Business management

The business management system at VKG enables the Group to adhere to the principles of sustainable development at all stages, starting from the development of the business strategy and up to actual business activities. The system of business management conforms to legal standards and other requirements as well as to in-house standards of the company. In this respect, the company is applying the best global practices and experience.

Good practices of corporate governance

VKG follows the good practices of corporate governance in its activities. The good practices of corporate governance are intended to be followed primarily by enterprises having their shares traded in the Estonian regulated market, but they are also recommended for other enterprises subject to public interest. The objective of VKG is to follow the good practices of corporate governance and to present the activities of the enterprise in a transparent manner; thus, the sustainable development report includes a chapter dedicated to the description of the good practices of corporate governance.

Basic principles of business management:

making decisions based on consistency and team spirit,
progressive and transparent dividend policy,
innovative technologies,

openness and transparency of the information,
fighting corruption in all forms,
cooperation with concerned parties,

following ethical norms and observing human rights,
providing sustainable development,
corporate responsibility.

Priorities of business management:

integrated development of the risk management and internal control system,
maintaining the good reputation of the company,

integrating social aspects, the issues of industrial and ecological safety into the strategy and current work,
providing the high quality of products and services,

transparency and openness.

Shares and share capital

As of 01.01.2018, the nominal value of the share capital of VKG was 6,391,164.21 euros. There were no changes in the share capital in the years 2008– 2018. VKG’s shares are not noted on the securities market

The Group has four shareholders with the following holdings as of 01.01.2019:

General meeting. The exercise of the shareholders' rights

The highest management body of Viru Keemia Grupp is the general meeting of shareholders. General meetings can be regular and extraordinary. The competence of the general meeting is prescribed in the Commercial Code of Estonia and in the Articles of Association of VKG.

General meetings are summoned by the Management Board of VKG. The notice of summoning a regular general meeting of shareholders is sent to the shareholders at least 3 weeks before the date of holding the general meeting; the notice of summoning an extraordinary general meeting is sent at least 1 week before the date of holding the meeting. Annual reports are available to shareholders at least 2 weeks before the date of holding the general meeting.

A general meeting of shareholders is competent to make decisions if more than 50% of the votes granted by shares are represented at the meeting.

The annual general meeting of shareholders, which confirmed the annual financial report for 2018, took place on 26 June 2019, and 100% votes represented by shares took part in it. The following resolutions were adopted at the general meeting of shareholders:

to confirm the annual financial report for 2018;
to pay the dividends in the amount of 1,200,000 EUR for the year 2018;
the undistributed profit balance after the distribution of profit made up 283,043,086 EUR.

ORGANISATIONAL CHANGES AT VKG IN 2018

Two changes took place in the Group in the reporting year.

March 2018
Changes in the Management Boards of Subsidiaries

In the end of March, changes took place in the Management Boards of the companies VKG Elektrivõrgud and VKG Soojus. The heads of these companies Tarmo Tiits and Aleksandr Šablinski left the positions of the members of the Board. The new member of the Board of VKG Elektrivõrgud became Ivo Järvala, and the new member of the Board of VKG Soojusel became Andres Klaasmägi.

October 2018
Changes in the Business Name of a Subsidiary

With the purpose of joining the provision of all of the logistic services in one unit thus increasing the transparency of this business sphere, from 1 October the logistic services have been offered by VKG Logistika instead of VKG Transport. This change has not been accompanied by the introduction of changes into employment contracts of the employees (salary, duration of vacation, job tenure, position names, etc.), but they will remain in effect with the same terms and conditions. The member of the Board Anton Nõomaa remains in the capacity of the head of the company.

Management board. Staff, duties and remuneration

The Management of the parent enterprise

The Management Board of Viru Keemia Grupp AS consists of five members: Chair of the Management Board, Deputy Chair of the Management Board and Technical Director, Financial Director, Management Board Member of VKG Kaevandused and Management Board Member of VKG Oil.

Three Management Board Members – Ahti Asmann, Meelis Eldermann and Jaanis Sepp – manage the activities of the Group as a whole and are also Supervisory Board Members of subsidiaries.

