• SOE Weekly Annual Survey

• Corporate governance in SOEs

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SOE Weekly Annual Survey

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Corporate governance in SOEs

Parliamentary commission of inquiry asks not to renew the contract with Ukrzaliznytsia’s CEO. On 17 December, the Verkhovna Rada’s Temporary Commission of Inquiry unanimously decided to ask the Cabinet of Ministers of Ukraine not to renew Oleksandr Kamyshin’s contract as CEO of the railway operator. The commission said this in a letter to Prime Minister Denys Shmyhal on 20 December.

[On 25 October, Oleksandr Kamyshin, who had served as acting CEO since August, was re-appointed as CEO. His tenure will last until the company’s new supervisory board is elected or until 31 December 2021, whichever occurs earlier.

We also reported in SOE Weekly (Issue 45) that the SOE Nomination Committee announced a competitive selection of independent supervisory board members for Ukrzaliznytsia. Candidates could submit their applications until 29 October 2021.

We are unaware on the current status of the competitive selection. – SOE Weekly.]

According to the Head of the Temporary Commission of Inquiry, Yulia Hryshyna, Kamyshin as Ukrzaliznytsia’s CEO, failed to implement presidential decrees, government plans, and the financial plan for 2021. The action plan for the EU Association Agreement was also not implemented.

Hryshyna said the company’s indicators fall very short of the financial plan approved by the Cabinet. In 2021, Ukrzaliznytsia expects:

• net profit of UAH 250 million, while the Cabinet expected UAH 3.6 billion;
• EBITDA of UAH 15 billion, while the Cabinet approved UAH 19.3 billion; and
• income from the sale of non-core assets: at the end of November, Ukrzaliznytsia made UAH 83.6 million, while the Cabinet expected UAH 1.5 billion.

Hryshyna explained that Ukrzaliznytsia did not increase salaries for its employees, which saved the company UAH 1.05 billion. The company also gained UAH 3 billion because the revaluation of its fixed assets was postponed. A positive exchange rate difference against foreign currencies made the company UAH 1.6 billion. According to her, without these factors, Ukrzaliznytsia would have shown UAH 8 billion in losses in 2021.

[As we explained in SOE Weekly (Issue 12), parliament has no formal role in the corporate governance of individual SOEs. It was (and remains) unclear which methodology the Parliament’s Temporary Commission of Inquiry used to assess Ukrzaliznytsia, its management, or supervisory board, if any.

Therefore, it was (and remains) unclear to whom the Commission’s recommendations would be made, what their status would be, and how they would be implemented, if at all. – SOE Weekly.]

In SOE Weekly (Issue 42), we said that on 9 September, at a parliamentary session, the Verkhovna Rada’s Temporary Commission of Inquiry presented its “audit report” on Ukrzaliznytsia, stating that the railway operator’s executive and supervisory boards failed to do their job, resulting in a loss of a third of the company’s fixed assets.

The Commission would recommend to the Cabinet of Ministers to dismiss Ukrzaliznytsia’s acting CEO and all members of its executive board, then reduce the size of that board.

Ukreximbank launches competitive selection for CEO. On 17 December, Ukreximbank’s supervisory board announced a competitive selection for the position of the bank’s CEO.

Applications will be accepted until 21 January 2021. The results of the selection will be announced no later than 18 March 2020.

Ukreximbank supervisory board dismissed the bank’s previous CEO, Yevhen Metzger, in Ocotber after receiving his resignation letter following an incident with journalists.

For an extended overview of the Ukreximbank incident and its analysis from a corporate governance perspective, see SOE Weekly (Issue 46).

Ukrnafta general shareholders meeting fails to take place for the second time. Ukrnafta’s general shareholders’ meeting did not take place on 23 December.

According to Ekonomichna Pravda (EP), Naftogaz’s CEO Yuriy Vitrenko said this after a briefing on 23 December. EP noted that the split of Ukrnafta’s assets among its major shareholders could have been raised at the meeting.

In SOE Weekly (Issue 54), we reported that according to EP, the general shareholders meeting of Ukrnafta did not take place due to the lack of a quorum.

We also reported that President Volodymyr Zelenskyy of Ukraine said at a press conference that the split of Ukrnafta’s assets among its major shareholders has not yet been approved but it would be a way out of the difficult situation with the Naftogaz’s historical debt to Ukrnafta.

