legislation to reform this sector. This legislation is missing from the • Make information on procurement and Strategic Defence Bulletin, but is provided for by side-agreements with partners in the private the National Security Strategy and the Concept market open to the public. for the Development of Ukraine’s Security and • Eliminate the current ambiguities which Defence Sector. The strategy must account for lead to subjective decision-making of Capital the real needs of the military, include all rele- Construction and Reconstruction planning. vant infrastructure to the defence housing da- tabase, and refect the current Ukrainian real • Create a healthy culture by setting new estate market. In addition, it should: organizational values in line with competi- tive, democratic military-civilian systems of • Include defence housing and infrastructure checks-and balances and education. into the Armed Forces of Ukraine capability planning and development, as its Euro-At- lantic partners do.

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INTRODUCTION

To date, the withdrawal of the Soviet Army Rather than being an incentive for future con- Western Guard from Eastern Germany (1988- scripts, defence housing has become a source 1994) remains, financially and logistically, of frustration for the Ukrainian Ministry of history’s largest foreign military withdrawal. Defence and its servicemen/women alike. For The Kremlin received almost 8 billion German these reasons, in this report NAKO calls at- marks for the relocation of over 300,000 So- tention to the manner in which the Ministry viet servicemen/women and their families, in- of Defence of Ukraine supplies housing to the cluding the construction of 36 thousand apart- servicemen/women of the Armed Forces of ments on Soviet territory - the brunt of which Ukraine. It is the objective of this study to iden- were to be built in Ukraine1. The Former First tify the key short comings and corruption risks Director of Germany’s Federal Intelligence of the defence housing system and to provide Service, the Bundesnachrichtendienst (BND), recommendations for its improvement. To this Volker Foertsch, remarked on the scandalous end, the study has been divided into 2 parts. corruption, and the misappropriation of funds Part One introduces the reader to the defence and property set free by the withdrawal2. Un- housing system, its problems as well as select- fortunately, little has changed. ed corruption risks. In Section One the mat- Ukraine’s outdated defence housing system ter of defence housing waiting lists and related remains based on a Soviet-era obligation to problems faced by service men and women are provide free housing to the members of its mil- presented. Section Two lays out the current itary force. This systemic obligation contra- system of defence housing management in venes international best practices and is un- Ukraine. It presents the structure of Ukraine’s sustainable by the Ukrainian State. In 1991, Head Quartering Directorate of the Armed when Ukraine gained its independence, its Forces (henceforth, Main Headquartering military comprised one of the largest forces of Directorate of the Armed Forces)3 and other the Soviet Union. Today, facing a war on its structural units belonging to the Ministry of Eastern front and the ramifcations of Russia’s Defence playing a role in the defence housing illegal annexation of Crimea, the Ukrainian system. Section Three presents the process- Ministry of Defence is also challenged by a cri- es related to construction, reconstruction and sis within its quartering (henceforth, defence renovations of military facilities and housing. housing) system. Matters pertaining to the purchase of housing at the secondary market and through capital The failure to modernise and reform the mili- participation are presented in Section Four. tary housing system, combined with the intro- Within each of the aforementioned sections, duction of contracted military service has led special attention is paid to matters pertaining to an increase in the number of families on to poor governance and corruption risks. housing waiting lists. In May 2018, the Min- istry of Defense reported that as of 1 January Part Two of this study contains recommen- 2018, 47.1 thousand servicemen/women on the dations for the improvement and reform of waiting list. Many have been waiting over ten Ukraine’s defence housing system. Particular years for the improved living conditions they attention is paid to the specifc subject matter are owed. Long waiting lists, overly complicat- covered in the individual sections presented in ed and non-transparent procedures governing Part One. The core of the recommendations the planning, procurement and distribution of found herein are summarized in the Conclu- defence housing appear to exacerbate the prob- sion, with the aim of creating a consolidated lem by facilitating arbitrary decision-making, policy recommendation document for use by the squandering of funds, and corrupt practices. the Ministry of Defence of Ukraine.

1 Dubinin Y. V. (Дубинин Ю. В.), (2005). Diplomatic Marathon (Дипломатическии Марафон), Москва (Moscow): Авиарус-21. р 8. (Dubinin notes that in the long run and after much political hardball Russia received most of the total amount). 2 Foertsch V. (1999). The Role of Counter Intelligence in Countering Transnational Organized Crime, in Trends in Organized Crime, Winter 1999. p 123. 3 Recognizing that Ukraine’s Ministry of Defence identifes the Head Quartering Directorate as such, a more accurate translation of the Ukrainian term “Головне квартирно-експлуатаціине управління “ is “Main Quartering Directorate”. Thus, this term and its corresponding acronym (MQD/Main QD) will be used for the purposes of this document rather than the name “Head Quatering Directorate” as provided for by the Ministry of Defence.

8 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

Open source information and analyses of cies). Whereas problems within these agencies laws and procedures (strategic and operation- may have similar causes, they require a sepa- al) governing housing supply were used as a rate approach. Also, defence housing is a com- foundation for the research. The fndings of ponent of Ukraine’s policy of providing social this report have been drawn from information security to its servicemen/women. Whereas collected through expert interviews with rep- numerous aspects of this policy require atten- resentatives of Ukraine’s Ministry of Defence tion, this study limits itself to matters pertain- MoD, servicemen/women of Ukraine’s Armed ing to defence housing. Forces, national and foreign military housing The authors of the study recognize the sphere specialists as well as members of Ukraine’s of housing maintenance of the Ministry of De- civil society. The NAKO team would like to fence is closely linked with the management thank these men and women for their time and of non-core assets of the Ministry of Defence cooperation. and its land resources. However, the corrup- Importantly, this study has been limited to tion risks and inefficiencies in these areas questions related of housing supply within the (non-core assets and land resources) also falls Ministry of Defence. It does not consider hous- beyond the scope of this study and will be con- ing supply mechanisms related to other agen- sidered in future publications. cies (i.e. agencies within the Ministry of Inter- nal Affairs, the Security Service of Ukraine or intelligence security related government agen-

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10 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

PART ONE

DEFENCE HOUSING IN UKRAINE -

POOR GOVERNANCE AND CORRUPTION RISKS

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SECTION 1: DEFENCE HOUSING BACKLOG AND WAITING LISTS

Over 47 thousand Ukrainian families are during the tendering, award and contract ad- waiting for defence housing. Most of them are ministration process6. The fatal tragedy, de- on waiting lists and many have been waiting lays and scandals surrounding this 353, 000, over ten years for the improved living condi- 000 UAH (approx. 13,6 million USD) defence tions they are owed. This backlog and result- housing project in Mykolayiv’s “Shyrokiy Lan” ing waiting list problem are caused by the casts doubts on another defence housing pro- continued use of an archaic defence housing ject planned for 2018. The MoD of Ukraine has system, cumbersome bureaucracy, a lack of dedicated 2.6 billion UAH (approx. 100 million transparency and ingrained corrupt practices. USD) promised to build Ukrainian service- men/women a garrison of 184 buildings with The starkness of the situation is poignantly living space for 23,000 servicemen/women7. To refected by a number of recent defence hous- avoid graft, this recent defence housing project ing related cases. In April 2018, media sources requires oversight and scrutiny. reported on appeals made to the President of Ukraine by 35 servicemen/women. The ser- These cases call for effective legal remedies, vicemen appealing to the president for housing media and judicial attention. They are stark are mostly senior offcers who remained loyal indicators of the dire state of Ukraine’s Min- to Ukraine after Russia’s illegal annexation of istry of Defence housing supply system, and Crimea. Four years after their patriotic choice its need for good governance and reform. The was made, they remain, quite literally, beg- system is failing the state’s social security ob- ging for the home that they are owed4. Anoth- ligations towards members of Ukraine’s Armed er case pertains to a recently opened investi- Forces. It is therefore necessary to consider gation by the National Anticorruption Bureau what it is, within the system, that is allowing of Ukraine (NABU). It depicts how the lack of for such abuses of the rights of servicemen/ transparency and bureaucracy facilitate cor- women, their families as well as the Ukrain- ruption in the MoD defence housing practices. ian taxpayers. In this particular case, military land in Kyiv is The purpose of this section is to present being used to construct an apartment complex. Ukraine’s current defence housing situation in Among other questionable practices, the prom- broad terms. To this end, problems pertaining ised 10% quota of apartments designated for to waiting lists, fnancing and the cumbersome servicemen/women barely reaches 3%5. registration process will be presented. With Another recent defence service housing case the aim of identifying solutions, a comparative illustrates many of the problematic elements analysis will be made of the approach to the pertaining to defence housing in Ukraine: defence housing by other states. Selected cor- Substandard service housing, in which ser- ruption risks and obscure procedures will also vicemen/women are forced to live in appall- be considered to help formulate recommenda- ingly unhygienic conditions; a freaki accident tions for an alternative approach to defence ending with serious injury and death; prom- housing in Ukraine. ises of NATO standards, suspicious activity

4 “Offcers who left Crimea talk about possible return after their Defence Housing needs are ignored”. Available at: http://bit.ly/2NjlKIB (verifed June 2018). 5 “National Anti-Corruption Bureau opens Criminal Case into Schemes related to Defence Housing”. Available at: http://bit.ly/2xsgd7S (verifed September 2018). 6 “Costs which were allocated to the building of Shirokiy Lan Polygon are being pilfered” http://bit.ly/2xfjOHd (verifed June 2018). 7 “The Ministry of Defence is Planning to Construct 184 Residential Building Complexes for Contracted Servicemen”. Available at: http://bit.ly/2xjrd8i (verifed September 2018). 12 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

1.1 Background Information and Current Problems

Ukraine’s current system of housing supply to defence and security sector. Ukraine’s present military servicemen/women and their families priorities and modern course of development do (henceforth defence housing) is regulated by not necessarily call for an increase of fnancing. the “Housing Code of the Ukrainian SSR” and Rather, they require increased effciency in the the “Law of Ukraine On Social and Legal Pro- use of existing fnancial resources, and the ap- tection of Military Men and Members of Their plication of best international practices. Families”8. The basis of both of these laws was The Soviet defence housing model aimed, developed in Soviet times. primarily, at increasing the number of fam- The housing system was designed to motivate ilies and children. The Handbook on Organ- military servicemen/women. It was well-de- ization of Accommodation for Armed Forc- veloped and functioned in the USSR, with the es of Ukraine Military Servicemen/women centrally planned economy providing for the and Their Families9 explains that the size of relatively successful resolution of defence hous- apartment/monetary compensation for hous- ing issues. Today, current legislative mecha- ing is calculated based on the number of fam- nisms are disconnected from reality; creating ily members; the more children in the family, an illusion of social protection whilst festering the larger the compensation. Today’s Ukraine societal discontent. Ukraine has an open mar- is on a new course of development, a result of ket economy; the mechanisms that worked in which has been the introduction of a qualita- the planned economy can no longer function tive approach to state defence, and, a regular successfully. Thus, there is an acute need to (contracted) army. These changes require the reform processes in the MoD and bring them defning of new priorities, a redefning of old up to market economy standards. ones - particularly as they pertain to the moti- vation of military servicemen/women through The USSR was a military Union which spent social protection. about 20% of its GDP on defence. Today, Ukraine only spends about 5% of its GDP on the

1.2 Waiting List Dynamics Two types of defence housing are currently or released from duty. More than half of the available in theory (i.e. promised) to Ukrain- total (54.9%) is waiting for permanent hous- ian military servicemen/women: ing. The remaining 21.9 thousand are await- ing service housing (Annex 1). In a follow-up • service housing (barracks, dormitories, review received from the Head of the Main service apartments etc.), and; Quartering Directorate Ministry of Defence, • permanent housing (provided as an apart- O.A. Halushko, additional and some modifed ment, monetary compensation or a land plot). numbers were presented. (Annex 2). However, both are in great defcit. The waiting An examination of a 10-year period (2006- lists are very long and the current housing sup- 2016) shows no signifcant signs of change or ply system is showing no signifcant progress improvement in the waiting list dynamics. in eradicating the problems. For instance, as of Rather, on average, the current system has 1 January 2018, there were 41.7 thousand per- been able to satisfy the needs of no more than sons awaiting defence housing. 35.6 thousand 5% of families on the waiting list; 1% of the (75.6%) of these are active servicemen/women; total number of military servicemen/women in the remainder have either been put on reserve the AFU.

8 The Law of Ukraine 2011-XII “On Social and Legal Protection of Military Men and Members of Their Families” of December 20, 1991. 9 Order of the MoD N737 “On Approval of the Instruction on Organization of Supply of Residential Facilities to Military Servicemen/women of the Armed Forces of Ukraine and Their Family Members” of November 30, 2011.

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Diagram 1: Dynamics of defence housing waiting lists over a decade

It is possible to estimate the waiting list fgures for 2018 by using the dynamics of its growth dur- ing the past years.

