The battle for food supplies for the Armed Forces of Ukraine: Can the old schemes be broken?

In Ukraine, food for the military is primarily associated with eggs worth 17 hryvnias. Yurii Nikolov’s investigation emphasizes that the non-transparent system of procuring food for the army harbors many corruption risks. This story prompted the return of food procurements to Prozorro. But did it bring about any dramatic changes?

In February 2023, MPs promoted Draft Law No. 8381 as a panacea, proposing reporting on certain defense procurements to Prozorro. Back then, at Transparency International Ukraine, we warned that this step would not lead to significant changes. Because the problem is not only transparency and free access. Prozorro is certainly a very useful system that has made procurements in Ukraine much more efficient. But an electronic system is just a tool.

Despite still observing food procurements on Prozorro and adopting a simplified approach at some point, the architecture has not changed.

Now feeding the military is a very complex and non-transparent procedure. It looks something like this. The Ministry of Defense enters into contracts with contractors who undertake to supply food in sets according to the catalog. But they supply it on request from military units. In military units, specific individuals are tasked with sending requests to contractors for specific sets of products. These same people check the products upon receipt. That is, the Ministry of Defense only selects these suppliers. In reality, only responsible individuals within military units and the suppliers themselves are aware of the specific items ordered from standard catalogs and the quality of their delivery.

But in 2024, they tried to change this mechanism.

Attempts of the State Rear Operator

In late 2023, a new organization in the field of defense procurement was established – the State Rear Operator. Transparency International Ukraine helped launch it. Since the beginning of 2024, the SRO has gradually assumed responsibility for procuring everything necessary for the army, excluding weapons. The agency’s staff was recruited through competitions rather than from the old team of the Ministry of Defense. It was headed by Arsen Zhumadilov, the former leader of the State Enterprise “Medical Procurement of Ukraine,” whose procurements we monitored. In particular, our analysts noted that this state-owned enterprise, for example, managed to procure ambulances at a considerably lower cost than other procuring entities.

After the establishment of the SRO, we’ve already witnessed successful procurements of clothing, including uniforms, helmets, and other ammunition. The SRO team managed to engage new suppliers and ensure significant savings. For example, during the tender for summer uniforms, the SRO received 14 proposals and managed to save almost UAH 60 million. In the procurement of active headphones, the agency applied non-price criteria to attract new suppliers (7 in total) and secure the acquisition of superior products. This was the goal of creating the agency – transparent and efficient procurements.

There were also high hopes for food procurement. The agency quite frankly stated that its goal is to attract retailers, namely large supermarket chains, to auctions in order to break free from the “monopoly” of the Ministry of Defense’s previous contractors. For this purpose, changes were made to the tender documentation, in particular, a new principle of geographical distribution was applied. They decided to assign suppliers not to military units, but to sectors in certain regions.

The SRO also developed an IT system for submitting food applications for military units. That is the agency wants to take over this function of communication with suppliers. Military units will formulate their product applications a month in advance and refine them a week before delivery. The SRO will aggregate orders and distribute them among suppliers. In addition to enhancing transparency and reducing corruption risks, the IT solution will provide those announcing food procurements with objective data on the actual orders from standard catalogs made by military units.

However, the State Rear Operator faced several problems at once. First and foremost, the previous supplier, Trade Granite Invest LLC (which secured UAH 4 billion worth of food contracts with the Ministry of Defense in 2023-2024), along with the related Trade Poltava LLC, appealed the terms of the new procurement in court. And the court took their side.

However, this isn’t the biggest problem. What’s worse is that the anticipated participation of retail did not come to the auction. According to the SRO’s explanation, it became apparent that the procurement of sets from the catalog is not convenient for retailers. In particular, this is due to the fact that the Ministry of Defense’s catalog includes “non-standard and exotic product units” that chains do not typically order for their supermarkets. In other words, the Ministry of Defense procures food items that are not commonly found in the market. Now they plan to reconsider the catalog to remove such products. However, this process takes time, and for the system to function effectively, the SRO needs to collect and distribute applications for products from military units.

So the tenders were re-announced. Those requirements that the court found discriminatory were removed. However, even these conditions for the new procurement were challenged, right up to the last day of accepting proposals. This was done by CROSS PRIME LLC, a company associated with one of the longstanding favorites of the Ministry of Defense. This time, they appealed the terms of the contract, including penalties for the supplier’s failure to meet obligations, an audit of its enterprise, and so on. These are adequate things in terms of reducing risks for the state. They have been included in a number of contracts with the Ministry of Defense before, sometimes even under more stringent conditions. According to the SRO, companies are not particularly pleased with the fact that the procuring entity here is different – not the same department they worked with for years. And the SRO plans to carefully monitor what military units order and receive. This is unwelcome for the previous monopolists who are accustomed to the old approaches.

The court of first instance sided with the state. So, the suppliers resorted to their last glimmer of hope – a boycott. They simply withdrew their proposals for re-announced tenders. The day before, Tetiana Nikolaienko, a member of the Public Anti-Corruption Council at the Ministry of Defense, revealed that one of the largest food suppliers in previous years, Atomservice LLC, is threatening to abstain from participating in new tenders unless the conditions are modified. According to her, in a letter addressed to the Ministry and the head of the SRO, Arsen Zhumadilov, the company expressed its disagreement with restrictions on the maximum number of contracts one supplier can receive, payment terms, potential delivery geography, audit of the company’s capacity, and the aforementioned catalog filling, among other issues.

Therefore, few proposals were received from new participants, and even those had to be rejected due to documentation issues. Once again, the tenders failed.

What’s next?

Due to the blackmail from long-term “monopolists” in food procurements, the state essentially has no other option but to acquiesce to their terms. The alternative is to stop supplying food to the army. Now there is no other way out but to continue cooperation with them.

In fact, there are three options:

1. the old department will continue its previous contracts,
2. the old department will enter into new direct contracts, or
3. the SRO will enter into new direct contracts.

This third option is the best. However, for this to happen, it is necessary for the Ministry of Defense to support the SRO and be prepared to sign food contracts through the agency.

In that case, the SRO will be able to collect real orders from military units. This will help optimize the catalog and discover new suppliers, including retailers or manufacturers, for future food procurements.

In theory, even if the Department of Defense signs the new contracts, it is still possible to incorporate the collection and distribution of food applications through the SRO. But how likely is this?

It also remains an open question how long these direct contracts will continue to be signed. After all, it depends on when we will be able to resume competitive bidding and, consequently, continue the reform of food procurement.

It is impossible to change the system in two months in the midst of a full-scale war. This must be accepted. However, this doesn’t imply that it’s impossible or unnecessary to change it.

I suspect that providing food for the military is a tightly knit knot. Now the SRO pulled the first thread and we saw the first problems. Then there will be a second thread and a third. And much more can float to the surface.

Again this does not mean that this knot does not need to be unraveled. Subsequent steps of the reform will follow, and they should be implemented gradually. Rather than testing changes across the entire system, it would be prudent to, for instance, select several areas for a pilot project and experiment with new approaches “in the sandbox.” If successful in the experiment, these approaches can then be scaled to the entire country.

The crucial point we all need to understand now is that the initial unsuccessful attempt to reform food procurement does not imply that the SRO is ineffective or requires different leadership. And I suspect that we will soon see many similar statements. This setback signifies, above all, that qualitative changes necessitate more time and ongoing support for the agency in its attempt to unravel this knot.

This publication was prepared with the financial support of the European Union. Its contents are the sole responsibility of Transparency International Ukraine and do not necessarily reflect the views of the European Union.