Can corporate governance reform at Ukrainian state-owned companies attract international energy investment?

Improving corporate governance in Ukraine would send a strong signal to international investors that the country’s energy sector is an attractive prospect

Investments in energy production and sustainable energy supply infrastructure are powerful drivers of economic growth and quality of life improvements. However, this does not come cheaply. Increases in oil and gas exploration and production, along with upgrades of transmission and distribution networks, require investments measured not in billions but in trillions of dollars. This means that the energy industry badly needs regular investment for its further development. All governments should encourage investment if they want their economies to become stronger.

Energy is one of the most valuable market segments in the world, but this is not enough in itself to guarantee investor interest. Investors consider many factors before choosing to stash their money in the energy business. Many investors pay attention to future growth potential, likely current returns, and other income opportunities. For ethical investors, it is also vitally important to make sure that an energy business is responsible and transparent. This is why many investors now prefer companies with strong corporate governance systems. They are interested in how companies manage themselves and maintain relationships with their stakeholders.

A recent emerging market investor survey by the International Financial Cooperation found that emerging market investors are particularly concerned about the level and quality of corporate governance. Global energy market participants repeatedly emphasize that greater transparency and easier access to energy markets can drive the entry of foreign investors. Acceptable corporate governance practices play a very important role in this process as investors consider their investment decisions.

Ukraine is currently undergoing corporate governance reform. This process is generating interest among investors, who are hoping to see an improvement in Ukraine’s corporate governance framework. What are the main concerns in the investment community and wider Ukrainian society? What can help build public trust in the Ukrainian energy business? What could encourage investors to commit? I believe the answers to these questions will lead us towards an awareness of the central importance of greater stakeholder engagement, improved governance culture, and heightened public trust.

Stakeholder Engagement

Stakeholder engagement is crucial to the success of any business. Energy companies must take into consideration the interests of their shareholders including business partners, customers, suppliers, employees, public authorities and local communities. To adhere to the principles of corporate governance means to act in response to stakeholder concerns, needs and expectations. A meaningful dialogue with present and potential stakeholders can help to establish effective business-society relations. Professional and independent boards can allow for a direct shareholder involvement.

Today one can observe a positive trend towards the establishment of supervisory boards in Ukrainian energy companies. Ukraine’s national oil and gas company Naftogaz has a supervisory board consisting of four independent members and three representatives of the state. The national power company Ukrenergo is in the process of forming its supervisory board. Questions remain over whether the country’s legal framework can ensure the effective regulation of the powers, duties and responsibilities of boards. These issues are currently under discussion in Ukraine’s parliament. Market participants expect amendments to certain legislative acts introducing improvements to the corporate governance of legal entities where the principle shareholder is the state.

One key issue for investors is internal control and risk management. Naftogaz Group is introducing internal controls that include such important areas as internal audit, risk management, financial control, compliance and investment management. In line with this strategy, Naftogaz is the first state-owned company in Ukraine to develop and approve a Risk Appetite Statement. Such positive changes give rise to optimism that the replacement of old and inefficient statutory controls can yet become the dominant trend among Ukrainian SOEs.

 

Better Business Culture

The quality of the legal framework in a country is crucial for corporate governance, but so is the quality of the business culture within individual companies. Ethical investors pay significant attention to a company’s values. Management guru Peter Drucker famously says that culture eats strategy. In other words, even the most brilliant business strategy in the world will not bring success to a company if bad governance culture is in place.

Ukraine’s corporate culture features many inherited Soviet values and behavioral norms that are quite different to the contemporary European values and norms that determine how employees in the EU tend to behave. A company that puts systems before people operates differently from a company that puts people before systems. Ukrainian company executives should invest their transformation energies into building a new corporate culture in order to make sure they are fostering the kind of human dimension upon which every company must depend. Business leaders should work hard to shape employee values, beliefs and behaviors.

One of the key indicators that helps in the assessment of changes to corporate culture is how employees of a company deal with one another and their external counterparts. Building a corporate culture is primarily the responsibility of a company’s executives. The current trend within Ukrainian energy companies towards adopting corporate ethics codes is certainly a good sign for investors. A code of corporate ethics establishes a new ethical framework in which employees operate. Any ethical framework is beneficial for a company if implemented effectively. It must also be credible. The daily lives of business leaders must meet with the underlying principles of any ethics code.

 

Establishing Public Trust

During a time of global energy market transformation, the issue of public trust is becoming especially important. Everyone today is familiar with trendy sloganeering like “Shifting to low-carbon economies will satisfy your health and safety concerns”. People want to understand how and when energy decision makers, governments, regulators and energy companies are going to implement these tasks. Energy consumers want to be informed and engaged in the transition process.

Levels of public confidence in energy companies can differ from country to country. The causes of distrust may also be different. A few years ago, an online survey by the Canada West Foundation detected that “while Western Canadians recognize the importance of the energy sector to the economy, there remains a high level of distrust of the oil and gas industry.” The main reason for this lack of trust was the perception that profit orientation was the only orientation of the energy industry. Based on the results of this survey, demonstrations of social and environmental responsibility can help energy companies to build public acceptance and confidence.

