The Verkhovna Rada has recently adopted draft law No 5009 on simplification of connection to electricity grids in the first reading.

The document is designed to significantly simplify the procedure for connecting customers’ electricity-generating equipment to electricity grids, reduce the duration of a procedure of land allocation for electricity grid facilities, introduce a “single window” mechanism for document exchange between customers and system operators (submitting appeals, applications, requests, obtaining the information on connection issues by customers, signing contracts and paying for services).

Why is this important?

Currently, the procedure for connecting to electricity grids is complex, bureaucratic, and time-consuming. In some cases, connection to electricity grids can take years. At the same time, the cost of connection to electricity grids for business is one of the highest in the world.

Additionally, the simplification of the procedure for connecting to electricity grids will significantly improve Ukraine’s position in the Doing Business rating (ease of doing business index).

Adoption of the draft law will simplify the procedure and reduce the connection time for citizens and businesses, eliminate corruption by reducing direct contacts between customers and operators’ workers, and, ultimately, improve the investment attractiveness of the economy and increase the efficiency of electricity grids.

BRDO experts are among the drafters of the law and are ready to provide further assistance to effectively simplify the procedure of utility connections and their maximum transparency.

Between 5.2 and 7 million Ukrainians use monthly open state data-based services — this is 17-23% of Ukrainian Internet users. The respective analysis was conducted by experts from the Better Regulation Delivery Office (BRDO).

According to the analysis, the most popular data are competitive intelligence (up to 2.7 million), medicine (up to 1.9 million), and public transport (up to 1.3 million) data.

The analysis was based on the SimilarWeb service data. For this purpose, the average monthly number of unique visitors to the service websites was used. Data of the largest services were refined by their representatives,

Services are categorized by subject. As user audiences may be the same within a category, the lower number of users in the category is the highest index in the category, and the upper one — the sum of indices.

Upper and lower estimates of the number of open data-based service users in Ukraine are defined as the sum of upper and lower estimates by category.

BRDO experts conducted the Open Data Policy analysis, which formed the main problems in the open data sector.

Industrial hemp is not a narcotic drug. The Parliament registered the relevant draft law No.5596 regarding the trade of hemp for medical use and in scientific and scientific-technical applications that will also allow legalizing medical cannabis. BRDO experts actively participated in drafting the document.

The draft law defines industrial hemp containing up to 0.2% of THC as non-narcotic. Accordingly, industrial hemp is considered a common crop that is not subject to quotas and licensing.

“For Ukrainian farmers, it is an opportunity to finally start growing this crop in the same way as European producers, and for Ukrainian businesses — to create a variety of products from it. In Ukraine, the developed industrial hemp market will give a powerful impetus for the economy, as this crop is one of the most environmentally friendly plants, which does not require pesticides and allows to create more than 50 thousand products (clothing, food, plastics, perfumes, cosmetics, oil, sweets, etc.),” Iryna Hruzinska, Agriculture Sector Head, explained.

It should be noted that so far in Ukraine, it is legally allowed to grow industrial hemp with up to 0.08% of the THC psychoactive component content. For comparison: in the EU, the permitted THC level in industrial hemp is 0.2%, in the US, Canada, and China — 0.3%. This creates over-regulation of the market and artificial barriers to business development and its competitiveness in international markets.

Last year, experts from the Better Regulation Delivery Office (BRDO) conducted an analysis of the industrial hemp market that also contained mechanisms for its development in Ukraine.

Moreover, if this draft law is adopted, Ukrainians with epilepsy, Parkinson’s disease, oncology, etc. will have a legal and long-awaited opportunity to be treated with medical cannabis, and Ukrainian scientists together with entrepreneurs will have a chance to develop drugs based on medical cannabis and sell them in Ukraine.

We are grateful for the support given by the people’s deputies and look forward to the adoption of the draft law as a whole!

One of the priority data sets for business and society — corporate financial reporting — is now available on the Single Open Data Portal. For this to be possible, BRDO experts have been advocating for making this data set publicly available and have been involved in the development of relevant regulatory acts for more than a year and a half.

For citizens and entrepreneurs, open financial statements are the way to:

• stop the data breach and sale on the ‘shadow markets’;
• assess the risk of cooperation for contractors;
• check the credibility of employers;
• analyze the status of companies when purchasing real estate, transport, etc.

Making financial statements publicly available will also have a positive effect for the state, in particular:

• it will help to improve the transparency and openness ratings of the state. Using the example of the Prozorro system that has received many international awards, Ukraine can become a leading country in the field of open data and share experiences with other countries;
• it will raise the credibility of Ukraine as a digital state in the international arena;
• it will promote the development of the economy (creating open data-based products). As a result, the budget will be filled;
• it will help to comply with international FATF standards and providing support for the OECD to fight the laundering of proceeds and terrorism financing;
• it will improve Ukraine’s investment attractiveness;
• it will reduce the number of schemes in public procurement: it will facilitate the AMCU search for tenders with schemes by identifying front organizations that do not have the necessary financial capacity (direct requirement of para.4, part 1 of Art. 16 of the Law of Ukraine “On Public Procurement”);
• it will improve the quality of management decisions both at the state and business levels.

Of course, this will also unlock the creation and development of new open data-based services. We expect that from 1 to 3 million Ukrainians will use such data every month.

Exactly a year ago, BRDO experts and some non-governmental organizations appealed to the relevant data holders to publish and regularly update the financial statements of companies. Currently, our colleagues are analyzing the quality and completeness of published data.

The Parliament supported draft laws #5118 and #5119, which were developed with the participation of BRDO (Better Regulation Delivery Office) experts, on simplifying doing business in the brewing industry. 

Today, the craft beer market share is only 3% of the total volume produced in Ukraine. This figure could be much higher, but excessive state regulation hinders the development of small breweries. In turn, quarantine restrictions also negatively affected the industry.

Legislative restrictions for small brewers allow producing no more than 300 thousand liters per year. That means that a wholesale license’s cost is UAH 30 thousand, and in case of exceeding the specified amount — UAH 500 thousand.

