Andriy Boytsun: Ukrainian State-Owned Enterprises Weekly

Corporate governance in SOEs

Former Director of Ukrzaliznytsia’s Cargo Business explains his resignation. Irakli Ezugbaia, the outgoing Ukrzaliznytsia cargo director, said that he left because the supervisory board stopped implementing reforms which would have split the company into two units, UZ Cargo and UZ Infra.

In his interview with Liga.net, Ezugbaia said that, by resigning, he hoped to draw attention to how slowing reform harms the interests of the state and the development of the country’s economy. He said that the reform delay was the reason why passenger tariffs increased this year but freight tariffs didn’t.

Ezugbaia added that today’s tariff-setting methodology contradicts European Uion directives, which do not allow cross-subsidies. In Ukraine, freight revenues subsidize passenger transportation and manufacturing business lines. Ezugbaia added that his team developed a unified per tonne-kilometre tariff model for railway access, but the reform was stopped without explanation.

As we reported in SOE Weekly (Issue 18), Ezugbaia resigned due to the company’s slow pace of reforms and the harassment of Ukrzaliznytsia’s management. According to Ezugbaia, “certain forces” [vested interests – SOE Weekly] are not interested in the establishment of a national freight carrier.

SOE Weekly (Issue 10) also relayed Ezugbaia’s earlier statement that Ukrzaliznytsia would establish UZ Cargo, a separate entity for its cargo business during the company’s reform. He then also said that cargo transportation remained the only profitable segment for Ukrzaliznytsia.

Minister of Infrastructure on Ukrzaliznytsia’s CEO dismissal. The Minister of Infrastructure Vladyslav Krykliy explained the dismissal of Ukrzaliznytsia’s CEO Volodymyr Zhmak by the lack of a consistent strategy for the company’s split into business units.

Krykliy said that the government as the owner of Ukrzaliznytsia wanted to understand exactly how the company planned to carry out and implement the split. According to Krykliy, however, the management board had begun to register new legal entities without a proper explanation of the purpose to the supervisory board, shareholders, and employees.

According to the Law on Joint-Stock Companies, the establishment of new legal entities always requires the supervisory board’s decision, suggesting that – if such new legal entities were established – Ukrzaliznytsia management did have the mandate to establish them.

In his recent interview, Irakli Ezugbaia also said that management had the supervisory board’s approval in November 2020, which was reversed later. – SOE Weekly.]

In SOE Weekly (Issue 19), we reported that Ukrzaliznytsia’s supervisory board proposed to dismiss the company’s CEO Volodymyr Zhmak by unanimous vote, after which the Cabinet of Ministers dismissed Zhmak.

Appeal against suspension of PrivatBank’s CEO selection to be considered in end-March. The Northern Commercial Court of Appeal will hear the Cabinet of Ministers’ and PrivatBank’s appeal against the ban on holding the competitive selection of the bank’s new CEO. The hearing is scheduled for 31 March 2021.

As we reported in SOE Weekly (Issue 16), the Commercial Court of Kyiv suspended this selection, satisfying the claim of the trade union of PrivatBank, which demanded to cancel the competition altogether.

The Court reasoned that, if selection results are declared illegal, this may lead to new lawsuits.

Rejected member of Oschadbank’s management board appointed department director. After the National Bank of Ukraine (NBU) rejected Dmytro Buts as a member of Oschadbank’s management board, Buts was appointed as the director of the risk management department.

The media referred to their sources as saying that the NBU said in its letter that it considered Buts professionally unfit.

Kateryna Rozhkova, the First Deputy Governor of the NBU, said that she was surprised by the NBU rejecting Buts as Oschadbank’s management board member. She said that she was present during Buts’ interview with the NBU’s Qualification Commission, which noted Buts’ strong professional skills and recommended his candidacy by majority vote.

However, the NBU’s Supervision Committee (with majority of the committee members being members of the Qualification Commission) did not support the Commission’s recommendation. Rozhkova called this an alarming signal.

Later this week, NBU’s Deputy Governor Yaroslav Matuzka said that there were no grounds for reviewing the central bank’s decision to dismiss Buts. Matuzka added that the decision of the NBU’s Supervision Committee resulted from a discussion between the committee members and the NBU’s Management Board, which also has the right to participate in the meetings. He did not disclose any further information.

