Editor’s Note: This is Ukrainian State-Owned Enterprises Weekly, Issue 42, covering events from Sept. 2-10, 2021.
Corporate governance in SOEs
Shmyhal orders competitive selection of four supervisory board members of Naftogaz
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.
Shmyhal wrote on Telegram that he did so to implement the National Security and Defense Council’s (NSDC’s) decision “On measures to neutralize threats in the energy sector” enacted by a presidential decree last week. According to Shmyhal, the government is demonstrating its commitment to the implementation of the Organization for Economic Cooperation and Development standards of corporate governance.
The competitive selection should be completed in November 2021 so that the new supervisory board has enough time to set CEO candidate requirements and complete a CEO selection no later than May 1 2022.
Last week (Issue 41), we reported that on Aug. 28, President Volodymyr Zelensky signed a presidential decree enacting the NSDC’s July 30 decision “On measures to neutralize threats in the energy sector.
One of the instructions given to the Cabinet of Ministers is to ensure that the OECD Guidelines on Corporate Governance of SOEs are implemented at Naftogaz by Oct. 31, 2021.
[In a comment to Ukrayinska Pravda, Oleksandr Lysenko, SOE Weekly team member, said that the OECD Guidelines cannot be implemented by a single decision of a government body. To do that, specific and transparent procedures in line with the OECD Guidelines need to be implemented, including a transparent and competitive selection of the supervisory board, CEO, and executive board, and other corporate governance elements. Lysenko also believes that the two-month deadline looks “very optimistic”. – SOE Weekly.]
Independent members of Naftogaz’s supervisory board resign
For an extended background of the Naftogaz case, see SOE Weekly’s Issues 25, 26, 27, 28, 29, 30, 32, 33, 34, 35, and 36.
According to Ekonomichna Pravda (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.
A day earlier, Prime Minister Denys Shmyhal said that a competitive selection of four independent members of Naftogaz’s supervisory board would be launched soon.
Later this week, the media reported that the board members said that they had resigned due to a lack of understanding with the company’s executive board and that they could not ensure its proper work.
[It remains unclear from the media’s reports what the “lack of understanding” between the independent supervisory board members and the Naftogaz’s executive board referred to specifically. Note that the executive board is a collegiate body whose decisions are made by a majority of votes of its members. Note also that all executive board members, except Yuriy Vitrenko, were elected or approved by the supervisory board of Naftogaz, which included the current independent members. Therefore, it is not yet clear from the media’s reports why they could not ensure the proper work of the executive board. – SOE Weekly.]
According to the letter to Prime Minister Denys Shmyhal, seen by EP, the independent members did not receive any practical proposals for reaching a compromise after the meetings with Naftogaz’s CEO on Sept. 6-7.
During a briefing on Sept. 8, Spottiswoode said: “Some meetings took place, we have not received any documents. We have been asking some questions that do not get answered.”
She added that they were concerned about the future of the company and its financial condition.
She also mentioned that investments were not possible because Naftogaz’s CEO, Yuriy Vitrenko, did not allow them, and Naftogaz appeared to be in a frozen state.
[If the independent supervisory board members are concerned about the financial condition of the company, it is unclear why two months ago, they positively evaluated the achievements of the executive board members in the first six months of 2021 and proposed to set their bonuses at Hr 126 million or $4.7 million. – SOE Weekly.]
The independent members of Naftogaz’s supervisory board will continue to perform their duties for another two weeks, until Sept. 21. According to EP, they also noted that the financial report of Naftogaz for the first half of 2021 is being prepared and should be ready by Sept. 20.
In SOE Weekly (Issue 26), we reported that Naftogaz’s supervisory board members had already submitted their resignation notices to the company on April 30, 2021. Later, the Cabinet of Ministers invited the supervisory board members to stay until new members are chosen via competitive selection.
In SOE Weekly (Issue 29), we reported that on May 19, the Cabinet of Ministers re-appointed the five board members until their replacements were chosen within one year. The Cabinet also dismissed one member of the supervisory board (state representative), Robert Bensh.
