Editor’s Note: This is the Ukrainian State-Owned Enterprises Weekly, Issue 31, covering events from June 4-11.
Corporate governance in SOEs
MGU left without a supervisory board
According to the information on the website of MGU (Mahistralni Gazoprovody Ukrayiny – Main Gas Pipelines of Ukraine), the powers of three independent members of the company’s supervisory board – Fabrice Noilhan, Jan Chadam, and Karina Luchinkina – expired on June 1, 2021.
Earlier, the Ministry of Finance as the ownership entity of MGU extended the powers of these supervisory board members from 1 March to 1 June 2021, as they were expiring on 1 March after their three-year term on the supervisory board, although the grounds for such extension are not clearly spelled out in the existing law.
The powers of another supervisory board member (state representative), Adomas Audickas, had expired on March 1, but were not extended. MGU failed to disclose this information on time, releasing it only on March 18.
This means that MGU is left with a non-quorate supervisory board consisting of a single member (state representative), Viktor Pynzenyk.
The government had earlier announced a competitive selection for the supervisory board of MGU, which has not been completed. As we reported in the SOE Weekly earlier (Issue 29), the independent members of the SOE Nomination Committee – which would complete the competitive selection for MGU – had suspended their work in late April after the Cabinet of Ministers changed management at Naftogaz. They had said then that they would be able to resume their work after the government offers clarity on the corporate governance action plan and clearly commits to respect corporate governance institutions.
MGU is a company that owns the Gas Transmission System Operator of Ukraine (GTSOU), with MGU’s supervisory board performing the function of the general meeting of GTSOU. A non-functional supervisory board at MGU means that certain key decisions cannot be made at GTSOU.
GTSOU is Ukraine’s most profitable SOE. As we reported in the previous SOE Weekly (Issue 30), GTSOU made a profit of UAH 20.4 billion in 2020, while most of the top 15 Ukrainian SOEs were loss-making in 2020.
Business Ombudsman suggests that supervisory boards’ remuneration should depend on achieving SOEs’ goals.
Business Ombudsman Marcin Święcicki proposed that Draft Law No. 5593 should envisage goal setting for SOEs via key performance indicators (KPIs). He also suggested that supervisory board members’ financial remuneration depend on the achievement of these KPIs.
[Note that it is common international practice to pay fixed remuneration to supervisory board members, independent of the company’s performance. – SOE Weekly.]
In SOE Weekly (Issue 30), we reported that 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. It 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 maintains its leverage and room for political meddling in the respective SOEs. The draft law also keeps the existing powers of the Cabinet to approve SOEs’ financial plans as they are today.
First deputy prime minister meets with EBRD representatives on corporate governance issues
Oleksiy Lyubchenko, the first deputy prime minister in the Economy Ministry, met with Matteo Patrone, the EBRD managing director for Eastern Europe and the Caucasus, and other EBRD’s representatives. They discussed corporate governance reform in Ukraine.
EBRD voiced key priorities for their activities in Ukraine, including continuing co-operation with Ukravtodor, which implies strengthening its corporate governance and anti-corruption policies. The government and the EBRD also discussed resuming the work of the SOE Nomination Committee, which should select new members of supervisory boards.
PrivatBank’s new CEO approved by the National Bank
On June 8, the National Bank of Ukraine (NBU) approved Gerhard Bösch as PrivatBank’s CEO. Bösch is appointed for a term of five years.
The G7 ambassadors congratulated PrivatBank’s upon a professional and competitive selection process. The ambassadors noted that the quality of the process, in particular its resilience to external pressures, demonstrates the benefits of good corporate governance.
In SOE Weekly (Issue 29), we reported that PrivatBank’s supervisory board appointed Gerhard Bösch as the new CEO of the bank, subject to NBU’s approval.
SOEs under the Ministry of the Economy lose UAH 5.8 billion in 2020
According to Marlin, SOEs overseen by the Ministry of the Economy made a total net loss of UAH 5.8 billion in 2020.
The biggest losses in 2020 were brought by:
- the State Food and Grain Corporation, UAH 5.8 billion;
- the Agrarian Fund, UAH 197 million;
- Research and Production Association “Pavlograd Chemical Plant”, UAH 156.9 million;
- Konyarstvo Ukrainy (Ukraine Horse Breeding), UAH 92.3 million.
In 2019, SOEs overseen by the Ministry of the Economy lost a total of UAH 4.9 billion.
The Ministry’s SOEs employed 23,651 people in 2020.
