Editor’s Note: Ukrainian SOE Weekly 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.
Privatization
United Mining and Chemical Company
The starting price is set for United Mining and Chemical Company.
The privatization advisers determined the starting price of United Mining and Chemical Company (UMCC) to be Hr 3.7 billion.
[BDO Corporate Finance Ukraine was the privatization advisor for this deal. – SOE Weekly.]
The UMCC will be the first asset to be auctioned off within a large-scale privatization framework.
According to the head of the State Property Fund (SPF) Dmytro Sennychenko, the price is based on “a comprehensive audit and a full assessment of the company’s logistics.”
Sennychenko said that the auction commission had determined the terms of the sale, which will be sent for approval to the Cabinet of Ministers.
He added that more than 10 companies have already expressed their interest for UMCC.
The auction is expected in July.
In SOE Weekly (Issue 21), we reported that the Verkhovna Rada adopted Draft Law No. 4543 in the second reading, paving the way for large-scale privatization.
[The law still must be signed by the President to become effective. – SOE Weekly.]
United Mining and Chemical Company changes its management board on the eve of privatization
The United Mining and Chemical Company (UMCC) is reported to have terminated and replaced its management board three months before privatization.
The reasons for such a decision are unclear. The media had previously reported possible allegations against the previous top managers. The media has also criticized newly appointed management for not having relevant industry experience.
Corporate governance in SOEs
The Ministry of Economy proposes unexplained dividend pay-out ratios for SOEs.
The media published the Ministry of Economy’s explanatory note for the draft Cabinet of Ministers Resolution which should set the basic dividend pay-out ratio for most SOEs at 50%.
[Normally, the basic ratio applies to all SOEs and state-owned banks, unless an individual ratio is set for a particular company or bank. Remarkably, the Cabinet’s draft resolution only covers corporatized SOEs and state-owned banks, whether directly or indirectly owned by the state. It does not cover state unitary enterprises and other non-corporatized SOEs. – SOE Weekly.]
For four entities, the draft resolution sets individual dividend payout ratios. The ratio set for Ukrhydroenergo and Oschadbank is lower than the default ratio, namely 30%.
The ratio set for PrivatBank is much higher (80%), as it is for Naftogaz (95%).
[The explanatory note did not provide any reasoning for any of these ratios, including the default ratio of 50% and the individual ratios of Ukrhydroenergo, Oschadbank, PrivatBank, and Naftogaz. The explanatory note also did not link the dividend policy to any other SOEs’ ownership policies or strategies. Note that Ukrhydroenergo, Oschadbank, have historically enjoyed a lower dividend payout ratio, typically 30%, than other SOEs, without any reasoning stated by the government. PrivatBank reported a profit of Hr 25.3 billion in 2020 and was the most profitable bank in Ukraine. This implies that the dividends to be paid by PrivatBank would be UAH 20.24 billion, which is roughly 91% of all the dividends of UAH 24.4 billion to be collected by the state according to this draft resolution. – SOE Weekly.]
The ministry’s explanatory note referred to the draft financial plan of Naftogaz for 2021, which was submitted to the Ministry of Economy. According to the plan, the company was expected to incur a loss of Hr 11.8 billion ($422 million) in 2020.
[Therefore, the purpose of establishing a 95% payout ratio for Naftogaz is unclear. – SOE Weekly.]
The 2021 state budget projects Hr 24.4 billion ($871 million) in dividends [i.e., 2% of state budget revenues – SOE Weekly].
Now the Ministry of Economy is saying that, without dividends from Naftogaz, state budget revenues from dividend payments are expected to be Hr 22.3 billion.
[Note that the difference is only Hr 2.1 billion, suggesting that a large shortage that may have occurred due to Naftogaz may have been covered by increasing dividends for PrivatBank. – SOE Weekly.]
PrivatBank reappoints two board members
PrivatBank reappoints two management board members well in advance. On April 17, PrivatBank’s supervisory board re-appointed Anna Samarina as Deputy CEO for Finance and Larysa Chernyshova as a Management Board Member for Risk Management.
Both re-appointments were based on the results of a competitive selection, as required by law. Both appointments are for five years and start from Sept. 1 2021.
