Aivaras Abromavicius certainly enjoys his return to the private sector.
Compared to when the Kyiv Post interviewed him in 2016 as Ukraine’s economy minister, Abromavicius seems to be a lot more upbeat, energetic and on the go.
But the former investment banker didn’t get that far away from the public sector: Since April 2017, Abromavicius chairs Ukrainian Corporate Governance Academy, a Kyiv-based non-profit aiming to bring effective management to Ukraine’s 3,000 state-owned enterprises.
Abromavicius wants to help the struggling state enterprises transfer to the private sector or completely liquidated as most are loss-making enterprises and cash cows for vested interests yet expensive for Ukrainian taxpayers.
For Abromavicius, state-owned enterprises are a topic of special interest.
Not only was he strongly promoting their privatization during his time as economy minister in 2014–2016, but state enterprises also played a role in his decision to leave the ministry.
Abromavicius quit the job with a bang, complaining he was hamstrung by Ukraine’s deep corruption and interference from President Petro Poroshenko’s top ally and business partner, Ihor Kononenko, who lobbied for his associates to be put in control of lucrative state companies. Kononenko denied the accusations and sued Abromavicius for defamation.
So far, Ukraine hasn’t shown eagerness to get rid of its burden of 3,000 state companies.
While in office, Abromavicius lobbied for Ukraine to pass a privatization law setting the framework for selling the state enterprises. But it was only passed in January, almost two years after he resigned.
“I am very happy that this privatization law was passed — obviously I tried to pass a similar law on a number of occasions in parliament,” Abromavicius told the Kyiv Post in his Leonardo Business Center office in Kyiv.
“But Ukraine is always known for passing good laws, it’s just the implementation that suffers. So I wouldn’t jump for joy because of the law before we see any credible results.”
According to Abromavicius, the new law specifies that for the largest companies the state shall recruit world known advisers — “the UBS’s, the JP Morgan’s, the Morgan Stanley’s of this world — and those guys helped privatize assets all around the world. So they know what needs to be done.”
The due diligence bill for evaluating the enterprises’ assets will be picked up by a potential buyer that hires its own due diligence experts. But the government still needs to spend some money to prepare the assets — a tiny fraction of the price for which the companies could be sold for, Abromavicius says.
UCGA was launched over a year ago with the intent to raise governance standards of state-owned enterprises. The academy organizes events and conferences to promote these standards and influence related policies.
Extensive partnership
UCGA just signed a partnership with the prestigious INSEAD business school to launch a corporate governance program in Ukraine.
Its students will have an intense six-day course workload and within a month can receive a joint certificate from UCGA and INSEAD. The program is meant to last at least for three years and already has two INSEAD professors and one from the London Business School on board.
UCGA is also preparing to sign a partnership with Organization for Economic Co-operation and Development this fall.
OECD’s experts already helped the academy draft “Recommendations on the governance of state-owned enterprises of Ukraine,” a 44-page report available on the academy’s website.
“We really wanted it to be a deep discussion, with as many stakeholders involved as possible,” Abromavicius said.
To achieve that, the academy hired the author of the original OECD principles of corporate governance Richard Frederick, who defined the term of corporate governance in 1999. It also got volunteers from European governments experienced in corporate governance such as Norway, Sweden and the U.K.
Abromavicius believes there is a special need for such education programs now that many reform-oriented officials left the government. He recalls his work in the government with Finance Minister Natalie Jaresko, Infrastructure Minister Andriy Pyvovarsky and Agriculture Minister Oleksiy Pavlenko, all coming from the same background — top management positions.
“So whatever I was proposing got full backing,” Abromavicius said. “But since all of us left… there is less expertise left in the government.”
He does give credit to the current government for passing in January the privatization law meant to make the process more transparent, but he is also skeptical about any big privatization happening in the next year before the upcoming presidential elections in March.
“I have serious doubts,” he said. “It may happen but we need to have it happen in a successful way.”
A successful privatization would mean that there is a foreign strategic investor that modernizes the enterprise and not an oligarch.
Despite the skepticism, Abromavicius also gives credit to the government for managing to set up an independent board for state-owned rail enterprise Ukrzaliznytsia and for state-owned gas monopoly Naftogaz.
Abromavicius reminds, however, that these initiatives were started back when he was minister suggesting that they should have happened a long time ago.
Distancing politicians
One of the recommendations from the UCGA report warns that ministers shall not be in charge of state-owned enterprises, like they are now.
“It’s not normal,” he said. “The average minister of economy serves 11.6 months. I mean why would a highly professional CEO of one of the largest companies in Ukraine… report to some political appointee who has possibly no prior experience in the private sector… It’s ridiculous.”
State enterprises therefore should be distanced from politicians by the creation of independent boards where politicians are not members, where independent directors shall make up the majority and any boards’ chairman shall be independent.
About half of Ukraine’s state-owned enterprises are not even operating, and many of those are in the process of liquidation. The report concentrates on Ukraine’s top 50 since they are responsible for around 75 percent of revenue. And Ukraine has delayed its privatization process by at least 15 years as most other Eastern European countries sold their enterprises years ago. This also significantly brought down the price of its assets.
“You should hit hard with the most important stuff and not focus on changing corporate governance at a tiny company,” he says.
Another option is concessions for enterprises such as ports and airports. But “as always, the devil is in the detail — if it is a concession again with our oligarchs, then I am against it. We’ve been there before.”
Odesa Portside Plant
Ukraine’s first privatization plan of a large state-owned enterprise — the Odesa Portside Plant — failed in 2016 due to bad management and oligarch interference.
“I personally met several potential Western investors… The interest is there,” Abromavicius said. “But so far those that ran the privatization process somehow did not manage to convince those potential participants that conditions for participating are clear, transparent. And unfortunately the way this asset has been sold now it immediately disqualifies a lot of potential investors because it is not a very clean asset.”
Ukroboronprom case
A trickier enterprise is Ukraine’s military-industrial complex Ukroboronprom, a giant state-run holding company of over 130 defense enterprises.
Enterprises such as this one are excluded from UCGA’s report because of the “sensitive issue” relating to security.
“But I have a Bloomberg terminal here and if I type in Lockheed Martin, I get a lot of news on Lockheed Martin,” Abromavicius said, pointing out to the transparency of their sales.
With more than $50 billion in revenue, its board of directors is diverse consisting of retired generals as well as business corporate executives.
“And yet our Ukroboronprom — which is like lots of companies in a possibly very profitable sector — have decided to go for minimum transparency… This is unfortunately one of the reasons why the president gets criticized because its quite clearly some of his closest allies basically overseeing that sector with minimum level of transparency.”
Abromavicius’ UCGA colleague Taras Ivanyshyn, executive manager of the academy, says that implementing good governance practices will actually let the government sell the state-owned enterprises for more.
“By creating a corporate governance in every state-owned enterprise could raise the price of the enterprise before privatization,” Ivanyshyn said. “So setting other good corporate governance is key to making a successful case of big privatization.”
Gender equality
One other important aspect which often is ignored in governance management is having more state-owned enterprise CEO’s that are female.
“Sweden has written in law that 40 percent of board members are minimum men and 40 percent minimum women,” Abromavicius said. Many good female entrepreneurs or business leaders often are crossed out as potential CEOs simply because of prejudices against women.
They could perhaps do “a much better job.”
