Editor’s Note: This is the 27th issue of Ukrainian SOE Weekly, covering the period of May 7-14, 2021.
OECD publishes review of corporate governance in Ukrainian SOEs
This week, the Organization for Economic Cooperation and Development published the results of its review of corporate governance of state-owned enterprises in Ukraine.
SOE Weekly team members – Andriy Boytsun, Dmytro Yablonovskyi, and Oleksandr Lysenko – are very proud to have been part of the review as OECD consultants. We contributed significantly to the review, including data collection, research, analysis, drafting support, and comments.
The review was started in the summer of 2020 and completed recently, having gone through two discussions with the Working Party on State-Ownership and Privatization Practices (a subsidiary of the OECD’s Corporate Governance Committee) in October 2020 and March 2021.
The Working Party and the Corporate Governance Committee are the OECD’s bodies that have developed the OECD Guidelines on Corporate Governance of SOEs, the most widely recognised standard for corporate governance across the globe.
The review describes corporate governance reforms as being “nascent” and “fragile” and, while gradual progress has taken place, changing priorities have led to “reform stagnation and setbacks.” It includes recommendations on near-term and long-term priorities for corporate governance reform.
Short-term priorities:
- Address inconsistencies in legal and regulatory frameworks;
- Continue corporate governance reforms in the top 15 SOEs;
- Implement best practices in transparency and disclosure in economically important SOEs, and upgrade financial and non-financial reporting;
- Develop a comprehensive ownership policy with clear rationales for ownership;
- Ensure that the governance of SOEs is carried out in a transparent and accountable manner;
- Reintroduce annual aggregate reporting, while upgrading the ProZvit platform;
- Professionalize state-ownership functions, as a means to fight corruption, and avoid undue political interference and unnecessary day-to-day intervention in SOEs, with the ultimate aim of enhancing SOE efficiency and profitability.
Long-term priorities:
- Establish a centralized ownership coordination entity;
- Ensuring a level playing field with private companies;
- Continue strengthening anti-corruption frameworks applicable to SOEs;
- See through reform of the remainder of the SOE portfolio in line with the ownership policy and fully centralize ownership.
The review is available here.
Privatization
Another Ukrspyrt distillery to be privatized. The State Property Fund put up Karavanske MPD, a new asset of Ukrspyrt, for privatization The starting price of the lot is Hr 23.1 million. An online auction will take place on June 7, 2021. The asset includes buildings and infrastructure with a total area of 11,980.5 square meters, including an administrative building, production buildings, warehouses, workshops, a carbon dioxide shop, alcohol and grain storage, etc. The company was founded in 1837 and most recently modernized in 2019. Assets are concentrated in two villages in Kharkiv Oblast; Karavan and Barchany.
Corporate governance in SOEs
For an extended background of the Naftogaz case, see SOE Weekly’s Issues 25 and 26.
A state representative on the Naftogaz’s supervisory board accuses the board chair of preventing him from performing his duties. Yuriy Vitrenko, the recently appointed CEO of Naftogaz, received an official request from Naftogaz’s supervisory board member Robert Bensh, a US citizen who was appointed as a state representative in 2020 and re-appointed by the government in late April 2021.
Recently, three independent members of Naftogaz’s supervisory board alleged that Bensh had a conflict of interest in a letter to Prime Minister Denys Shmyhal. In his letter to Vitrenko, Bensh fiercely denies the allegations.
He argues that there are no documents to support the allegations against him, nor are there any legal obstacles to prevent him from exercising his powers as a board member.
Bensh says that, on the contrary, it was the board’s chair Claire Spottiswoode and former CEO Andriy Kobolyev who violated the law and Naftogaz’s acts by not letting Bensch attend the Naftogaz’s supervisory board meetings.
Vitrenko commented that the company will analyze the situation thoroughly so it can form a position and respond to Bensh’s request.
Ukrnafta said in March that it wants the Cabinet to undo its decision to put Bensh on the Naftogaz supervisory board due to a conflict of interest.
In an interview with Interfax, Kobolyev also said that Bensh had a huge conflict of interest, in particular regarding his participation in the Louisiana Natural Gas Exports project.