Calculation of Estimated Figures of Waiting List Dynamics:

Year: 2013 2014 2015 2016 2017 2018

Regular army military servicemen/women: New persons 12 100 11 900 16 100 69 000 35 479 8 000* during the year

Total at the end 83 421 93 221 10 191 166 521 20 000 200 000 of the year: Military servicemen/women on the waiting list: Joined the waiting 926 2 259 1 994 2 742 12 065 6 203 list during the year:

Total at the end 44387 41 867 43 945 45 182 55 742 60 400 of the year: Total number of apartments provid- 365 695 895 1 505 1 490 1 505 ed during the year:

Diagram 2: Waiting list dynamics

14 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

Assumptions: 1,505 military servicemen, i.e. the queue is decreased by 70 military servicemen. 1. The number of military serviceman re- mains around 200,000. In 2017, there were 47,097 military servicemen on the queue. If the decrease rate remains the 2. Average time of service is 20 years. same, the queue will be closed in 658 years. 3. House supply remains at the level of year Thus, operating under the current system and 2016 and amounts to 1,505 apartments dynamic for defence housing improvement per year on average (in 2017, 1,490 apart- (which is somewhere between negative and ments were supplied). around zero), levels of fnancing and the set to- Calculations: tal number of contractual military servicemen/ women, it will take over 600 years to erad- Annual turnover of military servicemen: icate the waiting list. The ineffciencies hold 10,000 military servicemen annually = 200 true for both service and permanent defence 000 military servicemen during 20 years. housing. Percentage of new military servicemen joining Alternately, if we take 25-year service time as the queue: 14.34% (calculation shown in table the basis for the same calculations, the annual above). turnover of military servicemen will amount Annual increase of the queue: 1,434.78 mili- to 8,000 individuals per year, annual increase tary servicemen = 10,000 military servicemen of the queue will amount to 1,147 individuals, at a rate of 14,35%. annual decrease will amount to just over 357 individuals, and the queue will be closed in Every year, the queue is increased by 1,434 2148, i.e. in 131 years. military servicemen and is decreased by

1.3 Financing and Resolution of Defence Housing Issues

Signifcant fnancial resources are needed for today’s current terms of reference and business the MoD to deliver on its defence housing com- environment, the current system does not pro- mitments. For instance, approximately UAH vide for the effcient use of funds. There is no 54 billion (approx. USD 2.07 billion) would direct correlation between the amount of fi- be needed to cover the needs of the estimated nancing allocated to housing supply and ac- 46,116 families that will be on the waiting list tual supply of housing provided to service- in 2018. Additional annual expenditures would men/women and their families. constitute about UAH 1.3 billion. However, in

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Diagram 3: Correlation between Funding and Resolution of Defence Housing Problems

While the number of contractual military ser- Thus, the analysis of the current housing sup- vicemen/women is based on the country’s ob- ply system and waiting list should focus on its jective defence needs, fnancing is restricted by organization and regulation process. the existing economic capacity of the country.

1.4 Waiting List Registration

To register on the waiting list, servicemen/ families, it does nothing to address the long women need to collect a large set of paper doc- waiting period they must face. Moreover, the uments. These documents are then delivered electronic system is not equally available na- to MoD staff, who then need to process the tion-wide. fles manually. This cumbersome process (see A considerable attempt to optimize the process fgure below), is time consuming, leads to mis- of defence housing supply was made between takes, and enables corruption and non-trans- 2006 and 2015, when MoD purchased and parent processes. implemented the automatic software system It is noteworthy that recent positive changes “Zhytlo” (Housing), which is based on the SAP have been made to the registration process. R3 system. However, based on data from the They are directly related to the simplified Main QD, not all HMUs currently have func- “single window” document delivery process tional software and updated data in it, which through electronic state registers. Opportu- makes this project a waste of taxpayers’ mon- nities on how this process can be optimized ey. The fact that the whole scope of functions are considered further in this study. It is note- of the automatic system is not used by MoD worthy, however, that although a simplifed, officials leads to a disproportionately large electronic registration system may reduce the number of personnel in the Ministry for man- frustration of servicemen/women and their agement of the waiting list.

16 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

Diagram 4: Waiting list registration process

The analysis of the current system of registra- As a result, the military serviceman/woman’s tion of military servicemen/women on the wait- right to receive permanent housing for them- ing list, administration of the list and receipt selves and their families, as prescribed by law, of apartments attests to the fact that these is not properly observed. Profound changes to organizational processes are outdated, compli- the MoD’s approaches and mechanisms are cated and hardly make use of modern technol- needed immediately to ensure the success of ogy. Given its dynamics and of growth of the the Ukrainian army, and to avoid further de- need for housing, the current system is unable faulting on its social commitments. to resolve the defence housing supply issue.

1.5 International Practices

It is important to consider and compare how national leader in supply and budgeting of its some of Ukraine’s defence housing standards military’s housing, and the UK is the leader in correspond to the practices of other countries. Europe. The Russian Federation is the USSR’s Below, selected countries have been divided legal successor which continues to allocates into several groups: advanced military states, signifcant funds for military servicemen/wom- CIS states, Baltic states. Special attention is en and their families. paid to the United States, United Kingdom and Russia. The USA is the absolute inter-

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USA UK RU Turkey Poland Ukraine

Service housing waiting list waiting list

Compensation for service hous- 800 – 1000 510 – 538 85 – 490 n/a n/a 77 – 111 ing ($ per month), country average

Permanent no such no such waiting list no such no waiting waiting list housing thing thing stopped thing list (housing after 20 years of service)

Interest-free Military Military loans with mortgage service part of the (after 3 person pays loan paid years of market in- off from the Loan program service, the terest on the military (available at any absent state pays n/a absent loan and is budget – time) off the mort- exempt from from 40% gage com- payment of (depend- pletely while federal/state ing on the the soldier duties duration of is serving service)

Retirement up to 170 allowance ($), 000 (but the after 40 years 13 390 – 2 535 – 18 monthly 5 363 – pension is n/a of service (from salaries 161 857 reduced by 6 859 14 258 private to gener- 50%) al)

Diagram 5: International practices of social security provision to servicemen/women10

International practices show that advanced focus on its feld-specifc work, and maintain countries try to transfer compensations (i.e. economic effciency. service housing, food, healthcare etc.) into the monetary form, for instance, by refunding rent Advanced countries do not usually provide expenses rather than providing defence hous- their military servicemen/women housing. ing. “Outsourcing” all extra functions greatly Rather, they receive quality service housing simplifes the system, allowing the army to for the duration of their service or refund of its

10 The source of information for this chart was a survey of defense attaches of various countries accredited in Kyiv between 2016 and 2017.

18 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

rent. After retiring, servicemen/women tend to de jure. Ukraine must consider implementing receive an allowance. The state does not limit alternative solutions for the implementation of the choice as to the manner in which the allow- social protection mechanisms for its military ance may be spent. It can be used to pay for the servicemen/women. purchase of housing, new education, travel, or A retirement allowance is an example of an bonus money. effective social protection method. It serves Post-Soviet states that inherited the waiting as an incentive to join the army. In the UK, list system approach defence housing different- military service allowance can reach up to ly. Poland put a stop to the waiting list and, $170,000. For the UK Ministry of Defence, it due to signifcant fnancing, provided compen- is also a refned tool shaping career behaviour; sation for apartments to all military service- simultaneously motivating service for the peri- men/women on the list. Russia halted the wait- od of time required by the. It is done through ing list in 2016 by an order according to which a complex yet transparent calculation mecha- all military servicemen/women whose service nism of retirement allowance. started after 2005 no longer had the right to Another component of advanced-country social register on the waiting list. Yet, all new mili- protection is the provision of high-quality ser- tary servicemen/women are able to participate vice housing. Ukraine’s Ministry of Defence in a mortgage program with the aim of receiv- has a housing defcit; it does provide for the ing housing: A military serviceman/woman re- compensation of rental housing, but the com- ceives a fxed amount which is indexed for each pensation amount given is signifcantly low- year of service – after the end of the service, er than the rental market average11. Those he or she can purchase housing. Otherwise, who do receive service housing from the MoD a special program (compensated by the state) sometimes face the problem that, unlike other allows the military servant to get a mortgage countries, Ukraine has no standards of ser- for an amount ranging between USD 46,150 vice housing, and thus the quality of service – 53,850 - after three years of service. Other housing threatens to be extremely low. With post-Soviet countries, such as Kyrgyzstan, Ka- the aim of avoiding the provision of substand- zakhstan, Uzbekistan, Moldova and Belarus ard living conditions, Ukraine must create a use two main mechanisms: a) the possibility of system and standard for the supply of quality receiving service housing or a land plot after service housing. an average of 20 years of service, or b) mort- gage programs for housing. Still other post-So- The international experience of advanced coun- viet countries, such as Turkmenistan and Ta- tries serve as an example of the way forward jikistan, maintain the defence housing waiting for Ukraine. Alternative monetary mechanisms list system. for the social protection of servicemen/women must be considered as offering solutions to the Whereas the worldwide trend is gradually Ministry of Defence of Ukraine, and Ukraine moving away from it, Ukraine continues the should take steps to improve the quality of ser- practice of supplying free and permanent hous- vice housing to meet these standards. ing to military servicemen/women, at least

11 The monthly, received, average is around USD 77 against a national average, monthly rent constituting USD 108 reaching USD 245 in larger cities, which case only USD 111 are compensated.

19 The Independent Defence Anti-Corruption Committee (NAKO)

1.6 Corruption Risks and Practices in the Housing Backlog and Waiting Lists

After analysing information provided by the • Permanent housing - The distribution of MoD Reforms Project Offce, the survey of a fnancing between housing supply mech- Head QD staff member, and reviewing the anisms (i.e. construction/reconstruction/ Handbook on Organization of Accommoda- purchase on the secondary market/mon- tion for AFU Military Servicemen/women and etary compensation) is not formalized Their Families12, it has been determined that and is based on subjective decision-mak- the main corruption risks lay hidden inside ing of Head QD management. processes which are not strictly defned on the • Service housing – The distribution regulatory level and thus allow for subjective of financing between housing supply decision-making. The following are some key mechanisms (i.e. construction/recon- manipulations and corruption risks: struction/rent/compensation for sublet 1. In the formation of the defence housing etc.) is not formalized and is based on needs: subjective decision-making of Head QD management. • Military servicemen/women try to reg- ister on the waiting list for housing in • Distribution of housing/compensation big cities, especially in Kyiv. The high- between priorities on the list (fast- er desirability and market prices open tracked, priority, general waiting) is not considerable graft opportunities. formalized and is based on subjective decision-making by the housing com- 2. In defence housing supply: mittee. Moreover, the process allows • The distribution of fnancing between the Minister to allocate apartments by regions is not formalized and is based personal order. on subjective decision-making of the Main QD management.

Diagram 6: Pattern of territorial distribution of defence housing need

12 Order of the MoD N737 “On Approval of the Instruction on Organization of Supply of Residential Facilities to Military Servicemen/women of the Armed Forces of Ukraine and Their Family Members” of November 30, 2011

20 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

On average, 17-26% (on average) of the waiting to be transferred to them as their fnal station lists have been dealt with through monetary of service. In turn this enables other corrup- compensations rather through the supply of tive schemes. complete apartments13. This effective mecha- The lack of waiting list data transparency nism, nevertheless leads to imbalances in the concerns military servicemen/women, who, system, because military servicemen/women with good reason, see corruption risks in de- register on waiting lists for cities with a higher cision-making processes. One socially active - square meter price. According a letter received serviceman even sued the Kyiv QD on October from the Head of the MQD (Annex 2), the In- 5, 201114. Following a review of the case, the structions for the Organization of Defence court ruled “to oblige the Kyiv QD, within one Housing for Servicemen/women, and Their month of the court decision coming into effect, Families, confrmed by Order No. 737 of the to provide offcial, public, and, socially impor- Ministry of Defence dated 30.11.2011, stipu- tant information regarding apartment regis- late defence housing shall be awarded, not per tration and results of housing distribution in requests submitted by servicemen/women but Kyiv garrison between 2006 and 2011.” by their place of service. The aforementioned instructions stipulate it shall be determined The fact that the current Head QD mechanism by the place of their final dislocation. Notably, concerning both construction and distribution of common servicemen/women commonly desire housing does not work is confrmed by the 2015 to receive their permanent housing in larger audit conclusions of the Accounting Chamber: cities. This leads to the submission of requests

ìDue to the inadequate reaction of leadership and other officials of the MoD to the recommenda- tions provided by the Collegium of the Accounting Chamber, there has been no positive change in the system of use of budget funds allocated for construction (purchase) of housing for AFU military servicemen/women. The current system of managerial decision-making and supervi- sion of implementation of such decisions did not enable efficient use of budget funds and actual resolution of military servicemen/womení housing problem...overdue accounts receivable in the amount of over UAH 37 million has become effectively hopelessÖ The comprehensive program of housing supply to military servicemen/women, approved by the directive of the Cabinet of Min- isters of Ukraine of November 29, 1999 N 2166, is outdated and does not solve urgent problems of housing supply to military servicemen/women, the indicators it contains are unreal and the activities (mechanisms) for their implementation are either insufficient or absentÖ As the result of such actions, which carry signs of corruption, funds have been illegally transferred to a com- mercial structure, and the national budget suffered losses in the amount of over UAH 32 million.î

13 for instance, in 2015, 231 out of 895 families, source: MoD White Book 2015, chapter 6 14 Kyiv District Court Case № 2а-5293/11/2670 Available at: http://reyestr.court.gov.ua/Review/20259845 (verifed September 2018). 21 The Independent Defence Anti-Corruption Committee (NAKO)

SECTION 2: THE CURRENT DEFENCE HOUSING MANAGEMENT SYSTEM IN UKRAINE

To uncover some of the root causes of Ukraine’s ture and other units within the MOD involved defence housing problem it is necessary to in maintaining housing. Namely, the MoD understand the basic structure of the Main Finance Department, Department of Public Quartering Directorate of the Armed Forces Procurement, Internal Audit Department and of Ukraine (MQD) and other MoD agencies Head Directorate of Defence and Mobilization mandated to deal with defence housing. This Planning J-5. Special attention is paid to cor- section provides details about the MQD struc- ruption risks and practices.

