Over the past couple of years, Ukraine has taken serious steps to reform its energy legislation. Among the most important developments are the liberalisation of the country's coal market and the considerable enhancement of possibilities for private-sector participation.
Ukraine has adopted its fuel-balance reconsideration strategy in favour of coal. In particular, the strategy provides for switching thermal-power stations from black oil and gas to coal fuel.
Gregory Boyce, chairman of the world's largest private coal company, Peabody Energy Corp, has calculated that overall global coal consumption will increase by 3,000Mt by 2030.
Experts predict that the world's demand for coal will peak within the next 10-15 years. Thus, coal consumption from the power industry will increase 53 % by 2030.
China and India will be the dominant coal consumers in the world market in the next decade. World coal production is expected to grow by 50% by 2030.
The recent legislative changes on reforming the fuel and energy sector in Ukraine, along with this expected worldwide increase in coal consumption, create an excellent situation for the acquisition of coal-mining assets in the country and for investing in Ukrainian coal-mining enterprises.
Initially, serious changes in the coal market were anticipated due to President Yanukovych's programme of economic reforms between 2010 and 2014, called Prosperous Society, Competitive Economy, Effective Government, prepared by Ukrainian and foreign experts.
The programme envisages future developments of infrastructure and basic sectors, including reforms in the electric energy sector, coal sector and oil and gas industry.
It defines the primary goal of the coal sector reform as the efficient, break-even level for the coal industry to be able to supply the Ukrainian economy with raw materials at market prices competitive with the world prices.
In this regard the main objectives are:
- To liberalise the coal market and sale and pricing mechanisms;
- To reform the banking system; and,
- To privatise advanced enterprises and to close non-profitable mines.
Coal market liberalisation may be achieved through determining prices for coal products on the basis of demand and supply balance, a transition to the new system of auctions for the sale of coal products and the liberalisation of coal imports.
The centralised coal trading through a single state operator (co-ordinator) of the wholesale market has played a substantial role in stabilising the national economy at the initial stage of market transformations. However, a new system is required for further development.
By its order (No 1070-р) on October 26, 2011, the Cabinet of Ministers of Ukraine approved the concept of transition to the exchange form of coal trading.
The named transition to the exchange form of coal trading will simplify the procedure for seeking potential customers and suppliers, introduce a pricing mechanism based on real coal supply-demand balance, provide for the competitiveness of home coal by bringing the system into compliance with the European standards, and increase the investment attractiveness of mines.
Moreover, it will strengthen the motivation of enterprises to carry out their activity in a cost-effective manner on the break-even level with financial self-sufficiency, which would enable the state to decrease budget expenses in support of the coal industry, given the predicted deficit of coal products in the world market.
Recent developments are crucial for the issue of coalenterprises privatisation. Specifically, the privatisation of advanced mines and closing of non-profitable mines were also supported by the EU's Technical Assistance to the Commonwealth of Independent States (TACIS) Coal Sector Policy Support Programme as the only possibility for Ukraine.
Need for reform
The current situation in the mining sector requires immediate action. In most cases the state subsidies and grants are enough only for paying miners' salaries, while the overall unprofitability of mines cannot be covered by them.
Many mines have no means for maintaining the existing volumes of coal extraction, let alone the modernisation, which would allow increasing the volumes of extraction and improving safety. Neither does the state regulation system for the coal-mining sector improve the overall performance of mines.
On October 5, 2011 the Law of Ukraine "On Particulars of Lease or Concession of the State-Owned Objects of Fuel and Sector" came into force.
According to the law, state mines can be leased by private investors. Pursuant thereto, in January 2012 the Cabinet of Ministers included 87 coal companies in the list of state-owned assets of fuel and energy sector, which can be transferred in concession.
According to the law, the following state-owned assets may be leased out or let on concession:
- Assets of the fuel and energy sector that require modernisation;
- Coal mines subject to closing with no prospects; and,
- Unfinished construction projects that can be completed for coal mining.
The lease and concession of these assets will run on a competitive basis. Private investors' participation in state activities, lease and concession usually precede or substitute the actual privatisation.
On April 12, 2012, Ukraine's parliament adopted the Law of Ukraine "On Specifics of the Privatisation of Coal Mines" initiated by the Cabinet of Ministers of Ukraine. The law was signed by President Yanukovych and came into force in May 2012.
Under the law, assets that are subject to privatisation may be:
- Coal mining enterprises as integrated property complexes;
- Mines as integrated property complexes;
- Open-cast mines as integrated property complexes; and,
- Shares owned by the state in the authorised capitals of joint-stock companies formed in the process of privatisation or corporatisation of state mining enterprises.
The law does not specify the range of potential buyers (investors). Therefore, according to the general provisions of the Law of Ukraine "On State Property Privatisation", they can be both Ukrainian and foreign legal entities or individuals.
The law envisages special conditions for the privatisation of coal mines.
Among other things, it stipulates that all shares owned by the state (without preserving the state-owned stakes) in the authorised capitals of joint-stock companies formed in the process of privatisation or corporatisation of state coal mining enterprises shall be sold to investors. Privatisation experience has shown that preservation in state ownership of a minority holding is inefficient as it does not allow for the state to influence the managerial process and distribution of income.
A moratorium is set on the enforcement of sale of property subject to privatisation by suspending the enforcement and a moratorium on the institution of bankruptcy proceedings for up to three years after the completion of the privatisation.
The above clause will help to raise the investment appeal of the coal-mining enterprises, as the huge debts to be repaid at the expense of the new proprietor might be restructured and discharged within a longer period without bankruptcy risk.
An important clarification is that the existing special permits for mining operations for the buyer (investor) of an object of privatisation will be reissued without bidding.
The law provides for the following methods of privatisation: sale at auctions, sale at an investment tender or otherwise as provided by the law on privatisation (including the redemption by tenants and concessionaires for leased/concession objects).
The specific method will be determined by the privatisation authority jointly with the authority that manages state property according to the criteria to be approved by the Cabinet of Ministers of Ukraine.
Most likely, all mines will be put on auction first and a tender will be held only in case of absence of buyers. It will slow the privatisation process down and cause additional budget expenses, as the state will be obliged to continue subsidising the mines until their privatisation.
The auction or investment bidding procedure will also be approved by the Cabinet of Ministers of Ukraine.
The law expressly provides that if no auction has been held owing to lack of buyers, the privatisation authority has the right to announce the auction for the second time, with 30% reduction in the initial price of the privatisation.
If the auction failed again, it will be announced for the third time with 50% reduction in the initial privatisation price. If no auction is held, there will be an investment competition.
The winner, both in case of an auction and in case of investment bidding, will be the bidder that has offered the highest price or maximum value of the given investment in the asset to be privatised expressed in monetary terms.
In the event of failure of an investment plan, the privatisation authority is entitled to cancel the signed sale and purchase agreement in accordance with the Law of Ukraine "On State Property Privatisation." Special attention should be given to the provision on the assessment of objects of privatisation. In determining the value of objects, the value of industrial mineral resources is not considered. However, the residual value of special permits for mineral extraction is taken into account subject to their free transfer to the investor.
Among the conditions of sale and purchase agreements, the investor has an obligation to implement the programmes for production reequipment, to introduce advanced technologies, as well as to provide a guaranteed fixed amount of coal production throughout the period determined by the agreement (not exceeding 5 years).
Previously published by Mining Journal, September 21, 2012.
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