Ukraine’s ministry of energy GTSOU plans raise criticism

LONDON (ICIS)–Ukraine’s ministry of energy is preparing a raft of changes at the gas grid operator GTSOU this summer, some of which have sparked criticism from corporate governance observers.

On 20 April, the ministry sent several draft proposals for the change of the corporate governance structure at GTSOU to the council of ministers (CMU).

Under the new arrangements, GTSOU, currently owned by MGU, a holding company set up to oversee it, would be placed directly under the ownership of the ministry of energy.

MGU, which is now owned by the ministry, would cease to perform any functions.

Controversially, however, the ministry proposes the transfer of the current MGU supervisory board to GTSOU, despite international calls for it to be disbanded and replaced by a new board selected in line with corporate governance procedures.

TRANSIT LOSS

The MGU transfer proposal comes at a very sensitive time for GTSOU.

The future of the operator hangs in the balance as it faces the loss of 80% of its revenue from a five-year gas transit contract with Russia’s Gazprom, which is due to expire next year.

The MGU board was expected to focus its activity on finding alternative sources of revenue for the operator and to ensure its survival beyond 2024.

Instead, sources close to discussions described the activity of the board as ‘chaotic’, ‘lacking preparation’ and ‘failing to achieve tangible results’ even as it is running out of time.

Moreover, observers have also raised concerns about the fact that although the board is legally required to publish remuneration and activity reports it has failed to do so since 2018.

NO TRANSPARENCY

In an interview with ICIS, Andriy Boytsun, an independent corporate governance professional who initiated the reform of corporate governance of state-owned enterprises (SOEs) in Ukraine in 2014-2015, raised concerns over the accountability of MGU’s board.

Boytsun noted transparency was of utmost importance because the public had a right to know what steps MGU had so far taken to ensure GTSOU would continue its activity even if the transit contract ends.

An analysis published earlier this month in the Ukrainian SOE Weekly, a digest established by Boytsun, found that successive boards have been collectively paid around $4.8m since the board was established at the end of February 2018.

According to the assessment, an independent member of the supervisory board receives an annual remuneration of some $200,000, while a state representative, some $150,000.

Boytsun said Ukrainian supervisory board members receive higher incomes than similar boards in Europe but insisted the payments in many cases were fair as long as boards were doing their work properly.

CATALOGUE OF ‘FAILURES’

However, two sources close to discussions told ICIS the board had repeatedly failed to carry out appropriate preparations ahead of regular meetings and described the atmosphere on the board as ‘chaotic’, with members shouting or even bullying each other during meetings.

MGU and individual board members approached by ICIS did not respond to questions.

More worrying still, sources say that despite the catalogue of reported failures and a spate of scandals related to the dismissal of the former GTSOU CEO, Sergiy Makogon, and the resignation of the previous MGU chair, Huberte Bettonville, the ministry of energy, as the sole shareholder, has failed to carry out performance reviews.

Bettonville, herself, told ICIS that the MGU board had failed to achieve any tangible results in her 15-month tenure, depending instead on approvals from the government.

Last year, she raised concerns in a letter seen by ICIS to international financial institutions and the Energy Community that some of the board members had decided to fire the then international auditor because it was not ‘giving positive opinions’.

Instead, another external local auditor was appointed, but, she said, the selection was not carried out in line with procurement policies.

She acknowledged the fact that circumstances may have changed after the introduction of martial law following the start of Russia’s full-scale invasion of Ukraine in February 2022.

However, in the letter, she raised concerns the decision to replace the auditor may have been ‘an act of fraud.’

NO MINISTERIAL REVIEW

Despite the concerns flagged publicly or in writing by former board members or observers, the ministry of energy, as the sole shareholder, has not undertaken any performance reviews, nor investigated allegations against members, sources said.

Speaking to ICIS earlier in April, Dirk Buschle, the Energy Community’s deputy director, said if no steps are taken to tighten up corporate governance at GTSOU and to guarantee the independence of the supervisory board, the institution would be forced to reconsider the operator’s certification.

However, when asked on Tuesday whether the Energy Community had discussed the performance of MGU with the ministry of energy he did not reply to questions from ICIS.

The ministry of energy did not reply to questions.