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    ROADMAP FOR RESOURCE GOVERNANCE POLICY REFORM

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    This policy brief is prepared within the framework of the Project “Increasing Transparency in the Extractive Sector Through Promoting Legislative and Ad- ministrative Reforms in Ukraine” sup- ported by the Natural Resource Gover- nance Institute (NRGI). The Project is implemented by DiXi Group think tank. Any views or statements expressed in this document do not necessarily re- flect those of the  Natural Resource Governance Institute.

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    SUMMARY

    The resource governance reform requires implementation of simul- taneous changes in many public administration aspects. Sound pub- lic policy relating to such governance should harmonize provisions of land and fiscal laws, financial and accounting reporting rules, en- vironmental protection standards, format and extent of public data disclosure, including beneficial owners of extractive companies, and, more importantly, geological information.

    In addition, such policy should comply with the general principle of subsidiarity that is being implemented in Ukraine within the frame- work of the decentralization reform. It is especially important in a view of a satisfactory score in the local impact subcomponent of the Resource Governance Index (RGI)1.

    In other words, aligning extractive industry governance stand- ards in Ukraine with the best global practices is a challenging and comprehensive task.

    The latest RGI that analyzed resource governance quality for the pe- riod of 2015-16 provided the research team with a valuable general overview of the problem. While only governance standards in the oil and gas sector were assessed in Ukraine, it helped drag the re- searchers’ attention to the key aspects to be improved. Following a discussion of the RGI results, this analysis focuses on reforming 11 aspects of public policy as broken down into 3 large groups, includ- ing transparency and access to information, business deregula- tion tasks and involvement of local community interests.

    While occasional improvements cannot influence low RGI scores in the enabling environment component assessing general business environment, this roadmap of priority activities sought to out- line the path for Ukraine to substantially improve its current score in the next RGI.

    This study helped achieve one of the most valuable results — un- derstanding that over the last few years significant efforts have been made in the appropriate direction in terms of development

    1 For more information about the RGI and Ukraine’s scores see: http://dixigroup.org/publications/shcho-take- indeks-upravlinnya-resursam/

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    and, partly, adoption of amendments to the framework legislation. In particular, the Draft Laws No. 4646-д (implementation of modern accounting and financial reporting standards), No.  6229 (ensuring transparency in extractive industries), and deregulation Draft Law No.  3096-д were registered in the Verkhovna Rada, and the Laws No. 1793-VIII (partial rent decentralization) and No. 2059-VIII (envi- ronmental impact assessment) were passed.

    Almost every aspect of reforms requires significant coordinated efforts of different executive authorities for further clarification and regulation of specific procedures for implementation of im- proved rules. There are no concerns as regards delays in implemen- tation of such decisions in part where such regulatory activity coin- cides with other priorities of the Government, especially in terms of energy safety improvement. The rest of necessary activities as well as expanding relevant best practices beyond the oil and gas sector will require close attention and support from the civil society and international stakeholders.

    However, the decisions and documents passed generally focus on occasional elimination of barriers or improvement of specific proce- dures within licensing, environmental or fiscal policies. Development of the comprehensive policy which would establish strategic ob- jectives for the whole sector reform will take place in future. The new Subsoil Code of Ukraine should become the key document that must embody this idea and codify provisions scattered through different laws.

    Judging by the experience of efficient development of the Concept for Development of Ukraine’s Gas Production Industry2, the problem rather lies in the Government’s vision of priorities that in the lack of capacity for such strategic activity. Therefore, it is very important to give greater priority to improvement of resource governance standards in Ukraine on the Government’s reform agenda.

    The analysis showed that, given such political commitment and the successful results achieved, implementation of priority activities aimed at improvement of the policy and conditions for subsoil users and other stakeholders might actually take 15 months. In addition, if this time period will be used for extensive work involving develop- ment and launch of future strategic reforms, Ukraine can become one of the leaders of the future Resource Governance Index by 2019.

    2 Approved by the CMU Ordinance of 28 December 2016 No. 1079-р (http://www.kmu.gov.ua/control/uk/ cardnpd?docid=249766439)

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    PART 1. TRANSPARENCY BY DEFAULT

    Good governance is based on transparency across the whole value chain, reflected in detailed and disaggregated reporting. In extrac- tive sector, the latter means disclosing information on what you pay (production and revenues), why you pay (contracts and permits), and who stands to benefit (beneficial ownership).

    These became the new global standards in the extractive industry not just because transparency allows all stakeholders to observe ac- tual trends and developments in the extractive industries, but most importantly to hold responsible decision makers and market players responsible to account for their conduct. Directive 2013/50/EU (new Transparency Directive) and Directive 2013/34/EU (new Financial Re- porting Directive) require from oil and gas companies, mining com- panies and logging companies to report on their payments to gov- ernments at the project level. The same requirement can be found in the Extractive Industries Transparency Initiative (EITI) Standard, being implemented in more than 50 countries worldwide. Ukraine obtained the EITI candidate status in 2013. In the next year, the EU-Ukraine Association Agreement was signed with relevant com- mitments. At the same time, it is important to distinguish the EITI standard that provides a broad set of transparency requirements across the whole value chain of the extractive industries from the somewhat more specific and narrowed down EU accounting direc- tives, which are a great complement to this broader vision, particu- larly around production and revenue collection.

    Project level payment reporting provided for by these standards entails synergic benefits on numerous levels. Its approximation to the most detailed granularity enables all stakeholders to accurately determine whether the obligations that are usually determined at the project level are being met. In other words, it allows the govern- ment, companies and citizens to determine whether companies are compliant with their respective financial obligations. Not only does it bring considerable benefits for the citizens through allowing them to ensure that companies are paying their fair share, but it is also good for investment by means showing a non-discriminational treatment for all companies by the government.

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    Apart from payment reporting at the project level enabling inves- tors to make informed decisions on attractiveness of specific field developments and communities to understand their benefits, these standards require disclosure of contracts. It means that any con- tracts granting the right to mineral resources development (explora- tion, extraction and exploitation) must be disclosed to the general public.

    When people have no access to contracts, they cannot monitor the extractive company’s performance of its investment and other ob- ligations, which often leads to conflicts that block development of mineral resources and hinder economic development. In addition, disclosure of contracts results in deals that are more balanced; bet- ter able to stand up to public and commercial scrutiny and better drafted, so less likely to have legal issues associated with them.3, and thus has more chances to engage more responsible and transparent companies.

    Despite successful disclosure of some data, e.g. disclosure of the Register of Special Permits for Subsoil Use and geological maps4, and disclosure of information on ultimate beneficial owners in the Unified State Register5, the data on specific fields and areas under development or prospective development is scattered through vari- ous agencies. There is an acute need for creation of the single data portal with free access.

    We should also acknowledge that new reporting involves minimal expenses, including companies’ expenses related to additional ac- counting and financial reporting activities, auditor’s services as well as public expenditure on collection and processing of this informa- tion. However, due to extended access to extraction data, the Gov- ernment and potential investors will have a clear vision of the situ- ation and will be able to set rules of the game (including licensing system, tax and rent rates).

    It is proved that greater transparency brings greater investments: the data analysis in 81 countries of the world showed that only ac- cession to the