Auctions for the sale of special permits: what will change?

On July 26, the Government of Ukraine amended important resolutions that are key to the future work of subsoil users.

In particular, they relate to the procedure for conducting auctions for the sale of special permits for subsoil use, approved by Resolution of the Cabinet of Ministers of Ukraine №993 dated September 23, 2020 (hereinafter also referred to as the Procedure).

Changes that will have a positive impact.

Electronic signature. From now on, the minutes of the electronic auction and the Sale and Purchase Agreement (SPA) for a special permit for subsoil use will be signed with a Qualified Electronic Signature (QES) in accordance with the requirements of the Law of Ukraine “On Electronic Trust Services”.

Compensation for the cost of geological information. It is worth noting that now the compensation for the cost of geological information will be paid according to the details of the State Service of Geology and Mineral Resources of Ukraine (the SSGSU) specified in the e-auction protocol by the winner of the auction within 30 business days from the date of conclusion of the permit purchase agreement or the permit purchase agreement with a deferred circumstance.

Shorter time frame for holding auctions. The time frame for holding auctions is shortened after the announcement of the relevant auction is posted. For the first auctions, it is 20 calendar days from the date of the announcement. For repeated auctions, the period is 15 calendar days from the date of the announcement.

Requirements for auction participants. The bidder with the next highest bid cannot withdraw from the auction until the auction is completed.

Information on the ultimate beneficial owner. New requirements for disclosure of information on the ultimate beneficial owner of the applicant, participant and winner of the auction are established.

Will not have a significant impact:

Re-auction lot price. The amount of the initial price of the re-auction lot is changed. For the first re-auction, it is 75% of the initial price of this lot. For the second re-auction, it is 50% of the initial price of this lot.

Until the SSGSU provides clarifications, these changes may have a negative impact:

New requirements for information about the applicant. According to the current version of the Procedure, in order to register in the system of electronic bidding for the sale of permits, the applicant must provide up-to-date information (data) with the date of submission of the application, which allows to identify the ultimate beneficial owner.

Among them, the series (if any) and number of the document(s) certifying the identity and confirming citizenship (nationality), in particular, but not exclusively, the passport of a citizen of Ukraine for traveling abroad.

Pursuant to part one of Article 13 of the Law of Ukraine “On the Unified State Demographic Register and Documents Confirming Ukrainian Citizenship, Identity or Special Status”, the documents that prove identity and confirm Ukrainian citizenship include:

1. passport of a citizen of Ukraine; 
2. passport of a citizen of Ukraine for traveling abroad; 
3. diplomatic passport of Ukraine; 
4. service passport of Ukraine; 
5. seafarer’s identity card; 
6. crew member’s identity card; 
7. identity card for returning to Ukraine;
8. temporary identity card of a citizen of Ukraine.

If this provision is interpreted literally, it seems that the details of all these documents, if any, must be provided. 

In addition, if we model a situation where the ultimate beneficial owner is a foreigner who is a citizen (subject) of several countries, it will always be possible to refer to the fact that the applicant provided incomplete information and, accordingly, may be the basis for refusing to allow such entities to participate in the auction.

They will have a mixed impact

Special procedure for strategic objects. A special procedure for announcing an auction for subsoil plots (mineral deposits) that are of strategic importance for the sustainable development of the economy and the state’s defense capability is being created. According to the current version of the Procedure, the list of such subsoil sites will be approved by the Cabinet of Ministers of Ukraine. This list will be compiled by the SSGSU, not the investor. In other words, if an investor wishes to nominate a site that is not included in the list, he will have to wait for the government to approve it.

This innovation complicates the procedure for nominating new subsoil areas for metal ore and non-metallic minerals of strategic importance for the sustainable development of the economy and defense capabilities of the state, the list of which was approved by the National Security and Defense Council of Ukraine on July 16, 2021, including aluminum, iron, lithium, manganese, copper, titanium metal ores and non-metallic minerals such as barite, graphite, potassium salt, fluorite.

Will have a negative impact

A minimum guarantee fee is introduced. The minimum amount of the guarantee fee is set at 20% of the initial price of the lot, but not less than UAH 5,000,000 (five million) for minerals that are of strategic importance for the sustainable development of the economy and the defense capability of the state, UAH 10,000,000 (ten million) for hydrocarbons and UAH 500,000 (five hundred thousand) for other minerals (except for the lot for the sale of a special permit for geological exploration, including pilot development, extraction of groundwater (including mineral water) for all needs).

Security of guarantee fees. In addition, we would like to draw your attention to the fact that, in accordance with the innovations, guarantee fees are transferred to the regular bank account of the auction operator (organizer), i.e. the platform. This will be millions of UAH, which will not be protected from property seizure, bankruptcy, and possible abuse by officials of the auction operator (organizer) that receives the funds.

Our suggestions are: 

The new guarantee fees should not apply to the first auctions and to repeated auctions announced in connection with the recognition of the first auction as failed due to the lack of sufficient bidders. Given that the majority of auctions do not fail but are successfully completed on the first attempt. 

We propose to consider the proposal to open a special treasury account that will perform three functions:

1) acceptance of guarantee deposits;

2) transfer of guarantee fees to the state budget of Ukraine as a partial payment for granting a special permit for subsoil use or as a penalty for refusing to become the winner of the auction;

3) timely refund of guarantee fees to eligible bidders.

This innovation will provide state protection to the funds of auction participants. We believe that the transfer of tens of millions of UAH to the platforms is unreliable for a number of reasons.

It is also worth reducing the number of circumstances under which an auction is considered to have failed. We believe that if less than two bids are submitted before the deadline for accepting applications for participation in the auction, the auction should be considered to have taken place, because this provision forces potential subsoil users to create fictitious competition. In fact, it does not stimulate the development of competition, since in the absence of real competition, the permit is still purchased for the initial price with a premium in the amount of the auction step.

Also, if, according to the results of the auction, no participant has made an auction step, the auction should be considered as having taken place. According to our experts, this provision is unfair, since the state has announced the initial sale price, and with this provision it is forced to pay extra for the auction step. 

If the state wants to earn more money, then it would be more correct to estimate the initial value of the permits to be auctioned at a higher price. Accordingly, this changes the calculation methodology.

Conclusion.

To summarize the innovations adopted by the government, we believe that these changes in certain parts of the Resolution will indeed contribute to the de-bureaucratization of certain stages of the auction procedure for the sale of special permits for subsoil use. However, they are likely to have a negative impact on the development of the industry as a whole.

Though, the real consequences of the innovations will be assessed by subsoil users only with time. We hope that if our fears are not realized and the adopted changes are indeed a “small reform” of the subsoil use sector.