Editor’s Note: This is the latest edition of Ukrainian SOE Weekly, Issue 37, covering the period from July 17-31, 2021.
Corporate governance in SOEs
(1) Naftogaz supervisory board jumps the gun, evaluating the performance of four executives in the first half of 2021 and demanding a bank guarantee for an Hr 215 million payment to the executives
Excerpts from the minutes of the June 265, 2021 meeting of the Naftogaz supervisory board published by the media revealed that the board:
— set the objective and key results (OKRs) for four members of the executive board – Otto Waterlander, Peter van Driel, Serhiy Pereloma, and Yaroslav Teklyuk – for the first half of 2021;
— decided that each of the four executive board members met 90% of their OKRs in the first half of 2021;
approved the terms of a 12-month bank guarantee to ensure that the four executives get their bonuses for the first half of 2021, bonuses for medium-term projects, and severance pay; and
— instructed the CEO of Naftogaz Yuriy Vitrenko to sign an irrevocable bank guarantee to ensure that the above payments are made.
[It follows from the excerpts that the supervisory board:
- set the above OKRs on June 25, that is, only five days before the first half of 2021 ended;
- evaluated the achievement of these OKRs on the same day they were set; and
- evaluated the achievement of the OKRs before the first half of 2021 ended.
If true, this contradicts 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 appears to be met in this case. In addition, the achievement of OKRs was evaluated during the same meeting when they were set.
It is also unclear what the “medium-term projects” and related bonuses refer to, as Naftogaz has not communicated any such projects earlier.
Finally, it is 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.
We are not aware of Naftogaz’s corporate results, including audited financial statements, for the first half of 2021. In this case, the only information available to the supervisory board is the information compiled by management itself – that is, by the executives being evaluated.
Consequently, it is not clear whether the evaluation of the executive board members’ OKRs was linked to the corporate performance of Naftogaz at all, whether it was based on verified information, and how the supervisory board arrived at the 90% assessment.
Naftogaz CEO Yuriy Vitrenko assumes (see the section “SOE updates” below) that the company, in fact, may have lost Hr 105 billion in the first quarter of 2021. If verified by independent auditors, it is unclear how these losses will correspond to the supervisory board’s high assessment of management’s performance.
It is also unclear why the state-owned company should resort to third parties, such as a bank, and bear additional costs to guarantee future management pay, which is already guaranteed in the employment contracts protected by law. – SOE Weekly.]
Bruno Lescoeur, chairman of the nomination and remuneration committee of Naftogaz’s supervisory board, said in a statement seen by Ekonomichna Pravda that the supervisory board had not decided to award or pay bonuses to the executive board members for 2021.
[We are not aware if Lescoeur’s statement addressed any of the questions raised above, including the setting of OKRs for the first six months of 2021 (rather than 2021), the assessment of OKRs at 90% without corporate performance known for the first six months, or the bank guarantee. – SOE Weekly.]
Naftogaz commented that the information in Lescoeur’s statement was not true.
Naftogaz’s CEO Yuriy Vitrenko wrote a letter to Prime Minister Denys Shmyhal warning about the supervisory board’s decisions. According to Vitrenko, the financial plan for 2021 does not provide for any bank guarantees to cover such payments. He also said that these decisions were not in line with established practices.
According to the CEO’s letter, the total estimated amount of the bonuses and severance pay for 2021 to the four members of the executive board is Hr 215 million gross, or Hr 173 million net of taxes. That amount was calculated based on the terms of the bank guarantee approved by the supervisory board on June 25 and equalled 29 monthly pays of each of the four executive board members.
This only covers the bonuses for the first half of 2021 year as per evaluation by the supervisory board. The supervisory board’s decision stated explicitly that these amounts did not cover potential bonuses for the rest of the 2021.
Vitrenko also said that the supervisory board did not approve a remuneration regulation as required by the National Securities and Stock Market Commission (NSSMC), on which the payment of bonuses should be based, and the current remuneration practices did not conform to the Ukrainian law.
For an extended background of the Naftogaz case, see SOE Weekly’s Issues 32, 33, 34, 35, and 36.
