Editor’s Note: This is Ukrainian SOE Weekly, Issue 38, covering events from Aug. 1-6, 2021/
Corporate governance in SOEs
NSDC interprets the Organization for Economic Cooperation & Development corporate governance principles for Ukrzaliznytsia, gives the CEO role to the minister
The National Security and Defence Council instructed the Cabinet of Ministers to give the duties of Ukrzaliznytsia’s CEO to Minister of Infrastructure Oleksandr Kubrakov. This follows from the minutes of the NSDC’s meetings obtained by Novoye Vremya from the Ministry of Infrastructure.
At its July 30 meeting, the NDSC discussed “temporary management” until a new CEO is selected and the “fully-fledged governing bodies” are formed at Ukrzaliznytsia, due to the company’s critical condition.
[The OECD Guidelines on Corporate Governance of State-Owned Enterprises imply that giving the role of CEO to a minister is a direct intrusion into the operational autonomy of SOE management. – SOE Weekly.]
In the same decision, the NSDC instructed the Cabinet to consider “increasing” its controlling power as the company’s owner and “optimizing” the powers of the supervisory board, “in accordance with the OECD Guidelines.”
[Note that the supervisory board’s current powers are already limited relative to those prescribed in the OECD SOE Guidelines. For example, according to the guidelines, the board should have the power to appoint and remove the CEO. However, according to the current law, the power to appoint the CEO in SOEs overseen by the Cabinet, such as Ukrzaliznytsia, is vested in the Cabinet of Ministers. According to the charter of Ukrzaliznytsia, the supervisory board only nominates a CEO candidate, who then has to be appointed by the Cabinet. According to the same rules, the Cabinet also approves the financial plan of the company. In fact, vetoing financial plans may often be used as a leverage to intrude into SOEs’ operational autonomy. As we wrote earlier in SOE Weekly (Issue 36), on 15 July, the Verkhovna Rada approved Draft Law No. 5593-d on corporate governance in SOEs in the first reading. Although the current wording of the draft law is not yet in full compliance with the OECD Guidelines and requires improvement, it does move the power to approve financial plans of SOEs overseen by the Cabinet to such SOEs’ supervisory boards. – SOE Weekly.]
The NSDC also instructed the Cabinet to immediately convene a general shareholder meeting to set Ukrzaliznytsia’s tariffs at “economically justified levels.”
[The Cabinet acts a general shareholder meeting (owner) for Ukrzaliznytsia, while the Ministry of Infrastructure develops the policy for the transport sector and sets tariffs for rail transportation. According to the OECD SOE Guidelines, ownership, policymaking, and regulation should be separated for SOEs. In particular, tariffs should instead be set by a separately established regulator. To date, no such regulator has been established for the transport sector in Ukraine. The NSDC’s decision also violates the OECD Guidelines in that the same person will have the duties of both the CEO and regulator, resulting in an irreconcilable conflict of interest. Making Kubrakov both minister and CEO of Ukrzaliznytsia is also against the anti-corruption law. According to the law, ministers are banned from serving on supervisory boards, management boards, or other executive or controlling bodies of for-profit companies.
The position of the National Agency for Corruption Prevention (NACP) on this issue is unknown. – SOE Weekly.]
Kubrakov became the Minister of Infrastructure in May 2021
Previously, he was the head of Ukravtodor, Ukraine’s Automobile Road Agency. The acting CEO of Ukrzaliznytsia is Ivan Yuryk.
The court of appeal revives the National Agency for Corruption Prevention’s order to dismissVitrenko from Naftogaz
The Sixth Administrative Court of Appeal overturned a ruling by the Kyiv District Administrative Court that suspended the NACP’s order to fire Naftogaz’s CEO Yuriy Vitrenko. The NACP demanded that, in accordance with the court’s decision, the government must end Vitrenko’s contract. NACP chair Oleksandr Novikov sent a letter to the Cabinet of Ministers explaining that the law provides a specific mechanism for fulfilling the order.
According to the NACP, it is necessary to convene a Cabinet of Ministers meeting and consider the following issues:
- 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); and
- recognize Vitrenko’s appointment as illegal and terminate it.
Novikov added that the NACP is prepared to help with implementation.
In SOE Weekly (Issue 34), we reported that on 1 July, the NACP ordered Clare Spottiswoode, the supervisory board chair of Naftogaz, to terminate Vitrenko’s contract as illegal. Vitrenko sued the NACP to overturn the order, arguing that, if the NACP sees a violation in his appointment, it should go to court rather than issue orders.
In SOE Weekly (Issue 36), we reported that NACP later filed a lawsuit with the Kyiv Shevchenkivskyi District Court to terminate the contract between Naftogaz and Vitrenko.
