Editor’s Note: This is the end-of-the-year issue of Ukrainian State-Owned Enterprises Weekly. The Kyiv Independent is reposting it with permission.
At the end of the year, we would like to look back at the major events of 2021 in the domain of corporate governance at SOEs and privatisation. Based on our end-of-the-year survey, we selected one most important event in each category.
Top 2021 event in corporate governance at state-owned enterprises: Changes in management and supervisory board of Naftogaz
For an extended overview of the Naftogaz case and its analysis from a corporate governance perspective, see SOE Weekly’s Issues 25, 26, 27, 28, 29, 30, 32, 33, 34, 35, 36, 37, 41, 42, 43, 44, 45, 48.
On April 27, Naftogaz reported that it lost Hr 19 billion in 2020.Naftogaz last posted a loss in 2015.
On April 28, the Cabinet of Ministers dismissed the supervisory board of Naftogaz and its CEO, Andriy Kobolyev, due to low performance. By the same decision, the Cabinet appointed the then acting Minister of Energy Yuriy Vitrenko as the new CEO of Naftogaz starting 29 April 2021, for a term of one year. Although the CEO dismissal was not in line with the OECD Guidelines on Corporate Governance of SOEs, it was in line with Ukrainian law. This raised the more global issue of bringing the Ukrainian law in line with the OECD SOE Guidelines.
On April 30, Naftogaz said in a statement that its supervisory board members filed their notices of resignation, effective on May 14. Independent supervisory board members also sent a letter to Prime Minister Denys Shmyhal that the government’s decision to fire ex-CEO Andriy Kobolyev violated corporate governance standards. The board also said that it evaluated management’s performance in 2020 as very high, or even excellent, taking into account the circumstances.
On May 19, the Cabinet of Ministers: (a) re-appointed five current members of the supervisory board until the competitive selection of a new independent supervisory board is completed, but no longer than one year; (b) dismissed one member of the supervisory board (state representative), Robert Bensh; and (c) announced a competitive selection for four independent supervisory board members. Such re-appointment contradicted the current legislation and created risks for Naftogaz.
On the same day, the Cabinet established the base level of annual remuneration for a supervisory board member of Naftogaz at Hr 6.3 million. (By comparison, according to the current legislation, the maximum annual remuneration of supervisory board members of SOEs appointed after March 3, 2020, could not exceed Hr 2.5 million. – SOE Weekly.)
Later, in June 2021, the National Agency on Corruption Prevention (NACP) issued three orders to terminate Vitrenko’s contract, arguing that his appointment might violate anti-corruption law. None of the three NACP orders has been successful.
In early July, the Kyiv Post and Ukrayinska Pravda reported Naftogaz’s top management multimillion-dollar remuneration for 2020, awarded by the company’s supervisory board. The company’s 2020 annual report only disclosed the total remuneration of the management team (17 top officials) of nearly $25 million, including five executive board members, without providing a breakdown by the individual management team member.
This lack of transparency led to accusations that the supervisory board deliberately concealed the management remuneration information from the public. This also led to the outcry that such remuneration was inadequate against the company’s losses of Hr 19 billion and declining gas production, calling into question the proper exercise of duties by Naftogaz’s supervisory board.
Later in July, the media reported that Naftogaz’s supervisory board jumped the gun, evaluating performance of four executives in the first half of 2021 and demanding a bank guarantee for a Hr 215 million pay to the executives.
(This contradicted the idea of bonuses being a performance incentive. In normal practice, management’s goals are set and communicated before the reporting period begins and evaluated after the period ends. Neither of these conditions appeared to be met in this case, as (a) the achievement of management objectives was evaluated during the same board meeting when they were set, (b) corporate results of Naftogaz were not available at that time. It was also unclear why the supervisory board decided to evaluate management’s performance in the middle of the year rather than after year end, as normal practice – including the previous practice of Naftogaz – would suggest. – SOE Weekly.)
In September, three independent members of Naftogaz’s supervisory board (Bruno Lescoeur, Ludo Van der Heyden, and board chair Clare Spottiswoode) resigned, referring to a lack of understanding with the company’s executive board and not being able to ensure its proper work. Later, two executive board members (Otto Waterlander and Peter van Driel) left their positions as well.
