Reins of Government
"One of the key challenges is to reduce the political impact on state enterprises" OLEG BONDAR, MANAGING PARTNER AT ECOVIS BONDAR & BONDAR, IS CONVINCED
— Is the reform of corporate management in the infrastructure industry really necessary?
— I would introduce a moratorium on the use of the word "reform". This is particularly true for initiatives announced in the area of state property management. In my opinion, a reform is primarily a change in the basic principles and processes of state property management, changes in ideology, if you will. Today this loud word commonly refers to several draft laws/acts of a cosmetic nature, including, first and foremost, introduction of the institution of supervisory boards and independent directors for state enterprises. But how much is this a new and, most importantly, thoughtful solution?
The procedure for electing independent directors of supervisory boards is obviously far from ideal. What qualifications must the members of the nomination committee have and is it possible during a thirty-minute interview to provide an adequate assessment of candidates, what is the role of various observers included in this process, albeit formally, without the right to vote, will such initiatives lead to lose of control by the state or replacement of the influence of one group with the same influence of another, even if it’s a foreign one? The existing regulation does not provide answers to these questions.
— And is there, in your opinion, a request for changes in the corporate management of state assets in the transport sector?
— The purpose of any changes in the management of state assets is to bring these relations into line with the best practices, including with the principles of corporate management of the OECD. One of the key challenges is to reduce the political impact on state sector enterprises. The state and society must realize that a state enterprise is primarily a business, and its main goal is to earn profit. Accordingly, this business should be managed in the same way as any other private company, and the goal should be the same – to earn profit for a shareholder or to increase its capitalization.
It is no secret that officials and politicians continue to regard state assets not least as a means to achieve their political or other personal goals. This is particularly important in the infrastructure industry.
For example, what does the story with Ryanair demonstrate, which tried to enter the Ukrainian market with the support of the Ukrainian regulator? The Ministry, taking advantage of its shareholder status, publicly interfered in the operational activities of the state airport, forcing the airport to provide this carrier with special conditions of service not available for other airlines. For what? A PR campaign, at the behest of the Ministry, launched around this process in the press and social networks was, in fact, the only result.
— In your opinion, how should the corporate management in the transport industry be reformed?
— Instead of introducing all new mechanisms (certainly the most progressive and necessary), it would perhaps makes sense to use existing tools. For example, is organizing a state enterprise as a unitary enterprise effective? It is obvious that in joint-stock companies today, and especially in public ones, the rules of organization of work are described in much greater detail, the powers and responsibility between the shareholder, supervisory board and management are balanced and clearly distributed. Generally accepted mechanisms of control over the activities of the executive body are introduced, and the institutions of transactions with related parties and interested party transactions have been regulated. So why engage in improving the legal form of unitary state enterprises instead of reincorporating them? Well, at least large and strategically important enterprises.
Now a word or two about independent directors. Under the current conditions, the independence of board members is determined primarily by the ability to identify the interests of enterprises and to act accordingly. But for this the state will, as a shareholder, decide where the interests of its enterprises actually are. In other words, to work out a development strategy that should be consistent with the development strategy of the industry as a whole. For example, the National Transport Strategy has already been developing for two years. In this document, in addition to the usual slogans, strategic tasks shall be described that take into account the positioning of Ukraine as a global player in the transport market, the goals achievable in the medium term and a step by step implementation plan should be clearly set out.
Besides, I would like to pay special attention paid to the procedure of selection and appointment of members of the supervisory board. There are a significant number of state enterprises in the transport field which are actually or legally monopolists in their markets, have market power towards competitors and can regulate access of other players to this market. This refers to state rail provider Ukrzaliznytsya, airports, ports and other infrastructure companies. With regard to airports, the practices and recommendations of the ICAO (International Civil Aviation Organization) offer several ways of reconciling the interests of all participants. This is, among other things, organization of regular consultations between a monopolist and all players, granting the right to arbitration to a separate body, organization of the Airport Committee as well as inclusion of representatives of carriers to the airport’s board.
— Will a conflict of interest arise in such case?
— Even if it arises, the effect of this conflict depends on the distribution of votes. Three of the five directors shall be independent (whether they will be so in practice depends on many factors). Naturally, the state will seek to retain control even if there are independent directors. I do not believe that the presence of one vote held by carriers can lead to a conflict or to the blocking of a solution.
— So, will their role be minimized?
— They will have the opportunity to participate in decision-making. In theory a decision is brought up for discussion and consensus is developed. Already having one vote enables a certain problem issue to be put before a supervisory board and attempts made to resolve it. An alternative may be to include business representatives in nominating committees when supervisory boards of strategically important state enterprises are being formed. In this case, the business will have at least the opportunity to be heard.
— There is the question about stakeholders not being represented on the supervisory board: I mean consumers. In what form will they be able to assert their rights?
— I think the most effective way for this is the institution of collective lawsuits, which does not yet operate in Ukraine. State bodies dealing with consumer rights or antimonopoly policy are subject to political influence and are cumbersome enough.
— How do you see the prospect for development of legislation in the corporate management field? As we know, a decision was made to start corporatization of Kyiv’s Boryspil Airport. Does the experience of Ukrzaliznytsya’s corporatization enable the making of any predictions?
— Certainly, the corporatization process in railway transport has been considerably delayed. In particular, the issue with subsidiaries was not resolved, and for technical reasons the company could not register new Articles of Association for a long time. The situation is simpler at Boryspil Airport. It is necessary for the owner (Ministry) to establish the key issues of the Articles of Association. If there is the political will, the technical difficulties will disappear. Furthermore, the issue of creating a supervisory board will arise. In general, I believe that today there are sufficient legal instruments for effective management of any state assets. It is probably necessary to focus doing more on routine work in the implementation of developed legislation.