Corporate governance in SOEs

Naftogaz

The Cabinet of Ministers on April 28 dismissed Naftogaz’s supervisory board and CEO, Andriy Kobolyev, replacing him with Yuriy Vitrenko, the acting energy minister.

At Naftogaz’s general meeting of shareholders, the Cabinet considered the company’s financial statements for 2020, which reported a loss of Hr 19 billion, while the company’s financial plan approved by the Cabinet earlier had projected a profit of Hr 11.5 billion. The Cabinet’s statement also said that the financial plan was proposed by Naftogaz management itself in December 2020.

The performance of the supervisory board and management board of Naftogaz in 2020 was deemed unsatisfactory, and the supervisory board and CEO Kobolyev were fired.

According to the Cabinet of Ministers decision, the supervisory board will continue to exercise its powers until new candidates are appointed. For that purpose, the Cabinet decided to announce a competitive selection of four independent members of the supervisory board.

By the same decision, the Cabinet of Ministers appointed Vitrenko as the new CEO of Naftogaz starting on April 29 for a one-year term. According to Vitrenko, he was asked to lead Naftogaz by President Volodymyr Zelensky and Prime Minister Denys Shmyhal.

Kobolyev wrote on his Facebook page that he found out about his dismissal from the news. He also said that the government’s decision was putting an end to the corporate governance reform.

Later, Naftogaz’s press service and Kobolyev himself announced that he intended to challenge his dismissal in court.

Naftogaz called Kobolyev’s dismissal a “legal manipulation,” arguing that the Cabinet may appoint and dismiss the CEO of Naftogaz on the proposal of the supervisory board. The company said that the Cabinet dismissed the supervisory board for two days to be able to fire Kobolyev, calling it an insult to the basic principles of corporate governance of state-owned enterprises (SOEs).

Naftogaz claimed that the government’s decision was a return to the practice of manual management of SOEs, and that this sent a signal to investors in SOEs’ securities that the work of SOEs was unpredictable and might change based on politics.

US Department of State spokesman Ned Price twitted that respect for corporate governance, transparency, and integrity in energy sector personnel appointments, whether government or state-owned enterprises, were key to maintaining confidence in Ukraine and its commitment to reform.

The G7 ambassadors reacted to the Cabinet of Ministers’ decision, claiming that effective management of SOEs, free from political interference, was crucial for the competitiveness, prosperity, and fulfillment of Ukraine’s international obligations.

Naftogaz’s former supervisory board expressed disagreement with the decision of the Cabinet of Ministers and the low assessment of management’s performance. The board said that the company’s losses were due to certain circumstances beyond the company’s control. The board evaluated management’s performance in 2020 as very high, or even excellent, taking into account these circumstances. The statement did not indicate whether the supervisory board members will resign or stay.

The board also pointed to the accumulated debt of gas distribution companies, which Naftogaz was obliged to supply under public service obligations (PSOs). These PSOs were canceled in August 2020, but the debt has remained unpaid.

Ex-Chair of the board Claire Spottiswoode said that, according to the International Financial Reporting Standards, the company provisioned a reserve for bad debts, which caused the negative consolidated financial result of Naftogaz. Earlier, Naftogaz’s CFO Peter van Driel spoke about Hr 23 billion provisioned for the respective debts.

[The OECD Guidelines on Corporate Governance of SOEs state that the supervisory board of an SOE should have the power to appoint and remove the CEO. However, Ukraine has never implemented this rule for SOEs. Specifically, the Law on the Cabinet of Ministers of Ukraine and the Law on Management of the State Property vests this power in the Cabinet of Ministers of Ukraine 9CMU) for SOEs in which the CMU performs the ownership function (e.g., Naftogaz or Ukrzaliznytsia).

In addition, the current law gives the CMU, as well as other ownership entities of SOEs, the power to dismiss the supervisory board at any time and on any grounds.

Technically, the CMU’s decision was realized as a series of several decisions at the annual shareholder meeting of Naftogaz, namely:

(1) to deem the performance of the management board and the supervisory board as unsatisfactory;

(2) [based on that] to terminate the powers of the supervisory board (these powers were terminated for two days; during that period, the supervisory board of Naftogaz was de facto abolished – with its powers transferred to the CMU in its capacity as the general shareholders meeting);

(3) to dismiss the CEO and appoint a new one instead (since the supervisory board’s powers were now transferred to the general shareholders meeting, the CMU obtained the right to do so without respective proposal from the supervisory board).

Notably, the draft law on corporate governance in SOEs proposed by the Ministry of the Economy last week keeps these powers to appoint and dismiss the CEOs of SOEs under the Cabinet of Ministers. This suggests that, from a formal point of view, the situations such as the one at Naftogaz may occur again. – SOE Weekly.]

In SOE Weekly (Issue 15), we reported that Vitrenko, in a letter to Prime Minister Denys Shmyhal, proposed to immediately consider replacing Naftogaz’s management, terminating contracts with the members of its supervisory board, launching a competitive selection for these positions, auditing Naftogaz and all the companies in the Naftogaz group, as well as changing the accounting policies at Naftogaz.

According to the letter, Naftogaz did not meet its gas production indicators in 2020, which were approved by the Gas Production Industry Development Concept. In June 2019, the company’s supervisory board approved the business plan of the Integrated Gas Business Division for 2019-2023, setting Ukrgazvydobuvannya’s gas production forecast at 15 billion cubic meters in 2019 and 14.9 billion cubic meters in 2020. According to Vitrenko, this contradicted the Order of the Cabinet of Ministers № 161-p and the then effective ownership policy of Naftogaz, according to which the gas production had to be at least 18.2 billion cubic meters in 2019 and at least 20.1 billion cubic meters in 2020.

