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Issue 87
6–12 May 2023

Corporate governance of SOEs

The Cabinet published a resolution on Ukroboronprom’s corporatisation, but with a six-week delay. On 4 May 2023, the Cabinet of Ministers published its resolution to convert the State Concern Ukroboronprom into a joint-stock company called Ukrainian Defence Industry.

[As SOE Weekly reported in its Issue 80, the Cabinet said that it approved the corporatisation on 21 March 2023. In Issue 83, we reported that the corporatisation of Ukroboronprom had not yet begun: The government resolution was not public yet. – SOE Weekly.]

According to the minutes of the government meeting seen by liga.net, the resolution was given only one day to be finalised, but its publication was delayed for six weeks.

The leader of the Sluha narodu parliamentary faction and former member of Ukroboronprom’s supervisory board Davyd Arakhamia explained that new Minister of Strategic Industries Oleksandr Kamyshin “suspended [the publication] for a little while to look into it”.

[It is unclear why Oleksandr Kamyshin suspended the publication of a resolution that was already approved by the Cabinet, and whether he has the authority to do so.

In Issue 80, we reported that, on 21 March 2023, the Verkhovna Rada appointed former Ukrzaliznytsia’s CEO Kamyshin as the new Minister for Strategic Industries. – SOE Weekly.]

The publication of the resolution officially launches the corporatisation of Ukroboronprom. The resolution provides for the establishment of the joint-stock company Ukrainian Defence Industry (UDI for short) through the transformation of the State Concern Ukroboronprom.

The authorised capital of the company will be UAH 237 million. The charter of UDI and the regulations governing its supervisory board, approved in March, were also published.

According to its charter, the purpose of the company is to strengthen Ukraine’s defence capability, implement effective management, investment, and innovation development of Ukraine’s industry, as well as regulate, control, and co-ordinate the activities of business entities in the defence industry.

The sole founder and shareholder of the company is the state, represented by the Cabinet of Ministers.

According to its charter, UDI must pay annual cash dividends to the state equal to 30% of its profit no later than 1 September.

The governance bodies of the company will be the general meeting [effectively, the Cabinet of Ministers – SOE Weekly], supervisory board, and CEO.

The supervisory board must have six members – three independent and three state representatives. Their tenure will last for three years.

The supervisory board will appoint the CEO.

The concept of corporate governance reform and conversion of Ukroboronprom, including its target model and detailed action plan, was drafted by Andriy Boytsun, Oleksandr Lysenko, and Dmytro Yablonovskyi, members of the SOE Weekly team, as well as the international law firm Kinstellar, in March 2020. For a discussion of these documents, see the OECD Review of the Corporate Governance of State-Owned Enterprises in Ukraine.

In Issue 59, we reported that in July 2021, the Verkhovna Rada adopted Law 1630-IX (previously known as Draft Law No. 3822) which laid the groundwork for Ukroboronprom’s transformation.

On 9 December 2021, the Cabinet of Ministers approved resolutions and ordinances to convert Ukroboronprom into a joint-stock company. The Cabinet also approved the conversion of Ukroboronprom’s 43 uncorporatised enterprises into joint-stock companies or limited liability companies fully controlled by the state.

Court orders arrest of two people accused of involvement in theft of UAH 500 million from UMCC and Odesa Portside Plant. On 4 May 2023, the High Anti-Corruption Court (HACC) ordered the detention (in absentia) of the former acting CEO of United Mining and Chemical Company (UMCC).

SAPO did not name the suspect, but the media identified him as Artur Somov. According to prosecutors, Somov is one of the members of the criminal organisation that stole more than UAH 500 million from the Odesa Portside Plant (OPZ) and UMCC between 2019 and 2021.

On 8 May 2023, the HACC also ordered the detention (in absentia) of a former acting СEO of OPZ, Mykola Parsentyev.

Both in the case of Somov and Parsentyev, after their detention and delivery to the place of pre-trial investigation, the investigating judge will decide on the application of these measures of restraint, SAPO added.

In SOE Weekly (Issue 80), we reported that the National Anti-Corruption Bureau (NABU) and SAPO said that they exposed a criminal group run by former head of the State Property Fund of Ukraine (SPFU) Dmytro Sennychenko. See more about this case in Issue 80.

The court issued a warrant for the arrest of Sennychenko’s former adviser Yuriy Lypko and OPZ’s former acting СEO Mykola Synytsia (see Issue 81).

The suspects in this case, including Sennychenko, Parsentyev, and Somov, were placed on the wanted list. (See more in Issue 83.)

SOE updates

Energy sector

Naftogaz pays UAH 33 billion in taxes for the first four months of 2023. On 8 May 2023, Naftogaz Group reported that it paid almost UAH 33 billion into state and local budgets for January–April 2023.

According to the company, that accounts for 15% of Ukraine’s total tax revenue for this period.

