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Ukraine casts its net for SOE CEOs – but what will it catch?

February 27, 2016

The 26th February saw Government Ukraine launch an official public selection process to attract and appoint CEOs for several large State Owned Enterprises (SOEs).

The SOE’s in question are formally described thus – “PJSC Ukrzaliznytsia (UZ) is state-owned rail monopoly which operates 6 regional rail operators and close to 140 other subsidiaries. The domestic rail network is Ukraine’s strategic asset and a key transport link between the EU and Russia and Central Asia (4 out of 10 pan-European transport corridors cross Ukraine). UZ operates 21,600 km of rail tracks (47 % electrified) and a fleet of c. 4,000 locomotives and 123,000 railcars. It accounts for c. 60 % of total freight transportation and 38 % of passenger transportation in Ukraine, ranking first in Europe (ex-Russia) on freight turnover. UZ is number 2 by passenger turnover in the CIS and number 4 in Europe. Metal and mining goods accounted for 58 % of its 2014 freight transportation in volume terms, followed by construction materials (15 %) and grain (8 %). With over 300,000 employees, UZ is one of the largest employers in Ukraine. Company reported net revenue of UAH 28.9bn for 6m2015 (+23% y-o-y). Company’s net loss narrowed to UAH 4.7bn in 6m 2015 vs. net loss of UAH 8.2bn for the same period of 2014. 

PJSC Centerenergo is one of the TOP-100 largest SOEs in Ukraine managed by the Ministry of Energy and Coal Industry of Ukraine. Centrenergo is Ukraine’s second-largest thermal generator by capacity (7,660 MW), operating three power plants in the industrialised regions of Kyiv, Kharkiv and Donetsk. In 2014 it accounted for 7 % of the total electricity production in Ukraine (18 % of the total production by thermal power generation). For 9m 2015 company generated UAH 82m of net loss compared with net income of UAH 219m for 9m 2014. 

SE Ukrposhta is governed by the Ministry of Infrastructure of Ukraine and is one of the TOP-100 largest SOEs in the country. SE Ukrposhta is a national postal operator of Ukraine, which is wholly owned by the State. The enterprise has 29 branches (inc. 25 regional directorates) and more than 11 800 postal departments all over the country, which makes it the largest postal network in Ukraine. With over 87 000 employees, Ukrposhtaprocesses and delivers to customers about 240 million postal items, 16 million parcels and insured items, 15 million orders, and more than 83 million pensions per annum. For 9m 2015 net income increased 2.5 times compared to 9m 2014 and amounts UAH 30m.

SE Plant Electrovazhmash is governed by the Ministry of Economic Development and Trade of Ukraine and is one of the TOP-100 largest SOEs in the country. The company produces hauling equipment for mines and railways as well as turbo and hydro generators and direct-current electric machinery. EVM’s equipment is used in over 40 countries globally. 73% of thermal power stations in Ukraine is equipped with Electrovazhmash turbo generators and 78% of hydro power stations use hydro generators produced by Electrovazhmash. The enterprise supplies Europe, Asia, Latin America and Middle East markets. Partners of the enterprise are Siemens,ArcelorMittal and others. For 9m 2015 company amounts UAH 53m of net loss and for 9m 2014 company reported about UAH 84m of net income.

SE Ukrspyrt is a 100% state-owned holding company operating 41 domestic distilleries with total annual capacity of 31.3 million decalitres, located in Lviv, Ternopil, Vinnytsia and other regions. Being a state monopoly in production and export of ethyl alcohol, Ukrspyrt is responsible for the implementation of government policy and effective management of state-owned companies in the alcoholic beverage industry. The company has approx. 5 thousand employees, being the main employer in villages and towns where its production facilities are located.Ukrspyrt reported net income of UAH 164m in 9m2015 (+71% y-o-y).

SE Ukrenergo is governed by the Ministry of Energy and Coal Industry of Ukraine and is one of the TOP-100 largest SOEs in Ukraine. The enterprise is responsible for operating the domestic high voltage transmission system and cross-border transmission lines and providing power dispatching services. It controls real-time electricity output and monitors power generators’ operational generating units, fuel stocks and production efficiency, balancing electricity consumption with production. Due to its status as natural monopoly, tariffs for the company are set by the sector regulator, which uses a cost-plus approach to set tariffs based on its OPEX and CAPEX needs. Ukrenergo unites seven regional networks and operates 23,000 km of transmission lines operating at 220-750 kV voltage levels. The company regularly conducts cross-border capacity auctions and sells rights to export electricity from Ukraine to neighbouring countries. For 9m 2015 Ukrenergo generated UAH 408m of net income comparing with net loss of UAH 478m for 9m 2014.”

These are CEO roles that clearly require top quality candidates and eventual appointees if these enterprises are to be turned into what they could (and already should) be prior to any privatisation they may ultimately be subjected to.  (Though all may be currently listed for privatisation, certainly there remain questions over just how, exactly, rail will be privatised – a model similar to the US, or a model similar to many European models.  As a former-Deputy Minister was overheard to say by this blog, “privatising rail is simply too difficult” – which is perhaps why this individual is now in the “former” category of Deputy Ministers.)

This is not the first time Ukraine has openly sought top talent for its SOEs.  On 22nd July 2015 it attracted Mark Rollins to head Ukranafta. Mr Rollins’ remuneration is not clear, but a reader would suspect that it is probably far in excess of the (official) remuneration for the CEO of Naftogaz Ukraine.

The issue of remuneration (and perks) is of course pertinent when trying to attract top management – though for many genuinely top managers in any field of endeavour remuneration is perhaps secondary to the challenge placed before them.  Government Ukraine states ” Winners of the selection procedure will receive a competitive remuneration comparable to the private-sector compensation in Ukraine” – Prima facie not that enticing when it is problematic to accurately ascertain what “a competitive remuneration comparable to the private-sector compensation in Ukraine” actually is.  Official remuneration or actual remuneration?  Is Government Ukraine going to use the “actual” rather than the “official” remuneration figures?  The former is certainly far more attractive than the later.

CEO

The governmental plan is to have a Nomination Committee (consisting of 5 Ministers and 5 independent experts) initially compile a shortlist (between 2 – 10 candidates), followed by a final (undefined) selection phase thereafter which the Nomination Committee will recommend an individual to the Cabinet of Ministers for appointment.

Naturally all attention will be focused on the successful candidates as and when they are appointed – there will be “expectations” after all – however it would be perhaps worthy of paying attention to the number of quality candidates (if there are any quality candidates at all) that are subsequently unsuccessful, for they form part of a wider view when considering the attractiveness, challenges and opportunities, top industry professionals mull over when pondering CEO positions in Ukraine.

With Ukraine listing literally hundreds of SOEs for privatisation in the coming years, if it can’t attract top quality candidates for the headline SOEs, what hope for competent management for the lesser SOEs the State ultimately wants off the budget (subsidy) books?

In short, the quality and size of the applicant fields for these first six headline SOEs will be an indicator as to the expectations of candidate calibre for the second tier SOEs.  Whoever is eventually appointed for these first half-dozen CEO roles is perhaps less important than the quality of the applicant pool from which they are pulled.

For any readers interested in applying, the relevant links can be found within the Government of Ukraine announcement.

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