State-Owned Business Association

Contents FOREWORD 2 SOE PORTFOLIO: SNAPSHOT 4 OBJECTIVES AND STRUCTURE 5 OVERVIEW OF SOE REFORM IN UKRAINE 6 EFFECTIVE REGULATORY FRAMEWORK OF SOEs IN UKRAINE 17 UKRAINIAN ECONOMY 31 OVERVIEW OF PORTFOLIO RESULTS 36 ELECTRICITY 44 OIL & GAS 59 TRANSPORTATION 69 RAILWAYS 71 ROADS 76 AIRPORTS 80 SEA PORTS 86 POSTAL SERVICES 92 MACHINE BUILDING 96 FOOD & AGRICULTURE 111 CHEMICALS 127 COAL MINING 135 BANKING 141 COMPANY PROFILES 151 Agrarian Fund 152 Antonov 153 Centrenergo 154 Coal of Ukraine 155 Electrovazhmash 156 Energoatom 157 Illichivsk Sea Commercial Port 158 Kharkiv State Aviation Enterprise 159 Kharkivoblenergo 160 Khmelnytskoblenergo 161 Kyiv Boryspil 162 Lviv Danylo Halytskyi International Airport 163 Mariupol Sea Commercial Port 164 Mykolayivoblenergo 165 Naftogaz of Ukraine 166 Odesa Commercial Sea Port 167 Odesa Portside Plant 168 Roads of Ukraine 169 State Food and Grain Corporation of Ukraine 170 Sumykhimprom 171 Turboatom 172 Ukrainian Sea Ports Administration 173 Ukrainian State Air Traffic Enterprise 174 Ukrenergo 175 Ukrhydroenergo 176 Ukrposhta 177 Ukrspyrt 178 Ukrzaliznytsia 179 Yuzhny Sea Trade Port 180 Zaporizhyaoblenergo 181 METHODOLOGY NOTE 182 SOE PORTFOLIO 184 ABBREVIATIONS AND DEFINITIONS 188 002 UKRAINE’S TOP-100 STATE-OWNED ENTERPRISES › 2013 & 9 MONTHS 2014 Foreword When Ukraine gained its independence in 1991 it inherited a highly inefficient state-run economy. Even after the mass privatization of the 1990’s and sporadic privatization of selected assets in the 2000’s, the State remains the owner of a large portfolio of assets, including industrial enterprises, banks and real estate, which account for a significant share of the Ukrainian economy and make it the largest employer in the country. Until recently, reform of state-owned enterprises (SOEs) has been slow and incomplete; they remain under the control of ministries with insufficient commercial management ca- pabilities resulting in weak corporate governance, unmotivated management, and a lack of transparency. Currently, only 29 out of the TOP-100 SOEs have a Board of Directors in place composed solely of public servants, while less than 40% of the TOP-100 SOEs are audited and only a handful by internationally recognized audit firms. It is therefore unsurprising that SOEs have historically posted poor operating and financial results and find themselves in weak financial condition today. As of the end of Sep- tember 2014, the State owned 1,833 operational enterprises in a wide variety of industries. This review focuses on the TOP-100 SOEs, which comprise c. 80% of all the SOE sector revenues and c. 90% of assets. During the first 9 months of 2014 these TOP-100 SOEs re- ported a combined net loss of UAH 74.7bn. While UAH 62.5bn of these losses came from Naftogaz of Ukraine alone and a portion of the losses can be attributed to weak economic conditions and currency devaluation, it is unquestionable that the operating efficiency of the SOEs is unacceptably low. When I was appointed Minister of Economic Development and Trade of Ukraine, I made SOE reform one of my top priorities and assembled a strong team to lead those efforts. We began by passing transparency guidelines mandating all SOEs to publish their financial accounts. We involved representatives of the World Bank, IFC, EBRD, Kiev School of Economics and others in the nomination committee tasked with identifying high quality CEO candidates for the largest SOEs. We also launched an audit initiative in order to audit the largest SOEs by reputable, internationally recognized audit firms. SOE reform includes many other important initiatives that are explained further in this report. By enhancing the governance, upgrading the management, and increasing the transparency of its SOEs, Ukraine can substantially improve their performance, boost investment and ultimately increase budgetary inflows. Ukraine does not have to start from scratch. We are able to use well-established OECD guidelines on corporate governance of SOEs and the vast experience of well-developed European economies, which have successfully reformed their own SOEs in the past. Ef- fective management of SOEs depends on three fundamental principles: transparency; a clear commercial objective; and political insulation of all management decisions. Transparent public access to key performance indicators of SOEs is necessary to provide the basis for government accountability and raises barriers against possible political in- tervention into the operations of SOEs. Although many SOEs may not be listed on stock exchanges, they are public companies in the purest sense and should, therefore, be no 003 less and even more transparent than companies listed on the most demanding exchanges. Clearly established goals for SOEs and their management, along with periodic assessments as to the realization of those objectives, are also fundamental to good corporate governance and are a necessary ingredient to achieving sustained operational and financial results. Finally, political insulation requires a clear chain-of-com- mand