Reform of State-owned enterprises

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SOE Sector: Context

  Ukraine Total

Total number of companies 3340

-out of them operational 1829

Number of employees, m 0.9

Overdue salaries, UAHbn 0.5

Total assets, UAHbn 902.5

Asset depreciation rate, % 96.7

Net revenue, UAHbn 376.9

Net profit/(loss), UAHbn (115.4)

Source: Ministry of Economic Development and Trade of Ukraine

The Ministry of Economy has made the reform of SOEs one of its top priorities

The goal of this reform is to build a healthy and transparent SOE management system that will aim to make Ukraine adherent to global best practice, including OECD Guidelines

The full range of responsibilities for SOEs reform (from initiation through execution) has been assigned to the task force “SOE Reload”, which is a working group at the Ministry led by Adomas Audickas, Senior Advisor to the Minister of Economy

This group is working in cooperation with the Government, civil society and international organizations

Problem: Inefficient SOE Sector Aggregated data on SOEs for 2014

Ministry of Economic Development and Trade of Ukraine: SOEs Reform Initiative

State-owned enterprises (SOEs) have a large share in the Ukrainian economy:

Ukraine has 3340 SOEs, however out of them only 1829 are operating

the State is the largest employer: about 1m people work at SOEs

The SOE sector in Ukraine urgently requires to be reformed: it lacks transparency, supervision and efficient governance

SOEs do not contribute their actual potential to the state budget

the high level of corruption undermines public trust in the SOEs and the whole public sector

The performance of the SOE sector is very weak: SOEs reported an aggregated loss of UAH 115bn in 2014

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Top-100 SOEs

Total assets of all SOEs – UAH 903bn

• Out of them TOP-100 assets – UAH 845bn (94% of total SOE sector assets)

• We have prepared English and Ukrainian version of Annual report on TOP-100 SOEs

Aggregated revenues of all SOEs in 2014 – UAH 377bn

Out of TOP-100 SOEs only 57 are profitable and net profit margin is very low

The majority of SOEs have revenues less than EUR 1m (around 60% out of 1829 operating SOEs)

Ukraine’s TOP-100 State-owned enterprises in 2013 & 9m2014

English version Ukrainian version

Aggregated assets in 2014 (excluding banks)

Source: Ministry of Economic Development and Trade of Ukraine

TOP-1 TOP-5 TOP-10 TOP-50 TOP-100 TOP-300

25%

55%66%

88%94% 98%

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SOEs Reform Goal

Improvement of efficiency of state-owned enterprises

Privatization of non-strategic SOEs

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Reform is implemented in cooperation with international organizations:

Responsible for reform implementation:

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Improving efficiency of SOEs

Improving quality of corporate governance and developing comprehensive ownership policy

Transparency & accountability

Supervisory boards and

independent directors

Transparent process of

appointment of CEOs for SOEs and

market-level remuneration

Clear objectives for SOEs

Strategy for restructuring of groups of SOEs

Restructuring

Communication

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Privatization of non-strategic SOEs

Transparent privatization process

Communication

Only strategic SOEs should be owned by State

Improving quality of information on SOEs to be

privatized

Developing the mechanism to involve and cover

services of independent privatization advisors

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Transparency of SOEs

Transparency guidelines have been adopted (MinEconomy Decree #116 of February 11, 2015)

Law on mandatory information disclosure was drafted (being reviewed by line ministries)

1st Annual Report on SOE sector (TOP-100 SOEs) covering 2013-9M2014 was published in English and Ukrainian

A new report covering 2014-1q2015 is now being prepared

CMU Decree #390 “On certain issues related to audit of SOEs” was approved on June 4, 2015

We are now collecting information from Line Ministries on the timeline of the FY2014 audit

Initiative

• Strengthened information disclosure requirements for SOEs

mandatory publication of important information on SOEs activity in the Internet, incl:

• Financial reports, audit reports, information on significant transactions, CVs of CEOs and members of supervisory boards, decisions of general shareholder meetings

1. Preparation by Ministry of Economy of Annual Reports on SOE sector (TOP-100)

2. Strengthened requirements for independent audit of SOEs’ financial reports

the largest SOEs should be audited by internationally recognized audit companies accredited by EBRD and WB

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Progress to-date

2

3

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Supervisory boards and independent directors

Draft changes to the law “On SOEs management” have been developed, approved with the key line ministries and submitted to Cabmin

Draft was also sent for review to IMF, comments received and discussed with the IMF mission representatives

Key topics covered by the draft law:

introduction of supervisory boards in state unitary entities

inclusion of independent directors to SOEs supervisory boards (both, for newly established supervisory boards of unitary SOEs and existing supervisory boards of PJSC SOEs)

Obligatory audit of state unitary enterprises

Increased requirements for information disclosure of SOEs

Initiative

• Introduction of supervisory boards to state unitary enterprises

the corporate governance structure of unitary enterprises should be similar to that of joint stock companies

• Introducing independent board members to supervisory boards of both state unitary enterprises and joint stock companies

the draft law has been developed

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Progress to-date

2

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Transparent process of CEOs appointment and market level remuneration

Decree #777 of September 03, 2008 “On competitive selection of SOE CEOs ” was amended

• CEOs of SOEs with assets >UAH 2bn (or annual revenue >UAH 1.5bn) will be selected by the Nomination Committee (5 line Ministers and 5 independent experts)

