Ukrenergo CEO Kovalchuk: 'My team is Ukrenergo's main asset. And it is definitely a driver of reform in the power industry'
Vsevolod Kovalchuk has managed the state-owned National Energy Company Ukrenergo, one of the key enterprises in the country's power industry, for two years as "temporarily acting" chairman. By the standards of Ukrenergo, he is one of the longest serving in this post, and during these two years he experienced many uneasy events, particularly a transformer scandal, several searches, and two difficult heating seasons. At the beginning of the interview Vsevolod vowed not to talk about coal, the heating season or politics, but to focus on the management of the state company.
ABOUT UKRENERGO'S STRATEGY
What do you see as your main merit as Ukrenergo CEO?
I think that the company has a clear development strategy. Not the reform of public procurement, not transparency, not the signing of an agreement with ENTSO-E, not activity in the media. In fact, it's all secondary.
Primarily, this is a strategy, a clear understanding of who we are, what we are, and where we are moving. I believe that every state-owned company should have a strategy that is aimed at some difficult but clear goals, as it happens in private business.
For us, first and foremost, it means the minimization of expenses in the long run. Of course, we are working on the current operational effectiveness, but we should also think strategically, as certain actions lead to changes in the dynamics of our costs in the future. We should take care of increasing our capitalization and maximizing the profit of our shareholder. The more profits the more dividends or reinvestments. All this should not be confused with taxation, which goes beyond the effectiveness of enterprise management.
When I first came to Ukrenergo, I saw a set of separate, as a rule, and not interconnected investment projects and work plans with a one-year planning horizon. There was no systematization of approaches and vision of what the company needs not now, but in three to five years. There was nothing.
The company just lived, supported its system. And the company's core team was not to blame for that. There was simply no request for a long-term vision and planning from top management and shareholder. To be fair, I would say that the same situation was seen in Energoatom and Naftogaz Ukrainy, where I worked before Ukrenergo.
However, companies very often have public strategies that are simply a set of beautiful slides.
This is the problem of our country. In the era of "timeservers" there is no point in talking about any strategies. All come just to survive with all ensuing consequences. Accordingly, the attitude to this kind of documents is superficial – at best, elements of strategies are moved from one presentation to another.
What are the guarantees that if a new Ukrenergo head comes, he will not change the strategy?
I have no guarantee that if I suddenly leave the company, it will stop following the strategy. But I have the opportunity to make it so that all the next leaders would have difficulty getting off the track, which I and my team identified as strategic. All our actions and all the changes are tectonic, and many of them are "sewn up" in subsequent loan agreements with international financial organizations. Thus, it will be very difficult to change the set of actions.
For example, our automation program. Previously, Ukrenergo's approach to the modernization of substations and transmission lines was chaotic. For example, switches or transformers were replaced selectively, but the substations were not upgraded fully.
I completely changed the approach. The systemic approach is that instead of changing one switch at 30 or 40 substations and making hundreds more replacements of other equipment, we simply approved a program for the comprehensive modernization of 50 substations at once. The next step is 50 more substations.
And this is not just modernization. They will be completely automated, i.e. they will be managed remotely. And now we are putting this into investment projects. That is, anyone who comes to Ukrenergo in three to five years will be engaged in this project and will eventually have an absolutely different company, because the automation of substations implies a complete change and philosophy of company management – new IT solutions, new communications channels, a new level of data protection and a minimum of relevant personnel.
Why do you think that this strategy is correct for Ukrenergo?
Because it is correct. Last year, we clearly realized that in order to finalize the signing of an agreement with ENTSO-E on the terms of future accession, we need to build the trust of European partners. So we began to actively travel around Europe and visit European transmission system operators. By the way, we started from Austria. It was very useful, and above all not only in the context of integration.
What I saw there completely reversed my inner world. I realized how big the gap is between today's Ukrenergo and the best European transmission system operators. The gap of one generation.
And it's not about the reliability of the energy system itself. Our system is very stable, and it was well thought out. And our specialists are strong, but they are strong for their environment. The environment in Europe is quite different. The nature of the business is different, although it seems that both we and they transmit electricity.
Technologies do not stand still. They are rapidly running forward. Most importantly, the electricity market does not stand still. It is completely different. We do not have one. It has functioned for decades there. And the best practices, the best IT solutions allowed Europe to make this significant "civilizational leap."
We need not just modernization of the system in order to ensure the reliable operation of all elements of a new market model (balancing market, auxiliary services market, dispatching, administration of calculations, and commercial metering of electricity). It is necessary to reorganize the whole company globally and to rebuild the thinking of its employees, including your own thinking. And going out of your own comfort zone is not easy.
That is why, having plunged deeply into the everyday business of Ukrenergo and having visited many European colleagues, I initiated the preparation of a new strategy for the company.
I refused it to be written by anyone from outside, not because I wanted to save some money. I just wanted every top manager of the company in charge of a certain direction to get involved in this process, see how this business was organized abroad, and outline the key tasks and a vision.
We actively debated for two months about what should ultimately appear in the strategy. We approved it in May. There are ten key areas, with full details, what needs to be done and when, for ten years ahead. The tasks are very difficult and ambitious. We are reforming the very system of enterprise management. We are reforming technical and investment policy. Our main task is to become part of the civilized business of Europe.