The formal grounds on which Bensh was not allowed to participate in the supervisory board meetings remain unclear. Bensh is the only supervisory board member who did not file a termination notice two weeks ago.
Vitrenko reveals that the president and prime minister entrusted him as Naftogaz’s CEO
Yuriy Vitrenko said that President Volodymyr Zelensky and Prime Minister Denys Shmyhal gave him a task to organize the work of Ukrgazvydobuvannya efficiently so that the demand of the population of Ukraine is fully met by the company’s own gas extraction.
According to Vitrenko, prior to the increase in gas production, Vitrenko was tasked with organizing the profitable and stable operation of Naftogaz. The CEO added that, if there are problems in the supply chain, Naftogaz must play an active role in resolving these problems.
Vitrenko also commented on large debts of regional distribution companies, most of which are controlled by the oligarch Dmytro Firtash. He said that there these companies, including those owned by Firtash, should be sued. If they cannot pay, then these companies must become the property of the state in an appropriate legal manner.
Vitrenko expressed concern that, during the nomination of Naftogaz’s new supervisory board, the international partners would offer a political compromise, as they did with the previous board. Instead of a professional competitive selection according to the OECD standards, they would merely offer their representatives [on the board].
Vitrenko also said that the competitive selection of a new CEO of Ukrnafta, a company majority-owned by Naftogaz, is on the agenda. This appointment should abolish the dependence of company’s management on minority shareholders [the Privat group affiliated with Ihor Kolomoisky]. The issue of splitting Ukrnafta’s assets between Naftogaz and these minority shareholders is also on the agenda.
Naftogaz’s supervisory board offered to temporarily remain in office
The head of the President’s Office Andriy Yermak invited Naftogaz’s supervisory board to remain in the office and work until the new competitive selection is held.
Yermak also said that a 12-month contract was signed on May 13 with the new CEO of Naftogaz, Yuriy Vitrenko, and the next CEO will be elected via a transparent competitive selection, which will start in six months.
Yermak noted that a draft law on improving corporate governance of state-owned legal entities is currently being prepared.
[Note that, on 19 April – nine days before the Naftogaz crisis – the Ministry of the Economy had published the long-awaited draft law proposing changes to the legislation on corporate governance of SOEs. This draft law proposes that all the existing powers of the Cabinet of Ministers to appoint and dismiss CEOs of SOEs should be kept as they are. – SOE Weekly.]
Deputy head of the President’s Office Yuliya Svyridenko said that the goal is to more clearly delineate the functions of the state as a shareholder and to prescribe transparent evaluation criteria for supervisory boards.
Later, media reported that the National Agency for the Prevention of Corruption (NAPC) is investigating compliance with the requirements of the legislation on the prevention and
settlement of conflicts of interest in the appointment of Vitrenko as CEO of Naftogaz.
Prime minister comments on management changes in Naftogaz
This week Prime Minister Denys Shmyhal was interviewed by RBC. We selected the relevant points from this interview.
On corporate governance reform:
- “We did not and do not intend to stop or break corporate [governance] reform. The government represents the state of Ukraine, which is the shareholder of Naftogaz. Accordingly, as a representative of the shareholders – the people of Ukraine – the government takes measures to make the company efficient. And all this is within the current legislation. I am sure that these were the right decisions.”
- “We talked about this with our partners, who helped us implement corporate [governance] and other reforms, who invested their capital in it to move Ukraine forward. For example, during a meeting with US Secretary of State Antony Blinken, in meetings with ambassadors of the G7 states, we discussed the continuation of the reform. The key messages are: the names of managers do not matter; what matters is compliance with legislation, procedures, and the continuation of corporate [governance] reform. These vectors coincide with our views by 100%.”
Has the government been able to convince the international partners that it dismissed Andriy Kobolyev in accordance with law and corporate [governance] reform?
- “We are not obliged to convince our partners of the legitimacy of our decisions. If someone has doubts about the legality, there is a court. Of course, we understand that we are acting according to the law.”
Will this decision have consequences for negotiations with the creditors?
