Editor’s Note: This is Ukrainian State-Owned Enterprises Weekly, Issue 30, covering the period from May 28 to June 4.
Corporate governance in SOEs
Top 15 SOEs lose Hr 42 billion ($1.5 billion) in 2020
The SOE Weekly team collected the top 15 SOEs’ financial performance data for 2020, as published by the media and on the SOEs’ websites. Their net collective financial result in 2020 was Hr 42 billion in losses.
Nine out of top 15 SOEs lost money in 2020. Their collective loss in 2020 was Hr 72.4 billion ($2.7 billion). The biggest loss-makers are:
- Ukrenergo (UAH 27.5 billion) – $1 billion;
- Naftogaz (UAH 19 billion) – $697 million;
- Ukrzaliznytsia (UAH 11.9 billion) – $436 million;
- State Food and Grain Corporation of Ukraine (UAH 5.9 billion) – $216 million;
- Energoatom (UAH 4.8 billion) – $176 million;
- Ukrainian State Air Traffic Services Enterprise (UAH 1.5 billion) – $55 million;
- Boryspil International Airport (UAH 1.5 billion) – $55 million;
- Agrarian Fund (UAH 0.2 billion) – $7.3 million;
- Automobile Roads of Ukraine (UAH 0.1 billion) – $3.7 million
Six SOEs out of the top 15 were profitable in 2020, with a collective profit of Hr 30.1 billion – $1.1 billion.
These include:
- Gas Transmission System Operator of Ukraine (GTSOU) (UAH 20.4 billion) – $748 million;;
- Ukrhydroenergo (UAH 4.1 billion) – $150 million;
- Ukrainian Sea Port Administration (UAH 2.7 billion) – $99 million;
- Ukroboronprom (UAH 2.5 billion) – $91 milion;
- Polygraph Combine “Ukraina” (UAH 0.2 billion) – $7.3 million; and
- Ukrposhta (UAH 0.2 billion) – $7.3 million.
According to the media, GTSOU was the most profitable among all Ukrainian companies in 2020, including private ones. [Please note that this comparison does not account for private Ukrainian companies incorporated in foreign jurisdictions. – SOE Weekly.]
Note that most of the above SOEs are natural monopolies, with their tariffs set by the national regulators. Their losses can be, at least in part, explained by their public service obligations, not reimbursed by the state, and low tariffs.
Multiple commentators have suggested that these tariffs are often set in the interests of the Ukrainian oligarchs, as we discussed in various previous issues of the SOE Weekly.
The re-appointment of Naftogaz’s supervisory board is likely to violate the procedures
For an extended background of the Naftogaz case, see SOE Weekly’s Issues 25, 26, 27, 28, and 29.
Oleksandr Lysenko, a member of the SOE Weekly team, said in a comment to Ukrayinska Pravda, that the recent re-appointment of Naftogaz’s supervisory board members is likely to contradict the current legislation and can create risks for Naftogaz.
Lysenko reminded that, by its 19 May order, the Cabinet of Ministers of Ukraine (CMU) de jure appointed – and de facto re-appointed – members of Naftogaz’s supervisory board for a new term, starting from 24 May 2021.
On the same day, the CMU changed its Resolutions No. 142 and No. 143, which govern the selection and appointment of independent members and state representatives of SOEs’ supervisory boards. Specifically, the CMU extended exemption of Naftogaz from the coverage of these resolutions until May 31, 2021.
Lysenko said that the purpose of these changes was to:
- give the CMU opportunity, once again, to appoint independent Naftogaz’s supervisory board members without a competitive selection; and
- avoid the approval of the candidate state representatives with the SOE Nomination Committee.
However, the amendments to these CMU Resolutions became effective on 22 May 2021.
In turn, according to the wording of CMU Resolutions No. 142 and No. 143 that was effective on May 19, candidates for independent members of Naftogaz’s supervisory board should have been selected via a competitive selection, and the candidate state representatives should have gone through the SOE Nomination Committee’s approval. This is so because the validity period of the respective exemptions for Naftogaz had expired on 30 April and was only restored on 22 May.
Thus, from a legal perspective, on May 19, the CMU likely had no grounds yet to select Naftogaz’s candidate supervisory board members for their further appointment.