As we wrote in SOE Weekly (Issue 11), Samarina has also been the acting CEO of PrivatBank after ex-CEO Petr Krumphanzl’s contract with PrivatBank expired on Jan. 23, 2021.
As we reported in SOE Weekly (Issues 16, 19, 21, 23), the selection of the bank’s new CEO has been blocked by court following a lawsuit from PrivatBank’s trade union.
Danyliuk is not on the list of NDU board nominees
Former Finance Minister Oleksandr Danyliuk not on the list of nominees for National Depository of Ukraine’s supervisory board. The vote ballots for the shareholders’ meeting of NDU, which is to take place on April 26, indicate eight nominees for NDU’s supervisory board.
The board consists of five members and is elected by cumulative vote. This means that five of the eight candidates that gain the largest number of votes will be elected.
The eight nominees include four incumbent supervisory board members: Yuriy Heletiy (Deputy Governor of the NBU and Adviser to the Minister of Finance), Vitaliy Lisovenko (Ferrexpo’s supervisory board member), Vitaliy Milentyev (partner of the Cornerstone Financial Group), and Yaroslav Shlyakhov (a commissioner at the National Securities and Stock Market Commission, NSSMC).
The only incumbent board member who is not on the list of nominees is the NDU’s current board chair,Danyliuk, who, besides serving as finance minister, was also secretary of the National Security and Defence Council.
The NSSMC, which controls 60% of the shareholder votes in NDU, proposes to re-confirm the powers of Yaroslav Shlyakhov and Vitaliy Milentyev for another term.
The NBU, which controls 36% of the votes together with the NBU’s pension fund, re-nominated Yuriy Heletiy and Vitaliy Lisovenko for a new term.
The NSSMC also nominated Oleksandr Masenko, owner and director of Business Oriented LLC, as an independent member on the NDU’s supervisory board. The media suggested that, given NSSMC’s controlling block, the NSSMC intends to replace Danyliuk with Masenko.
According to the media, before he established software developer Business-Oriented LLC with a share capital of UAH 50,000, Masenko was the CFO of Univer-Capital LLC in 2016-2018.
In turn, minority shareholders of NDU nominated Oleksiy Kiy, president of the Professional Association of Capital and Derivatives Market, Bohdan Lupiy, head of the PFTS Stock Exchange, and Serhiy Rump, the former CEO of the NDU, as supervisory board candidates.
In SOE Weekly (Issue 23), we reported that the NSSMC might change the NDU’s supervisory board. Danyliuk said that he expected that the NSSMC will dismiss the NDU’s supervisory board at the next general shareholder meeting and appoint loyal people who will elect a new CEO of the NDU.
[According to the charter of NDU, the CEO is elected by the general meeting rather than the supervisory board. The board may make non-binding proposals and has recently initiated a competitive selection of CEO candidates for that purpose. – SOE Weekly.]
SOE updates
Banks
Oschadbank
Oschadbank joins the Individuals’ Deposit Guarantee Fund. On April 14, the Cabinet of Ministers supported the draft law that will connect Oschadbank to the Individuals’ Deposit Guarantee Fund (IDGF).
As reported earlier, Oschadbank’s connection to the IDGF is the first step towards the European Bank for Reconstruction and Development’s (EBRD’s) entry into the bank’s capital.
Currently, deposits of Oschadbank’s depositors are guaranteed by the state in full, i.e., 100%, regardless of the amount. After joining the IGDF, the guaranteed amount for new depositors will be UAH 200,000, as it is for all other Ukrainian banks.
In SOE Weekly (Issue 22), we reported that the government decreed that Oschadbank should ensure its connection to the IDGF as from 1 January 2021.
PrivatBank
PrivatBank’s profit falls fourfold in the first quarter.
In the first quarter of 2021, PrivatBank received a profit of Hr 2.4 billion, compared to Hr 10.4 billion in the first quarter of 2020.
Profit from customer services and banking operations came to Hr 8.5 billion, 27% more than in the first quarter of 2020. The number of active customers increased by 6% to 18.64 million.
However, PrivatBank lost Hr 6.8 billion on indexed domestic government bonds in the first quarter. The bank described this as a situational loss, unrelated to its normal activities. At the same time, the exchange rate fluctuations offset the loss by Hr 0.5 billion.