ABOUT INTEGRATION INTO EUROPE
Is Ukrenergo's main strategy aimed at following the example of Europe?
In general, it is. By the way, in terms of the scope of the tasks, I believe that such ambitious tasks are faced by only three state companies in Ukraine – Ukrenergo, Ukrtransgaz and the regulator (the National Commission for Energy, Housing and Utilities Services Regulation).
Each of us should do a great deal of work due to the fact that Ukraine has assumed a large layer of obligations on the implementation of European legislation as part of the Energy Community and the Association Agreement. We and the gas transmission system operator must ensure the full-fledged launch of electricity and gas markets in Ukraine, ensuring equal access to the network for all participants. The regulator is obliged to introduce the best practices of monitoring and regulating these two markets. The price of the issue in the aggregate is at least $20 billion, or about 20% of the country's gross GDP.
A further perspective is clear for each of us – Ukrenergo will become a member of ENTSO-E (when the Ukrainian energy system is synchronized with the European one), the gas transmission system operator will be a member of ENTSO-G, and the regulator will as closely as possible implement the standards of work of the EU Agency for the Cooperation of Energy Regulators (ACER). All of us (and this is inevitable) will gravitate toward the orbits of these organizations, or rather their policies. This, in turn, will require that we adopt completely new approaches in what we do, a new vision and institutional capacity.
However, Ukrenergo, perhaps, is awaiting the most difficult part due to the fact that technologically the electricity market is the most complex one, and it requires complex technological solutions in order to run like a Swiss watch.
That it, we face the task of not only carrying out reforms and being an effective state enterprise (as well as in front of other state companies), but also having the institutional capacity to be a pioneer of changes in the electricity market and bring a new opportunity for the Ukrainian consumer – the opportunity to enter the European market. And this, in turn, requires a new quality of thinking in the company – at the level of management and staff.
In addition, we have one more, barely noticeable mission – to allow new technologies in the electric power industry (first of all, "green technologies") to be established as a class. Without us, the development of "alternative energy" is impossible, because networks and balancing are key technological limitations today and in the next three to five years.
That is, synchronization with ENTSO-E is an accomplished fact, no matter who manages Ukrenergo?
Our integration into the EU electricity market is inevitable. In view of both geopolitical (Russia) and purely economic factors – they have the most liquid and developed electricity market.
And we will be part of the European electricity market. It is only a matter of time. And political will is important here. If we have it, we can witness that in the next five years.
By the way, we have recently started publishing in English all the information that we give on our website and on Facebook. Moreover, we created a page at LinkedIn and started communicating on this site only in English.
This is not just a tribute to the English language or international direction. We try to learn to be understandable to European partners and demonstrate to everyone that our vision is integration into the European market. By the way, we have it fixed in our new strategy. In addition, we really began to equate ourselves not with Ukrainian companies, but with our European colleagues. We look, we study, we compare. Believe me, this is a completely different philosophy, thinking and vision of development, as well as good vaccination against the Ukrainian habit of thought in the period of one or two years.
The problem of the entire Ukrainian electricity market is that everyone is used to thinking in the present. But in fact, the present is the long forgotten past in the countries of Europe, which occurred 20-30 years ago. And it is Ukrenergo that is obliged to be a driver of change, creating a technological basis for transforming the entire industry.
Does the country's leadership share your position on the "inevitability" of synchronization with ENTSO-E?
I believe that in this process we are several years ahead of the development of social thought (I will call it this way). And this is natural, because historically our decisions are made, as a rule, proceeding from the present, not from the future. Therefore, I think this is my personal key indicator of effectiveness – to convince the country's leadership, key stakeholders that synchronization is important and that Ukrenergo cannot do it alone.
And gradually I see that the number of supporters of synchronization is growing at different levels. First of all, among medium and large businesses – entrepreneurs begin to understand that for them we are a "window of opportunity" for optimizing electricity costs.
We have recently calculated that synchronization would help our industry save about 800 million U.S. dollars a year, not to mention that it will create a new type of business – electricity trading (total trade will reach about EUR 1.5 billion) and will definitely attract billions of dollars as investment in Ukraine's power industry.
ABOUT THE TEAM AND PEOPLE
Why have some of the state companies stalled in their development (nothing is heard about them), while others are demonstrating at least an attempt to change?
The main reason is people. Believe me, the team is the main condition for success. If there is no team, you can collect your things and leave the company.
I was unspeakably lucky (although, in many respects, this is the result of my two-year work on finding talented managers). I managed to unite around myself a good team of like-minded people. Most of them are new faces in the electric power industry, people from business, with good reputation and excellent work experience. It is they who set the pace for all the changes that are currently taking place in the company.
Do you know why? Because the changes that we carry out at Ukrenergo are beyond the strength of not just one, but even three or five top managers, no matter how what kind of geniuses of management they might be and how many hours they would have worked per day. In order to resort to such a transformation, you need about 50 agents of change of the first circle, motivated people who know what they do. And these people should have their own verticals of agents of change, of the second circle. Now I have such a team, and this is the most important "goodwill" of Ukrenergo. And this team, unequivocally, is a driver of reform in the electric power industry.