As we reported in SOE Weekly (Issue 19), the NBU refused to approve Dmytro Buts as a member of the management board and Chief Risk Officer of Oschadbank, despite his strong banking track record. The reasons for Buts’ rejection by the NBU were unclear.

Council of Directors to be established in SFGCU. The State Food and Grain Corporation of Ukraine (SFGCU) announced a plan to establish an advisory body, the Council of Directors.

According to the company’s management, the council will include the CEOs of “the leading companies”. [It is unclear which companies are referred to. SFGCU has numerous branches. – SOE Weekly]. The Council of Directors will improve and systematise working with SFGCU’s branches and involve them in addressing strategic company development issues, the company’s statement said.

Notably, according to a CMU protocol decision, SFGCU is on the top-15 Ukrainian SOEs list, in which the OECD Guidelines on Corporate Governance of SOEs should be implemented, including the establishment of an independent supervisory board.

However, even though establishing a supervisory board is required by Ukraine’s State Property Management Law and by SFGCU’s bylaws since 2018, no supervisory board has been established at SFGCU. – SOE Weekly].

SOE updates

Banks

Systemically important banks can now be tracked on the NBU’s website. The National Bank of Ukraine (NBU) has launched a page with the main parameters of the 13 systemically important banks. The activities of these financial institutions affect the stability of the entire banking system.

The NBU will publish a definition of the term “systemically important bank”, a justification for the regulator’s greater attention to, a list of stronger requirements for, and an up-to-date list of such banks, as well as a history of relevant changes. In particular, the NBU’s website will report the market share for each systemically important bank.

The list of systemically important banks includes all the four state-owned banks: PrivatBank, Oschadbank, Ukreximbank, and Ukrgasbank.

State-owned banks reduced NPLs by Hr 87 billion. According to the Ministry of Finance, in 2020, state-owned banks (SOBs) reduced their non-performing loan (NPL) portfolios from Hr 397 billion to Hr 310 billion. The share of NPLs in the SOBs’ loan portfolio decreased to 57.4%.

The decrease was mainly due to the write-off of distressed assets from banks’ balance sheets at the expense of reserves by over Hr 123 billion.

In addition, last year, SOBs restructured NPLs by about Hr 42 billion; more than half of this amount (Hr 23 billion) was restructured under the Law on Financial Restructuring. The amount of overdue debt of SOBs was also reduced by Hr 6 billion.

According to the government’s recently SOB reform strategy, the goal is to reduce the share of NPLs in the SOBs’ loan portfolio below 20% by 2025.

Energy sector

Energoatom-Trading sells 100% of offered volume for Hr 938 million. At a March 19 auction, Energoatom fully sold the electricity on offer to 16 companies. The total value of the electricity sold on the Ukrainian Energy Exchange is almost Hr 938 million.

As a result of competitive bidding, Energoatom-Trading sold 100% of the offered volume of night-time electricity (1,100,500 MWh) at a weighted average price of Hr 851.94 / MWh.

The delivery period is 1 April – 31 December 2021. According to Energoatom-Trading, at this auction, the company sold electricity for a period of 9 months for the first time since auction rules were changed.

As we reported in SOE Weekly (Issue 19), Energoatom-Trading sabotaged the sale of night-time electricity at the 16 March auction: The company did not sell any energy at an auction for night-time electricity through the end of the year.

Naftogaz signs a contract with YE Energia to provide stable gas supply to households. Naftogaz signed an agreement for the sale of natural gas with YE Energia LLC, allegedly related to Dmytro Firtash group. This will allow market participants to offer gas to households at a fixed price throughout the year.

Naftogaz has completed the development of a market solution that will be able to protect households from seasonal jumps in gas prices in the next “heating season” (autumn 2021 – spring 2022), as well as from price increases due to global economic recovery. The solution entails an annual tariff with a single price for gas during the year.

Regional gas companies are responsible for supplying gas to 65% of households. Naftogaz supplies gas to 13% of retail consumers.

The annual tariff will be provided by default to all gas supply companies, according to the draft decision of the National Energy and Utilities Regulatory Commission (NEURC). Naftogaz added that throughout the year, each consumer will be able to change the annual tariff plan to a monthly one, as well as choose the services of any other gas supplier.

