• SOE Weekly Annual Survey

• Corporate governance in SOEs

• SOE updates

  • Energy sector

  • Infrastructure

• Privatisation

• Procurement Notices – powered by ProZorro

SOE Weekly Annual Survey

Dear readers,

The SOE Weekly is preparing a special issue that will summarise the top events in the domain of SOEs and privatisation in 2021. Please vote for the top events via our survey. The survey will only take about 90 seconds.

We will send you a special issue of the SOE Weekly based on the voting results during the last week of the year. Thank you for your engagement!

Corporate governance in SOEs

The Cabinet of Ministers replaces the Guaranteed Buyer’s acting CEO a few weeks after appointment. The Cabinet of Ministers dismissed the recently appointed acting CEO of the Guaranteed Buyer, Vadym Ulyda, on 9 December.

As we reported in SOE Weekly (Issue 54), Ulyda was appointed as acting CEO as recently as 13 November and filed his resignation letter on 30 November. Ulyda said his was resigning due to health problems.

Andriy Pylypenko became the new acting CEO. Prior to this appointment, Pylypenko was the Director of Personnel Management and Legal Affairs at Khmelnytskoblenergo.

MP Oleksiy Honcharenko (European Solidarity) accused Pylypenko of having a conflict of interest. According to the lawmaker, Pylypenko owns a company producing renewable energy, which the Guaranteed Buyer purchases.

According to the media, on 14 December, Pylypenko declared ownership of the Solargrad solar power plant project in the Kyiv region. A full 100% of the authorised capital of Solargrad LLC belongs to Pylypenko’s wife Olena. In addition, their family is a creditor (investor) of Ecobudenergy, a 1.1 MW solar power plant in Khmelnytsky. This plant owes Pylypenko’s family UAH 4.95 million.

For an extended overview of the recent developments at the Guaranteed Buyer, see SOE Weekly (Issue 52).

The Ministry of the Economy explains why SOE assets appear to have plunged by almost UAH 400 billion. As we reported in SOE Weekly (Issue 51), the Ministry of the Economy published the Unified Monitoring of Efficiency of State Property Management for the first half of 2021. The SOE Weekly team analysed the data. Then, according to the monitoring, Ukrainian SOEs had UAH 1,261 billion in assets – a decrease of UAH 392 billion (24%) compared to the estimated value of assets at the end of the first quarter of 2021.

At Ekonomichna Pravda’s request, the Ministry of the Economy explained that state-owned assets appeared to go down by UAH 392 billion in the first half of 2021 because Naftogaz had not provided the necessary information on time, and its assets had to be omitted from the half-year report.

The Ministry added that as of today, it already received the information that it needed from Naftogaz, which has been taken into account. As a result, the total value of assets of Ukrainian SOEs was reported to be UAH 1,667 billion [which is nearly as much as at the end of the first quarter of 2021 when it was UAH 1,653 billion – SOE Weekly].

[Note that the Ministry of the Economy publishes the data broken down by the ownership entity, but not by the enterprise. It also does not publish full data on the SOEs’ balance sheets, profit and loss, or cash flow items. Hence, it is not possible to calculate many of the standard ratios for the SOE portfolio, such as return on equity (ROE) or liquidity, nor the ratios for individual SOEs.

Doing so would allow us to see which specific SOEs contributed to the aggregate performance of the SOE portfolio. Detailed data on individual SOE performance is published on ProZvit with significant delays and is incomplete. It is therefore not yet possible to juxtapose the data from the two sources for deeper analysis. – SOE Weekly.]

In SOE Weekly (Issue 38), we reported the results of the Unified Monitoring of the Efficiency of State Property Management for the first quarter of 2021.

In SOE Weekly (Issue 35), we reported the results of the Unified Monitoring of the Efficiency of State Property Management for 2020.

NSSMC publishes ESG annex to the Corporate Governance Code. The National Securities and Stock Market Commission (NSSMC) developed and approved an ESG Annex to the Corporate Governance Code [ESG stands for Environmental, Social and Corporate Governance. – SOE Weekly.]

