the-debt-for-procurement-of-the-ministry-of-defense-has-reached-uah-193-billion-deputy-defense-minister-yuriy-dzhyhyr-explains-how-it-arises-and-why-it-is-not-treason

The debt for procurement of the Ministry of Defense has reached UAH 193 billion: Deputy Defense Minister Yuriy Dzhyhyr explains how it arises and why it is not "treason"

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As of January 1, 2024, the Ministry of Defense's receivables increased 10 times compared to the debt at the beginning of 2022, to UAH 193.1 billion. And overdue receivables reached UAH 51.5 billion. Deputy Defense Minister Yuriy Dzhyhyr noted in an article for Forbesthat this is actually money that someone owes the Defense Ministry for undelivered goods, and explained why the amount of debt is growing, UNN reports.

Details

Reportedly, receivables, which are mostly receivables that arise when you buy something with a prepayment, are an integral part of arms procurement. If the arms budget increases, the receivables increase with it, because the number of contracts and advance payments increases. 

It is noted that most of the accounts receivable as of the beginning of January this year (UAH 141.6 billion) are "current receivables". "A real example: we have ordered and paid 70% of the advance for certain models of drones and ship-based air defense systems to be delivered in 2025. A contract was signed with a foreign supplier for the construction of two Corvette-class ships for the Ukrainian Navy. The first is scheduled for delivery in December 2024, the second in 2027. Therefore, the receivables for these contracted drones, air defense systems, and ships will be held by the Defense Ministry for more than a year, 10 months, and three years, respectively. This is not an ideal, but acceptable situation," Dzhyhyr explains in his article.

If the delivery of the advanced goods does not take place within the agreed period, as indicated, the receivable becomes overdue. And this is one of the areas that the ministry's auditors are focusing on.

"We entered February 2022 with UAH 3.1 billion of overdue receivables. Over the year, its volume increased to UAH 58 billion. In fact, new overdue debt in 2022 increased by UAH 56.3 billion, but another UAH 1.7 billion remained outstanding from the "inheritance" to the full-scale invasion," the official said in the article.

Overdue accounts receivable of the Ministry of Defense Photo by the press service of the Ministry of Defense

This abnormally high figure is said to have been at least partially caused by the shock of the first months of the full-scale Russian invasion. "It was necessary to react quickly, so it was difficult to take into account all the levers of financial control when purchasing and advancing arms supplies. But whatever the reasons and circumstances of those decisions, this is not a reason not to return the money owed," Dzhyhyr said in his article. 

After some stabilization and adaptation to active hostilities, the Defense Ministry reportedly faced two tasks: to solve the "inherited" problem of overdue receivables and to provide the military with equipment and weapons without interruption, taking into account "work on mistakes." 

Repayment of overdue receivables

As mentioned, if an overdue receivable is not repaid, it accumulates from year to year. Repayment can take place in three stages, each of which can solve the problem.

"The first task is to identify cases where deliveries are delayed for objective reasons and the supplier's integrity is beyond doubt. The option of terminating such contracts and demanding a refund often makes no sense. Manufacturers may indeed have difficulties with timely deliveries, in particular, this applies to Ukrainian production," Dzhyhyr says in article .

Sometimes, despite the delay, the contract remains very profitable. "A real-life example: one of the suppliers has slowed down the pace of delivery for objective reasons, and instead of six months, the delivery of goods will take three. However, the quality-price ratio is unique, and the manufacturer is ready to produce goods under any conditions. Therefore, the Ministry of Defense is waiting for this receivable to be repaid, as deliveries continue, and it is impossible to purchase the same goods more profitably and earlier from an alternative supplier," the article explains.

It is stated that in more problematic cases, the Ministry of Defense resolves the situation through negotiations and mediation. This is a regulated and transparent process that helps to save time and avoid litigation. "Making the most of such opportunities is our second task," the deputy head of the Defense Ministry said in an article .

In some cases, counterparties reportedly voluntarily pay the money owed even before filing a lawsuit, while in others they do so during the course of the court case. But before the court decision is made, because they agree to pay the debt in the process. 

"In 2023, national suppliers voluntarily paid UAH 3.18 billion in arrears to the Ministry of Defense through mediation, while foreign suppliers paid $1.2 million and €180,500 in penalties," the statement said.

"The third task is to protect the interests of the Defense Ministry in courts. We go to court when other options to solve the problem are exhausted. In 2023, 11 court decisions were issued in favor of the Ministry of Defense to recover overdue receivables worth UAH 3.7 billion. In another 44 decisions, the court satisfied the claims of the Ministry of Defense to recover penalties for breach of contract for UAH 1.2 billion. The Ministry of Defense continues to represent itself in 11 more cases in national courts and self-representation in two arbitration proceedings in the International Commercial Arbitration Court against foreign counterparties," Dzhyhyr said in his article .

As noted, in 2023, 77% of the overdue receivables inherited from the shocking year of 2022 were repaid (UAH 43.3 billion). UAH 13 billion remains outstanding, but most of these cases (UAH 10.4 billion) are already in court. Another UAH 2.2 billion is in the process of pre-trial settlement, and the remaining UAH 0.4 billion is considered by us to be non-risk debt that will be repaid over time.

Dynamics of overdue accounts receivable of the Ministry of Defense Photo by the press service of the Ministry of Defense

"The Ministry of Defense entered 2024 with these outstanding UAH 13 billion, along with UAH 1.7 billion outstanding in 2021. And also with UAH 36.8 billion - a new overdue receivable formed in 2023. The total amount of all overdue receivables as of the beginning of January amounted to UAH 51.5 billion," the Deputy Minister said in his article .

Overdue receivables from the Ministry of Defense as of December 31, 2023

The amount of overdue receivables for 2023 is reportedly decreasing - "in the context of new agreements, we took into account the experience of 2022." "Overdue receivables decreased almost threefold as a percentage of the defense procurement budget (11% in 2023 vs. 32% in 2022). That is, the percentage of overdue receivables is decreasing against the background of a significant increase in procurement itself," Dzhyhyr said in his article .

Overdue Receivables as a Share of Defense Procurement Photo by the Defense Ministry Press Service

"The structure of overdue receivables generated in 2023 gives us a chance to settle them: in January, it decreased by UAH 8.3 billion. More than half of the debt (UAH 21 billion) is in the process of pre-trial settlement, and another part (UAH 4.9 billion) is non-risk liabilities. The rest of the cases are in courts," the article says.

"Now for the hard part. Deliveries are still delayed, and lawsuits arise. Contractors created new UAH 2.7 billion of overdue receivables in January (most of them are already being dealt with in pre-trial proceedings). The volume of these problems is decreasing - we have taken into account previous experience and are properly concluding reasonable planned contracts. But there is still work to be done," the official said in his article .

"Now it is important not to be distracted by the numbers, which do not actually show 'treason', and to focus efforts and public oversight on those issues where the quality of procurement really needs to be improved," Dzhyhyr concludes in his article .

Lilia Podolyak

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