Coronavirus has already made its adjustments in the life of every Ukrainian. Even before the start of quarantine, experts predicted the world's largest economic recession since the 2008 world financial crisis. And, in addition to business, the state will be among the victims. Millions of unemployed will translate into billions of unearned hryvnias for the state budget. In such conditions, it is very important to shape public policy so that on the one hand ways to compensate the state budget are found so that so that the country can function, and on the other not to kill anybody with a the tax burden in a business environment already weakened by quarantine restrictions.
In this situation, state-owned enterprises are an extremely important filler of the budget. Revenues to the budget from state-owned companies, as well as the lease of state property can, if not save a country from crisis, definitely mitigate the impact that the economy will feel due to the quarantine.
However, Ukraine is Ukraine and the issue of state property management is not without pitfalls.
What's going on?
The system of corrupt sharing out of income streams did not bypass such giants of the domestic public sector as the United Mining and Chemical Company (“UMCC”) and the Odessa Port Plant (“OPP”). According to the blog of journalist Sergei Lyamts, during the quarantine quite interesting things happened with these two giants,.
On April 17, the SPF announced a raider capture of the UMCC. A press conference was even held on this topic with the participation of the head of the SPF Dmitry Sennichenko. According to the SPF, the company has taken over the former board of the company, which is related to the former head of UMCC, Ruslan Zhurilo. However, the SPF's statement was later refuted by an official statement from the National Police.
After journalists began to understand this story, it turned out that there was no raiding. It turned out that the SPF management had previously fired the former management of the UMCC, but did so clumsily and in violation of labour laws.
What happened was that the former deputy head of UMCC, Gladushko, went to court and to freeze the situation until the moment when the company fires him in accordance with the requirements of the Labour Code. On that unfortunate day, Gladushko came to the UMCC office and handed the new head of the company, Peter Davis, a court decision and left. It was from this confusing and seemingly ugly scene, that the SPF leadership made a show for the whole country.
The second company that Lyamets mentions is OPP. During the years of independence, every government has milked the OPP. After Maidan, Poroshenko and Yatsenyuk's people fought over the plant, then the plant worked with different suppliers on a toll basis. At present, Auto Gas Trading LLC supplies gas to OPP. At the same time, based on the financial statements of the enterprise, in the 4th quarter of last year OPP recorded a loss of 929.8 million hryvnias, and in the 1st quarter of this year the loss amount increased to 1.51 billion hryvnias. Accounts payable of OPP is also growing: 10.059 billion hryvnias in the 4th quarter of 2019, and 11.558 billion hryvnias in the 1st quarter of this year. Thus, we see that a company that produces products, but still goes bankrupt.
Lyamets claims that Sennichenko knows that the plant is being robbed. And the head of the SPF arranged the show arrest of a man who offered him a bribe of $ 5 million for letting the right supplier into the plant only because he was offered very little.
Energy in sight
Back in the fall, when the world was unaware of the coronavirus, President Zelensky and Prime Minister Alexei Goncharuk announced plans for large-scale privatisations and the largest state assets were transferred to the State Property Fund to prepare them for privatization. Preparations have been going on for almost the entire term of the Goncharuk government, however, as a result of the coronavirus, the question of the wisdom of privatisation at this time has arisen.
At the same time, in the conditions of cataclysms, SPF officials no longer seek to fulfil the task of privatization, and the situation with some state assets resembles a systemic looting.
To take another example, Khmelnytskoblenergo is one of the most efficient enterprises both in the energy sector and among state-owned enterprises in the country as a whole. Last year, the company made a net profit of 86 million hryvnia. Such figures are largely to the merit of the company's management, in particular, the acting General Director of the enterprise Oleg Kozachuk, who has been the head of the regional power company since 2016. Despite Kozachuk’s successes, SPF officials (for unknown reasons) decided to remove the manager. At the same time, during this personnel shift, a number of legal errors were made.
On February 26, 2020, the Cabinet of Ministers, chaired by Prime Minister Goncharuk, issued an order approving the appointment of VM Gaponov to the popst of Acting General Director of Khmelnytskoblenergo. The order was adopted in accordance with a request from the State Property Fund. On the same day, similar orders were issued in relation to Centerenergo, Kharkivoblenergo and Nikolayevoblenergo.
The order of the Cabinet of Ministers is the first step in the procedure of replacing the head of Khmelnytskoblenergo and gives the right to Supervisory Boards to take further decisions. In the Supervisory Board of the a enterprise, most members are representatives of the SPF. However, during this attempt to enforce a decision, the SPF committed a number of legal violations. In particular, two of the five SPF representatives resigned and as such refused to vote at subsequent Supervisory Board meetings, and the retired SPF representatives should be replaced by issuing an order signed by the SPF Chairman with a copy of that decision sent to the e-mail of the state company. This process has not happened in this case, and the persons specified in the order did not pass the procedure of competitive selection, thereby violating the requirements of a resolution of the Cabinet of Ministers adopted in 2017.
