To look at the situation at Khmelnytskoblenergo, and how this state company managed to establish an effective work process despite the complex realities of operating in Ukraine, we interviewed Oleg Kozachuk, the Acting General Director of the enterprise.
The word "state" effectively means "unprofitable" or "inefficient". All the time in Ukraine these things were considered to be equals. The management of the facilities, many awaiting privatization, is either of poor quality or it is used to drain resources from these state-owned companies for the benefit of oligarchics and their protégés, leaving them with nothing more than problems and losses.
But, it turns out, there are cases where this is not so. In the critical energy sector, in addition to Turboatom, we can look at the example of Khmelnytskoblenergo. Here we can see an increase profits, increased employee salaries, no debts to the energy market, and an enterprise confidently make plans for the future. It is strange then that in the last winter the State Property Fund ("SPF"), with a lot of violations of the law like failing to hold an open competition, made an attempt to change the head of Khmelnytskoblenergo. Also making this a strange case, no complaints were made against him by the SPF.
Oleg Ivanovich, what’s the situation with Khmelnytskoblenergo today? Who is currently the head of the company?
O.K. I would say this: this position is currently being established by the court. As we speak today, I was and I remain the legitimate head of the enterprise, but, unfortunately, as a result of the destructive actions of the SPF, the situation may change at any time.
Our problems arose at the end of February of this year when the previous Cabinet of Ministers, headed by then Prime Minister Alexei Goncharuk, decided to approve a proposal from the SPF to replace the Director General of this state-owned company. Strangely, the Property Fund did not provide any substantiated arguments for this move. Even without this, we have good reason to say that the government's decision goes against procedures prescribed by law. We don’t just want to hold on to titles and offices, in fact we would be ready to leave them at any moment. But for us it is fundamentally important that any change of management is done publicly, there must be transparent and legal moves that bring stable development to the company, in which we have invested so much effort, and only positive changes.
It is gratifying that our position is shared by local authorities. The mayor and the chairman of the regional council together addressed the Cabinet of Ministers with a request to "intervene and ensure, within the limits of their competence, a review of this unfounded and illogical personnel decision." It appears that from close by it’s clearer how the enterprise works than it is from Kyiv.
What was the condition of the enterprise when you took it over? It was in 2016, if I'm not mistaken?
O.K. Well, without doubt the Khmelnytskoblenergo of 2016 and the current enterprise are two very different animals. At the start of my work the company was an average market player among regional power companies, with traditional problems such as debts to the energy market, no dividends, low salaries, and a lack of capital. The formation and implementation of our development strategy allowed us to turn this around and become leaders. We reformed the organisational and staffing structure, and automated processes of personnel management, accounting, vehicle management, labour protection and document management. We are actively reforming the models of automation of maintenance and repair of equipment processes. This made it possible to significantly increase productivity and the new efficient work modes translated into dynamically growing indicators.
Tell us more about this, what specifically has changed at the company over the past three years?
O.K. I remember the first steps after being appointed the head of Khmelnytskoblenergo. Needless to say, times were difficult. I remember we started eliminating the accrued debts to the energy market, and solving the problem of three-year debts to minority shareholders.
There really is a visible “before and after” comparison. If you look at the implementation of the investment program, before our arrival it was 60-80% of the target amount. In 2016-2018, as a key to ensuring stable development, we became the only state-owned energy company that 100% financed the planned investment program. In 2019 we again maintained the 100% but in this year we were joined by Kharkovoblenergo in reaching this goal. We do not fall below 100% with the financing of major repairs.
Dynamics of implementation of key technical indicators of "Khmelnytskoblenergo",%
As of September 1st 2019 Khmelnytskoblenergo is one of only two energy companies to have fully paid for electricity supplied to them. At the same time, the growth in the value of assets from 2015 to 2019 was almost 60%, an increase from UAH 1.2 billion to UAH 1.9 billion.
In recent years, our profits have been growing dynamically. Compared to the previous year in 2019 we doubled profits to UAH 85.7 million, and if we take into account the performance our wholly-owned subsidiary Khmelnitskenergosbyt, UAH 29.7 million in the black, the consolidated profit is 115.4 million UAH. This amount exceeds the total profitability of all other state regional power companies combined. This is despite the fact that the target profit level set for the enterprise amounted to just UAH 30 million net profit for Khmelnytskoblenergo and UAH 5 million for Khmelnitskenergosbyt. Therefore the set net profit target was exceeded by UAH 55.6 million, and the consolidated net profit by UAH 80.4 million.
Dynamic growth of net profit at Khmelnytskoblenergo. Thousands of UAH.
What do such indicators mean for the state and the community of the region?
O.K. According to the decision of the current Cabinet of Ministers of Ukraine, 50% of the net profits of Khmelnytskoblenergo (as proportionate to the state shareholding) should be transferred to the state budget, and depending on approved of the investment programme by the National Energy and Utilities regulatory Commission of Ukraine (“NEURCU”) the remaining 50% will be used to improve the reliability of power grids.
