facilities. The share of raw materials of Ukrainian origin in the production cost of such solar modules shall make at least 30% starting from 01.01.2013 and 50 % starting from 01.01.2014, respectively.

Though the first condition shall take effect on 01.01.2012, the procedure for determining that share has not been approved yet. However, a respective draft has been developed at this point.
 
Description of the Draft
The draft defines the basic concepts, i.e. the materials, main assets and services. Under the draft, raw material, goods, main assets, works and services will be considered as those of Ukrainian origin, if they are produced, performed or provided by a Ukrainian producer. The latter should be a resident having its seat on the territory of Ukraine, performing its activities in accordance with the legislation of Ukraine, and producing goods, performing works or providing services in the territory of Ukraine.
The draft determines the formula for calculating the share of raw stock, materials, goods, main assets, works and services of Ukrainian origin.
According to the draft, the share of raw stock, materials, main assets, works and services of Ukrainian origin in the construction cost of power facilities will be subject to preliminary and to actual calculation.
Preliminary calculation will be performed by an authorized expert organization (which is included in the list of expert organizations that meet the criteria established by order of the Ministry of Regional Construction No53 dated 23.05.2011 and can perform the expertise of construction projects) after the approval of the respective project documentation.
The actual calculation will be carried out by the applicant itself upon the completion and commission of the facility, and will be submitted to the NERC for approval, together with supporting documents according to the list established by the project.
The decision on the share percentage of raw stock, materials, main assets, works and services of Ukrainian origin in the construction cost will be passed at the NERC’s public meeting.
Also, the provision stipulates that the NERC may check applicants and suspend “green” tariffs in the case of inconsistency or lack of data or documents referred to or submitted with the application.
 
Remarks to the Draft
1)      The first substantive remark concerns the legislative drafting technique, which is especially evident in the terminology that is not consistent throughout the draft wording.
Thus, the draft defines a Ukrainian producer as a resident of Ukraine, without specifying it as an individual or entity. However, instead of that definition, the term “resident company” is applied in Section 2.3.1., which is narrower in the literal interpretation (in this case, individual entrepreneurs are not covered by the term “company”) than the above mentioned concept of the “Ukrainian producer”. Essentially though, the latter should be meant.
Similarly, the text abounds in abstract formulations for the event of changes in legislation (e.g. in para. 2.2, “a document, which is effective under the law at the time of the commission of the facility, will be required to confirm the compliance…”), as well as in references to specific operating regulations (e.g., para. 2.4 referring to the State Construction Standards (ДБН 1.1.1.-2000) in the wording as of 17.06.2003).
In para. 2.1, the term “main funds” is applied, whereas the draft itself defines the concept of “main assets”, which is used further, e.g. in para. 2.2.
2)       The appropriateness of the mandatory preliminary examination of the share of raw stock, materials, main assets, works and services of Ukrainian origin is doubtful. First, the project does not contain any information regarding the procedure for determining the cost of such examination, and the one to bear the respective additional costs, which gives grounds to assume that the costs will fall on the applicant’s shoulders. Furthermore, the draft stipulates that a conclusion on examination results shall be submitted in the prescribed form, which has not been approved so far. In general, the need for preliminary calculation can also be doubted because the actual calculation, as mentioned before, will be conducted by the applicant itself, and only the actual calculation will be approved by the NERC. Such a mandatory stage will just complicate the procedure for obtaining a “green” tariff and make it more expensive.
3)      A more accurate definition is also required for the NERC’s opportunity to compare the client’s prices with the “regular price” (a concept from tax law) without imposing any implications, as provided in para. 4.3, if the NERC concludes that the prices do not correspond to the regular ones. Thus, according to the Tax Code of Ukraine there is a presumption that contract prices correspond to usual prices. To prove the contrary under the Tax Code is the obligation of tax authorities. Therefore, the draft is required to clearly specify the implications for the case when the NERC considers that the client’s contract prices do not match the regular ones.
4)      According to para. 5.1 of the draft, which establishes the list of documents to be submitted to the NERC by the applicant, the latter should submit a set of documents “in print”. In contrast to similar regulations, the draft does not contain any information on whether copies or originals of such documents should be submitted, and what kind of copies (simple, sealed by the applicant, certified by a notary, if required).
5)      Similarly, the draft does not directly indicate the document to be regarded as the one confirming the share of raw stock, materials, main assets, works and services of Ukrainian origin, to be submitted to the NERC for the approval of “green” tariffs. It would be logical to assume that the NERC’s decision is meant, which is passed after considering the respective application. This, however, must either be clearly stated in the draft itself, or additionally specified in the approval procedure for “green” tariffs.
6)      It is necessary to indicate the list of reasons in the project for NERC to make the decision on inconsistency of share of the «Ukrainian constituent» with the norms prescribed by the law.
7)      Arguable is the necessity of para. 6 of the draft, establishing that the NERC may check the applicant and suspend the “green” tariff in case of inconsistency or lack of data or documents referred to or filed with the application. The question arises, why the NERC should check the compliance of the data or documents to be submitted for a decision on the share? Actually, the NERC decides on the percentage of the share based on such documents. So if the documents are not submitted in full, the NERC shall notify the applicant thereof and return the set of documents without review. Moreover, the client is responsible for the accuracy of the information submitted.
The establishment of the NERC’s right to conduct such checks without clearly defining their reasons, terms and procedure may trigger unlawful pressure on electricity producers in the future.
8)      Finally, one of the most important aspects is the formula for calculating the “Ukrainian constituent.” As stated above, under the Law of Ukraine On Electricity, it is the share of raw materials, main assets, works and services of Ukrainian origin in the construction cost of a corresponding facility. Nevertheless, the formula proposed in the draft contains “the cost of main assets of Ukrainian origin set up for constructing the facility, excluding the cost of technological equipment of Ukrainian origin” in the numerator, with no mention of works and services.
 
Conclusion
First and foremost, the draft requires substantial changes in the terms described above.
We should also point out the lack of clear boundaries for some concepts, e.g. “services are all and any activities for obtaining tangible or intangible benefits in the process of construction”, which complicates the clear division of assets. For instance, an absurd situation may occur, if an investor spends significant means on business-class flights by Ukrainian Airlines or services provided by Ukrainian consultants and thus collects the required share of the “Ukrainian constituent.” The first thing to do here is to specify the starting point of the “Ukrainian constituent”, i.e. the preparatory phase, site selection, obtaining land rights, approval of documentation, or some other point? As well the «completion» moment is very important – for example, will the «Ukrainian constituent» include the cost of service of the built object within 3-5 years after exploitation date in case such services will be given to the Ukrainian residents? Moreover, to meet the “Ukrainian constituent” requirement and obtain the supporting documents (preliminary and actual) is costly in both finance and time. In the end, the investor cannot even be sure that the attainment of a certain “Ukrainian constituent” will be confirmed (this happens namely at the stage where the facility is fully constructed and put into operation). Such constraints may turn the potential investors away from Ukraine, and direct their attention to other countries in terms of investment. Ukraine should be aware of the competition for investment with other countries.
Finally, we would like to stress again that the idea of the mandatory use of a certain “Ukrainian constituent” percentage is not a good one. Anyhow, market-based instruments will help to ensure that, of all the options, the high-quality and affordable ones will be chosen. If Ukrainian goods/services meet such criteria, the investors will choose them. The “good intention” to support the national economy in practice is likely to cause adverse effects.

Please download the copy of original document (in Russian) here

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