[Naftogaz owns 50% + 1 share of Ukrnafta. A group of companies informally known as the Privat group, associated with oligarchs Ihor Kolomoiskyi and Hennadiy Boholyubov, own about 42% of the shares. – SOE Weekly.]

The President said that without dividing Ukrnafta, there is a high probability that the companies that own Ukrnafta’s shares [Privat group – SOE Weekly] could win their lawsuit against the state over these debts.

Naftogaz’s executive board extended for another four months. On 23 December, the Cabinet of Ministers extended the powers of Naftogaz’s temporary executive board members until 28 April 2022.

[Note that Naftogaz’s CEO Yuriy Vitrenko is also appointed until 28 April 2022. – SOE Weekly.]

In SOE Weekly (Issue 45), we reported that on 28 September, the Cabinet of Ministers appointed new members of Naftogaz’s executive board: Mavriky Kalugin, Vladyslav Volovyk, Olena Boichenko, and Roman Chumak.

These appointments were temporary: according to the Cabinet’s ordinance, the executive board members were to keep these roles until a new supervisory board can decide what to do with the executive board, but no longer than 28 December 2021.

As we wrote in SOE Weekly (Issue 48), on 23 October, the Ministry of the Economy announced a competitive selection for four positions of independent supervisory board members for Naftogaz. Applications were to be accepted until 6 December 2021.

[The deadline was then extended until 20 December 2021, suggesting that the supervisory board could not be appointed by the end of the year and, as the powers of the executive board members were expiring, they needed to be prolonged. – SOE Weekly].

SOE updates

Banks

The NBU amends the provisions on the remuneration of bank executives and supervisory board members. On 15 December, the National Bank of Ukraine (NBU) amended its Resolution No. 153, which sets requirements for remuneration of executive and supervisory boards members of Ukrainian banks (including state-owned banks).

[The NBU made the following changes:

• The resolution now effectively introduces the concept of a remuneration policy as the bank’s internal document. Among other things, such a remuneration policy should set the practice of using fixed and variable parts of the remuneration, as well as severance pay. The bank’s supervisory board will be responsible for approving and reviewing the remuneration policy, as well as monitoring its implementation.
• The resolution expanded its coverage. In addition to the bank’s supervisory and executive boards members, the resolution now also covers “influential persons” who are not members of the bank’s governing bodies. The list of “influential persons” includes:
• head of the internal audit department;
• chief risk officer;
• chief compliance officer;
• anti-money laundering officer;
• other persons whose professional activity has a significant impact on the bank’s risk profile.

It is the bank itself that determines the “influential persons” in accordance with the criteria set by its remuneration policy. – SOE Weekly.]

High Anti-Corruption Court arrests PrivatBank’s ex-CEO in absentia. The High Anti-Corruption Court (HACC) has chosen pre-trial detention for Oleksandr Dubilet, ex-CEO of PrivatBank. Since Dubilet is not in Ukraine, the ruling was made in absentia.

Dubilet is suspected of embezzling the bank's funds on the eve of its nationalisation, causing $ 314.9 million in losses.

The HACC investigating judge decided to fully grant the request of the National Anti-Corruption Bureau (NABU) and the Specialised Anti-Corruption Office (SAPO). Dubilet remains on the international wanted list.

In SOE Weekly (Issue 21), we reported that acting SAPO head Maksym Hryshchuk said that SAPO put a warrant out on Dubilet. He is suspected of being involved in the embezzlement of UAH 8 billion from the bank before its nationalisation in late 2016.

As we reported in SOE Weekly (Issue 16), Volodymyr Yatsenko, the former first deputy CEO of PrivatBank, was detained at the Boryspil airport. He is also suspected of embezzlement. On 25 February, a company whose name the court may not disclose deposited UAH 52 million, and Yatsenko was released on bail.

According to the Prosecutor General’s Office, Dubilet was charged in absentia with embezzlement of UAH 136 million on 23 February.

In SOE Weekly (Issue 19), we reported that Prosecutor General Iryna Venedyktova signed new charges against former PrivatBank officials, including former Dubilet, Yatsenko, and the head of interbank operations. They are suspected of embezzling UAH 8 billion.