Khmelnytskoblenergo is a natural monopolist and of course its activities are strictly regulated by NEURCU, we work under the same conditions as other regional energy distribution companies so it is impossible to sharply increase profits by simply increasing the tariffs. The main factors in increasing the company's profits came through non-tariff revenue streams; revenues from non-monopoly services, co-suspension of networks, interest on funds held in deposit accounts, laboratory services, etc., in addition, considerable attention was paid to reducing non-productive and non-core costs. Khmelnytskoblenergo is public and transparent in its activities, so all of this information can be easily found and verifies from open sources.
We did not stop there, in the first quarter of this year net profit amounted to UAH 29 million, which is UAH 10 million more than in the same period last year. We are also one of the largest taxpayers. For Q1 2019 we paid 70 million UAH to the budget, and for the same period this year that figure has risen to almost 109 million UAH.
Together with the local authorities and the Ministry of Energy, it was also possible to resolve an issue that had been deadlocked for many years; namely the transfer to communal ownership of a building housing a kindergarten, which had been on the company’s balance sheet. This is an example of effective mutually beneficial cooperation with the local community, because in this case the enterprise reduced non-core asset expenditures, accordingly increasing profitability, and the community received a kindergarten in good condition, which will help improve the situation with regard to access to preschool programmes for local families.
My task, both as a leader and as a member of the team, is to ensure maximum efficiency of the company and increase profitability. This gives us the opportunity to balance the interests of all stakeholders: the main shareholder (the state) by ensuring the payment of dividends; communities, through dual goals of increasing the reliability of electricity supply and implementing social development programs; and the enterprise itself, by increasing the value and quality of assets it holds and generally improving investment attractiveness. For me it is very strange to hear the position of a person claiming the title of head of the company, whose policy is actively supported by the management of the SPF, that the lower the profit the greater the benefits to the company, and increasing net profit is "money laundering". We clearly have diametrically opposed views and interests.
We are also constantly investing in staff development. Advanced training is achieved through continuous training of employees. About a thousand employees have been trained in our training centre.
Employee salaries are also growing dynamically. We don’t have a salary pyramid, as is the case when lower-level specialists receive significantly less than higher-ranking colleagues. Judge for yourself: over the last year, the salary of an electrician has increased from 9,500 UAH to 15,000 UAH, at the same time the average salary of a full-time employee at the company is 15,600 UAH. It is also worth noting that our average salary level is 30% higher than the average salary in the region as a whole, which is 12,000 UAH.
Today, evaluating how far we have travelled, it is a pleasure for me and my team to state not only that state-owned companies can and should be effective, but that we have proven that this is possible at Khmelnytskoblenergo.
How was all this carried out, what measures, efforts, and actions did you implpiment?
O.K. It’s necessary to understand that a state enterprise also obeys the laws of the market. So it is necessary to manage it based on market rules and to keep up with modern trends and innovations.
We analysed in detail all business processes and economic components of the electricity distribution process, conducted a serious energy audit and identified the causes of unproductive operations in our market like electricity losses, low efficiency in distribution, and accounting weaknesses.
That lead to a constant fight for positive changes in some painful areas, so we addressed non-paying consumers, high production costs linked to high numbers of manual labour combined with low efficiency, and we worked to ensure transparency in procurement.
Programs have been developed for all of these key issues, each stage of which is strictly controlled.
You mentioned the problem of non-payment, which is applicable to many state-owned enterprises. Who wasn’t paying you? The general public or businesses?
O.K. You will be surprised, but payments for energy supplied to residences is almost 100% in recent years. The problem was with industrial enterprises. So we looked at it with this mentality, no one delivers petrol, or diesel fuel, for example, to a factory or a motor transport company for free, right? So why should electricity be treated differently?
We met with each debtor, talked to them, worked out restructuring programs. If there were any complaints about us we removed them, found compromises. Most importantly, we removed any possible way of questioning accounting by creating, and not only for debtors, modern systems clearly registering electricity consumption, and we created a multi-tariff system of rates per unit of energy consumes depending on the time of day when the electricity is used.
Of course, where the counterparty had not been in dialogue with the enterprise for years we had to adopt a tough position and be prepared to go to court and win lawsuits. That was a last resort, but we get money we are owed for the supplied electricity.
For the first time, the company really become customer-oriented. As a result of building relations with them the debtors stopped expecting that debts would be forgiven simply because we were overwhelmed with too many of them, instead our customers became our partners. As a result, the old debts of "chronic" debtors decreased in recent years to one third of what they had been.
Debts of energy supply companies for purchased electricity to Energorynok as of January 1, 2019, thousand UAH
How was the problem of losses and low transmission efficiency solved?