2.1 The Main Quartering Directorate and Subjugated Bodies

The Structure of Ukraine’s Armed Forces major renovation of military objects (CPCEF Quartering Units consists of a Main Quarter- 2101120)17; capital construction work and pur- ing Directorate (MQD), 5 Territorial Quarter- chase of housing (CPCEF 2101190); social is- ing Directorates (QD), Housing Management sues including: accounting of individuals who Units (HMU), and; Housing Services of Mil- have the right to housing and distribution of itary Units15. These quartering units are ar- living quarters; budget planning, fnancing ranged in a hierarchical structure. Together, and control over use of funds; logistic support they are responsible for the accounting and use to the AFU, lodging and technical supervision. of military funds and lands; technical opera- There are 3 levels of management and 4 levels tion of barracks, quarters and other military of apartment maintenance. facilities:16 general military construction and

Diagram 7: Territorial structure of AFU quartering units

15 Order of the MoD «On the Approval of the Regulation on the Organization of Quartering Support of the Armed Forces of Ukraine» of July 3, 2013 N448 16 Order of the MoD «On the Approval of the Regulation on the Head Quartering Directorate of the Armed Forces of Ukraine» of August 29, 2016 N448. 17 According to the Budget Code of Ukraine, art. 40, part two, the Law on the National Budget of Ukraine shall provide detailed information on the expenditures and fnancing by major spending units of the national budget based on the program classifcation of expenditures and fnancing of the national budget, by groups of functional classifcation of expenditures and fnancing of the budget and individual categories of economic classifcation of budget expenditures and fnancing. - In its turn, according to the Budget Code of Ukraine, art. 2, part 1, clauses 3 and 4, budget classifcation is a unifed grouping of revenue, expenditures, fnancing of the national budget and debt according to the Ukrainian legislation and international standards; budgeting program is a set of activities aimed at the achievement of a single goal, objectives and expected results, defned and implemented by a spending unit in accordance with the functions assigned.

22 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

The Main Quartering Directorate (MQD) is responsible for the construction of military facilities, maintenance and renovation/renovation of housing in garrison towns and use of land plots. The MQD is a military management agency funded by the Armed Forces of Ukraine (AFU). It is sub- ordinated to a) the Deputy Minister of Defence18 for matters pertaining to military, political and administrative management, and, b) The Deputy Chief of the General Staff of the Forces of Ukraine for matters pertaining to military management and AFU needs.

Diagram 8: MQD Subordination

It was created to: • coordinate accommodation and barracks service; • develop a maintenance system for barracks, quarters and other military facilities; • provide accommodation (provision of buildings and facilities under the right of operational con- trol and land plots under the right of permanent use); • to maintain troops (forces) placed on high defence alert and mobilization readiness; • implement the national policy concerning housing supply to AFU military servicemen/women, retired servicemen/women, and families with the right to receive housing from the MoD19; • develop and co-implement budget programs (sub-programs) on the supply (purchase) of goods, works and services in the system of AFU funding20.

18 Order of the MoD «On the Approval of the Regulation on the Head Quartering Directorate of the Armed Forces of Ukraine» of August 29, 2016 N448. 19 Order of the MoD «On the Approval of the Regulation on the Organization of Quartering Support of the Armed Forces of Ukraine» of July 3, 2013 N448. 20 Order of the MoD «On the Approval of the Regulation on the Head Quartering Directorate of the Armed Forces of Ukraine» of August 29, 2016 N448.

23 The Independent Defence Anti-Corruption Committee (NAKO)

Territorial Quartering Directorates (QD) is a Housing Services of Military Units HSMU territorial agency of the AFU subordinated to responsibilities include accounting and main- the Head QD. It is responsible for the imple- tenance of housing stock of garrison towns mentation of the national military and techni- and land plots maintained by the MOD. They cal policy on housing of troops (forces) located account for buildings, facilities and utilities within its jurisdiction with the aim of main- owned by public companies and organizations taining troops (forces) in a high defence alert (except for budgetary institutions) which are and mobilization readiness. under the management of MoD (hereinafter – companies), and manage documentation and Housing Management Units (HMU) provide bookkeeping. In addition, HMUs the ensure direct housing services to military units lo- work of central heating systems of barracks in cated within its jurisdiction. They are sub- garrison towns21. ordinated to the relevant QD based on ter- ritorial designation. Regarding the use of Importantly, the housing and operational ser- housing stock and territories of garrison vices of military units realize apartment main- towns, they are subordinated to the garrison tenance of the military units in which they are commander. created as integrated structural subdivisions.

Thus there are 3 levels of management and 4 levels of realization of apartment maintenance. Housing services are provided to military units through one of the following two systems22: System I

military MQD QD HMU units

System II (under the decision of the Minister of Defence of Ukraine)

military MQD types o f AFU units

Diagram 9: Defence Housing Service Provision Systems

Although these systems may appear simple and effcient, a closer look at the structure of the MQD alone (at the beginning of 2018) reveals a time consuming, corruption-prone bureaucratic structure. The organizational chart of the HDQ Directorate below reveals that the Directorate has one direc- tor and deputies including one lead engineer. Six supporting subsections are directly subjugated to the director. This reveals a substantial amount of oversight and control delegated to the single director.

24 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

Diagram 10: MQD organizational and personnel structure

In addition to the 6 supportive sections the HDQ consists of nine, interconnected, departments; some with no subjugated departments and others with as many as four.

Diagram 11: Main Departments of the MQD

25 The Independent Defence Anti-Corruption Committee (NAKO)

The charts presented above reveal a large, ganizational structures and interconnectivity complex state structure. When contrasted with of the territorial QDs, HMUs and HMUSs are the severity of the defence housing defcit and not presented here, it is possible to suggest the enormity of the waiting list backlog it becomes same holds true for the entire, nation-wide de- evident that despite its size, the structure of fence housing system. the system is not effcient. Although the or-

2.2 Other Structural Units within the Ministry of Defence Involved in Defence Housing

Notably, the MQD, QDs, HMUs and HMUSs housing in Ukraine. Namely, the Ministry of do not constitute the entire defence housing Defence Finance, Procurement and Internal system. Four other institutions belonging to Audit Departments, and, the Main Directorate the Ministry of Defence are also mandated of Defence Mobilization J-5. Their key func- by law to act in matters pertaining to defence tions are considered in this section.

Diagram 12: MQD interaction with other structural units of the MoD and the AFU GS

2.2.1 MoD Finance Department The Department of Finance at the Ministry of and budgeting reporting. Importantly, it is not Ukraine is responsible for the implementation only responsible for carrying out centralized of the national policy on funding of the AFU. calculations and fnancing lower level spend- Thus, it monitors the MoD budget implemen- ing units, it is responsible for the timely and tation, analyses the funding system and pre- accurate funding of the MoD structural units, pares proposals for its improvement. It takes establishments, and military units within the lead in the organization of the MoD budget al- approved scope of allocated funding. location process, the formation of the annual budgetary requests (for the current year and The enormous backlog in the housing system following two following years, and, it provides raises questions about the effectiveness of follow-up support to both the executive and the MOD Finance Department, and whether legislative agencies. The Department of Fi- the necessary regulations are in place and nance is answerable to the MoD on fnancial how they are implemented.

26 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

2.2.2 MoD Department of Public Procurement

The general key tasks of the Department of curement laws; Public Procurement, as provided for in the • prepare and conclude agreements (con- 2016 Regulation on the Department of Public tracts) for procurement and supply of ma- Procurement and Material Resources Supply terial resources, including those necessary of the MoD, are to: to fulfl mobilization tasks and during the • organize and runs procurements by the Special period (hereinafter – legal deeds) Committee for Competitive Bidding to cov- in accordance with the fnancial needs and er the AFU needs; funds allocated by the National Budget of Ukraine; • receive documentation pertaining to procurement i.e. proposals for the annu- • monitor the implementation of contracts; al procurement plan and amendments to • provide financial and economic support it, applications and documents concerning in terms of legal deeds and accounts pay- the organization and running of procure- able (contracts on works and services) for ment procedures, conclusions concerning the supply of material resources23. compliance of bidding proposals of the bid- ding participants with technical and other According to the aforementioned Regulation requirements established by the bidding of 2016, the specifc key tasks of the MoD documentation (request for proposals) from Department of Public Procurement, as they MoD structural units and AFU military pertain to the Main Quartering Directorate management units; Activity are to: • ensure operational coordination with MoD • supply material resources in accordance structural units and AFU military manage- with the defined needs stipulated by Gen- ment units regarding organization and op- eral Staff of the Ukrainian Armed Forces eration of the procurement procedures; - within the scope of funds allocated by the National Budget of Ukraine, and; • publicise information concerning pro- curement procedures in the media and on • to organize of supply of sustainment the Internet; goods and services to the AFU during times of emergency or war... • prepare and submit procurement proce- dure reports to institutions and organi- zations in accordance with the public pro-

23 Regulation on the Department of Public Procurement and Material Resources Supply of the MoD, approved by the order of the Ministry of Defence of Ukraine of May 11, 2016 N246.

27 The Independent Defence Anti-Corruption Committee (NAKO)

2.2.3 MoD Internal Audit Department The Internal Audit Department of Ukraine’s • illegal, ineffcient or counterproductive use MoD is divided into 5 territorial subsections: of fnancial and material resources by the Kyiv, Chernihiv, Vinnytsia, Lviv and Odesa. MoD, the AFU General Staff, other subor- With the exception of Kyiv, each of the oth- dinate units; ers are responsible for the respective oblasts • mistakes and other shortcomings in the ac- subjugated to them, ranging from four oblasts tivity of the MoD, the AFU General Staff, (Vinnytsia) to 7 (Chernihiv & Lviv)24. other subordinate units. According to the 2016 Regulation on the Inter- Its role is a valuable in identifying where sys- nal Audit Department of the Ministry of De- temic corruption within the defence housing fence of Ukraine, the key task of the Internal system and identifying areas for improvement. Audit Department of the Ministry of Defence This has already been exemplifed by the ref- (as they pertain the to the work and responsi- erence made the MoD Internal Audit fndings bilities of the Main Quartering directorate) is regarding the waiting lists backlog in Section prevention25. Its duty is to provide impartial One. and independent conclusions, recommenda- tions and proposals aimed at the prevention of:

2.2.4 Main Directorate of the Defence and Mobilization Planning J-5 The Head Directorate of the Defence Planning of • preparation of amending proposals to the the AFU General Staff is a structural unit of the Chief of the General Staff concerning de- AFU General Staff. Its key responsibilities to- fence programs and plans; ward the Main Quartering Directorate relate to: • improvement of proposals on budget re- • defence planning in the AFU and the de- quests and distribution of funds connect- velopment of medium- and short-term de- ed with the General Staff and fence planning documents; • provision of the information on the sta- • control over implementation of activities tus of use of funds to the Chief of the Gen- related to medium- and short-term defence eral Staff with. planning;

2.2.5 The Housing Conditions Inspection Committee To ensure the quality of defence housing in When considering the sorry state of defence Ukraine, a committee must be formed by the housing in Ukraine, one is naturally drawn manager of the structural unit responsible for to trying to understand the cause, within the implementation of the budget program of con- functioning and structure of this committee, struction (purchase) of housing for AFU mil- that allows for such low standards of delivery. itary servicemen/women. According to Art. To ensure transparency of work of the inspec- 10 of the Rules of Procedure of the Selection tion committee, it is suggested to develop and Committee, this person “forms a committee to publish the rules of procedure for such a com- inspect the technical and quality condition of mittee, and, to make the plans and results of apartments in residential buildings suggested work the committee, its members etc. pub- by competition participants26.” licly available. The committee must include representatives of the military servicemen/

24 Chernihiv: Chernihiv, Sumy, Poltava, Kharkiv, Luhansk, Dontesk, Cherkassy. Vinnytsia: Kyiv, Khmelnytskyi, Vinnytsia, Zhytomyr. Lviv: Lviv, Zakarpatia, Volyn, Rivne, Ternopil, Ivano-Frankivsk, Chernivtsy. Odesa: Odesa, Mykolayiv, Kropyvnytskyi, Zaporizhia, Dnipropetrovsk. 25 Regulation on the Internal Audit Department of the Ministry of Defence of Ukraine, approved by the order of the Ministry of Defence of Ukraine of May 24, 2016 N275. 26 MoD Order N374 «On Approval of the Procedure of Work of MoD Committee on Selection of Proposals Concerning Procurement of Apartments through Capital Participation and on the Secondary Market in the Regions of Ukraine» of June 2, 2014

28 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

women for whom the apartments are procured. Technical requirements also contain condi- Transparency and civil oversight will beneft tions concerning new sanitary and electronic if: representatives of the commander; members appliances, heating devices etc. being installed of housing committees responsible for distribu- in the apartment, and if the apartment was tion of apartments among military servicemen/ previously used by the owner, all these devices women; military servicemen/women them- must be replaced with new ones. This stand- selves, or; representatives of the public were to ard does not guarantee that the quality of the partake in committee membership. The func- new devices will be high or higher than those tions of this committee can be assigned to a installed before. The factors that really matter third party, independent, professional organi- are usually the manufacturer and the quality zation working in real estate. Such an assess- of appliances, not how new they are. The same ment would be more objective than the work of holds true for decorative work and components an internal committee. of the house such as doors and windows. Technical, quantitative and qualitative re- One tendering procedure exists both for the quirements for the procurement of items in procurement of apartments at the secondary MoD tender documentation often include a market, and through capital participation (i.e. number of requirements which narrow down by investing in buildings under construction). the possibilities of certain market participants. The reasoning behind this singular approach is For instance, Art. 13 of the tender documen- opaque, e.g. the cost of apartments in a build- tation (from the MoD website) provides that ing under construction is often signifcantly buildings in which defence housing apartments lower than that in a house which has been put are to be located must have been put into ser- into service. It would be logical to reform this vice not earlier than 201027. Similarly, recon- by organizing procurement at the secondary structed apartments are not considered. market separately from procurement through capital participation.

