Crisis over Ukraine gas monopoly snowballs

Crisis over Ukraine gas monopoly snowballs
Crisis over Ukraine gas monopoly snowballs as another supervisory board member resigns
By Sergei Kuznetsov in Kyiv September 6, 2017

The management crisis at state-owned gas monopoly Naftogaz took a new turn after Charles Proctor, an independent member of the supervisory board, said he will resign from his post in late September, citing lack of the government's support required to deliver corporate governance reform, the company said in a statement on September 5.

Proctor is the second supervisory board member to  resign in the last six months, following the resignation of Naftohaz's head of the supervisory board Yulia Kovaliv, who represented the state of Ukraine.

Kovaliv's move followed the receipt by the government of a letter on April 6 from four of the independent board members - Paul Warwick, Markus Richards, Charles Proctor and Kovaliv - expressing deep concern over the situation in the company. Without "material progress" it would be "inappropriate and untenable" for them to continue as supervisory members, they said.

On April 7, Sir Suma Chakrabarti, the president of the European Bank for Reconstruction and Development (EBRD), warned the Ukrainian leadership of negative effects from the threatened resignation of the independent board members of Naftogaz.

This move might not only “severely damage” the company at a time when its transformation is finally beginning to take hold, but could also “shatter the international confidence in your government’s commitment” to reform and restructuring of Naftogaz and other state-owned enterprises in Ukraine, said the letter published by bne IntelliNews.

"Impossible to fulfil his role effectively"

Explaining his decision, Proctor said that the level of government support required to deliver corporate governance reform "had not been forthcoming, despite repeated commitments from government officials", according to the statement.

He noted that in addition to threatening the overall corporate reform effort, this had resulted in a substantial increase in the time commitment required from the supervisory board members compared to that envisaged at the time of appointment. "Taken together, these factors made it impossible for him to continue to fulfil his role effectively and therefore with regret, he had decided to resign," Naftogaz underlined.

Meanwhile, the remaining members of Naftogaz supervisory board share Proctor’s disappointment with the present situation and his concerns about the future of corporate governance reform, the statement reads.

"Citing, amongst other areas of concern, the lack of an agreed strategy for the company, which creates a potential regulatory void enabling political meddling in the company’s operation, and the continued lack of approval of agreed financial plans for Naftogaz group companies for 2017 with a consequent impact on the company’s ongoing business, and specifically investment in critical projects to maintain transmission infrastructure and grow domestic gas production," Naftogaz underlined. "These are material issues that have a direct impact on the success of the supervisory board.

Although they currently remain committed to the success of Naftogaz they say that without significant progress their situation is not sustainable, according to the statement.

Further reforms

In July, the Ukrainian government approved a 2017 financial plan for Naftogaz with expected Ebitda at UAH14.211bn (€472.25mn), making an expected 60% drop year-on-year, and net profit of UAH21.781bn (€723.8mn), down 17.9% y/y. Thanks to the reforms Naftogaz has already become the biggest contributor to the budget revenues of the state-owned companies. 

The approval of the 2017 Naftogaz financial plan and performance indicators for the company's supervisory board by the end of July are among the EBRD's demands further allocation of a multi-million package to Kyiv for natural gas purchases.

At the same time, the government has refused to increase the price of gas for the country's households from October 2017 by 18.84% or UAH931 per 1,000 cubic metres (cm) to UAH 5,873 without VAT. The hike was in line with demands of the International Monetary Fund (IMF), and was necessary for the improvement of Naftogaz's financial results.

In July 2016, Kyiv adopted full cost recovery levels for gas and heating tariffs, while Naftogaz's deficit has almost been eliminated, after the deficit amounted to 5.6% of GDP in 2014.

"The large tariff increases to full cost recovery have provided incentives to conserve energy and supported an improvement in energy efficiency and a dramatic decline in household gas consumption and corresponding reduction in macro imbalances," the IMF wrote in comments published in April.

According to the Fund, low tariffs for residential gas and district heating have encouraged excessive energy consumption and led to large quasi-fiscal losses, pushed up gas imports, and discouraged investment in domestic production in Ukraine until recently.

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