State ownership of energy companies is a necessary evil in Ukraine, according to Andriy Boytsun, editor of Ukrainian State-Owned Enterprise Weekly.
Large-scale privatization could be the key, but most state-owned enterprises are not ready for such a change because there is no market nor government regulation strong enough to limit the powers of a private monopoly, according to Boytsun.
“The state is the second-best solution Ukraine has today,” Boytsun said during an online webinar titled “Does the state-run energy companies smartly?” organized by the Kyiv Post on Sept. 10.
But state ownership is not a deliberate policy, according to Edward Chow, a member of the DTEK Advisory Council, attributing more to “the legacy of the Soviet Union,” one in which “Ukrainian politicians have found it convenient to hold on to control of these companies,” Chow said.
Watch the webinar here: Does the state run energy companies smartly?
Ukraine’s state enterprises collectively bleed billions of dollars a year through corruption or mismanagement. These costs are shouldered by their owners — the taxpayers.
Political pressure
Ukrainian gas production is about 20 billion cubic meters a year. And even when prices change, the production doesn’t change, which is a sign of a market failure, Chow said. Consequently, Ukraine needs to import 10 billion cubic meters of gas or more to satisfy domestic consumption.
Five of Ukraine’s 15 largest state-owned firms are in the energy sector, but the state doesn’t manage them properly.
State oil-and-gas giant Naftogaz has been unable to boost oil and gas production in Ukraine.
Low electricity prices don’t bring enough funds to the electricity transmission system, Ukrenergo, to rehabilitate its archaic grid.
And Energoatom’s nuclear power plants, which supply about 50% of Ukraine’s electricity supply, are outdated.
All but three of Ukraine’s reactors began operations in the 1980s, putting most of them close to the end of their engineered lifespans of 40 years. 12 of Ukraine’s 15 reactors were slated to retire this year, but recent inspections gave them 5 to 10 more years.
When the Soviet Union collapsed in 1991, Ukraine inherited not only the embers of Chornobyl, but also four other nuclear power plants, including the largest nuclear plant in Europe, the Zaporizhzhia plant.
On Aug. 31, Energoatom and U.S.- based Westinghouse agreed to build reactor units for Khmelnytskyi nuclear plant for up to $30 billion, a day prior to President Volodymyr Zelensky’s long-awaited meeting with U.S. President Joseph Biden in Washington, D.C. on Sept. 1.
Ukrainian politics have harmed state-owned enterprises, according to Boytsun, making them more vulnerable to corruption, meddling, and populist management and pricing pressures. For instance, it’s more difficult to lay off unneeded workers in a state-owned firm than in a private one. The same holds true for pricing.
“It’s easier for the state to decree that a company should sell electricity or gas at an administratively set price, low enough to keep the voters happy but inefficient for the company,” he said.
Overall, politicians suffer from short-term thinking, while successful management of a company requires a long-term approach, he said.
Valentyn Gvozdiy, member of the supervisory board of hydropower company Ukrhydroenergo — one of the country’s only profitable state-owned energy companies — agreed with Boytsun on political meddling.
He said that the management of Ukrhydroenergo had been pressured to “do illegal things” under Ukraine’s previous government led by former Prime Minister Oleksiy Honcharuk. Still, Gvozdiy said the company reported the pressure, which has stopped under the government of Prime Minister Denys Shymhal.
The government needs more public offerings for the sales of state-owned companies to tap market efficiencies, according to Chow. A public offering is when a firm offers securities such as bonds or equity shares to investors in the open market. Such a structure would ensure independent operations, according to him.
“It would also take away the temptation of some future government to interfere in the operations of the company,” Chow said.
Privatizing successful companies
According to Chow, Ukraine’s current way of managing state-owned enterprises is not sustainable for a functioning market economy. Overall, Ukraine needs to modernize its energy sector to have access to the European market.
Privatization could improve management, according to Gvozdiy. “Privatization is a good way of getting rid of something unprofitable to make it profitable in good hands,” Gvozdiy said.
Boytsun also sees profitability as an argument for privatization, contrary to the prevailing Ukrainian political thinking today. “I’d rather start with a profitable one than with the junk that nobody’s willing to buy,” he said.
Nevertheless, Ukrhydroenerho is an exception in state-owned companies because it’s profitable, compared to Ukraine’s top five energy companies.
This state company administers major hydropower plants along Dnipro and Dniester rivers.
Ukrhydroenerho produces up to 10% of the market’s electricity demands, but in 2020, the company produced almost 7 billion kilowatts per hour. It also “balances the market,” which means it can inject the right amount of energy for the grid’s demand almost immediately — one of the key reasons behind the company’s success, according to Gvozdiy.
Ukrhydroenerho boasts a $300 million (Hr 8 billion) profit since 2021, making it a good candidate for potential privatization, Gvozdiy said.
However, national security can be an obstacle to such privatization. If a dam breaks, the state must take care of potential risky outcomes of massive flooding, he said.
“Yes, we’re ready for an initial offering, but I don’t know if our country will benefit from it,” Gvozdiy added.
Good corporate governance
Good corporate governance helped Ukrhydroenerho attract $211 million investment from the World Bank for its projects, which shows that a proper corporate governance policy can make a company successful.
Gvozdiy praised the virtue of corporate governance reforms to prepare companies to meet free and competitive energy market standards, a vision shared by Chow and Boytsun.
Boytsun also said that good governance principles could be a game-changer for Ukraine’s state-owned energy sector’s transition towards privatization.
“Since the state has chosen to own these companies, then we talk about good corporate governance,” he said.
Ultimately, however, Boytsun said the state should divest. “The more privately-owned enterprises we have, the more the state can focus on its role,” Boytsun said.
And long-term vision is essential, especially in the energy sector, Chow said, something that is lacking today in Ukraine.
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Andriy Boytsun: Ukraine needs to sell many of its state-owned enterprises, properly manage the rest
