EU helps Ukraine develop new Subsoil Code

Today in Ukraine less than 17% of mineral deposits are exploited. Increasing production requires strategic public policy and transparent regulation of the field. That is why the EU provided financial and expert support to the Government of Ukraine to develop a new Subsoil Code of Ukraine based on best European practices and taking into account Ukrainian realities.

Because of the non-transparency of extraction permit procurement process, over 80% of subsoil deposits in Ukraine are not being developed and the state budget underreceives a substantial amount of tax revenues.

The issue of a comprehensive reform of the extraction market has long been on the agenda. As of today, less than 17% of all deposits of extractable resources are being developed in Ukraine.

Because of insufficient development of natural gas fields, our country still remains energy dependent: last year, a third of gas volume consumed by Ukrainians was bought abroad.

The main reasons for underdevelopment of the extractive sector are the absence of a strategic national policy and the flawed and non-transparent regulation of this sector, which breeds corruption.

Legislative acts which regulate the extractive industries are often nonconformant with each other, and sometimes even contradict each other.

Some of them were passed back in the 1990s, and therefore, have long become outdated. Others are changed chaotically and inconsistently: since 2011, the Resolution 615 on the Issuance of Special Extraction Permits has been changed more than twenty times.

Another major source of the market’s stagnation is the absence of competition when issuing special extraction permits. Today, the absolute majority of them were issued outside auctions, which creates several problems at once.

The first problem is that an extraction site goes to the one who learned first, in a certain and often non-transparent manner, about the existence of a freely available, promising deposit. The lack of equal and transparent access to extractable resources creates corruption risks.

The second problem is that the permit holder pays a fee to the budget based on the starting sale price of that permit at an auction, i.e., the minimum amount.

A cheap and uncompetitive access to resources creates the situation in which the permit holder does not develop the site after receiving a permit, keeping it “just in case”, idling. Deposits like that are not being developed at all for years.

These and other problems of the extractive sector need a systemic, comprehensive solution that would benefit both bona fide subsoil users and Ukrainian citizens as the state budget will receive proper revenues from the use of common natural resources, Ukraine’s domestic market will receive the necessary raw materials, and new jobs will be created.

Solving the sector’s problems and achieving the aforementioned goals could be possible by improving the regulatory framework.

That’s why the European Union provided financial and expert support to the Ukrainian government for development of a new Subsoil Code of Ukraine.

The EU’s project envisages that a consortium comprised of Projekt-Consult GmbH (Germany), MinPol (Austria) and the Better Regulation Delivery Office (BRDO, Ukraine) will deliver to the Ministry for Environmental Protection and Natural Resources the text of a new Subsoil Code developed on the basis of the best European practices and considering Ukrainian realities.

This document should replace the ineffective regulations and create favorable conditions for responsible market participants by improving Ukrainian legislation as required by the Ukraine-EU Association Agreement.

The purpose of the New Subsoil Code project is to create a complex document regulating all types of economic activity featuring extraction operations, including extraction of raw materials, oil, gas, uranium, and also, underground water and geothermal energy.

The Code will contain a list of critical mineral raw materials whose shortage may pose threat to the country’s economic and social stability, and the provisions enabling assessment of raw material reserves according to international standards.

The new Code will regulate:

– the scope of powers of authorities regulating this sector;

– transparent issuance of extraction permits: auction / without an auction / production sharing agreements;

– establishment of rules for extension / denial / reissuance of special extraction permits;

– the possibility of alienating the subsoil usage rights to third parties;

– establishment of exhaustive grounds for, and a transparent procedure of, suspension and cancelation of special extraction permits;

– establishment of mechanisms for assessment of extractable reserves according to international standards;

– implementation of mechanisms stimulating the processing of certain raw materials into finished industrial products;

– introduction of a land plot reservation institute;

– definition of a raw materials circulation mechanism;

– introduction of a transparent control system.

Since resources in this sector have for many years been disbursed according to non-transparent, corrupt rules and almost nobody cared about the real development of this market, the newly-developed Code must accomplish two critical tasks.

Firstly, it must implement various anticorruption safeguards to ensure equal access to natural resources. Secondly, it must lay the foundation for strategic development of subsoil use in our country.

To accomplish the first task, we want, in particular, to include provisions to the Code envisaging creation of an electronic subsoil user account, the procedure of organizing auctions selling special extraction permits and production sharing agreement contests, the possibility of alienating the subsoil usage rights to third parties, and other clear procedures and new institutes.

By Volodymyr Holovatenko, Senior Policy Advisor at the EU’s project “New Subsoil Code of Ukraine”,

Simon Pow, Expert Team Leader at the EU’s project “New Subsoil Code of Ukraine”

Source: Ekonomichna Pravda