Editor’s Note: This is Ukrainian State-Owned Enterprises Weekly, Issue 44, covering events from Sept. 18-24, 2021
Corporate governance in SOEs
The Cabinet of Ministers does not extend the powers of the chair and three members of Ukrzaliznytsia’s supervisory board
The Cabinet of Ministers did not extend the powers of Ukrzaliznytsia’s supervisory board chair, Şevki Acuner, and supervisory board members, Sergii Leshchenko, Andreas Matje, and Oleh Zhuravlyov. No replacements have been appointed or named yet.
In its release, the Ministry of Infrastructure said that Adomas Audickas was the only supervisory board member (state representative) whose powers and contract remained valid until June 2022.
Later this week, Minister of Infrastructure Oleksandr Kubrakov submitted Leshchenko’s candidacy to the SOE Nomination Committee, proposing to return him to the company’s supervisory board as a state representative. The media learned this during the meeting of the Parliament’s Temporary Commission of Inquiry investigating Ukrzaliznytsia.
The commission decided on April 30 to coordinate the company’s personnel appointments.
[We are not aware of any legal power of such decisions by the commission. In addition, even if existent, any involvement of parliament in personnel appointments would suggest an outright political intervention in the corporate governance of an SOE. – SOE Weekly.]
At the commission’s meeting, Deputy Minister of Infrastructure Vasyl Shkurakov said that Kubrakov has the right to nominate a board candidate (state representative) to be considered by the Cabinet. He added that the appointment of supervisory board members was made in accordance with the procedures of the Cabinet of Ministers.
[The selection, nomination, and appointment of supervisory board members in Ukrainian SOEs is indeed governed by procedures set by the Cabinet of Ministers. These procedures do not envisage any role for parliament or its bodies. – SOE Weekly.]
In SOE Weekly (Issue 41), we reported that Ukrzaliznytsia hired a head-hunting agency to select candidates for the positions of the CEO, executive board members, and four independent supervisory board members.
In SOE Weekly (Issue 33), we reported that the government decided to give Ukrzaliznytsia’s independent supervisory board members (Acuner and Matje) and state representatives (Leshchenko and Zhuravlyov) another three months on the board unless new members are appointed earlier.
We also said then that Audickas was the only supervisory board member of Ukrzaliznytsia whose powers had not been extended.
[This does not appear to be entirely correct, as follows from the Infrastructure Ministry’s recent release cited above. Indeed, the Cabinet made no decision to extend Audickas’ powers, but no such extension was required as his contract remained valid until June 2022. – SOE Weekly.]
In SOE Weekly (Issue 12), we explained the vague role of Parliament’s Temporary Commission of Inquiry. It was unclear which methodology the commission used to assess Ukrzaliznytsia, its management, or the supervisory board, if any. It was also unclear what status or effect the commission’s findings would have if any.
Parliament has no formal role in the corporate governance of individual SOEs. Therefore, it was (and remains) unclear to whom the Ccmmission’s recommendations would be made and how they would be implemented, if at all. Hryshyna is a member of the Verkhovna Rada’s Committee on Education, Science and Innovation whose scope is not related to either SOEs or economic policies.
Three supervisory board members and two executive board members leave Naftogaz
According to Ekonomichna Pravda’s (EP’s) sources, three independent members of Naftogaz’s supervisory board (Bruno Lescoeur, Ludo Van der Heyden, and Claire Spottiswoode) and two executive board members (Otto Waterlander and Peter van Driel) are leaving their positions.
According to EP, on Sept. 20, the supervisory board approved the dismissal of the two executive board members. By law, independent members’ duties expired on Sept. 21, after their recent resignation notices.
Van Driel was Naftogaz’s chief financial officer and Waterlander was both chief transformation officer and chief operating officer.
In SOE Weekly (Issue 42), we reported that according to EP, three independent members of Naftogaz’s supervisory board (Lescoeur, Van der Heyden, and board chair Clare Spottiswoode) filed their two-week resignation notices on Sept. 7.
The three state representatives continue to serve on the supervisory board.
SOE Weekly on the importance of appointing a new Naftogaz supervisory board
In his recent column, SOE Weekly team member Oleksandr Lysenko explained why – until new independent supervisory board members at Naftogaz are appointed – the board’s work will be paralyzed and the company’s transactions delayed.
He also said that – if decisions are made by a body not authorized to make them instead of the supervisory board (such as the Cabinet of Ministers as the shareholder of Naftogaz) – this might lead to such decisions being declared invalid.