In April alone, Naftogaz Group paid UAH 6.2 billion in taxes – almost 13% of all tax revenues in April, Naftogaz’s CEO Oleksiy Chernyshov said.

Chernyshov said that heat producers only paid 41% of the cost of the gas they used and urged local governments to pay up or restructure their debts with the company. Households that buy gas directly from Naftogaz have paid about 80% of the total costs.

In SOE Weekly (Issue 85), we reported that the Cabinet of Ministers established how much SOEs must pay in dividends for 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 expected to post a loss of UAH 40 billion in 2022, according to preliminary results. If Naftogaz gets losses, it will not pay any dividends.

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

He said that the underlying receivables of the company 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).

[It appears that, if Naftogaz gets the compensation for PSOs from the state budget as expected, its net fiscal impact will be negative. – SOE Weekly.]

Energy regulator investigates alleged market manipulation, with DTEK benefiting at Energoatom’s expense. On 9 May 2023, the National Energy and Utilities Regulatory Commission (NEURC) started an investigation into whether energy company DTEK caused financial damage to Energoatom. DTEK is owned by Ukrainian billionaire Rinat Akhmetov.

The investigation concerns DTEK subsidiaries DTEK Zakhidenergo, DTEK Dniproenergo, DTEK Kurakhivska TPP, D.Trading, Energo-Gaz, and Energozakhid, as well as the state nuclear operator Energoatom and state-owned energy trader ECU.

NEURC will review these companies’ activities on Ukraine’s electricity market from 1 February to 30 April 2023, specifically the day-ahead market and the balancing market.

[There are four market segments: (i) market of bilateral contracts, (ii) day-ahead market, (iii) intraday market, and (iv) balancing market.

Ideally, buyers and sellers trade using (i) bilateral contracts. However, as electricity production and consumption are highly volatile and cannot be predicted with much precision, additional volumes are traded in segments (ii) and (iii). In case they fail to fully smoothen the fluctuations, segment (iv), the balancing market, is invoked.

If there is a shortage of electricity, the price in the balancing market is high, as sellers have no other way to buy it if they have not bought the necessary volumes in segments (i), (ii), or (iii). In case of excess supply, the price is low. – SOE Weekly.]

NEURC says that it identified possible violations, such as distortion of competition and/or restrictive contractual practices in the market.

The behaviour of these market participants may have led to a significant reduction in Energoatom’s sales, creating a significant excess supply of electricity [in the day-ahead market – SOE Weekly], the regulator said.

The alleged scheme was discussed earlier in social and traditional media. According to these reports, Energoatom failed to sell some of its electricity on the day-ahead market in March due to high prices. Instead, it had to sell it at a much lower price on the balancing market, primarily to DTEK.

As a result, Energoatom made a symbolic 0.01 UAH per megawatt hour instead of at least 2,600 UAH per megawatt hour, observers said. Thus, the state-owned company lost at least 300,000 megawatt hours in March.

[If the observers’s data are correct, assuming the minimum price of 2,600 UAH per megawatt hour, Energoatom has lost at least UAH 780 million in this manner. – SOE Weekly.]

At the same time, Energoatom shifted the “financial responsibility for these imbalances to the ECU by joining its balancing group”, the regulator said. [As far as we understand, this suggests that the losses from such a scheme would be covered by ECU’s revenues from electricity exports. – SOE Weekly.]

According to observers, ECU is the state-owned trader that was established on the initiative of Deputy Head of the Presidential Administration Rostyslav Shurma and Energy Minister Herman Halushchenko to export electricity from Energoatom. In the summer of 2022, the company was the largest electricity exporter after DTEK. ECU is headed by former DTEK manager Vitaliy Butenko, observers added.

During a NEURC meeting, Natalia Karabenko, head of ECU’s Regulatory Support Department, noted that the regulator had not requested any information that could give grounds to starting an investigation.

DTEK’s press service said that the group abides by the law and electricity market regulations.

Privatisation

Date set for third auction to privatise Bilhorod-Dnistrovskyi seaport. The SPFU has scheduled a third auction to try to sell the Bilhorod-Dnistrovskyi trade seaport for 6 June 2023.

The starting price has been set at UAH 184.92 million (excluding VAT). Bidders must deposit a guarantee fee of UAH 36.98 million.

[A deposit guarantee of 20% of the starting price is required by law.

The starting price for the first auction was UAH 187.6 million. For the second one, it was halved to UAH 93.8 million. – SOE Weekly.]

Oleksandr Slavskyi, head of SPFU’s regional office in Odesa and Mykolaiv Oblasts, explained on Facebook that the starting price changed due to the change in the company’s asset value. He added that they decided to relaunch the procedure to start with a full starting price as they saw demand for the asset.