At the same time, the generally accepted European beer production volume for small breweries is 20 million liters per year, and this, in particular, allows such breweries to pay a reduced excise duty, which is     50% less than the national excise rate.

What do the draft laws #5118 and #5119 propose?

• increasing the maximum production volume allowed to 20 million liters per year for small beer producers;
• reducing the excise beer production duty by 50% of the national excise rate for small beer producers;
• canceling the wholesale license for small beer producers;
• introducing perpetual license for beer production and differentiating differentiate fines depending on the annual production volume;

In the process of drafting the laws, BRDO experts conducted analytical market research, public consultations with business representatives, as well as studied the international experience of regulating the beer industry and Ukraine’s European integration commitments in this area.

Over the past 10 years, the beer market has decreased by 42%, and in 2019, its production volume amounted to 185 million decaliters, in particular, through the introduction of licensing for selling beer drinks; reduction of the income level of the population; increase in raw material prices. One of the urgent problems of the industry was the difficulties of craft beer producers.

That is why the proposed regulatory solutions are aimed at simplifying the business environment for small beer producers, implementing Council Directive 92/83/EEC on the harmonization of the structures of excise duties on alcohol and alcoholic beverages by setting a production limit of 200,000 hectoliters of beer per year for small beer producers and introducing a differentiated approach to the excise duty payment.

On May 19, the EU flagship business support initiative, which guided the work of the Better Regulation Delivery Office and SME Development Office, summarised the results of its 5-year implementation in Ukraine. The regulatory and SME policy framework strengthened by FORBIZ will become a building block for further state and international donor efforts to improve the business environment in Ukraine. 

“Through the EU4Business initiative, the European Union helps SMEs to get better access to finance, markets and skills, and aims to improve the overall business environment in the country. The work of FORBIZ was instrumental in the recent business environment and SME policy changes, and bringing the SME interests to the forefront of the Government policy-making. We will continue to support further steps towards better regulatory and operational environment for SMEs in Ukraine, in which SMEs can flourish and reveal their full potential., said Chloé Allio, Head of Operations Section – Economic Cooperation, Energy, Infrastructure and Environment, EU Delegation to Ukraine.

The FORBIZ project closure coincides with the Government announcement of the creation of the Office for Entrepreneurship and Export Development (EEPO), which represents a milestone in the institutionalization of the project SME policy support efforts and Government’s services to Micro, Small and Medium-sized Enterprises (SMEs) in Ukraine. The new office builds on the work of the Export Promotion Office and will also integrate the SME Development Office (SMEDO), which until now served as an advisory body to the Ministry of Economic Development, Trade and Agriculture with FORBIZ project support. SMEDO’s piloting efforts to improve state services for SMEs will now be strengthened and further developed within the enlarged office. Such services included for example: entrepreneurs’ improved access to information through the SME Info-Portal, access to affordable financial resources via the Government’s 5-7-9% lending programme or factoring services to participate in public procurement, and more convenient general services, offered through 12 SME support points and 10 Business Innovation Centres.

“We are happy to launch officially the State Institution “Entrepreneurship and Export Promotion Office” for the further development and internationalization of Ukrainian SMEs. And would like to express our gratitude to EU support in the SME development progress over the last years through FORBIZ project and beyond,“ said Tetyana Miskova, Director of the EEPO.

The Better Regulation Delivery Office (BRDO) since its creation in 2015 has grown into a reputable better regulation think tank. The regulatory reforms supported by BRDO resulted in increased transparency, cost savings, removal of barriers for doing business, and improved regulatory policy decisions for business, consumers, and the public. The estimated business cost savings for the last five years reach around Euro 1 billion, thanks to regulatory improvements supported by BRDO. The main results of the Office also include: 66 Green Papers in various areas of state policy, 166 drafted legislation acts; 1.245 obsolete or unnecessary regulatory acts removed; 5 unique online tools for entrepreneurs, civil servants and local governments, used by millions of Ukrainians and thousands of civil servants. For these digital online tools, BRDO received 4 national and international awards such as Open Data Awards (2017-2019) and European Enterprise Promotion Awards 2020 (National Winner).

“Both the capacity building and the performance of BRDO evolved into a significant, internationally recognised success case, due to the swift and convincing delivery of practical policy guidance and economic results. Paramount to the success, is the overwhelmingly localised expertise, benefitting from BRDO experts’ high level of insight and understanding of context,” said Matthias Halder, FORBIZ Project Manager.

BRDO is committed to further support medium-term economic reforms that are not susceptible to political changes and to contribute more prominently and effectively to policy making efforts in collaboration with other NGOs.

“Last year, we had the largest policy successes to date. At the same time, Ukraine is facing a combination of hybrid challenges with weak societal institutions and public administration. This makes our roles even more critical: reform engineers, advocates, watchdogs, advisers, coordinators,” said Oleksii Dorogan, CEO of BRDO.

FORBIZ contributed to the development of the first ever National SME Development Strategy until 2020, and its respective action plan, thus forming the foundation for further SME policy updates, aligned with international best practices. Thanks to FORBIZ with BRDO and SMEDO, SME priorities were integrated into the Government’s  Anti-Covid-19 Programme 2020-22, and the ambitious longer-term National Economic Strategy 2030. Both policy papers emphasize SME development and necessitate provision of new resources to support Ukrainian businesses.

In February this year, a law that effectively formalized the activities of investment managers, better known as “investment nannies”, came into force.

From January 1, 2022, investors implementing large projects in Ukraine will be able to receive state support under the terms of special investment agreements concluded with them.

The law establishes the maximum term of preferences — 15 years, and the project implementation period should not exceed 5 years.

Why should we have “nannies” for investors?

Political and economic stability are key factors in attracting long-term investment.

In Ukraine, the high level of corruption and the shadow economy deters potential investors, who prioritize transparency, predictability, and stability of the institutional environment.