- “No. Creditors and our partners may be affected by decisions that break the principles of the corporate [governance] reform, as well as other reforms that are being implemented in Ukraine. We have not and are not going to break any principle of the corporate [governance] reform”.
- “Regarding the implementation of reforms, our partners are more concerned about the continuation and completion of the reform of the judiciary, anti-corruption system – the National Anti-Corruption Bureau (NABU) and the National Agency for the Prevention of Corruption (NAPC) – and [the] anti-corruption legislation. I think that corporate governance reform is a third or fourth priority, but along with large-scale privatization and other reforms. Both Kobolyev and Vitrenko are perceived by Western partners as top managers-reformers. The literal phrase of our partners was: the name does not matter.”
Later this week, G7 ambassadors reiterated their concern that the government, as Naftogaz’s shareholder, and the company’s supervisory board, had not yet reached an agreed solution that will enable the current board to execute its responsibilities independently. They urged the government to resolve this swiftly, in a way that reflects its commitment to international standards of corporate governance.
The government ignores the assessment of Ukrzaliznytsia’s 2020 losses
As we reported in SOE Weekly (Issue 24), at the annual general shareholders meeting of Ukrzaliznytsia on April 21, 2021, the Cabinet of Ministers as the shareholder of Ukrzaliznytsia considered the company’s performance in 2019. The meeting approved Ukrzaliznytsia’s annual report, including its audited financial statements, as well as the reports of the supervisory board and management board, for 2019.
[As we noted SOE Weekly (Issue 24), this was not a typo. The annual report, the supervisory board’s reports, the management’s report, and the distribution of profit were approved for 2019, not 2020. – SOE Weekly.]
However, no information is available to indicate that the Cabinet has considered Ukrzaliznytsia’s annual report, the supervisory board’s report, the management’s report, and the distribution of profit for 2020.
[According to the Law of Ukraine “On Joint-Stock Companies”, approval of the annual report and distribution of profit are the issues that must be mandatorily considered at the annual general shareholders meeting. – SOE Weekly.]
In SOE Weekly (Issue 23), we reported that, according to the 2020 results, Ukrzaliznytsia made a net loss of Hr 11.9 billion. The government has not yet made any statements on such performance of the company.
As we reported in SOE Weekly (Issue 25), the Cabinet recently assessed the performance of Naftogaz’s supervisory board and management as unsatisfactory due to the Hr 19 billion losses, and dismissed the board and management. At the same time, the Cabinet also assessed the performance of Ukrhydroenergo’s supervisory board and management as unsatisfactory, despite the net profit of Hr 4.1 billion, but did not dismiss the board (see next paragraph).
Government assesses the work of Ukrhydroenergo’s supervisory board and management in 2020 as unsatisfactory, the board disagrees
On April 28, the Cabinet of Ministers found the work of Ukrhydroenergo’s supervisory board and management board in 2020 to be unsatisfactory after reviewing their annual reports. The company’s supervisory board does not agree.
The supervisory board called on the government to engage in a constructive and open dialogue in the interest of Ukrhydroenergo, based on best practices as in the OECD Guidelines on Corporate Governance of SOEs.
The supervisory board emphasized that, in 2020, the company received a net profit 4.7 times higher than planned, fully implemented the investment programme, and paid 52% more into the state budget than it was supposed to – a total of Hr 3.5 billion. The board also stated that the company’s assets grew by 18.2% in 2020, while they were only expected to grow by 3%.
The board also said that its representatives were never invited to discuss the company’s performance.
The government approves dividend pay-out ratios for SOEs without justification, nearly all the amount to be paid by PrivatBank.
On April 28, the government issued a resolution approving the basic dividend pay-out ratio for state-owned enterprises and banks for 2020. For most of them, the rate is set at 50%.
[As we noted in SOE Weekly (Issue 25), normally, the basic ratio applies to all SOEs and state-owned banks, unless an individual ratio is set for a particular company or bank.
Remarkably, the Cabinet’s resolution only covers corporatized SOEs and state-owned banks, whether directly or indirectly owned by the state. It does not cover state unitary enterprises and other non-corporatized SOEs. – SOE Weekly.]
