Crux (#05 May 2017)

Legislative Update

Over the course of last month our team monitored legislative initiatives and changes that may be of particular interest. We asked experts to give us their hands-on comments. Particularly on our radar are the parliamentary initiatives on reorganizing healthcare institutions into state and municipal non-commercial enterprises, promoting alternative energy sources and introducing commercial accounting of utility services. The month was also rich in Government resolutions, such as the new procedure for the establishment and operation of independent supervisory boards in state companies and introduction of the drugs reimbursement mechanism. Of course, it is important to note novelties from the National Bank of Ukraine.

 

The Cabinet of Ministers (CMU) has approved a new procedure for the establishment and operation of independent supervisory boards in state companies, proposed by the Ministry of Economic Development and Trade. How does this initiative affect the corruption risks in the management of state-owned enterprises?

Oleksandr Kez

Associate, Baker McKenzie

Pursuant to the regulations, the responsible state authorities have been granted the opportunity to implement important elements of governance of state-owned enterprises (SOE) by establishing a Supervisory Board (SB), which is capable of making professional and well informed decisions in line with good international practices, e.g. setting up proper internal controls. The approved regulations, however, are only one piece of the larger “puzzle” — the full-scale corporate governance reform of SOEs.

In contrast to private companies, where a SB is largely created to prevent the management from taking “half-baked” decisions and missteps, the SB of an SOE is tasked with protecting the company from political manipulations affecting its performance, as well as with stepping in when the Government fails to take responsibility or lacks the political will to do so.

The same rationale applies to corrupt practices. Once the SB is empowered to approve ‘high risk profile’ transactions, e.g. self-dealing and material transactions, as well as to appoint and remove the CEO and other key executives, it is reasonable to expect a decrease in the level of corruption risk.

However, for some key matters to be reserved exclusively for the SB, it would require further legislative amendments which are currently being developed. To date, an SOE SB is prevented from deciding independently on strategy, budget, capex plan, and other important areas of a SOE’s operation.

The initiative has become somewhat overshadowed by the latest legislative developments. The international community, including the leading international donors, is concerned that all of corporate governance reform is being put at risk today. By virtue of the recent Law No. 1975-VIII dated 23 March 2017, members of SOE SB shall be on an “equal footing” with state officials in terms of anticorruption restrictions, which appears to be overly burdensome, impractical and contrary to international practice, which tends to favor officers’ internal corporate rather than public reporting.

 

CMU Resolution No.152 dd. of 17 March 2017 On Ensuring Affordability of Medicinal Products introduces a drugs reimbursement mechanism by setting wholesale prices for these drugs. What changes should pharmaceutical companies expect?

Lana Sinichkina

Partner, Arzinger

Adoption of CMU Resolution No.152 of 17 March 2017 On Ensuring Affordability of Medicinal Products relieved tensions on the market caused by flaws in the reimbursement mechanism adopted earlier. We are glad that state authorities listened to patients, experts and pharmaceutical market operators who substantiated that ambiguous wording, an unclear and unjustified mechanism of pricing, as well as excessively strict mark-ups would lead to withdrawal from the market of a number of medicines commonly used by Ukrainian patients.

We expect a significant boost in the sales of medicines included in the reimbursement system. Even though medicines subject to reimbursement will become affordable to patients, the latter should expect price increases for medicines not subject to state pricing regulation.

As medicines subject to reimbursement are sold based on prescriptions containing not TMs, but INNs, companies will need not only to strengthen their educational and promotional activities among HCPs but also support the education of patients with respect to the reimbursement system.

The mechanism is only the beginning of effective reimbursement in Ukraine. Companies should take a proactive position in pointing out to the Government any practical problems that arise. The success of this system is likely to determine the prospects of introducing reimbursement for a larger number of medicines, which in turn will significantly reduce the scope of medicinal products subject to public procurement and corruption during tenders.

 

According to the Decree of the National Bank of Ukraine No. 270 of 17 June 2004, the regulator gives creditors an opportunity to initiate the registration of a creditor’s replacement without the participation of the borrower. How can this rule affect the borrower and the risks taken by the lender in the exercise of their rights under the loan?