SOE updates
Banks
Oschadbank files an appeal regarding $1.3 billion compensation for Crimea
Oschadbank filed an appeal with the Court of Cassation of France to challenge the decision of the Paris appellate court. That decision said that the appellate court had no jurisdiction to consider the dispute, in which the bank claimed a compensation of $1.3 billion from Russia for the losses incurred when the Russian Federation annexed Crimea.
In SOE Weekly (Issue 21), we reported that the Paris Court of Appeal ruled in favor of the Russian Federation, which had been ordered to pay $ 1.3 billion to Oschadbank by the Permanent Court of Arbitration seated in Paris. The NBU had expressed concern about the appellate decision and emphasized that it was important to prove that Russia’s actions against Ukraine were unlawful on an international level.
Energy sector
G7 ambassadors discuss Energoatom’s corporatization with its management
The G7 ambassadors met with Energoatom’s CEO Petro Kotin to discuss plans to modernize and deepen the integration of its energy systems with the rest of Europe.
They stressed the need for a liberalized, competitive electricity market and the corporatisation of Energoatom in line with the OECD principles.
[Note, that decisions to launch Energoatom’s corporatization have been made since 2012, starting at least with the National Action Plan for 2012 on the Implementation of the Programme of Economic Reforms in Ukraine for 2010–2014. However, no progress with corporatiation has been made. – SOE Weekly.]
Energoatom and Ukrenergo make billions in profits in the first quarter of 2021
According to financial reports published by Marlin, Energoatom made a profit of UAH 1.01 billion and Ukrenergo, UAH 3.72 billion in the first quarter of this year.
For comparison, in the first quarter of 2020, Energoatom lost UAH 1.6 billion and completed 2020 with a loss of UAH 4.8 billion.
According to Energoatom’s report, the company had no negative exchange rate differences in the first quarter of 2021, while it had lost UAH 4.7 billion due to exchange rate differences in the first quarter of 2020. This appears to be the key reason for Energoatom’s better financial performance last quarter.
Ukrenergo lost UAH 4.6 billion UAH in the first quarter of 2020 and completed 2020 with losses of UAH 27.5 billion.
Ukrenergo’s profitability in early 2021 is due to increased income from electricity transmission, reactive power, and dispatching, as well as a UAH 2.9 billion reduction in total costs.
In SOE Weekly (Issue 30), we reported that Energoatom and Ukrenergo were among the biggest loss-makers in 2020. Ukrenergo was on top of the list, with UAH 27.5 billion in losses, while Energoatom reported UAH 4.8 billion in losses.
The World Bank to give Ukraine a $ 211 million energy loan
According to the Ministry of Energy, the World Bank and the Clean Technology Fund will give Ukraine a $ 211 million loan to increase the stability of the energy system for the European integration of the power grid and install hybrid power generating systems at Ukrhydroenergo.
$ 177 million will come from the World Bank $ 34 million from the Clean Technology Fund.
The World Bank’s Board of Directors will consider the package of guarantees and financial agreements by the end of June.
The project implies the installation of energy storage systems at four hydroelectric power plants (HPP), as well as the installation of a 35.9 MW solar power plant to be used as a backup power source and for charging batteries. Also, the Dniester HPP will get batteries with a capacity of 15 MW and a solar power plant with a capacity of 28 MW for similar purposes.
Defense
Draft law on reforming Ukroboronprom submitted to the Verkhovna Rada for second reading
According to Yuriy Husyev, Ukroboronprom’s CEO, the Verkhovna Rada’s Committee on National Security, Defence and Intelligence unanimously decided to submit Draft Law No. 3822 on reforming Ukroboronprom to the parliament for the second reading.
The recent changes to the version of this draft law that was adopted by the parliament in the first reading were made available on the Verkhovna Rada’s website on 11 June 2021, when this SOE Weekly was prepared for publication.
In SOE Weekly (Issue 12), we analyzed the version adopted in the first reading. According to that version, the reform would be implemented in three stages:
The first stage involves preparing the member enterprises of Ukroboronprom for reorganization.
At this stage, Ukroboronprom remains the authorized entity for the management of state-owned assets in the defense industry (until its transformation into a joint-stock company).
Ukroboronprom’s supervisory board will consist of seven members, with two appointed by the President of Ukraine, two by the Cabinet of Ministers of Ukraine, and another three being independent.
The second stage involves the conversion of the member enterprises of Ukroboronprom into joint-stock companies or limited liability companies.
The third stage envisages a direct transformation of Ukroboronprom (currently existing as a “State Concern”) into a joint-stock company.