2.3 Corruption Risks and Practices

The decisions of MoD offcials concerning the within the system, it is indicative of how, rela- method of meeting defence housing needs should tively easily, the current structure can be ma- be based on a thorough analysis of real-estate nipulated. market conditions, the demand within a certain region, and cost-effciency--but they are not. Case study: An Obscure Selection within the Main Quartering Directorate (MQD) The structure of the defence housing system includes numerous institutions and is com- The Head of the Main Quartering Directorate bined with shrouds of secrecy. It is clear that is an extremely powerful one, subjugated to the current Ukrainian defence housing system the Deputy Minister of the Defence and the is cumbersome and out-of-date. Its porous sys- Deputy Chief of the General Staff. It is there- tem of checks-and-balances open avenues for fore interesting to consider a recent example poor governance and corrupt practices. of how important it is that strong mechanisms are in place to ensure the quality and integrity A recent case show how manipulatable the of its director. system is. Although the case presented below neither covers nor presents all corruption risks On 17 August, 2016, the competition for vacant

27 Competition Documentation as Confrmed by Protocol No. 1/7/4/-HEP dated 21.11.2017 http://www.mil.gov.ua/content/tenders/ KD-23112017.pdf (verifed September 2018).

29 The Independent Defence Anti-Corruption Committee (NAKO)

positions was announced by the order of the Ministry of Defence State Enterprise “Cher- Director of the MQD28. This was the position kasy Construction and Installation Directo- of Deputy Director of the MQD29. rate”33. This enterprise is currently being in- vestigated for matters concerning the entity’s Curiously, the announcement was not placed bankruptcy by the Cherkasy Oblast Economic on the website homepage or its special sections Court34. On October 30, 2012, Cherkasy Pros- represented in the main menu. This compli- ecutor’s Offce on Observance of the Military cated access for the general public to relevant Laws opened a criminal case against Mr. Kai- information. It also made the selection process un35 for criminal violations, namely appropri- non-transparent; the announcement was de ation and embezzlement while in the position facto available only to those who knew where of the Head of the State Enterprise of the it can be found or people informed about the “Cherkasy Construction and Installation Di- competition in advance. Moreover, in violation rectorate”36. Thus, the winning candidate is a of the provisions held in Art. 15, 46 & 50 of suspect in an ongoing criminal case related to the Procedure for Holding of the Competition corruption in the housing sector. for Public Service Positions, the MoD Reforms Project Offce was not involved in the work of After resigning from the bankrupt enterprise, the selection committee and did not analyse and despite the criminal charges against him, qualifcation criteria set for the applicants for the suspect was promoted In July, 2013, to the this high position30. position of Head of Podil Capital Construction Directorate of the MoD37. Moreover, no proper On December 7, 2016, the results of the compe- verifcation of the candidate’s/suspects fnan- tition were published on the same website sub- cial position was carried out38. section announcing that Yurii Volodymyrovych Kaiun won the competition with 4.16 points31. Thus, the individual appointed Director of the His success, however, has been marred by nu- Main QD, a unit responsible for the implemen- merous procedural violations. tation of the defence housing budget program, which had UAH 751,022, 300 in 2017 accord- Violation of the Deadline for the Results ing to CPCEF 2101190 “Construction (Pur- Announcement chase) of Housing for Military Servicemen/ women of the Armed Forces of Ukraine,” is a According to the requirements of Art. 63 of the person currently under criminal investigation aforementioned Procedure, the competition re- whose: sults must be published within 45 days from the day of publication of the announcement • fnancial condition makes him easy to ma- on the competition32. Thus, the results should nipulate (through blackmail or graft); have been published no later than October 10, • has prior experience as the head manager 2016, not December 7, 2016 It was done 58 cal- in organizations with negative corporate endar days after the deadline expiration. history, including embezzlement and bank- ruptcy; Lack of Proper Background Check • who was appointed based on the results of of Candidates non-transparent procedure with deliber- In October to December, 2012, the winning ately restricted competition and violation candidate had been the acting director of the of the deadline for the announcement of the results.

28 Order of the Head of the MQD No. 220 dated 17.08.2016, available at: http://bit.ly/2xtllc5 (verifed September 2018). 29 Announcement of Competition Activity, available at: http://www.mil.gov.ua/diyalnist/nashi-konkursi/ogoloshennya/26052016- dis-01.html. This information was published on August 26, 2016 at 3:08 PM (ID: 23269) in the Activity section, Our Competitions subsection of the MoD website 30 CMU Regulation N246-2016-p «On the Approval of the Selection Procedure for Offcial Public Positions» of March 25, 2016 31 Information on Competition Results for the Vacency at the MQD available at: http://bit.ly/2PJB8e8 (verifed September 2018) 32 CMU Regulation N246-2016-p «On the Approval of the Selection Procedure for Offcial Public Positions» of March 25, 2016 33 entity code 07848615 34 Case number N 01/5026/333/2011 35 ЄРДР № 42013250020000016 (Single register of pretrial investigations). 36 Art. 191 (5) Criminal Code of Ukraine 37 entity code 24980188 38 Information provided by P. Kaiyuk Consulting.

30 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

This case provides evidence that the laws and The facts laid out in this exemplary case not regulations around defence housing are easily only undermine, but sadly justify, the Ukrain- violated or manipulated by corrupt forces, and ian society’s level of trust to the MoD. In part raises questions about the appointment pro- two of this study, a deeper look is made into cess of senior positions. the systemic problems and recommendation for solutions are provided.

31 The Independent Defence Anti-Corruption Committee (NAKO)

SECTION 3: CONSTRUCTION, RECONSTRUCTION, MAJOR RENOVATIONS

3.1 Mechanisms for Meeting Needs

Currently, the MoD divides the mechanisms of c) Reconstruction, maintenance and reno- meeting housing and infrastructure needs into vation of general military facilities, and; two different categories: d) Transfer of facilities of other executive 1. Housing (service housing and private agencies under the management of the MoD. housing); Importantly, capital construction and recon- 2. General military facilities (barracks, head- struction of AFU facilities includes pre-design, quarters, washhouses, security control design, construction, installation, assembly and points, garages etc.) or infrastructure. commissioning works. The works are conducted in accordance with the following regulations: The facilities are fnanced from two different budget programs: The Code of Program Clas- • Residential Facilities – a list adopted by sifcation of Expenditures and Financing of the MoD order and approved by the Minis- the National Budget (CPCEF) 2101190, and try of Finance of Ukraine; 2101020. Although the manner in which the • Military, Special and Social Facilities – activities covered by the two programs is or- by plans approved by the Minister of De- ganized in different ways, each aim at meeting fence of Ukraine39. military servicemen’ and AFU’s housing and infrastructure needs. Lists of Residential Facilities and Plans for Capital Construction for the respective year The housing supply program “Construction are prepared by the Main Quartering Depart- (and purchase) of Housing for AFU Military ment based on the cost sheet approved by the Servicemen” (CPCEF 2101190) pertains to the: MoD. Importantly, the MQD exercises pre- a) New construction of residential facilities; liminary and ongoing control over fnancing of capital construction (reconstruction) of the b) Reconstruction of general military facil- AFU facilities. However, the capital construc- ities into residential facilities; tion and reconstruction services of all AFU c) Purchase of housing on the secondary facilities are ordered by the MQD, together market and through capital participation; with the Territorial Capital Construction Di- rectories (CCD), companies and organizations d) Monetary compensation to military ser- of the MoD and AFU – based on authorization viceman/woman for the facilities owed, and; by the Minister of Defence of Ukraine40. The e) Joint activity agreements (investment Territorial Quartering Directorates operate in agreement). accordance with their internal regulations.

The housing supply program CPCEF 2101020 As with construction, the procurement of “Support of AFU activity and training of the housing for AFU military servicemen on the troops” provides the general budget for sup- secondary market and through capital partic- port, namely: ipation (set out in the following Section) also takes place in accordance with the Procedure a) Monetary compensation for housing of Use of Funds Allocated for Construction sub-rental; (Purchase) of Housing for Military Servicemen b) New construction of general military and Persons in the Rank and File and Com- facilities; manding Offcers41.

39 Order of the MoD «On the Approval of the Regulation of the Organization of Capital Construction (Reconstruction) of AFU Facilities of Military, Special, Residential and Social, Cultural and Everyday Use» of November 3, 2015 N610. 40 Order of the MoD «On the Approval of the Regulation of the Organization of Capital Construction (Reconstruction) of AFU Facilities of Military, Special, Residential and Social, Cultural and Everyday Use» of November 3, 2015 N610. 41 CMU Directive N147 “On Approval of the Procedure of Use of Funds Allocated for Construction (Purchase) of Housing for Military Servicemen and Persons in the Rank and File and Commanding Offcers” of December 26, 2011

32 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

In 2017, the amount of financing for the UAH42. The manner in which these funds were program of housing construction (CPCEF to be distributed is illustrated below. 2101190) constituted 751,022,300 million

UAH

Total: 751 022 900

Including:

- Construction (recon- 299 963 800 struction of housing facilities)

- Purchasing on the Secondary Market 231 558 500 and through Capital Participation

- Monetary compen- sation to military 219 500 000 serviceman/woman for the facilities owed

Diagram 13: Allocation of Expenditures

In 2017, capital construction and renovation of buildings and facilities which belong to the of infrastructure was fnanced in the amount AFU and rent of housing for military service- of over 3.5 billion UAH (3,523,998,400). In men. However, information on the detail of addition to construction and reconstruction, such expenditures is not available. this budget item also covers the maintenance

3.2 Tendering

Between 2016-2017, 1,330 tenders were an- nounced, out of which, as of the date of analy- sis, 1,140 (88.61%) had been completed43. But the level of competition in procurement is ex- tremely concerning.

42 CMU Directive N214-r “On Distribution of Funds Allocated in the National Budget for Program 2101190 ‘Construction (Purchase) of Housing for Military Servicemen of the Armed Forces of Ukraine’ for 2017” of March 29, 2017 43 Annex 2

33 The Independent Defence Anti-Corruption Committee (NAKO)

Diagram 14: Correlation of Tenders and Participants

Nearly 40% of the total value of all the agreements which were concluded through procurement procedures was distributed between 4 companies: • TOV RIST – 15%, over 284 million UAH44; • TOV Construction Company ProgresTekhBud – 11%, over 205 million UAH45; • TOV Vinnytsia Construction Company – 9%, over 176 million UAH46; • TOV BK ATTIS Ukraine – 4%, over 82 million UAH47.

4% 11% TOV BK ATTIS Ukraine; 4 %

TOV Construction Company 11 % 9% ProgresTekhBud;

TOV Vinnytsia Construction 9 % 61% Company;

TOV RIST; 15 % 15% other participants (less than 2%) 61 %

Diagram 15: Contract Distribution

As depicted in the diagram above, apart from the 4 major players, the remaining companies’ share 61% of the rest, but do not constitute more than 2% of concluded agreements each.

44 (total value UAH 284,214,446.90) 45 (total value UAH 205,486,559.40) 46 (total value UAH 176,279,457.80) 47 (total value UAH 82,400,000.00)

34 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

It is necessary to analyse the competition within these procurement procedures, and identify the fnal benefciaries of the aforementioned companies. Apart from unfair competition and embezzle- ment, another risk is related to the low level of players. When a great number of commitments ends up in “the same hands,” the risk of failing to deliver is high. For instance, as of the date of analysis, the aforementioned companies have contractual commit- ments not only toward the MoD, but also to other agencies and local government bodies:

Total value Company name Those to MoD, UAH of commitments*, UAH

TOV Construction Company ProgresT- 312 937 050.00 205 486 559.40 ekhBud

TOV RIST 299 275 321.99 284 214 466.90

TOV Vinnytsia Construction Company 193 138 696.49 176 279 457.80

TOV BK ATTIS Ukraine 82 400 000.00 82 400 000.00

Diagram 16: Contract and Cost Distribution

The table above only shows commitments The risk of having a company fail to deliver its based on procurements covered by the Ukrain- contractual obligations toward the MoD can be ian Law on Public Procurement. Unfortunate- mitigated. The candidates in the tender pro- ly, there is no information on the agreements cess should be required to provide evidence of concluded with partners on the private market their production program history. This would as those procurements are not governed by it. provide decision-makers insight into their Importantly, companies which participate in production capacity. Current contractual com- public procurement are not prohibited from mitments (as of bidding date) should also be having contractual obligations with private required. Companies which have exhausted companies or required to submit information their production capacities due to existing about those contracts, in order to reduce the agreements should be considered high-risk and risk of conficts of interest. disqualifed.

3.3 Capital Construction Planning

Construction in the AFU is subject to the and Cultural Purpose (hereinafter – the Reg- Regulation on Organization of Capital Con- ulation)48. It defnes the procedures for capital struction & Reconstruction of AFU Facilities construction and distribution of functions be- of Military, Special, Residential, and Social tween the stakeholders in the course of plan-

48 Order of the MoD «On Approval of the Regulation of the Organization of Capital Construction (Reconstruction) of AFU Facilities of Military, Special, Residential and Social, Cultural and Everyday Use» of November 3, 2015 N610.

