Ukraine Lets Private Developers Build Underground Arms Factories for Defense Companies

Ukraine is separating two roles that governments typically combine when expanding protected defense production: building the facility and paying manufacturers for their output. Under a new Cabinet-approved mechanism, private developers can finance and construct underground production space, then sell, lease or otherwise transfer its use to eligible defense companies.

The rule took effect on October 22, 2026, according to Prime Minister Serhii Koretskyi. It amends Cabinet Resolution No. 1494 and creates a simplified construction and permitting route for developers using their own or borrowed capital. The mechanism covers new factories as well as space needed to relocate or expand existing production.

For Ukraine, the immediate benefit is another route to protected manufacturing capacity without requiring the government to finance and own every building directly. Repeated pressure on defense plants has made continuity of production a central industrial constraint, while the capital cost and construction burden of protected facilities can compete with spending on equipment, components and completed systems.

The private-finance model moves that initial construction burden to developers, but it does not make the facilities free. Defense manufacturers remain responsible for buying or leasing the space. Companies fulfilling state contracts could potentially meet those costs with revenue received under those contracts, meaning public money may still support the facilities indirectly through the price of the manufactured goods.

Deputy Defense Minister Hanna Hvozdiar described the mechanism as adding no burden to the state budget because investors supply or raise the construction capital. In accounting terms, that distinguishes the model from direct government construction spending. Its longer-term public cost will depend on the commercial terms negotiated between developers and manufacturers and on how facility expenses are reflected in state-contract pricing.

Those terms are not left entirely open-ended. An agreement must be concluded between the investor and the defense company before construction begins, setting out financing arrangements, deadlines, transfer procedures and conditions for subsequent use. The Defense Ministry says it will have five working days to review draft agreements and investor documents for compliance with the requirements.

The framework also sets a floor for shared projects. If a manufacturer receives only part of a completed facility, its portion must comprise at least 25% of the total area and be suitable for production. A lease or other fixed-term right of use must run for at least one year, and the company can request an extension through the end of martial law.

That 25% requirement gives defense production a substantial place within a mixed-use development rather than allowing a developer to qualify a much larger project through a nominal industrial allocation. At the same time, shared facilities could spread construction and ownership costs across more than one use. The practical tradeoff is reduced flexibility for smaller manufacturers that need less than one-quarter of a given site.

Access is limited to defined categories rather than the entire manufacturing sector. Potential users include Defence City residents, companies registered as state defense contractors and manufacturers designated by the Defense Ministry as critically important. That concentrates the simplified process on firms tied to recognized defense requirements, although companies outside those categories do not receive the same route to protected space.

The model also broadens who can initiate construction. Previously, defense manufacturers themselves were the central clients for such projects. Private legal entities can now act as construction clients, bringing property development and outside financing into a sector where manufacturers may have production demand but lack the capital or expertise to manage a major building program.

Ukraine is pairing the construction change with a separate measure aimed at component costs. Weapons-production parts financed by international partners will be exempt from import duty and value-added tax. Koretskyi said customs inspection and clearance would be shortened through a “single window.” Together, the measures address two different constraints: obtaining protected floor space and moving partner-funded inputs into production without adding import taxes.

The approach follows direct public support for damaged manufacturers. In December 2025, the Defense Ministry reported that more than UAH 1.5 billion, approximately $36 million, in budget funding had helped affected defense companies restore operations. The ministry was also planning to relocate or duplicate critical plants, while underground complexes were already under construction.

Private development now adds another financing channel rather than replacing those state programs. Its performance will depend on whether developers can raise capital on workable terms, manufacturers can support lease or purchase payments, and contracts can allocate construction and handover risks without slowing delivery. Ukraine has opened the door to more protected production space; the next test is whether commercial agreements can turn that authority into completed factories at costs the defense-contract system can sustain.

By David Whitaker — Associate editor for AMI’s aerospace and drone systems desk, translating flight systems, aircraft programs, spaceflight, and UAV developments into accessible technical stories.