Recently, former people's deputies from the Samopomich party Victoria Voitsitska and Lev Pidlisetsky accused the top management of NPC Ukrenergo of corrupt relations with the system operator's contractors. The deputies did not provide any specific facts, moreover, it turned out that Pidlisetsky had such relations himself. Despite the criticism, experience has shown that the transmission system operator has reformed the procurement system effectively and purchases equipment at a much lower cost than other participants in the energy market.
Transparent and competitive procurement policy of Ukrenergo is related directly to the success of the corporate governance reform and the creation of a supervisory board, which have recently begun to feel more and more criticized by other people's representatives. This activation of the deputy corps is explained by the fact that the latter do not want to lose control, to increase the level of independence and competition in the state sector of the economy.
During the press conference, which was held on July 29 at the Interfax-Ukraine agency, former people's deputies Victoria Voitsitska and Lev Pidlisetsky sounded accusations against the top management of the NPC Ukrenergo system operator of its possible relations with contractors and announced corruption risks. The deputies recalled procurement by the company of the so-called "Hryhoryshyn's transformers", which took place in 2015-2016. Then Ukrenergo under the leadership of Yuri Kasich, who before his appointment worked in companies whose shareholder is businessman Kostiantyn Hryhoryshyn (Luhansk Energy Association, Vinnytsiaoblenergo and Cherkassyoblenergo), planned to purchase transformers at an initial cost of UAH 2.2 billion, but as a result of the first tender cancellation and a competitive bidding, the price fell to UAH 928 million.
According to Voitsitska her active speeches in parliament and appeals to the National Energy and Utilities Regulatory Commission, which approves Ukrenergo's investment program, helped to stop the procurement of transformers at an overprice. “Thanks to our speeches in the Verkhovna Rada and the National Energy and Utilities Regulatory Commission this pseudo competition was revised and, as a result, hundreds of millions of hryvnias were saved for taxpayers,” she said.
Pidlisetsky also said about his participation in the fight against the “Hryhoryshyn's transformers”: “We have successfully overcome the deal with the Hryhoryshyn's transformers, which (I saw) are in the warehouse and not all are assembled, because not so many of them could be purchased then, as there was no such a NPCessity."
In addition to the case of 2015-2016, former deputies announced the possibility of corruption in Ukrenergo procurement after the leadership of Kasich, during the leadership of Vsevolod Kovalchuk (October 2015 - February 2020). Voitsitska said that today, investigations are conducted (or were conducted) involving companies (subcontractors) that may be indirectly related to Kovalchuk's management. At that, she did not provide any specific facts of corruption, the relationship of certain companies and managers of Ukrenergo.
Pidlisetsky said that recently the KPMG auditing company has analyzed the possible relations of the NPC management with contractors and prepared a corresponding report. Referring to this report (which was not published due to the presence of confidential and personal information in it), Pidlisetsky stated that this document confirms the connection between Kovalchuk and the Horos company (according to YouControl, the founder of the company is Yuri Kachanov, the head is Denis Hrom).
“(Report - Ed.) confirmed the relationship of management with a number of companies, including Horos,” - Pidlisetsky said. At that, the ex-deputy did not provide any details that would describe the conflict of interests of Kovalchuk and his relation with Horos. Answering the question of the ExPro correspondent about the conflict of interests of the new head of the system operator Volodymyr Kudrytsky, Pidlisetsky said that he did not find Kudrytsky's involvement, but the latter, according to the ex-deputy, is involved due to the fact that he was the right hand of the ex-head of the company. Note that the KPMG auditing company did not investigate the relationship of Kudrytsky, but only of the head of the company (Kovalchuk) and the head of the Economic Security Department. Also, answering a direct question whether the KPMG report contains information on corruption, Pidlisetsky and Voitsitska unanimously stated that it does not, and that “there is only information about a potential conflict of interest in the document”.
