• Corporate governance of SOEs

• SOE updates

  • Fiscal risks from SOEs

  • Energy sector

  • Infrastructure

• Privatisation

• Procurement notices – powered by Prozorro

Corporate governance of SOEs

The Cabinet sets a dividend pay-out ratio for SOEs for 2022. On 18 April 2023, the Cabinet of Ministers established how much SOEs must pay in dividends for 2022. Most SOEs must contribute 50% of their profits as dividends if 30% of the profit is used to restore the damaged assets and counter Russian aggression.

[The resolution does not differentiate among most of the top SOEs, setting the dividend pay-out ratio at 50% for most of them.

Based on the official data and preliminary data from the media, most of the top SOEs will likely be loss-making in 2022, with losses as follows (most figures below are likely unaudited):

• Ukrposhta – UAH 1.3 billion (audited);
• Ukrzaliznytsia – UAH 10.8 billion;
• Energoatom – UAH 3.3 billion;
• Ukrainian Sea Port Authority (USPA) – UAH 0.5 billion;
• We have not found any data for Borsypil IA, but it will most likely be loss-making as well, because it has not operated since February 2022.

According to the media, two top SOEs should post profits (likely, unaudited):

• Ukrhydroenergo – UAH 11.8 billion; and
• Ukrenergo – UAH 2.7 billion.

Most of these SOEs have suffered severe losses due to the Russian invasion of Ukraine.

Based on the above predictions, the aggregate result across the top SOEs is likely to be modest at best, with a negligible contribution from SOE dividends to the state budget. See also the next item on fiscal risks from SOEs, below. – SOE Weekly.]

The Cabinet also set individual dividend pay-out rates for the following SOEs:

• PrivatBank – 80%.

[As we reported in Issue 73, PrivatBank made a net profit of UAH 30.25 billion in 2022. This suggests that the bank will pay UAH 24.2 billion in dividends. Note that it is not the first time that PrivatBank pays the highest dividends among Ukrainian SOEs.

In particular, in 2020, Naftogaz predicted UAH 11 billion in profits, but posted UAH 19 billion in losses instead. The large shortage in SOE dividend revenues that occurred due to Naftogaz’s losses at that time is likely to have been covered by increasing the dividend pay-out ratio for PrivatBank, from the originally planned 50% to 80% that year.

See Issue 24 for detail. – SOE Weekly.]

• Oschadbank must allocate 30% of its net profit for 2022 for dividends.

[As we reported in SOE Weekly’s Issue 73, Oschadbank earned UAH 690 million in net profit in 2022.]

• Naftogaz must allocate 30%, and the rest of the profit must be used to purchase natural gas produced in Ukraine.

[In Issue 77, we reported that Naftogaz expects to post a loss of UAH 40 billion in 2022, according to preliminary results. If Naftogaz gets losses, it will not pay any dividends. – SOE Weekly.]

• Ukrhydroenergo must pay 30% (subject to the allocation of 50% of the profits for the restoration of damaged assets).
• Ukrainian Financial Housing Corporation – 30% (subject to allocation of 50% of the profits for affordable mortgage lending).
• Ukrainian Danube Shipping Company – 30% (subject to 50% for fleet renewal).
• Ukragroleasing – 80%.
• Ukrbud – 95%.

The Cabinet replaces two state representatives on Ukrposhta’s newly approved supervisory board. On 25 April 2023, the Cabinet of Ministers published its decision to approve the new supervisory board of Ukrposhta.

The independent board members are Rinat Abdrasilov, Jakub Karnowski, Gary John Carroll, Olena Malynska, and Ihor Mityukov. For more details on them, see our Issue 80.

The state representatives are Kostiantyn Hura and Serhii Derkach.

[Note that these are different than the two state representatives that the Cabinet had named in its release when announcing the new Ukrposhta board on 23 March 2023. That release announced Natalia Bernatska and Kristina Prasolova as the newly approved state representatives. For more detail on these prior candidates, see SOE Weekly’s Issue 80.

However, as we wrote in Issue 80, the Cabinet’s decision that the above release referred to was not publicly available at that time. Nor was it available a week later (see SOE Weekly’s Issue 81).

The Cabinet did not publicly explain why the state representatives got replaced. – SOE Weekly.]

Kostiantyn Hura has served as the head of the State Agency for Infrastructure Projects of Ukraine since June 2022. Before that, he was the acting head of the State Agency on Energy Efficiency and Energy Saving of Ukraine.

Serhii Derkach has served as Deputy Minister for Communities, Territories, and Infrastructure Development since February 2023. Before that, he held senior positions at the National Agency for the Prevention of Corruption (NAPC), including as the Deputy Chief of Staff and Head of the Department for the Prevention and Detection of Corruption.

