Ukrainian Energy Ministry’s GTSOU plans draw criticism

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LONDON (ICIS) — Ukraine’s energy ministry is preparing a series of changes at gas network operator GTSOU this summer, some of which have drawn criticism from corporate governance watchers.

On April 20, the Ministry sent to the Council of Ministers (CMU) several draft proposals for changing the corporate governance structure of GTSOU.

Under the new arrangements, GTSOU, currently owned by MGU, a holding company set up to oversee it, would come under the direct ownership of the Department of Energy.

MGU, now owned by the ministry, would cease to perform its functions.

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

TRANSIT LOSS

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

The operator’s future 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.

MGU’s board was to focus its activity on finding alternative sources of revenue for the operator and ensuring its survival beyond 2024.

Instead, sources familiar with the talks described council activity as chaotic, lacking preparation and failing to deliver tangible results even as time is running out.

Additionally, observers have also expressed concern that although the board is legally required to publish compensation and activity reports, it has not done so since 2018.

NO TRANSPARENCY

In an interview with ICIS, Andriy Boytsun, an independent corporate governance professional who initiated the corporate governance reform of state-owned enterprises (SOEs) in Ukraine in 2014-2015, expressed concerns about accountability of the MGU Board of Directors.

Boytsun noted that transparency was of the utmost importance as the public had a right to know what steps MGU had taken so far to ensure that GTSOU would continue in business even if the transit contract ended.

An analysis published earlier this month in the Ukrainian SOE Weekly, a summary compiled by Boytsun, found that successive boards have collectively been paid around $4.8 million since the board was established in late February 2018. .

According to the valuation, an independent member of the supervisory board receives an annual compensation of about $200,000, while a state representative, about $150,000.

Boytsun said Ukrainian members of supervisory boards received higher incomes than similar boards in Europe, but insisted payments were in many cases fair as long as the boards did their job properly.

FAULT CATALOG

However, two sources familiar with the talks told ICIS that the board repeatedly failed to prepare properly ahead of regular meetings and described the atmosphere within the board as chaotic, with members shouting or even harassing each other during the meetings.

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

More worryingly, sources say that despite the catalog of reported failures and a series of scandals related to the sacking of former GTSOU CEO Sergiy Makogon and the resignation of former MGU President Huberte Bettonville, the Ministry of Energy, as the sole shareholder, did not carry out performance evaluations.

Bettonville, herself, told ICIS that MGU’s board failed to achieve tangible results during its 15-month tenure, relying instead on government approvals.

Last year, she raised concerns in a letter seen by ICIS to international financial institutions and the energy community that some board members had decided to fire the international auditor of the time because he did not give positive opinions.

Instead, another external local auditor was appointed, but, she said, the selection was not made in accordance with procurement policies.

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

However, in the letter, she expressed concern that the decision to replace the auditor may have been an act of fraud.

NO MINISTERIAL REVIEW

Despite concerns reported publicly or in writing by former board members or observers, the Department of Energy, as the sole shareholder, has not undertaken any performance reviews or investigated allegations against members, sources said.

Speaking to ICIS earlier in April, Dirk Buschle, the deputy director of Energy Communities, said that if no steps were taken to strengthen GTSOU’s corporate governance and to ensure the independence of the supervisory board , the institution would be forced to reconsider the certification of operators.

However, when asked on Tuesday whether the Energy Community had discussed MGU’s performance with the Department of Energy, he did not respond to questions from ICIS.

The Department of Energy did not respond to questions.

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