Much like their counterparts around the world, Ukrainian energy companies need to work on building public trust. One of the main criteria energy consumers and local communities use relates to the positive benefits they can receive and potential negative impacts on their lives. Meanwhile, many ethical investors use Environmental, Social and Governance (ESG) Criteria to screen potential investments. The energy industry enjoys a much better chance of successful development if it takes the demands and expectations of its main stakeholders into account. If state authorities and energy companies enjoy greater public trust, they are able to gain all-round support for different energy projects.

 

Attractive to Investors

A strong and effective corporate governance strategy is a critical factor in all investment decisions. Investors take a close look at how companies manage themselves and how they establish their relationships with their main stakeholders. A high level of transparency is very important since it can ensure that companies use high quality accounting, disclosure, compliance and auditing standards. One of the main challenges facing the energy industry worldwide today is trust. Investors increasingly focus on how good governance culture forms and how productive relationships with stakeholders develop.

High quality corporate governance can encourage investors to make their final investment decisions. This in turn means that strengthening governance practices can help Ukrainian energy companies attract investments and prosper in the global marketplace. The good news is that corporate governance reform is on Ukraine’s agenda. Positive results from this reform process can influence how investors behave when deciding whether to invest in the Ukrainian energy sector.

Author: Olha Bosak
Friday, 26 October 2018

Source: Business Ukraine

I&U Group agroholding builds zero-waste biogas plant in Kirovohrad Oblast

A Ukrainian agroholding I&U Group is building a new 6 megawatt biogas plant in the Kirovohrad region of central Ukraine. It is the first project financed with a total of 15 million euro loans from the European Bank for Reconstruction and Development and the Clean Technology Fund under the program aimed at developing renewable energy production from biowaste in the agricultural sector of Ukraine, EBRD reported on Oct. 24.

I&U Group was founded by a Kirovohrad businessman Sergiy Tarasov. The holding’s main company is Agrospetsservis, one of Ukraine’s biggest agricultural producers.

According to the company’s press service, its Novomyrhorod sugar plant accumulates approximately 90,000 tons of beet pulp, or leftovers from the processing of sugar beet, that usually decomposes in fields.

The new plant will be the first in Ukraine using an Austrian technology that allows for producing twice more power from harvest waste, byproducts, and manure than other biogas plant usually do. Moreover, the residues from the biogas production can be used as biofertilizers, partially replacing the chemical ones, and the process water is suitable for field irrigation after it is treated.

According to EBRD, the technology will reduce carbon emissions by 24,000 tons annually.

The Ukrainian government has set a goal of reducing costly energy imports to below 30 percent and increasing renewable power production from the current 4 percent to 11 percent by 2035.

Thanks to the feed-in tariff on electricity produced from renewable sources, Ukraine has attracted a record $1.3 billion worth of investment since 2015, mostly into solar and wind energy, less so in biomass. However, as an agricultural powerhouse, Ukraine has a huge potential in biogas production from harvest waste and manure which could also mitigate negative climate effects.

In order to benefit from the existing “green tariff,” I&U Group wants to launch the new plant before December 2019. The Ukrainian government plans to replace the “green tariff” with auctioning after 2019 when renewable energy producers will have to propose their price on electricity.

 

Source: Kyiv Post

General Electric signs second contract with DTEK for wind turbines

U.S.-based General Electric (GE) signed another contract with Ukrainian energy giant DTEK on Oct. 17 to supply 26 more wind turbines to Prymorska wind farm, doubling its generating capacity to 200 megawatts.

The new turbines will be erected on the shores of the Azov Sea in the same area of Zaporizhia Oblast, some 700 kilometers southeast of Kyiv.
“This … proves that Ukraine is really developing in renewables, into which 900 million euros has already been invested since 2015,” said Sergiy Savchuk, the head of the State Agency on Energy Efficiency and Energy Saving of Ukraine.

The 26 turbines have a generating capacity of 3.8 megawatts each.

The first contract between the two companies for the first 100-megawatt phase of the project was signed with GE in December 2017, and work on it will be completed by the end of 2018. DTEK’s total investment in the second phase of the Prymorska wind farm will be around 150 million euros, the same as in the first phase.

The second stage of construction of the wind farm will start in the fourth quarter of 2018.

DTEK already owns Ukraine’s largest wind power plant in Botievo in Zaporizhia Oblast, about 40 kilometers to the west of Prymorsk, which has a total capacity of 200 megawatts, as well as the 10 megawatt Tryfanivska solar power station in Kherson Oblast.

“By end of 2019, the company plans to have 1,000 megawatts of capacity in solar and wind power plants. This goal requires a huge investment that exceeds 1 billion euros,” said Maxim Timchenko, the CEO of DTEK.

Created in 2005, DTEK manages the energy assets of System Capital Management, owned by the Ukrainian oligarch Rinat Akhmetov, Ukraine’s richest person.
The company currently produces 49 percent of the country’s coal and generates 70 percent of its power. However, according to Timchenko, DTEK’s priorities are now aimed at building up new renewable energy capacities as well as heavily investing in gas production.

