Editor’s Note: This is Ukrainian State-Owned Enterprises Weekly, Issue 33, covering the period of June 19-25, 2021.
Corporate governance in SOEs
Parliament registers a draft law on corporate governance in SOEs that conforms to OECD standards
On June 15, 2021, the Verkhovna Rada, Ukraine’s parliament, registered Draft Law No. 5593-2, aimed at improving the corporate governance of state-owned enterprises (SOEs).
The proposed law was drafted by SOE Weekly team members Andriy Boytsun and Oleksandr Lysenko and submitted by members of parliament from the Holos faction led by Yaroslav Zheleznyak.
Another two draft laws on the same topic, No. 5593 and No. 5593-1, were also registered in parliament. Notably, both were submitted by members of parliament from the Sluha Narodu faction.
Compared to other drafts, Draft Law No. 5593-2, within its scope, fully reflects the OECD Guidelines on Corporate Governance of SOEs and the recommendations in the recent OECD Review of the Corporate Governance of State-Owned Enterprises in Ukraine.
In particular, the proposed law:
- clearly establishes the exclusive power of the SOE’s supervisory board to appoint and dismiss the CEO, as well as set the CEO’s remuneration – including in SOEs owned or overseen by the Cabinet of Ministers of Ukraine (such as Naftogaz and Ukrzaliznytsia);
- clearly establishes the exclusive power of the supervisory board to approve the SOE’s strategic and financial plans;
- establishes an exhaustive list of grounds for early dismissal of the SOE’s supervisory board members – which, in particular, will not allow the Cabinet of Ministers and other ownership entities to arbitrarily interpret “improper performance of duties” by supervisory board members; and
- improves the dividend pay-out procedure and ensures equal treatment of all shareholders who have invested in SOEs – which will enable Ukrainian SOEs to invest in their development rather than have dividends arbitrarily collected by the state.
In SOE Weekly (Issue 30), we reported that the Verkhovna Rada registered Draft Law No. 5593, which is also called to improve the existing legislation on corporate governance of SOEs in Ukraine.
The SOE Weekly team analyzed the draft law and concluded that it was based on the draft that had been previously put up for public consultation by the Ministry of the Economy. The analysis is available on the KSE’s website. The SOE Weekly team was critical of how the Ministry’s draft law conformed to OECD Guidelines on Corporate Governance of SOEs and Ukraine’s commitments within the IMF’s current stand-by program..
Prime minister thinks NACP’s order to fire Vitrenko should be decided by court
Prime Minister Denys Shmyhal said that the National Agency on Corruption Prevention’s (NACP) order to cancel Yuriy Vitrenko’s appointment as the CEO of Naftogaz, in fact, requires that the Prime Minister should violate the Ukrainian law.
Shmyhal wrote on his Facebook page that the same anti-corruption law, to which the NACP referred in its order, requires that the NACP should go to court if it feels that Vitrenko’s appointment was illegal. According to the prime minister, a court decision will be the best solution to the situation.
He added that, per the Constitution, the Cabinet of Ministers of Ukraine is a collegiate body – and the prime minister cannot make single-handed decisions to revoke Vitrenko’s appointment in that manner.
According to Shmyhal, the government has acted, and will act, solely within the limits set by the Ukrainian law and expects everyone else involved to do the same.
In SOE Weekly (Issue 32), we reported that the NACP ordered the Cabinet of Ministers to cancel Vitrenko’s appointment as the CEO of Naftogaz. The agency said that the appointment broke Ukraine’s anti-corruption law. Specifically, the order called for:
- canceling items 8 and 9 of the Cabinet of Ministers Order No. 370-r (appointing Vitrenko and instructing the Minister of the Economy to sign contracts with Vitrenko and the supervisory board members of Naftogaz);
- to terminate Vitrenko’s contract, which the NACP deemed illegal.
On June 17, the Kyiv District Administrative Court’s press service said that Prime Minister Denys Shmyhal, sued the NACP, asking the court to void the NACP’s order to fire Vitrenko.
On June 18, the court suspended the NACP order until it considers the merits of the case. The court hearing is scheduled as soon as June 29, 2021.
Vitrenko may soon be suspended as CEO, media say
According to Ukrayinska Pravda, Naftogaz’s supervisory board may have considered suspending Yuriy Vitrenko at an extraordinary meeting scheduled on June 24. The agenda of the meeting was unknown, the company’s press service told the media.
The chair of Naftogaz’s supervisory board Claire Spottiswood announced last week that the issue of suspending Vitrenko would be considered at an extraordinary meeting of the supervisory board.
As we reported in SOE Weekly (Issue 32), Spottiswoode said last week that the company’s supervisory board would initiate Vitrenko’s suspension from the office due to the NACP’s order.
At the same time, Vitrenko emphasized that the supervisory board did not discuss the information on the NACP’s order with him.
It was unclear whether Spottiswoode’s statement was her own or a statement of Naftogaz’s supervisory board. There has been no evidence that other supervisory board members subscribed to or opposed this statement. There has been no further news on any supervisory board decisions made in this respect.