Of course, Ukraine has some achievements in improving the investment climate, but there are still significant problems and barriers for investors. In the Doing Business-2020 rating, Ukraine ranked 64th among 190 countries, having strengthened its position in the protection of minority investors by +27 points during the year, but the ‘enforcing contracts’ and ‘paying taxes’ indices have decreased (-6 points and -11 points accordingly).

According to the Corruption Perceptions Index (CPI), in 2020, Ukraine ranked 117th among 180 countries, receiving only 33 points out of 100 possible. In 2021, the Index of Economic Freedom included Ukraine in the list of “mostly unfree” economies. As a result, we have the 126th position among 180 countries. At the same time, Ukraine gained only 35 points out of 100 possible in the investment freedom component.

The laws aimed at removing institutional barriers and creating investment incentives for potential investors should improve the situation.

At the same time, trying to cater to investors, we actually recognize that it will be difficult for businesses to work without a special intermediary solving problem with highly-placed officials.

This also confirms that state institutions in Ukraine are weak, and the current regulatory environment and regulatory framework are not always effective. Investment managers have to open the doors that should be open to everyone anyway. This is a really frank admission.

“Investment nanny’s” functions: support of investment projects or an additional intermediary?

“Investment nannies” will be authorized state investment managers, one of the main functions of which is to interact with public authorities and local self-government bodies regarding issues related to the support of generation and implementation of large-scale investment projects in Ukraine.

By creating an additional structure in the relationship between investors and the state, we simplify the communication process and reduce compliance risks. This is the main purpose of providing professional information and advice.

However, it is important to prevent a situation when such support turns into intermediation with additional informal costs for investors. Additionally, the new structure in the negotiation process may

be perceived as an attempt to strengthen state control, which may cause additional concerns among investors.

It would seem that an investor who invests at least 20 million euros can hire highly qualified lawyers to professionally represent his/her interests. If state institutions work effectively, that should be enough.

It is clear that the “investment nanny” idea with such a set of “services” is a response to the weakness of government institutions resulting in the lack of confidence in the state’s capacity to ensure the rights of any entity, including investors.

This is very clear evidence of the so-called transitive consciousness of Ukrainian society, which is characterized by its readiness to compromise on unfair rules of the game. However, admission of the problem is the first step towards solving it.

Why is it more important than ever to improve the investment climate?

Investment failure as a global trend in 2020

Back in the summer of 2020, when it was hard enough to estimate real economic losses from quarantine restrictions, experts from the United Nations Conference on Trade and Development (UNCTAD) estimated the COVID-19 pandemic challenges at $0.6 trillion in lost investment per year.

Although official statistics for 2020 have not yet been published, it is clear that the coronavirus crisis will lead to a sharp decline in global foreign direct investment flows by at least 40%, and for the first time since 2003, their amount will be less than $1 trillion.

But do not expect the capital flows to be resumed in 2021 because even according to optimistic forecasts, their amount will decrease by another 5-10%. Capital flows to transition economy countries and developing countries will be affected the most, as export industries suffer the largest investment decline. Accordingly, competition for capital will only increase in global markets, and the countries with the most favorable investment climate will benefit.

Investment needs and achievements of Ukraine

The importance of investments for ensuring sustainable economic growth can hardly be overestimated. The National Economic Strategy 2030 approved by the government on March 3, 2021, identifies the attraction of foreign direct investments as a key issue because the Ukrainian economy is systematically underfunded.

This is confirmed by statistics: as of the end of 2019, Ukraine has accumulated about $48.9 billion in foreign direct investment per 41.5 million people, while Poland — $236.5 billion per 38 million people, and Hungary with a population of 10 million — $97.8 billion.

How much foreign investment does Ukraine need?

According to the Methodical Recommendations for Calculating the Level of Economic Security of Ukraine, the investment attraction level, at which the ratio of net annual growth of foreign direct investment to GDP is 6%, is a satisfactory level for investment and innovation security (the optimal rate is 7%). However, since 2007, net FDI inflows to Ukraine have not exceeded 6%.

To ensure sustainable economic growth, it is necessary to focus on increasing value added, and this requires the creation of new production facilities at enterprises or the renewal of existing ones, and hence significant capital investment. However, the data of the State Statistics Service show that capital investments have decreased by almost 40% over the past year. In general, in Ukraine, there is a tendency to reduce investment in fixed assets from 4.5% in 2009 to 0.4% in 2020 at the expense of foreign investors.

The dynamics of attracting fixed capital investments at the expense of bank loans and other loans also decline: from 17.9% in 2011 to 7% in 2020.

Thus, the formation of a favorable institutional environment aimed at stimulating investment activities is extremely important for Ukraine, although the relevant law was adopted with significant delay.

Protection of national interests

The idea of creating a specialized institution that would take care of investors is not new. For example, in Lithuania, a government agency “Invest Lithuania” was established at the Ministry of Economy and Innovation to stimulate the inflow of foreign investment in 2010.

The agency provides free consultations and assistance to companies wishing to do business in Lithuania. Its activities cover three main areas: investment assistance, project management, and support. I emphasize that “Invest Lithuania” is focused on foreign investors.

The Ukrainian analogue — UkraineInvest — was established in 2016. The organization’s activity is also aimed at promoting the attraction of foreign capital.

At the same time, the creation of preferences for foreign investors has certain threats.

For example, in Poland, in the pre-EU accession period, the provision of income tax benefits to foreign investors, in particular a reduction of the rate to 5%, stimulated significant capital inflows, but most of the industry sector moved to the ownership of foreign multinational enterprises.

In Hungary, as a result of extremely favorable foreign capital laws (The 1988 Law on Investment by Foreigners) that allowed foreign investors to own 100% of the company and did not impose any restrictions on the capital repatriation, in 1997, more than 60% of the country’s banks came under the control of foreign investors.

And if the external capital accounted for only 24.1% in the total capital of enterprises in 1989, it was already 85% in 2000.

The advantage of the new Ukrainian legislation is the lack of preferences for foreign capital, as state support for investment projects is provided to create a favorable environment for attracting significant, both domestic and foreign, investments in Ukraine.