Two Management Board Members – Margus Kottise and Nikolai Petrovitš – are the Managers of the strategically most important subsidiaries of the Group.

The duties of the Management Board include everyday management of VKG’s economic activities and representing the business association.

In all legal procedures of the Group, an enterprise is always represented by two Management Board Members together, whereas one of them must be the Chair or Deputy Chair of the Management Board.

Start times of terms of office of Management Board Members

Ahti Asmann
Chair of the Management Board – since 21.09.2015
Margus Kottise
Management Board Member – since 09.05.2000
Meelis Eldermann
Deputy Chair of the Management Board and Technical Director – since 06.03.2008
Nikolai Petrovitš
Management Board Member – since 16.11.1999.
Jaanis Sepp
Management Board Member, Financial Director – since 15.04.2016

The Management Board Members are paid a monthly remuneration consisting of the pay for performing the duties of a Management Board Member and the pay for keeping business secrets and for respecting the competition prohibition. The duties of the Management Board Members are stated in service contracts signed with the Management Board Members. According to the service contracts, the Management Board Members can get additional monetary remuneration which is paid according to the relevant decisions of the Council.

Supervision over the Management Board’s activities

Supervision over the activities of the parent enterprise’s Management Board is done by the Supervisory Board, consisting of six Members, since 1st of February 2012. The Meetings of the Supervisory Board take place once per month, on the last Wednesday of every month. Urgent matters requiring the approval of the Supervisory Board are constructively decided using electronic means of communication.

Pursuant to the Authorised Public Accountants Act of the Republic of Estonia, VKG is an entity subject to public interest and is thus required to have an Audit Committee. The members of the Audit Committee of VKG are Ants Laos (Chair of the Committee), Priit Piilmann, Margus Kangro and Elar Sarapuu. According to the Statutes, the Audit Committee is an advisory body for the Supervisory Board of VKG in the fields of accountancy, auditing, risk management, internal audits, supervision and budgeting and the legality of activities.

The staff of the Management Boards and Supervisory Boards of the parent enterprise and subsidiaries of the Group (January 2019) is presented in the following table.

Commercial name	Management Board Member	Supervisory Board Members
Viru Keemia Grupp AS	Ahti Asmann (Chairman) Meelis Eldermann (Deputy Chair) Jaanis Sepp Nikolai Petrovitš Margus Kottise	Toomas Tamme (Chairman) Priit Piilmann Margus Kangro Ants Laos Elar Sarapuu
VKG Kaevandused OÜ	Margus Kottise Margus Loko	Ahti Asmann (Chairman) Jaanis Sepp Meelis Eldermann
VKG OIL AS	Nikolai Petrovitš Priit Pärn	Ahti Asmann (Chairman) Meelis Eldermann Jaanis Sepp Marti Viirmäe
VKG Energia OÜ	Marek Tull	Meelis Eldermann (Chairman) Ahti Asmann Jaanis Sepp Marti Viirmäe
Viru RMT OÜ	Andry Pärnpuu	Meelis Eldermann (Chairman) Ahti Asmann Jaanis Sepp
VKG Logistika OÜ	Anton Nõomaa	Ahti Asmann (Chairman) Jaanis Sepp Andres Liivas
VKG Elektrivõrgud OÜ	Ivo Järvala	Jaanis Sepp (Chairman)) Ahti Asmann Meelis Eldermann Andres Liivas
VKG Soojus AS	Andres Klaasmägi	Jaanis Sepp (Chairman) Ahti Asmann Meelis Eldermann Andres Liivas

Cooperation between the Management Board and the Supervisory Board

Cooperation between the Management Board and the Supervisory Board takes place in a constructive manner. In addition to regular monthly meetings of the Supervisory Board, any urgent matters requiring the approval of the Supervisory Board are decided without summoning a meeting. Consultations are provided as well.

Supervisory board. Staff and duties

The Council plans the activities of the public limited company, arranges its management, and exercises supervision over the activities of the Board, and it consists of three to seven members, according to the Articles of Association.

