Editor’s Note: This is the 26th edition of Andriy Boytsun’s Ukrainian State-Owned Enterprises Weekly covering events from April 23-May 7.
Privatization
Law unblocking large-scale privatization signed by Zelensky
President Volodymyr Zelensky on April 29 signed the Law of Ukraine No. 4543 for the sale of large-scale privatization objects, which lifts the ban on large-scale privatization in Ukraine enacted a year ago due to the Covid-19 situation. According to Dmytro Sennychenko, the head of the State Property Fund of Ukraine, the following companies will be the first offered for sale in 2021: United Mining and Chemical Company, First Kyiv Machine-Building Plant (known as the “Bilshovyk”), and President Hotel.
Corporate governance in SOEs
For an extended background of the Naftogaz case, see SOE Weekly’s Issue 25.
Naftogaz’s ex-CEO Andriy Kobolyev interviewed
Ex-CEO of Naftogaz Andriy Kobolyev was interviewed by Interfax Ukraine after his dismissal. We have selected the key points from this interview:
- “Naftogaz’s plan was to replace dividends with some other payment in the amount of Hr 32 billion – to pay dividends in advance or via [the purchase of] government bonds. The prime minister and the president were aware of the plan.”
- “The government has also been informed in advance that, instead of the planned Hr 11 billion profit stated in the financial plan, there would be a loss. Naftogaz has repeatedly warned about the problem of non-payments for gas and the need to provision reserves for these bad debts [which was one of the main reasons for Naftogaz’s losses – SOE Weekly]”.
- “The cash balance on the company’s account on the date of Kobolyev’s dismissal was more than $2 billion, and there was 7 billion cubic meters of natural gas owned by Naftogaz in underground storage. This evidences that the company is financially stable.”
- Kobolyev claimed that he and Naftogaz worked on maximizing contributions to the state budget, which reached a record amount in 2020.
Naftogaz’s supervisory board members resign
Naftogaz said in a statement that the supervisory board members who attended the board’s extraordinary meeting on April 30 were filing their resignation notices to the company. According to the procedures currently in effect, these resignations will be effective on May 14.
[The statement did not specify the names of the supervisory board members who were present in that meeting, and why not the entire supervisory board was present. It remains unclear which board members effectively resigned. – SOE Weekly.]
The supervisory board met with the newly appointed CEO [Yuriy Vitrenko] and other executive board members. The latter raised their concerns about the ability to continue serving Naftogaz further.
The resigning supervisory board members said that they would use the coming two weeks of their notice period to help the company as much as they can to deliver an orderly transition.
The Cabinet of Ministers invited the supervisory board members to stay until a new competitive selection is completed and new independent board members are elected.
The Cabinet of Ministers said that it remained committed to corporate governance reform according to the OECD standards, aiming to improve the governance of SOEs.
Independent supervisory board members of Naftogaz admonish the Cabinet’s decision in a letter to the prime minister
Independent members of Naftogaz’s supervisory board wrote that the government’s decision to fire ex-CEO Andriy Kobolyev violated corporate governance standards and that they disagreed with the low assessment of management’s performance.
[The letter did not make it clear if this position is supported by the other three supervisory board members representing the state and, if not, why. – SOE Weekly.]
According to their letter to Prime Minister Denys Shmyhal, the supervisory board had explained what had been happening at the company and why the 2020 results should not have come as a surprise.
The supervisory board members wrote that they had no issue with the authority of the shareholder to terminate their powers, even early, as this is the exclusive competence of the Cabinet in their capacity as Naftogaz’s shareholder. However, they said, changing the CEO was in the board’s remit. They also denounced the “Soviet” procedure, where the board’s powers were briefly suspended to clear the way for changing the CEO.
Contrary to good practices, there was no appropriate contest for the new CEO role, the authors added.
[Note that there has never been a competitive selection for the CEO of Naftogaz, including under this supervisory board. – SOE Weekly.]
They also recalled that, when reviewing the former CEO, the supervisory board did not retain Yuriy Vitrenko as a feasible CEO candidate.
They also suggested that a better nomination process for the supervisory board must be found to make sure that the process is removed from undue political influences.
International partners express concern about Naftogaz’s CEO dismissal
The European Union (EU), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the World Bank and the International Finance Corporation (IFC) expressed concern over the dismissal of the Naftogaz CEO.
International partners called on the Ukrainian government to ensure that crucial management decisions at state-owned enterprises (SOEs) follow basic corporate governance standards.
They said that Ukraine has made significant progress improving corporate governance at SOEs in recent years, advancing it towards transparency, accountability, and independence. They are hoping for Ukraine’s renewed commitment to continuing reforms that will unlock investments, allowing the country to recover and realise its potential.
The topic of corporate governance was also one of the key issue raised during the meetings of US Secretary of State Antony Blinken with parliament members and the President of Ukraine.