In early September, Prime Minister Denys Shmyhal instructed Oleksiy Lyubchenko (First Deputy Prime Minister and Minister of the Economy) to announce a competitive selection of four independent members of Naftogaz’s supervisory board. (The competitive selection was announced on Oct. 23.)
In late September, the Cabinet of Ministers dismissed the three state representatives on the supervisory board (Yuliya Kovaliv, Yuliya Svyrydenko, and Nataliya Boyko), leaving theboard empty. The Cabinet took over the supervisory board’s function and appointed a new executive board at Naftogaz.
(According to Ukrainian law, the general shareholders meeting may exercise the powers of the supervisory board only when one is absent. For Naftogaz, having a supervisory board is mandatory by law. Even though it has no members now, the board is not legally “absent”. Thus, the Cabinet of Ministers is likely to have no legal right to make decisions in lieu of the supervisory board. – SOE Weekly.)
The executive board appointments were temporary: The new members were to keep these roles until a new supervisory board could decide what to do with the executive board, but no longer than 28 December 2021. On Dec. 23, the Cabinet extended this term until April 28, 2022, likely due to the ongoing competitive selection for the supervisory board.
Top 2021 event in corporate governance at state-owned banks: Ukreximbank’s CEO dismissed after an incident with journalists
For an extended overview of the Ukreximbank case and its analysis from a corporate governance perspective, see SOE Weekly’s Issues 46, 47, 52, and 57.
On Oct. 4, journalists of the investigative TV programme Skhemy (the Ukrainian for “schemes” – SOE Weekly) were attacked in the state-owned Ukreximbank while filming an interview with the bank’s CEO, Yevhen Metzger, in his office. The journalists said that Metzger did not like one of the questions and ordered his guards to seize the cameras, pull out their memory, and delete the recording.
The question that caused such a reaction from the CEO related to a $60 million loan, which the bank gave to the firms of a businessman who, according to the copies of documents published by the media, is a co-founder of a company operating and paying taxes in the occupied part of the Donetsk region.
Skhemy were able to recover the recordings, which showed bank employees using force against the camera operator and confiscating two cameras and recording cards. The police opened a criminal investigation and handed notices of suspicion to Metzger and Volodymyr Pikalov, Ukreximbank’s Director of the Information Policy Department, on 7 October.
Metzger temporarily stepped down and apologised to the journalists. At its extraordinary meeting, the supervisory board decided to remove him from office for the time of the internal investigation, which was launched shortly after the incident. The board appointed Serhiy Yermakov as the bank’s acting CEO starting Oct. 12 until a new CEO is appointed, but no later than April 12, 2022.
On Oct. 11, the media reported that the court placed Metzger and Pikalov under night-time house arrest for two months. On the same day, during an extraordinary meeting of Ukreximbank’s supervisory board, the board received Metzger’s resignation letter and dismissed him.
On Dec. 17, the supervisory board announced a competitive selection for a new CEO. Applications will be accepted until Jan. 21, 2021. The results of the selection will be announced no later than March 18, 2022.
Top 2021 event in the banking sector: Updated IMF Memorandum on state-owned banks
On Nov. 22, 2021, the Executive Board of the International Monetary Fund (IMF) completed the first review of Ukraine’s economic performance under the 18-month Stand-By Arrangement (SBA) that had been approved on 9 June 2020. Under the updated Memorandum, the Ukrainian government undertook the following commitments with respect to state-owned banks:
- To enact legal amendments that reverse the recent relaxation of the eligibility criteria for state representatives in state-owned banks’ supervisory boards (structural benchmark, end-November 2021).
(The IMF said that changes to the recently approved Banking Law relaxed these eligibility criteria, creating risk of weakened oversight. We are not aware on any updates on this benchmark. – SOE Weekly.)
- To adopt a time-bound succession plan for the supervisory boards of each of the state-owned banks that support the implementation of the approved 2021-2024 strategies for each of the banks (structural benchmark, end-November 2021).
(We are not aware on any updates on this benchmark. – SOE Weekly.)
- To conduct the first performance assessment by an internationally reputable advisor for each of the banks in 2022 (based on the 2021 performance), which will inform the Cabinet’s performance assessment in line with the Banking Law.
- To facilitate the privatisation process of Ukrgasbank.
(Note that in 2017, the Ministry of Finance had already announced its intention to privatise Ukrgasbank in 2018-2019. – SOE Weekly.)