35 The Independent Defence Anti-Corruption Committee (NAKO)

ning, design, implementation and fnancing of • Projected amounts and facilities suggested capital construction. by top managers of the Territorial Capital Construction Management Directorates There are programs for residential construc- (CCMD) for fnancing in the planned year tion and the program of capital construction of are frequently disregarded by the MQD f- general military facilities: “The List of Resi- nal version of the List of Residential Fa- dential Facilities for Construction” and “The cilities which must be fnanced from the Plan of Capital construction”. The main dif- budget program CPCEF 2101190. ference lies in the structural units ordering the service. • There is no joint, coordinated work of ter- ritorial QDs (HMUs) and CCMDs to meet The Regulation mostly refers to legislative and the housing needs. A signifcant number of regulatory acts which regulate capital con- facilities which were suggested by territo- struction and budget fnancing49. rial HMUs to fnance their reconstruction The Regulation does not cover a signifcant were not included in the fnancing plans number of issues at the planning stage for cap- either for 2016 or 2017. ital construction. In fact, it includes ambigui- • Every year, the List of Residential Facil- ties pertaining to plans on: ities to be fnanced from the budget pro- • How prospective plans of capital construc- gram CPCEF 2101190 is compiled based on tion should be developed and on what basis; the principle of “using the allocated funds” instead of addressing the existing housing • What the project prioritization criteria problem (need) in every area. should be; • What exactly should be approved by the Other problems not included in a letter deliv- Deputy Minister of Defence of Ukraine, ered to the Deputy Minister of Defence (which Chief of the General Staff and AFU mili- contained the aforementioned analysis), but tary commanders; are worthy of attention, include: • The selection process of facilities for fnanc- • A signifcant number of unfnished facili- ing in the event budget-approved expendi- ties registered with the MoD, do not belong tures are less than the anticipated capital to the Ministry de facto or had been com- construction plans. pleted by other developers. Yet, the MoD continues to register them, because it had The absence of clear procedures in this area invested certain funds into their construc- enables subjective managerial decision-mak- tion. In this situation, a decision has to be ing, which in turn enables corruption. With made to write off these expenses and re- the aim of determining which projects could move the facilities from the list, or to start actually be completed, put into service and litigation to receive compensation for the delivered to military servicemen by 2017, and damages. to identify for the MoD major pitfalls, experts from The Ministry of Defence Reforms Pro- • The current management system does not ject Offce and Main Quartering Directorate allow for the active implementation of this analysed all 178 residential facilities under number of projects, so most facilities are construction (so-called “continuing construc- “waiting until better days.” tion facilities”). The analysis (Annex 3), part • When MQD experts develop annual plans, of which was delivered to the Deputy Minister they “spread” the funds planned by the na- of Defence, identifed a number of problems in tional budget for a year in small amounts the current procedure and processes of capital to numerous facilities under construction. construction, namely: This happens because the MQD wants to • The annual list of facilities and amounts avoid having remaining unused funds at of funding by CPCEF 2101190 is compiled the end of the year which they would have subjectively; to return to the budget, as that would

49 For instance: in cases of procurement of design and survey works, goods and services on construction The Law of Ukraine “On Public Procurement” is applied; State Construction Standards – for design and survey and construction works; directives issued by the Cabinet of Ministers of Ukraine etc.

36 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

serve as evidence of failure to achieve the It is therefore recommended to create incen- planned performance indicators. However, tives that motivate MQD staff to deliver on the if a certain facility is projected to be put planned construction indicators, instead of focus- into service in the current year but has not ing on 100% use of the budget funds. The proce- yet been put into service as of the end of dure for the development of plans and establish- the year, it only entails sanctions for con- ment of priorities for every specifc facility has to tractors, not the MQD. be formalized and open, and draft construction plans must be readily available to the public. • A low quality of management services is provided by territorial CCMDs. A cause for The project management system of capital con- this may be that the procurement of these struction facilities requires an overhaul, and the services takes is based on instructions to project management capabilities of CCMD person- the territorial CCMD and not according to nel need to be signifcantly improved; the MOD the standard procedure (based on the Law should consider drawing on consultants to provide of Ukraine “On Public Procurement”). project management capability in the interim.

3.4 Contractor Agreements

According to the MoD Reforms Project Offce, instances of ambiguous phrasing remain, and the tendering documentation for the procure- special features of the budgeting process and ment of capital construction works, and con- a lack of offcial documents establishing prior- tractor agreements, is not transparent. Their ities among the projects contribute to this as phrasing is unclear as to what a contractor can well. Eliminating provisions that lead to sub- expect in the event of non-standard situations. jective decision-making in contractor agree- In some cases, the agreements allow for sub- ments would reduce corruption. Issues that jective decision-making by MoD offcials. The cannot be regulated at the stage of entering project offce has contributed to a signifcant into agreement, such as those which depend on number of changes made to the contractor the budgeting process or other factors, should agreements and tender documentation, which be regulated by the MoD’s internal procedures render subjective managerial decision-making and regulations, which should, in turn be in- by MoD offcials more diffcult. However, some corporated by reference into the contracts.

3.5 Participation of Military Servicemen/women

Another problem identifed in the course of anal- construction of Special Operations Forces head- ysis of the legislative framework which governs quarters. Unsuitable premises were delivered capital construction is the fact that military ser- yet, none of the military commanders formally vicemen have virtually no powers or possibilities complained or refused to accept the buildings, to take managerial decisions at any stage of capi- feeling that they had better take what they were tal construction. The heads of military structural being given rather than receive nothing at all. units don’t participate in the planning of capital construction, the supervision of its implementa- Military commanders should obtain rights and tion, nor in receipt of facilities ready for service. obligations in capital construction processes. A result of this is that constructed facilities do These rights and obligations should be formulat- not correspond to the needs of the military. A ed to ensure compliance of the future facilities prime example of this is what happened with the with their needs and requirements.

37 The Independent Defence Anti-Corruption Committee (NAKO)

3.6 Corruption Risks and Practices

Budgeting & fnancial mismanagement 2017 will constitute UAH 11,234.32/m2, while the average cost recommended by the Minis- Using the example of a 129-apartment resi- try for Territorial Development, Building and dential building at 97/3 Kotovskoho street in Housing of Ukraine is UAH 10,213/m2. Cherkasy, the MoD Reforms Project Offce cal- culated the effciency of use of budget funds for Thus, the excess expenditure per square meter defence housing. The design and survey work constitutes UAH 1,021.32, or 10% compared to for the building is dated 2002. However, the fa- the price recommended by the Ministry of Ter- cility was not fnanced between 2002 and 2010 ritorial Development. – the construction only started in 2010. Taking into account the expenses incurred by In 2002, the initial projected cost (budget) for the MoD to rent houses for military servicemen the construction of the facility was UAH 9.817 who are supposed to receive accommodation in million. Within the MoD, the projected costs this facility, the estimated excess expenditure are linked to average housing construction will constitute UAH 9,722.23 per m2, or 95%. costs of the regions of Ukraine. They are ap- Unfortunately, it is not possible to calculate proved by the Ministry of Regional Develop- the expenses for managerial staff of the Main ment and recommended for further use as a QD, since general expenses for its support are frame of reference for public fnancing of con- not distributed between ongoing projects (see 50 struction from the public funds . Annex 4). To increase budget effciency, the de- Since the average housing construction cost cisions made by the Main QD offcials should changed between 2002 and 2017, the con- be based, frst and foremost, on their knowl- struction cost recommended by the Ministry edge of the real estate market in Ukrainian re- of Regional Development was also re-calcu- gions. It is important to take into account the lated many times. At the beginning of 2010, duration of construction of facilities in the con- the projected cost was UAH 39.773 million, in text of the existing management system and 2014 it was UAH 55.042 million, and by 2017, correct the calculations taking into account it rose to UAH 62.245 million. The amount of the estimated changes in the consumer prices actual, incurred expenses based on accounting index. The calculations should also take into information of the Central CCMD was UAH account indirect and overhead costs. 42.205 million, plus the estimated cost of con- It is recommended that the Ministry introduce struction completion based on cost allocation distribution of indirect costs between the ongo- for CPCEF 2101190 for 2017, which constitutes ing projects to see the actual effciency of the 51 UAH 17.040 million . use of budget funds for capital construction. Based on these calculations, the indexed cost of the incurred charges as of the beginning of A lack of transparency in strategy and plan- 2016 constituted UAH 90.506 million. Suppos- ning enables undue infuence ing the construction of the facility had been According to the media and information on completed by the end of 2017 for the UAH the offcial MoD website, work is being done 17.040 million allocated in the 2017 budget, on the development of military infrastructure the indexed cost of this facility would consti- and housing. It includes the construction of tute UAH 107.546 million52. garrison towns in Mykolaiiv and Lviv oblasts, The total area of apartments in this building construction of residential facilities, plans con- constitutes 9,573 m2. Thus, the indexed cost of cerning construction of 91 housing blocks in construction of 1 m2 of housing at the end of 21 Ukrainian oblasts to accommodate AFU

50 Order of the National Committee of Ukraine on Construction and Architecture N174 “On Approval of the Procedure and Implementation of Indicators of Average Housing Construction Cost by Regions of Ukraine” of September 27, 2005. 51 CMU Directive N214-r “On Distribution of Funds Allocated in the National Budget for Program 2101190 ‘Construction (Purchase) of Housing for Military Servicemen of the Armed Forces of Ukraine’ for 2017” of March 29, 2017 52 Signifcantly, this is only the absolute cost. This amount does not take into account the index of changes in consumer prices and other indirect costs. To make valid conclusions, calculations have been made to bring the cost of the incurred and projected expenses to the same date – the end of 2017, taking into account the effective infation rate and the estimate made by the Ministry of Finance until the end of 2017.

38 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

troops etc. And yet, none of the strategic doc- in 2017 be rewritten to include objects located uments, which serve as the basis for imple- within their electoral districts. However, there mentation of these projects are available. As is no need for construction by the MoD in those a result, it is unclear why these facilities are districts. Others had asked him to put build- being built, why in these regions, which build- ings under construction by their affliated con- ings s are constructed frst and why, and which struction companies on the list, etc. The MPs ones are to be built in the future, etc. This is even threatened they would not approve the particularly disconcerting because 100% of list suggested by the MoD and approved by the decisions connected with public procurement Cabinet of Ministers of Ukraine, which would are to be based on published national strategic effectively render the use of allocated budget documents53. funds by the MoD impossible. In that case, MoD would be the one under fre, publicly, and This lack of public information and access to accused by the same MPs, of ineffective work. documents of a strategic level indicates that, firstly, such strategic documents and plans ï Recommendations The MOD should devel- have not been discussed publicly and are not op, publicly discuss, approve and implement available to the public (if they exist in the frst a procedure regulating the development of place). Secondly, the lack of documents allows operational programs for the construction of those with delegated decision-making powers housing and infrastructure based on trans- to make decisions subjectively which in turn parent approaches and principles, which allows for biased decisions concerning key would eliminate subjective prioritizing and tasks and priorities when it comes to the de- enable publishing mechanisms to ensure velopment of such plans and their implementa- public oversight. The MOD should simplify tion, with little oversight. the procedure of approval of the list of facil- ities to be fnanced. For example, the Law For instance, the MoD Reforms Project Offce of Ukraine provides the “allocation of funds received two very different draft lists of facili- to areas (facilities, events), including the ties to be fnanced in 2017 based on the budget budget program “Construction (Purchase) program “Construction (Purchase) of Housing of Housing for Military Servicemen/women for Military Servicemen/women of the Armed of the Armed Forces of Ukraine” (CPCEF Forces of Ukraine” (CPCEF 2101190)54. The 2101190) is based on the decision of the Cab- frst draft list was given to the Offce before inet of Ministers of Ukraine which shall be the appointment of the Deputy Chief of the approved by the Committee on Budget of the Main QD responsible for this program. The Verkhovna Rada of Ukraine55 Likewise, the second draft list was given to the Offce after Procedure of Use of Funds Allocated for the his appointment. These two documents not Construction (Purchase) of Housing for Mil- only contained different lists of facilities, but itary Servicemen/women and Persons in the also different amounts of financing for each of Rank and File and Commanding Offcers them. When asked about these discrepancies, stipulates the allocation of budget funds in the Deputy Chief of the Main QD explained he 2017 (2016) based on budget programs… is believed the second version to be more effcient made by the Cabinet of Ministers shall then and that it would produce more apartments. be approved by the Committee on Budget of 56 During their offcial meeting in May of 2017, the Verkhovna Rada of Ukraine . The pertinent Deputy Minister of Defence, The procedure currently requires multiple ap- Shevchuk, informed the former Secretary Gen- provals and the obligation to coordinate the list eral of NAKO that he had experienced pres- with the budget committee. It effectively nullifes sure from certain Ukrainian MPs. They de- the responsibility of the Ministry of Defence and manded the list of facilities to be constructed leads to excessive interference in its activity.

53 Task 2.5.1 of the Security Development Bulletin 54 CMU Regulation No. 214 “On the Distribution of the State Budget Funds Allocated under Program 2101190 ‘Construction (Purchase) of Housing for the AFU Military Servicemen in 2017’ dated 29 March 2017. 55 Task 2.5.1 of the Security Development Bulletin 56 CMU Regulation No. 214 “On the Distribution of the State Budget Funds Allocated under Program 2101190 ‘Construction (Purchase) of Housing for the AFU Military Servicemen in 2017’ dated 29 March 2017.