According to Lysenko, there are grounds to believe that the Cabinet has appointed Naftogaz’s supervisory board members with a violation of the legislation effective at that time. If that is the case, then this will open the way for challenging the CMU’s May 10 decision and other decisions. To avoid these negative consequences, Lysenko recommended that the CMU re-appoint the supervisory board members once again.
However, more broadly, from the perspective of the Organization for Economic Cooperation and Development corporate governance standards, it is necessary to abandon the practice of appointing supervisory board members without a competitive selection. As the Ukrainian experience shows, it all too often leads to negative consequences, including the case of the Naftogaz board.
Lysenko added that the OECD has recently published a comprehensive review of corporate governance of SOEs in Ukraine. Among other things, the review pointed to the mismatch between the practice of board appointments without a competitive selection and the OECD standards.
Draft law on corporate governance of SOEs registered
The Verkhovna Rada of Ukraine registered Draft Law No. 5593, which is called to improve the existing legislation on corporate governance of SOEs in Ukraine. The draft was submitted by three parliament members from the Sluha Narodu faction.
The SOE Weekly team has analyzed the draft law and concluded that it is based on the draft that had been previously published by the Ministry of Economy for public consultation.
The main difference is that the parliamentary version proposes to establish by law that the Cabinet of Ministers may only appoint and dismiss the CEOs of SOEs (overseen by the Cabinet) on the proposal of the SOE’s supervisory board. That is, the final decision on the appointment/dismissal of the CEO will remain under the CMU, which maintain its leverage and room for political meddling in the respective SOEs
Also, both the parliamentary and government versions of the draft law keep the existing powers of the Cabinet to approve SOEs’ financial plans as they are today.
As we reported in SOE Weekly (Issue 28), the Corporate Governance Stream of the Kyiv School of Economics (KSE) was critical of how the Economy Ministry’s draft law conformed to the OECD Guidelines on Corporate Governance of SOEs and Ukraine’s commitments within the IMF’s current stand-by programme.
The analysis is available on the KSE’s website
The Cabinet of Ministers adds a position for a European Union representative on the SOE Nomination Committee
Prime Minister Denys Shmyhal met with the members of the SOE Nomination Committee to discuss the implementation of the corporate governance reform in Ukraine. The Cabinet expanded the Committee by adding a position for an “EU representative.”
At the meeting, Shmyhal said that this decision stemmed from an agreement with the ambassadors of the G7 countries.
Shmyhal offered the Committee to develop a roadmap for further corporate governance reform. He said that a meeting of the Committee was planned in the first half of June to consider the appointment of supervisory board members in key Ukrainian SOEs.
The prime minister instructed Oleksiy Lyubchenko, first deputy prime minister/minister of the economy, to hold a meeting with the committee to approve its work plan.
In SOE Weekly (Issue 29), we reported that Shmyhal instructed the Ministry of the Economy to resume the work of the SOE Nomination Committee.
Deputy Head of the President’s Office appointed on Naftogaz’s supervisory board
Yuliya Svyrydenko, deputy head of the President’s Office, was appointed as a state representative on Naftogaz’s supervisory board.
According to Cabinet Order No. 529-p dated 31 May, Svyrydenko will serve until 19 May 2022 or until the Cabinet appoints new state representatives.
In SOE Weekly (Issue 29), we reported that, on 19 May, the Cabinet adopted an order on several issues related to Naftogaz’s supervisory board:
- The Cabinet re-appointed five current members of the company’s supervisory board until the competitive selection of a new independent supervisory board is completed, but no longer than one year.
- Dismissed one board member, state representative Robert Bensh.
- Announced the competitive selection of four independent supervisory board members.
New chair of Ukroboronprom’s supervisory board
At the first meeting of the new composition of Ukroboronprom’s supervisory board, Tymofiy Mylovanov was unanimously elected as a new board chair. At present, Ukroboronprom’s supervisory board consists of five members.
Mylovanov listed some of the issues considered at the meeting, namely:
- the first audit of the Ukroboronprom for 2019, conducted by Baker Tilly, was approved;
- the board asked the CEO to develop a plan to transform Ukroboronprom to improve its ability to respond to future threats and modernise its production;
- three ad hoc committees were established: a remuneration committee, a regulations committee, and a transformation committee.
