Editor’s Note: This is Ukrainian State-Owned Enterprises Weekly, Issue 28, covering the period of May 14-21.
Corporate governance in SOEs
KSE’s experts critical of the long-awaited draft corporate governance law.
The Corporate Governance Stream of the Kyiv School of Economics (KSE) published a detailed analysis of the Economy Ministry’s draft law proposing changes to the legislation on corporate governance of SOEs. The draft was offered for public consultation on April 19l.
In particular, KSE’s analysis was very critical of how the proposed draft law conformed to:
- Organization for Economic Cooperation and Development Guidelines on Corporate Governance of SOEs; and
- Ukraine’s commitments within the International Monetary Fund’s current standby program.
The analysis is available on the KSE’s website.
As we reported in SOE Weekly (Issue 27), the 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.
Naftogaz supervisory board agrees to reappointment
For an extended background of the Naftogaz case, see SOE Weekly’s Issues 25, 26, and 27.
At a meeting with the ambassadors of the G7 countries and the European Union Delegation to Ukraine, Prime Minister Denys Shmyhal said that, on 13 May, representatives of the
government and the President’s Office had met with members of Naftogaz’s supervisory board.
According to the prime minister, five members of the supervisory board (three independent members and two state representatives) accepted the government’s offer to stay for another year until the government can find replacements. The recently nominated CEO [Yuriy Vitrenko – SOE Weekly] would stay for the same term length.
During that period, the government will hold a transparent and public selection of new supervisory board members – and only after that, a competitive selection of a new CEO, the prime minister’s statement said.
Shmyhal noted that the government is ready to ensure the company’s stability during this transition period. He also said that the board discussed including a new member on Naftogaz’s supervisory board – “a representative of the United States.”
Later, this week, the Cabinet of Ministers invited members of Naftogaz’s supervisory board to its meeting. Shmyhal noted that the government planned to continue cooperating with the supervisory board, as well as hold a new competitive selection of both supervisory board members and the CEO.
According to Shmyhal, “the government plans to improve the work of the SOE Nomination Committee, which is responsible for appointing members of independent supervisory boards.” [Apparently, the Prime Minister meant “responsible for selecting and nominating independent members of supervisory boards in SOEs” – SOE Weekly.]
A representative from an international partner may join the committee, Shmyhal said. In an earlier statement, the Prime Minister said that he proposed the EU Delegation to delegate their representatives to the SOE Nomination Committee.
[Note that, since November 2017, Naftogaz had been exempt from the Cabinet’s Resolution No. 142, which governs the nomination process for independent supervisory board members in SOEs. That exemption expired three weeks ago. Consequently, the SOE Nomination Committee was never involved in the nomination of the members of Naftogaz’s current supervisory board.
The members of the current supervisory board have been selected and appointed via direct consultations between the government and foreign embassies and international partners – rather than via a transparent and competitive nomination process, as the OECD Guidelines on Corporate Governance of SOEs would require.
It is unclear what needs to be improved in the work of the SOE Nomination Committee, and how adding another member to that committee would solve that problem. – SOE Weekly.]
After meeting with the Cabinet on May 19, five members of Naftogaz’s supervisory board said they were prepared to accept the government’s offer and stay on for a year. The government published its respective decision on Friday evening, when this issue of the SOE Weekly was prepared for publication.
Naftogaz’s supervisory board chair on their agreement with the government
Claire Spottiswoode, chair of the supervisory board of Naftogaz, told Interfax that the supervisory board and the Ukrainian government as the shareholder of the company agreed to keep the current management board members at least until Dec. 31, 2021.
According to Spottiswoode, this is a result of a “healthy and productive dialogue” that allows five [of the six] supervisory board members to accept the re-appointment for up to one year based on the conditions in the previously signed contracts. She also noted that the supervisory board members are open to discussing the issue of attracting new members in accordance with the established procedures.
Spottiswoode said that the process of selecting a new CEO must begin no later thanNov. 1 2021, and the assessment of the conflict of interest of the currently appointed CEO must be completed in accordance with the anti-corruption law to minimize possible risks for Naftogaz.
According to Spottiswoode, the government has confirmed its intention to elect a new independent member of the supervisory board to replace Amos Hochstein, as well as to terminate the membership of Robert Bensh no later than May 17, 2021.
She also said that the parties agreed that any changes to the company’s strategy must be agreed with the current management board and supervisory board.
[Taken together, Spottiswoode’s and Shmyhal’s statements suggest:
(a) that the government will first select and appoint a new supervisory board at Naftogaz
(b) the new board will run a competitive selection for the new CEO and
(c) although the current management cannot be dismissed earlier than Dec. 31, 2021, new management board members may be appointed now.