Thus, market competition is not distorted, there are no incentives for the development of round-tripping operations and withdrawal of capital by Ukrainian residents for further investment in the economy of Ukraine, but with preferences.

Preventive measures on the use of a certain category of shadow schemes are also welcome, as offshore companies cannot apply.

Moreover, the new legislation provides for the analysis of not only economic and financial indicators but also social effects and environmental consequences of the investment project. This complies with the implementation of the sustainable development concept to attract and intensify responsible investments.

Conclusions

The strong government intervention in the market mechanism of the investment process can certainly be harmful. The introduction of any investment incentives can lead to market imbalances and shift the competitive balance.

However, staying away from the global trend of improving the investment climate means losing the competition for capital in international financial markets.

The possibility to receive certain tax preferences and state support in other forms is an effective tool to stimulate investment activities. The main provisions of the law will be gradually adapted to the new challenges and features of the country’s socio-economic development.

In particular, the focus will be shifted to supporting other areas with the highest priority and using an up-to-date set of regulatory tools at a different level over time.

In addition, it is important to remember that the adoption of a single law that provides benefits to a particular category of investors will not immediately create a favorable investment climate in the country. However, this is the first step towards investors.

It is quite obvious that it is unlikely to be possible to encourage investors with the help of “investment nannies”. In the process of generation and implementation of investment projects, the authorized institution plays a minimal role in the formation of a favorable investment climate.

However, provided that the principles of support (instead of intermediation) are followed, the state investment manager will be an additional bonus, although not a significant factor.

Today, the main challenge for Ukraine is not the adoption of law useful for the economy and society, but its effective implementation for the benefit of citizens. After all, it is worth remembering that even the best initiative can be distorted if used in the context of the interests of certain stakeholder groups.

Source: Economichna Pravda

The Parliament registered a draft law #5454 on the cancelation of ‘open-ended’ terms for the provision of administrative services. The Better Regulation Delivery Office (BRDO) actively participated in drafting the document, and Olena Shulyak and 37 other MPs initiated the draft law.

At the beginning of quarantine in 2020, the Verkhovna Rada adopted the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine Aimed to Prevent the Occurrence and Spread of Coronavirus (COVID-19)” #530-IX designed to regulate the terms of providing administrative services during the quarantine.

Under the law, the duration of providing administrative services is suspended from the day when the quarantine was announced. After the quarantine is ended, the service term is extended taking into account the time that has passed before its suspension.

However, due to the long quarantine duration, the terms of providing any administrative and other services have become virtually unlimited, and the documents submitted to obtain the relevant service have been considered for several months.

Thus, providers of administrative services received the ‘right’ to set a deadline for consideration of documents to obtain the relevant administrative service.

Draft law #5454 registered in the Verkhovna Rada proposes to cancel this provision. In particular, it states that quarantine measures introduced for the period necessary to eliminate the epidemic or outbreak of a particularly dangerous infectious disease cannot be a reason for the subjects of administrative services to suspend the terms of providing administrative services prescribed by law.

“Due to temporary quarantine restrictions, the authorities have been given the legal right to process applications for administrative services for an indefinite term, as a result of which Ukrainians suffer every day. During the quarantine, the authorities had sufficient time to organize effective activities in the new conditions. It is time to cancel open-ended terms in the provision of administrative services,” Oleksii Dorogan, BRDO CEO, said.

Better Regulation Delivery Office (BRDO) proposes to abolish price regulation in the international communications market amounting to 98 million euros per year. The relevant analysis was published on the BRDO website.

When a foreign subscriber calls a Ukrainian subscriber, a foreign operator should pay for the traffic termination service to a Ukrainian operator. The termination fee amount per international traffic unit (one chargeable minute) is called an international mobile termination rate (IMTR).

The process of determining market termination rates is bilateral: Ukrainian operators and their foreign partners agree on mutually beneficial rates, according to which traffic will be terminated within the networks of Ukrainian operators and their foreign partners.

If one of the two parties increases the termination rate, the other party may also increase it. However, Ukrainian operators are forced to terminate traffic at low rates, as they are limited by the decision of the National Commission for State Regulation of Communications and Informatization (NCCIR).

In 2017, the NCCIR ordered Ukrainian operators to accept international traffic at a rate of 0.10 euros per minute. At the same time, foreign operators can charge 0.15 – 0.20 euros or more for the same service. Ukrainian operators do not have the right to refuse traffic termination, even if it is unprofitable for them.

As traffic termination at a low price is guaranteed for intermediary operators, they can offer much cheaper traffic delivery to Ukraine for foreign operators, than if foreign operators agreed directly with mobile operators. Revenues of intermediary operators from the international traffic transit increased by 2.7 times in 2017 alone. In total, in 2020, the market for international traffic transit at a regulated rate amounted to 2.5 million euros, and the market for international traffic termination amounted to 98 million euros.

“We believe that it is necessary to abolish IMTR price regulation in Ukraine. The current situation does not allow for the freedom of pricing for Ukrainian operators, limits their negotiating positions, and artificially increases the intermediary traffic transiter market,” Ihor Samokhodskyi, ICT Sector Head at BRDO, said.

Such price regulation does not meet market requirements. BRDO calls for the NCCIR to abolish IMTR price regulation, namely the requirement of para. 2 of item 1 of the NCCIR’s decision No.456 dated 30/08/2016.

At its meeting in March, the National Security Council approved a decision on a large-scale audit of the subsoil use sector.

In particular, it implies the verification of the legality of all subsoil use permits obtained since 1991.

The regulator should carry out unscheduled inspections of business entities that:

• have special production permits issued without an auction and based on the results of approbation of mineral reserves without special permits for geological exploration, in particular for pilot exploitation;
• have special permits for oil and gas production, but have not started production for two years after obtaining them;
• have not started production within two years after the approval of hydrocarbon reserves, while having special oil and gas subsoil use permits for geological study, including pilot exploitation with further extraction;
• have not started production within ten years after obtaining special oil and gas subsoil use permits for geological study, in particular, pilot exploitation with further extraction;

That is, at the meeting of the National Security and Defense Council, the President of Ukraine placed a high priority on addressing the issue of so-called ‘inactive licenses’ — already issued special permits for subsoil use in the areas, in which no production has occurred for many years. Unfortunately, this term is still not defined legislatively.