Naftogaz, PrivatBank and Oschadbank are exceptions to the pay-out ratios. The ratio set for Oschadbank is lower than the default ratio, namely 30%, and for PrivatBank and Naftogaz, much higher than the default ratio: 80% and 95%, respectively.
[Please note that, on the same day that the decision on dividend ratios was made, the government – in its capacity as the shareholder of Naftogaz – decided not to collect dividends from Naftogaz for 2020 due to the company’s losses in that year. The goal of setting the dividend ratio for Naftogaz at 95% is unclear.
In accordance with the previous draft resolution, the government also planned to set an individual ratio of 30% for Ukrhydroenergo – but in the adopted resolution, this exception for Ukrhydroenergo was excluded.
As we noted in SOE Weekly (Issue 25), the explanatory note attached to the draft resolution did not provide any reasoning for any of these ratios. The explanatory note did not link the dividend policy to any other SOEs’ ownership policies or strategies, either.
Note that Ukrhydroenergo and Oschadbank have historically enjoyed a lower dividend payout ratio, typically 30%, than other SOEs, without any reasoning stated by the government.
PrivatBank reported a profit of Hr 25.3 billion in 2020 and was the most profitable bank in Ukraine. This implies that the dividends to be paid by PrivatBank would be Hr 20.24 billion, which is roughly 91% of all the dividends of Hr 22.3 billion to be collected by the state according to the adopted resolution. – SOE Weekly.]
The 2021 state budget projects Hr 24.4 billion in dividends [i.e., 2% of state budget revenues – SOE Weekly]. Now the Ministry of Economy is saying that, without dividends from Naftogaz, state budget revenues from dividend payments are expected to be Hr 22.3 billion.
[Note that the difference is only Hr 2.1 billion, suggesting that a large shortage that may have occurred due to Naftogaz may have been covered by increasing the dividend pay-out rate for PrivatBank. – SOE Weekly.]
Boryspil looks for a CEO
The supervisory board of Boryspil International Airport announced a competitive selection for the company’s CEO. The position became vacant after the previous CEO Pavlo Ryabikin was appointed as the Head of the State Customs Service.
Applications for the competitive selection are accepted from May 12-25, 2021. The results of the competition are to be announced by 7 July 2021.
In SOE Weekly (Issue 04), we reported that Oleh Struk, who had been a deputy CEO, would temporarily serve as the acting CEO of Boryspil until a new CEO is appointed.
SOE updates
Energy sector
Centerenergo lost Hr 800 million in the first quarter of 2021
According to the media, Centerenergo lost Hr 794.7 million in the first quarter of 2021. For comparison, in the first quarter of 2020, the company reported a loss of Hr 163 million.
According to the media, in the first quarter of 2021, Centerenergo’s net income from sales amounted to Hr 2.98 billion, while it was Hr 4.27 billion for the same period last year. The cost of goods sold were Hr 3.64 billion (against Hr 4.32 billion during the same period last year).
[Centrenergo is supermajority-owned by the State Property Fund of Ukraine (SPF). No official communication from the SPF or Centerenergo is available, including comments on what caused these losses. In the first quarter of 2021, SPF reported an income of almost Hr 1 billion from selling smaller assets, such as alcohol distilleries and real estate, via privatisation auctions. Note that the first quarter’s losses of Centerenergo alone almost offset that income. In addition, the SPF has held many other large SOEs in its portfolio for many years. We are not aware of the financial performance of the SPF’s aggregate portfolio. All SOEs in the SPF’s portfolio are designated for privatization. – SOE Weekly.]
In SOE Weekly (Issue 22), we reported that Ukrvuhlezbahachennya Group LLC, allegedly related to Ihor Kolomoisky, has reportedly made Hr 120 million by reselling state coal to Centerenergo, and owes Hr 250 million to coal mines. According to journalists, in January-February 2021, Ukrvuhlezbahachennya sold about 400,000 tons of coal to Centerenergo.