“Renewables are the future energy around the world, and DTEK is helping to bring this future closer to Ukraine,” said Alex Dimitrief, the CEO of General Electric Global.
In Ukraine, after the completion of the construction of two phases, the savings of carbon dioxide emissions into the atmosphere will be some 700,000 tons per year, according to DTEK’s press release on the GE contract.

“Today, wind energy in the world is seen as a technology that prolongs people’s lives,” said Andriy Konechenkov, chairman of the Ukrainian Wind Energy Association, commenting on DTEK’s renewables investment.

 

Source; Kyiv Post

Ukraine and Canada’s extraordinary business relationship is just getting started

Opinion: Ukrainians want a democratic, reliable, and economically strong country. With Canada’s help, we will continue efforts to deliver it for our mutual benefit

Ukraine is a trusted friend and partner for Canada. Our relationship spans more than a century of shared family, cultural and political connections. The next step in our ongoing journey together is in expanding our business relationships.

While Ukraine gained its formal independence in 1991, our country is just three years into the rebirth that resulted from the Revolution of Dignity in 2014. Since the Euromaidan, we have set out to build a new European state. We signed a Deep and Comprehensive Free Trade Area agreement with the European Union in 2016, and the Canada-Ukraine Free Trade Agreement (CUFTA) last year — deals that effectively create an uninterrupted duty-free trade zone comprising almost 600 million consumers.

Starting in 2016, our economy has rebounded with 10 consecutive quarters of positive economic growth, including growth of up to 3.8 per cent in the second quarter of 2018.

Even though CUFTA took effect only in August 2017, total Canada-Ukraine goods trade in 2017 grew by 42 per cent to US$349.6 million. A further year-over-year increase of 2.7 per cent was recorded in the first seven months of 2018.

Our trade strategy is combined with an ambitious economic reform program to make Ukraine more attractive to western investment. Since 2014, we have achieved more reforms than at any time since independence. We have deregulated sectors of the economy, streamlined business regulations and undertaken privatization of state-owned enterprises. Reforms are underway to improve creditors’ rights and intellectual property rights. As of July 1, 2018, the total volume of direct foreign investment amounted to US$40.7 billion.

Ukraine is committed to fighting corruption through new legislation, government systems and institutions. The centrepiece of our commitment is the High Anti-Corruption Court, which began in June. International bodies, such as the G7 and the International Monetary Fund, have endorsed the court as a significant step in achieving our anti-corruption objectives.

These initiatives to improve the investment climate are paying off. Canadian investment in Ukraine increased 20.9 per cent in 2017, and was up 21.6 per cent in the first half of 2018 compared to the same period one year earlier. We are focusing on four sectors: agro-industry, information technology, infrastructure and natural resources. Canadian firms have expertise in each of these sectors and opportunities are opening in Ukraine for potentially lucrative investments. Our trade and investment promotion efforts are therefore concentrated in these business sectors.

Ukraine’s IT industry has transformed rapidly from a fringe economic player to to the country’s third-largest export sector in only five years. In 2017, IT services grew by 20 per cent and exports are estimated to double in the next five years. The IT sector comprised about 61 per cent of Ukraine’s services exports to Canada in 2017.

Our geographic location gives us the potential to be a trade and transportation hub for Europe, the Middle East and Asia. Our road, rail, aviation and marine infrastructure is well developed, but much of it needs renovation, upgrades and modernization, creating opportunities for Canadian investors.

Ukraine is pursuing a goal of energy independence by 2020, opening up opportunities for Canadian companies to help by investing and building infrastructure in both traditional energy segments and for renewables, such as solar, wind and bioenergy. In June, Canada and Ukraine signed a letter of intent on energy co-operation with the International Centre of Regulatory Excellence (ICORE), a not-for-profit organization founded by the Alberta Energy Regulator, to bolster transparency and regulatory excellence.

While it is still early days for new investments, the shovels already in the ground provide an indication that opportunities abound. TIU Canada is constructing a new solar power plant near the village of Kalinovka in the Mykolaiv region. Brookfield Asset Management is a backer of the Innovation District IT Park now under construction in Lviv. Fairfax Financial Holdings Ltd. is a significant investor in Astarta Holding, an agroindustrial holding company. And investment is flowing the other direction as well: Ukrainian investors broke ground in September for the Canada Meat Group Inc. meat-processing plant and cold storage facility in North Bay, Ont.

Ukraine greatly values the support that Canada provides — as a partner for peace, a provider of development assistance through the Canada-Ukraine Trade & Investment Support Project, and shared deep cultural connections. Canada has graciously offered to host the annual Ukraine Reform Conference in June 2019 , and we will welcome the opportunity to describe additional positive momentum.

Ukrainians want a democratic, reliable, and economically strong country. With Canada’s help, we will continue our efforts to deliver it for our mutual benefit.

Stepan Kubiv is First Vice Prime Minister and Minister of Economic Development and Trade for Ukraine.

Source: Financial Post
November 8, 2019

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