Members of the Supervisory Board:

Toomas Tamme

(Chairman)

Margus Kangro

Elar Sarapuu

Priit Piilmann

Ants Laos

Proceeding from the Articles of Association of the public limited company, the consent of the Council is required for carrying out such transactions on behalf of the public limited company that are accompanied:

Acquiring and terminating holdings in other associations;
Acquiring, transferring or terminating an enterprise;
Acquiring, transferring and encumbering immovable property;
Acquiring, transferring and encumbering constructions;
Establishing and closing foreign subsidiaries;
By making investments in the amount exceeding the rate of expenses provided for in the investment budget for the current financial year;
By taking loans and undertaking other debt obligations that are different from the ones provided for in the annual budget, or with the terms and conditions different from the ones agreed upon with the Council;

Granting loans, if outside the scope of everyday activities;
Securing debt obligations;
Waiving hopeless debts;
Signing any employment contracts with employees, if those contracts grant pension and/or benefits after the end of the employment relation;
Approving the annual budget of the Group;
Establishing and terminating subsidiaries.

Prevention of Possible Conflict of Interests

The corporate management system of the Group incorporates a set of norms and procedures, which are aimed at prevention of the conflict of interests between control bodies within the Group. If the conflict arises, there are certain mechanisms aimed at implementing required measures for the complete resolution of the conflict, and for creating the conditions that would prevent the occurrence of such conflicts in the future.

The Internal Audit Service and other competent subdivisions of the Group deal with the prevention of conflicts of interest within the Group by cooperating with each other. In order to prevent possible conflicts of interest, there are certain limitations existing in the Group as well as the requirements for the Council and the member of the Board. Management Board Members are prohibited from competing with Viru Keemia Grupp AS in its field of activities, unless having the prior consent of the Supervisory Board.

Within the reporting year, no conflicts of interest between the members of the Council or the Board occurred.

In order to avoid conflicts of interest, all Management Board Members and middle-level managers of the business associations belonging to the Group are required to submit upon any changes a declaration in the approved format, stating their holdings in legal entities and/or membership in management bodies of legal entities and/or activities as self-employed persons.

Financial reporting and auditing

The Management Board of Viru Keemia Grupp AS has the duty of preparing financial reports. Within the accounting system of the entire Group the accounting principles as well as the means of representation of the information in accordance with the standards of international financial reporting developed by the International Accounting Standards Board (IASB) are used, alongside with their interpretations. The decisions concerning the most important transactions carried out by VKG as well as strategic goals are made by the Management Board of the company at its weekly meetings.

The Financial Service of the Group deals with planning and managing daily cash flows within the Group, i.e. preparing the budgets for the Group and its subsidiaries, exercising supervision over budget execution, preparing business projects, and communicating with the sources of financing. Financial services in subsidiaries support the Financial Service of the Group, whose range of tasks also includes the analysis of the financial activities of subsidiaries. All the technical financial transactions are carried out by the centralized Accounting Service of the Group. The Accounting Service makes payments, calculates salaries, pays holiday pays and sick leave allowances as well as prepares balance sheets for each financial year. The company that has an obligation to maintain accounting records should provide the access to up-to-date, important, objective, and comparable information about its financial status, financial results, and cash flows. Unless the rules provide the description of an event within the accounting system of VKG, one should proceed from the International Financial Reporting Standards (IFRS), the Estonian Accounting Act, the guidelines issued by the Estonian Accounting Standards Board, and other legal acts.

The accounting period is a financial year with a length of 12 months. The financial year begins on January 1 and ends on December 31. VKG has a right and an obligation to keep its accounting records independently, proceeding from the internal accounting rules confirmed by the Articles of Association of the public limited company. The internal accounting rules can be amended and supplemented for financial reasons agreed upon with the shareholders of Viru Keemia Grupp, in the event of restructuring of the activities of the public limited company, introducing changes into accounting principles, proceeding from the guidelines and methodological recommendations issued by the International Financial Reporting Standards (IFRS) and the Estonian Accounting Standards Board of the Republic of Estonia, from changes made in national tax legislation and guidelines related to taxation, and for other reasons.