According to the first reading’s version, the state, represented by the Cabinet of Ministers or the ministry in charge [currently, the Ministry for Strategic Industries of Ukraine – SOE Weekly], would be the founder and sole shareholder of the joint-stock company established as a result of the transformation of Ukroboronprom.
In SOE Weekly’s opinion, the first reading’s version was not yet in line with the OECD Guidelines on Corporate Governance of SOEs and required major amendments to be consistent with the SOE Guidelines.
Specifically, the then wording of the draft law:
cemented the conflicting roles of the state as owner, policymaker, and regulator, as it opened room for intervention by politicians, including the line ministry;
o allowed room for political meddling and graft, as it did not guarantee the independence of the supervisory board from the owner and policymaker; and
o allowed for easy replacement of management and, under the proposed corporate governance set-up, made the transfer of assets during the transformation, as then proposed, a major risk.
We reported in SOE Weekly (Issue 10), that Yuriy Husyev, Ukroboronprom’s CEO, asked the [resident to designate Draft Law No. 3822 as “urgent.”
Privatization
The State Property Fund sells another Ukrspyrt distillery
Karavanske MPD’s assets in the Kharkiv region were sold at a privatization auction. The starting price of UAH 23.1 million increased to UAH 101 million during the auction.
According to the State Property Fund (SPF), three participants were competing for the assets. The facility was founded in 1837 and most recently modernized in 2019.
If the winner rejects the lot, they will forfeit the security deposit of about 2 million to the state budget. The SPF explained that – to officially complete the privatization – the winner of the auction must sign off on the results of the auction, enter into a contract, and transfer the payment.
Successful privatization of a Lviv prison
This week, the State Property Fund sold the assets of Lviv’s former Correctional Facility No. 48 for a total of UAH 407.5 million in a privatization auction.
The assets were offered in two lots. Seven participants competed for the first lot, offered at a starting price of 132.7 million. The lot was sold for UAH 377.5 million.
Nine participants took part in the auction for the second lot. The starting price of 3.4 million increased by more than 700%, with these assets sold for UAH 30 million.
Public assets
The State Property Fund wants to return the Samara-Western oil pipeline to state ownership
The Commercial Court of Zhytomyr region opened a lawsuit filed by the State Property Fund (SPF) to return the Samara-Western oil pipeline – a seized asset of the Viktor Medvedchuk-affiliated Prykarpatzakhidtrans – to state ownership.
The hearing is scheduled for Sept. 14
In SOE Weekly (Issue 24), we reported that Ukrnafta won a tender and was selected to manage the pipeline by the Agency for Search and Management of Assets (ARMA). ARMA and Ukrtransnafta were supposed to sign a contract after the assets were valuated.
In SOE Weekly (Issue 16), we reported that Ukrtransnafta had to protect and maintain the Samara-Western pipeline by the decision of the Supreme Anti-Corruption Court.
Events
(Upcoming Webinar on Corporate Governance at SOEs in Ukraine. On June 15, the Strategy Council will hold a Webinar on Corporate Governance at State-Owned Enterprises in Ukraine.
The panel of experts, drawn from both the management and supervisory boards of Ukraine’s largest and most prominent SOEs, will discuss how to ensure progress for corporate governance.
The speakers lineup includes:
Andriy Boytsun, a member of the SOE Weekly team,
Yuliya Kovaliv, Deputy Chair of Naftogaz’s supervisory board,
Artem Shevalev, Deputy Chair of PrivatBank’s and Ukrgasbank’s supervisory boards,
Olha Bielkova, Director for Government and International Affairs of the Gas Transmission System Operator of Ukraine,
Şevki Acuner, Chair of Ukrzaliznytsia’s and Ukrenergo’s supervisory boards,
Roman Bondar, Ukroboronprom’s First Deputy CEO,and
Artur Somov, Acting CEO of UMCC Titanium.
The following issues will be addressed:
- practical steps that can be implemented to strengthen the role and status of independent supervisory boards;
- how to ensure that SOE managers are accountable to their independent supervisory boards and not to officials and politicians;
- how far Ukraine’s leading SOEs are from reaching the required governance levels to undertake an international listing or to access the international bond markets;
- addressing the complicated legal framework which creates extensive bureaucracy and undermines the SOE’s ability to act in a timely and effective manner; and
- recruiting and motivating the best talent on the market and ensuring they are retained for the long-term.
The registration for the webinar is available here.
The 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 Ukrainian SOE WeeklyTM 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