Energy sector

Naftogaz doesn’t have to pay UAH 1.2 million fine for not admitting NEURC inspectors. According to the media, on 17 December, the National Energy and Utilities Regulatory Commission (NEURC) lifted a fine of almost UAH 1.2 billion that it was going to impose on Naftogaz for not allowing commission representatives to conduct an inspection.

It is reported that the regulator let Naftogaz off with a warning not to allow further violations of licensing requirements and legislation. In addition, the NEURC will conduct unscheduled inspections at Naftogaz.

In SOE Weekly (Issue 55), we said that according to Naftogaz, the NEURC fined the company for not admitting inspectors. The amount of the fine was not disclosed.

Naftogaz said that it had asked NEURC to postpone the inspection for several weeks due to high workload, which is caused by the beginning of the heating season and some Ukrainian gas suppliers not coming through on their obligations to supply gas because of rapidly rising gas prices in foreign markets. [Apparently, this implies that Naftogaz must act as a supplier of last resort. – SOE Weekly.]

Naftogaz added that thousands of Ukrainian consumers found themselves without suppliers. In particular, Naftogaz provided gas to state budget-funded organisations. In such circumstances, NEURC’s decision to impose a fine looks strange, Naftogaz’s statement reads.

Naftogaz seeks to transfer the PSO to supply cheap process gas. According to Ekonomichna Pravda (EP), Naftogaz is seeking the transfer of its public service obligation (PSO) to supply process gas [the gas required by regional gas distributors to cover production and technological losses – SOE Weekly] at the special price of UAH 7.42 per cubic meter to the Gas Transmission System Operator of Ukraine (GTSOU). The volume of the process gas required is about 1.3-1.4 billion cubic meters per year.

The Cabinet of Ministers, in its draft resolution seen by the EP, suggests imposing a PSO on the GTSOU for the period from November 2021 to April 2022. In turn, the GTSOU insists that this PSO should be imposed on Naftogaz, EP said.

On 22 December, the National Energy and Utilities Regulatory Commission (NEURC) set tariffs for gas distribution services for 2022 for 40 gas distribution system operators at UAH 7.42 per cubic meter. Prior to that, regional gas distributors had to buy gas for coverage from the supplier of the last resort (SoLR), whose function is performed by Naftogaz. Today, the SoLR price is set at about UAH 80 per cubic meter.

EP also said that they saw the NEURC’s opinion, in which the regulator is categorically against the Cabinet adopting such a resolution. NEURC states that this document would contradict the natural gas market law.

According to the EP’s interlocutors at the Cabinet of Ministers, imposing this PSO on the GTSOU would be a violation of the criteria for its certification as the independent transmission system operator. This could serve as a ground for the regulator to revoke this certification.

[According to the OECD Guidelines on Corporate Governance of State-Owned Enterprises, the costs related to public policy objectives should be funded by the state and disclosed. The costs of the PSO described above should be financed by the state, not by the SOEs – either Naftogaz or GTSOU – which violates the OECD Guidelines. – SOE Weekly.]

Government allocates another UAH 300 million from the state budget to pay miners’ salaries. The Cabinet of Ministers agreed with the Verkhovna Rada’s proposal to allocate UAH 300 million from the state budget to pay salaries to miners of state-owned coal companies.

On 17 December, 307 MPs voted to ask the Cabinet to allocate UAH 300 million from the reserve fund of the state budget for miners’ salaries.

In SOE Weekly (Issue 56), we reported that the Ministry of Energy said that it had agreed with Centrenergo management that the company would transfer about UAH 700 million to state-owned coal mining companies before the end of last week.

In SOE Weekly (Issue 55), we reported that on 8 December, the Ministry of Energy said that it transferred UAH 300 million to state-owned coal mines to pay salaries to miners. The Ministry of Energy also asked the Cabinet to re-allocate another UAH 90 million for miners’ salaries due to savings from the Ministry’s other budget-funded programmes.

Then, the Ministry said that it was working together with Centrenergo on additional advance payments to state-owned coal companies since these funds can be used to pay salaries.

In SOE Weekly (Issue 40), we reported that the State Treasury Service of Ukraine, at the initiative of the Ministry of Energy, had already given ten state-owned coal mines UAH 653 million to pay wage arrears to miners in August.

