OECD Review of the Corporate Governance of State-Owned Enterprises in Ukraine
The ongoing controversy over the governance of the oil and gas giant Naftogaz has once again focused attention on state-owned enterprise reform in Ukraine. Recent developments have revived concerns about the consistency of reforms in this area and their alignment with high standards of corporate governance.
The stakes are enormous. Naftogaz is arguably the most important state-owned enterprise in Ukraine, the largest contributor to the state budget, and the implications of the controversy extend beyond Naftogaz to the rest of Ukraine’s large SOE sector. At issue are the arrangements for managing billions of dollars of state funds and assets, and the efficiency with which key public services are delivered to households and firms.
SOE reform also has profound implications for the investment attractiveness of the country. An SOE sector that is professionally managed, transparent, accountable, and competitive is essential to maintaining an open trade and investment environment. Improving the governance of SOEs, particularly in the energy sector, will help strengthen public finances, as well as energy security and supply.
That is why SOE reform has long been such a critical priority for Ukraine. Weak SOE governance is a recipe for rent-seeking, inefficiency, and corruption, imposing huge costs on the state, on private-sector firms, and, ultimately, on ordinary citizens.
Following the EuroMaidan Revolution, which ended Viktor Yanukovych’s presidency in 2014, Ukraine embarked on an ambitious reform of its SOE sector, including, among other things, the gradual corporatization of SOEs, the establishment of independent boards in some of the largest SOEs, new transparency and disclosure requirements, and the introduction of mandatory independent audits for economically important SOEs. In parallel, Ukraine undertook an equally ambitious reform of its energy sector, with a view to liberalizing energy markets and ensuring European integration.
The OECD has been committed to accompanying these reforms, working with Ukraine, our own members, and other partners to help support the policies and institutions that govern Ukraine’s energy sector towards international best practice. Both reforms have advanced a long way, and the results are there for all to see, not least in the improved performance of Naftogaz.
These reforms, however, are neither complete nor irreversible. Many reforms still need to be entrenched in robust legislative and policy frameworks, to reduce the risk of ad hoc changes and unwarranted political intervention, and to resolve inconsistencies in legal frameworks. As the current controversy shows, there are issues still to clarify and implementation gaps to close.
Last year, Ukraine launched the process for adhering to the OECD Guidelines on Corporate Governance of State-Owned Enterprises, which would further anchor its SOE reforms amid shifting political conditions. The guidelines offer a blueprint for SOEs to operate efficiently, transparently, and responsibly, helping countries approach to reform in a comprehensive way. Moreover, they serve as a guidepost for exercising professionalism in ownership practices, ensuring that SOEs operate according to sound corporate governance principles and compete in the marketplace on a level playing field.
On May 2, the government again affirmed its commitment to OECD standards of corporate governance and to improve the governance of public sector enterprises. The OECD welcomes this commitment, and we are ready to work with Ukraine towards this end. The OECD has just published a full assessment of Ukraine’s position against the SOE Guidelines, along with specific recommendations for their implementation.
Many of our proposals will seem quite technical, but the technicalities matter – the devil, as they say, is often in the details. Certainly, that is true when it comes to corporate governance. Nonetheless, the basic elements are relatively straightforward.
First, more needs to be done to strengthen the state’s ability to exercise ownership rights professionally and effectively. In particular, the government needs to establish a professionalized ownership entity that either centralizes or coordinates ownership functions, at arm’s length from policy-making and regulation. The conflation of policy, regulatory, and ownership functions is a recipe for inefficiency, corruption, rent-seeking, and competitive distortions.
Closely related to this is the need to shield the SOEs, including in the energy sector, from undue political interference. This applies not only to the rent-seeking agendas of private and public actors outside the company – an obvious concern – but also to abrupt policy shifts based on legitimate public policy aims and that destabilize the framework within which SOEs are meant to operate. To achieve this end, Ukraine should streamline its fragmented legal framework to ensure consistent and improved corporate governance practices in and around the SOEs. Based on the OECD assessment, this includes empowering independent supervisory boards and respecting their prerogatives in line with the guidelines, namely in “CEO appointment, dismissal and remuneration, setting the strategy, [and] approving key corporate documents” – precisely the issues at the center of the current controversy.
Above all, legislative and other formal changes are necessary, but not sufficient. The key challenge will be ensuring effective and consistent implementation. Matching words with deeds is needed to bring about the transformation of the SOE sector that Ukraine needs. Done properly, further SOE reform will translate into better SOE performance, better services for citizens, and a better business and investment environment for all.
Masamichi Kono is deputy secretary-general of the Organization for Economic Cooperation and Development.
OSCE press release on Ukrainian SOEs:
Ukraine must match words with deeds in SOE corporate governance reforms
The government of Ukraine has made strong commitments to align corporate governance of state-owned enterprises (SOEs) with international best practices. Words must now be matched by deeds, according to a new OECD report.
OECD Review of the Corporate Governance of State-Owned Enterprises in Ukraine evaluates the corporate governance framework of the Ukrainian SOE sector. It recognizes the substantial progress made since 2014. These include the gradual corporatization of SOEs, the establishment of independent boards, transparency and disclosure requirements, and the introduction of mandatory independent audits for economically important SOEs.
Nevertheless, reform efforts have remained fragile, and in some cases, they have been reversed. “These reforms are neither complete nor irreversible,” said OECD Deputy Secretary-General Masamichi Kono. “Many reforms still need to be entrenched in robust legislative and policy frameworks, to reduce the risk of ad hoc changes and unwarranted political intervention, and to resolve inconsistencies in legal frameworks. As the current controversy [around Naftogaz] shows, there are issues to clarify and implementation gaps to close.”
The report argues strongly that Ukraine needs to establish a professionalized ownership entity that either centralizes or coordinates ownership at arm’s length from policymaking and regulation. The separation of policy, regulatory, and ownership functions better shelters SOEs from inefficiencies, corruption, rent-seeking, and competitive distortions. Other priorities include:
- addressing inconsistencies in the legal and regulatory frameworks bearing on SOE corporate governance;
- continuing corporate governance reforms in the top-15 and other large SOEs;
- developing a comprehensive ownership policy with clear rationales for state ownership;
- ensuring that SOEs adhere to the principles of competitive neutrality and maintain a level playing field with private companies; and
- strengthening anti-corruption frameworks applicable to SOEs by promoting high standards of conduct and integrity.
The assessment of Ukraine’s SOE sector relative to the OECD Guidelines on Corporate Governance of State-Owned Enterprises was carried out by the OECD in 2020-21.
The OECD and Ukraine have worked together since 1991 to improve governance and stimulate economic development. In 2021, the two parties renewed a Memorandum of Understanding (MoU) for strengthening cooperation and are currently revising the joint Action Plan to identify the priority areas for OECD activities in Ukraine. Work under the MoU has helped build capacity, strengthen institutions, and promote reforms in many areas of public policy, including investment, competition, public administration, and corporate governance. The OECD is supporting Ukraine’s SOE sector reform with financial assistance from the Government of Norway.
