Why Ukraine needs mandatory disclosures legislation

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.


Ukraine transparency infographic (1)

First EITI report in Ukraine – a golden opportunity

The launch of the first ever published EITI report in Ukraine in December 2015 offered a golden opportunity to look back at the progress accomplished so far and to look ahead at the actions still needed to generate genuine openness and accountability in the Ukrainian oil, gas and mining sectors.

In recent times, Ukraine has often made it into the headlines for negative reasons. With an unnerving conflict in the Eastern part of the country and the ongoing economic downturn, there was not much positive to report about. Nonetheless, Ukrainians and, in particular, civil society remain undefeated and have been ceaselessly campaigning for a better management of the natural resources exploited in Ukraine. Despite numerous challenges, civil society actors have put many efforts into engaging government bodies and extractive companies on the need to improve accountability in the oil, gas and mining sectors. It therefore comes as no surprise that civil society has become the driving force of the implementation of the Extractive Industries Transparency Initiative (EITI), a global multi-stakeholder initiative that Ukraine officially joined in 2013. After having overcome many challenges in collecting the relevant data, the first ever EITI reconciliation report – which brings together what extractive companies pay to access natural resources and what different Ukrainian government entities receive in exchange – was published early December 2015. This first EITI report is the first time that the Ukrainian population will have access to important information about the development of oil and gas are in their country and how the sector contributes to the Ukrainian economy and state budget.

The 2013 data in the published EITI report shows how much Ukraine has earned from oil and gas industry that year. With a production of 3 million cubic meters of oil production and 21 million cubic meters of gas production for 2013, the industry has paid more than UAH 25 billion, or just over US $ 1 billion, in taxes, which is the equivalent of the Ukrainian 2015 defence budget. Direct contributions of the oil and gas extraction sector to Ukraine’s GDP amounted to 1.3%.

The report goes on explaining how Ukrainian regions, called oblast, can also benefit from oil and gas exploitation. Of the 17 taxes included in the scope of the 2013 report, seven actually go directly to regions where extraction is taking place: Ivano-Frankivsk, Lviv, Poltava, Sumy, Kharkiv Oblasts. For Ukrainian citizens, and in particular those living close to extractive sites, it is a first to find out how much money goes to their local budget. Benefits from hydrocarbons do not only come in the form of monetary contributions to the state funds, they also include the creation of job opportunities. In 2013, 55 600 Ukrainians were active in the country’s oil and gas sector, amounting to the population of an average Ukrainian city.

Even more importantly, the report reveals the great potential of the extractive sector for Ukraine. From the 410 fields that were commercially operated in 2013, only 252 fields (61%) were generating revenues for the state. The remaining fields were divided up among those in the state of exploration (108 fields – over 25%) and those suspended (50 fields – 12%). This means that with sufficient investments, the extractive sector could quickly become a driving force of the economy, while also ending Ukraine’s energy dependency, provided though that the sector is well managed. This is where the biggest challenges for Ukraine lies. Overcoming the tensions with Russia does seem to be an obvious first step towards stability but is only part of the solution.

Old habits die hard and despite the exciting achievement of having published a first EITI report, opacity in the sector prevails. The EITI report falls short of many disclosure requirements under the EITI Standard. No data was compiled for the mining sector for instance, although the intention is that coal in particular will eventually be covered by EITI reporting. Only a third of the 120 identified private companies were willing to voluntarily disclose information about their operations. Only half of state enterprises were willing to communicate their data to the independent reconciler while many local state entities simply refused to cooperate. Mistrust and tension between all parties are still dominating in the extractive industry.

This is why civil society in Ukraine can’t solely relied on a voluntary disclosure mechanism such as the EITI. The Ukrainian PWYP coalition, with the Dixi Group, a think tank with a special focus on Ukraine’s energy sector, has actively sought to advance mandatory legislation and was able to land some major victories in this in 2014 and 2015. In October 2014, the Law on Amending Certain Legislative Acts Related to Identification of Ultimate Beneficiaries of Legal Entities and Public Officials was adopted, required companies, including those operating in the extractive sector, to disclose their real owners. This was a tremendous step forward and has put Ukraine in a leadership position in fighting dodgy deals enabled by secret ownership structures.

“Disclosing the information about beneficial owners will make business not only more transparent, but also more responsible.” Olena, Pavlenko

“Disclosing the information about beneficial owners will make business not only more transparent, but also more responsible. The real owner will not be able to hide, s/he will be accessible to lawyers and journalists and will understand her/his responsibility for any violations made by the company in the country. When the business has a concrete face, it is always easier to talk about fair rules of the game. Moreover, you will never be successful in breaking up monopolies if you don’t know who the players are. For the Ukrainian energy sector it is one of the most important objectives now, and we are waiting for the disclosure of this information.” – says Olena Pavlenko, Dixi Group.

The fact that the international Board of the EITI, who met in Kyiv on the 9th and 10th of December, discussed making the disclosure of beneficial ownership a requirement under the EITI Standard was therefore no coincidence. Although important technical aspects, such as the timeline for when this would become mandatory for all EITI implementing countries, remain to be determined, the EITI Board strongly supported the need to identify the real owners of companies bidding for, operating in and investing in the oil, gas and mining sectors.

In addition, the PWYP coalition is currently pushing for mandatory disclosure of extractive revenues, in alignment of the EU Transparency and Accounting Directives adopted in June 2013. A draft law has already been prepared in partnership with the Ministry of Energy and Ukrainian NGOs and published on the Ministry’s website for public discussions. “We do expect that the draft law will come to the Parliament soon, and will work with Members of Parliament to adopt it by the middle of 2016” – says Olena Pavlenko.