Hryhoryshyn's Transformers Story
Ex-people's deputies recalled Hryhoryshyn's transformers as one of the high-profile corruption scandals during the presidency of Petro Poroshenko. It was a fairly well-known story that luckily ended in a victory for competition and transparency. The fact is that in mid-July 2015, the National Energy and Utilities Regulatory Commission approved the Ukrenergo’s investment program, which provided for more than UAH 2 billion for the procurement of 27 transformers for transmission system. The then head of Ukrenergo Kasich said such a large-scale replacement of transformers was needed since the transmission system was already worn out by 70%. Kasich argued the significant costs of purchasing new equipment as follows: “It is better not to wait for the time when the lines begin to fall, and voltage transformers, switches and power transformers begin to explode and burn.”
Voitsitska's criticism of the regulator did nothing to stop the approval of the expensive investment program. Significant capital expenditures were supported by the then head of the National Energy and Utilities Regulatory Commission Dmytro Vovk, who before his appointment worked for the well-known confectionery company Roshen and the investment company ICU, which became the talent factory during Poroshenko's time. In addition, according to media reports, the fifth president and Kostiantyn Hryhoryshyn were long-term business partners.
After the investment program approval, the regional energy systems of Ukrenergo announced tenders for the purchase of transformers. According to the newspaper Nashi Hroshi, for example, the South-Western Energy System planned to purchase 2 transformers at a price of $ 26 thousand/MVA, in some tenders the price reached $ 35 thousand/MVA, while prices on the world market for similar transformers at that time amounted to $ 10-15 thousand/MVA, and Zaporizhtransformator (ZTR) itself offered prices at the tenders at the level of $ 20-25 thousand/MVA.
However, the decision of the Antimonopoly Committee, which was then headed by Yuri Terentyev, who was also appointed by Poroshenko, prevented the acceptance of ZTR's proposal and payment to the manufacturer of advance in the amount of 50% of the order value. The AMCU revealed that ZTR together with the Zaporizhzhya Plant of Heavy-Duty Transformers (this enterprise is also associated with the business interests of Hryhoryzhyn) in 2011-2013 together took part in tenders of Chernihivoblenergo, in which transformers were sold at a price of $ 29 thousand/MVA. Thus, the AMCU prohibited ZTR to participate in tenders. In addition, the Security Service of Ukraine intervened, whose representatives said that during the first tender, the cost of transformers was overstated by 40%.
On October 2, 2015, Ukrenergo announced a new tender for the purchase of 22 transformers with an expected cost of UAH 2.05 billion. It was prepared by the same Kasich, but he was dismissed by the order of the Ministry of Energy and Coal and the tender was held by the management of Ukrenergo under the chairmanship of the new head - Vsevolod Kovalchuk, who was previously the first deputy director and was responsible for the direction of international investments and cooperation with the EBRD, the World Bank, the European investment bank, etc.
The new team changed the requirements for manufacturers and engaged many equipment suppliers. Foreign manufacturers came to the new tender, namely Siemens, ABB, Daewoo International Corporation and Kvant-Service (which represented Hyundai), ZTR was also there. As a result of transparent and competitive procurement, the cost of the transformers procurement has decreased by more than 2 times - from the starting value of UAH 2 billion to UAH 928.6 million. The most interesting thing is that the same ZTR became the winner, but this time it took part in the competition and reduced a price to the market level. Thus, the success of the second tender was achieved not due to the vibrant rhetoric of the deputies, but as a result of the efforts of the new Ukrenergo team, which achieved competitive and transparent rules of the game.
The Cheapest Procurements On The Market
The procurement of Hryhoryshyn's transformers at market prices was the first successful case for the new Ukrenergo team. According to the data of the Prozorro public procurement system, if we compare the procurement of similar goods or services by NPC and other energy companies, we can see that Ukrenergo buys much cheaper than other players on the market. For example, in May 2017, Energoatom purchased a BRDLW-800/1000-3 high-voltage bushing for UAH 7.4 million, and NPC in August 2019 bought the same product, but almost 2 times cheaper - for UAH 3.9 million. In addition, in December 2017, Ukrenergo purchased an oil shunt reactor for a voltage of 750 kV for UAH 24.9 million, and in September 2019 Energoatom purchased the same reactor twice as expensive - for UAH 52 million. Comparing tenders of the nuclear company and NPC, one can find the difference in price for the same product exceeding 2 times, for example, the purchase of a 330 kV surge suppresser, which was purchased by Energoatom in August 2019 for UAH 216.3 thousand, while NPC bought the same suppresser in September 2017 for UAH 69.8 thousand.