Citizens of Ukraine are held hostage by such inactive licenses. Due to revenue shortfalls to the budget and the lack of new jobs that should appear in the areas, for which production permits have been issued, the Ukrainian economy remains dependent on imports.

According to the SRDE “GeoInform of Ukraine”, more than 20,000 deposits and occurrences of 117 types of mineral raw materials, including about 8.7 thousand commercial deposits, have been discovered in Ukraine.

However, only 3,000 of them have been developed. This is about 15% of what we can produce in our country.

Let me give you an example. In 2020, Ukraine extracted 20.2 billion cubic meters of natural gas. However, 30.9 billion cubic meters were consumed. That is, while having its own deposits, the Ukrainian industry meets only 65% ​​of demand. We need to buy the rest from other countries, including those with which we are currently at war in the east.

One of the main reasons that negatively affect the increase in hydrocarbon production (organic compounds that are components of oil, natural gas, and products of their processing) is the inactive licenses, which are non-producing for years.

According to the State Service of Geology and Subsoil of Ukraine (Derzhheonadra), 560 special oil and gas subsoil use permits were valid as of last year. At the same time, according to the State Tax Service, 149 of their owners do not start mining activities.

It should be noted that these permits were issued before 2017. In other words, they have not been used for production for more than three years. It is estimated that every third license in Ukraine is inactive.

It is expected that the New Subsoil Code will solve key subsoil use problems. The document will regulate all types of subsoil-related economic activities, including the extraction of minerals, oil, gas, uranium, as well as subsoil water, and geothermal energy.

It is designed to implement EU Directive 94/22 and other European Union legislation in pursuance of the Association Agreement.

The new draft Code provides for the further introduction of a new tax — the subsoil use fee on the ‘produce or pay’ principle — to deal with inactive licenses.

This tax should be levied on those subsoil users who, having obtained a license, have not started the production and do not pay rent.

According to the new Subsoil Code, the period from which a subsoil user will be required to pay a tax will depend on the minerals and subsoil use type.

This is not a new practice. Introducing subsoil use fees is a widely used mechanism to combat inactive licenses in countries with developed extractive industries.

For example, a similar tax applies to subsoil users who do not start the timely production of minerals in the UK, Norway, the USA, Azerbaijan, and Croatia.

If the new Subsoil Code is adopted and the subsoil use tax is approved, even the most conservative estimates show that the national budget will receive an additional 2 billion hryvnias.

Therefore, we hope that the audit of the subsoil use sector announced at the National Security and Defense Council’s meeting is only the first step towards a large-scale restart of the system and Ukraine’s chance to break out of the energy dependence circle.

Source: Economichna Pravda

Natural resources, like money, have only one unpleasant tendency — they tend to end, and in the case of subsoils, they ‘become depleted’.

The world’s mineral resources are becoming really depleted, while the demand for some minerals, on the contrary, keeps growing.

It was because of such a rapid interest, first of all, in certain mineral deposits that a new subsoil category appeared in the world – it is critical raw materials. This article is the first in a series of NAMIU’s (National Association of Mining Industry of Ukraine) publications that will introduce you to the interesting world of ‘materials of the future’ — a group of minerals that will be most in-demand in the next 30 years.

Critical raw material origins

We need to understand by what criteria this or that raw material can be categorized to obtain a privileged status marked ‘critical’. The methodology for determining ‘critical raw materials’ was developed in 2008 in the United States, and it is based on the following three features: 1) the possibility to replace with other types of raw materials; 2) functional irreplaceability; 3) supply risk. These are the markers that allow describing a particular mineral as ‘critical’.

“In Europe, the first report on critical raw materials, which included 14 minerals, was published in 2011. In the following years, the policy of sustainable subsoil management within the Union was modernized. In 2017, the first methodology for assigning raw materials to the status of ‘critical’ was developed, and in January 2018, a report on the renewable industry prospects in the EU was published. The logical conclusion of this process was the creation of ERMA — an industrial alliance that formulated a more detailed definition of critical raw materials in this area,” Volodymyr Holovatenko, Senior Policy Adviser, EU Project New Subsoil Code of Ukraine, said in a conversation with the NAMIU.

According to Volodymyr Holovatenko, critical raw materials in the EU are first and foremost raw materials that are both economically and strategically important for the European economy and the production of which is associated with high supply risk. Materials used in green technologies, consumer electronics, healthcare, steel industry, defense industry, space, and aviation research are not only critical to key industries and future applications, but also the sustainable functioning of the European economy.

The important thing here is that these materials are considered scarce and therefore classified as ‘critical’ because:

• They have a significant economic importance for key sectors in the European economy, such as consumer electronics, green technologies, automotive, aerospace, defense, medical and steel industries.
• They have high risks for supply chains due to a high share of imports and high concentration of critical raw materials in particular countries
• There is a lack of relevant (viable) substitutes due to the very unique and reliable properties of these materials for existing and future application cases.

In 2020, the European Commission issued a newsletter that contained a list of 30 minerals (including titanium, lithium, manganese, graphite, beryllium, and other minerals available in Ukraine), which are or will be critical to the European economy.

“Critical raw materials are particularly important for the EU’s mega-sectors and a wide range of commercial and governmental programs: green technology, telecommunications, space exploration, aerial imaging, aviation, medical devices, micro-electronics, transportation, defenсe, and other high-technology products and services. As a result, EU industry, the environment, and a quality and modern way of life depend on access and use of these important raw materials,” Volodymyr Holovatenko summed up.

To create a modern aircraft, we need about 80 metals. They include the following critical rare metals important for the high-tech industry: bismuth, cobalt, lithium, gallium, germanium, iridium, lithium, palladium, platinum.