[Later, Yuliya Svyrydenko replaced him on the company’s supervisory board. – SOE Weekly.]
Parliament makes the salaries of state-owned company officials public
On Sept. 8, the Verkhovna Rada supported Draft Law No. 3952 in the second reading. The law requires that information on board and executive remuneration in SOEs should be made publicly available. According to the Verkhovna Rada’s website, 324 members of parliament voted in favor.
The draft law amends the Laws of Ukraine “On Personal Data Protection” and “On Access to Public Information,” making information on the remuneration structure, remuneration policy, and the actual amounts paid out to SOEs’ board members and executives public.
The law will make it mandatory for SOEs to publish respective information on their websites on a monthly basis.
[According to the OECD Guidelines on Corporate Governance of State-Owned Enterprises, SOEs should report material financial and non-financial information on the enterprise in line with high-quality internationally recognised standards of corporate disclosure, including information on remuneration of board members and key executives of SOEs.
However, in best practice, the above OECD Guideline is implemented via SOEs’ annual reports, which, among other things, contains information on the remuneration of supervisory board members and top executives.
Please note, that the Ukrainian law already requires disclosing remuneration of supervisory board members and executives of SOEs for:
- state-owned banks; and
- state unitary (i.e., non-corporatized) enterprises.
Similar legal requirements also exist for joint-stock companies. However, in practice, they do not mandatorily apply to state-owned joint-stock companies.
To properly implement this part of the OECD Guidelines, it would be more efficient:
- To initiate changes to the corporate governance legislation by:
o extending the current legal requirements on disclosure to effectively cover state-owned joint-stock companies;
o implementing legal requirements for SOEs to disclose material financial and non-financial information (i.e., not only on the remuneration of supervisory board members and top executives) via their annual reports; and
o implement effective liability for SOEs for failing to disclose such information.
- [To ensure enforcement of the already existing legal requirements regarding disclosure of all types of material information (i.e., not only on remuneration) by SOEs, including enforcement of liability for non-disclosure. – SOE Weekly.]
Parliamentary commission says that Ukrzaliznytsia lost a third of its assets through mismanagement
On Sept. 9, at a parliamentary session, the Verkhovna Rada’s Temporary Commission of Inquiry presented its “audit report” on Ukrzaliznytsia, stating that the railway operator’s executive and supervisory boards have failed to do their job, resulting in a loss of a third of the company’s fixed assets.
The Commission will recommend to the Cabinet of Ministers to dismiss Ukrzaliznytsia’s acting CEO and all members of its executive board, then reduce the size of that board.
[Note that the current acting CEO of Ukrzaliznytsa, Oleksandr Kamyshyn, was only appointed less than a month ago. The Commission’s recommendation seems to be outdated – it appears to refer to the previous acting CEO, Ivan Yuryk. – SOE Weekly.]
The commission also proposed that the CVs of the candidates for supervisory and executive boards should be sent to the commission for discussion.
[Note that no such procedure is envisaged by the law. It also creates risks of corruption and political meddling. – SOE Weekly.]
In its report, the commission recommends choosing:
- choosing various deputy ministers as state representatives;
- trade unions representatives; and
- industry experts and lawmakers as independent members.
[Note that this proposal of the commission directly violates the Law on Corruption Prevention, as it prohibits members of parliament to serve on SOEs’ supervisory boards. With a few exceptions, deputy ministers may also not serve SOEs’ supervisory boards. The legislation on SOE corporate governance envisages no quota for trade unions on supervisory boards of SOEs.]
In SOE Weekly (Issue 12), we said that it was unclear which methodology the commission used to assess Ukrzaliznytsia, its management, or supervisory board, if any. It was also unclear what status or effect the commission’s findings would have, if any. The parliament has no formal role in the corporate governance of individual SOEs.