It is also interesting to compare with Ukrhydroenergo, which in the same period with Ukrenergo (in November 2018) purchased a 330 kV high-voltage transformer bushing for UAH 2.8 million, and NPC - for UAH 1.2 million. In addition, in October 2018, Ukrhydroenergo bought a cable with a cross section of 14x2.5 mm KVVGeng for UAH 187.5 thousand, which is 2 times more expensive than the same purchase by Ukrenergo (UAH 96.8 thousand) in August 2018. A similar situation took place at tenders of distribution companies, for example, Odessaoblenergo in the same period as NPC (in July 2019) purchased a wire with a cross-section of 70 sq mm MG for UAH 247.9 thousand, which is 1.7 times more expensive than purchase of the same wire by the system operator. In August 2019, Kharkivoblenergo bought a high-voltage automated AC bridge of the CA7100-3 type at 1.7 times more expensive than Ukrenergo.
All prices are per unit and exclude VAT. It should be noted that the companies' need for the same equipment is explained by the work in a common transmission network and the need to equip both NPC substations and generating or distribution companies with the same transformers, shunt reactors and other equipment.
The analysis shows that Ukrenergo buys the same equipment, including even fire extinguishers, roofing felt, Internet access and other common goods and services, 0.4 - 2.1 times cheaper than Energoatom, Ukrhydroenergo, Centrenergo and distribution system operators.
The involved parties recognized the transparency of Ukrenergo's tenders. In April 2018, CoST (Construction Sector Transparency Initiative) recognized the level of openness of information on the NPC procurement as unprecedented. The company provided 93% of the information on CoST Initiative requests. Ukrenergo received the same assessment from the international organization Transparency International.
In a commentary for ExPro, Pavlo Kukhta (in 2016-2019 he held a position of an advisor to the then Prime Minister Volodymyr Groisman, in 2019-2020 he was the First Deputy Minister of Economic Development and Trade) called Ukrenergo's procurement quite transparent and open. “The general impression of Ukrenergo is that they have fairly clear tenders,” he said.
Olha Yeryomina, Associate Director, Senior Banker of the EBRD Energy Department, also expressed a similar opinion for ExPro.
“I have no complaints about the transparency, efficiency and procurement procedures at Ukrenergo. The company and staff are developing in the right direction, they are reforming their procurement system,” she said. Note that the EBRD is the largest lender of Ukrenergo, the package of equipment and service purchases financed by this institution is measured in billions of hryvnia.
Conflict of Interest with Ukrenergo’s Contractors
During the press conference, Pidlisetsky also recalled the possible conNPCtion of the ex-head of Ukrenergo Kovalchuk with the construction company Horos, which is a contractor of the system operator and other energy companies. At that, the deputy again did not explain the essence of the connection with the contractor.
Note that in July 2020, the program "Our Money with Denis Bigus" reported on the possible relationship of Kovalchuk with Horos. Journalists noted that Oleksandr Mezhevets, who was the manager of Ukrenergo during the times of Kovalchuk, worked as the commercial director of the contractor. In 2013-2014, the head of Horos was Dmytro Kuznik, who was manager in Reisors Distribution Company and Ukrainian Forestry Company, which Kovalchuk allegedly owns. At the same time, according to YouControl, Kovalchuk is not the owner of these companies or their founders.