O.K. When we conducted the energy audit we identified bottlenecks, problem points, where there were unproductive energy losses. They were eliminated by gradual modernization of networks and equipment and the introduction of various innovations.
We quickly realized that innovation should not be an end in itself, and nor should it be just for PR, innovations need to bring a real economic effect. I have already talked about the automation of management processes and enhanced customer relations, these things have reduced the cost of our services and given consumers the opportunity to interact with us, as their electricity supplier, more comfortably.
Another important direction was the introduction of modern technologies to reduce what are called technological losses in the transmission of electricity. To do this, we used not only lessons from the existing market, but also our own experience. One of the effective methods here is to replace obsolete transformers with modern ones. Another step was the development, production and application of the Mobile Test Lab Hi-teKH mobile power laboratory, designed for the audit of 10 (6) kV distribution network equipment. The energy audit, with the help of that diagnostic tool, allowed to reveal where we were experiencing losses of electric power. The next step after detection is to logically eliminate the problem.
Another key factor came in how we looked at executing our investment program, which in 2019 exceeded UAH 128 million, we focused on investing in major repairs and the replacement and modernization of equipment. This includes repair of overhead lines, replacement of supports, and the overhaul of substations. Seeing the result did not take long, the capacity increased threefold from 51.5 MW to 147.5 MW. In addition, it was in the replacement of networks that we invested UAH 120 million on connecting new customers to our grid.
What are your thoughts about the prospect of introducing RAB tariffs in Ukraine? Will they increase the efficiency of distribution network operators?
O.K. RAB regulation, which is scheduled replace our current regulation from January 1 next year, will provide a higher level of investment and that, in turn, will improve the performance of power grids. When properly implemented RAB tariffs encourage distribution system operators to reduce costs and to actively upgrade their networks. The experience of other, maybe we can say more developed, countries shows the high efficiency of incentive regulation. For example, in Romania, asset depreciation decreased from 75% to 48% over the period from 2004 to 2011. Ukraine should copy the European experience in introducing incentive regulation.
Local government plays an important role in how the energy enterprises work, how have you developed relations in your case?
O.K. I would call them working and positive, how can it be otherwise ?! Khmelnytskoblenergo is one of the largest employers in the region as well as one of the largest taxpayers to both the state and local budgets. Over the past three years, we’ve almost doubled payments to budgets from 210 million UAH to 405 million UAH. We have earned the right to really call ourselves a socially responsible company, both at a regional level and nationwide.
How else is that social responsibility expressed? In addition to taxes paid and increased wages?
O.K. When it comes to employees, we do our best to make them and their families feel truly socially protected. For example we have a social insurance program whereby the company reimburses employees half the cost of insurance policies.
Our colleagues dine in a corporate dining room where, along with high quality food, they enjoy very discounted prices. If necessary, certain specialists can order food to be brought directly to their workplaces, so as not to disrupt the production process.
We pay special attention to holidays of all kinds for our employees. Travel for the purpose of health can always be done through access to discount certificates for colleagues and their family members. We also have a corporate children's camp called Spring. The fame of Spring goes far beyond our region, because we are systematically updating the camp base with new homes, playgrounds, furniture, beds, mattresses and more.
We are constantly improving the infrastructure throughout the various facilities of our enterprise. For example at the Training and Course Complex we have implemented automated exams and testing, completely updated the information materials, and the Yablonovy Sad Training and Medical health resort has been completely updated with new furniture, we also installed a modern whirlpool bath and safety equipment, built a modern automatic water supply system, and built a salt room.
It is one of our main principles that we see the main asset of the company is not equipment or even innovation, but our employees. It is their skill and professionalism that allow the company to actively develop and look to the future with confidence.
FOR REFERENCE:
Oleg Kozachuk was born on July 18th 1980 in the city of Kazatin, in Ukraine’s Vinnytsia region. In 2002 he graduated from Vinnytsia National Technical University with a degree in electrical engineering. Following that he earned a Master’s Degree in public administration, and more recently he added an MBA in Business Administration (with honours) to his list of qualifications.
From the first years of his career Oleg Kozachuk has been associated with Khmelnytskoblenergo. After graduating high school, he worked as an inspector of Letichevsky District Electric Networks (DEN). Later he became the head of the Letichevsky REM section. Since May 2003, he has held the position of Deputy Head of Marketing and Energy Sales of Letichevsky DEN of Khmelnytskoblenergo. Two years later, he headed the quality management department of the Khmelnytskoblenergo.
From 2013 to 2015 Oleg Kozachuk has held various senior positions at energy companies and has been engaged in public and expert activities in the field of energy. The focus of his activities during these years was energy efficiency. Thus, in 2013-2015 he headed the NGO "Association for Energy Efficiency and Energy Saving", from 2015 - he became its vice president. Since 2014 - Chairman of the Public Council at the State Agency for Energy Efficiency and Energy Saving of Ukraine, voting director of the Wholesale Electricity Market Council.