The intermediary bought this coal from coal mines for an average of Hr 1,200/ton and resold it to Centerenergo at an average price of Hr 1,640/ton. Discounted by the cost of enriching the purchased coal, Ukrvuhlezbahachennya’s estimated earnings in just two months were Hr 120 million. At the same time, according to the investigative journalists’ sources at the Ministry of Energy, Ukrvuhlezbahachennya still owes the mines about Hr 250 million for the coal supplied. If this outstanding debt is included, Ukrvuhlezbahachennyahas made Hr 370 million in total.
Infrastructure
Automobile Roads of Ukraine lost Hr 130 million
According to its 2020 results published by the media, the state-owned company Automobile Roads of Ukraine (ARU) reported net losses of Hr 130 million.
According to the results of 2019, ARU reported losses amounting to Hr 443.2 million. In 2018, the financial report revealed a loss of Hr 314.7 million. The loss for 2017 was Hr 82 million.
[Notably, the founder and owner of 100% of the shares of ARU is the state represented by Ukravtodor (the State Service of Roads of Ukraine).
There is no rationale for the state to own an SOE like ARU.
This also contradicts the government-declared basic principles of state ownership policy. Since the services that the company provides are readily available from private providers in the competitive market, Automobile Roads of Ukraine should be privatized or liquidated.
There is also a conflict of interest in Ukravtodor being the owner of ARU, the regulator and the main customer for road construction and repairs in Ukraine at the same time. – SOE Weekly.]
Ukrposhta announced a tender worth $50 million
Ukrposhta announced a tender for the construction of an automated sorting center in Kyiv region. The expected cost of the project is $50 million. According to the company’s CEO Ihor Smilyanskyi, in a few years, Ukrposhta plans to have six or seven such centers and approximately 60 or more new depots. He added that there are two options for the contract: an investment agreement or a long-term lease with the possibility of a buy-out by Ukrposhta. The deadline for submission of proposals is June 6, 2021.
Events
Roundtable on “The implementation of corporate governance principles in Ukraine’s defense industry.”
On May 13, a roundtable took place on “The implementation of corporate governance principles in Ukraine’s defense industry: From initiative to realization.” The roundtable discussed the status of corporate governance reform in Ukroboronprom, including the draft law on its transformation (Draft Law No. 3822).
Andriy Boytsun, a member of the SOE Weekly team, took part in the roundtable. Other participants included: Yuriy Husyev (CEO of Ukroboronprom Group of Companies); Oleksandr Zavitnevich (Head of the Verkhovna Rada Committee on National Security, Defence and Intelligence); Roman Bondar (First Deputy CEO of the Ukroboronprom); Yuriy Pashchenko (Director of Iskra, an Ukroboronprom enterprise); Olena Trehub (General Secretary of the Independent Defence Anti-Corruption Committee, NAKO); Hlib Kanevsky (Head of State Watch).
Boytsun said that the current version of Draft Law No. 3822 is not in line with the OECD Guidelines on Corporate Governance of SOEs.
Specifically, the current wording of the draft law:
- cements the conflicting roles of the state as owner, policymaker, and regulator, as it opens room for intervention by the politicians, including the line ministry; and
- leaves room for political meddling and graft, as it does not guarantee the independence of the supervisory board from the owner and policymaker.
Boytsun also said that the parliament should adjust the draft law to take these shortcomings into account. He added that the recent corporate governance events in Ukrainian SOEs have vividly demonstrated that adopting a compromising version will compromise the corporate governance reform.
[On May 14, the Verkhovna Rada Committee on National Security, Defence, and Intelligence unanimously supported Draft No. 3822, recommending that the parliament should adopt the document in the second reading. – SOE Weekly.]
Ukrainian SOE Weekly is an independent weekly digest based on a compilation of the most important news related to state-owned enterprises (SOEs) and state-owned banks in Ukraine. Editorial team: Andriy Boytsun, Mariia Kramar, Dmytro Yablonovskyi, and Oleksandr Lysenko. The SOE Weekly is produced and financed by Andriy Boytsun. Communications support is provided and financed by CFC Big Ideas. The SOE Weekly is not financed or influenced by any external party. © 2020–2021 Andriy Boytsun, all rights reserved. Spaces – Maidan Plaza || Maidan Nezalezhnosti 2, Kyiv 01012, Ukraine Email: [email protected] || Telephone: +380 44 247-7829.