Igor Lozenko

Counsel, AVELLUM

Under the revised registration procedure for cross-border foreign currency loans, lenders themselves can initiate the registration of changes to lenders, which adds flexibility to the process.

The novelty means that there is no longer a need to rely on the borrower’s cooperation for the registration of change to the lender under the assigned loan. This is particularly important in the case of non-performing loans (NPLs), where previously without the assistance from the borrower, a new lender could not be registered with the NBU. As a result, in the past new lenders exposed themselves to additional enforceability risks if they decided to acquire an NPL without borrower’s cooperation in the NBU registration process. At the same time, initiating the registration of changes through lenders under the new procedure will now be reliant on cooperation from the existing lender, as well as from the servicing bank. Consequently, NPL sale transactions will now require additional structuring to address these developments.

As for borrowers, the new procedure should not have a significant impact on them given that the NBU retained the right of borrowers to initiate the registration. As such, in case of loan transactions with borrowers that continue to cooperate with lenders, the relevant borrower can still make all the necessary filings to register a change to the lender. At the same time, in the loan assignment negotiation process, borrowers will now have less leverage (if any at all).

 

According to the changes introduced by the NBU Board Resolution No. 30 of 4 April 2017, legal entities and individuals-entrepreneurs will have to sell not 65%, but 50% of their foreign exchange earnings. How will this easing of administrative restrictions affect business?

Nickolas Likhachov

Counsel, Spenser & Kauffmann

By reducing the share of the currency which is being sold, the National Bank of Ukraine expects to reduce exchange rate risks and help Ukrainian export-oriented enterprises that need imports to produce products, which are subsequently sold abroad. However, exporters often sell all incoming foreign currency, so such liberalization of the legislation is in fact unlikely to have any impact on the situation.

We need to understand that the requirement of mandatory sale of currency earnings itself is not a criteria to give a characteristic of a stable or unstable economy in the country. This provision exists in many countries and its indicator fluctuates: this, for example is 100% in South Africa and Brazil, or 50% in China and Russia.

But the increase in the limit on the sale of foreign currency in cash or banking metals to one physical person within one working day and within one financial institution from UAH 12,000 to 150,000 in equivalent (up to USD 5,500), is evidence that the NBU considers the situation on the currency market to be quite stable and that people will not rush massively to exchange machines to retain their assets.

It seems that recent adoption of the decision by the Board of Directors of the International Monetary Fund to allocate Ukraine the fourth tranche of USD 1 billion affected the decision of the NBU. These conditions will remain in effect until the next resolution of the NBU Board subject to the absence of signs of the banking system finding itself in an unstable financial condition or threats to its stability. This tranche is likely to be around the corner, as a decision to allocate another tranche of IMF should be made in May.

 

Parliament adopted Draft Law 2309a-d allowing the reorganizing of healthcare institutions into state and municipal non-commercial enterprises. How will these changes affect the quality and administration of healthcare?

Olena Khytrova

Partner, ILF

The need for this law has been under discussion for two years, with both proponents and naysayers. The resulting law is a compromise. The provision on reorganizing clinics into state or municipal non-commercial enterprises is not compulsory, with the decision resting on local authorities, the owners of those clinics. On the other hand, this does provide new opportunities. By transforming clinics into non-commercial enterprises, local authorities will also hand them autonomy. Clinic administrators will be able to manage their assets, buy new computers and equipment, and seek out funding from grant programs and international projects. They will also be in a position to change how doctors get paid. Furthermore, clinics will be free to choose whether to manage their own medical laboratory or buy those services elsewhere to save money. The freed up space could be used for public–private partnership projects with private companies or national and foreign investors.

These changes will have a positive effect on the quality of medical services due to new equipment, the remuneration system for doctors, and investment opportunities. But since the law isn’t obligatory, it’s hard to say whether it will spread across the country.

That is why more radical legislative measures are necessary to make the process countrywide, like reform of the funding system. This can be done with the law on state financial guarantees for treatment and medication, which has already been submitted to Parliament. According to it, clinics of any form of ownership will be able to operate using budget funds.

 

On 21 March 2017 Parliament adopted Draft Law No. 4334 On Amending the Law On Heat Supply regarding the promotion of the production of thermal energy from alternative energy sources. How would you comment on this initiative? What consequences do you see for the alternative energy sources market?