(2) MGU, Ukrenergo, and Market Operator transferred to the Ministry of Energy
On July 28, the Cabinet of Ministers adopted an order transferring the management rights over three major energy companies to the Ministry of Energy.
These include the national electricity grid operator Ukrenergo, the electricity infrastructure company Market Operator, and Main Gas Pipelines of Ukraine – Mahistralni Gazoprovody Ukrayiny (MGU), the owner of the Gas Transmission System Operator of Ukraine (GTSOU).
According to the Cabinet, the “final transfer will proceed according to a roadmap provided by the Energy Community”. [We are not aware of what the “final” transfer refers to. – SOE Weekly.]
[As we wrote in SOE Weekly (Issue 07), the government had initiated a swap of energy companies back in November-December 2020, when Olha Buslavets was acting minister of energy. The swap implied a transfer of energy-generating companies (most importantly, Energoatom and Ukrhydroenergo) to the Cabinet and a transfer of Ukrenergo and MGU to the Ministry of Energy.
At that time, no information was shared on the rationale, economic reasoning, or any formal requirements for this swap. The potential conflict between the ownership function for Ukrenergo and MGU with the policymaking function of the Ministry of Energy was not discussed, either.
Ukrenergo was transferred from the Ministry of Energy to the Ministry of Finance as recently as two years ago, which was one of the conditionalities of the EU’s Macro-Financial Assistance package at that time.
No analysis of implications for the certification of GTSOU as a transmission system operator was shared. – SOE Weekly.]
(3) State representatives appointed to Ukrenergo’s and Ukrhydroenergo’s supervisory boards
According to the Ministry of the Economy, the SOE Nomination Committee appointed [proposed – SOE Weekly] state representatives to Ukrenergo’s and Ukrhydroenergo’s supervisory boards on 19 July.
However, the Ministry did not communicate the number of state representatives selected nor their names.
According to Ukrenergo’s website, when this SOE Weekly was prepared for publication, the company’s supervisory board included Şevki Acuner, Peder Andreasen, Olivier Appert, and Luigi de Francisci as independent members, as well as Yuriy Tokarski as a state representative. The board, which should be composed of seven members, was missing two state representatives.
According to Ukrhydroenergo’s website, when this SOE Weekly was prepared for publication, the company’s supervisory board included Steve Walsh, Nataliya Mykolska, and Oleh Terletsky as independent members. Vasyl Shkurakov and Valentyn Hvozdiy were the state representatives on the board. The board, which should be composed of seven members, was missing one independent member and one state representative.
(4) Ukrzaliznytsia looking for head-hunters to select candidates for four independent supervisory board positions. According to ProZorro, Ukrzaliznytsia announced a tender for executive search consultants who will be tasked with finding candidates for the four positions of independent supervisory board members.
In SOE Weekly (Issue 26), we reported that the Cabinet of Ministers approved Order No. 363-r announcing the selection of two independent supervisory board candidates for Ukrzaliznytsia.
(5) The government appoints MGU’s supervisory board members. On 21 July 2021, the Cabinet of Ministers approved MGU’s new supervisory board members: Huberte Bettonville, Iryna Marushko, and Jan Chadam as independent members and Tetiana Fedorova as a state representative.
Ekonomichna Pravda reported that Huberte Bettonville worked previously for Belgium’s Fluxys and UK’s Interconnector, Iryna Marushko is an independent lawyer, and Jan Chadam is the former the CEO of the Polish Gaz-System. Tetiana Fedorova is a former executive board member of Ukrtransgaz.
Jan Chadam is the only independent member to be re-elected to the MGU’s supervisory board. He had served on that board for over three years. Victor Pynzenyk, who joined the company’s board in 2019 as a state representative, remains on MGU’s supervisory board as well.
In SOE Weekly (Issue 36), we reported that Prime Minister Denys Shmyhal said on 11 July that the SOE Nomination Committee selected independent members of MGU’s supervisory board.
In SOE Weekly (Issue 32), we reported that the powers of three independent members of MGU’s supervisory board – Fabrice Noilhan, Jan Chadam, and Karina Luchinkina – expired on 1 June 2021. The powers of state representative Adomas Audickas had expired on 1 March, but were not extended. This left MGU with a non-quorate board consisting of a single member, state representative Viktor Pynzenyk.