The Cabinet approves Oschadbank’s new supervisory board. According to Oschadbank, the new independent members of the supervisory board, approved on 21 April 2023, are:

• Michał Krupiński – served as Undersecretary of State in the Polish State Treasury, alternate executive director of the World Bank Group, head of Global Banking and Markets for Central and Eastern Europe at Bank of America Merrill Lynch, CEO of the insurance company PZU Group, and the CEO the Polish Bank Pekao;
• Elizabeth Nelson – worked as a Vice President at the EBRD since 2012, including Vice President of Risk and Compliance and Chief Risk Officer from late 2016 until the end of 2019. Before that, she was Head of Credit in the Risk Specialist Division of the Financial Services Authority (FSA, now PRA) in the UK. Prior to that, she had a 30-year career at JPMorgan Chase;
• Philip Heasley – worked as the President and CEO of ACI Worldwide from 2005 to 2020, and currently serves on the boards of directors of Jopari Solutions Inc. and PayPower; and
• Volodymyr Lavrenchuk – former CEO of Raiffeisen Bank (2006-2019), Regional Director of NEQSOL Holding Ukraine.

The four new members will replace Baiba Apine, Michael Weinstein, Peter Briggs, and Janne Harjunpaa.

Juan Enrique Perez Calot and Anton Piatygin served as independent members on the previous board, and will continue in that role, Oschadbank reported.

[By law, the supervisory board of Oschadbank, as the board of any bank that is 100% owned by the state, must include six independent members and three state representatives.

No information on the re-appointment of the state representatives on Oschadbank’s board was available at the time of this writing. According to Oschadbank’s website, Julia Pashko, Roza Tapanova, and Alexander Rodnyansky continue to serve on the board. – SOE Weekly.]

In SOE Weekly (Issue 80), we reported that, according to Ekonomichna Pravda (EP), Ukraine must finish forming supervisory boards at state-owned banks to comply with the new IMF programme.

Previously, the government appointed new boards at PrivatBank (see SOE Weekly’s Issue 69 for detail) and Ukrgasbank (see our Issues 73 and 75 for detail).

[The competitive selections for PrivatBank, Oschadbank, and Ukreximbank started simultaneously on 11 October 2022, with application deadlines of 11 November 2022.

The government has not given any public updates on the selection for Ukreximbank.

According to Ukreximbank’s board chair, Olyana Gordiyenko, the selection process of the bank’s supervisory board is at the stage of interviews with candidates.

We are not aware of the reasons for the delay. – SOE Weekly.]

SOE updates

Fiscal risks from SOEs

The Ministry of Finance warns the Cabinet of fiscal risks, many relating to SOEs. The 2023 state budget failed to include the hundreds of billions of hryvnias in compensation for gas and electricity tariffs, potential losses of state-owned banks, and payments of state-guaranteed debts, Ekonomichna Pravda (EP) found out from the letter of Denys Uliutin, First Deputy Minister of Finance, to the Cabinet of Ministers.

These risks include:

• SFGC’s loan to the Export-Import Bank of China. In Issue 68, we reported that on 17 December 2022, the Cabinet of Ministers approved the state guarantee to repay the State Food and Grain Corporation’s (SFGC) $1.5 billion loan from the Export-Import Bank of China.

Per the Cabinet’s Resolution, the state will ensure the repayment of the loans and interest, albeit with deferrals and capitalisation of accrued interest. According to EP, it involves deferring interest payments for three years.

At the same time, SFGC continues to suffer losses, so it is most likely that even after the end of the grace period, the state will have to fulfil its obligations as a guarantor and pay the Chinese debt from the state budget. Even if the company achieves its planned results for 2023, it will suffer losses of $197.4 million, EP wrote.

“At the same time, there is no [approved] financial plan for SFGC for 2023 and no action plan to break even,” the Ministry of Finance said.

In SOE Weekly (Issue 63), we reported that the Ministry of Finance transferred UAH 2.5 billion to the Export-Import Bank of China instead of SFGC in January 2022. According to the Ministry, SFGC repays a loan instalment every six months. As of 21 January 2022, the company paid just $8.8 million of the $96.4 million it was supposed to. Due to the state guarantee, the Ministry of Finance had to pay the rest.

In Issue 62, we reported that SFGC offered to restructure its outstanding $900 million debt to the Export-Import Bank of China, according to an October 2021 presentation.

In Issue 61, we reported that MP Maryan Zablotskyy (Sluha Narodu faction) wrote on his Facebook page in January 2022 that SFGC might go bankrupt soon. According to Zablotskyy, SFGC was unlikely to repay its next $95 million loan tranche on its own.