Resources that are not enough to go around

What are the main trends in the use of metals today? On the one hand, more and more countries are involved in the production of metals, on the other — the production of some of them is monopolized: China has the largest share. It produces 50% of all metals, primarily intended for the high-tech industry, although its population is 19% of the world’s population. The economic appetites are growing, and the consumption of metals is growing accordingly. According to Ksenia Orynchak, the annual tin production has increased by 21%, and gallium —by 29 times in recent years.

“The development of technologies caused by the fight against climate change will also require a significant increase in metal consumption — up to 20 gigatons in a few years. Thus, the development of renewable energy will increase the consumption of aluminum, cobalt, and other metals required for the construction of wind-driven turbines by 300%, solar panels —by 200%, energy storage devices —by 1000%. What effect it may have? Just look at the situation with copper,” Ksenia Orynchak, Executive Director of the NAMIU, said.

According to Ksenia Orynchak, copper has been consumed since time immemorial, but its production growth has been an average of 3% per year for many years. At the same time, everything has changed significantly in recent years: as much copper was produced from 2013 to 2017as has been produced in human history.

“It is expected that after 2030, copper production will decline sharply due to depletion of resources. And, say, rhenium, which is a very important material, will be enough for about the same time,” Ksenia Orynchak said.

The next logical question is how to provide the ever-growing world population with metals, with further increase in their consumption? How to provide resources to the achieved standard of living and improve it through scientific and technical achievements?

Who controls the critical metals market?

The global market for rare earth metals (REM) is growing rapidly. Over the past 50 years, its volume has increased by 25 times (from 5 thousand tons to 125 thousand tons per year). The main areas of application of REM are: production of magnets (22% of REM consumption), various construction materials (about 19%), modern catalysts for petrochemicals (18%), as well as high-quality optics and glass, and devices based on them (about 15%). The main promising and fast-growing applications of REM are related to the production of hybrid vehicles, wind-driven turbines, defense, telecommunications, computer and television equipment, autocatalysts, and catalysts for oil cracking, lasers, superconductors and fuels, and unique metallurgical products.

The key REM consumers are the world’s largest economies: China (54%), Japan and South Korea (24%), European countries (mainly Germany and France, 13%), the United States (8%). Currently, the foreign market for rare earth products is quite saturated and supply exceeds demand due to the poorly predictable behavior of the People’s Republic of China as a major exporter in the world market. Prior to the coronavirus pandemic, it was predicted that global demand for REM would increase by 1.5-2 times and reach 185-200 thousand tons per year by 2021. Supply in the REM market is likely to still exceed demand, but this will be through excess lanthanum, cerium, and other light REM. In turn, medium and heavy lanthanides (samarium, europium, gadolinium, dysprosium, terbium, holmium, erbium, thulium, as well as ytterbium, lutetium, and yttrium) remain scarce and even extremely scarce.

Until recently, 97% of rare earth elements were produced in China, while that country controlled up to 42% of the world’s reserves. China’s dominant position in this market has led to the intensification of the development of a new EU course to provide itself with this raw material type.

Taking advantage of the raw material resources base, the lack of strict requirements, and low costs, Chinese REM manufacturers have been supplying REM to the global market at dumped prices for 10-15 years. As a result, prices for REM decreased by 2-4 times or more (depending on the liquidity of a REM). This led to the closure of REM production outside China due to unprofitability (half of metal concentrates and mixtures obtained during their initial processing were sent by the Chinese to separator plants in developed countries).

At the same time, developed countries relied on the production of the most complex and high-quality expensive products using REM. After its tactical victory, China localized the whole technological chain of REM production (carbonates, oxides, and individual metals, as well as finished REM products) on its territory and thus provides access to markets for final products with high-added value supplied for its own needs, and also for export to countries with developed high-tech industries (USA, Japan, etc.). It looks not so much as a well-thought-out strategy, but as a logical option to develop the Chinese economy, in which labor is valued more and more and resource, transport, and environmental constraints are becoming more evident.

Given that the use of rare earth materials is mainly strategic and defensive, as repeatedly stated by the Pentagon and the Defense Ministry of Japan, the governments of these countries have a clear strategy to organize joint production in third countries (Japanese Sumimoto in Kazakhstan, India, and Vietnam). In November 2012, the SARECO’s REM concentrate plant was launched. It is also planned to launch a REM separation and magnet production plant. South Korea, represented by the state-owned KORES company, is involved in the development of REM fields in South Africa. EU countries conclude cooperation agreements with REM-producing countries (Germany signed an agreement with Kazakhstan and Mongolia in 2012), as well as provide bank guarantees for the REM supply.

Map of EU’s critical infrastructure, in which Ukraine is not included yet. Source: European Commission

Focus on resource survey, not just consumption

Experts say that as for many critical metals (gallium, selenium, tellurium, vanadium, cerium-group rare earth elements, bismuth, cadmium, and some others), world reserves are not adequately assessed at all.

“The fact is that these metals are found naturally in three forms: in the form of minerals, in the form of impurities in other minerals, or as part of crystalline structures of other minerals. Usually, the reserves of the last two groups are not accurately determined, because it requires special methods of calculating reserves and analyzing the forms of these metals in ores,” Ksenia Orynchak said.

The executive director of the relevant Association explained that there were no deposits of cobalt, gallium, indium, rhodium, germanium, selenium, tellurium, or rhenium in the world. Their sources are copper, aluminum, zinc, and iron ores. The associated metal content in different ores may vary greatly, so it is very difficult to predict the quantitative product yield. Even if you know exactly how much copper is mined in the world, this does not mean that you can accurately calculate the tonnage of associated molybdenum, much less rhenium, which is obtained from molybdenum ores.

The estimated lithium production in the world. Forecast until 2030. Source: Statista 

Geologists believe that the main way to solve this challenge is to discover new deposits. The second option is to improve technologies for the mining and processing of metals. The third option is related to recycling, ie re-extraction of metals. And the fourth one — to extract metals from technological waste. Thus, the academician Bortnikov stated that the Earth’s interior contains much larger amounts of metal reserves than previously thought. The reason is that most deposits discovered cropped out and were close to the surface, while many deposits were formed at depths of up to two or three kilometers (these are the so-called blind deposits that have been discovered just in recent years).