In addition, Spottiswoode’s statement conflicted the official position of the company on the NACP’s order, as cited on the Naftogaz website.
[Now that the effect of the NACP’s order has been suspended by the court until June 29, the order cannot serve as a ground for suspending Vitrenko. – SOE Weekly.]
The Cabinet of Ministers extends powers of Ukrzaliznytsia’s supervisory board members for three months
The Cabinet of Ministers extended the powers of four out of five current members of Ukrzaliznytsia’s supervisory board, whose contracts expired on 19 June, for up to three months.
[The grounds for such extension are not clearly spelled out in the existing law, as they are only explicitly envisaged for CEOs rather than supervisory board members. Earlier, the Cabinet extended the powers of supervisory board of MGU (Mahistralni Gazoprovody Ukrayiny – Main Gas Pipelines of Ukraine) in the same manner. – SOE Weekly.]
According to Order No. 666 dated 18 June, the government decided to give Ukrzaliznytsia’s independent supervisory board members (Şevki Acuner and Andreas Matje) and state representatives (Serhiy Leshchenko and Oleh Zhuravlyov) another three months on the board, unless new members are appointed earlier.
[Note that the supervisory board of Ukrzaliznytsia was incomplete in the first place, with only five out of the seven members required by the company’s charter appointed. – SOE Weekly.]
The only board member of Ukrzaliznytsia whose powers were not extended was Adomas Audickas.
Earlier, in SOE Weekly (Issue 32), we reported that Audickas was also the only supervisory board member of MGU whose powers had expired in March and were not extended, while they were for all other supervisory board members of MGU.
Ukrzaliznytsia’s supervisory board members to be selected by the Ministry of Infrastructure
The government approved changes to the nomination procedure for Ukrzaliznytsia’s supervisory board. According to Cabinet of Ministers’ Resolution No. 629 dated 16 June, candidates will be selected by the Ministry of Infrastructure rather than the SOE Nomination Committee.
According to Cabinet Resolutions No. 142 and No. 143, as amended by the above resolution, the Ministry will propose both independent members and state representatives to the Cabinet of Ministers.
[Note that the Ministry of Infrastructure currently acts as the regulator and policymaker for Ukrzaliznytsia, so it may run into a conflict of interest when selecting candidates for the supervisory board as the company’s owner. According to the OECD Guidelines on Corporate Governance of SOEs, the state’s ownership function towards SOEs should be separated from the regulatory and policymaking functions.
The OECD Guidelines also recommend that CEO appointments in SOEs should follow a transparent and competitive nomination process. Instead, all recent changes in legislation allow abolishing the competitiveness and transparency in the nomination process for the most important SOEs, such as Naftogaz, Ukrposhta, and Ukrzaliznytsia.
These legal changes may have also been caused by the fact that the work of the SOE Nomination Committee has remained blocked after recent management changes at Naftogaz, as we reported in Issue 29. The government may therefore have attempted to find other ways for these appointments, especially where the powers of respective officers are about to expire. – SOE Weekly.]
In SOE Weekly (Issue 32), we reported that the Cabinet of Ministers, at its meeting on 16 June, adopted amendments to Resolution No. 777, which allows the supervisory board to appoint Ukrposhta’s CEO directly, with no competitive selection.
[However, at the OECD event on 24 June 2021, the Head of the National Agency on Corruption Prevention (NAPC) Oleksandr Novikov said that he demanded that the Cabinet should not adopt this resolution, and “the government heard” NAPC’s advice and “stopped the adoption of these decisions”.
Novikov said that the NAPC was discussing with the Cabinet how to “resolve the Ukrposhta issue”. It follows from Novikov’s information that the above amendments to Resolution No. 777 were not adopted. – SOE Weekly.]
Also, in SOE Weekly (Issue 29), we reported that the Cabinet extended until May 31 the exemption of Naftogaz from the coverage of the Cabinet’s Resolution No. 142, which governs the process of selecting and appointing independent supervisory board members of SOEs.
[This extension was necessary to reappoint the current members of the company’s supervisory board without a competitive selection. – SOE Weekly.[
SOE updates
Energy sector
Ukrtransgaz wants reimbursement from Naftogaz for 300 million cubic meters of gas, which was given to fraudulent companies. Naftogaz’s subsidiary Ukrtransgaz is demanding a compensation from Naftogaz for returning 305 million cubic meters of natural gas to Profi Gaz LLC.
The company claims that, in 1999, Naftogaz illegally supplied 305 million cubic meters without the consent of the gas’s owner, Ukrenergozbut. This forced Ukrtransgaz to tap into its own reserves to return the gas to Ukrenergozbut (now called Profi Gaz LLC), following a decision by the Arbitration Court of Kyiv on 12 July 2020.
Ukrtransgaz now wants its parent company to make it whole.
Naftogaz denied that it had disposed of Ukrenergozbut’s gas without permission. Naftogaz argued that, during the disputed period, the company did not have the authority to distribute gas. Naftogaz also stated that it has no obligation to return 305 million cubic meters of gas its subsidiary.
