Why Ukraine needs mandatory disclosures legislation
By Mariia Melnyk and Roman Nitsovych, DiXi Group on June 15, 2016
After being accepted as an EITI Candidate country in October 2013, Ukraine’s first UAEITI report was published in December 2015. The report covered the oil and gas sector, with both production and transportation, for the 2013 financial year. While it was a significant step towards more transparency in Ukraine’s extractive sector, the impact of the report has turned out to be quite limited. The data aggregation is too high level and only 38 of the 120 upstream companies disclosed their revenues in full, significantly narrowing the scope of the report. Moreover, according to the UAEITI national secretariat, iron ore mining and coal industry weren’t part of this report and should be included in the next EITI report, which will cover the 2014 financial year.
At first glance, it seems like Ukraine is heading in the right direction. Back in October 2014, a legislation on the disclosure of beneficial ownership for all types of companies was adopted. It has taken almost a year to implement this system, with a public registry now fully functional. While this makes Ukraine a global leader on the disclosure of beneficial ownership, there are still areas that need improvement.
Secondly, following efforts by Ukrainian experts, NGOs and MPs, the Ukrainian parliament adopted a law on ensuring transparency in the extractive industries. This law is what made publishing the first UAEITI report possible. However, most companies affected by this law have been reluctant to report or to provide disaggregated data, as there were no clear provisions for its implementation. It was only in December 2015, a few days before the UAEITI report was released, that the government published a detailed procedure for data collection and reconciliation.
In April 2016, the government adopted amendments to the procedures of granting licenses for the use of subsoil and the respective auctions to be held. These changes create more opportunity for competitive and transparent procedures, demanding that the participating companies disclose property structure up to final beneficiaries.
Despite these positive steps, Ukraine still lacks a solid legislative basis on transparency in extractives and, without it, the ambitious scope of the next UAEITI reports could be undermined. Civil society and local communities are asking for more detailed and disaggregated reporting in order to get relevant information on production volumes, investments, revenues, and especially expenditures on infrastructure, environmental protection and local development.
In order to bridge this gap and cover both oil and gas and the mining industry, including the production of coal and iron ore, the members of the Ukrainian Multi-Stakeholder Group (MSG) – in particular civil society experts – initiated a study of best international practices of project-by-project reporting. Those included the U.S. Dodd-Frank Act and the SEC rules, the EU Accounting and Transparency Directives, the Canadian Extractive Sector Transparency Measures Act, and the Australian PWYP Bill.
Following the study, the DiXi Group think tank initiated the development of the draft law on mandatory disclosure. It was supported by the MSG and the government: in September 2015, the Ministry of Energy and Coal Industry created a working group in charge of drafting the law, in December 2015 the document was published. Currently, stakeholders are in the process of finalizing the law, following both official procedure of interagency agreement and extensive discussions with businesses and civil society.
The law “On Data Disclosure in the Extractive Industries” will lead to better accounting and financial management, which will already be required by the new rules on financial reporting (the legislative initiative currently pursued by the Ministry of Finance). Its universal application would allow for respective data of all companies operating in the field to be accessible. The disclosure of this required information, namely on socio-economic and environmental aspects, will provide the necessary ground to establish a dialogue with local communities.
This draft law targets both implementation of the EU directives, in terms of project-level, reporting and the mainstreaming of the EITI Standard. It also covers contract transparency and a wide range of options for the disclosure data.
As a unique case in Europe, its adoption would ensure implementation of international reporting standards in the extractive industry of Ukraine so that the companies could no longer conceal relevant information under the guise of certain interests, including trade secrets.
With project-specific information, citizens and local communities in particular can ensure that the companies receive fair returns, and track how the money is used by different levels of government. The government, on its part, needs project-level data to detect misconduct and improve fiscal policy.
Transparency in Ukraine’s energy sector is a key opportunity to attract necessary investments and improve performance in how business is done. Once the law is adopted these opportunities could be seized for the benefit of all citizens of Ukraine.