In his letter, Vitrenko also referred to the violations that the State Audit Office established in Naftogaz in 2018-2019. According to the auditors, these led to losses of HR 75.5 billion. The letter also cited the Large Taxpayers Office, which had claimed violations in Ukrtransgaz that led to Naftogaz dividends to be understated by UAH 35.2 billion.

PrivatBank

“Headless PrivatBank: What threatens a bank without a CEO and how to appoint one”. In their article, Andriy Boytsun and Dmytro Yablonovskyi, members of the SOE Weekly team, analyse the current uncertainty related to the selection of PrivatBank’s CEO and provide recommendations on how the selection process should be organised and communicated.

The article concludes that:

there are more cons than pros in the so-called “open” competitive selection of CEO candidates (an “open” competitive selection is publicly advertised and in which any person can apply);
the publication or leakage of candidates’ names is a very harmful practice, although common in Ukraine; and
succession planning is crucial.

Transparency about CEO selection for a state-owned bank means that society must know the rules by which selection takes place – such as nomination policies and procedures. However, this does not mean that the selection should be “open” and that confidential information, such as candidates’ names, should be disclosed.

PrivatBank is best advised to take care to communicate properly what and how it did in terms of CEO selection.

“How trade union wants to paralyze PrivatBank”.

In another article by the SOE Weekly team, Oleksandr Lysenko and Andriy Boytsun provide an in-depth analysis of the ongoing litigation between the “trade union” and PrivatBank. Although the claims of the dubious “trade union” are inadequate, the litigation may lead to PrivatBank’s CEO not being appointed on time. The potential negative implications for Ukraine’s largest and most profitable bank may then include:

a paralysis of operational management;
new litigations; and
PrivatBank’s weaker position in litigation against the bank’s former owners.

The article also provides practical advice on the actions to be taken by PrivatBank in order to protect itself from these negative effects:

challenge the Commercial Court’s decision, by which the court denied PrivatBank’s request to cancel the injunction on appointing a new CEO;
submit the winner of the competitive selection for prior approval of the National Bank of Ukraine (NBU); and
prepare for possible operation without a CEO.

Possible CEO candidate for PrivatBank.

According to Novoye Vremya, the front-runner to replace Petr Krumphanzl as PrivatBank’s CEO is Gerhard Bösch. He is currently the first deputy CEO of Raiffeisen Bank Aval. His terms of office at Raiffeisen will expire on 30 April.

Bösch was the Head of the World Treasury and Markets Department at Raiffeisen from 2004 to 2006. Since March 2006, he has been deputy CEO, and since November 2010, the First Deputy CEO of Raiffeisen Bank Aval.

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 may be under the influence of the bank’s former owners, the media reported.

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.

SOE updates

Energy sector

Naftogaz officially reports a loss of Hr 19 billion. Naftogaz reported that it lost Hr 19 billion in 2020. In 2019, the company reported a profit of Hr 63.3 billion (which includes the Gas Transit Arbitration award of Hr 55.7 billion paid by Gazprom). Naftogaz last posted a loss in 2015.

The company named three factors to explain the 2020 losses:

the world economic crisis and record low gas prices;
debts for gas released under public service obligations (PSOs), which reached record numbers; and
the fact that the gas transmission system was unbundled, and the profits that it generated now goes to the Gas Transmission System Operator of Ukraine (GTSOU).

In SOE Weekly (Issue 23), we mentioned that Ekonomichna Pravda obtained a document with Naftogaz’s financial reporting, which reported a loss of Hr 36.93 billion in 2020.

Naftogaz’s ex-CEO Andriy Kobolyev then said on his Facebook page said that the information published by Ekonomichna Pravda was incorrect, and Naftogaz would soon publish documents with all comments and explanations.

GTSOU posts an Hr 20.4 billion profit in 2020.

According to the audited financial statements of the Gas Transmission System Operator of Ukraine (GTSOU), its net profit amounted to Hr 20.4 billion in 2020.

Other key financial indicators of 2020 are as follows:

income from activities in international markets was Hr 47.5 billion;
income from activities in the domestic market, Hr 10.1 billion;
operating expenses, Hr 34.6 billion;
taxes paid, Hr 14.9 billion;
EBITDA, Hr 29.7 billion.

Currently, the company makes most of its money on international clients and almost no money on domestic consumers: The cost of transportation in the final price of gas is only about 3%.

Procurement Notices – powered by ProZorro

Together with ProZorro, we selected procurement notices announced by top 15 Ukrainian SOEs and four state-owned banks from April 22 to 28 with an expected value of more than Hr 1,000,000. State Food and Grain Corporation, Automobile Roads of Ukraine, and PrivatBank are not subject to the requirement to use ProZorro by law and have not used it in the past two years.

Issue 25 – April 23-30, 2021

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.

Andriy Boytsun: Ukrainian State-Owned Enterprises Weekly

SOE updates

Energy sector

Naftogaz officially reports a loss of Hr 19 billion. Naftogaz reported that it lost Hr 19 billion in 2020. In 2019, the company reported a profit of Hr 63.3 billion (which includes the Gas Transit Arbitration award of Hr 55.7 billion paid by Gazprom). Naftogaz last posted a loss in 2015.

Procurement Notices – powered by ProZorro