The enterprise is required to document all its economic transactions and to register those transactions in its accounting ledgers. Economic transactions are carried on debit accounts and credit accounts according to the double entry method.

Economic transactions are recorded in chronological and systematic accounting registries at the moment they take place or immediately after. An accounting registry is a database used in accountancy. An accounting registry is formed in chronological order (ledger) and as accounts (turnover balance). All reports and registries of accounts are prepared on the basis of the accounting software in use. Reports and registries of accounts are preserved on computer disks, servers and/or as paper printouts. Since 1 January 2001, the software Baan has been used for planning the resources of the company and managing finances (ERP) in accounting. In 2018, the preparations for the transfer to the new ERP software began. The auditor of Viru Keemia Grupp AS is assigned with a decision of the general meeting of shareholders. The Management Board organises a competition to find an auditor, with the goal of finding the auditor for the next financial year. The latest competition to find an auditor took place in the year 2015. Auditing service is provided by KPMG Baltics OÜ.

Disclosure of Financial Reports

Every year VKG publishes a consolidated financial report together with the resolution of an auditor. The transparency of financial reporting is one of the main elements of corporate management. On 29 June 2018, the Group published the consolidated audited financial report for the year 2017.

Information Policy

The Group follows the principles of the openness of the information and provides important information in a timely manner to all the parties concerned on the following grounds:

We publish information about the main fields of our activities on a regular and consistent basis.
Up-to-date information about the important events taking place in the Groups as well as essential facts should be published in a timely manner.
The information that is being disclosed about the activities of the Group and its subsidiaries must be complete and authentic.
The availability of the information should be provided to concerned parties, and different categories of concerned parties should have equal access to the information.
With regard to the information disclosed in a special manner and/or format, its conformity and coordination should be provided as well as the opportunity to compare and contrast the indicators in different time periods, which have been made public.

The Group publishes important information about its activities and avoids formal approach when publishing such information. Hereby the Group is not trying to avoid the disclosure of negative information about itself, if such information is essential for the parties concerned. In 2018, 11 press releases were published on the webpage of Viru Keemia Grupp concerning the activities of the Group.

Internal audit and risk management

In the field of risk management and internal audit, we attach great importance to the provision of reasonable certainty and security upon the achievement of strategic and operational goals as well as the preservation of assets, conforming to the requirements of legal acts and regulations, and the correspondence to the procedures of information disclosure and its safety in all fields of activities. The policy of risk management embraces the goals of risk management, its tasks and principles, the functions of the participants of the corporate system in risk management, and the mutual relation of the process of risk management to the processes in the field of strategic and investment planning, operational activities planning, human resources and labour relation management, supply chain, industrial safety, ecological and social activities.

The Group is developing the integrated risk management system that is based on the analysis and assessment of such possible factors that can affect the indicators in the field of production and financial activities or exert direct or indirect effect on current activities and/or strategic plans. Risk management is aimed at the identification of all essential risks, their assessment and monitoring as well as at taking measures aimed at the minimisation of risks that can have a negative effect of the outcome of the activities of the Group at the current moment and in the long run. The main aspects of risk assessment is the likelihood of the arrival of the risk event and the priority of preventive measures over reactive ones. The Group proceeds from the principle of prevention while planning strategic and current activities of the Group in all of the areas. This principle determines the mechanism of risk control in accordance with the prevention of risk occurrence or its minimisation under the circumstances that are beyond the control of the Group.

Internal audit

The Group carries out activities aimed at ascertaining the risks pertaining to business processes and implementing control procedures which promote an increase in the efficiency of business processes and their manageability, the provision of the reliability of financial reports, and the adherence to the requirements established by legal acts and the rules of internal conduct. Internal audit plays a crucial role in enhancing the efficiency of the manageability of the Group and in connection with financial activities.

