The parliament adopts as the basis a draft law on transparency of extractive industries

02 March 2018

The Verkhovna Rada of Ukraine has adopted as the basis the draft law 6229 on transparency of extractive industries, voted “for” by 231 MPs.

This draft law was developed for the purpose of implementing international standards and advanced practices of disclosing information in Ukraine’s extractive industries in accordance with the Extractive Industries Transparency Initiative (EITI).

“This law implements the EITI standard comprehensible for large and medium-sized international companies. Over 600 companies in the United Kingdom, France and Canada are already publishing their reports according to these rules, and hundreds of companies more will join them soon”, Roman Nitsovych, Dixi Group’s Head of Programs said at the round table “How to ensure transparency of extractive industries?” He referred to the studies proving that implementation of EITI translates into the growth of foreign direct investments by 5.3% on average.

 

According to the explanatory note, the passage of this law is an important step toward ensuring transparency of the management of extractable resources, because it will enable the society to analyze tax and administrative burden on extractive businesses and the need in investments.

"Considering the fact that effective 1 January 2018, a portion of the taxes collected in extractive industries will be remitted to local budgets, this draft law attains huge importance. People will know that they aren’t being cheated. That a well, or some deposits, or a quarry located within their community is not misused and that people will benefit from it", MP Lev Pidlesetskyi, a co-author of the draft law 6229 said.

According to this document, parent companies operating in extractive industries and registered in Ukraine will have to file consolidated financial statements and consolidated reports on production operations and payments.

Extractive companies will be required to file their production and payment reports every year by 1 September of the year following a reporting period.

Extractive companies will also be required to post electronic copies of their special extraction permits, along with the relevant abstracts from extraction operation agreements, on their websites.

In turn, the Energy Ministry will have to make electronic copies of issued special extraction permits and information regarding essential terms and conditions of extraction operation agreements available on its official website.

“Only extractive businesses know extraction economy and whether extracted resources are spent on yachts, apartments in London, etc. for the benefit of a narrow circle of senior execs of extractive businesses, or they generate budget revenues. Neither the government nor the society has this information”, MP Ostap Yednak, a co-author of the draft law commented on this situation.

The draft law also envisages establishment of a multi-stakeholder group for implementation of EITI in Ukraine, comprised of representatives of central bodies of executive power, businesses operating in extractive industries and civil society organizations.

"The passage of this draft law means closure, to a large extent, of the problematic holes preventing Ukraine from joining the ranks of the world’s most transparent countries. These are requirements concerning the companies’ reporting in general and reports on particular projects, and requirements concerning disclosure of information regarding the companies’ operations", Oleksii Orlovskyi, member of the EITI Board said during the round table “How to ensure transparency of extractive industries?”

On the eve of voting, representatives of civic organizations from the Poltava, Lviv and Kharkiv Oblasts made a video appeal to members of the Ukrainian parliament. The public activists urged MPs to support the draft law 6229. In just one day, the video received over 1000 views on Facebook. Watch the video.

According to assessments by DiXi Group, the draft law 6229 on transparency of extractive industries will help increase the inflow of revenues to the state budget, reduce budget deficit and stabilize the exchange rate.

On aggregate, over 70 special permits for more than 11 thousand sq.km of production sites in total (~30% of all licensed sites) may be categorized as “dormant”, i.e. ineffectively used. The law requires licensees to report on every licensed site, and will allow to determine who underpays taxes to the state budget and how much.

In 2017, state budget revenues from the rent payable on production of oil, gas and gas condensate amounted to UAH 40.8 billion. Had dormant licenses been used effectively, the state budget would have additionally received almost UAH 12.26 billion in rent payments (*estimated). With other taxes included, this figure would have been much higher.

With the additional UAH 12.26 billion in revenue from rent payments, budget deficit could’ve been reduced by 25.6% in 2017 (deficit of the 2017 state budget has totaled UAH 47.85 billion).

The draft law on transparency of extractive industries implements the best practices of the EITI standard, which means, according to economic studies, a growth of foreign direct investments in Ukraine by 5.3% of GDP.

EITI is an independent, voluntarily maintained international standard on transparency of extractive industries being implemented 51 countries of the world, including Kazakhstan, Norway, United Kingdom, Germany, United States and other.

A video of the round table “How to ensure transparency of extractive industries?”

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