SMG's Position on Audit of Corvette Program's Budgetary Financing


In September, auditors from the department of the Southern Office of the State Audit Service of Ukraine (SAS) in Nikolaev region intended to audit financial and economic activities of Chernomorsky Shipbuilding Yard within the framework of Corvette public program's implementation for the period from 1 January 2015 to 30 September 2017. Upon arrival at the company, the auditors were officially notified that there were no legal grounds for such audit because ChSY did not receive government funding under this program during the specified period.

A few days later the company received another letter from the department of the SAS’s Southern Office notifying it of the intention to make another audit of Corvette program, now for the period from 1 January 2011 to 30 September 2017. We have to state that this time the reasons for such an audit are also extremely doubtful from the legal viewpoint.

In the period from 2011 to 2013, Chernomorsky Shipbuilding Yard indeed received budget funding for the construction of Vladimir the Great corvette. The financing was incomplete and irregular – only UAH 215.3 million were actually transferred to the company out of UAH 387.5 million foreseen by the program. In general, the program for the construction of a series of corvettes, approved by resolution of the Cabinet of Ministers of Ukraine no. 1150 of 9 November 2011, provided for budgetary financing in the amount of UAH 16.2 billion.

All the funds received from the state budget were used by the contractor as advance payments in purchasing equipment and as financing for hull work. At the same time, the economic and financial activity of the company within the framework of the corvette construction program was repeatedly audited by the predecessor of the State Audit Service, that is the State Financial Inspectorate. Such audits were made in 2013 and in 2015.

The audits did not reveal any irregularities from the main contractor's side. The main "violation" found by the auditors was the state's failure to meet the financing schedule for the construction of the first Ukrainian corvette. This fact was confirmed by the ruling of Kiev Economic Court of Appeal of 14 June of the current year under case No. 910/7130/15-r (document with "for internal use only" status). The court refused to satisfy the claims of the Defence Ministry on enforcing ChSY to supply equipment worth about UAH 83 million and to pay a fine of UAH 6.8 million for the alleged delay with the advance payment report. The court's judgment has entered into force.

Let us recall that the shipyard received the last tranche from the state budget for the construction of the vessel in December 2013, while the company received an official notification from the Ministry of Defence about the termination of financing only in June 2014. This entailed a disruption in the work schedule and made it impossible to receive the contracted equipment from suppliers that are world-renowned companies. The results are well known: the state has not yet received a modern powerful vessel capable of reliably protecting it sea borders, and the shipyard, having failed to pay in full for the equipment of foreign suppliers, for which advance payment had been made, incurred losses of about UAH 100 million as penalties for violation of settlement deadlines under foreign currency transactions. In addition, the Ministry of Economic Development also imposed sanctions on the shipbuilders, which made it more difficult for the company to work on other contracts not related to military shipbuilding.

Since then, the company has not received any new financial document related to raising and the use of budgetary funds for the construction of the corvette. Therefore, there are no real grounds for such an audit by the State Audit Service, except for reviewing the results of the audit made by their predecessors.

It is obvious that the state must decide on the future of the first Ukrainian corvette. And if the financing of its construction is resumed, the State Audit Service will receive real rather than trumped up grounds for such audits.