In SOE Weekly (Issue 02), we reported that representatives of Kostiantyn Zhevago accused the management of Naftogaz and Ukrtransgaz of fraud and corruption. They said that Ukrenergozbut was stolen from Zhevago, illegally raided, and re-registered under a new beneficiary in the so-called Donetsk People’s Republic / Luhansk People’s Republic.
Later, in SOE Weekly (Issue 03), we reported that Ukrtransgaz asked the Commercial Court of Kyiv to approve a settlement that implies a transfer of 300 million cubic meters of gas to a pool of companies.
After approval of the agreement by the court, private company Fin-Invest must return the funds withdrawn from the Ukrtransgaz accounts based on a previous court decision in the amount of UAH 226 million, while Ukrtransgaz transfers more than 304 million cubic meters of gas to the company.
According to the decisions of 10 and 13 November, the Commercial Court of Kyiv satisfied the motion to approve an amicable agreement between Ukrtransgaz, Ukrenergozbut, and Fin-Invest.
State-owned enterprises gain more freedom in the gas market
State-owned and municipal companies will be able to buy natural gas outside the ProZorro system from 1 July. This opportunity is provided by the amendments to the Law on Public Procurement of Natural Gas, which became effective recently.
Such purchases can be made only on the short-term market at licensed exchanges, and gas can be purchased only by state-owned companies that use transportation services.
The only exchange in Ukraine that ensures the operation of the short-term gas market and complies with the Gas Transmission System Code is the Ukrainian Energy Exchange (UEB). The Gas Transmission System Operator of Ukraine (GTSOU) announced that it chose this platform to trade gas for the company’s needs.
GTSOU’s CEO, Serhiy Makogon, stated that the development of exchange trade is a guarantee of increased competition and transparent market prices
Infrastructure
Ukrzaliznytsia makes UAH 1.7 billion losses in the first quarter of 2021
According to Marlin, Ukrzaliznytsia made a net loss of UAH 1.7 billion in the first quarter of 2021.
Marlin said that these losses were due to:
- Ukrzaliznytsia’s traffic volumes decreased due to the Covid-19 pandemic – the passenger turnover was 5.5% lower than planned, and freight traffic was 4.4% lower; and
- the company’s costs growing at a faster rate than its net income, due to growing costs of energy sources, personnel, and land tax.
Ukrzaliznytsia sells UAH 1.2 billion worth of scrap metal
Since the beginning of 2021, Ukrzaliznytsia has held 43 auctions for the sale of ferrous and non-ferrous scrap in the Prozorro.Sales system, which generated as much as UAH 1.185 billion.
Privatization
UMCC’s privatization will be held in August
The privatization auction of the United Mining and Chemical Company (UMCC) will take place on 31 August 2021.
According to the head of the State Property Fund, Dmytro Sennychenko, the starting price was originally contemplated at UAH 2.1 billion [about $ 78 million], but it was almost doubled to UAH 3.7 billion [about $ 137 million – SOE Weekly].
Sennychenko said the higher starting price was due to UMCC’s recent growth in revenues and disclosure of the ore deposits to the investors. He also said that a wide range of investors, including foreign investors, expressed preliminary interest in the asset.
[It is not quite clear why the starting price had to be increased. If there is a large number of potential bidders, this will ensure strong competition, and the starting price will not affect the final auction price. At the same time, the higher starting price will narrow down the number of bidders. – SOE Weekly.]
In SOE Weekly (Issue 32), we reported that the Cabinet of Ministers approved UMCC’s privatisation terms. According to Prime Minister Denys Shmyhal, the starting price should be at least UAH 3.7 billion [about $ 137 million – SOE Weekly].
UMCC will be the first asset going on sale as part of the recently unblocked large-scale privatization.
Events
Roundtable discussion of OECD’s Review of Corporate Governance of SOEs
On 24 June, the OECD held a roundtable discussion of its Review of Corporate Governance of SOEs in Ukraine.
The agenda of the event can be found in SOE Weekly’s Issue 32.
Oleksiy Lyubchenko, First Deputy Prime Minister – Minister of the Economy of Ukraine opened the event. Lyubchenko re-confirmed the government’s intention to continue SOE reform and bring the corporate governance of SOEs in line with the OECD Guidelines.
Kristina Golubytska, Deputy Minister of Economy also re-confirmed this intention and described some specific steps that the government would undertake. These include raising the legal status of the state ownership policy and further development of the SOE reporting platform Prozvit.
Andriy Boytsun, a member of the SOE Weekly team, took part in the discussion. He emphasized the following priorities to address, based on the OECD Review:
- to professionalize the state’s ownership function;
- to improve the legal and regulatory framework for SOEs, notably referring to Draft Law No. 5593-2 (see the beginning of this issue of SOE Weekly for detail);
- to ensure a level playing field for SOEs and their private counterparts, as well as improve their transparency and disclosure; and
- to use the gap analysis, which was done as part of the Review, as the foundation for the corporate governance action plan that the government should develop.
A video recording of the OECD event will be available here during the next three months.
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.