(6) The court will hold a preparatory hearing next week in the Vitrenko vs. NACP case. On 4 August, the Kyiv District Administrative Court will hold a preparatory hearing on Naftogaz CEO Yuriy Vitrenko’s lawsuit against the National Agency for Corruption Prevention (NACP).
In SOE Weekly (Issue 34), we reported that on 1 July, the NACP ordered Clare Spottiswoode, the supervisory board chair of Naftogaz, to terminate Vitrenko’s contract as illegal. Vitrenko sued the NACP to overturn the order, arguing that, if the NACP sees a violation in his appointment, it should go to court rather than issue orders.
For an extended background of the Naftogaz case, see SOE Weekly’s Issues 32, 33, 34, 35, and 36.
(7) National Security and Defence Council instructs the Cabinet of Ministers to figure out the state of affairs at Ukrzaliznytsia.
According to the media, the secretary of the National Security and Defence Council (NSDC) Oleksiy Danilov made a statement on the “dangerous processes in the financial activities” of Ukrzaliznytsia. He did not rule out “cardinal personnel decisions” at the company.
Danilov said this during a briefing following the NSDC’s meeting on Friday, July 30. He said that the NSDC instructed the Cabinet of Ministers to figure out the current situation at the company and, if necessary, make drastic decisions on this issue, including personnel changes.
Ekonomichna Pravda (EP) reported that it obtained a document prepared for the meeting. The media did not publish the document nor describe its status. The document seen by EP includes a negative assessment of the current situation at Ukrzaliznytsia and blames the supervisory and management boards for this.
According to the document, to resolve the situation, the introduction of temporary management at Ukrzaliznytsia is initiated for the period during which a new CEO is selected and full-fledged governing bodies of the company are formed according to the requirements of the Ukrainian law and the OECD [corporate governance] standards.
[The NSDC is a co-ordination body for national security and defence issues, so it may raise SOE-related issues if they impact national security and defence. However, best practice implies that SOEs should be insulated from political intervention, such as management changes initiated by the NSDC. – SOE Weekly.]
SOE updates
Banks
(8) PrivatBank’s makes a profit of Hr 11.6 billion in the first half of 2021
PrivatBank’s net profit in the second quarter of 2021 amounted to Hr 9.2 billion. In the first half of the year, its net profit was Hr 11.6 billion, which is 17.4% less than in January-June last year (Hr 14.04 billion).
According to PrivatBank, the impact of growing long-term yields on U.S. treasury bills and the strengthening of the hryvnia led to a negative revaluation of indexed domestic government bonds, which the bank had received as a contribution to its share capital during the nationalization [in 2016 – SOE Weekly].
The loss due to the revaluation of this portfolio in the first six months of 2021 amounted to Hr 6.9 billion. The bank said that the positive impact of exchange rate fluctuations on the bank’s results partially compensates for these losses (Hr 1.3 billion). The bank’s profit from customer service and banking operations in the first six months of 2021 was Hr 17.4 billion, 35% more than in the first half of 2020.
The volume of deposits with the bank at the end of the first half of 2021 increased by 14% (to UAH 305 billion), compared to the first half of 2020. PrivatBank’s loan portfolio increased by 11% (to UAH 62.5 billion) due to growing lending to small and medium-sized businesses.
Energy sector
(9) Vitrenko assumes Naftogaz lost Hr 105 billion in the first quarter of 2021
Naftogaz’s CEO Yuriy Vitrenko stated that he doubts the correctness of the company’s financial results in the first quarter of 2021.
In his interview with RBC Ukraine, Vitrenko said that there are two problems with the financial reporting.
Firstly, it did not reflect the financial condition of teplokomunenergos (municipal heating companies) which had not paid back their gas debts by the time the reporting was prepared.
Secondly, Naftogaz’s gas debt to Ukrnafta was not accounted for. Ukrnafta is likely to demand that the debt should be returned, and there are grounds to assess Naftogaz’s liabilities for the gas supplied by Ukrnafta at current market prices.