According to the bank, changes in the global and Ukrainian economy, primarily the growth of long-term US Treasury yields and the strengthening hryvnia in the first quarter led to a negative revaluation of indexed domestic government bonds that the bank had received as a contribution to the bank’s share capital during the nationalization.
Oschadbank
Oschadbank’s net profit decreased 10 times. According to Ekonomichna Pravda, Oschadbank made Hr 252 million in net profit in the first quarter of 2021. In the first quarter of 2020, it had made Hr 2.63 billion.
The bank saw Hr 2.1 billion in operating profit, Hr 2.3 billion more than in the first quarter of 2020. According to the bank, the positive result was achieved in part due to the growth of Oschadbank’s net interest income to Hr 2.9 billion, which is Hr 1.4 billion (96%) more than in 2020.
The bank’s net commission income in the first quarter came to Hr 1.4 billion, which is Hr 342 million (32.1%) more than in the same period last year.
[The above information suggests that Oschadbank made a large profit of 2.9 + 1.4 = Hr 4.3 billion on net interest income and net commission income. The reasons for the total result of Hr 0.25 billion and the decline in profits are unclear. – SOE Weekly.]
Energy sector
Naftogaz
Naftogaz sues the government.
The state-owned oil and gas company Naftogaz filed a lawsuit in the Kyiv Commercial Court to recover Hr 4.5 billion from the Cabinet of Ministers. There is no other information available about the case at the moment. The first hearing will take place on May 5.
Ukrnafta
Ukrnafta makes more than Hr 4 billion net profit in 2020. In 2020, Ukrnafta reported a net profit of Hr 4.29 billion. In 2019, the company suffered losses of Hr 4.58 billion. Ukrnafta reports that its annual general shareholder meeting will take place on May 18, 2021. The meeting agenda states that 2020 figure is not yet audited.
The State Audit Office attempts to audit Ukrnafta and Ukrgazvydobuvannia. According to the correspondence of the State Audit Office with the Cabinet of Ministers published in the media, the state auditors planned audits of Ukrnafta and Ukrgazvydobuvannia. However, the companies did not allow the auditors to do the audit, saying that they are not subject to control by state financial control bodies.
[OECD’s studies of the Ukrainian hydrocarbon sector and energy sector, when analyzing the functions of the State Audit Office, noted its excessive interference in SOEs’ operations. In particular, the state auditors had been present directly in the offices of the SOEs, were involved in the day-to-day SOE operations, and potentially duplicated the internal audit functions (where they existed), though certain functions of the State Audit Office have been limited since. According to the imperfect law, the State Audit Office may have certain rights to audit select SOEs, although such audits are originally designed for state-funded organizations such as ministries. At the same, these rights create openings for misuse. In our opinion, this deviates from best practice and may create a conflict between the functions of the state audit and the SOEs’ external audit and internal control systems. We believe that such audits in SOEs should be abolished. – SOE Weekly.]
Infrastructure
Ukrzaliznytsia
Ukrzaliznytsia’s credit rating downgraded. International rating agency S&P Global Ratings downgraded Ukrzaliznytsia’s credit rating from “B” to “CCC” due to increased refinancing risks.
Ukrzaliznytsia’s $116 million loan from a local bank matures on May 30, 2021. The company does not seem to be able to repay the loan on time and is now working on various refinancing options.
[Ukrzaliznytsia said later in a statement that this was part of a loan from the Russian state-owned Sberbank. – SOE Weekly.]
As we reported in SOE Weekly (Issue 23), in its consolidated financial statements, Ukrzaliznytsia said that it was looking for better borrowing options in order to refinance its liabilities. The company considered issuing Eurobonds in 2021 – however, it would resort to raising funding from state-owned banks and government support mechanisms if it fails to raise funds in international capital markets.
Ukrzaliznytsia to transfer Hr 749.5 million dividends for 2019.
According to the Cabinet of Ministers’ decision on April 21, 2021, the Cabinet as the shareholder of Ukrzaliznytsia approved the company’s annual report, including its audited financial statements, for 2019. The government also approved the reports of Ukrzaliznytsia’s supervisory board and management board for 2019.