- To ensure the development and approval by PrivatBank and Oschadbank by the end of 2021 in co-operation with the Ministry of Finance of a roadmap that will determine the steps needed for their partial or full privatisation, and attract reputable international investors (structural benchmark, end-January 2022).
(We are not aware on any updates on this benchmark.
There is no rationale for the state to own Oschadbank or PrivatBank. This also contradicts the government-declared Basic principles of state ownership policy. Since the services that these banks provide are readily available from private providers in the competitive market, both should be privatised. – SOE Weekly.)
- Any additional decisions that may affect state ownership in the banking sector (including, but not limited to the acquisition of corporate rights by government bodies and state-owned enterprises (e.g., Ukrposhta) will be undertaken only if consistent with the government’s overall strategy to reduce state ownership and control in the banking sector, ringfencing the banking services in a separate legal entity, which will be subject to international best practices including stringent licensing safeguards (such as prudential vetting of shareholders).
(According to the media, Ukrposhta has recently reached an agreement on the purchase of Alpari Bank. The deal price is Hr 260 million. The Cabinet of Ministers and the Ministry of Infrastructure reportedly agreed on the agreement. Consent from the NBU is pending. – SOE Weekly.)
Top 2021 event in the energy sector: Naftogaz sells cheap gas to households, heat producers, and budget-funded and religious organisations
Naftogaz offered medium-term contracts to state budget-funded and religious organisations with a fixed price for gas – Hr 13.7 per cubic meter (or Hr 16.8, including delivery cost and VAT). The contract is to be concluded for a period of 15 months, until the end of 2022.
According to Naftogaz’s CEO, Yuriy Vitrenko, budget-funded organisations can buy gas from any supplier. Vitrenko said that many suppliers offer a monthly gas price of Hr 30-45 per cubic meter or abandon their obligations under contracts with a lower price that were concluded earlier. Unlike these suppliers, Naftogaz is out to the market with a fixed price offer for the next 15 months, at a level that is more than half as low as the current monthly price.
Naftogaz also offers heat producers to switch over to three-year contracts: The amount of gas that they need to supply heat and hot water to budget-funded organisations can also be purchased at Hr 13.7 per cubic meter, excluding VAT and delivery cost.
Earlier, Naftogaz offered household customers to join the new “Comfort Season” tariff plan and pay for gas in equal monthly instalments. The price for gas in the new tariff plan was set at Hr 7.96 per cubic meter, excluding the delivery cost. The total gas bill was determined by how much gas the household consumes during the heating season (from October to the end of April).
(Note that Naftogaz’s special rates for households, heating companies, and budget-funded and religious organisations can be considered as a public service obligation (PSO). According to the OECD Guidelines on Corporate Governance of State-Owned Enterprises, PSO costs should be compensated from the respective (state or local) budgets. The average price for gas per cubic meter in December at the Ukrainian Energy Exchange was Hr 36.3.
Note also that by fixing the price for a period of time for the above-mentioned groups of clients, Naftogaz performs a function of hedging against price fluctuations, in fact correcting market deficiencies. In developed markets, such hedging products are normally available from various providers. – SOE Weekly.)
Top 2021 event in the defense sector: Ukroboronprom’s transformation
In July 2021, the Verkhovna Rada adopted Law 1630-IX (previously known as Draft Law No. 3822). The law has laid the groundwork for Ukroboronprom’s transformation. As we reported in SOE Weekly (Issue 36), although the law improved from the first reading to the second reading in parliament, it may still be risky for the effective implementation of the OECD Guidelines on Corporate Governance of State-Owned Enterprises.
On Dec. 9, the Cabinet of Ministers approved the respective resolutions and ordinances to transform Ukroboronprom into a joint-stock company. The Cabinet also approved the conversion of Ukroboronprom’s 43 strategic state unitary and state-owned enterprises into business companies (joint-stock companies or limited liability companies – SOE Weekly), which will be 100% controlled by the state.
(The transformation of Ukroboronprom into a joint-stock company, as well as its state unitary and state-owned enterprises into business companies, should provide for the standardisation required by OECD Guidelines on Corporate Governance of State-Owned Enterprises, and bring these practices in line with commonly accepted corporate norms. – SOE Weekly.)
Top 2021 event in the infrastructure sector: The Ukrzaliznytsia crises – losses of Hr 12 billion, parliamentary commission of inquiry, and seized accounts
In 2021, Ukrzaliznytsia faced significant turmoil, including changes in management, deterioration of financial performance, and seizure of its accounts.