The company has an internal control system, which ensures:

risk minimisation;
development, deployment, correct compliance, supervision and improvement of control procedures on all levels of business activity and management;
continuity of operations of the company, highest possible efficiency and sustainability and opportunities for development, including adjusting in the operation of the company in due course according to the changes in the internal and external environment;
a uniform and systematic methodological approach and quality information and analytical support on management decision-making;
resolving conflicts of interests emerging during the operation of the company in due course.

Combating corruption

The Group is working on the upgrading of its internal procedures on a regular basis, which are aimed at the prevention and avoidance of the violation of the valid Antimonopoly Act, including the upgrading of qualifications of the employees dealing with the issues of antimonopoly regulation.

The Group ascertains corruption risks that are inherent in potentially vulnerable business processes, carries out their assessment and regular re-assessment. While ascertaining and assessing the risks, the information pertaining to the activities and plans is taken into consideration, including the information about investment and strategic plans that is available at the moment of carrying out assessment or re-assessment.

There is a special confidential channel functioning in the Group, which can be used by employees or people outside of the Group to send a notice about various violations related to the activities of the Group, let it be the issues related to professional activities, corporate management and corporate ethics, human rights, work organisation, social aspects, industrial and environmental safety, protection at the workplace, quality of goods and services, or any other issues, including the matters related to corruption. Applications and notices are accepted and reviewed by an independent representative.

In 2018, two notices were received and handled: a suggestion for improvement and a message signalling possible theft and abuse. The measures aimed at the minimisation of risks related to the violations pertaining to production and financial activities as well as improving workplace discipline and increasing responsibility were taken.

Several control measures aimed at the prevention of violations that had been detected before was added.

Risk management system

The Management Board of the Group has the duty of shaping the risk management policy and affecting the risk management of Viru Keemia Grupp.

Approach to risk assessment:

risk identification,
planning the measures aimed at risk minimisation,
risk monitoring and the check-up of the implementation of measures aimed at risk minimisation.

With the purpose of ensuring ongoing development in mind, risk management has been integrated into the decision-making mechanism and the management system as well as into all of the fields of activity:

Safety

Business management
Industrial safety
Protection at the workplace and health protection
Environmental protection
Fighting corruption

Business continuity

Business management
Investment policy
Production processes
Technology and intangible assets
Financial performance
Quality of products and services
Information safety

Corporate longevity

Strategy and planning
Law abidance
Corporate management
Preservation and efficiency of assets
Information technologies
Personnel management

The goals of risk management of Viru Keemia Grupp are as follows:

to support the making of management decisions;
to avoid or diminish any damages to the Group’s assets and reputation;
to increase the effectiveness of the Group’s activities;
to increase the efficiency of using the Group’s resources (capital, energy);
to reduce occurrences of unexpected situations and to prepare action plans and risk scenarios for such situations.

The base document for risk management is the one on which the risk management system is based. The document provides descriptions of significant risks of the Group, assessments of those risks, and opportunities to hedge them. The risks are determined on the basis of the Group’s most important targets, related to VKG’s striving to value oil shale as much as possible and to process it as efficiently as possible.

Principles of risk management

The risk management system has been developed on the basis of a common approach and similar standards across all of the companies within the Group.

Continuity

Continuity means that the risk management system is functioning uninterruptedly.

Complex approach

Complex approach means that the risk management system covers all the fields of activity of the Group as well as all the types of risks occurring within them. Control procedures exist within all the business processes at all management levels.

Reporting obligation

Reporting obligation means that the risk management system determines competence in decision-making and check-up processes in the field of risk management at all levels.

Information awareness and timely notification

Information awareness and timely notification means that the risk management process is accompanied by objective, reliable, and up-to-date information.

Rationality

Rationality means that the Group uses resources aimed at the implementation of risk management measures rationally.

Adaptability

Adaptability means that the risk management system is updated on a regular basis in order to ascertain different risks related to various activities and enhance the efficiency of the application of risk management and check-up methods to the maximum.

Precise rules

Precise rules mean that all the transactions are carried out in accordance with the procedures for their implementation that are established in relevant in-house documents regulating the relevant issue.