According to NSSMC, the Annex summarises how to apply corporate governance legislation by describing the following key points:

• the rationale for implementing best ESG practices;
• what is of interest to investors in terms of ESG practices;
• performance and reporting standards that companies can use for their ESG practices;
• guidelines on how companies can implement the recommendations of the Corporate Governance Code.

Just like the Corporate Governance Code, the Annex is based on the G20/OECD Principles of Corporate Governance and reflects the recommendations given in the final report on Sustainable finance in emerging markets and the role of securities regulators of the Growth and Emerging Markets Committee, International Organization of Securities Commissions (IOSCO).

NABU and AMCU expose collusion in UAH 500 million public procurements. Materials obtained by detectives of the National Anti-Corruption Bureau of Ukraine (NABU) during a pre-trial investigation helped the Antimonopoly Committee of Ukraine (AMCU) establish that a group of seven companies used concerted anti-competitive actions when bidding to supply UAH 500 million worth of software to state-owned companies in 2016-2019.

According to AMCU, the companies involved in the collusion include Infopuls Ukraine, Sapran Ukraine, SAP Ukraine, Brig-Retail, Ageles, Benoi, and Itelligence. On 15 December 2021, the AMCU fined these companies a total of UAH 105.3 million and prohibited them from participating in public procurement tenders for three years.

The software procurement tenders in question had been announced by PrivatBank, Energoatom, Ukrgazvydobuvannya, the IT Centre of Ukrzaliznytsia, the Mint of the National Bank of Ukraine, and Polygraph Combine Ukraina.

SOE updates

Energy sector

Naftogaz loses money in the first three quarters (unaudited). According to its unaudited condensed consolidated interim financial statements, the Naftogaz Group posted a loss of UAH 4.37 billion for the first three quarters of 2021. In the first three quarters of 2020, the company lost four times as much money, UAH 17.03 billion.

Naftogaz and its subsidiaries’ revenue for the first nine months was UAH 136.7 billion, a 31% increase from the same period last year. According to the company’s consolidated reporting, revenues mainly rose in exploration and production, which made UAH 36.4 billion, an 84% increase, and trading, which made UAH 42.7 billion, a 72% increase.

Ukrenergo loses a billion dollars in the third quarter (unaudited). According to a report published by Marlin, in the first three quarters of 2021, Ukrenergo made a net loss of UAH 2.7 billion. In the same period in 2020, the company lost UAH 28.5 billion, almost ten times as much.

Ukrenergo blamed the seasonal increase in the generation of renewable energy sources. Ukrenergo has an obligation to spend part of its revenue to pay the feed-in tariffs.

In SOE Weekly (Issue 54), we reported that according to Marlin, enterprises overseen by the Ministry of Energy posted combined net losses of UAH 6.2 billion in the first three quarters of 2021. The third quarter saw the biggest losses, UAH 4.6 billion. The largest losses in the third quarter were incurred by Ukrenergo (UAH 3 billion).

As we reported in SOE Weekly (Issue 48), Ukrenergo made a net profit of UAH 307 million in the first half of 2021. [This suggests all Ukrenergo’s losses of the first nine months are explained by the third quarter alone. – SOE Weekly.]

[Note that the above results are based on intermediate, unaudited financial reporting. The audited annual results will provide a more reliable picture, which may differ from that produced by the intermediate results. – SOE Weekly.]

The government plans to transfer UAH 27 billion to local authorities to repay debts to Naftogaz. On 15 December, the Cabinet of Ministers approved a procedure to provide UAH 26.7 billion to local governments’ budgets to repay the debts [of the regional heating companies – SOE Weekly] to Naftogaz.

The government has a memorandum with local authorities laying out how to use these sums. According to Ekonomichna Pravda, Prime Minister Denys Shmyhal said that mayors undertook not to increase the heat tariff until the end of the heating season.

The Minister of Finance, Serhiy Marchenko, noted that the funds from the rent [apparently, royalties for gas and/or other extractables – SOE Weekly] should be transferred to a special fund, which will then make the expenditures.