Therefore, it is necessary to develop technologies that would allow discovering deep-earth deposits. Mining dumps should be an important source of rare metals. We also should not forget about the resources of the World Ocean resources. For example, experts estimated that copper reserves in the ocean might be enough for six thousand years.

Source: National Association of the Mining Industry

Ukrainian government has recently started its work on introducing a foreign investment evaluation system.

On January 20, 2021, the Cabinet of Ministers approved a draft law that is broadly in line with the global trend toward the development and implementation of such mechanisms.

We analyzed this initiative in the context of other countries and found out whether Ukraine needs such investment screening.

How it works in the United States

International experience shows that the screening and monitoring of investments are carried out to avoid the concentration of foreign capital in certain sectors of the economy in line with the national security of the state.

The American equivalent of investment screening is the Foreign Investment Risk Review Modernization Act of 2018 (Foreign Investment Risk Review Modernization Act, FIRRMA). The document was drafted as a response to growing skepticism about Chinese investment in US companies.

The active expansion of Chinese companies, which began in the early 1990s and was particularly widespread in the 2000s, when Lenovo purchased the IBM Thinkpad in 2005, could not be ignored for long.

In 2011, members of Congress became worried about the potential acquisition of 3Leaf Systems by the Chinese telecommunications giant Huawei.

During 2011-2016, the number of cases reviewed by the Committee on Foreign Investment in the United States (CFIUS) increased by 55%.

During 2017-2018, such Chinese companies as Ant Financial Services Group (Alipay), China’s Hubei Xinyan Equity Investment Partnership’s, and Chinese heavy-duty commercial vehicle were denied the purchase of American MoneyGram International, Xcerra Corporation, and UQM Technologies companies.

During the same period, the Chinese conglomerate HNA Group was not allowed to invest in the SkyBridge Capital hedge fund.

Acquisitions of Lattice Semiconductor and Qualcomm were not approved as well.

Therefore, drafting a legislative act to regulate the procedure for reviewing foreign investment projects was particularly relevant and important for the United States.

The primary focus of the FIRRMA law is the investment inflow to US business related to confidential personal data, critical infrastructure and technology (big data protection, artificial intelligence, nano- and biotechnology), as well as activities related to real estate located close to seaports, airports and military facilities.

Experience of the EU Member States

The investment screening mechanism in the EU implies a procedure for preliminary consideration of requests, with a focus on checking the creditworthiness, stability, and good faith of investors.

The EU’s Foreign Direct Investment Screening Regulation (Foreign Direct Investment Screening Regulation, FDIR), which officially entered into force on April 10, 2019, defined the following sensitive foreign investment areas:

✔ critical infrastructure (energy, transport, water, health, communications, media, data processing and storage, aerospace, defense, election, or financial infrastructure);

✔ critical technologies (artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy-saving technologies, as well as quantum, nuclear, nano- and biotechnologies);

✔ supply of critical resources (energy, raw materials, food security);

✔ access to confidential information (protection of personal data, media freedom and pluralism).

When evaluating investment proposals, special attention is paid to three aspects:

✔ direct or indirect government control over a potential investor;

✔ participation in activities that affect security or public safety;

✔ risk of attracting a foreign investor to illegal or criminal activities (at the same time, a successful screening procedure is a confirmation of the investor’s good reputation as a reliable partner).

Thus, the world’s leading economies have recognized the investment screening importance for projects related to sensitive areas of national security.

Screening in Ukraine: yes or no?

The need for investment screening in Ukraine is a controversial issue.

In 2019, the volume of foreign direct investment in Ukraine amounted to only 2% of GDP and was 4 times less than remittance flows from Ukrainian migrant workers ($3.1 billion against $12 billion).

Moreover, the economy of Ukraine is characterized by a predominance of offshore foreign direct investment: in 2019, almost 30% of capital came from Cyprus, another 20% — from the Netherlands. In turn, this complicates the procedure for identifying the ultimate investment beneficiary.

For example, according to the National Bank, during 2010-2019, reinvestment in the Ukrainian economy through the round tripping investment mechanism (residents send funds abroad and then they return to the country in the form of direct investment) is estimated at $9.4 billion, which is 22.8% of the total foreign direct investment inflow in Ukraine.

The largest round tripping transactions were carried out through Cyprus, the Netherlands, Switzerland, and Austria. In 2019, the National Bank of Ukraine (NBU) estimated round tripping transactions at $1 billion, ie 34.1% of the direct investment inflow in Ukraine.

How Europeans protect themselves from the expansion of Ukrainian producers and what should we do about that?

The adoption of draft law No.5011 is extremely unfavorable to a certain group of resident companies in Ukraine, as it will require full disclosure of information on the official registration of foreign investors in the head-office country. Additionally, the ownership structure and affiliates need also to be disclosed.

Another important requirement is to disclose information on the amount of income and taxes paid for the last two years by the tax authority of the head office country of a foreign investor.

This practice will facilitate the implementation of the BEPS (Base Erosion and Profit Shifting) action plan on the implementation of measures to combat the tax base erosion and profit shifting in Ukraine. Our country joined the implementation of the BEPS action plan on January 1, 2017.

Moreover, the time limits for the submission of tax information (for 2 years) and the auditor’s report on the enterprise’s financial statements (for the previous year) make it impossible to use specially created shell companies.

All the above measures will help increase the transparency of investment projects and improve the investment climate in Ukraine.

Investors are usually indifferent to the needs of a host country, as the main goal of any business is to maximize profits within its corporate network, gain access to target, low-cost labor, technology, natural resources markets and strengthen competitive positions.

A vivid example of the negative foreign direct investment impact on the national economy is the acquisition of the Zaporizhzhya aluminum plant that was owned by the Russian group SUAL (since 2007 — RusAl) in 2004.