39 The Independent Defence Anti-Corruption Committee (NAKO)

SECTION 4: PURCHASING ON THE SECONDARY MARKET AND THROUGH CAPITAL PARTICIPATION

It appears that the current structures and been concluded following tenders and infor- procedures for purchasing on the secondary mation on the state of implementation of such market are greatly lacking coordination and agreements59. This is a direct violation of re- transparency. quirements of the Law of Ukraine “On Public Procurement” Art. 2, Sec. 1, subsection 5 and Procurement of defence housing on the second- Art. 10, Section 1, paragraph 11. ary market and through capital participation takes place in accordance with the ‘Procedure Despite this, using the Prozorro resource, it of Use of Funds Allocated for Construction was possible to analyse the information con- (Purchase) of Housing for Military Servicemen cerning property procurement60. The analysis and Persons in the Rank and File and Com- of the 2017-2017 period shows that 176 proce- manding Offcers’ as well as the ‘Procedure of dures of property procurement were published Work of MoD Committee on Selection of Pro- on the electronic procurement system. Of posals Concerning Procurement of Apartments these, 157 (89.2%) were procedures reporting through Capital Participation and on the Sec- on concluded agreements (Annex 5). Notably, ondary Market in the Regions of Ukraine the MoD does not provide this information and (hereinafter – Procedure of Work)’57. is not among the agencies organizing these property procurement procedures. Instead the According to the 2017 Cabinet of Ministers of aforementioned were reported by two territori- Ukraine Directive “On Distribution of Funds al divisions of the Security Service of Ukraine, Allocated in the National Budget for Program the Ministry of Education and Science, and the 2101190”, the funds allocated for defence hous- leadership is held by Poltava City Council61. ing procurement on the secondary market and through capital participation total UAH To ensure public control over the process of 231,558,50058. housing procurement at the secondary market The offcial MoD website contains information and through capital participation, it is recom- on bidding documentation and reports of the mended that the MoD follow requirements of selection committee on procurement of apart- the law and publish information on concluded ments on the secondary market and through agreements in the system of electronic pro- capital participation. However, there is no in- curement ProZorro. formation regarding agreements which have

4.1 Corruption Risks and Practices

4.1.1 Application for the Procurement of Apart- the draft tendering documentation, require ments approval from the Internal Audit Service and MoD legal service63. Various units in the MOD are responsible for completing applications to enter a competition However, the preparation of the aforemen- to procure apartments. They are also responsi- tioned application is not regulated. There is no ble for monitoring the cost of one square meter public discussion or guidance on how the MOD of housing in the various regions of Ukraine62. should decide where homes are procured. As a The competitions are approved by the internal result, the decision does not take into account audit service and MOD legal service before cost effciency. being put to tender. The application, togeth- er with the monitoring results for the price of The lack of coordination between the respective one square meter of residential housing and structural unit of the General Staff (HDDMP

62 MoD Order N374 «On Approval of the Procedure of Work of MoD Committee on Selection of Proposals Concerning Procurement of Apartments through Capital Participation and on the Secondary Market in the Regions of Ukraine» of June 2, 2014. 63 MoD Order N374 «On Approval of the Procedure of Work of MoD Committee on Selection of Proposals Concerning Procurement of Apartments through Capital Participation and on the Secondary Market in the Regions of Ukraine» of June 2, 2014. 40 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

of AFU GS), commanders of various branches/ 4.1.2 Apartment Procurement Plans types of armed forces is problematic – the end There is no practice of preparing annual apart- users, servicemen and women, are not consult- ment procurement plans that outline territo- ed. This lack of coordination, participation and rial distribution of procurement, the number transparency leads to opaque decision-making of apartments in each region and the number and thus enables bias and corruption. of bedrooms per apartment. Such plans would In order to ensure transparency of the process of contribute to engagement of the biggest pos- formation of housing procurement application, sible number of participants in the process, it is recommended to determine the principles thereby increasing the level of competition and guidelines for forming such an application. and in turn the quality of defence housing. At There should be a single coordinating depart- the time of publication, the MoD website only ment, and approval secured from HDDMP of contains tender documentation on specifc pro- AFU GS and commanders of branches / types of curements, which take place several times dur- armed forces; ideally they should also be includ- ing the year. The aggregated apartment pro- ed in forming and approving applications. curement plan is absent.

4.1.3 Tender Documentation over Ukraine. For example, item 4.2 of the an- nouncement “On Holding the Competition for Tender documentation is written in such a Procurement of Apartments through Capital way that a single procedure includes a large Participation and on the Secondary Market in number of apartments in many regions all the Regions of Ukraine” states: ´description of the procurement item or its part: lot 1 ñ Kyiv, up to 10 apartments; lot 2 ñ Irpin, Bucha in Kyiv oblast, up to 80 apartments; lot 3 ñ village Hatne, town Chabany, Kyiv oblast, up to 50 apartments; lot 4 ñ Uman, Cher- kasy oblast up to 50 apartments; lot 5 ñ Lviv, up to 20 apartments; lot 6 ñ Chernihiv, up to 20 apartments; lot 7 ñ Vasylkiv, Kyiv oblast, up to 20 apartments; lot 8 ñ Khmelnytskyi, up to 20 apartments; lot 9 ñ Novohrad-Volyntskyi, Zhytomyr oblast, up to 5 apartments; lot 10 ñ Kharkiv, up to 20 apartments; lot 11 ñ village Sofiivska Borshchahivka, village Pet- ropavlivska Borshchahivka, Kyiv-Sviatoshyn District, Kyiv oblast, up to 30 apartments; lot 12 ñ Vinnytsia, up to 5 apartments.64ª

4.1.4 Procurement Items - Lots Restriction of the tender documentation with the word “apartment” is another form of dis- There is no transparency in formation of “lots,” crimination. MoD procures housing, which i.e. the group of houses bought in a particular includes not only apartments, but also private procurement. This should specify where and residential houses, semi-detached houses etc. how many homes should be procured. Such specific phrasing in tender documen- For instance, let us consider the announcement of tation restricts the rights of other owners of the procurement listed above65. In this procure- housing, creates a risk of corruption and may ment, there is Lot 3, which is set forth in doc- indicate the intentions of MoD offcials to fa- umentation as “village Hatne and town Chaba- vour certain construction companies without ny, Kyiv oblast – 50 apartments.” It is clear that justifed reason. there is an intention to purchase housing south of Kyiv, however, it is not clear why these locali- ties - why not the village of Novosilky or Khotiv, or Teremky community in Kyiv, which also meet the location requirements?

64 Call for Tender No 286/7/7007-HEP available at: http://www.mil.gov.ua/content/tenders/o-23112017.pdf (verifed September 2018). 65 Call for Tender No 286/7/7007-HEP available at: http://www.mil.gov.ua/content/tenders/o-23112017.pdf , and, http://www.mil.gov.ua/content/tenders/KD-23112017.pdf 41 The Independent Defence Anti-Corruption Committee (NAKO)

Teremky

Hatne y silk vo No

y Chaban

Khotiv

Vita -Posht ova

Diagram 17: Illustration of preferences of certain developers

4.1.5 Price Monitoring plemented by third party independent expert organizations, such as NGOs or external au- The Rules of Procedure of the Selection Com- ditors. This would further reduce the possibil- mittee are unclear as to which methodology is ity of subjective assessment of the situation by to be used to monitor the price of one square MoD offcials or data falsifcation in order to meter of housing by regions of Ukraine and justify the decisions. whether such guidance exists at all. This also poses a potential risk and may contribute to 4.1.6 Selection of Winning Tenders unfair assessment of the situation on the real According to Art. 3 of the Procedure of Use of estate market in the regions, thus becoming a Funds Allocated for Construction (Purchase) corruption risk. of Housing for Military Servicemen and Per- To ensure transparency of this process, it is sons in the Rank and File and Commanding recommended to publish the methodology of Offcers and Art. 11 of the Procedure of Work monitoring and generalization of data on the of the Selection Committee66, the winner(s) is square meterage price by regions of Ukraine. (are) the participant(s) of the competition who A regular publication containing this infor- submitted the lowest-cost proposal, based on mation and results of monitoring should be which the purchasing price per square me- introduced. The monitoring itself may be im- ter of housing through capital participation

66 CMU Directive N147 “On Approval of the Procedure of Use of Funds Allocated for Construction (Purchase) of Housing for Military Servicemen and Persons in the Rank and File and Commanding Offcers” of December 26, 2011 and, MoD Order N374 «On Approval of the Procedure of Work of MoD Committee on Selection of Proposals Concerning Procurement of Apartments through Capital Participation and on the Secondary Market in the Regions of Ukraine» of June 2, 2014.

42 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

and on the secondary market in the regions 900,000. The area of a 2-bedroom apartment of Ukraine is the lowest among the submitted 75 m2 * UAH 14.9 thousand (the cost of 1 m2) proposals67. = UAH 1,117,500. The saving of budget funds can be about UAH 200,000 per apartment if This approach does not ensure effcient use of the new version were to be applied.68” In the budget funds. This has been confrmed by rep- first case, the price of one square meter is resentatives of the MoD fnancial department, higher, but the price of the apartment overall who prepared a rationale for determining the is lower, thus the budget funds are used more winner based on the lowest price of the hous- effciently when the cost of the item (apart- ing item (apartment) (see Annex 6): ment) is estimated in general, not by the price “The area of a 2-bedroom apartment 60 m2 * of one square meter. UAH 15 thousand (the cost of 1 m2) = UAH

67 CMU Directive N147 “On Approval of the Procedure of Use of Funds Allocated for Construction (Purchase) of Housing for Military Servicemen and Persons in the Rank and File and Commanding Offcers” of December 26, 2011 and, MoD Order N374 «On Approval of the Procedure of Work of MoD Committee on Selection of Proposals Concerning Procurement of Apartments through Capital Participation and on the Secondary Market in the Regions of Ukraine» of June 2, 2014. 68 Information provided by P. Kaiyk Consulting.

43 The Independent Defence Anti-Corruption Committee (NAKO)

44 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

PART TWO

RECOMMENDATIONS

45 The Independent Defence Anti-Corruption Committee (NAKO)

The defence housing system in Ukraine is Before presenting the recommendations, it is overloaded with outdated legislation and reg- necessary to consider the legislative foundation ulations, waiting list back-logs, imbedded cor- upon which these defence housing processes rupt practices and networks and is ripe for and reforms are based. Thus, the frst section serious reform that will promote transparency of Part two presents the interstices between and lighten the terrible burden of the obsolete Ukraine’s National Security Strategy, the Con- system’s endemic corruptive practices. cept for the Development of Ukraine’s Security and Defence sector, the Strategic Defence Bul- Part Two of this study presents recommenda- letin and Defence Housing. It will become clear tions for the reform of Ukraine’s defence hous- from the beginning that without legislatively ing system, particularly as it pertains to the is- sealing the gaps between them, defence hous- sues set out in Part 1: Defence Housing Backlog ing reform will remain moot. and Waiting Lists, The Defence Housing Man- agement System, Construction, Reconstruction, Major Renovations, Purchasing on the Second- ary Market and through Capital Participation.

1. Guiding Documents: the National Security Strategy, Concept for Development of the Security and Defence Sector, and the Strategic Defence Bulletin

The National Security Strategy of Ukraine was Before considering specifc recommendations approved by Presidential Decree on 25 May, for the reform of Ukraine’s defence housing 2015 (henceforth, the Strategy)69. This strategy system, it is helpful to consider what is provid- serves as the basis for the adoption of the Con- ed for in the existing guidance documents. cept for the Development of the Security and 70 1.1.1 The National Security Strategy Defence Sector (henceforth, the Concept) . In of Ukraine and Defence Housing turn, the Strategic Defence Bulletin of Ukraine (henceforth, the Bulletin) was adopted in 2016 The Concept for the Development of the Securi- to ensure the achievement of strategic goals set ty and Defence Sector states that two relevant forth by both the Strategy and the Concept. The activities should have taken place by the end Bulletin serves as a roadmap for Ukraine’s de- of 2017. These activities are aimed at reform- fence reform up to 2020. ing the social support of military servicemen/ women broadly, including housing. They are: The Bulletin specifes manners of implementa- “development and implementation of the Long- tion based on the principles employed by NATO Term Social Policy Implementation Strategy”, member states. Unfortunately, however, many and, “increasing the supply of housing to mili- of the activities provided for by both the strate- tary servicemen/women, law enforcement per- gy and concept are not found in the Bulletin. sonnel and their families.71” This creates a legislatative vaccum.

69 Decree of the President of Ukraine №287/2015 “On the Decision of the National Security and Defence Council of Ukraine of May 6, 2015 “On the National Security Strategy of Ukraine” of May 25, 2015. 70 Decree of the President of Ukraine №92/2016 “On the Decision of the National Security and Defence Council of Ukraine” of March 4, 2016 “On the Concept for the Development of the Security and Defence Sector» of March 4, 2016. 71 Paragraph 4.4 of the Concept for the Development of the Security and Defence Sector.

46 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

Diagram 18: Defence Housing Strategy and Legislation

The following housing-related activities were ï The development of principles for the in- slated for completion by the end of 2020 in the troduction of the Military Ombudsman Concept: for representation and protection of inter- ï The restoration and development of the mili- ests of military servicemen/women, their tary infrastructure to meet the requirements families and persons retired from the mil- of the security and defence sector (this is also itary service; provided for in The Bulletin Par. 2.7); ï The improvement of the system of mili- ï The deployment of autonomous military bas- tary accommodation and housing supply es with necessary infrastructure for accom- to the military; modation of military units formed at new ï The supply of service housing to persons deployment sites, including those whose pur- currently in military service; pose is ensuring continued military presence in the East of the country (this is also provid- ï The introduction of a transparent housing ed for by Bulletin Par. 2.7.2). distribution mechanism through publica- tion of relevant information on the official ï The improvement of the control mechanism websites of public agencies in the defence over the social protection of the members of and security sector; security and defence forces by public and civic institutions, achievement of the re- ï The purchase (procurement) and construc- quired level of social protection of the mili- tion of housing, including service housing; tary servicemen/women;

47 The Independent Defence Anti-Corruption Committee (NAKO)

ï The development of mechanisms for en- there are no comprehensive NATO policies or gaging personal funds of the military recommendations concerning defence housing servicemen/women and law enforcement supply. The issues fall within the scope of do- staff members for the construction (pur- mestic policy of NATO countries. chase) of housing; Importantly, however, NATO member states ï The introduction of a transparent mecha- consider housing and infrastructure supply nism of land plot allocation for individual in the context of capability development and construction for military servicemen/wom- social policy. They do so to ensure the simul- en and law enforcement staff members. taneous development of all elements affecting capability formation and development. The Concept provides clear and precise goals with a mid-term timeframe. It follows from the According to Capability-Based Planning, above that housing constitute parts of AFU ca- all elements infuencing capability develop- pability development. It is therefore necessary ment are developed simultaneously to ensure to include defence housing and infrastructure achievement of an effective fnal result. Thus, to AFU capability planning and development. housing and infrastructure are developed to- But none of the provisions aimed at reforming gether with other elements, such as personnel the system of social protection for military per- training, procurement and introduction of new sonnel were included in the Bulletin. weapons and equipment, etc. NATO member states employ a “Program Approach to Man- Today, the national programs that should be agement.” The Program Approach to Manage- developed on the basis of the National Security ment method ensures that all other aspects of Strategy and the Concept for the Development capability(ies) are viewed in the context of the of the Security and Defence Sector have been acquisition and development of a defned ca- omitted by the Strategic Defence Bulletin, and pability. For instance, the capability of a new as a result do not have mechanisms for nation- training centre of military and tactical edu- al implementation. Instead, the Ministry of cation requires construction of the centre and Defence continues to use outdated legislation barracks for accommodation of the military, as and regulatory documents for the course of well as a selection of instructors, who should planning and implementing national housing be provided with housing, necessary social supply programs. and medical infrastructure, etc. All of these To ensure implementation of the national pol- elements should be developed simultaneously. icy concerning infrastructure supply to the This method provides mutual coordination of AFU, frst of all, it is necessary to enter the separate projects and works. provisions of the Concept for the Develop- The same approach is used in the Recom- ment of the Security and Defence Sector into mendations for the Capability-Based De- the new Security Defence Bulletin. fence Planning in the MoD and AFU, and is approved by the Minister of Defence of 1.1.2 Proposals Concerning Changes to Ukraine72. Moreover, they are contained in Planning Methods the Strategic Defence Bulletin73. Thus, in- frastructure and housing can, and should, The Concept for the Development of the Secu- be regarded as one of the capability devel- rity and Defence Sector provides for the use opment areas of the AFU which employs of NATO approaches, or approaches of NATO the Program Approach to Management. member states, to reform to the system of com- prehensive support of the AFU. Currently,

72 Recommendation on Defence Planning dated 12.06.17 available at: http://www.mil.gov.ua/content/other/Recommendationson_ CBP_120617.pdf (verifed September 2018). 73 Order of the President of Ukraine No.240/2016 regarding the deicision of the National Security and Defence Council dated 20 May 2016 Regarding the Strategic Defence Bulletin http://www.president.gov.ua/documents/2402016-20137 (verifed September 2018).