“Neither I, nor my wife, who regularly becomes the object of slander by unscrupulous politicians, nor my sister or my other relatives, have ever been founders, ultimate beneficiaries, partial owners or officials of the specified legal entity, I mean Horos, as well as any legal entities linked by the ownership structure. None of the companies to which I (or my relatives) had any relation whatsoever had economic relations. This is slander," Kovalchuk commented for the ExPro agency.
“If you check all the companies that operate on the electricity market, you will find a lot of former Ukrenergo’s employees in their top management positions because there is a rotation of personnel, people are trying to find themselves in the energy sector further. I am aware of three heads of the Capital Construction Department at Ukrenergo who are currently working in contractors. This in no way means that these people have additional influence on the operator's decision,” Kovalchuk said.
The ex-head of Ukrenergo also commented on the KPMG report, which Pidlisetsky referred to. According to Kovalchuk, he personally initiated a forensic audit in order to confirm his own reputation in the light of the accusations (open blackmail) that took place in October-November 2019 on the part of persons who identified themselves as representatives of the editorial office of Shariy.net.
“I put forward the idea to order an inspection from an independent institute for my colleagues, for the supervisory board of Ukrenergo, in order to avoid any doubts. When (whatever he may be, but popular) video blogger makes such accusations, I want to refute them," Kovalchuk said, adding that the KPMG auditor did not identify corruption risks either from the point of view of national legislation or from the point of view of Ukrenergo's internal procedures. "If I knew that there was something like this against me (real corruption risks - ed.), I would definitely not have initiated such an investigation," Kovalchuk summed up.
During the press conference, another Ukrenergo’s contractor was mentioned - the Pivdenzakhidelectromerezhbud company (PZEMB), which, according to Pidlisetsky, was disqualified “for some minor violations”. Answering a question from journalists about his connection with this company, Pidlisetsky said that he worked as its head only in 2014, after which he became a people's deputy from the Samopomich party and was no longer related to this company.
However, according to Pidlisetskiy's 2019 declaration, his wife Natalya in 2014-2019 owned a stake in PZEMB. In a comment for ExPro, Pidlisetskiy confirmed that his wife owned 100 shares out of the total number of 700 thousand shares. According to the deputy, he personally acquired these shares when he was the director of PZEMB.
“These shares were purchased by me when I was a head. Some elderly man came to me, he introduced himself as a former employee and complained about a difficult financial situation so he wanted to sell his 100 shares, and I, with compassion, personally bought them for UAH 1,000! This is 0.014% of the company shares,” Pidlisetsky said, adding that later his wife sold these shares.
In addition, Pidlisetsky indicated in the declaration his mother-in-law, Stephaniya Adamovych. According to YouControl, the previous head of PZEMB (in 2016 - March 2020) was Rostyslav Adamovych, who has the same patronymic as the ex-deputy's wife, that is, the mother-in-law's son (Natalia Pidlisetska's brother). Commenting for ExPro the fact that his wife's brother held the position of the head of PZEMB, the former deputy noted that Rostyslav Adamovych is no longer a head, and Pidlisetsky himself never hid this and did not lobby anyone.
According to the Clarity Project resource, Pidlisetska was a sponsor of the Samopomich party, for example, in March 2019, she personally transferred UAH 930 thousand to Andriy Sadovy. At the same time, this political force rented cars from PZEMB and paid the rent fee to the company. Facts from open registers testify to the connection of Pidlisetsky with PZEMB after being elected as a people's deputy and, most importantly, after joining the supervisory board of Ukrenergo.
Pidlisetsky himself objected to his influence on the contractor during his tenure in the supervisory board of the system operator. At that, according to Prozorro, PZEMB did not take part in Ukrenergo's tenders at all in 2017-2019; before that, the company was acting only as a subcontractor. It began to apply for NPC tenders actively from April 2020. The company offered its services at tenders until June 2020. Note that Pidlisetsky was in the NPC supervisory board from the end of February to the end of July 2020. Such a time coincidence of Pidlisetsky's cadence as a member of the supervisory board of Ukrenergo and the activation of PZEMB, the influence on which the deputy retains, raises questions.