In his interview, Antony Blinken said that the latest change in Naftogaz’s leadership is a bad signal and a potential international damage to Ukraine’s image. He also said that the government might understand this and would move forward on the corporate governance of Naftogaz, since it must be transparent and independent and must serve the interests of Ukrainians.
In SOE Weekly (Issue 25), we reported that US Department of State spokesman Ned Price tweeted that respect for corporate governance, transparency, and integrity in energy companies’ staff appointments was key to maintaining confidence in Ukraine and its commitment to reform.
The G7 ambassadors reacted to the Cabinet’s decision by saying that effective management of SOEs, free from political interference, was crucial for the competitiveness, prosperity, and fulfilment of Ukraine’s international obligations.
Cabinet of Ministers looking for two supervisory board members for Ukrzaliznytsia
The Cabinet of Ministers approved Order No. 363-r announcing the selection of two independent supervisory board candidates.
Currently, the company’s supervisory board has five members out of the seven required by the company’s charter. These include two independent board members (Chairman Şevki Acuner and Andreas Matje) and three state representatives (Adomas Audickas, Serhiy Leshchenko, and Oleh Zhuravlyov).
[Note that Acuner and Matje were appointed in June 2018, meaning that their contracts will expire in June 2021. The law requires a competitive selection for the Cabinet of Ministers to appoint or re-appoint independent board members. No information on this matter has been released yet. – SOE Weekly.]
New chair of Ukrgasbank’s supervisory board appointed
At the annual general meeting of shareholders of Ukrgasbank, Teimur Bagirov was appointed as the chair of the supervisory board. He has been a member of the board since 2015.
Bagirov replaced Shrenik Davda in this role, who stepped down as board chair to take care of other commitments. Davda remains an independent member of the supervisory board.
Verkhovna Rada’s Temporary Commission of Inquiry asks the Cabinet of Ministers to dismiss Ukrzaliznytsia’s management and supervisory board
According to Yulia Hryshyna, chair of the parliament’s Temporary Commission of Inquiry investigating Ukrzaliznytsia, the Commission called on the Cabinet of Ministers to dismiss all members of Ukrzaliznytsia’s management board, along with acting CEO Ivan Yuryk, and look for new members.
Hryshyna wrote on her Facebook page that the commission was impressed by the incompetence, audacity, and insane losses of the state railway company and its management.
The commission recognized Yuryk and the management board as incompetent and the supervisory board’s work as unsatisfactory. It also said that the salaries of supervisory and management board members should be brought in line with the company’s financial indicators.
Hryshyna noted that the two people directly responsible for the performance of Ukrzaliznytsia – Minister of Infrastructure Vladyslav Krykliy and acting CEO Ivan Yuryk – did not appear at the commission’s meeting on April 30.
In SOE Weekly (Issue 12), we stated that it is unclear which methodology the commission will use to assess Ukrzaliznytsia, its management, or supervisory board, if any. It is also unclear what status or effect the commission’s findings will have, if any.
The parliament has no formal role in the corporate governance of individual SOEs. It is therefore unclear to whom the commission’s recommendations will be made and how they will 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.
SOE updates
Energy sector
Naftogaz reports Hr 12.6 billion in net profit in the first quarter of 2021
Naftogaz CFO Peter van Driel said on his Facebook page that Naftogaz received Hr 12.6 billion in net profit in the first quarter of 2021. Net profit for the same period in 2020 amounted to UAH 3.2 billion.
Van Driel said that the business environment was showing clear signs of recovery, with higher prices and higher demand than last year.
Later, in an official statement, Naftogaz said that these numbers were based on unaudited and unconsolidated financial statements and that such reporting was less accurate than annual financial statements.
According to the statement, the main driver of the improved financial performance is the significant increase in natural gas prices in the European and Ukrainian markets compared to the previous quarter and the same period last year.
According to Yuriy Vitrenko, the newly appointed CEO of Naftogaz, it is not clear how sustainable such financial results of the company are, due to unresolved financial problems in the entire chain of transportation, distribution, and supply of gas to end consumers.
Energoatom finishes the first quarter of 2021 with a profit
According to Energoatom’s financial statements [likely, unaudited – SOE Weekly], Energoatom made more than Hr 1 billion in net profit in the first quarter of 2021.
In the first quarter of 2020, the company posted a net loss of Hr 1.6 billion.
Ukrtransgaz makes losses in the first quarter of 2021, despite increased revenue
Ukrtransgaz received a net income of Hr 1.3 billion in the first quarter of 2021 but ended the quarter with a net loss of Hr 30 million.
Serhiy Pereloma, acting CEO of Ukrtransgaz [who is also an executive board member of Naftogaz – SOE Weekly], said on his Facebook page that Ukrtransgaz’s income was 23% higher than in the first quarter of 2020, but the company still failed to break even and took a net loss of Hr 30 million. For comparison, the company lost Hr 16.3 billion in the first quarter of 2020.