This was the NACP’s third attempt to terminate Vitrenko’s contract. Two previous attempts were NACP’s orders addressed to Prime Minister Denys Shmyhal and Naftogaz’s supervisory board chair Clare Spottiswoode, respectively.
Both orders were suspended by the court until the merits of the case are considered, after which the NACP decided to go to the court.
It is still unclear whether the NACP has agreed with the illegality of its earlier orders. If it has not, it is unclear why the Agency decided not to wait for court decisions on the two orders. – SOE Weekly.]
For an extended background of the Naftogaz case, see SOE Weekly’s Issues 32, 33, 34, 35, 36, and 37.
Ukrnafta’s supervisory board extends the contract with the current CEO until November
Ukrnafta’s supervisory board will keep Oleg Gez on as the CEO until November 2021, Gez said in an interview with Interfax Ukraine. Gez told Interfax Ukraine that he wants to take part in the competitive selection for the job as soon as it’s announced.
ARMA receives a new acting head
The Cabinet of Ministers appointed Dmytro Zhoravovych as the acting head of the Asset Recovery and Management Agency. Zhoravovych currently heads the North-Eastern Interregional Territorial Department of the ARMA.
As we reported in SOE Weekly (Issue 37), the State Bureau of Investigation (DBR) charged ARMA’s leadership and two lawyers with misappropriating $400,000 in cash. The court removed ARMA’s leaders from office and placed them under house arrest.
State property evaluated for the first quarter of 2021, results are in. The Ministry of the Economy published the Unified Monitoring of the Efficiency of State Property Management for the first quarter of 2021. The SOE Weekly team has analysed the data.
The state has 3,332 SOEs (decreased by 11 from 3,343 at the end of 2020). Of these, 1,369 (41%) are operating SOEs. Among the operating SOEs, 802 are profitable, making up 24% of the entire SOE portfolio.
The ownership of these companies is dispersed among 87 entities.
SOEs have Hr 1,653 billion ($61 billion) in assets (a more than Hr 25 billion (nearly $1 billion) decrease from the Hr 1,679 billion ($62 billion) in assets at the end of 2020. There are 684,000 full-time employees (31,000 fewer than the 715,000 employees at the end of 2020).
In the first quarter of 2021, the total profit of SOEs was Hr 20.6 billion ($750 million – unaudited), a significant improvement from last year. In the first quarter of 2020, SOEs lost a combined Hr 16.1 billion or $600 million.
[Please note that the first quarter’s results are based on only intermediate, unaudited reporting. The annual audited results will provide a more reliable picture, which may differ from that produced by the intermediate results. – SOE Weekly.]
In SOE Weekly (Issue 35), we published the results of the Unified Monitoring of the Efficiency of State Property Management for 2020.
SOE Nomination Committee picks members of the Odessa Portside Plant supervisory board
The SOE Nomination Committee selected independent members and state representatives of the supervisory board of the Odessa Portside Plant (OPZ).
No information on who was selected was available at the time this SOE Weekly was prepared for publication.
According to Minister of the Economy Oleksiy Lyubchenko, OPZ is on the State Property Fund’s list of assets up for large-scale privatisation, and it is important to improve its performance for a successful sale.
In total, 77 applicants competed for the positions. The shortlist consisted of 15 candidates.
The SOE Nomination Committee also approved the requirements for the selection of supervisory board members of the state-owned enterprise Medical Procurement of Ukraine.
SOE updates
Energy sector
Ukrnafta appeals to Zelensky over the AMCU’s fine of Hr 2.4 billion
Ukrnafta turned to President Volodymyr Zelensky over the Antimonopoly Committee’s (AMCU) decision to fine the company Hr 2.37 billion or $88 million. Ukrnafta also appealed to the Ministry of Justice, Ministry of the Economy, and Ministry of Finance.
The company believes that the AMCU’s actions break the law and jeopardize Ukraine’s Association Agreement with the European Union.
On March 30, the AMCU decided to fine Ukrnafta for anti-competitive behavior in the light petroleum products market in 2015-2017. The company claims that the accusations are groundless, and the fine is six times as high as what is allowed by law.
Ukrnafta said that, when determining the amount of the fine, AMCU must only use the revenue from the company’s gasoline station network (Hr 3.9 billion), meaning that the fine should not exceed Hr 400 million. Instead, the AMCU used Ukrnafta’s total revenue for 2020, including revenue from wholesale trade in oil, natural gas sales, and other income.
Zelensky was asked to review the actions of AMCU officials in taking this decision.
In SOE Weekly (Issue 21), we reported that the AMCU determined that Privat group’s gas stations colluded with one another and fined them for a total of Hr 4.7 billion. The investigation established that the petrol retailers used a system of non-cash payments with scratch cards and Avias brand fuel cards to engage in anti-competitive behavior.