As we reported in SOE Weekly (Issue 42), on Sept. 7, Prime Minister Denys Shmyhal instructed Oleksiy Lyubchenko (first deputy prime minister and minister of the economy) to announce a competitive selection of four independent members of Naftogaz’s supervisory board within one week.
There has been no information about a new competitive selection since.
Naftogaz’s executive board member interviewed
Naftogaz’s Chief Transformation Officer and Chief Operating Officer Otto Waterlander was interviewed by Ekonomichna Pravda (EP). He confirmed that he had sent a letter to the company’s supervisory board stating that he could no longer work efficiently and intended to leave the company.
We selected some key points from the interview.
On the company’s new management and CEO:
- “Very many decisions are frozen. For example, there are certain operational problems in procurement. This is very difficult for the company because the contracts must be accepted by the executive board, and these decisions do not get made. I understand that (CEO Yuriy) Vitrenko confirmed our strategy, he does not want to change it. But he wants to do other things that are not in line with our strategy. He would like to organize the company in a different way.”
On his own dismissal/resignation:
- “I informed the supervisory board that an effective solution is needed in such a situation. I understand that the supervisory board tried to remove Vitrenko from the post of the company’s CEO, but it was unable to do so. Accordingly, to resolve the situation, a possible solution would be my dismissal/resignation.”
[The Ukrainian version of the interview does not make it clear whether Waterlander refers to resignation on his own initiative or dismissal by the supervisory board. Commonly, if the company dismisses an employee prematurely, he/she would be entitled to severance pay. When he/she resigns on his/her own initiative, no severance pay is commonly paid. – SOE Weekly.]
On other executive board members and their possible dismissal/resignation:
- “Peter van Driel wrote a similar letter to the supervisory board. I hope that Serhiy Pereloma will stay, since he also heads the gas storage business – Ukrtransgaz. I cannot say anything about Yaroslav Teklyuk’s intentions.”
[Naftogaz’s executive board consists of five members: Yuriy Vitrenko (CEO), Serhiy Pereloma (First Deputy CEO), Otto Waterlander (Chief Transformation Officer), Peter van Driel (Chief Financial Officer), and Yaroslav Teklyuk (Director for Legal Affairs). – SOE Weekly.]
On the resignation of the independent supervisory board members:
- “My understanding of the situation is that the supervisory board worked to dismiss or suspend Yuriy Vitrenko from the CEO position, but it does not have this opportunity at the moment – and now, its resignation seems logical.”
In SOE Weekly (Issue 42), we reported that according to EP, three independent members of Naftogaz’s supervisory board (Bruno Lescoeur, Ludo Van der Heyden, and board chair Clare Spottiswoode) filed their two-week resignation notices on Sept. 7.
The three state representatives continue to serve on the supervisory board.
State Audit Service to audit Naftogaz
According to the media, at its Sept. 22 meeting, the Cabinet of Ministers ordered the State Audit Service (SAS) to audit Naftogaz and the group’s enterprises for 2017-2021.
The Cabinet of Ministers also instructed Naftogaz to create appropriate conditions for the service to exercise state financial control. In particular, audit officials should be admitted to the respective enterprises and provided with necessary documents.
Centrenergo’s supervisory board was approved by the shareholders
According to SMIDA, Cenerenergo’s shareholders approved the company’s new supervisory board at an extraordinary general meeting on Sept. 16 All supervisory board members were elected for a term of three years.
[Centerenergo is supermajority-owned by the State Property Fund of Ukraine (SPF). The SPF’s share in the company is 78.289%. – SOE Weekly.]
In SOE Weekly (Issue 43), we reported that on Sept. 15, the government approved the candidacies of Valeriy Bezlepkin, Oleksandr Muzhel, and Valeriy Shchekaturov as independent members, and Denys Kudin and Andriy Gotha as state representatives.
SOE updates
Infrastructure
Ukrzaliznytsia challenges VR debt – VR responds
Ukrzaliznytsia said it will only pay its confirmed debt to VR Global Partners (VRGP). According to Ukrzaliznytsia, its debts of $153.25 million to Prominvestbank were sold to VRGP in 2019, and the agreement took place without the participation of the railway company’s representatives.
Ukrzaliznytsia said that VRGP did not have the status of a financial institution in accordance with Ukrainian law, and the agreement transferring the debt, concluded in February 2019, was by nature a factoring agreement that requires a license. The court argued that VRGP presented a factoring agreement as a sale and purchase agreement and declared the agreement invalid, Ukrzaliznytsia said.
According to Ukrzaliznytsia, in similar cases, the maximum interest rate for the use of credit funds after the expiration of the loan term, which ended in 2014-2015, is 3%, not 10 to 11%.
