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Five Ways to Improve Ukraine’s Draft Extractives Transparency Law

A widely backed draft law on extractives industries transparency passed its first reading in Ukraine’s parliament in March. It is an important milestone in the country’s oil, gas and mining sectors, and, crucially, addresses opaque licensing processes.

After the first passage, a window for submitting suggestions for improvements to the draft law opened. Key recommendations from the Natural Resource Governance Institute were incorporated into the text of the law during a discussion on 2 April in parliament. Subject to final approval in the law’s second reading, for which a date has not yet been set, these changes would considerably strengthen the legislation.

The version of the law that passed its first reading in March aims to set out legal principles for the collection, disclosure and dissemination of data on Ukraine’s extractive industries. It takes some significant steps forward.

A report from Ukraine civil society organization Dixi Group outlined how the current licensing system is complicated, bureacratic, unpredictable and prone to corruption. For example, obtaining necessary documents for putting a new oil and gas field or a mining project into industrial operation takes 42 months. Furthermore, license-holders are under no mandatory timeline to develop such projects.

The March draft law promotes reporting for each license and special permit. It also aims to make it easier to determine tax avoidance and slap offenders with substantial penalties.

In total, more than 70 special permits covering more than 11,000 square kilometers, or 30 percent of all licensed areas, can be classified as “dormant” (i.e., not in active exploration, development nor production). According to Dixi Group, state budget rental income from the extraction of oil and gas condensate in 2017 amounted to UAH 40.8 billion (USD 1.55 billion). If the dormant licenses were active, companies would pay an UAH 12.26 billion in rent to the state budget.

One of the law’s important clauses mandates that the Ministry of Energy publish electronic copies of special permits and information on each contract’s terms regarding subsoil use on its website.

The law would benefit from the following recommendations NRGI has proposed ahead of a second reading. NRGI’s recommendations reinforce the law’s main message—to increase transparency across the extractives decision chain.

  • The law should mandate transparency across the full extractives decision chain and should suggest transparency best practices directly into relevant sector laws, policies and practices. One approach would be for the law to enumerate the general categories of required disclosure and mandate future regulations and/or reforms to sector laws contain detailed reporting requirements for each disclosure area. Regulation development should involve relevant regulators and agencies.
  • The law should focus on more timely and mainstreamed ongoing reporting, rather than multiple standalone annual reports. To facilitate more timely and mainstreamed disclosures, the term “Reporting Period” could, at minimum, be revised to mean “a calendar year or such shorter period as may be established.”
  • Payment disclosures should be disaggregated with respect to projects and joint ventures. Extractive entities should report their share of payments to government arising from joint ventures on a proportionate share basis.
  • The law should require the full-text disclosure of all new permits and agreements along with any amendments or annexes. Given that full-text disclosure is required to understand the nuances of agreed terms, legislators should make it clear that the government should disclose the full text of all permits approved by the government and agreements made between the government and companies, along with annexes and amendments.
  • The law’s reference to reporting the “absence” of beneficial owners—the individuals who ultimately control or profit from a company—should be removed and additional extractives-specific beneficial ownership reporting requirements, including on lower control thresholds and politically exposed persons, should be specified. The law requires disclosure of information on beneficial owners or “on their absence.” Including the option to disclose information on the “absence” of beneficial owners opens the door to a major potential loophole that companies could exploit to avoid disclosing beneficial ownership information.
For NRGI, Dixi Group and other Ukraine stakeholders, this has been a multiyear transparency battle. If designed correctly, the proposed law could enable any Ukrainian to view companies’ reports on the taxes they pay to the national and local budgets, companies’ overall production and the identities of their ultimate beneficial owners. This level of transparency is critical if Ukraine’s extractive industries are to be held accountable.

Nasima Nazrieva is a consultant with the Natural Resource Governance Institute (NRGI) in Ukraine.