• 3 CEOs have been appointed already and 5 companies running CEO nomination selection process now and 7 more companies approved CEO selection criteria and will launch process shortly

• Also, the selection process for small SOEs is underway (72 CEOs have been appointed by now)

Draft Decree on market level remuneration for CEOs is prepared, agreed with management bodies and sent to Ministry of Justice for approval (based on principles of European Commission)

Draft law has been prepared on (1) market level compensation for Deputy CEOs and (2) management contracts

Initiative

• Revised procedure of CEOs appointment for the largest SOEs

Creation of competitive environment to attract CEOs for SOEs, incl:

• Establishment of fair requirements for candidates

• Selection of CEOs by the independent and professional Nomination committee

• Public and transparent selection process

1. Bringing remuneration (salaries) of SOE CEOs to the private sector level

2. Remuneration are to consist of fixed and variable parts (depending on KPIs)

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Progress to-date

2

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Clear objectives and special obligations

Guidelines on classification of SOEs by activities (commercial and non-commercial) are being drafted

Template reports SOEs special obligations are being prepared and preliminary evaluation of the scope of special obligations is to be done

Initiative

• Clear objectives setting

Setting of clear objectives for SOEs is necessary to monitor operational effectiveness, management performance and improve accountability

SOEs often perform commercial and non-commercial (social and economic) functions. In such cases their financial reports should be made public and contain exhaustive information on important social activities

1. Special obligations

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Progress to-date

2

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Restructuring

We have analyzed the SOE portfolio to identify key groups for restructuring

Corporatization: we have prepared a draft CMU Decree to identify the list of unitary SOEs that shall be transformed into PJSC. This Decree also simplifies the existing corporatization procedure

The list of non-operating SOEs for liquidation is currently being prepared: we have analyzed the SOE portfolio and identified non-operating SOEs which can be liquidated. We are now waiting for information from Line Ministries on the expected timeline and costs of such liquidation (we expect to receive this data by August, 20). We will then proceed with our cost-benefit analysis and prepare a more detailed liquidation strategy

We have drafted a CMU Instruction that will set guidelines for preparation of restructuring action plans for 10 SOEs with largest fiscal risks

Initiative

• Analysis of the existing portfolio of SOEs to determine the restructuring strategy:

corporatization of all unitary SOEs with prevailing commercial functions

liquidation of non-operating SOEs

restructuring to improve operational effectiveness (development of detailed plans to improve operational efficiency)

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Progress to-date

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Strategic and financial planning

We held a meeting on July, 2 with representatives (CEO and CFO) of 8 largest SOEs to discuss the problems in the procedure and content of strategic and financial plans

The companies sent us their complains, comments and suggestions in order to improve strategic and financial planning

We also had a meeting with MinFin and Line Ministries

We are now developing changes to the legislative procedure

Initiative

• Adopt MoE decree aimed at revising the methodology for developing the SOEs’ financial plans to require the inclusion of a 3-year action plan to increase operating efficiency:

Merge strategic and financial plans, improve their format

Set efficient deadlines for submission of strategic and financial plans to Line Ministries (the plans shall be approved by year-end, not by 1 September as in the current legislation)

Simplify the approval procedure

Progress to-date

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• Only strategic enterprises should be owned by State

• SOEs can be owned by State when sufficient grounds exist (to preserve critical infrastructure, protect national security and other reasons). When sufficient grounds are absent such SOEs may be subject to privatization

• Improvement of quality of information about SOEs subject to privatization

prepare teasers on SOEs to be privatized (for marketing among investors)

• Develop a procedure for engaging independent advisors and establish a payment structure for their services

Engaging privatization advisors is a widely spread international practice (OECD principles)

Privatization of non-strategic SOEs

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List of 345 SOEs for privatization in 2015 was adopted - CMU Decree #271 of May 12, 2015 “On transparent and competitive privatization in 2015”

List of SOEs banned for privatization (913 SOEs) was adopted by Cabmin and submitted to Verkhovna Rada for approval – Draft law #1567

We have also submitted to Rada separate Draft Laws on exclusion of spirit manufacturers and sea ports from the “banned from privatization” list

205 teasers on SOEs for privatization in English and Ukrainian have been prepared and published on MinEconomy website and Facebook

A concept of engaging advisors (investment banks) to the privatization process is currently being developed – this will be a CabMin Decree. This document will set the general procedure and requirements for advisors, their scope of work and payment structure. More specific details will be developed for each privatization target separately

Initiative

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Progress to-date

2

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• SOE Reload communication strategy

• Message tracks for SOE issues

• Media and public speaking engagements

• SOE communication materials

Communication (1 of 2)

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Draft prepared and shared with WB, SOE Reform Supervisory Council, NRC communication team

Message tracks for Minister prepared for TV engagement and conference in Wroclaw, Poland

General message track will be incorporated into the communication strategy document

Presentation of TOP 100 SOEs report to Ukrainian media

Meeting with editors and senior journalists to brief them on SOE reform progress

Interviews with Novoe Vremya, HUBs, and Zerkalo Nedeli; 3 press releases + 5 responses to media inquiries

In progress

Initiative

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Progress to-date

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• SOE Reload website

• SOE Reload FB account

Communication (2 of 2)

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In progress – 80% complete

FB page operational – https://www.facebook.com/soe.reload

Initiative Progress to-date

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