According to SPFU, whoever buys the company must pay its wage arrears within six months of the purchase date. According to Bilhorod-Dnistrovskyi, the wage arrears were UAH 96.4 million as of 31 March 2023. The final amount will be established when ownership is transferred.

[In the buyer’s expenses on purchasing the asset, the wage arrears effectively add up to the price itself. This means that the effective starting price is no less than UAH 318.3 million, including VAT and wage arrears. – SOE Weekly.]

The first privatisation auction for Bilhorod-Dnistrovskyi failed as no one registered.

At the second auction, the seaport was sold for UAH 220 million to Ukrdoninvest LLC, owned by Ukrainian businessman Vitaliy Kropachov. However, Ukrdoninvest did not pay up, failing to explain why.

As we reported in SOE Weekly’s Issue 85, the company said that it backed out while hashing out the terms of the purchase agreement with SPFU’s regional office in Odesa and Mykolaiv Oblasts. Ukrdoninvest did not provide any further details.

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

For more detail, see SOE Weekly’s Issues: 74, 78, 79, 84, and 85.

Procurement notices – powered by Prozorro

Together with Prozorro, we selected procurement notices announced by top 15 Ukrainian SOEs and four state-owned banks from 4 to 11 May 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.

Organiser Expected value, UAH CPV Classification
Ukreximbank 1,400,000 30000000-9 Office and computing machinery, equipment and supplies except furniture and software packages
Ukreximbank 2,500,000 31000000-6 Electrical machinery, apparatus, equipment and consumables; lighting
Ukrposhta 2,250,951 39000000-2 Furniture (incl. office furniture), furnishings, domestic appliances (excl. lighting) and cleaning products
Ukrposhta 2,646,180 18000000-9 Clothing, footwear, luggage articles and accessories
Ukrposhta 4,429,800 09000000-3 Petroleum products, fuel, electricity and other sources of energy
Naftogaz 9,786,672 79000000-4 Business services: law, marketing, consulting, recruitment, printing and security
Naftogaz 14,643,439 79000000-4 Business services: law, marketing, consulting, recruitment, printing and security
Oschadbank 5,025,470 34000000-7 Transport equipment and auxiliary products to transportation
Oschadbank 9,136,253 30000000-9 Office and computing machinery, equipment and supplies except furniture and software packages
Energoatom 6,616,250 24000000-4 Chemical products
Energoatom 21,031,725 44000000-0 Construction structures and materials; auxiliary products to construction (except electric apparatus)
PK “Ukraina” 2,800,000 45000000-7 Construction work
Ukrgasbank 1,912,358 50000000-5 Repair and maintenance services
Ukrgasbank 5,817,230 32000000-3 Radio, television, communication, telecommunication and related equipment
Ukrenergo 1,727,500 45000000-7 Construction work
Ukrenergo 2,273,755 44000000-0 Construction structures and materials; auxiliary products to construction (except electric apparatus)
Ukrenergo 3,420,556 34000000-7 Transport equipment and auxiliary products to transportation
Ukrhydroenergo 1,578,133 18000000-9 Clothing, footwear, luggage articles and accessories
Ukrhydroenergo 1,713,524 71000000-8 Architectural, construction, engineering and inspection services
Ukrhydroenergo 2,046,067 45000000-7 Construction work
Ukrhydroenergo 2,928,337 42000000-6 Industrial machinery
Ukrhydroenergo 3,373,417 45000000-7 Construction work
Ukrhydroenergo 3,546,546 45000000-7 Construction work
Ukrhydroenergo 4,200,000 38000000-5 Laboratory, optical and precision equipments (excl. glasses)
Ukrhydroenergo 6,298,650 48000000-8 Software package and information systems
Ukrhydroenergo 7,120,409 48000000-8 Software package and information systems
Ukrhydroenergo 8,304,014 45000000-7 Construction work
Ukrhydroenergo 8,953,970 45000000-7 Construction work
Ukrhydroenergo 9,359,584 45000000-7 Construction work
Ukrhydroenergo 11,986,095 45000000-7 Construction work
Ukrhydroenergo 13,755,155 45000000-7 Construction work
Ukrhydroenergo 18,744,069 45000000-7 Construction work
Ukrhydroenergo 26,292,551 45000000-7 Construction work
Ukrhydroenergo 171,669,129 45000000-7 Construction work

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, Dmytro Yablonovskyi, Oleksandr Lysenko, Oleksii Pavlysh, and Mariia Kramar.

This publication was produced with the financial support of the European Union within the project “Supporting Ukraine in rebuilding and recovery” implemented by the KSE Institute (Contract NI/2022/424-502 dated 14 November 2022). The contents of this publication are the sole responsibility of the editorial team of the Ukrainian SOE Weekly and do not necessarily reflect the views of the European Union.

© 2020–2022 Andriy Boytsun, all rights reserved.

Email: corpgovteam@gmail.com

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