with the real delegation of key management func- tions to properly formed Boards with seasoned independent directors and professional managers selected via a transparent nomination process. Still, the reform of SOEs, while necessary, is not an end in and unto itself. Ultimately, the State’s role in a market economy is not to own and operate a significant portfolio of enterprises but rather to establish and regulate an en- vironment in which commercial activity can flourish to the benefit of society. Commercial activity, however, should be the province of the private sector wherever possible, with the role of SOEs limited to exceptions such as natural monopolies and endeavours related to the State’s strate- gic interests or security. As such, SOE reform should go hand-in-hand with an improved privatization program based on a fair and transparent process that maximizes social value. This Annual Review is the first, but not the last, publication of its kind in Ukraine and as a result has its limita- tions. For example, most of the financials that have been provided are not audited, thus accuracy of the data may be questionable. We expect to improve the quality and accuracy of information provided in each future report. Still, this first report is an important step in creating a transparent framework for the improved management of Ukraine’s SOEs, which will improve the competitiveness of Ukraine’s economy and ultimately bring dividends to their real owners — the Ukrainian citizens. Aivaras Abromavičius Minister of Economic Development and Trade of Ukraine 004 UKRAINE’S TOP-100 STATE-OWNED ENTERPRISES › 2013 & 9 MONTHS 2014 SOE Portfolio: Snapshot 005 Objectives and Structure The report is the first publication of this kind. The document presents a summary of financial information and analysis concerning the operations of selected top SOEs in Ukraine in 2013 and the first 9 months of 2014. This first review is based on information derived from various sources, such as financial statements of SOEs, information provided by the Ministries and State Agencies, and other public sources. At this stage most SOEs do not have a track record of quality audits of their financial information; therefore, accuracy and completeness of their financial statements cannot be assured. No independent verification of information presented in this report has been performed; therefore, users should not rely on this information to make decisions of any nature. The authors of this report, the Government of Ukraine and any other institution of the state or any other entity under the control of the state is not and in any circumstance shall not be liable for any decisions of third parties based on the information, conclusions and opinions presented in this report. The report consists of five main sections. The first section covers different facets of SOE reform, such as the reasoning behind its launch, its main objectives and its approach to the implementation. This section also outlines the experience of other countries in this area. The second section provides an overview of the existing SOE regulatory environ- ment in Ukraine. The third section presents the aggregated financial information on the portfolio of SOEs as well as some other key indicators of the performance of SOEs. The fourth section covers several sectors in which SOEs operate. Finally, in the fifth section, the financial results for Ukraine’s 30 largest SOEs are presented. The concluding pages of this publication include a list of the SOEs covered by this report and outline the main principles of the methodology employed during the preparation of this document. 006 UKRAINE’S TOP-100 STATE-OWNED ENTERPRISES › 2013 & 9 MONTHS 2014 Overview of SOE Reform in Ukraine Objectives of the Reform For a long time after Ukraine regained its independence, successive governments in Ukraine have shown a lack of attention to SOEs. As a result, this sector of the Ukrainian economy has barely undergone any changes. Therefore, the low efficiency of SOEs is a glaring consequence of ignoring the problem for the past twenty-four years and the key reason for the need of reform. As shown by experience of other countries and various studies, the main cause of poor operational efficiency of SOEs is a weak corporate governance system, which does not encourage profitability of SOEs, sets conflicting objectives and thus, leads to inadequate management of such enterprises. As in many other countries, the relationships between SOEs and the Government are very close in Ukraine, and the subordination of SOEs to in- dividual Ministries shields many of them from outside competition. Although the primary function of Ministries should be regulation of the respective sectors, Ministries frequently take an active part in management of SOEs. This results in an unavoidable conflict of interest. For a long time, privatization of SOEs was believed to be the only way for governments to deal with the above situation. Transparent and trustful privatization is required in Ukraine as well.

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