Vitrenko added that the company’s reporting for the first quarter of 2021, which was prepared under the previous management of Naftogaz [ex-CEO Andriy Kobolyev – SOE Weekly], was not audited by independent auditors. Therefore, no reliable conclusion that the first quarter was profitable [as Naftogaz CFO Peter van Driel said on his Facebook page in early May – see SOE Weekly’s Issue 26] could be made.
Vitrenko said that miscalculations in the gas production program, which were made over the past two years, now led to significant import costs. For example, if the production program had been implemented, Naftogaz would not have had to import $2 billion worth of gas this summer.
(10) More than 20% of gas sold by Naftogaz in May to regional distribution companies at reduced prices intended for households resold to businesses at market prices
The media reported that in April, Naftogaz signed new contracts with regional distribution companies.
According to the contracts for the period from May 2021 to April 2022, Naftogaz is obliged to sell the gas to regional distributors at a fixed price, with the gas to be further resold to households at the fixed price plus a margin.
JE Energy, linked to the oligarch Dmytro Firtash, contracted for the largest volumes, 6 billion cubic meters, at Hr 7.42 per cubic meter.
[According to the media, Dmytro Firtash’s companies control about 70% of the gas distribution in Ukraine. According to the Ukrainian Energy Exchange, the gas price in May was Hr 9.3 per cubic meter, while in August it was as high as Hr 15.7 per cubic meter. – SOE Weekly.]
Naftogaz said that the company had imposed no obligations on the gas distribution companies to supply this gas exclusively to households. Thus, suppliers bought the “cheap” gas from the state-owned enterprie and sold some of it to businesses at the higher market prices. In May 2021, more than 20% of natural gas that was released to gas distributors to supply households under annual contracts was resold at higher market prices to non-household consumers.
[This suggests that JE Energy would be making several billions of hryvnias on the price arbitrage, with other regional gas distribution companies profiting from it as well. This practice was one of the core corruption schemes before the gas market reform. The reform implied that the only way to prevent misuse of price arbitrage was to allow a single market price. Households that cannot afford that price should get direct monetary subsidies to pay for the gas. The subsidies should be distributed and verified by the Ministry of Social Policy. – SOE Weekly.]
Gas Transmission System Operator of Ukraine (GTSOU) announced that it fully implemented the target, internal control model as part of its corporate governance reform in line with the OECD Guidelines on Corporate Governance of SOEs. GTSOU established a risk management function to prevent, identify, and effectively manage risks.
(12) Energoatom reports Hr 1.1 billion profit in the first half of 2021
Energoatom said in a statement that it made a net profit of Hr 1.1 billion in the first half of 2021. The company’s press release did not specify whether the financial statements for this period were audited.
In SOE Weekly (Issue 31), we reported that according to financial reports published by Marlin, Energoatom had made a profit of Hr 1.01 billion in the first quarter of this year. [This suggests that Energoatom’s profit in the second quarter was Hr 99 million. – SOE Weekly.]
For comparison, Energoatom lost Hr 1.6 billion in the first quarter of 2020. The company completed 2020 with a loss of Hr 4.8 billion.
In SOE Weekly (Issue 30), we reported that Energoatom was among the biggest loss-makers in 2020.
(13) Centerenergo reports a profit of Hr 203.5 million in the second quarter of 2021
Centrenergo received Hr 203.5 million in net profit in the second quarter, bringing its cumulative loss in the first half of 2021 down to UAH 591.2 million.
In SOE Weekly (Issue 27), we reported that Centerenergo lost Hr 794.7 million in the first quarter of 2021. For comparison, in the first quarter of 2020, the company reported a loss of Hr 163 million.
(14) Zelensky ratifies an agreement to upgrade Ukrzaliznytsia’s locomotive fleet
According to the President’s Office, President Volodymyr Zelenskyy signed a law ratifying the Framework Agreement between the Cabinet of Ministers of Ukraine and the Government of France to renew Ukrzaliznytsia’s electric freight locomotive fleet, which was approved by the Verkhovna Rada on 1 July.