48 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

preparation is at least three years, since it is 1.1.3 Ukraine’s Current Program-based impossible to implement an entire project and Targeted Management Methods achieve the goals within one budget year. For instance, this example has already been set by the Ministry of Finance which will be im- Currently, unlike NATO Member States, plementing a model of transition to three-year Ukraine’s Armed Forces and Ministry of De- budget planning starting in 201875. fence use a program-based, targeted manage- ment method. This method considers manage- A second issue is timing. Actual fnancing of ment within one specifc area, such as housing housing construction on the CPCEF 2101190 supply (i.e. the CPCEF 2101190) and does not program is possible only starting from the 4th take into account how individual housing to 6th month every year. This is the of time re- supply projects affect a certain capability. quired to have the list of facilities to be fnanced The same holds true for the construction in a budget year approved by the MoD, the Cab- program of general military facilities. inet of Ministers of Ukraine and the Committee on Budget of the Verkhovna Rada of Ukraine. As stated in the Concept for the Development Under such contracts, work can only start af- of the Security and Defence Sector and in the ter another two months, which is the period Strategic Defence Bulletin, the subject of a required for a procurement procedure. Thus, program (programs) at the level of the AFU or out of the 12 months of a year, only 4-6 months the MoD must be the development of a capabil- remain for actual fnancing and implementa- ity in a given structural unit. Thus, a national tion of construction works, which renders im- target program may aim at the implementation plementation of projects of residential housing of a given task within a specifc area, but it construction diffcult, if not impossible. must take into account the necessary devel- opment of capabilities of the structural unit. As a result of its current planning methods, the Ministry of Defence and the General According to MoD Reforms Project Offce ex- Staff do not have a comprehensive under- perts, there a number of other problems in standing of the housing problem nor do they the current planning and budgeting system74. have comprehensive ways of resolving it76. First, the budgeting system covers planning Thus, the current program-based targeted within a single budget year, so the MoD and management methods requires changes based the AFU General Staff develop plans for the on the capability-based planning approach, planned budget year instead of full projects or adopted by the Concept for the Development of programs. However, for complex projects, the the Security and Defence Sector77. planning horizon which would ensure quality

74 Information provided by Consultant P. Kaiyuk. 75 “Ukraine will move to a three year economiv planning system – Ministry of Finance”available at: http://bit.ly/2D6KEqj (verifed September 2018). 76 The Project for Reforming the Systems of Housing Supply to AFU Military Servicemen/women and Their Families of the MoD Reforms Project Offce, implemented according to the Memorandum of Cooperation between the MoD and PricewaterhouseCoopers of August 10, 2016 N 15682/z, made attempts to develop a general concept to resolve the issues of the waiting list for improvement of housing conditions. 77 The Project for Reforming the Systems of Housing Supply to AFU Military Servicemen/women and Their Families of the MoD Reforms Project Offce attempted to develop a relevant and general concept. It was presented to the President of Ukraine, received overall positive feedback but did not result in development or approval of any executive or regulatory document. 49 The Independent Defence Anti-Corruption Committee (NAKO)

2. Waiting lists - Recommendations to Resolve Problems and Eliminate Risks

The defence housing waiting list back-log in list; b) optimising the waiting list manage- Ukraine requires immediate attention and re- ment by automating it, by expanding im- form aimed at eliminating the problem. It is plementation of the Zhytlo and Maino sys- evident that the housing problem is a social tems already in place, and; c) developing issue which requires resolution by creating a alternate housing mechanisms. new system of social protection of military ser- vicemen/women based on transparent process- 2. The development of a new system of social es and best international practices. For the du- protection for Ukraine’s military service- ration of waiting list reform, which may take men/women. up to 10 years, it is necessary to optimize the 3. The implementation of a transition phase current housing supply mechanism. This sec- for those servicemen/women within the tion presents a four-step approach to address- years of reform. ing the issue. Namely: 1. Reduction of defence housing waiting list 4. Abolishing the law permitting new addi- backlog through a) auditing the waiting tions to the waiting list.

Diagram 19: Recommended phased approach to defence housing reform

The concept was presented to the President of Ukraine and defence and law enforcement leadership, received overall positive feedback from defence and law enforcement leadership, while the President of Ukraine made specifc remarks and established strategic priori- ties. However, the review of the concept did not result in development or approval of any executive or regulatory document.

50 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

The main areas of management reform and minimization of corruption risks relate to activities aimed at reducing: a) housing need and the number of families registered on it, and; b) activities aimed at increasing housing supply.

Stage 1.1: Optimization of Waiting List Management

An effective, fair and transparent mechanism • provision of web-access to the necessary of delivery on the commitments concerning de- information from the waiting list to fence housing supply requires an optimization military servicemen/women taking into of the manner in which the waiting list is man- account protection of personal data; aged. • automatic calculation of a certain In order to reduce the number of families on method of meeting the need for housing the waiting list, NAKO recommends that the based on the advantage of this method MOD: for the MoD: permanent construction/ reconstruction/purchase on the second- 1. Conduct an audit of the waiting list, in or- ary market/monetary compensation; der to identify and remove those who do not service housing – construction/recon- have a legal reason to be on the waiting struction/rent/compensation for sublet list, and to restructure the order in which etc.; the families are waiting in accordance with proven and justifed priority. Added trans- • automatic calculation and formation of parency will be gained through the imple- need for service and permanent housing mentation of the “Zhytlo” in the monetary and physical measure- ments by regions with fnancial plan- 2. Improve transparency by implementing the ning horizon of up to 20 years, automat- Maino-Zhytlo software. Increase effective- ic distribution of need for fnancing by ness of the software by including: regions;

• storage of all information together with • automatic distribution of housing electronic copies of source documents on among the waiting list based on univer- families registered on the waiting list sal algorithms from Maino software to (apartment cases); families registered in Zhytlo software;

• administration of the waiting list and • compilation and administration of MoD its history; real-estate register;

• provision of all information for de- • analysis of assets. For those assets cision-making, reports (allocation of which do not comply with conditions of apartments, need analysis, preliminary operational effectiveness, it is necessary audit etc.), graphic reports with key in- to calculate whether it makes sense to dicators; reconstruct the housing for partial re- duction of the waiting list; • automatic preliminary audit and annu- al audit of the waiting list based on pa- • land plots (main parameters as well rameters “family members” and “prop- as schemes or cadastral plans, general erty owned by them”; plans). It requires scanners and increase in the capability of server equipment; • automatic export of data from Zhytlo software to the general state register • facilities and buildings (main data, of families in need of improvement of foor plans, layouts); housing conditions;

51 The Independent Defence Anti-Corruption Committee (NAKO)

• service housing fund, integration with Once in place, the system will allow for pro- Zhytlo software; cesses to be automated, which will signifcant- ly reduce corruption risks. It will also facilitate • indicators of estimated and/or standard the maintenance of up-to-date information, cost of real-estate, which will allow for access to information e.g. comprehensive re- the non-budgetary assessment of MoD ports and simple indicators for informed deci- potential; sion-making.

• adding information on technical ser- It should be noted, in reference to NAKOs rec- vice, maintenance, major renovations, ommendation that the waiting lists be audit- reconstruction and upgrade (date, cost, ed, NAKO researchers were informed that the list of works), which will allow to plan system does not function and is need of updat- expenses for future maintenance; ing. In its review of the preliminary draft of this document, the Head of the MQD specifed • adding information on utility use in that it is indeed interested in cooperating with physical and monetary measurements, NAKO and other partners to this end. which will allow for the planning ener- gy-saving activities;

• automatic calculation of projected fg- ures of expenditures for operation and maintenance of immovable property in terms of physical and value indicators.

Stage 1.2: Introduction of Alternate Housing Supply Mechanisms

Not only is it necessary to improve already ex- vicemen and women by collaborating with isting systems of defence housing supply, but the State Mortgage Institution (SMI); there is a need to introduce alternative options and improvement of the existing ones. The im- • construction of housing with the use of ex- plementation of these recommendations will ternal loan capital; speed up housing supply to a greater number • optimization of service housing: protect ser- of families on the waiting list without addi- vice housing needed by the MoD –from pri- tional expenditures of budgetary funds. vatization by military servicemen/women; In addition to those which already exist, i.e. monetary compensation, purchase of housing on • analyse unfinished facilities, calculate the secondary market, and, construction. The whether it will be effcient to reconstruct following mechanisms aim at the development them into housing for service personnel; of alternate approaches to improving the hous- ing conditions of military servicemen/women: • in lieu of defence housing, offer land not need- ed by the MoD to those on the waiting list. • Develop a leasing package for military ser-

Stage 2: The development of a new system of social protection for Ukraine’s military servicemen/women/women

A comprehensive approach to defence capacity waiting list reform, it is necessary to develop a and capability-based planning, requires that at new, transparent and fair system of social pro- least some attention be paid to questions per- tection of military servicemen/women. A new taining to the social protection of Ukraine’s package should replace the old, ineffcient mech- military service men and women. To date, the anisms and improve housing conditions, par- promise of defence housing in Ukraine remains ticularly for those military servicemen/women part of the (outdated) package of social protec- who are only going to conclude a military con- tion for servicemen. Thus, simultaneously with tract and are not registered on the waiting list.

52 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

Based on international best practices, the fol- • Introduction of a fexible human resourc- lowing priority route of reforms is recommend- es management and motivation tool for ed. The new system of social protection of mil- the MoD. The system of social protection itary servicemen/women must fulfl a number of military servicemen/women must be re- of strategic functions. They include the garded as an important tool for the MoD for informal psychological infuence on a • Replacement of the old, ineffcient waiting military servant through fnancial lever- list mechanism of waiting list for improve- age to motivate him or her to serve during ment of housing conditions with a new, the period of time necessary for the state efficient and monetary system in order as long as he or she is useful to the defence to reduce corruption risks and eliminate capability of the state, to increase his or housing activity which is not feld-specifc her mobility, effectiveness and loyalty. for the MoD. This comprehensive approach will allow for the • Provision of transparency, justice and con- creation of a multifaceted systemic tool for so- cern for the wellbeing of each military serv- cial protection of military servicemen/women. ant of the regular (contract-based) army in the new social protection system without exceptions and delays.

Diagram 20: Alternative monetary solutions to compensation

Stage 3: The Implementation of a Transition Period

It is envisioned that a transition period will be housing and the new social system) and reduc- needed to smooth over the process of transfer ing social tensions among military servicemen/ from the old system to the new one. With the women during the period of transformation. aim of reducing the fnancial burden on the MoD (caused by the temporary simultaneous It is therefore advisable that a period of tran- activity of two programs i.e. waiting list for sition be offered to families on the waiting list.

53 The Independent Defence Anti-Corruption Committee (NAKO)

who can transfer to the new system of social of permanent housing should be restricted to protection of military servicemen/women. As the transition period and whilst introducing for the transitionary period of housing supply new mechanisms. mechanisms, funds allotted to the construction

Diagram 21: A soft exit from the promise of permanent defence housing

Stage 4: Abolishing the Law Permitting New Additions to the Waiting List

As the next step for implementation of the new • Investments in housing for military service- system of social protection of military service- men/women already registered on the MoD men/women, it is necessary to stop adding to waiting list will gradually reduce the list; commitments of the state concerning housing supply to military servicemen/women through • If necessary, new military servicemen/wom- the current waiting list mechanism. Abolishing en will be able to register on the general the law which allows military servicemen/wom- waiting list for improvement of housing con- en to register on the waiting list with the MoD ditions with the local authorities, since the will lead to the following: MoD waiting list will be closed.