Moreover, we do not stand still. We are looking for talents, wherever possible. We seek out those who are able to create and encourage others to change. By the way, for this purpose we launched the Ukrenergo Laboratories project – in fact, to search for natural geniuses for their further development at Ukrenergo.
ABOUT THE STATE AND BLUE CHIPS
Speaking about the reform of corporate governance, how should relations between the state and strategic state assets be built?
There are states that effectively own companies, but they can be counted on the fingers of both hands. In most developed countries, there are practically no companies that can be considered state-owned. For example, the United States thinks that they have just five state companies in the whole country, but there are also thousands in which there is a state share. The question is not who is written as the owner in the charter, but how management procedures are built.
For the last year and a half I have been an apologist for state companies to undergo a full-fledged corporate governance reform. Given the political essence of our state and the number of contradictions between political and economic decision-making centers, the absolute majority of enterprises should be sold.
There are also enterprises in respect of which a strategic decision was made, that they should always be in state ownership, and Ukrenergo is one of them. But this does not mean that such enterprises should not conduct activities in accordance with the rules of private companies. The laws of business in the world are the same. Therefore, if the state wants to benefit from what it controls, then it needs to be managed as an effective private business.
So you think that the heads of the country's key state-owned enterprises should manage them as a private business?
You're absolutely right. Moreover, they must have a direct financial benefit (of course, absolutely transparent, through a system of bonuses) from how successfully they manage state assets.
In conditions of political instability and other factors, no one came up with anything better than the well-known principles of the Organization for Economic Cooperation and Development (OECD), clearly written through decades of changes in approaches to property management. One must understand that even a very intelligent person who heads a subdivision for the management of state property in the ministry cannot be equally good at dozens of types of activity and in some cases also in hundreds of companies that obey him.
Corporate governance reform, first of all, is engaged in building a foundation and a wall between the owner in the person of the state and the management of companies so as to protect the enterprise from the influence of any political decisions. Because the directors change, the ministers change, and the state secretaries will also change. There must be an institution that ensures stability, so that the strategies approved could exist, rather than be changed every time.
Kovalchuk left, someone else arrived, and one minister was replaced along the way. This human factor and lack of understanding of how much the manager will work significantly prevent the enterprise from being effective. We need to build the basis for sustainable development, and only then do the rest.
Can the state effectively manage state property?
It cannot manage it directly. First and foremost, it is just not able to do it. Not a single ministry or department is able to effectively manage the objects it owns. There are no corresponding intellectual resources, there is no business competence, and the level of motivation (including monetary motivation) is minimal. In the absence of proper remuneration for work and due to the politicized position of ministers, the temptation to "steer" state companies in someone's interests is enormous.
By and large, ministries should not manage anything. They should have a supervisory function (through the supervisory board and the shareholders' meeting). To manage is the destiny of top management, which bears personal responsibility before the supervisory board for the fulfillment of the assigned tasks.
In addition, ministries should be engaged in the development of policies and "rules of the game." And here there is a lot of work to be done. There are great opportunities for self-realization. It is a pity that so far this has not been the priority of many state agencies.
How is your corporate governance reform progressing at Ukrenergo? Will the supervisory board be still set up this year?
Ukrenergo was morally ready for corporate governance reform more than a year ago, and institutionally from the moment the Cabinet of Ministers adopted all the necessary resolutions. We hired independent consultants and drafted the necessary documents. From April to September, we were in the process of a dialogue with our ministry, which ended with the signing of a new version of our charter.
The wording of the charter approved by the Energy and Coal Industry Ministry is much better than the previous one, but worse than the charter our consultants counted on. Nevertheless, this opens up the way for the formation of an independent supervisory board.
This reform has not yet been 20% carried out, because the new charter itself cannot work without a formed supervisory board. The functions of the supervisory board before its creation are performed by a management body under the Energy and Coal Industry Ministry, but nothing has in fact changed so far. We expect the selection of independent directors to be announced in the near future.
Ukrenergo is a state enterprise. And it is strictly forbidden to sell it by law. Do you agree with this, looking at the prospect of 5-10 years?
I believe that Ukrenergo can be a very effective company if the state as an owner can formalize its relations with the supervisory board and its board.
But in general, I believe that access to IPOs on the European platform and the involvement of minority owners, for example, European companies – power transmission system operators, would make Ukrenergo in seven to ten years not only more transparent, but also more understandable business for Europe, which is extremely important, given our European integration tasks. We could have really become in ten years one of the leading and important operators of the transmission system in Europe. It is high time for us to stop sitting in our sandbox, while it is in a huge quarry.
But we should not confuse the privatization of the main asset (for example, the transmission system) with the free/public turnover of the shares of the company that manages this asset. A good scenario for Ukraine in the near future is state ownership of a key material asset and a controlling stake in the company that it manages. This will ensure the protection of national interests. At the same time, this guarantees transparency and effectiveness of business processes, because being a public company by European or world standards is a huge responsibility, which requires the reconfiguration of all key processes inside.