It is unclear how the agreements to keep the management and agree on the strategy can be formalized, other than via a gentlemen’s agreement. The government’s decision did not formalize these agreements, and we are not aware of any comment by the Prime Minister on Spottiswoode’s statements. – SOE Weekly.]
PrivatBank likely to remain headless
At the meeting of the Kyiv Commercial Court on PrivatBank’s blocked CEO selection, a technical break was announced until June 16, 2021.
[Note that the Regulation on Banking Licensing of the National Bank of Ukraine (NBU) sets a deadline of six consecutive months for the temporary performance of duties of a bank’s CEO (by one or more persons collectively). In this regard, PrivatBank must appoint a permanent CEO by July 24.
For an in-depth analysis of the ongoing litigation around the CEO selection, as well as the implications to PrivatBank in case its CEO is not appointed on time, see “How the ‘trade union’ wants to paralyse PrivatBank”, an article by the SOE Weekly team members, Oleksandr Lysenko and Andriy Boytsun. – SOE Weekly.]
In SOE Weekly (Issue 16), we reported that the court first blocked the competitive selection for PrivatBank’s CEO on 24 February 2021 due to a lawsuit by PrivatBank’s trade union, which – according to the media – may be under the influence of the bank’s former owners.
In SOE Weekly (Issue 19), we reported that, due to the recusal of judges, the Northern Court of Appeal had not scheduled PrivatBank’s appeal hearing.
In SOE Weekly (Issue 21), we reported that the Northern Court of Appeal postponed the hearing of PrivatBank’s appeal against the Commercial Court of Kyiv’s decision suspending the CEO selection. The grounds were unknown.
In SOE Weekly (Issue 22), we reported that the Kyiv Commercial Court on 6 April refused to satisfy PrivatBank’s request to lift the injunction against electing and appointing the bank’s CEO.
New member of Oschadbank’s management board
The National Bank of Ukraine (NBU) approved Oleksiy Volchkov as a member of Oschadbank’s management board responsible for corporate business.
Volchkov has 27 years of experience in the banking sector. He worked at Azhio bank, served as a management board member at Index Bank and Deputy CEO at Kalion Bank Ukraine. He also worked nine years as Deputy CEO for Corporate Business at the First Ukrainian International Bank.
Parliament approves changes to the banking law in the first reading
On May 20, the Verkhovna Rada of Ukraine adopted Draft Law No. 4367 in the first reading. The draft law proposes to amend the legislation on corporate governance in banks and other issues related to the functioning of the banking system.
[In particular, the draft law proposes amendments to Article 7 of the Law of Ukraine “On Banks and Banking” which regulates the corporate governance of state-owned banks:
- The draft introduces requirements for state-owned bank’s supervisory boards and management boards regarding their collective suitability and efficient management of and oversight over the bank’s activities.
- It requires NBU’s mandatory approval of supervisory board candidates for state-owned banks before such candidates can assume their duties as supervisory board members.
- It further specifies the current procedure for competitive selection of CEOs and management board members. Specifically, according to the draft law, it is the supervisory board’s nomination and remuneration committee who decides on the candidates, based on the competitive selection, and such competitive selection must be announced no less than three months before the powers of the CEO or management board member expire.
Draft Law No. 4367 is an important conditionality of IMF’s standby programme. – SOE Weekly.]
SOE updates
Banks
State-owned banks’ profit declines by 72% in the first quarter. The aggregate profit of the state-owned banks – PrivatBank, Oschadbank, Ukreximbank, and Ukrgasbank – in the first quarter of 2021 was Hr 3.2 billion. All the four banks were profitable.
[The aggregate profit of state-owned banks thus decreased by 72% (from UAH 11.2 billion) relative to the first quarter of 2020. – SOE Weekly.]
According to the Ministry of Finance, PrivatBank is the most profitable among the state-owned banks: It made a profit of UAH 2.4 billion (75% of the aggregate profit of the state-owned banks or 21.8% of the aggregate profit of all Ukrainian banks, including state-owned and private banks).
[PrivatBank’s profit thus decreased by 77% (from UAH 10.4 billion) relative to the first quarter of 2020. – SOE Weekly.]
The first tranche of PrivatBank’s dividends to the state budget come to UAH 10 billion
PrivatBank transferred the first tranche of its dividends to the state budget.
According to its 2020 annual report, PrivatBank will send UAH 19.4 billion in dividends to the state, which is 80% of the net profit of 2020.
According to the bank’s annual report, its net profit for 2020 was UAH 24.3 billion.