Marchenko also added that the State Audit Office should confirm the authenticity of the actual charges.

Ukrenergo’s transmission system development plan approved. The National Energy and Utilities Regulatory Commission (NEURC) approved the transmission system development plan of Ukrenergo for 2022-2031.

The plan provides for the construction of 1,670 kilometres of new power lines and 61 substations, as well as increasing the transforming capacity of substations. An estimated UAH 65.7 billion will be spent on existing and future projects.

Centrenergo advances UAH 700 million to state-owned coal mines to pay miners’ salaries. 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 the week.

The Ministry of Energy called on the miners’ unions to make sure that mine managers implement a rule under which 80% of all funds must go to pay miners’ salaries.

In addition, the Ministry of Energy promised to allocate another UAH 90 million from the state budget funds that it saved on other expenditure items for miners’ salaries in December.

In SOE Weekly (Issue 55), we reported that the Ministry of Energy said that on 8 December, it transferred UAH 300 million to state-owned coal mines to pay salaries to miners. The Ministry of Energy also asked the Cabinet of Ministers 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.

[It appears that the Ministry is effectively redistributing cash from one SOE to others. If the private suppliers cannot receive such advance payments from Centrenergo, this appears to be a discriminatory operation.

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 President hands over an airline and unfinished terminal at the Boryspil Airport to the Ministry of Infrastructure. According to the President’s Office, President Volodymyr Zelenskyy agreed to the Ministry of Infrastructure’s proposal that it should manage the State Aviation Enterprise ‘Ukraina’ and its unfinished terminal at the Boryspil International Airport.

The State Aviation Enterprise ‘Ukraina’ provides special flights to Ukrainian senior officials and delegations.

Privatisation

International companies not prepared to participate in the UMCC auction. BDO Corporate Finance, the State Property Fund’s adviser on the privatisation of the United Chemical and Mining Company (UMCC), said that international companies are not prepared to participate in the privatisation auction of UMCC 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.

The terms had been drafted and proposed to the Cabinet by the State Property Fund (SPF) in October. The application deadline for the UMCC auction was on 9 December, and the auction is to take place on 20 December 2021. This will be the SPF’s third attempt to sell UMCC.

[Providing representations and warranties by the seller to the buyer is standard practice in M&A deals, including privatisations. However, the practice is not used during privatisation in Ukraine.

In addition, other countries also use privatisation terms that impose significant investment commitments rather than simply a commitment to buy the asset. This practice is meant to encourage strategic investors rather than speculators or insiders, but it has not been successfully used in Ukraine. – 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 the UMCC privatisation auction. 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.

The sale of Elektronmash fails, new auction at half the starting price date set. According to ProZorro.Sale, the Elektronmash privatisation auction was recognised as not having taken place, as the winner of the auction failed to sign the contract on time.

On 7 December, the Kyiv Regional Office of the State Property Fund (SPF) provided Lorten Group, the winner of the auction, with a draft sale and purchase contract for Elektronmash. The contract had to be signed by 13 December, but there was no response from the buyer as of 14 December.

The auction has been declared as one that has not taken place. The buyer has lost its security deposit of UAH 6.67 million, which will be transferred to the state budget.

The next Electronmash privatisation auction has been set for 14 January 2022.

[Note that according to the privatisation law, the next auction will start at half the starting price in the previous auction, UAH 33.4 million, or as little as 3% of the highest bid and the second highest bid offered in the previous auction.

In the previous auction, the highest bid was UAH 970 000 000.01; the second highest bid, UAH 970 000 000.00; the third highest bid, 560 000 100.00; and the fourth highest bid, 560 000 000.00. This possibly abnormal behaviour of the bidders may be a good ground for the Antimonopoly Committee of Ukraine (AMCU) to enquire into possible collusion among the bidders. – SOE Weekly.] 

Procurement Notices – powered by ProZorro

Together with ProZorro, we selected procurement notices announced by top 15 Ukrainian SOEs and four state-owned banks from 9 to 15 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.