In SOE Weekly (Issue 30), we reported that Ukrzaliznytsia was among the biggest loss-makers in 2020. Its loss amounted to Hr 11.9 billion.
In SOE Weekly (Issue 41), we reported that Ukrzaliznytsia signed two agreements with a head-hunting agency to find four independent supervisory board members.
Ukrenergo looks for independent supervisory board member
According to the Ministry of the Economy, the grid operator Ukrenergo launched a competitive selection of four independent supervisory board members. The application deadline is Sept. 24, 2021. The requirements and criteria are available here.
[The terms of office of the incumbent supervisory board members of Ukrenergo expire in October 2021. – SOE Weekly.]
The government expanded Ukrzaliznytsia’s executive board to seven people
The Cabinet of Ministers increased the number of Ukrzaliznytsia’s executive board members from six to seven. The Cabinet also temporarily designated Orest Logunov as a member of Ukrzaliznytsia’s executive board.
Reforming of SOEs among key economic reforms Zelensky and Biden agreed on
After President Volodymyr Zelensky met U.S. President Joseph Biden, the countries issued a Sept. 1, 2021, joint statement of the U.S.’s support for a series of economic reforms in Ukraine.
Part of the agreement concerns reforming state-owned enterprises. This may include Draft Law No. 5593-d on corporate governance at state-owned enterprises, which the Verkhovna Rada adopted in the first reading on July 15, 2021.
In SOE Weekly (Issue 36), we reported that the current wording of Draft Law No. 5593-d is not yet in full compliance with the OECD Guidelines on Corporate Governance of SOEs and requires improving.
AMCU’s Annual Report on State Aid 2020 published
The Anti-Monopoly Committee (AMCU) published its Annual report on the provision of state aid to business entities in Ukraine for 2020. We selected the most important points:
- During 2020, AMCU adopted 191 decisions concerning financial support to municipal and state-owned enterprises;
- AMCU considered UAH 27.6 billion in requests for providing state aid to municipal and state-owned enterprises. The Committee rejected applications for UAH 232.5 million as inadmissible state aid [less than 1% of the total state aid provided – SOE Weekly].
- In the report, the AMCU also mentions that the central executive bodies, the most significant providers of state aid, do not report all of the state aid to the AMCU.
State-owned universal service providers to be transferred to Energoatom’s supervision
On the National Security and Defence Council’s decision, the president decreed that Energoatom will run state-owned universal service providers.
According to the media, there can be two reasons for that:
- the population may get electricity cheaper from Energoatom; and
- state-owned providers can compete against private ones, increasing market competition.
Note that state-owned universal service providers situated in a particular region can sell electricity to any consumers in any location of Ukraine.
SOE updates
Energy sector
Enterprises under the Ministry of Energy lose 295 million ($11 million) in the second quarter.
In the second quarter, enterprises under the Ministry of Energy lost Hr 295 million, the media reported.
According to the consolidated report on the implementation of the SOEs’ financial plans for the second quarter of 2021 published by Marlin, a total of 24 state-owned energy enterprises incurred losses of Hr 441.7 million, while 15 enterprises made a profit of UAH 146.2 million. One company broke even.
The following state-owned enterprises lost the most money: Eastern Mining and Processing Plant (SkhidGZK) – Hr 238.6 million, Pervomaiskvuhillya – Hr 86.7 million, Mine named after Surhai – Hr 82.2 million, Toretskvuhillya – Hr 67.5 million, and Lysychanskvuhillya – Hr 47.9 million.
[Note that all the biggest loss-makers, except SkhidGZK, are coal mining companies. – SOE Weekly.]
In SOE Weekly (Issue 41), we reported that the State Treasury Service of Ukraine, at the initiative of the Ministry of Energy, gave 20 state-owned coal mines Hr 653 million to pay wage arrears to miners.
These 20 state-owned coal mines included the above-mentioned Pervomaiskvuhillya, Mine named after Surhai, Toretskvuhillya, and Lysychanskvuhillya.