Later this week, CEO of Naftogaz Andriy Kobolev announced that the company will keep the price at Hr 6.86/cubic metre for households in April.

Ministry of Energy announced the amount of wage arrears to miners. The total wage arrears of state coal mining enterprises for 2015-2020 were nearly Hr 1.2 billion, including Hr 782.3 million for January-February 2021.

According to the Ministry of Energy, as of March 22, 2021, Hr 526 million were allocated for the payment of salaries, which is 40.2% of the accrued salary. The Ministry stressed that the financial condition of state-owned coal mining companies does not allow for the payment of current salaries and wage arrears.

The ministry also added that, in order to repay the debt, they asked Prime Minister Denys Shmyhal and the Ministry of Finance to make changes to the monthly schedule of allocations of the general fund of the 2021 state budget.

Enterprises under the Ministry of Energy reported Hr 4 billion in total losses in 2020. According to the media, in 2020, 46 state-owned enterprises under the Ministry of Energy reported a total net loss of Hr 4.2 billion.

A total of 31 companies ended 2020 with a loss of Hr 8.4 billion, 14 companies with a profit of Hr 4.2 billion, and one company broke even.

The biggest lossmakers in 2020 were: Energoatom (Hr 4.8 billion or 57.5% of the total loss); coal mining enterprises (Hr 2.9 billion or 34% of the total loss); and SkhidGZK (Hr 550.2 million or 6.5% of the total loss).

The Ministry of Energy was led by Olha Buslavets from April 16 to November 20 2020. As we reported in SOE Weekly (Issue 14), Energoatom said that there was a shift in nuclear power plant repairs schedule upon her instructions in 2020, which led to a drop in the company’s revenues.

According to the 2019 financial results, state-owned enterprises under the Ministry of Energy had reported a profit of Hr 3.6 billion.

Infrastructure

Ukrposhta’s proposal to raise tariffs rejected. The National Commission for State Regulation of Communications and Informatisation (NCCIR) rejected Ukrposhta’s request to review tariffs for universal postal services.

On Feb. 19, the NCCIR held a working meeting with Ukrposhta, as a result of which the company had to correct a number of identified shortcomings and inconsistencies its proposals. However, according to the NCCIR’s statement, the Ccmmission did not receive a proper correction of these shortcomings from Ukrposhta.

The regulator said that the inconsistencies concerned changing tariffs for parcels and priority mail.

Ukrposhta proposed to raise maximum tariffs for postal services in two stages: first, by an average of 30.6% from the decision date through Nov. 30, 2021, and second, by an average of 8.8% starting Dec. 1, 2021.

In SOE Weekly (Issue 18), we reported that Ukrposhta’s CEO Ihor Smelyansky complained about Ukrposhta being forced to provide services at low tariffs. He asked the NCCIR, the Pension Fund of Ukraine, the Ministry of Social Policy, and the Ministry of Finance to acknowledge that the costs have increased significantly and that Ukrposhta lacks the Hr 300-400 million it needs to pay for services, making the need for tariff increase essential.

Ukrposhta will buy 1,860 cars for mobile offices for Hr 1.3 billion. As part of a European Bank for Reconstruction and Development loan, Ukrposhta signed a contract for the purchase of 1,860 Citroën Berlingo L2 Worker cars for its mobile offices, with a purchase price of UAH 1.3 billion, Minister of Infrastructure Vladyslav Krykliy said. According to the minister, a contract was signed with the winner of the procurement tender, Vidi. He added that Ukrposhta expects to receive the first cars at the end of this summer.

Defense

Court seized Motor Sich shares and assets, Ukroboronprom prepared to run Motor Sich assets. According to the Security Service of Ukraine (SBU), the Shevchenkivskyi District Court of Kyiv seized Motor Sich’s assets and 100% of the company’s shares.

The court transferred Motor Sich’s property into management of the Asset Recovery and Management Agency (ARMA). [As reported in SOE Weekly (Issue 18), ARMA showed an almost zero return on the assets under its management in 2020.]