Active participation of the Board

Active participation of the Board means that the Management Board of the Group supports the implementation of the risk management system and its updating as well as takes active part in the process.

The methodology of risk management

Corporate risk management system is aimed at ascertaining potential risks and providing an opportunity to take timely measures for risk elimination or minimisation. It provides an opportunity to make corrections in business planning, investment plans, and social policy. With due consideration of dynamic development of the business environment as well as the ongoing changes introduced in the aggregate of different factors affecting the activities of the Group, their nature and intensity, the risk management system is being upgraded on a regular basis in order to ensure timely response.

The management of the Group has prepared a detailed list of risks that can affect the sustainability of the company. All the risks in the list have been divided into four groups:

strategic risks – related to the Group's long-term goals (changes in the market and competition);
operational risks – related to the Group's processes (operations of employees and equipment);
financial risks – related to direct financial loss (interest rates, exchange rates);
compliance risks –- related to regulations (laws, guidelines)..

The analysis of potential risks looks at external and internal factors.

External factors: conditions related to the market, sector of the economy, socio-economic, political, financial, cyclical conditions and other conditions related to the activities of the group and its subsidiaries.
Intra-group factors: related to management, production and staff, social, ecological, and other.

In connection with every type of risk, the assessment has been provided as for the likelihood of its occurrence and the scale of potential effect. Proceeding from that, the risks of critical importance have been selected, the likelihood of the occurrence of which is high, and the effect is significant. Such risks are described in the Risk Management Report of the Group, they have been assessed, a member of the Board responsible for each risk has been assigned, and the action plan aimed at the reduction of risk has been agreed upon.

The three most important risks are listed below.

Risks related to the availability of raw materials

Since the main goal of VKG is adding value to oil shale, the most critical factor in terms of the continuation of the activities of the company has been the provision of the oil shale resource. In 2012, the VKG Ojamaa mine was opened, in the result of which the risk related to the availability of oil shale has been significantly reduced. The Ojamaa mine will cover about 85% of the need for oil shale at VKG until 2030. The missing 15% is provided by long-term supply contracts with other oil shale extractors or at the expense of the existing warehouse stock. If it is not possible to purchase oil shale from the market under suitable conditions, and the warehouse stock runs out, the load at the plants is decreased, and they operate with a partial load.

In order to provide the consistent availability of oil shale after 2030, the Group is actively working on obtaining new extraction permits. Considering the factors related to environmental protection and economic situation, the most suitable would be the permit for extraction oil shale from Uus-Kiviõli extraction field, which is located nearby the Ojamaa extraction field. The plan is to provide the supply of oil shale until the year 2045 within the next two years.

Risks related to world market prices of crude oil

Since the main product obtained in the course of adding extra value to oil shale is shale oil, the economic success and stability of the Group are directly dependant on the price the global energy market would be ready to pay for shale oil. The reference product of shale oils is the fuel oil with 1% content of sulphur, whose price, in its turn, depends on the price of the crude oil. Since the price of the crude oil can fluctuate significantly as a result of even the slightest changes in offer and demand, the profit obtained from the sale of shale oils tend to fluctuate as well. Depending on the price of oil at the global market, the revenue from the sale of shale oils can make up 50-90% of the total amount of profit of VKG.

VKG is actively dealing with the minimisation of risks related to the prices for crude oil at the global market. In the event of a sudden decrease in sales revenue, the Group has two mutually reinforcing measures at hand which will provide the sustainability of the company:

1. Fixing the sales price of shale oils by means of future transactions.
2. Accumulation of liquidity buffer.

In accordance with the existing policy, VKG grounds the price of the reference product for shale oils by 25-65% from the expected production volume in the next 18 months. In the event of an increase in the liquidity buffer, the share of future transactions from the total amount of sales can decrease.