In SOE Weekly (Issue 29), we reported that President Volodymyr Zelensky appointed Mylovanov, Oleksandr Nosov, the former member of Sich bank’s supervisory board, and Rostyslav Shurma, CEO of Helios JSC, as Ukroboronprom’s supervisory board members on 21 May.
Changes in Ukrzaliznytsia’s supervisory and management boards planned
Yulia Hryshyna, chair of the parliament’s temporary commission of inquiry investigating Ukrzaliznytsia, posted on her Facebook page that a new selection for the company’s supervisory board will be announced soon. The new supervisory board will select the management board.
According to Hryshyna, Shmyhal agreed that Ukrzaliznytsya was in a critical state.
In SOE Weekly (Issue 26), we reported that Hryshyna’s commission asked the Cabinet to fire and replace all the management board members, along with acting CEO Ivan Yuryk.
In SOE Weekly (Issue 12), we explained that it was unclear which methodology the commission would use to assess the performance of Ukrzaliznytsia and its management or supervisory boards. It’s also unclear what impact the commission’s decisions will have.
The parliament has no formal role in the corporate governance of individual SOEs. It is therefore unclear who the commission will report to and whether its recommendations will be implemented. 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.
[Note that the Ukrzaliznytsia’s charter envisages seven members of the supervisory board; only five in place currently. The three-year term of powers, envisaged by the charter, of two independent supervisory board members, Andreas Matje and Şevki Acuner, should expire in June 2021, since they were appointed in July 2018.
The contract of Sergii Leshchenko also expires in June 2021. Hence, the Cabinet of Ministers should launch a competitive selection for the positions of at least five supervisory board members. The obligation to launch this competitive selection is legally independent of the decisions or recommendations of the above-mentioned commission of inquiry. – SOE Weekly.]
SOE updates
Banks
Ukreximbank sells non-core assets totaling Hr 1 billion
Ukreximbank is selling property that it obtained as repayment of non-performing loans in the past decade. The first 16 lots’ starting price exceeded Hr 1 billion in total.
According to Ukreximbank, during the last ten years, the property has remained on the balance sheet of the bank, but has not been used for commercial activities.
The pool includes office centres in Kyiv’s Podil district, housing in Pechersk district, a land plot near Kyiv, as well as a number of warehouses and commercial premises in the various regions of Ukraine. The real estate is owned by the bank and will be sold without any encumbrances.
Electronic auctions will be held via the Setam system.
The court closed the proceedings on PrivatBank’s nationalization by applying the “anti-Kolomoyskiy law” for the first time
The Commercial Court of Kyiv dismissed a lawsuit by PrivatBank’s ex-CEO Oleksandr Dubilet, pursuant to the so-called anti-Kolomoisky law that bars returning insolvent or nationalised banks to their former owners.
PrivatBank noted that this is the Commercial Court’s first decision that officially recognises PrivatBank’s nationalisation in more than 50 cases initiated by the bank’s former shareholders.
Energy sector
Naftogaz prepared a gas supply contract for municipal heating companies. Naftogaz prepared a three-year contract to supply gas to heating providers
The market price for the next 13 months, starting in June 2021, is set at Hr 7.42 per cubic meter. The pricing offers for the municipal heating companies starting from July 1, 2022, and July 1, 2023, will be indexed.
According to Naftogaz, the long-term market price in the contract concerns only the volume of historical gas consumption. Additional volumes of gas will be provided to municipal heating companies at a spot price.
Thirty-four municipal heating companies have already signed contracts with Naftogaz Trading for commercial gas purchases.
Infrastructure
Ukrposhta announced tenders totaling $65 million. Ukrposhta launched tenders for the construction of automated sorting centers in Lviv and in Ivano-Frankivsk worth $ 65 million in total. According to Prozorro, the expected cost of the Ivano-Frankivsk center is $13 million, while the Lviv center is estimated at $52 million. The deadline for submission of proposals is June 27, 2021.
Earlier, in SOE Weekly (Issue 27), we reported that Ukrposhta announced a tender for the construction of an automated sorting center in the Kyiv region. The expected cost of the project is $50 million.
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.