At the beginning of 2021, the Verkhovna Rada established a Temporary Commission of Inquiry for Ukrzaliznytsia. The Commission was to assess the state of Ukrzaliznytsia and investigate possible inaction and violations of the law, which caused a deterioration of the company’s performance and technical condition.
(It was, and remains, unclear which methodology the Commission would use to assess Ukrzaliznytsia, its management, or supervisory board. It is also unclear what effect the Commission’s findings would have, if any. Since parliament has no formal role in the corporate governance of individual SOEs, it is also unclear to whom the Commission’s recommendations would be made and how they would be implemented, if at all. The Chair of the Commission is Yulia Hryshyna, who has been a member of the Verkhovna Rada Committee on Education, Science and Innovation whose scope is not related to either SOEs or economic policies. – SOE Weekly.)
As we reported in SOE Weekly (Issue 30), according to the 2020 results, Ukrzaliznytsia made a net loss of Hr 11.9 billion. The government ignored such performance of the company: No information is available to indicate that the Cabinet has considered Ukrzaliznytsia’s annual report, the supervisory board’s report, the management’s report, and the distribution of profit for 2020.
As we reported in SOE Weekly (Issue 28), according to the media, the State Executive Service seized Ukrzaliznytsia’s bank accounts for debts on May 6.
On April 22, 2021, the Supreme Court ruled on four cases involving Ukrzaliznytsia’s debts. All four rulings were against the company. The seizure of accounts was the execution of one of these four decisions, which provided for the repayment of $13.7 million and Hr 99.7 million to a creditor. Three other lawsuits involved enforcing the recovery of $34 million and over Hr 300 million from Ukrzaliznytsia.
As for the results for the first half of 2021, Ukrzaliznytsia topped the list of loss-makers with a loss of Hr 1.4 billion.
On Oct. 25, Oleksandr Kamyshin, who had served as acting CEO since August, was re-appointed as CEO. His tenure would last until the company’s new supervisory board is elected or until 31 December 2021, whichever occurs earlier.
On Dec. 29, the media reported that the Cabinet approved the new supervisory board members of Ukrzaliznytsia, including four independent members and three state representatives.
Top 2021 event in large-scale privatisation: Large-scale privatisation unblocked
On April 29, 2021, the President of Ukraine signed Law of Ukraine No. 4543, which lifted the ban on large-scale privatisation in Ukraine enacted a year before, ostensibly due to the Covid-19 situation.
Dmytro Sennychenko, the Head of the State Property Fund of Ukraine, said then that the following companies would be offered for sale in 2021: United Mining and Chemical Company (UMCC), First Kyiv Machine-Building Plant (commonly known as the “Bilshovyk”), and President-Hotel.
According to the updated IMF Memorandum, the Ukrainian authorities committed to launch tenders for the sale of at least three large SOEs by end-December 2021, including UMCC, the Bilshovyk, and the President-Hotel.
The Bilshovyk was sold on Oct. 27, and the deal was completed after the Antimonopoly Committee of Ukraine (AMCU) granted its concentration permission for the purchase of the asset on Dec. 29.
Note that AMCU said that it was a concentration permission only – that is, when granting that permission, AMCU only considered potential negative impact of the acquisition on market competition. AMCU also said that it continued its inquiry into possible anticompetitive behaviour of the auction participants. The inquiry was started almost two months ago after media reports about possible collusion among the bidders. (This implies that the deal can be reversed if AMCU establishes that a collusion took place. — SOE Weekly.)
The UMCC auction was postponed three times, and the President-Hotel auction has not been announced as of the end of the year. Neither of these auctions will not take place by the end of the year.
Top 2021 event in small-scale privatisation: Privatisation of distilleries
As of Nov. 22, 2021, the State Property Fund sold 30 alcohol distilleries worth more than Hr 1.7 billion via transparent auctions.
Of these, the buyers paid Hr 1.05 billion for the assets purchased, and another Hr 37 million, as fines and guarantee fees for refusing the auction results. (The remaining amounts were yet to be paid. – SOE Weekly.)
More importantly, the privatisation of distilleries paved the way to the liquidation of the state monopoly in alcohol production.
The SOE Weekly team wishes you Happy Holidays! We will start the year with an overview of the top events to look forward to in 2022.
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.