Environmental risks

Since VKG is a representative of the processing industry and a manufacturer of the fuel containing carbon, significant environmental risks accompany the activities of VKG, which manifest themselves both in oil shale extraction, boosting its value, and marketing oil shale products. The goal of VKG is to become a pioneer in this branch of industry and set an example of how it is possible to resolve environmental risks within traditional production in a smart and rational way, using modern technologies. Within the past 15 years the Group has made an investment in the total amount of ... million EUR into different environmental project, aiming at minimising its environmental footprint. Investments has mainly been focused on the efficient use of resources and the minimisation of accompanying environmental effects. This type of work is carried out on a regular basis, and it will continue in the future, since in the long-term perspective it will definitely pay off.

In addition to the minimisation of environmental risks that accompany production activities, it is as important to talk publicly about them as well as involve different interest groups into the discussion of how to change things for the better. With that purpose in mind, VKG holds an Environmental Day every year. The Environmental Day held in 2017 was focused on environmental effects.

Risk management scheme at the company

International management systems

International management systems like ISO and OHSAS have separate procedures for risk hedging in quality management, environmental management and occupational safety management. Those internationally recognised systems are in effect in VKG as well. The table below lists the management systems in use in the Group’s subsidiaries.

	ISO certificates (environmental and quality management systems)	OHSAS certificate (occupational health and safety management system)
VKG	ISO9001, ISO14001	-
VKG Oil	ISO9001, ISO14001	OHSAS 18001
VKG Kaevandused	ISO9001, ISO14001	OHSAS 18001
VKG Energia	ISO9001, ISO14001, ISO 50001	OHSAS 18001
Viru RMT	ISO9001
VKG Soojus	ISO9001, ISO14001	OHSAS 18001
VKG Elektrivõrgud	ISO9001	OHSAS 18001

Supply chain

Viru Keemia Grupp is developing cooperation with subcontractors, placing special emphasis on the openness of the market, the price formation arising from market conditions, and mutual long-term and transparent relations. VKG is trying to develop various means for motivating subcontractors and flexible price-formation mechanisms.

The Group purchases and sells a considerable amount of goods and services. The selection of suppliers takes place in the Group in accordance with common rules, but only on the basis of public online auction proceedings. Each potential supplier has an opportunity to take part in the offer, while it is mandatory to prove the conformity to established requirements.

The goals of purchasing activities at VKG:

to provide the maximum economic feasibility and efficiency of purchases;
to involve the best possible selection of potential participants into the proceedings being conducted;
to provide objective, justified, and unbiased process of selection of winners within different proceedings;
to provide the openness of the proceedings being conducted;
in cooperation with key purchasers, to provide the consistent development of competitive ability and the technological basis for both parties.

The process of selection of subcontractors and cooperation with them takes place within the frames of tenders held under the established integrated management system.

The main criteria in the process of selection of suppliers are price, quality, and the availability of the experience required for the purpose of work completion and service provision. One of the main selection criteria is the adherence to the rules of production safety, established in the Group, on the part of suppliers. The conformity of potential suppliers to corporate requirements is assessed as a single package. Following the principles of corporate liability, the Group also checks the adherence of potential suppliers to the principles of ecological and social responsibility. If the subject matter of the offer also contains the requirement to check the status of the system of industrial safety, protection at the workplace, and environmental protection that exists at the potential supplier's, the specialists of the Group should carry out a relevant expert assessment. The latter can serve as a confirmation in response to the enquiry concerning the existence of necessary production facilities and technologies at the subcontractors'; the fact that their specialists hold relevant qualification; the availability of licenses, certificates, including ISO; and technical audits.

If it becomes clear that candidates do not conform to the set of the existing criteria, they are not allowed to participate in the tender. In accordance with the requirements existing in the Group in the field of industrial safety, protection at the workplace, and environmental protection, all of the suppliers and subcontractors must adhere to the principles valid in the Group, and also to legal and corporate norms and standards upon the fulfilment of obligations arising from the contracts entered into with the Group.

Purchasing activities of the Group have the largest share of public tenders among the Estonian manufacturing companies based on private equity. In 2018, 593 tenders were held with the total value of 34.6 million EUR. The total tender volume remained at the level similar to the year 2017.