The Cabinet’s decision also approved the distribution of Ukrzaliznytsia’s net profit for 2019, in particular, allocating 30% of the profit (Hr 749.5 million) to pay out dividends to the state budget, and the remaining 70% of the profit (Hr 1.75 billion) to cover losses of the previous years.
[Please note that this is not a typo. The annual report, financial statements, the supervisory board’s reports, the management’s report, and the distribution of profit were approved for 2019, not 2020. – SOE Weekly.]
Defense
Ukroboronprom transfers 17 enterprises to the SPF for privatization.
Pursuant to the Cabinet of Ministers’ resolution № 1229 dated Dec. 9, Ukroboronprom transferred 17 SOEs to the State Property Fund (SPF). All these companies have lost their significance for the country’s defence capabilities or performed poorly, the company said.
The total value of the transferred enterprises’ assets as of July 1, 2020 is a modest Hr 280.6 million. In the first half of 2020, they posted losses of almost Hr 15 million, with the amount of wage arrears totalling over Hr 7.6 million.
At present, Ukroboronprom unites 118 enterprises, 21 of which are located in the temporarily occupied territories.
Ihor Hladkovsky wanted by NABU.
On April 21 2021, the National Anti-Corruption Bureau (NABU) declared Ihor Hladkovskyi wanted as one of the eight suspects in the Optimumspetsdetal The investigation believes that Hladkovskyi is hiding from the investigating authorities and the court in order to avoid criminal responsibility.
According to the investigation, due to the suspect’s actions in 2015-2017, Optimumspetsdetal received preferred contracts with and payments from Ukroboronprom enterprises. Hladkovskyi’s share was to be 50% of the total illegal income received by the scheme participants. In this way, the accused received Hr 950,000 in illegal benefits under one contract alone.
[Ihor Hladkovskyi is a son of Oleh Hladkovsky, the former first deputy secretary of the National Security and Defense Council. Oleh Hladkovskyi is a friend and business partner of the former President Petro Poroshenko. A journalist investigation by Bihus.Info in spring 2019 revealed massive corruption and embezzlement in Ukroboronprom enterprises under the presidency of Poroshenko. Poroshenko had also vetoed the law on corporate governance in SOEs, saying that defense SOEs should be excluded from the coverage of the law. As a result, defense companies were not part of the corporate governance reform, staying an attractive target for corrupt schemes. – SOE Weekly.]
Other sectors
State-owned Liky Ukrainy suffers millions in losses.
The State Audit Office conducted an audit of the state-owned pharmacy network Liky Ukrainy and found violations amounting to millions of hryvnias in 2018-2020.
According to the Office’s letter to the Cabinet of Ministers, annual losses of Liky Ukrainy in 2018 amounted to Hr 6.4 million and in 2019, to Hr 4.8 million.
[There is no rationale for the state to own such an SOE as Liky Ukrainy. This also contradicts the government-declared basic principles of state ownership policy. Since the services that the company provides are readily available from private providers in the competitive market, Liky Ukrainy should be privatised or liquidated. – SOE Weekly.]
Public assets
ARMA appoints manager of Samara-Western oil pipeline. According to the results of the tender, the Agency for Search and Management of Assets (ARMA) elected Ukrtransnafta as the manager of the Samara-Western oil pipeline.
It turned out that Medvedchuk-affiliated Prykarpatzakhidtrans, a company that was banned by the Supreme Anti-Corruption Court from disposing of the pipeline, also took part in the tender.
ARMA and Ukrtransnafta must sign a contract after the assets are valuated.
In SOE Weekly (Issue 16), we reported that Ukrtransnafta must have protected and maintained the Samara-Western pipeline by decision of the Supreme Anti-Corruption Court. On Feb. 22, Naftogaz gave Ukrtransnafta consent to accept the seized assets of the Medvedchuk-affiliated Prykarpatzakhidtrans for temporary safekeeping.
Procurement Notices – powered by ProZorro
Together with ProZorro, we selected procurement notices announced by top 15 Ukrainian SOEs and four state-owned banks from April 15 to 21 with an expected value of more than Hr 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.
Ukrainian SOE Weekly 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