Approximately 1,625 gas stations took part in the scheme, including Ukrnafta, which operates 537 petrol stations, the AMCU said. Ukrnafta announced that it planned to appeal the penalty in court.
According to the media, on Aug. 4, the Cabinet of Ministers adopted an order transferring six state-owned, coal-fired thermal power plants from the State Property Fund to Naftogaz.
These include the Severodonetsk TPP and the shares of the Dnipro TPP, Mykolayiv TPP, Kryvyi Rih TPP, Kherson TPP, and Odessa TPP. All six have been excluded from large-scale privatization.
During the meeting, Prime Minister Denys Shmyhal said the Cabinet may let local governments manage the plants, if they can prove that they have the confidence and resources to handle this responsibility.
The Cabinet explained the transfer by saying that the plants owe Naftogaz a total of Hr 5.7 billion ($210 million). The Antimonopoly Committee granted its permission for the handover. The SPF must complete the transfer within a week.
GTSOU’s profit halved due to debts of Firtash’s regional gas companies
According to the financial results for the first half of 2021, the Gas Transmission System Operator of Ukraine (GTSOU) reported Hr 5.6 billion in net profit, less than half of the Hr 13.1 billion it reported over the same period last year.
The GTSOU’s revenue in the first half of 2021 amounted to Hr 28.8 billion, almost as much as the Hr 29 billion it received in the first half of 2020.
However, according to GTSOU, the key negative factor that influenced the net profit in this period was Hr 10 billion in debt from gas market participants for balancing and transportation services. Private regional and city gas companies owe 91% of this debt.
The GTSOU said that the debts of regional and city gas companies increased by 93% compared to the first half of 2020, and their total debt to GTSOU for gas transportation and balancing services in this period amounted to almost UAH 9.8 billion.
The largest debtors are regional gas companies operating under the brand of Regional Gas Company (RGC), associated with the oligarch Dmytro Firtash. Their total debt is UAH 7.97 billion
Other sectors
The Cabinet of Ministers sets the terms of loans at UFHC
The government determined the conditions to receive mortgage loans and financial leasing services from the Ukrainian Financial Housing Company.
According to the Ministry of Finance, the government adopted a resolution developed by the ministry, determining who can apply for housing assistance. The list includes people who receive salaries from state or local budgets, and people in the Internally Displaced Persons (IDPs) database.
[The grounds for such discrimination are unclear. The state financial institutions are commonly established to address market failures, such as insufficient supply of services by private providers. The state can provide affordable housing loans to people who cannot take such loans from private players.
While the provision of loans to IDPs seems reasonable, limiting the target group to employees of state and local authorities appears to be an unreasonable discrimination. It is also unclear if the borrowers would remain eligible for special conditions after they leave their public sector jobs. – SOE Weekly.]
The rest of the criteria imply that the loans should go to less wealthy citizens who have poorer housing conditions. The conditions also imply that the agreement term should not exceed 20 years, and that the housing purchased with the loan is not in the premium housing segment.
Mortgage loans have a 7% per annum rate. Financial leasing services have a rate of 5%.
As we reported in SOE Weekly (Issue 10), Minister of Finance Serhiy Marchenko signed the charter of PJSC Ukrainian Financial Housing Company, and Vasyl Shkurakov was appointed as CEO. According to the Ministry of Finance, the company offers affordable financial instruments making it possible to get a mortgage loan of as low as 7% per annum or lower, for a period of up to 20 years, with the government involving banks in the lending process. The authorised capital of the UFHC is a modest Hr 10 million.
Firtash’s Zaporizhzhya Titanium and Magnesium Plant is state-owned again
The Specialised Anti-Corruption Prosecutor’s Office (SAPO) said that the Zaporizhzhya Titanium and Magnesium Plant (ZTMK) was returned to state ownership. ZTMK previously belonged to the oligarch Dmytro Firtash.
According to the SAPO, the Commercial Court of Zaporizhzhia oblast made the ruling, to satisfy SAPO’s claim against Firtash’s Tolexis Trading Limited and ZTMK.
The SAPO said that the court had already made a similar decision in July 2018, which was upheld on appeal. However, the Supreme Court remanded the case for retrial. So far, the court of first instance fully satisfied the SAPO’s claim and returned the plant to state ownership.
Later, Tolexis Trading Limited’s lawyer Roman Chyshinsky said that the decision to return ZTMK to state ownership would be challenged in the court of appeal. According to him, the decision is “biased and unfair.”
Privatization
Shmyhal gives officials a month to make a 2022-2023 privatization list
On his Telegram channel, Prime Minister Denys Shmyhal said that he instructed the Ministry of the Economy and the State Property Fund (SPF) to prepare a list of objects for privatisation in 2022-2023 within one month.
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