[Actions favouring certain SOEs, such as state-owned coal mines in this instance (or disfavouring others, such as Centrenergo in this instance), violate the level playing field principle of the OECD Guidelines on Corporate Governance of State-Owned Enterprises.

As far as we understand, the Ministry of Energy already spent UAH 653 million in August and UAH 1 billion in November-December on wage arrears and/or upcoming salaries of coal miners. In addition, it has asked for another UAH 1 billion for the same purpose.

The August payments were implemented as a re-allocation of costs between two items on the state budget – “Measures to liquidate non-viable coal mining enterprises” to “Restructuring of the coal industry”.

In other words, instead of spending money to liquidate or restructure the loss-making coal mines, the government decided to spend the same money on covering their operating costs.

Note that the Cabinet’s Resolution “On approving the criteria for assessing the eligibility of state aid to business entities in the coal industry” includes a clause allowing the state aid to cover coal mines’ operating expenses until 1 September 2022.

According to the OECD Guidelines on Corporate Governance of SOEs, providing state aid to SOEs to cover their operating expenses violates the level playing field principle. – SOE Weekly.]

Infrastructure

The Supreme Court does not recognise Ukrzaliznytsia’s debt to VR Global Partners. The Supreme Court invalidated Prominvestbank’s agreement to sell Ukrzaliznytsia’s $ 196 million debt to VR Global Partners (VRGP). This ruling upheld the decision of the Northern Commercial Court of Appeal of 16 September 2021.

In SOE Weekly (Issue 44), we reported that Ukrzaliznytsia said that it would only pay its confirmed debt to VRGP. According to Ukrzaliznytsia, its debts of $ 153.25 million to Prominvestbank were sold to VRGP in 2019, and the agreement took place without the participation of the railway company’s representatives.

Ukrzaliznytsia said that VRGP did not have the status of a financial institution under Ukrainian law. The February 2019 agreement transferring the debt was by nature a factoring agreement that requires a license. The court argued that VRGP presented a factoring agreement as a sale and purchase agreement. The agreement was declared invalid, Ukrzaliznytsia said.

According to Ukrzaliznytsia, in similar cases, the maximum interest rate for the use of credit funds after the expiration of the loan term in 2014-2015, is 3%, not 10 to 11%.

In response, VRGP published a release stating that there was no requirement for Prominvestbank to inform Ukrzaliznytsia of its plans – the bank, as the lender, had full legal rights to sell the debt without the borrower’s consent.

VRGP also said that Ukrzaliznytsia’s claim that it was not aware of Prominvestbank’s intent to sell the loans is verifiably false. Eight days before the auction in which the loans were sold, Ukrzaliznytsia’s senior management, including its then-CEO, Yevhen Kravtsov, and its then-replaced CEO, Ivan Yuryk, met at the company’s offices in Kyiv to discuss the issue of the loans and the upcoming auction with VRGP’s senior management. At that meeting, Ukrzaliznytsia’s management expressed no objection to the auction or VRGP participating in the auction.

According to VRGP, the debt was sold in a public auction whose procedures were approved by the National Bank of Ukraine. The auction price was supported by two independent valuations provided to Prominvestbank, including one from KPMG. The contract complied with Ukrainian law and proceeds from the sale went directly into the accounts of Prominvestbank, which is registered in Ukraine.

In SOE Weekly (Issue 43), we reported that the Northern Commercial Court of Appeal upheld Ukrzaliznytsia’s appeal, declaring invalid the contract for the sale of Ukrzaliznytsia debt from Prominvestbank to the New York-based investment fund. VRGP said in a press release it would challenge this decision in the Supreme Court.

Accounting Chamber lists the reasons for Ukrzaliznytsia’s 12 billion losses in 2020. In its audit report, the Accounting Chamber explained Ukrzaliznytsia’s losses of UAH 11.9 billion in 2020 with the following factors:

• UAH 11 billion was lost because of failure to fulfil freight revenue plans;
• UAH 7.6 billion was lost due to failure to sell non-core assets;
• UAH 5.5 billion was lost due to exchange rate differences;
• UAH 3.4 billion went to service 23 loans concluded in previous years;
• UAH 417 million was spent on fines and financial sanctions for the execution of court decisions.