Fresh Out of the Oven: Fresh EITI Law Adopted in Ukraine

On 16 June 2015, the Parliament of Ukraine adopted the law “On amendments to some legislative acts of Ukraine on increasing transparency in the extractive industries in Ukraine” (Reg. № 2591 from 04.07.2015).
This is a big step forward for transparency and accountability in the sector in Ukraine and the result of years of campaigning by civil society including the PWYP affiliated coalition under leadership of Dixie Group and politicians in the country. It is expected to lead to major changes in the legislative system as it needs to be aligned with the EU Transparency Directive.

The law was prepared to enable the disclosure of financial information and business activities of Ukrainian extractive companies ahead of the EITI report due to be submitted by 17 October 2015. The report will cover the 2013 calendar year only, proving that Ukraine still needs to have a stronger law on mandatory disclosures with reporting data on annual bases and in open online and machine readable format.

The disclosure of payments from extractive companies to the government and of the government’s revenues from their activities will help overcome corruption, ensure the creation of a favourable investment climate and enable an effective and competitive environment in Ukraine.

One of the supporters of the law – Member of Parliament Ms. Natalia Katser-Buchkovska, from the “People’s Front” party, wrote on her Facebook page: “Thanks to the implementation of this initiative, every citizen will have access to: information on national and local taxes paid by gas producing companies; information on the geological exploration, use and protection of natural resources. In its turn, the government will have opportunities to manage better the mining sector of the economy.”
Transparency standards will have a positive impact on the sovereign credit rating of Ukraine, will facilitate cash flows and will strengthen investors’ trust as a result of reduced corruption and increased competitiveness of the industry.
In addition, these measures will lead to the modernisation of Ukraine’s gas transit projects by allowing technical assistance from international financial institutions, with the expectation that this will enable Ukraine to use gas pipeline systems for reverse gas transportation from the European Union. As a major gas transit from Russia to Western Europe, Ukraine earns millions each year.

Olena Pavlenko, president of the DIXI Group and member of PWYP’s Global Council, feels very optimistic about the adoption of the new transparency law: “Civil society in Ukraine has been campaigning for the implementation of the EITI since 2008. In 2013, after over 5 years of non-stop campaigning, we reached our goal and Ukraine finally became a candidate country. However, this was just the tip of the iceberg. It took us another 1,5 years and consolidated joint efforts from all stakeholders to push this law through. Our coalition and other supporters are very excited about it and are looking forward to the shift from transparency to accountability. There is always room for improvement so we’ll continue our everyday modest work towards a better future for the citizens of Ukraine.”

This win highlights the important role that civil society plays in ensuring transparency and accountability in the extractive industries in Ukraine and beyond. But this is not the end of the road in Ukraine, next steps will be to make change happen progressively through the EU Transparency Directive and mandatory disclosures.

Communiqué of PWYP Eurasia meeting

On 27-29 April 2015 representatives of civil society from Albania, Azerbaijan, Germany, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan and Ukraine gathered in Kyev, Ukraine for the workshop on Ukrainian and Eurasian civil society in the EITI: Common challenges – joint approaches.
Civil society in the region faces similar difficulties in the implementation of EITI, whether that is ensuring that civil society is an effective participant of the multistakeholder group, having to operate in a restrictive environment or a lack of funding opportunities. The need for civil society to have a deeper knowledge of EITI and be better coordinated was expressed, and so this workshop also aimed to strengthen the network of PWYP Eurasia members with a view to promote sharing resources and information.

In order to face these challenges, participants met to not only share their experiences and best practices – in order for national coalitions to improve their own strategies based on shared knowledge – but also to strategise on how they could work together as a region to better implement and use EITI.

To this end, participants identified a series of best practices for benchmarking MSGs, which include the recommendations of holding the meetings in an extractive region outside the capital and the need for consultations with local communities in order to inform citizens about EITI. Participants also pooled their knowledge to map important extractive companies operating in their country, so as to find targets for joint advocacy and areas of common ground. Participants also agreed on a 2015 – 2017 joint action plan to promote and defend EITI implementation in the region.

Civil society organisations in the region are committed to EITI implementation in their respectful countries and share a number of recommendations.

That governments in the region ensure free, full, independent, active and effective participation of civil society in the EITI implementation process. Publish What You Pay members will monitor the situation in various countries and support members that face a deteriorating environment.
That governments embed EITI Standards in their national legal frameworks.
We call on global donor organisations to recognise that Eurasia is a region with much potential that faces many challenges, and to support projects in the region, particularly those related to transparency and accountability in the extractive sector.


We call on all extractive companies to adhere to and respect their EITI obligations in the respective countries of Eurasia. Too many companies are in breach of environmental regulation or fail to disclose their payments.


To call upon other countries in the region such as Georgia, Armenia, Russia, Romania to commit to the principals of transparency and accountability and implement EITI.

All decisions and recommendations are based on the principle that natural resources belong to the citizens and need to be managed responsibly and equitable so that women, men and youth in resource rich countries benefit.

Ukraine

Launched in 2009 to unite the efforts of Ukrainian NGOs working for transparency and accountability in the extractive industries, the Energy Transparency Association was affiliated to PWYP in 2014. Despite difficulty operating in recent years due to the Crimean political crisis, members have worked to address legal obstacles currently preventing full and effective EITI implementation. They have also engaged with the government on the introduction of a mandatory disclosure law that would oblige extractive companies to publish their payments to governments. At community level, the coalition works to inform people living alongside extractive sites about the impacts and benefits of extraction.