In response, VRGP published a release stating that there was no requirement for Prominvestbank to inform Ukrzaliznytsia of its plans — Ukrzaliznytsia was the borrower, and the loan provided full legal right of the lender [Prominvestbank] to transfer its position without borrower consent.
VRGP also said that Ukrzaliznytsia’s claim that it was not aware of Prominvestbank’s intent to sell the loans is verifiably false. Eight days prior to the auction in which the loans were sold, Ukrzaliznytsia’s senior management, including its then-CEO, Yevhen Kravtsov, and its then-replaced CEO, Ivan Yuryk, met at the company’s offices in Kyiv to discuss the issue of the loans and the upcoming auction with senior management of VRGP. At that meeting, Ukrzaliznytsia’s management expressed no objection to the auction or to VRGP participating in the auction.
According to VRGP, the debt was sold in a public auction whose procedures were approved by the National Bank of Ukraine. The auction price was supported by two independent valuations provided to Prominvestbank, including KPMG. The transaction took place under a Ukrainian law contract, and proceeds from the sale went directly into the accounts of Prominvestbank, a Ukrainian-registered bank.
On Ukrzaliznytsia’s allegations that VRGP is seeking more than $388.5 million from the company, VRGP stated that on 28 February 2019, VRGP presented a formal offer to Ukrzaliznytsia for the settlement of the debt by way of conversion to Eurobonds in an amount of $145.9 million. This implied a write-off of all overdue interest amounts, as well as a discount to the principal amount of loans.
VRGP never received a substantive response to this proposal. Likewise, VRGP has made multiple further proposals to the company in the ensuing two years. None of these proposals have sought figures even remotely in the realm of what Ukrzaliznytsia attempts to have the public believe.
On June 15, 2021, VRGP President Richard Deitz presented an archive of its correspondence with Ukrzaliznytsia regarding the ex-Prominvestbank loans before the Parliamentary Temporary Commission of Inquiry.
In SOE Weekly (Issue 43), we reported that the Northern Commercial Court of Appeal upheld Ukrzaliznytsia’s appeal, declaring invalid the contract for the sale of Ukrzaliznytsia debt from Prominvestbank to the New York-based investment fund VRGP. VRGP said in a press release it would challenge the court decision in the Supreme Court.
Ukrzaliznytsia plans to sell non-core assets for Hr 500 million
According to Ukrzaliznytsia’s CEO, Oleksandr Kamyshin, the company expects to receive Hr 500 million ($19 million) due to the sale of its non-core assets – more than 400 items – by the end of 2021.
Kamyshin said this during the panel discussion on “Reform of state-owned companies as an impetus for the development of competitive markets” organized by the Kyiv School of Economics and the Embassy of Japan.
More information on the panel discussion is available here. Full video recording of the discussion can be viewed here.
State Audit Service identifies risks and violations worth Hr 60 billion at Ukrzaliznytsia
According to the State Audit Service (SAS) report on Ukrzaliznytsia for 2017-2020, published by Marlin, SAS found financial violations and external and internal risks worth a total of Hr 61.4 billion ($2.3 billion) at the company.
The audit report mentions that in 2018, Ukrzaliznytsia was to purchase freight cars worth $150 million under a loan from the European Bank for Reconstruction and Development. The project started but was not completed due to unknown reasons. Ukrzaliznytsia refused the loan funds, but paid Hr 75 million in transaction costs, which was an unnecessary expense for the company. The report also states that Ukrzaliznytsia did not pay Hr 956 million ($36 million) in dividends to the state budget from its 2018-2019 net profit.
In SOE Weekly (Issue 34), we reported that Ukrzaliznytsia paid 30% of its 2019 profit (Hr 750 million) in dividends to the state budget.
[The State Audit Service (SAS) is under the direction of the Cabinet of Ministers and the Ministry of Finance. It is responsible for implementing policy in state financial control and monitoring the efficiency of the use of public resources while having broad legal and sanctioning powers. Note that SAS functions may overlap with the functions of the internal and external audit and the Accounting Chamber. – SOE Weekly.]
Defense
Ukroboronprom makes half a billion hryvnias in profit in the first half of 2021 months
Ukroboronprom made Hr 517.6 million ($19 million) in net profit in the first half of 2021, compared to Hr 243 million for the same period in 2020. This follows from the report on the implementation of the Ukroboronprom’s financial plan published by Marlin. The plan is 99.5% implemented.
