How to reactivate the subsoil use sector?

12-01-2021

Since its independence, Ukraine has constantly changed the subsoil legislation.

Legislative acts were often developed as the moment arises. It is logical that after all these years, there are a lot of such acts and most of them are not harmonized with each other.

Experts from Projekt-Consult GMBH (Germany), MinPol (Austria), and the Better Regulation Delivery Office (Ukraine), with the support of the European Union, developed a new subsoil code and submitted it to the Ministry of Environmental Protection.

The document should become a common denominator in the subsoil use regulation. What important problems will it solve?

The subsoil use is okay, but the land use is not

Entrepreneurs often receive a subsoil use permit, but cannot obtain land title documents: land plots are privately owned or buildings or forests are located on them.

The new code should resolve this issue. Such aspects as a land owner, the availability of real estate, nature reserves, cultural heritage objects, or forests, will be clarified before the reservation.

A land plot with no restrictions will be reserved for a specific deposit by its administrators to be transferred to a subsoil user. Private land can also be reserved but in case of its preliminary purchase, including all the buildings located on it, from owners. Land forest plots will also be subject to reservation.

Subsoil assets will not be provided if it is impossible to acquire land within the field. Reserved land plots may be provided for use not for the subsoil use purpose only for the period until the permit is issued.

Stand-by of mineral deposits due to “inactive” licenses

After obtaining a subsoil use permit, a market participant has the right to produce the field exclusively personally. If there is no more need or possibility to produce it, the subsoil user is faced with a choice: to return the permit or keep it “inactive” (non-producing permits).

Now in Ukraine, every third subsoil use permit is “inactive”. Holders of such licenses have once been granted the subsoil use right outside of auctions and do not renounce them voluntarily, keeping them “for further use”.

Due to this, mineral deposits are idle and the increase in raw material production is blocked. The result is that Ukraine continues to depend on imports.

The new draft code proposes to allow transferring subsoil use rights to third parties (fully or partially, to one or more third parties). To do this, a licensee will have to inform the State Service of Geology and Subsoil of Ukraine (Derzhheonadra), and a subsoil user who obtained it will have to re-register the subsoil use permit.

If holders of “inactive” licenses do not want to transfer the rights but do not use their land deposits, they will be forced to pay for the subsoil use. The time at which a subsoil user will start paying for subsoil use will depend on the type of use and minerals.

Stagnation of geological exploration

The state lacks funds for geological exploration, so it becomes impossible to increase the mineral resource base and create geological information. The new draft code provides for the creation of the State Fund for the Development of Mineral Resources as part of a special state budget fund.

It will be filled with deductions from rent, fees for subsoil use permits, funds from the sale of permits at auctions, fees for the provision of geological information, and fees for subsoil use.

Outdated regulation

Subsoil users now face many problems when submitting and registering documents. They are required to submit a full list of documents in person, although all this information is publicly available. Both subsoil users and the state suffer from the lack of digitalization.

The creation of e-cabinets for users and a catalog of geological information along with an interactive map of minerals for the state will significantly reduce the permitting procedures and corruption risks allowing to receive up-to-date information on the situation in the sector.

Additionally, it is still difficult to regulate the relations between the Derzhheonadra and subsoil users during inspections. One of the results of Derzhheonadra’s inspections is an instruction for subsoil users to eliminate the identified violations of legal requirements.

However, deadlines for implementing such instructions are not set. Sometimes there are situations when regulatory authorities manipulate these deadlines. The draft code sets clear deadlines for such instructions and removes this legal conflict.

Moreover, it will be possible to suspend subsoil use permits only by a court decision, and not by a Derzhheonadra’s decision as it is now.

Constraints on the sector’s development

Some of the current regulatory acts do not help to attract investments in the sector. For example, the methodology by which mineral reserves are estimated in Ukraine does not allow investors to properly assess their qualitative and quantitative characteristics and determine the prospects of deposits.

The new draft code will allow subsoil users to assess mineral reserves according to international standards. This is important in the context of the introduction of the “subsoil use right alienation” concept because it will allow subsoil users to alienate their subsoil use rights to another investor, including a foreign one.

Lack of state support

It is extremely important to develop the subsoil use market, as it concerns national security. The draft code provides for state support for users who invest heavily in the more environmentally friendly production and use modern technologies and equipment minimizing environmental impacts.

Subsoil users working in difficult geological conditions, for example, at great depths of mineral occurrence, will also receive support.

The subsoil use development can be facilitated by the support of fully-integrated enterprises. They can employ thousands of workers and become budget-generating enterprises in the respective areas.

However, now they participate in auctions on general terms, sometimes not being able to compete with other participants. The new draft code will allow such enterprises to obtain permits without an auction.

For this purpose, it is planned to create a register with clear requirements for enterprises, which can be classified as the fully-integrated ones. Such a requirement, for example, is the distance of not more than 50 km between the enterprise and the land deposit.

Another problem that also should be resolved is the classification of almost all minerals as minerals of national importance. It is difficult to obtain a permit to use these types of minerals.

However, in Ukraine, there is a list of minerals of local importance. Expanding this list will increase the number of minerals, the subsoil use permits for which can be obtained under a simplified procedure without an auction. This will provide the domestic market with its own raw materials, in particular for construction.

In general, the draft code is aimed at fulfilling Ukraine’s European integration obligations. The costs of doing business will be reduced to the amount reasonably necessary and related to business development, ensuring employee safety and ecological security, paying tax liabilities.

Outdated permitting procedures and documents will be canceled. Access to information on mineral deposits will be as open as possible, and the administration of permits will become digital. The subsoil use rights will be alienated mostly through competitive procedures.

Ukraine will become less dependent on imports of energy and raw materials. The subsoil use sector will be able to attract foreign investments. The competition will intensify, and the geological exploration and extraction rate will increase.

Additional jobs will be created and budgets at all levels will be filled through taxes, fees, and other mandatory payments.

The introduction of state support will allow the use of modern technologies, the purchase of more environmentally-friendly equipment, the maximum extraction of minerals from deposits and their extraction in difficult geological conditions.

We expect that the new draft subsoil code will be considered by the parliament soon.

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