Ukraine's Defence Ministry prepares new mechanism to ensure no army procurement scandals in the future

The Defence Ministry of Ukraine has stated that it is collaborating with law enforcement agencies to eliminate the risks of corruption in procurement for the Armed Forces, while simultaneously implementing a new NATO-standard procurement architecture.

Source: Ukraine's Defence Ministry

Details: The statement explains that until May 2023, suppliers could effectively set their own prices for the food they delivered to military units.

To achieve this, shortly before the tender they would set unfairly low prices for the set of food as a whole, including all food items. This enabled them to win the tender. After winning, the supplier would change the prices of specific items, raising the prices for mass groups of items such as vegetables, fruit, dairy and meat products, etc. They would then reduce the prices for less common items, such as strawberries or blueberries. This allowed them to keep the overall price of the set of food unchanged. It was under this scheme that the infamous "US$0.50 eggs" appeared, the Defence Ministry says. 

To prevent such abuses, the ministry has introduced product price caps which suppliers may not exceed when selling food to the military. For example, previously, according to the National Anti-Corruption Bureau, suppliers set the purchase price of potatoes at UAH 16/kg (US$0.50), but in December 2023 the Defence Ministry set a price cap of UAH 10.35 (US$0.30) on one of the tenders. The situation is similar with cabbage (UAH 28 and 14.54 respectively) and onions (UAH 39 and 22.86 respectively).

The ministry also added that a radical reform of procurement has been launched. The new system involves a two-tier mechanism whereby the Defence Ministry establishes procurement rules and ensures quality control, and a new agency, the State Logistics Operator, carries out the actual procurement. Previously, these functions were centralised within the ministry, which could lead to conflicts of interest. The distribution of responsibilities is intended to eliminate corruption risks, the ministry says.

The State Logistics Operator has announced the first tenders under the new procurement system on Prozorro, a public electronic procurement system where state and municipal customers announce tenders for the opportunity to become a state supplier. The new procurement system will be launched in the second quarter of this year.

Background: 

• On 21 January, ZN.ua reported, citing a Defence Ministry food procurement contract, that the ministry was purchasing food for servicemen at prices two to three times higher than Kyiv shops were charging. The December contract with the food company was signed on behalf of the ministry by Bohdan Khmelnytskyi, then head of the State Procurement Department at the Ministry of Defence of Ukraine, who was involved in a case of embezzlement of US$580,000 during the procurement of military ammunition.
• The "US$0.50 eggs" became especially controversial.
• The Ministry of Defence said this was a lie and manipulation and promised that it would be in touch with the Security Service of Ukraine (SSU). Oleksii Reznikov, Minister of Defence, denied the accusations of corrupt practices in the Ministry. Later, Reznikov said in an interview to Ukrainska Pravda that his reaction had been overly emotional, and promised that all the facts found by the journalists would be thoroughly investigated.
• Vyacheslav Shapovalov, Deputy Minister of Defence, resigned and was fired on 24 January amid the scandal. On 25 January, Bohdan Khmelnytskyi’s dismissal as head of the Defence Ministry’s State Procurement Department was announced as well.
• Prime Minister Denys Shmyhal instructed the government to update the state procurement system of the Armed Forces of Ukraine so that the prices of food and products are publicly available.

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