On April 6 Khmelnytskoblenergo received notice from 2 members of the Supervisory Board stating that they no longer wished to hold these positions and asking that the enterprise remove them from their responsibilities as of April 20 2020, two weeks following the notice. This information was published only on April 21 2020.
Later, on April 22 2020, the company received an order from the SPF on the replacement of retired members of the Supervisory Board. This is also a violation of current procedures as replacement of a member of the Supervisory Board is possible only during their existing term of service and not after that has expired.
Also, the SPF's attempt to dismiss the current head of Khmelnytskoblenergo is not in line with a March 25 decree of the Cabinet of Ministers, which requires that "public sector entities of strategic importance to the economy and the security of the state, including state banks, refrain from personnel changes in order to ensure uninterrupted work during the coronavirus quarantine period."
In conclusion, we can see that the SPF, guided by decisions of the previous government, is trying to change the management of regional power entities and in doing so acts in violation of the procedures and directives of the current Cabinet.
What do experts think?
We decided to find out the opinion of experts on whether it is appropriate to change the management of state-owned enterprises during a time of crisis, and to seek opinions on these events from the market participants themselves.
According to these experts, the leadership changes during quarantine looks like a very questionable step from the SPF.
For example, the director of the law firm Saad Legal, Shadi Saad, considers the legality of holding shareholders' meetings during quarantine to be ambiguous, at a minimum.
"We have a Cabinet resolution banning mass events, but we have no definition of what a mass event is, and there is no definition of whether a shareholders' meeting is a mass event or a meeting of persons. Therefore, there is no simple answer to this question in any case. We studied it, given the great interest in this issue, and discovered that most companies decide either to postpone such meetings or to simply not hold them" says the lawyer.
Dmitry Marunych, co-chairman of the Energy Strategies Fund, considers the situation to be a consequence of the general low efficiency of state-owned enterprises management by the SPF. "In general the SPF is not actively managing these assets. Of course these are allegations about the SPF, but particularly in the energy sector, unfortunately, this is also the case. There have been quite a number of signals (especially recently and during Zelensky's presidency - Ed) indicating that personnel policy is woefully lax" said the expert. Also, in his opinion, there are a large number of questions on a number of persons which the SPF is promoting to the governing bodies of state energy companies.
In addition, Marunych also notes the fact that to change one acting head of a concern for another, during a crisis, is extremely illogical as it would not be fiscally responsible to privatise state assets during a recession. “The SPF was tasked with completing privatisation in the energy sector. Centerenergo, which tried unsuccessfully to privatise, falls into the same category. It all seems illogical for one simple reason: now everyone will not be against privatisation," Marunich said.
The SPF is also criticised by the first deputy committee of the Verkhovna Rada for energy and utilities, and in particular the former Minister of Housing and Communal Services Olexiy Kucherenko. In his opinion, the idea that regional power companies managed by the SPF and the relevant ministry and at the same time this fact does not negatively affect their work is nonsense. Kucherenko believes that due to the weak level of management, state-owned enterprises such as Zaporozhyeoblenergo and Cherkasyoblenergo have become the objects of very large scale corruption schemes worth hundreds of millions of hryvnias.
"It was like this under the previous government, but nothing has changed. These companies simply wrote off a lot of money in a clearly illegal way. Such acts are caused by minority shareholders and other individuals, but the whole system of governance in the energy sector is in real danger. This includes regional power enterprises" - the parliamentarian said.
Kucherenko also considers it inexpedient to privatise in a crisis and believes that these state owned energy assets should be put under the management of the relevant ministry. In turn, the president of the Association for Energy Efficiency and Energy Saving Vitaly Postolenko notes that due to the low quality of state property management by the SPF, the public sector was also then affected by the systemic crises that overwhelm the energy sector.
According to Postolenko, regional power companies which are partly state-owned and partly privately owned must all work in a unified system in accordance with the new rules of the electricity market, however this system does not work normally.
One of the reasons for this is the inefficient or incomplete public management of these companies and this is a consequence personnel policy. "I know many examples when people, professionals, experts, apply to participate in competitions for positions at different levels. They pass these competitions, win them, and then they are either not appointed or someone else is appointed. Or the competitions that have been held are simply cancelled. This happens all the time," says the expert.
Instead of an epilogue
As we can see, experts and market participants agree that there is a systemic crisis in the field of state property management. The crisis is largely due to the actions of a new management team at the State Property Fund, where instead of the publicly announced policy of "Big Privatisation" they appear to be preparing "Big Scam Schemes."
At this time, Sennichenko's team is destroying really good state companies and firing talented management. The SPF management is making gross mistakes and bringing about scandals. Neither the public nor the authorities like the actions of the SPF. Therefore, it is possible that soon the management of the SPF may change, or state-owned enterprises will be transferred to the management of the relevant ministries. Otherwise, the crisis and the effect on the economy may worsen, which will intensify the recession and add problems to the government team before local elections are scheduled to take place.