Later, EP published an article, explaining how SFGC’s debts accrued and claiming that on 21 January 2022, SFGC would default on its debt. According to EP’s sources, the President’s Office supported a “default scenario”, which would automatically invoke a state guarantee.

• Risks related to privatisation. The Finance Ministry warns that there is a risk that privatisation would result in a shortfall of about UAH 5.1 billion.

[Planned revenues from privatisation in the 2023 state budget are UAH 6 billion.

According to the State Property Fund of Ukraine, privatisation revenues were UAH 0.9 billion in the first quarter of 2023 (see below). – SOE Weekly.]

• Risks of additional expenditures for the recapitalisation of state-owned banks. According to the Ministry, there is a high risk that the government will have to make additional expenditures to recapitalise its banks.

Due to the war, many loan collaterals have been destroyed, and borrowers’ solvency has significantly decreased. The National Bank of Ukraine estimates that the share of non-performing loans could increase by 30% of the banking system’s total loan portfolio, EP added.

“The economic instability provoked by the Russian aggression may also significantly affect the growth of expenditures to support state-owned banks as a result of credit risk,” the Ministry of Finance said.

• Naftogaz needs over UAH 300 billion, largely as compensation for special tariffs. According to EP, the draft financial plan of Naftogaz for 2023 includes UAH 327 billion that the company wants to receive from the state budget.

[This also implies that Naftogaz’s financial plan for 2023 is not approved yet. – SOE Weekly.]

The biggest share of this would be used to compensate the company for the public service obligation to pay the difference between market tariffs and discounted consumer tariffs. In 2022, Naftogaz reportedly had UAH 116.5 billion in costs that were not covered by revenues.

“The [state] budget for 2023 does not provide for such expenditures,” the Ministry of Finance said.

The Ministry notes that it has provided comments on Naftogaz’s draft financial plan, to which the company replied that it did not consider it appropriate to make changes, EP wrote.

In SOE Weekly (Issue 77), we reported that Naftogaz expected to post a loss of UAH 40 billion in 2022, according to preliminary results.

Naftogaz’s CEO Oleksiy Chernyshov blamed significant receivables that arose due to the state’s use of Naftogaz’s working capital to meet the needs of energy consumers.

Chernyshov said that the company’s underlying receivables had three components: the difference in tariffs (UAH 36 billion), the debt of regional gas suppliers and gas distribution companies (UAH 76 billion), and public service obligations (PSOs) for 2022-2023 (UAH 158 billion).

• Energoatom could lose UAH 82.5 billion in 2023. Due to the reduction in electricity production and sales, including the seizure of Zaporizhzhia Nuclear Power Plant (NPP) by the Russian occupiers, Energoatom estimates that it will lose UAH 82.5 billion in 2023.

As a result, Energoatom would reduce the payment of taxes and fees to the budget by UAH 21 billion [apparently, compared to the 2023 plans – SOE Weekly].

In addition, if the current electricity tariffs for households are maintained until the end of the year, the “shortage in [Energoatom’s] finances” would exceed UAH 60 billion, EP added.

In SOE Weekly (Issue 71), we reported that due to continuous Russian occupation, losses of Zaporizhzhia NPP increased by almost 50% – from UAH 28 billion in November to UAH 40 billion in January 2023.

Energy sector

Centrenergo starts exporting electricity. On 26 April 2023, Centrenergo exported electricity for the first time in its history, according to the State Property Fund of Ukraine (SPFU), which holds a 78.3% stake in this company.

The SPFU believes that exports would enable Centrenergo to reduce its dependence on the situation on the domestic electricity market and gain access to European Union markets.

[Ukraine has recently resumed electricity exports due to a surplus in the system. Slovakia, Poland, and Moldova are the major buyers of Ukrainian electricity.

At the end of 2022, Centrenergo suffered a loss of UAH 7.24 billion, which exceeded the 2021 losses more than sevenfold. – SOE Weekly.]

Ukrenergo to be inspected due to suspension of electricity exports to Slovakia: losses reach up to UAH 20 million per day. On 26 April 2023, the National Energy and Utilities Regulatory Commission (NEURC) decided to conduct an unscheduled inspection of Ukrenergo due to the suspension of electricity exports to Slovakia.

NEURC called the stoppage an emergency, as revenues from electricity exports are critical to restore the damaged infrastructure.

“Due to the suspension of exports to Slovakia, Ukraine loses about UAH 20 million per day,” NEURC chair Kostiantyn Ushchapovskyi said during the Commission’s meeting.