The ultimate goal of this acquisition was to destroy a competitor: The plant’s operation was suspended, equipment was actively exported, and the Ukrainian economy suffered significant losses — jobs, tax deductions, export potential, and so on.

Conclusions

Today, the government faces a difficult choice — an open market for foreign investors as a stimulus to economic growth or prudent control and the establishment of certain restrictions in certain areas of the economy.

The statutory mechanism that allows foreign investors to participate in the capital of Ukrainian strategic enterprises will help reduce corruption risks associated with the decision-making of some officials, as well as make the procedure clear, transparent, and, most importantly, sustainable.

Uniform and clear rules are the basis for avoiding compliance risks and are always attractive to investors.

After all, the introduction of a procedure for reviewing and approving investment requests in Ukraine requires using a well-structured approach and understanding that screening is needed in cases where potential foreign investment losses become secondary and are quite acceptable compared to potential threats to national security and economy.

At the same time, the introduction of a systematic approach to the protection of national interests should not create unnecessary barriers to capital inflows.

In 2020, 19% more subscribers complained about content services schemes to the NCCIR* than in 2019. In particular, these are jokes, SMS horoscopes, dating clubs, and many other services that mobile operators charge for without the knowledge of subscribers. 

This is according to the NCCIR’s data obtained by BRDO experts in response to a request for complaints about content services.

In 2016, the NCCIR received 18 complaints about content services; in 2017 – 413; in 2018 – 549; in 2019 – 481; and in 2020 – 572.

According to the NCCIR report, they received 4,812 complaints from citizens regarding the provision of mobile services in 2020. Content services account for 12% of these complaints.

“Operators are not ready to stop activating the services (that users deliberately did not order) for their subscribers. Unfortunately, prepaid subscribers do not actually have any effective protection of their rights,” Ihor Samokhodskyi, ICT Sector Head at BRDO, said.

According to him, today it is extremely important to protect subscribers. For this purpose, it is necessary to approve amendments to the Rules for the Provision and Receipt of Telecommunications Services. The draft decision that will resolve the situation has been considered for more than a year and a half — mobile operators are deliberately delaying the process. Currently, the document is being approved by the State Regulatory Service. It provides for obligatory notification of subscribers when they are charged, compliance with the law on e-commerce and other mechanisms to protect consumers.

It should be reminded that the BRDO submitted a formal appeal to the Prime Minister of Ukraine, the Verkhovna Rada Committee on Digital Transformation, and the Office of the President of Ukraine regarding violations of consumer rights in the provision of content services and the need to address this problem immediately. It is estimated that Ukrainian subscribers lose hundreds of millions of hryvnias due to content service schemes.

*NCCIR — the National Commission for State Regulation of Communications and Informatization.

Bees pollinate more than 80% of the world’s plants.

These insects increase the productivity of crops, and their unique by-product is known worldwide.

In Europe, the economic effect of pollination is estimated at 22 billion euros per year.

In Ukraine, beekeeping has been a popular activity for many centuries. Now it is a source of income for small and medium-sized businesses in villages.

However, some acts regulating the industry were adopted in Soviet times and do not cope with current challenges.

Bee conservation has recently become a critical issue. Due to air pollution, bees are in danger of dying out. One of the key threats to them is agrochemical poisoning.

The main reason is the lack of effective communication and cooperation between farmers and beekeepers. Farmers use plant protection agents on their lands, while beekeepers lose thousands of bee colonies as a result. This leads to millions of hryvnias of direct losses and hundreds of millions of hryvnias of indirect losses.

The economic effect of plant pollination by bees is measured not only by the cost of honey collected. Pollination also boosts crop yields and brings additional profits to the agricultural sector, but there are just a few positive cases of cooperation between beekeepers and farmers in our country.

One of them is the pollination of sunflowers that are grown by the Agroindustrial Group Arnika. (2,325 bee families from Poltava and Cherkasy regions were involved). Beekeepers received honey, and farmers — a good crop.

The Ministry of Economy and the Better Regulation Delivery Office (BRDO) have been working with the Association of Beekeepers and all parties concerned for three years to address beekeeping issues, in particular concerning the policy of good neighborliness of beekeepers and farmers.

This cooperation resulted in the Order of the Ministry of Economy #338 “On some issues in beekeeping” dated February 19, 2021. The approval of this document is an important step in ensuring an eco-friendly environment and protecting biological diversity in Ukraine.

In particular, the order introduces clear rules of the game for the state and beekeepers, creates modern and effective tools for regulating the beekeeping market.

This implies a simple and fast procedure for registration of bee farms and issuance of veterinary and sanitary certificates of bee farms, effective instructions for prevention and determination of a fact of bee poisoning by plant protection agents, the introduction of a mechanism for economic assessment of losses from bee poisoning.

From now on, the state, beekeepers, and other concerned parties will be able to obtain reliable information on the number of bee farms and the volume of honey production. The order also introduces a mechanism of communication regarding the use of plant protection agents between beekeepers and farmers that will prevent bee poisoning.

The next step should be the adoption of the Law “On Beekeeping” that will comprehensively regulate all problematic issues in the industry, as well as a legal document that will regulate the legal relationship regarding pollination.

As known, Ukraine must harmonize its legislation under the commitments made to the European Union and the requirements of the EU to producers in terms of implementing the European Green Deal.

As part of this policy proposed by European Commission President Ursula von der Leyen, two important strategies have been published:  published: Farm to Fork (F2F) and Biodiversity.

Pollinators, including bees, are included in both strategies. Biodiversity is focused on the protection and restoration of natural areas, stimulation of sustainable and organic agriculture development.

The Biodiversity’s priority is to reduce the use of harmful pesticides for reducing the negative impact on natural ecosystems and preserving pollinators. Also, bees are discussed in paragraphs of the section “Bring nature back to agricultural lands” of the F2F strategy.

The authorities should continue to create a safe beekeeping infrastructure in Ukraine and conditions for agricultural producers to access EU markets in line with the Green Deal purposes.

Source: Economichna Pravda