The audit report also stated that Ukrzaliznytsia partly blamed the Covid-19 pandemic for lower traffic. However, the company was expected to receive UAH 7.6 billion for selling non-core assets – a plan that management never implemented.

Also, according to the Accounting Chamber, Ukrzaliznytsia spends hundreds of millions of hryvnias on dormitories and recreational facilities, even though it lacks title documents for some of its land and properties. These assets become targets for unauthorised seizure by private individuals.

In SOE Weekly (Issue 23), we said that according to the 2020 results, Ukrzaliznytsia made a net loss of UAH 11.9 billion. Then, the company said that its financial result was affected by the decrease in revenues from freight and passenger transportation by 10.3% and 58.3%, respectively, compared to 2019. In addition, significant fluctuations in exchange rate differences led to a net loss of UAH 5.5 billion against a net profit of UAH 4.3 billion in 2019.

As we reported in SOE Weekly (Issue 24), at the annual general shareholders meeting of Ukrzaliznytsia on 21 April 2021, the Cabinet of Ministers as the shareholder of Ukrzaliznytsia considered the company’s performance in 2019. The meeting approved Ukrzaliznytsia’s annual report, including its audited financial statements, as well as the reports of the supervisory board and management board, for 2019.

[As we noted SOE Weekly (Issue 24), this was not a typo. The annual report, the supervisory board’s reports, the management’s report, and the distribution of profit were approved for 2019, not 2020. – SOE Weekly.]

However, 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.

[According to the Law of Ukraine “On Joint-Stock Companies”, approval of the annual report and distribution of profit are the issues that must be mandatorily considered at the annual general shareholders meeting. – SOE Weekly.]

Privatisation

State Property Fund postpones UMCC’s privatisation auction for the third time. The State Property Fund (SPF) said that it received two applications for the privatisation auction of United Mining and Chemical Company (UMCC), one of which did not meet the requirements of the applicable legislation.

Holing an auction with only one participant is not allowed by the privatisation law. For that reason, the UMCC privatisation auction was declared invalid [for the third time – SOE Weekly].

The SPF noted that the new date of the UMCC auction will be set on a separate occasion.

[Note that according to the updated IMF Memorandum, the Ukrainian government undertook the commitment to launch tenders for the sale of at least three large SOEs by end-December 2021, including UMCC, First Kyiv Machine-Building Plant, and the President Hotel.

However, none of these auctions will take place by that deadline. As noted above, the UMCC auction was postponed again. The sale of the First Kyiv Machine-Building Plant (commonly known as the Bilshovyk) is suspended by the Anti-Monopoly Committee, and the President Hotel auction has not been announced to date. – SOE Weekly.]

In SOE Weekly (Issue 33), we reported that the UMCC privatisation auction was scheduled to take place on 31 August 2021. Later, in SOE Weekly (Issue 41), we reported that the SPF cancelled that privatisation auction since only one bidder qualified after the received applications were checked. The SPF Auction Commission set 29 October as the new auction date.

The media then published a list of participants allegedly interested in UMCC assets. Some of them said that the asset was not well prepared for privatisation, and they did consider the auction’s conditions fair. Others claimed that the starting price was inadequate. It was reportedly impossible to estimate the company’s mineral deposits.

In SOE Weekly (Issue 49), we reported that the SPF cancelled t 29 October auction for UMCC. The SPF then explained that it only received two auction applications, one of which did not meet the requirements. The SPF Auction Commission then set a new auction date, 20 December.

In SOE Weekly (Issue 56), we said that BDO Corporate Finance, the SPF’s adviser on the privatisation of UMCC, said that international companies were not prepared to participate in the UMCC auction despite their interest in the property. The adviser said that this is because there were no warranties that would protect the prospective buyers’ investments. As of 14 December, the Cabinet of Ministers has not approved the privatisation terms of the UMCC auction that would include such warranties.

In SOE Weekly (Issue 50), we reported that the AMCU began an inquiry into the recent privatisation auction of the Bilshovyk. No further information on the progress or status of the inquiry has been publicly available since it was announced.

Procurement Notices – powered by ProZorro

Together with ProZorro, we selected procurement notices announced by top 15 Ukrainian SOEs and four state-owned banks from 16 to 22 December 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.