The baseless criminal case recently opened against me for allegedly abusing my powers as the acting head of the State Food and Grain Corporation is part of a dangerous trend.
Its main purpose is to discredit the initiatives taken by a few reform-oriented managers and politicians who want to see Ukraine’s state-owned enterprises succeed. It is also a signal to independent executives thinking of moving into the state sector in search of job satisfaction rather than money that they should stay away.
Yet Ukraine urgently needs to bring high-quality talent from the private sector to reform SOEs and contribute to attracting foreign investment and driving economic growth.
At the end of 2019, the reform-minded Oleksiy Honcharuk government invited me to lead the State Food and Grain Corporation (SFGC) out of crisis and attract investment into the company. The corporation faced a $1.5 billion loan due for repayment in 2021 and had spiraling operating losses due to poor governance and unaccountability.
I had just completed the restructuring and sale of Mriya Agro Holding, one of Ukraine’s largest agricultural companies. When my team took over at Mriya, it had a debt portfolio of $1.1 billion. The one condition that I made for accepting this new challenge was that I should be able to hire a team of professional managers from the market at commercial rates. This was agreed and I hired 15 senior and middle managers within two months to take on the immediate task of auditing current assets and liabilities and preparing a 90-day crisis action plan for the approval of the Ministry of Economic Development, Trade and Agriculture under Timofiy Mylovanov.
Our efforts and plans came to a sudden halt after Mylovanov’s resignation. Since there was no longer government support for reforms at SFGC, I and my team left soon after.
Nine months later, I was summoned by the State Fiscal Service and charged with embezzling $320,000 in salaries paid to the employees I recruited because I had hired them at market rates even though I was fully entitled to do so. The Fiscal Service did not interview me during the preliminary investigation and gave me no opportunity to refute the absurd charge.
Reform of Ukraine’s SOEs cannot take place without honest, competent, properly paid managers who can ensure that the companies function free of political interference in line with the basic principles of corporate governance. Independent supervisory boards are also essential. Strategic investors require full financial transparency, protected shareholder rights, and political stability to make the long-term investments that the sector so urgently needs. Large SOEs are competing with the private sector in global capital markets.
The financial costs of implementing these changes are negligible relative to the value they will bring to the Ukrainian state.
To put numbers into perspective, SFGC should currently contribute $10 million in annual operating profits and $50 million of export VAT earnings (excluding payroll and other taxes) to the state treasury. Instead, the corporation reported a net loss of $150 million in 2019, most of it from loss-making trading positions. With $200 million of investments into infrastructure modernization and operational efficiency, operating profits would more than triple together with VAT earnings. The knock-on effect across the supply chain would be significant – from transparent grain origination to cheaper logistics and improved trading profit margins. By contrast, the cost of implementing basic governance is less than $5 million per year.
There have been some success stories at SOEs that have embraced reform. Ukrposhta and UkrOboronProm are notable recent examples in addition to the progress in the banking and energy sectors, and lately the privatization drive at the State Property Fund. Yet others such as SGFC have seen reform efforts stymied by a fight within the elites over access to the rents that they generate.
Finding a strategic partner to develop SGFC should be a top priority. This year the corporation must restructure the $1.5 billion loan from a Chinese bank intended to finance grain deliveries to China. SGFC’s assets are well located but run down and inefficient. The government should sell the company (even for a low price) to a global operator in exchange for significant investment commitments. In parallel, an agreement should be reached with the Chinese to restructure the debt and possibly convert it into equity and contribute other assets to reach an agreement.
To deliver a deal of this kind requires demonstrating to an investor that SGFC has a professional management team that operates without political interference.
The criminal case launched against me is another crude attempt to subvert reform of entrenched corruption in SOEs. It is also a litmus test of how foreigners’ legal rights are treated in Ukraine.
Simon Cherniavsky is a British citizen who has lived in Ukraine since 2010. He was head of State Food and Grain Corporation from December 2019 until April 2020.