Ukroboronprom’s total revenues amounted to Hr 17.1 billion ($638 million), 19% more than last year. However, Ukroboronprom’s operating profit decreased by 59%, from Hr 1.6 billion to Hr 681 million. This was primarily due to a 21% increase in administrative expenses from Hr 1.4 billion to Hr 1.7 billion and a 161% growth of sales expenses, from Hr 559 million to Hr 1.4 billion.
Other sectors
The government injects Hr 20 billion ($750 million) into the Ukrainian Financial Housing Company to issue preferential mortgage
According to the Ministry of Finance, the Cabinet of Ministers increased the authorized capital of the Ukrainian Financial Housing Company (UFHC) by Hr 20 billion. The Ministry of Finance said that 20,000 Ukrainian families receiving salaries from the state or local budgets and internally displaced persons (IDPs) will be able to obtain housing under 8,000 mortgage loans or 12,000 financial leasing agreements.
[The grounds for such discrimination are unclear. The state financial institutions are commonly established to address market failures, such as an insufficient supply of services by private providers. The state can provide affordable housing loans to people who cannot take such loans from private players.
While the provision of loans to IDPs seems reasonable, limiting the target group to employees of state and local authorities appears to be unreasonable discrimination. It is also unclear if the borrowers would remain eligible for special conditions after they leave their public sector jobs. – SOE Weekly.]
In 2021, the Ministry of Finance will purchase newly issued state-owned shares in UFHC worth UAH 20 billion in exchange for domestic government bonds. For this purpose, the Ministry will issue government bonds worth Hr 20 billion with a maturity of up to 15 years and an income rate of up to 13% per annum.
[Note that this will increase the government debt accordingly. – SOE Weekly.]
In SOE Weekly (Issue 38), we reported that the government determined the conditions to receive mortgage loans and financial leasing services from the UFHC at interest rates of 7% and 5%, respectively.
OPZ suspends its work until November
The press service of the Odesa Portside Plant (OPZ) said that its supplier Agro Gas Trading would decrease gas supplies to the plant due to rising prices for gas needed for urea production, with urea prices growing slower than gas prices.
OPZ also said that Agro Gas Trading owes the plant Hr 140 million. As a result, OPZ has a debt owes to the gas distribution company Odesagas. Management decided to stop the plant to avoid an emergency shutdown by Odesagas or excessive spending of its working capital.
This development is not new for the plant, which had already halted its operations in 2018-2019.
OPZ’s release reported that on Nov. 1, 2021, the plant planned to start working on a toll contract with a new company that won the tender in July 2021.
In the meantime, while urea production is halted, OPZ’s main income will be from the transhipment of ammonia transported through the ammonia pipeline.
[OPZ’s release did not project the losses that the plant is likely to incur due to the halt, including the cost of re-launching ammonia production after the halt. It is also unclear what the prospects of the plant collecting the debt from Agro Gas Trading are. Finally, if the ammonia production is loss-making, as OPZ’s release appears to suggest, it is not clear why the new company would be interested in producing ammonia under a tolling contract. OPZ is slated for privatization. – SOE Weekly.]
SFGC’s grain terminals working at 10% of total capacity
According to the media, actions of previous management of the State Food and Grain Corporation (SFGC) led to a significant decrease in the capacity utilization of SFGC’s grain elevators and transshipment at its port terminals.
Since the start of the year, SFGC’s elevators have only been working at 10% of their total capacity, and the corporation has not sent a single grain shipment to its strategic partner, the China National Machinery Import and Export Corporation. This is a record low since the start of their business relationship.
In SOE Weekly (Issue 30), we reported that SFGC was among the biggest loss-makers among all Ukrainian SOEs, with its 2020 loss totalling as much as Hr 5.9 billion.
In SOE Weekly (Issue 39), we reported that National Police investigators established that management of SFGC had squandered the corporation’s property by selling grain to offshore companies at reduced prices, without prepayment.
On Aug. 13, the National Police detained Andriy Vlasenko, former acting CEO of SFGC, at Kyiv’s Zhulyany airport when he was trying to flee Ukraine. His accomplice was detained along with him.
In SOE Weekly (Issue 42), we reported that Vlasenko, who is suspected of embezzling Hr 71 million and placed under house arrest, was “relieved of his duties as acting CEO” by order of the Ministry of Economy dated Sept. 15, SFGC said on its Facebook page, and Vasyl Kovalenko was appointed as new acting CEO.
Privatization
Oligarchs prevented from taking part in the large-scale privatization
On Sept. 23, the Verkhovna Rada passed presidential Draft Law No. 5599 on oligarchs in the second and final reading. According to the newly adopted law, people defined as oligarchs will be barred from participating in large-scale privatization.
Ukrainian SOE WeeklyTM 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