The agreement will allow Ukrzaliznytsia to buy 130 freight locomotives.
The President’s Office reported that the purchase will come out of the state budget and external borrowing. France will support Ukraine with credit financing for up to 85% of the project.
The total amount of support will be € 750 million. Of this amount, € 350 million will be a treasury loan and € 400 million will come from bank loans guaranteed by BPI France Assurance Export.
Ukrposhta gets Hr 118 million in net profit in the second quarter
Ukrposhta received Hr 118 million in net profit in the second quarter of 2021. As a result, its cumulative loss in the first half of the year went down to Hr 9.8 million.
In the first half of 2021, the company also increased its revenue by Hr 1 billion (from Hr 4.3 billion to Hr 5.3 billion) compared to the first half of 2020. Ukrposhta’s personnel costs increased by 19% in the same period.
(16) Standard & Poor’s upgrades Ukrzaliznytsia’s credit rating to CCC+, with a stable outlook
According to Ukrzaliznytsia, Standard & Poor’s raised the company’s credit rating to CCC+, with a stable outlook, given significant improvement in the company’s liquidity. This mainly reflects the successful placement of $ 300 million in five-year bonds and refinancing of current debts.
Privatization
(17) Unknown plaintiff asks the court to seize the state-owned stake in Centerenergo
On July 27, 2021, the Commercial Court of Kyiv received a claim asking it to seize the state-owned stake (78.289%) in Centrenergo.
The order of the State Property Fund of Ukraine No. 1275 dated July 23, 2021, said that the privatization of Centrenergo should take place between August and December 2021. The plaintiff argues that the sale of the state’s share would violate his/her rights. The identity of the plaintiff was not disclosed. The court is currently deciding whether there are legal grounds for the claim.
(18) Starting price of Hr 1.4 billion proposed for the Bilshovyk plant
According to the State Property Fund, the auction committee for the privatization of the Bilshovyk plant will propose to set the starting price at Hr 1.4 billion [about $ 52 million – SOE Weekly].
As we reported in SOE Weekly (Issue 32), this starting price was announced back in mid-June by Serhiy Tsivkach, executive director of UkraineInvest.
Public assets
(19) ARMA’s leadership is suspected of misappropriating more than $ 400,000 of criminal cash
Investigators from the State Bureau of Investigation (DBR) charged the leadership of the Asset Recovery and Management Agency (ARMA) and two lawyers with misappropriating $400,000 of cash.
The money had been allegedly confiscated by the National Police as “obshchak” [common budget of an organised criminal group kept by the group’s treasurer – SOE Weekly].
DBR said that the alleged abuses were exposed in cooperation with the special unit for combating corruption and organized crime of the Security Service of Ukraine (SBU).
According to DBR, between August and December 2020, the acting head of ARMA Vitaliy Syhydin, his deputy Volodymyr Pavlenko, and department head Vakhtang Bochorishvili colluded with the two lawyers and a man named Ihor Korol to seize the funds that were confiscated by the National Police and transferred into the management of ARMA.
The investigation is ongoing. According to the media, the court removed ARMA’s leadership from office and placed them under house arrest.
As we wrote in SOE Weekly (Issue 18), according to ARMA’s then acting head Vitaliy Syhydyn, total assets under ARMA’s management were more than Hr 3 billion. In 2020, ARMA reported a meager profit of Hr 15.7 million, transferred to the state budget.
[This implies an almost zero return (namely, 0.5%) on the assets under ARMA’s management. ARMA’s budget for 2020 was UAH 190.45 million, implying that the above profit only covers around 8% of the agency own operational budget. – SOE Weekly.]
As the SOE Weekly reported earlier (Issue 07), ARMA transferred a remarkably modest UAH 13 million to the state budget from its “asset management profit” received in January-October 2020. For the same period in 2019, ARMA transferred an even lower amount of UAH 10.94 million.
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. © 2020–2021 Andriy Boytsun, all rights reserved. Spaces – Maidan Plaza || Maidan Nezalezhnosti 2, Kyiv 01012, Ukraine Email: [email protected] || Telephone: +380 44 247-7829.
