In particular, there is a number of problems relating to illegal coal extraction and buying from territories not controlled by Ukraine. Also, oil & gas and coal industries received subventions from the budget of Ukraine for many years which reduced the real cost of the end product.
With EU standards in place, the market rules will become understandable for European companies, on the one hand, and the market itself will become transparent for all market players and public authorities, on the other.
Legal Framework
The Ukrainian society’s striving for harmonization with EU standards implies bringing the legislation, financial reporting, transparency of doing business and active public participation in social and political processes into compliance with these standards. This also includes the implementation of the EU–Ukraine Association Agreement.
The implementation of Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings and Directive 2013/43/EU on compulsory audit of annual financial statements and consolidated financial statements after signing the EU–Ukraine Association Agreement is important in this context. Thus, Directive 2013/34/EU requires that undertakings provide their annual financial statements that must include at least the balance sheet, the profit and loss account and the notes to the financial statements. Annual financial statements should give a true and fair view of an undertaking’s assets and liabilities, financial position and profit or loss. Directive 2013/43/EU provides for compulsory audit of the annual financial statements.
Back in August 2015, the Government registered the draft Law No. 2486а with the Parliament proposing amendments to the Law “On Accounting and Financial Reporting in Ukraine”. The document sets the requirement to reporting by extractive companies in compliance with international standards only. At the same time, its provisions were rather too much general and satisfied neither MPs nor the market players. The draft Law was ultimately withdrawn because of changes in the composition of the Cabinet of Ministers.
At the same time, during March–April 2016, the working group established by MPs significantly improved the document. These improvements must be taken into account during the consideration of the draft Law No. 4646 proposed by the Government and replacing the previous version. The Parliament’s version was registered as an alternative draft Law under the No. 4646-1.
Requirements to Disclosure
In this context, special importance is given to a public initiative supported by the Ministry of Energy and Coal Industry regarding the adoption of the special Law “On Disclosure of Information in Extractive Industries”. It aims at detailing the requirements set by the above-mentioned EU Directives and the introduction of the Extractive Industries Transparency Initiative (EITI) standard in Ukraine.
The adoption of this draft Law developed by a working group attached to the Ministry of Energy and Coal Industry will make disclosure of detail information about activities of extractive companies compulsory and simplify access to such information for the public, international investors and public authorities.
Information subject to disclosure under the EITI standard and EU Directives includes the following:
- Data from the register of licenses (special permits for the subsoil use);
- Data on contracts — subsoil use agreements, PSAs, joint venture agreements (not required by Ukraine’s law so far, confidential);
- Data from the register of beneficiaries (ultimate beneficiaries) of extractive companies, including beneficial interest of the government and state enterprises;
- Data on the volumes of prospecting and mining of minerals;
- Data on the export of minerals (total volumes and costs of export with the breakdown by products);
- Data on all types of payments to the state budget, including taxes, and, respectively, budget revenues;
- Data on sales of portion of extracted products or other revenues of the state in kind;
- Data on infrastructure fees and barter agreements;
- Data on incomes from hydrocarbon transportation;
- Data on transactions relating to state enterprises;
- Data on spending budget revenues from mining, including subnational payments, i.e. payments to local budgets.
As a matter of fact, duly prepared EITI reports should include both general information, key performance indicators for the industry, and information on reconciliation of pay records of the government and undertakings. The latter aims to reveal differences in the information on taxes and other payments declared by both parties, and explain them.
The Law “On Disclosure of Information in Extractive Industries” will make such reporting binding for all large extractive undertakings of national importance (i.e. undertaking producing all minerals except sand, crushed stone and come construction materials). In 2015, Ukraine published its first EITI Report which only confirmed the importance of legal regulation of information disclosure as only 32.5% of extractive companies provided the requested information. Although these companies produced 85% of all oil and gas in the country, the information they provided was too generalized, lacked details for particular entities.
Reporting
Analysis of reports of domestic and European companies shows to what extent they are compliant with the above-mentioned requirements. Let’s look at the largest Ukrainian energy companies — Naftogaz of Ukraine NJSC and DTEK. Both published quite detail reports for 2014 which allows analysing the information disclosed by them in terms of its compliance with the minimum EITI requirements.
The report of Naftogaz of Ukraine NJSC substantially complies with these requirements as it contains all the required information except the data from the register of special permits and information about contracts.DTEK’s report is sufficiently detailed too, but lacks information about ultimate beneficiaries, data from the register of special permits and information about contracts. At the same time, these reports provide gross consolidated data on extractive activities without project-by-project specification (i.e. without providing specific information about particular fields or groups of fields where they are grouped under a certain project geographically or operationally).
It should be noted that the EITI standard requires specifying only the entity that made or received payments, and the type of payments. Project-by-project detalization is much welcome. At the same time, EU Directives require such differentiation.
So it is no surprise that reports of the European companies Total and Statoil published in compliance with Directive 2013/34/EU contain more detail information and data from the register of beneficiaries, taxes and statistics on a country and project basis. For example, financial section of Total’s and Statoil’s reports includes information about sales, prices, incomes, expenditures, paid taxes, cashflow analysis.
So the requirements set by the draft Law “On Disclosure of Information in Extractive Industries” are quite realistic. Ukrainian extractive companies will have to disclose project-by-project payment data which will be undoubtedly important for communities. Also, they will have to report not only on their payments to local budgets but on the implementation of social programs which will allow quantitative assessment of their contribution in the development of local communities and infrastructure.
Once the draft Law is adopted, all extractive companies will have to adhere to the principles of transparency and openness. This will make the industry more fair and understandable by making the rules equal for all players. It will also make the industry attractive for foreign investors which, in its turn, will bring capital into the market and support domestic production in Ukraine.
