Sustainable Legal Framework to Regulate Transparency in Extractive Industries as a Basis for Establishing a Dialogue and Raising Investments

The “offshore” scandal, the notorious investigation of Onyshchenko case and the recent decision on the investor in Yuzivska field much increased the importance of ensuring transparency in the extractive business.

Sustainable legal framework regulating the issues of transparency in business is one of the methods to prevent corruption or other illegal schemes. In Europe, these issues are regulated by Directives 2013/34/EU, 2013/50/EU and 2007/14/EC. These directives introduced project-by-project reporting that provides for extractive companies’ reporting on their incomes, taxes, liabilities, number of employees, etc., on a country and project basis.

Earlier, international rules required reporting on a general corporate basis disclosing global and regional indicators. Therefore, such reports contained information about general activities in Africa and Europe without, however, providing details on each particular country or license.

Project-by-project reporting helps governments and the public to obtain more detail information as companies are required to report on each on-going project, i.e. provide information about their extractive activities in a particular country.

These rules are already followed by such companies as Statoil and Shell that were one of the first to publish their detail project-by-project reports. Moreover, such reports enable tracking payments by subsidiaries of large multinational companies operating in Ukraine to national and local budgets. Such data can be found, for example, in the reports published by Eni or Ferrexpo.

In the U.S., similar rules were introduced by Section 1504 of the Dodd-Frank Act. It requires American as well as foreign companies listed in the U.S. to disclose information about their payments to any governments.

Of course, when the Act was adopted in 2010 these revolutionary rules caused much ado and faced opposition. In particular, a number of companies initiated court proceedings to defend their right to keep confidential and not disclose such information. Following a several-year long litigation, the U.S. authorities had their way, and new rules were introduced in June 2016. From now on, extractive companies will have to provide their detail financial statements.

Ukraine is trying to follow the global trends as well. Thus, in December 2015, the Ministry of Energy and Coal Industry published the draft Law “On Disclosure of Information in Extractive Industries” on its website which had been developed by public experts with the support of Renaissance International Fund. In June 2016, following a series of discussions with representatives of the government and business, the document was registered with the Parliament (reg. No. 4840). MPs members of expert committees on fuel and energy sector and environmental policy supported this draft Law and recommended it for adoption in the first reading which is expected in autumn.

So what exactly does this draft Law provide for? It will bind extractive companies to disclose information about taxes and other duties they pay to the budget. Such information will be disclosed in annual reports to be published by companies and compared to the information about the budget revenues within the framework of the Extractive Industries Transparency Initiative (EITI).

At the same time, the draft Law also provides for project-by-project reporting. Once it is adopted, such large Ukrainian companies as Naftogaz of Ukraine NJSC and DTEK will report on all their operations, including foreign ones. Therefore, Naftogaz’s report will show the company’s taxes paid in Egypt, and DTEK’s — in Russia.

But it will be local communities whose territories are used for extractive purposes that will benefit most. Their representatives will be able to check amounts actually received by local budgets, and whether companies and local self-governing authorities managing the budget funds fulfil their obligations in good faith. In the long run, business is no less interested in building dialogue with the public on trust.

The adoption of the draft Law will not only show Ukraine’s compliance with international standards, but also drastically change business practice in terms of doing transparent business. Corporate reporting will allow improving the investment climate in the extractive industry thanks to the transparent updated information about the state-of-the-art in the industry, and establish a dialogue between the government, the business and the public.

Mariia MelnykSpecialist for European Integration Programs
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