Ministry of Energy initiates the purchase of 1 million tons of coal for Centerenergo at the expense of the State Reserve
The Ministry of Energy is initiating the allocation of funds from the State Reserve for the purchase of coal for Centerenergo in the amount of approximately 1 million tons.
[Apparently, the Ministry initiates the re-allocation of funds from one cost item to another cost item in the state budget. – SOE Weekly.]
According to the media, the First Deputy Minister of Energy Yuriy Vlasenko said that at the moment, they are trying to make appropriate changes to the state budget in order to purchase coal for Centerenergo at the expense of the State Reserve.
In SOE Weekly (Issue 40), we reported that Centerenergo does not have the money to procure a sufficient supply of coal for the upcoming heating season. The Ministry of Energy asked state-owned Oschadbank and Ukreximbank to lend the money.
As we wrote in SOE Weekly (Issue 37), Centerenergo reported a loss of UAH 591.2 million in the first half of 2021. The company is slated for privatization.
Centrenergo’s TPPs among the biggest air polluters in Ukraine
The Centre for Research on Energy and Clean Air (CREA) published a report On the impact of emissions from Ukrainian coal-fired power plants on public health.
According to the report, Ukraine has some of the most polluting coal-fired power plants in Europe and the world. Centrenergo’s TPPs (Trypilska, Vuhlegirska, and Zmiivska) are among Ukrainian coal-fired power plants with the highest level of emissions in 2019. Vuhlegirska TPP greatly exceeded emission standards in 2019.
Infrastructure
Ukrposhta signed a contract for the construction of a sorting center near Kyiv
Ukrposhta and Tetra Invest LLC signed a contract to build a new logistics and sorting center. All works are planned to be completed by the end of 2023.
The Ministry of Infrastructure reported that the sorting centre would cover an area of 9.2 hectares and would be located on the territory of the industrial park in Boryspil.
According to Interfax, Tetra Invest LLC won the tender with a final bid of $46 million.
According to YouControl, Tetra Invest LLC was registered in March 2021 with an authorized capital of Hr 1,000, and the company’s main activity is the lease and management of real estate.
In SOE Weekly (Issue 27), we reported that Ukrposhta announced a tender for the construction of an automated sorting centre in Kyiv Oblast. The expected cost of the project was $50 million.
Swiss-registered company to invest $ 40 million in Chornomorsk port
According to the Ministry of Infrastructure, the Ukrainian Sea Port Authority (USPA) and Risoil signed a co-operation agreement that should bring $40 million in direct investment via various interdependent projects in Chornomorsk seaport.
According to Risoil’s website, the company is co-owned by Aleksandr Minov and was established in Switzerland. According to Novoye Vremya, Risoil’s another co-owner and director general is Shota Khadzhishvili.
Within the framework of the agreement, Risoil plans to build a pier with a length of 339.75 m. USPA will carry out dredging works.
Minister of Infrastructure Oleksandr Kubrakov added that in the next five years, more than Hr 17 billion of capital investments are needed to upgrade the infrastructure of Ukrainian ports.
Defense
Ukroboronprom to co-operate with U.S. defense contractors. Following negotiations, Ukroboronprom signed a number of co-operation agreements amounting to $2.5 billion, including agreements with Lockheed Martin Corporation, Harris Global Communications Inc., Global Ordnance, and Day & Zimmermann Lone Star.
Privatization
State Property Fund names Bilshovyk privatization auction date and conditions
The Cabinet of Ministers approved the terms of the privatization auction for the First Kyiv Machine-Building Plant (previously as the Bolshevik Plant) with a starting price of UAH 1.389 billion.
Later, the auction commission approved Oct. 27, 2021 as the date of the auction.
As the head of the State Property Fund, Dmytro Sennychenko, reported, according to the privatization conditions, the new owner will have to invest over Hr 57 million in the repair and modernization of the enterprise, maintain the enterprise’s core activities, and settle its debts and wage arrears.
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