NEURC asked Ukrenergo to provide an action plan to launch auctions for access to interstate crossings between Ukraine and Slovakia. The company did not provide information in response to the regulator’s request, NEURC said.

[Since 21 April 2023, Ukrenergo has not offered capacity for electricity exports to Slovakia, which previously amounted to 200 MW per hour and was always fully purchased by traders. – SOE Weekly.]

Cross-border transmission capacity is regulated by the Law of Ukraine “On the Electricity Market” (in particular, Article 43) and the Procedure for Allocation of Cross-Border Transmission Capacity approved by NEURC Resolution No. 763 dated 3 April 2020.

According to European rules, when two countries trade electricity, their grid operators split the distribution profits. When Ukraine’s power system joined ENTSO-E in March 2022, it pledged to synchronise its auction rules with European ones, but a one-year postponement was granted. Now, European operators are demanding profit sharing, EP wrote.

Ukrenergo holds auctions half an hour earlier than the operators of neighbouring countries, including Slovakia. The Slovak transmission system operator did not agree to this, NEURC reported. On 19 April 2023, the operator refused to provide access to its interstate crossing with Ukraine until this issue is resolved.

On 21 April, Ukrenergo responded that uninterrupted electricity exports to European countries are currently hampered by the lack of a procedure for holding joint auctions for access to cross-border crossings, and it is NEURC’s responsibility to approve such a procedure.

Ukrenergo has been asking the regulator to do that for several years now, claiming that the company has provided all necessary data and documents for this purpose.

Although NEURC has not yet adopted the procedure, Ukrenergo continues to work with partners to ensure that electricity exports can proceed within the regulatory framework currently established by NEURC, Ukrenergo added.

The company stated that electricity exports to Poland and Moldova continue, and that it is working to restore exports to other countries.

Infrastructure

Ukrposhta loses over UAH 1.3 billion in 2022. On 27 April 2023, Ukrposhta reported its financial results for 2022.

According to its release, Ukrposhta ended 2022 with a loss of UAH 1.258 billion. Of this amount, UAH 0.217 billion was due to losses from assets lost in the temporarily occupied territories of Kherson, Donetsk, and Luhansk Oblasts, and UAH 0.402 million was lost due to foreign exchange fluctuations.

The company ended 2022 with a net revenue of UAH 10.3 billion from sales of goods and services, down 7.7% from 2021. The data was confirmed by an international auditor, Ukrposhta stated.

The volume of domestic and export parcels in 2022 remained at the level of 2021. Revenues from trade increased by 41.9% compared to 2021. Due to the full-scale Russian invasion, the volume of written correspondence in 2022 decreased by 53.4% year-on-year with a gradual recovery by the end of 2022. Therefore, revenues in this area decreased by 18.3% compared to 2021.

Also, due to the dissolution of many printed media outlets, as well as population migration, revenues from the distribution of periodicals decreased by 22.4%, the company reported.

According to its release, thanks to the profits of previous years and measures to preserve cash, Ukrposhta maintained a strong liquidity position in 2022, which allowed it to maintain operations without a cash deficit, meet its financial obligations on time, and restart its capital investment programme.

In 2022, the company continued to automate its operations, buying and installing 780 point-of-sale terminals in its outlets. By increasing their total number to more than 8,500 units, revenues from acquiring services increased by 194.3% compared to 2021, Ukrposhta said.

In total, in 2022, Ukrposhta paid UAH 2.9 billion in taxes, duties, and mandatory payments.

Pre-trial investigation in the Pyvovarsky case extends, HACC seizes his property. On 25 April 2023, former Infrastructure Minister Andriy Pyvovarsky, who was charged with abuse of power, wrote that the prosecutor of the Specialised Anti-Corruption Prosecutor’s Office (SAPO) informed him that the pre-trial investigation would be extended until 22 May 2023. According to Pyvovarsky, he has not yet received an official letter about this.

According to a 3 March 2023 decision of the NABU detective, NABU recognised the Ukrainian Sea Port Authority (USPA) as an injured party. It is not yet clear whether USPA would recognise itself as an injured party. Pyvovarsky’s lawyers have not yet received a response, the ex-official added.

Pyvovarsky also wrote that last week he abruptly found out that his property had been seized by the decision of the High Anti-Corruption Court (HACC). The court confirmed this. The hearing was held behind closed doors back in February. Pyvovarsky’s wife’s property was also arrested, including assets that she owned before she married him, the former minister alleged.

According to Pyvovarsky, the court representative told the lawyers that he has been notified of the above by post. Neither he nor his lawyers received the mail, Pyvovarsky claimed. Moreover, the arrest was made even before the detective himself recognised the state-owned company as the injured party, the ex-official wrote.