He added that natural gas storage is Ukrtransgaz’s main source of income. Net income from gas storage was Hr 1.1 billion in the first quarter of 2021, which is 9% higher than last year.
According to the 2020 results, the company made a net loss of Hr 2.6 billion against HR 23.6 billion in 2019.
[The acting CEO did not provide any explanations for the loss. – SOE Weekly.]
Ukrhydroenergo is likely to lose Hr 2.3 billion under new PSOs
Ukrhydroenergo posted projections that the company will lose Hr 2.3 billion from the sale of electricity under new public service obligations (PSOs).
Under the new procedure, Ukrhydroenergo was mandated to buy electricity from private producers in the Burshtyn Energy Island [apparently, from Rinat Akhmetov’s DTEK at prices set by DTEK] and sell it for Hr 10/MWh to universal service providers in Burshtyn Energy Island in volumes that are needed to meet the needs of household consumers in the area.
Bohdan Sukhetskyi, deputy CEO of Ukrhydroenergo, stated that this model is not compatible with any development for Ukrhydroenergo, but the company has to abide by the shareholder’s decision. He stressed that this is the ninth iteration of PSO changes in almost a year and a half.
The company’s statement also noted that the new PSO procedure created a risk that Ukrhydroenergo would lack working capital. The Cabinet of Ministers does not specify the sources of funding or procedure for compensating market participants under PSOs.
[Notably, almost 90% of the electricity in Burshtyn Energy Island is generated by Burshtyn Thermal Power Plant (TPP), Dobrotvirska TPP, and Ladyzhyn TPP, all owned by Rinat Akhmetov’s DTEK Zahidenergo. – SOE Weekly.]
Infrastructure
Ukrposhta reports Hr 160 million net profit for 2020 and Hr 128 million loss in the first quarter of 2021
Ukrposhta’s CEO Ihor Smilyanskyi said on his Facebook page that the company made Hr 160 million in net profit and paid out Hr 80 million (50%) in dividends to the state in 2020. In the first quarter of 2021, the company made a loss of Hr 128 million.
Smilyanskyi added that the 2020 profit resulted not only from tariff increases, but also from larger business volumes: physical volumes of parcel deliveries grew by 25%, number of payments processed, by 19%, and number of money transfers, by 13%.
Compared to the first quarter of 2020, the parcel segment grew by 36% and the international parcel segment, by more than 30%, the CEO added.
Smilyanskyi said that the first quarter’s loss was primarily due to the regulator’s refusal to raise tariffs for the company’s services imposed by public service obligations (PSOs).
According to Smilyanskyi, the National Regulatory Commission for Communications and Informatisation has finally proposed raising tariffs by 10% from 1 July (or by 5% for the year). However, with costs rising by 30-40%, this does not resolve the overall situation for Ukrposhta.
Defense
Ukroboronprom makes Hr 2.5 billion in net profits in 2020
According to the media, the State Concern Ukroboronprom ended 2020 with a net profit of Hr 2.5 billion, compared to Hr 1.2 billion in 2019. Ukroboronprom overperformed on its financial plan for 2020: net profit had been originally forecast at Hr 2.1 billion.
Net income from domestic sales and exports amounted to Hr 37.4 billion. Compared to 2019, this figure decreased by Hr 2.3 billion (5.8%). Ukroboronprom explained the decline in sales by quarantine restrictions related to the Covid-19 pandemic.
According to a screenshot from the Ukroboronprom report posted by Marlin, the main savings came from the distribution costs, which decreased from hr 4.4 billion in 2019 to Hr 1.5 billion in 2020.
[This is a remarkable decrease, responsible for savings of as much as hr 2.9 billion, i.e., more than the whole annual profit. It is unclear how such a large decrease was achieved or why the distribution costs were so large previously. – SOE Weekly.]
According to the 2020 results, labor costs at Ukroboronprom’s enterprises reached Hr 11 billion. Ukroboronprom employs 67,252 people.
As of Dec. 31, 2020, Ukroboronprom oversaw 118 companies.
Agriculture
Agrarian Fund reports almost Hr 200 million in losses. According to Marlin, the state-owned Agrarian Fund posted a net loss of Hr 197 million in 2020.
The Agrarian Fund made a net loss of Hr 3.9 billion in 2019 and a net loss of Hr 27.6 million in 2018.
In 2020, the company’s net income from the sale of agricultural products amounted to Hr 2.2 billion against the planned Hr 5.5 billion.
The total liabilities of the Agrarian Fund were Hr 156.5 million.
The company’s response to the Marlin’s requests for information was very vague and difficult to interpret: The Agrarian Fund said that the 2020 loss resulted from the first quarter’s loss of Hr 206.7 million, which led to a shortage of working capital, adversely affecting the Fund’s commercial activities.
Since May 2020, Bohdan Banchuk has been acting CEO of the Agrarian Fund.
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
