October 6, 2017 / 8:07 PM / a year ago

Reform of Ukraine's Naftogaz is unlikely to progress: ex-board members

KIEV (Reuters) - Key reforms to Ukrainian state-owned firm Naftogaz are unlikely to be implemented despite the government’s promises, two former members of its independent supervisory board told Reuters.

FILE PHOTO: A man walks past the headquarters of the Ukrainian national joint stock company NaftoGaz in central Kiev, Ukraine, March 15, 2016. REUTERS/Valentyn Ogirenko/File Photo

In September, Paul Warwick and Marcus Richards, the last remaining members of the board, resigned alleging government obstruction of efforts to modernize Naftogaz and put its finances on a sustainable footing.

Their departure added to fears that Kiev’s commitment to reform is waning, despite promises to backers such as the International Monetary Fund and the European Bank for Reconstruction and Development.

In a Skype interview on Wednesday, Richards said the government was initially constructive when he joined last year.

“At the start of the process there was huge support for moving forward, but this has turned into a situation where it’s not clear whether the government is supporting reform as originally designed or intended,” he said via Skype.

Following their resignation and charges of obstruction and interference, Prime Minister Volodymyr Groysman promised that the Naftogaz reforms, including an “unbundling” of its production, transport and sales businesses, would not be derailed.

Last year, Naftogaz was seen as a bright spot in the government’s broader reform program thanks to gas tariff increases that led to a sharp reduction in its deficit, which had exceeded 5 percent of gross domestic product in 2014.

The supervisory board was set up in 2016 to help drive change but four of its members have quit and not been replaced.

“The changes laid out in the corporate governance action plan and promised (by the government) when we joined the supervisory board – it’s unlikely that those areas will proceed,” Warwick said.

He said, as of this October, Naftogaz still did not have a business plan for 2017 because the government did not approve one agreed by the supervisory board.

“This is quite extraordinary in running any business, let alone a business that is involved in oil and gas,” he said.

“In terms of Naftogaz operations, we were unable to see that the company was liquid enough in its cash reserves to be able to continue funding its business plans, assuming they would be approved, into next year,” he added.

Due to a confidentiality agreement, Richards and Warwick were not able to say which ministries or government officials had offered the most resistance to the board’s work.

Richards said Naftogaz’s reorganization is likely to serve as a litmus test for reform of other state enterprises.

“If you can’t achieve material change at Naftogaz to the benefit of the people of Ukraine, then you’re probably not going to see it on a smaller scale without a lot of effort.”

Any further support from international financial organizations, such as the EBRD, must be tied to tangible improvement of Naftogaz’s corporate governance, Warwick said.

“More leverage needs to be given by those third parties in order to progress within the corporate reform area,” he said.

Editing by Matthias Williams and David Evans

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