Pyvovarsky was served with a notice of suspicion by NABU and SAPO for allegedly causing over $30 million in damage in 2015. This damage resulted from an allegedly illegal order issued by him as the Minister of Infrastructure: The order allowed private companies to charge half the harbour dues at Pivdenny seaport.

Pyvovarsky then argued that the charges were unfounded, because according to the Law “On Sea Ports of Ukraine,” proceeds from tonnage tax are distributed between the user of the port’s harbour (in this case, USPA) and the owner of the operational harbour (in this case, private company TIS).

He posted bail of UAH 10 million, as ruled by the court. Pyvovarsky has also been handed a request to extend the pre-trial investigation until 22 May 2023, with the amended suspicion accusing him of causing $43.6 million in damage.

For a detailed overview of the Pyvovarsky case, see SOE Weekly’s Issues 76, 77, 79, 80, 82, and 83.

Privatisation

Sale and purchase agreement for the first seaport in Ukraine signed. On 21 April 2023, the State Property Fund of Ukraine (SPFU) announced the signing of a sale and purchase agreement for the Ust-Dunaisk trade port with the winner of the auction, Elixir Ukraine LLC.

According to SPFU, Elixir Ukraine, an official representative of the Serbian company Elixir Zorka, which trades in complex mineral fertilisers, aims to increase transhipment volumes. It also plans to upgrade the port’s infrastructure and, in the long term, build a 50,000-tonne grain terminal.

In SOE Weekly (Issue 71), we reported that on 17 January 2023, SPFU sold the Ust-Dunaisk trade seaport for UAH 201 million, a more than threefold increase from the starting price (UAH 60 million). This was the first sale of a seaport in the history of independent Ukraine.

Kropachov fails to explain why he did not complete the purchase of the Bilhorod-Dnistrovskyi trade seaport. The winner of the Bilhorod-Dnistrovskyi trade port privatisation auction, Ukrdoninvest LLC, owned by Ukrainian businessman Vitaliy Kropachov, said that it backed out of the sale at the stage of hashing out the terms of the sale and purchase agreement with the SPFU regional office in Odesa and Mykolaiv Oblasts.

[Ukrdoninvest did not provide any further details. There was no public comment from the SPFU at the time of this writing. – SOE Weekly.]

The sale price of the port was UAH 264 million (including VAT). According to Ukrdoninvest, the company would not demand a refund of the UAH 18.8 million [about $0.5 million] guarantee fee from the state and hopes that these funds would be used to improve the defence capability of Ukraine.

[It is remarkable that Ukrdoninvest gave up on an amount of as much as $0.5 million without providing any explanation of what went wrong at the negotiation stage. – SOE Weekly.]

The first privatisation auction for Bilhorod-Dnistrovskyi trade seaport failed as no one registered, but a second auction was held with a winning bid of UAH 220 million by Ukrdoninvest LLC. However, the winner missed the payment deadline.

Later, SPFU announced that it would put the Bilhorod-Dnistrovskyi trade seaport up for privatisation for the third time.

This is not the first botched privatisation auction involving Kropachov’s Ukrdoninvest. In 2018, the company participated in the privatisation auction for Centrenergo, but SPFU later cancelled the auction because the documentation submitted by the bidders did not meet the legal requirements.

In 2018, Ekonomichna Pravda (EP) wrote that Kropachov had monopolised the supply of coal to Centrenergo. According to EP, more than 80% of the coal supplied to Centrenergo was provided by entities directly or indirectly linked to the businessman.

For more detail, see SOE Weekly’s Issues: 74, 78, 79, and 84.

State budget gets UAH 902 million from privatisation in the first quarter of 2023. On 26 April 2023, the SPFU reported that in the first quarter of 2023, the state budget earned UAH 902 million from privatisation of assets in logistics, trade, warehousing, distilleries, and other assets.

On 27 April 2023, MP Roksolana Pidlasa (Sluha Narodu faction), Chair of the State Budget Committee, wrote on her Facebook page that the state budget received UAH 1.027 billion from the privatisation of state property in less than four months.

In Issue 68, we reported that from 19 August 2022 to the end of 2022, Prozorro.Sale conducted 220 privatisation auctions. As a result, the state and local budgets were expected to receive UAH 1.5 billion.

Procurement notices – powered by Prozorro

Together with Prozorro, we selected procurement notices announced by top 15 Ukrainian SOEs and four state-owned banks from 20 to 27 April with an expected value of more than UAH 1,000,000. Note that the State Food and Grain Corporation has not used Prozorro since 2017; PrivatBank, since 2018; and Automobile Roads of Ukraine, since 2021.