Pidlisetsky confirmed the fact that PZEMB was active during his tenure in the supervisory board, but stressed that the company actually won four tenders, and then was disqualified. At the same time, he did not lobby for its interests before the management of Ukrenergo.
“This suggests that I apparently had the opportunity to ask for some kind of assistance if I had a desire to lobby! But I didn’t do that,” Pidlisetsky said in a comment for ExPro.
Local Populism Versus Experience of Successful Countries
The desire of politicians to promote the development of their own business during their tenure in public office is quite natural, and very this desire creates corruption at the top level. Perhaps not a single government in Ukraine has resisted such a temptation and was not associated with corruption scandals with large state assets, the story of the relationship between Pidlisetsky and the contractor of Ukrenergo is no exception. A logical question arises: "How can we get rid of such risks or at least reduce the possibility of their occurrence, regardless of the political environment?" Since Ukraine has chosen the European path of development, it is worth taking as an example the successful experience of countries with market economies, members of the Organization for Economic Cooperation and Development. This organization has developed the best corporate governance practices, including for state-owned enterprises, which reduce corruption risks and enable the enterprise to operate in the market, and not be the executor of the wishes of politicians who, in addition to social protection of the population, may be guided by their own interests.
According to Pavlo Kukhta, the corporate governance reform and the creation of supervisory boards at state-owned enterprises for the public sector of the economy is as important as hygiene for the human body.
“It’s like daily hygiene, it’s the practice of the civilized world ... Cleanliness from corruption appears with the presence of an advanced corporate governance system,” he said, adding that Ukrenergo is one of the state-owned enterprises that has advanced the most in the implementation of corporate reform and effective management. Kukhta also emphasized that successful corporate governance reform is related directly to the transparency of procurement by the state companies, their independence from the political environment and focus on market approaches only. He criticized the recent legislative initiative of Yulia Tymoshenko (draft law No. 3955), which almost nullifies the corporate governance reform in the public sector, returning the latter to the control of the Cabinet of Ministers, which is formed by the parliamentary coalition. His opinion was supported by Kovalchuk.
“This draft law clearly introduces direct control by the central executive body, that is, state bodies. It is clearly aimed at destroying the seeds of independence of state assets in their market activities and returning these enterprises to direct political and administrative control. This draft law seeks to bring political corruption back through the management of state-owned enterprises,” he said.
Kukhta noted that the idea of banning the presence of foreigners on supervisory boards, which is set out in the draft law, is exclusively populist.
"The slogans of politicians about the threat of the foreigners presence in the supervisory boards are political populism, this is the low quality of Ukrainian politicians who have done nothing in 20 years in power," Kukhta said, adding that the corporate governance reform is not political, but purely economic matter, an effective recipe for managing the public sector, which has been developed by successful countries of the world.
According to Yeryomina, the supervisory board performs a very important function: it prevents many politicians from interfering administratively with the work of the company and leading it astray. Thanks to the work of an independent supervisory board, the EBRD representative noted, the company can define and follow its market strategy.
The “anti-corruption” struggle of the people's representatives and, at the same time, their connection with contractor enterprises, as well as the desire of politicians to return the public sector under manual control - this is a practice that has been taking place in Ukraine for many years. It began to change with the introduction of corporate governance reform in line with OECD standards, without invention of the Ukrainian bicycle. The example of Ukrenergo is indicative: the company has created an independent, highly professional supervisory board and introduced a transparent procurement system. The supervisory board of the company includes top-level specialists from EU countries who have worked in European operators of transmission systems and the General Assembly of the European network of system operators ENTSO-E, where Ukraine seeks to integrate. Attracting such specialists and using their experience will allow to connect the Ukrainian energy system to the European one. Considering the importance of corporate governance reform for integration into the European energy space, overcoming political corruption, bringing state-owned enterprises into the market space and creating a competitive procurement system, one should continue the path begun by developed countries, and not follow the slogans of Ukrainian politicians with significant experience, but dubious results ...
Dmytro SydorovAuthor: ExPro