On 21 March, Ukroboronprom’s CEO Yuriy Husyev announced on his Facebook page, that Ukroboronprom is prepared to manage Motor Sich assets. Husyev said that Ukroboronprom had already sent a respective letter to ARMA.

Decision on Motor Sich nationalisation came into force. On 23 March, President Volodymyr Zelensky enacted the 11 March 2021 decision of the National Security and Defence Council (NSDC) to nationalise Motor Sich.

The text of the NSDC’s decision is unavailable.

As we reported in SOE Weekly (Issue 18), the NSDC decided to nationalise Motor Sich. The NSDC’s Secretary, Oleksiy Danilov, said that Motor Sich’s investors would receive compensation.

Ukroboronprom may lose control of a strategically important company, appeals to SBU. 

Ukroboronprom appealed to the Security Service of Ukraine (SBU) over the threat of losing control over tech company Meridian due to interference from a private shareholder.

Meridian develops and produces drones and mobile laboratories for measurement equipment. 50,0001% of the company’s shares belong to Ukroboronprom and 40%, to Meridian Soyuz LLC, which is controlled by Vadym Hryb and his son. Hryb is the founder of the TEKT investment company. He served as advisor to the Head of the SBU in 2010-2012 and 2015-2016.

Ukroboronprom said that Meridian Soyuz LLC systematically had impeded Ukroboronprom’s attempts to bring the charter and governing bodies of Meridian in line with the requirements of Ukraine’s current legislation for several years. In particular, Meridian continues to operate as an “open joint-stock company”, a legal form that was abolished by the Law of Ukraine On Joint-Stock Companies in 2009.

According to Ukroboronprom, the governing bodies of Meridian adhere to its charter, which does not comply with the current legislation.

In addition, Ukroboronprom complained about systematic disruption and pressure on Meridian’s supervisory board through blackmail and threats. All actions of the board are challenged in court, and Ukroboronprom’s representatives – such Director of Assets, Corporate Rights and State Defence Orders Mustafa Nayem – get accused of allegedly extorting illegal benefits.

Ukroboronprom said that it has not been able to fully manage Meridian for several years, which affects the company’s efficiency and production for the needs of the Ukrainian Army.

Events

On March 26, the Independent Defence Anti-Corruption Committee (NAKO) held a press conference on “The implementation of corporate governance principles in Ukraine’s defence industry: From initiative to realisation”.

The press conference discussed the status of corporate governance reform in Ukroboronprom, including the draft law on the transformation of Ukroboronprom (Draft Law No. 3822). The conference was moderated by Brian Bonner, Chief Editor of Kyiv Post.

The speakers included: Kristina Kvien, US Chargé d’Affaires in Ukraine; James Roed-Moor, British Embassy in Ukraine; Oleksandr Zavitnevych, Head of the Parliamentary Committee on National Security, Defence and Intelligence; Svitlana Panaiotidi, Deputy Minister of Economic Development and Trade; Yuriy Husyev, CEO of Ukroboronprom; Mustafa Nayem, Deputy CEO for Asset Management of Ukroboronprom; Olena Tregub, NAKO’s Executive Director; Hlib Kanevsky, Chairman of StateWatch; and Oleksandr Lysenko, a member of the SOE Weekly team.

Lysenko said that the current version of the draft law is not in line with the OECD Guidelines on Corporate Governance of SOEs. Specifically, the current wording of the draft law:

• cements the conflicting roles of the state as owner, policymaker, and regulator, as it opens room for intervention by the politicians, including the line ministry; and
• allows room for political meddling and graft, as it does not guarantee the independence of the supervisory board from the owner and policymaker; and

Lysenko also said that the corporate governance framework for Ukroboronprom should be based on the same provisions as those for SOEs rather than special law. Kristina Kvien and James Roed-Moor also expressed concerns about these issues and stressed that the draft law must be brought in line with OECD’s SOE Guidelines.

As we reported in SOE Weekly (Issue 11), on 29 January, the Verkhovna Rada adopted a draft law on the transformation of Ukroboronprom in the first reading.

Procurement Notices – powered by ProZorro

Together with ProZorro, we selected procurement notices announced by top 15 Ukrainian SOEs and four state-owned banks from 19 to 24 March with an expected value of more than UAH 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.