How to participate in auctions for subsoil use

What should companies know to participate in auctions for the sale of special permits for subsoil use?

According to the State Service of Geology and Mineral Resources of Ukraine (the SSGSU), 241 special permits for subsoil use were issued in the period from 2019 to 2021, based on the results of electronic auctions.

This is about 35% of the total number of permits issued during this period, although auctions were almost never held until March 2019.

Our company assisted in obtaining a significant share of special permits issued as a result of electronic auctions.

There are at least two reasons for the increase in the number of special permits for subsoil use sold at auctions.

The first one is that today, an electronic auction is practically the only way for a business entity that did not previously have the status of a subsoil user to obtain a special permit for subsoil use. After all, without an auction, a permit is granted only in exceptional circumstances, a full list of which is clearly defined by legislation. .

The second reason is that the electronic auction is indeed a fairly transparent tool for obtaining a special permit for subsoil use, which, in turn, grants such a right. This mechanism for selling special permits is understandable to both international investors and transparent Ukrainian businesses.

However, despite its advantages, this tool for acquiring special permits for subsoil use, as the practice shows, needs to be improved.

For a better understanding of the issues faced by bidders, auction winners, and subsoil users who have won the auction, we propose to focus on the weakest points of this instrument and to consider them in chronological order.

Preparing a subsoil plot for an auction

Any auction in the field of subsoil use is impossible without submitting an application to the SSGSU to nominate a subsoil plot for auction or initiating such a plot from the investment atlas. This application is the basis for launching the auction procedure.

Then, after receiving recommendations (approvals) from state authorities, local governments (the list of approval bodies depends on the type of mineral) and having the SSGSU prepare the auction documentation, the auction is announced.

What you should pay attention to

If you want to buy a subsoil plot at an auction, you should be prepared to bear the costs of searching for it, analyzing it and preparing a package of auction documents for its nomination.

If you find the desired subsoil use object in an investment atlas, you will save on the costs associated with the nomination, but the risk of buying a pig in a poke will increase.

Unfortunately, as practice shows, these subsoil use objects are only formally inspected, and no one can guarantee that after winning the auction and obtaining a special permit for subsoil use, you will be able to actually start development, and if you do that it will be profitable.

After all, the results of initial exploration vary, so it is not always possible to clearly determine the quantity and quality of the minerals declared to be present in the relevant subsoil area.

Also, before registering for the auction, it is worth at least a superficial assessment of the possibility of allocating land for subsoil use and successfully passing the environmental impact assessment procedure in accordance with the current legal requirements. Failure to succeed at these stages will negate the resources spent.

This shows that the decision to participate in the auction should be balanced and based on sufficient information obtained from a detailed analysis.

Announcement of the auction

After the auction is announced, bidders can register for the auction within the time limit established by the applicable law.

At this stage, you need to go through a number of procedures to sign documents and upload electronic versions to the electronic system, as well as pay the guarantee fee.

After successfully completing this stage, you will receive the status of an auction participant.

What you should pay attention to

At the registration stage for the auction, the current legislation sets forth certain requirements and criteria for participants and the amount of information they must provide, but does not establish a clear list of documents that must be submitted to participate in the auction.

This uncertainty creates an opportunity for platforms to require documents from bidders that may potentially contain such information but are not required by the current Ukrainian legislation.

Accordingly, this uncertainty is a good place for manipulations related to the initiation of the winner’s disqualification procedure by dishonest bidders who failed to win fairly.

Of course, a simple electronic form on the chosen electronic platform which the auction participant fills in and signs with a qualified electronic digital signature would solve the problem.

Auction

The auction is held in three stages, and the highest bidder wins. The right to obtain a special permit is granted to the winner of the auction and, in case of the winner’s refusal, to the next highest bidder.

This right is not transferred to subsequent bidders, although, in our opinion, the absence of this restriction could reduce the number of failed auctions.

According to the SSGSU, in 2021, the average sale price increased 1.8 times, amber was the most popular mineral, and oil and gas special permits traditionally became the most expensive lots.

What you should pay attention to

Once you have decided to participate in an auction, you should determine the highest price you are willing to pay.

To do this, you need to carefully analyze the market, identify potential competitors, and analyze a range of other information.

Only by simulating different scenarios of the behavior of other participants during the auction will you be able to avoid getting confused during the auction and win the desired victory.

Obtaining a special permit for subsoil use

After winning the auction, but before obtaining the special subsoil use permit form, the auction protocol is signed, the auction site fee and the cost of the auction documentation package are paid, and the special permit sale and purchase agreement is signed.

The state budget receives funds equal to the difference between the sale price of the permit and the guarantee fee. An agreement on compensation of the state’s expenses for exploration is signed. Compensation of the state’s expenses for geological exploration work, which resulted in the creation of geological information, is paid. An agreement on the terms of subsoil use is signed together with the work program.

What you should pay attention to

As practice shows, it takes at least one month from the end of the auction to the moment when the winner receives the special permit for subsoil use.

The reason for this is the lack of clear instructions for the winner to obtain the special permit form, bureaucratic procedures on the part of the SSSGSU, and imperfect standard forms of documents.

In our opinion, this situation could be remedied by the SSGSU using electronic document management in this process and creating a platform where the winner of the auction and other participants in this process could sign all the necessary documents with a qualified electronic signature.

The flaws in the procedure can be corrected by the client-oriented approach of the SSGSU in working with the auction winners.

In the long run, the creation and use of a platform for efficient electronic document management will eliminate most of the procedure’s flaws.

So, to conclude

Before registering and participating in the auction, a potential bidder should investigate the object to be auctioned, in particular the available geological information, as well as the possibility of obtaining the right to use the land plot that is part of the subsoil plot or will be needed for subsoil use; establish that there are no circumstances under which it is impossible to obtain a positive environmental impact assessment.

You should have a clear strategy for winning with all possible scenarios during the auction. When developing this strategy, you should consider information about the market, potential competitors, and other data.

After winning the auction, if you want to meet the deadlines, you should be very active, but even with an active position, but without experience in this area, it is quite difficult to meet the deadlines established by law.

To make sure that your participation in the auction is successful, you can consult with specialists or entrust the preparation and support of the auction to experts in the field of subsoil use and law.