[According to the media, PrivatBank had earlier reported a preliminary profit of UAH 25.3 billion in 2020 and was the most profitable bank in Ukraine. As we reported in SOE Weekly (Issue 24), this implied that the dividends to be paid by PrivatBank would be Hr 20.24 billion. This would be roughly 91% of all the dividends of Hr 24.4 billion to be collected by the state. – SOE Weekly.]
Energy sector
GTSOU’s profit falls by 27% in the first quarter of 2021
In the first quarter of 2021, the Gas Transmission Operator of Ukraine (GTSOU) received UAH 4.6 billion in net profit.
More than 80% of GTSOU’s main income came from international operations, with the rest coming from the domestic market. Given the planned reduction in Russian gas transit in 2021-2024 from 65 to 40 billion cubic meters, GTSOU’s profits decreased by UAH 1.7 billion UAH compared to the same period in 2020.
According to GTSOU, another factor that influenced the results was the debt of regional gas operators. At present, debts and accruals of regional gas companies amount to almost UAH 10 billion, and the provisions for bad debts have increased. Yuriy Kulyk, the company’s CFO, stated that if it were not for these debts, GTSOU’s net profit would have been almost double, UAH 8.6 billion.
At the same time, the cash flow from GTSOU’s operations in the first quarter came to UAH 1 billion against UAH 7 billion for the same period last year. The company added that the regional gas operators are taking off more and more gas from the system, with receivables from them continuing to accrue. This has affected the results and threatens GTSOU’s financial stability.
As we reported in SOE Weekly (Issue 11), most household consumers buy gas from the regional distributors. The largest number of these belong to Dmytro Firtash’s group JE Energy. Its Regional Gas Company (RGC) is the largest operator of gas distribution networks.
Infrastructure
Media report Ukrzaliznytsia’s bank accounts to be seized
According to the media, the State Executive Service has seized Ukrzaliznytsia’s bank accounts for debts since 6 May. This was reported by ZN.UA with reference to a document from the Ministry of Justice and the decision of the Kyiv Commercial Court.
On April 22, 2021, the Supreme Court ruled on four cases involving Ukrzaliznytsia’s debts. All four rulings were against the company. The seizure of accounts is the execution of one of these four decisions, which provides for the repayment of $ 13.7 million and UAH 99.7 million to a creditor. Three other lawsuits involve enforcing the recovery of $ 34 million and over UAH 300 million from Ukrzaliznytsia.
ZN.UA said that VR Capital, a creditor of Ukrzaliznytsia, is a holder of Ukrzaliznytsia’s debts totalling $ 160 million, which can run up to $300 million with fines and penalties from more than 25 lawsuits.
So far, Ukrzaliznytsia has not collapsed, because, according to ZN.UA, the CEO of Oschadbank did not execute the seizure warrant, leaving Ukrzaliznytsia at least its operating account, allegedly for only a week.
Ukrposhta intends to buy a bank
Ukrposhta has announced a tender for a valuator in order to acquire a commercial bank with few or no branches and without a portfolio of bad assets. Ihor Smilyanskyi, the CEO of Ukrposhta, wrote about it on his Facebook page.
Smilyanskyi said that he has high hopes to close the deal in the next 5 or 6 months and added that there are already several candidates with which the company is to start negotiations.
Boryspil loses UAH 1.5 billion in 2020
According to media, Boryspil International Airport lost UAH 1.482 billion in 2020. The reasons named include: Covid-19 related quarantine restrictions and the resulting closures of traffic.
Other sectors
State Space Agency’s companies lose almost a billion in 2020
According to the media, the companies overseen by the State Space Agency lost a total of UAH 811 million in 2020. In previous years, state-owned space companies also operated at a loss. According to the 2019 results, the State Space Agency lost UAH 433.8 million. It also lost UAH 74.7 million in 2018 and UAH 1.2 billion in 2017.
The Space Agency manages a total of 15 state-owned companies, including five companies making small profits, five that are deeply unprofitable, four companies under bankruptcy proceedings, and one company that did not report to the agency at all due to the dismissal of all employees.
The biggest losses in 2020 were caused by the Pivdenmash factory named after Makarov (UAH 672.2 million) and Ukrkosmos (UAH 137.7 million).
Starting in 2020, the State Space Agency is subordinated to the newly established Ministry of Strategic Industries, headed by Oleh Urusky.
Privatization
Another Ukrspyrt distillery privatized
The State Property Fund (SPF) sold the assets of Rava-Ruske MPD, an Ukrspyrt distillery, for UAH 31.74 million at a privatisation auction.
Two participants competed in the open bidding, which increased the price from the starting UAH 27.7 million to UAH 31.7 million.
The asset is located in the town of Rava-Ruska, Lviv region, and consists of buildings and alcohol production equipment.
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