It is necessary to develop a Draft Law of Ukraine “On Amendments to Certain Laws of Ukraine Concerning Improvement of Social Protection of Military Servicemen/women and Their Families,” which will undertake the task of stopping the state’s legislative commit- ments to military servicemen/women concerning supply of free housing for permanent residence and monetization of the system of social protection of military servicemen/ women and their families through creation of a new mechanism of personalized cumula- tive monetary retirement allowance. Moreover, the out-dated, 1983 Soviet Housing Code of the Ukrainian SSR (which affects civilians and servicemen/woman alike) must be abol- ished and brought up-to-date. The Ministry of Defence should co-operate with relevant Ukrainian institutional counterparts to this end.

54 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

The main provisions of the draft law would ADVANTAGES AND POSITIVE be connected with amendment of article 12 of IMPACT the Law of Ukraine “On Social and Legal Pro- • Each military servant (not only those who can tection of Military Men and Their families” to have potential corrupt connections) will month- eliminate the possibility of supply of free hous- ly feel personal material concern for his or her ing for permanent residence of military service- wellbeing and family on behalf of the state; men/women and their families. • an effective mechanism of military service- At the same time, it is suggested to add provi- men/women’ career management and indi- sions concerning a new mechanism of personal- vidual motivation will be created; ized monetary cumulative retirement allowance to the aforementioned law. • accountability of military servicemen/wom- en for their own everyday life will increase, Likewise, the draft law should provide for intro- instead of assigning this function to the duction of a mechanism for transition from the MoD, the Government or the President, old system to monetary personalized relations since the apartment is not given for free any “between the military servant and the state” more – the military servant participates in with the possibility of voluntary transfer of mil- the mortgage and receipt of the apartment itary servicemen/women from the old system to with his or her own funds; the new one. ADVANTAGES AND POSITIVE • considerable financial resources will be EFFECT steadily transferred to the banking sector on the long-term basis and become an ad- • It will allow to stop accumulating impossi- ditional internal source of fnancing of the ble social commitments of the state to mil- national economy; itary servicemen/women concerning free • in the new system, MoD will act only as a supply of apartments; transit entity of the money between the na- • It will reduce expenditures for maintenance tional budget and Oshchadbank (Savings of the apparatus of administration of hous- Bank) without specifc administrative powers, ing supply to military servicemen/women. which eliminates corruption risks and abuses.

55 The Independent Defence Anti-Corruption Committee (NAKO)

3. Recommendations to Reform Defence Housing Management System

With regard to the aforementioned, we suggest the following ways of development (transfor- II. SYSTEMIC DEVELOPMENT: mation) of the Head QD according to the new 1. Raising compensation of key staff AFU Development Concept. Prompt and eff- members. cient reinforcement of the current system is needed as it undergoes systemic development. 2. Creation of a “healthy” culture: The nature of systemic development should • Setting new organizational values; ensure that it is capable of self-improvement, development and fexible to change. • Open competitive selection of per- sonnel for vacant positions; It should be noted that in it its review of the preliminary version of this document, the • Balance of military and civilian po- Head of the MQD asserts that due to serious sitions; budgetary constraints, the creation of addition- • Education and training of personnel al departments or the employment of addition- for the performance of new tasks. al experts appears unlikely (Annex 2). 3. Reforming the management system, opera- I. REINFORCEMENT: tional processes and policies. 1. Strategic planning: 4. New mission, vision and goals of the sys- • Setting up a department which will tem. support the Main QD. 5. Reforming the Main QD structure via a se- • Development of procedures and ries of controlled steps. training of professionals. 6. Reforming the management, operational • Hiring best professionals. processes and policies 2. Procurement – continue improving ten- 7. Optimization of product creating processes, der procedures and contracts. strategic planning, regulatory framework. 3. Project management – implementation • Introduction of project and contract of the basic principles, training on pro- management systems. ject management methodology. • New programs of housing and infra- 4. Automated housing distribution, devel- structure supply to the AFU. oping Statement of work for the imple- mentation of the automated system.

3.1 Defence Housing Management System – Recommendations

1. Develop internal planning procedures in organizations in project management. the MoD which render impossible subjec- CCMDs (the entities ordering the service) tive managerial decision-making at the should participate in the procurement on stage of annual planning and establishing the same basis as other participants. priorities for fnancing. 2. Change management priorities to motivate 5. In the tendering process, it is necessary to Head QD staff to meet the construction plan request the candidates to provide their pro- instead of 100% use of the national budget. duction programs of the previous years (as frame of reference to determine the produc- 3. The planning procedure must be open to the tion capacity) and the current contractual public, plans of capital construction and pri- commitments as of date of bidding. Com- orities of each project in the plan must be panies which have exhausted their pro- published in publicly open resources. duction capacities due to existing commit- 4. Engage third party independent expert ments must disqualifed as being at high

56 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

risk of failure to perform the contractual 8. Decisions of Head QD offcials must be based obligations. on their knowledge of the situation on the real estate market in Ukrainian regions. 6. All provisions that allow for subjective de- cision-making must be eliminated from 9. In managerial decision-making, it is im- contractor agreements. Issues that cannot portant to take into account the duration be regulated at the stage of entering into of construction of facilities in the context of agreement, such as those which depend the MoD management system and correct on the budgeting process or other factors, the calculations taking into account the should be governed by MoD’s internal pro- estimated changes in the consumer prices cedures and regulations, which should be index. The calculations must take into ac- incorporated in the contract by reference. count indirect and overhead costs. 7. Military commanders should obtain rights 10. 10. It is recommended that the Ministry and obligations in capital construction pro- introduce distribution of indirect costs be- cesses necessary to ensure compliance of tween ongoing projects to see the actual ef- the future facilities to their needs and re- fciency of the use of budget funds for capi- quirements. tal construction.

3.2 Construction, Reconstruction, Major Renovations - Recommendations

1. To ensure public control over housing pro- 5. Publish/develop the methodology of mon- curement on the secondary market and itoring of data on the price of 1 m2 of through capital participation, it is recom- housing in regions of Ukraine. Defne how mended that the MoD should publish re- exactly these data will affect managerial ports on concluded agreements in the sys- decision-making in terms of choice of the tem of electronic procurement ProZorro method to meet the need (purchase/con- struction/rent/other). 2. The MoD must determine the principles and guidelines of formation of an appli- 6. Procurement winner must be determined cation for housing procurement and have based on the total cost of the apartment, them (the principles) approved by HDDMP not the price of 1 m2. It is possible to intro- of AFU GS, commanders of branches / duce a multi-criteria proposal assessment types of armed forces or to include these where the price takes at least 75% of the agencies in the process of formation and value (according to the Law of Ukraine approval of the application. The aforemen- “On Public Procurement”), with technical tioned principles must eliminate the pos- and economic/fnancial parameters having sibility of subjective decision-making by a different value. MoD offcials. 7. The process/procedure of inspection of the 3. The location of procured housing must be technical condition of apartments must be determined transparently in ways which do transparent. Rules of procedure of the in- not restrict the rights of developers in other spection committee, its members, plans and localities. The area of procurement can be work results must be publicly available. specifed by adding graphic material. 8. Technical requirements which restrict the 4. Lots must be determined specifcally based rights of apartment owners or developers on what apartments exactly are procured must be eliminated. (with how may bedrooms) and on what principles the MoD determines the number of apartments procured.

57 The Independent Defence Anti-Corruption Committee (NAKO)

CONCLUSION

Ukraine’s defence housing system is in disar- development of the necessary legislative basis ray. The dynamics presented herein indicate and regulations; inclusion in the new Bulletin. the level of improvement in the defence housing Part One of this study presented the waiting sphere lies somewhere between negative and list problematics. The current system of reg- zero. Under the current conditions, it could istration of military servicemen/women on take over 600 years to eradicate the waiting the waiting list, administration of the list and list. Alarmingly, widespread institutional inef- receipt of apartments attests to the fact that fciencies pertain to the defence housing insti- these organizational processes are outdated, tutional structure, over and under-regulation, complicated and hardly make use of modern capital construction and investment. technology – despite its almost nation-wide Institutional ineffciencies combined with an availability. underpaid workforce (which is not trained in With the aim of eliminating the waiting list democratic values and principles), huge sums problem, the Ministry of Defence could make of money and cronyism are components keep- more effective use of automatization systems ing the ineffcient system in place and open such as the Zhytlo and Maino data programs. to corruption. This holds true for both service This would facilitate an expedited the reso- and permanent defence housing. lution of the problem. It would also lower the Ukraine’s current, program-based, targeted number of necessary administrative personnel, management methods require changes in line give adequate oversight over real-estate be- with the capability-based planning approach. longing to the MoD, thereby raising the level This method is used by NATO member states. of transparency and helping to close the doors It is also contained in the Concept for the De- to corruptive practices. velopment of the Security and Defence Sector. This being said however, the use of technol- It is used in the Recommendations for the Ca- ogy alone will not alleviate the problem. It pability-Based Defence Planning in the MoD was shown that despite the use of technology and AFU, and is approved by the Minister of geared at promoting transparency and effcien- Defence of Ukraine78. Moreover, it is contained cy, it was still possible for an individual with in the Strategic Defence Bulletin79. Important- an ongoing criminal investigation against him ly, infrastructure and housing can, and should, – that concerns housing – to be appointed to be regarded as one of the capability develop- the Main Quartering Directorate by a ‘legit- ment areas of the AFU which employs the Pro- imate’ selection committee. Thus, technology gram Approach to Management. alone cannot fully replace the system. A major legislative problem has been identifed The problems connected to poor governance in this report. Namely, although the resolu- and corruption in Ukraine’s defence housing tion of defence housing problematics, as well system are very strongly tied to human per- the need to upgrade of the system to harmo- ceptions, dignity and values and ethical stand- nize with Euro-Atlantic standards, has formal- ards of the system in which they work. A re- ly been made public in the National Security structuring of organizational values and work Strategy, and is contained in the Concept for ethics is an unmissable component to reform the Development of the Security and Defence in Ukraine. Sector, the roadmap on how to do it is missing. Particularly, The Defence Strategy Bulletin, The structure of the Current Defence Hous- widely recognized as a roadmap to security ing Management System is cumbersome. Its sector reform, does not regulate key issues re- system of hierarchy and lax decision-making lated to defence housing reform. leave too much room for subjective decision Thus, the effective promotion and implementa- making and corruption. The system requires a tion of recommendations to the system present- restructuration which will operate in a health- ed in Part Two of this document require the ier organizational culture with more checks

78 Defence Planning Recommendations Confrmed by the Minister of Defence, dated 12.06.17 available at: http://www.mil.gov.ua/con- tent/other/Recommendationson_CBP_120617.pdf (verifed September 2018). 79 Order of the President of Ukraine No.240/2016 regarding the deicision of the National Security and Defence Council dated 20 May 2016 Regarding the Strategic Defence Bulletin http://www.president.gov.ua/documents/2402016-20137 (verifed September 2018). 58 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

and balances. This holds equally true to the is fowing to the construction and acquisition other institutions within the Ministry of De- of apartments which are never built. Some con- fence whose work impacts defence housing. struction projects are taking decades and are budgetary black holes. It was shown that the The time is ripe for Ukraine’s Ministry of De- lack of transparency and seeming cronyism has fence to introduce alternative defence-housing allowed for 4 construction companies to main- compensation packages to its servicemen/wom- tain a virtual monopoly over a system that is en. Although the current system does provide not delivering its promises to Ukrainian ser- for the compensation of rental housing, the vicemen/women and taxpayers as a whole. The compensation amount given is significant- tendering processes must be improved to be ly lower than the rental market’s average80. more inclusive with the aim of increasing com- Those who do receive service housing from the petition on the defence housing market. MoD sometimes face the problem that, unlike other countries, Ukraine has no standards of The promise of service lodging to servicemen service housing, and thus the quality of service and woman is an important factor to Ukraine’s housing threatens to be extremely low. With national security. Particularly, in today’s un- the aim of avoiding the provision of substand- stable times of conficts in the Donbas. Howev- ard living conditions, Ukraine must create a er, the promise of permanent housing outdated system and standard for the supply of quality and is drowning the system. The failure to de- service housing. liver also has negative societal and political se- curity effects as the perception of the Ministry The Housing Conditions Inspection Committee of Defence and government as a whole wanes carries a lot of responsibility in securing that in light of broken promises. Ukraine’s servicemen/women are provided quality housing – (when and if they receive it). It is therefore necessary to move away from However, the principles of work of this commit- the Soviet-born system which offered perma- tee, its members, rules, rules of procedure etc. nent housing to servicemen/women. The system are not publicly available. Moreover, represent- and market would be greatly improved if that atives of military servicemen/women for whom promise were no longer made. With the aim of such housing is procured are excluded from eliminating waiting lists and providing societal participating in such committees. Democratic security to Ukraine’s servicemen/women it is governance, transparency, justifability and strongly recommended to introduce alternate accountability within the Ministry of Defence mechanisms that would work as real incentives. require knowledge of the committee’s work i.e. Monetary compensation, modernized pension publicity and engagement of those affected by plans, facilitated mortgages are but a few keys to it, i.e. servicemen/women. resolving defence housing problems in Ukraine. The social cost and amount of money apparently The recommendations held herein are a blue- being syphoned out of Ukraine’s budget through print for Ukraine’s Ministry of Defence on corrupt and ineffcient practices in Ukraine’s what needs to be done to effectively reform the defence housing system is staggering. Money defence housing system in Ukraine.

80 The monthly, received, average is around USD 77 against a national average, monthly rent constituting USD 108 reaching USD 245 in larger cities, which case only USD 111 are compensated.

59 The Independent Defence Anti-Corruption Committee (NAKO)

ANNEXES

Annex 1

60 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

61 The Independent Defence Anti-Corruption Committee (NAKO)

62 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

63 The Independent Defence Anti-Corruption Committee (NAKO)

Annex 2

64 Poor Governance and Corruption In Ukraine’s Defence Housing System: Risks and Recomendations

65 The Independent Defence Anti-Corruption Committee (NAKO)

66