Mykhaylo Soroka,

Associate, AEQUO

The augmentation of the renewable energy sector is not only a matter of environmental protection or obligations to the Energy Community, but also a geopolitical challenge in order to minimize dependence on foreign natural resources, especially on Russian gas. As opposed to a “green tariff” for renewable electricity, there were no legislative drivers for investors to innovate municipal heating and make it green. For example, by developing biomass-to-energy projects. An outdated methodology for calculating heating prices (tariffs), allowing for profitability of just 6%, and time-consuming procedures on approving the tariffs were considered significant barriers on the way to alternative non-gas heating. Hence, the legislator’s support for alternative energy shown by the 21 March 2017 amendments to the Law of Ukraine On Heat Supply encourages investors to modernize the industry. The fact that the legislative changes were backed by international organizations such as USAID, NEFCO, EUEA and the Danish Energy Agency also proves their urgency and importance.

The main idea of the bill, which easily passed through Parliament, was to fix the prices of alternative heating at the level of 90% of the tariffs for the heat produced with gas. Conducted research demonstrates the attractiveness of such a pricing approach securing short-term returns for municipal and private heat suppliers. Consumers of heat supplied at the reduced tariff, which is set for individuals and public institutions, will definitely benefit from the lower prices. We also expect a boost in biomass production. Finally, the changes provide grounds for a competitive environment across the heating industry, which will ensure better quality and prices in general.

 

Cabinet of Ministers Draft Law No. 4493 On the Electricity Market of Ukraine envisages structuring the electricity market from the following components: market of bilateral agreements; day-ahead market; intraday market; balancing market; market of ancillary services. What do the authors of the draft mean by these components? How can this initiative be reflected in the electricity market as a whole?

Yaroslav Petrov,

Counsel, Asters

As a member of the European Energy Community, Ukraine has undertaken to liberalize its electricity market. To fulfill this commitment, on 24 October 2013 the Ukrainian Parliament adopted Law No. 663-VII  On Operating Principles of Electricity Market of Ukraine (the Law No.663). However, Law No.663 does not correspond to the EU Third Energy Package. To bring our electricity legislation into compliance with the Third Energy Package Draft Law No.4493 On the Electricity Market of Ukraine was developed.

Under the existing electricity module, operating based on the 1997 Law of Ukraine On Electric Power Industry, electricity should be sold in the majority of cases through the Wholesale Market of Ukraine, and under strictly regulated prices. Purporting to create a more competitive and liberalized electricity trading regime, Draft Law No.4493 foresees liquidation of the Wholesale Market of Ukraine and provides for the establishment of six electricity markets, in particular the (1) market of bilateral agreements; (2) day-ahead market; (3) intraday market, (4) balancing market; (5) ancillary services and (6) the retail electricity market. Under this new module electricity producers will be able to sell electricity through any of the markets, except for certain regulatory limitations. Moreover, certain groups of customers will be allowed to choose their electricity supplier. Such flexibility and competitive electricity prices will result in a much more liberalized electricity market.

 

Draft Law No. 4901 On Commercial Accounting of Utility Services provides for the mandatory equipment of all buildings with energy and water metering units. How can this initiative affect large business entities?

Borys Karas,

Associate, Gramatskiy & Partners

In Ukraine the wasting of energy, especially thermal energy, is huge and Ukraine probably has no counterpart in Europe. The Ukrainian Parliament recently adopted in the first reading the long-expected Draft Law On Commercial Accounting of Utility Services (hereinafter — the Draft). This step was taken in the light of two circumstances. First, a compulsory requirement made by the European Union to reform the Ukrainian energy sector and, second, Ukrainians simply do not have enough money to pay for utility services consumption.

In compliance with the Draft, Ukrainian pipelines operators are obliged to install metering devices in residential and nonresidential buildings, the Draft also sets deadlines for such installation. Metering devices will be installed by operators. However, owners and co-owners of buildings are able to perform this obligation alone. In case of groundless avoidance of the installation of metering devices, operators are able to establish easement through a court ruling.

The Draft removes all regulatory barriers and simplifies the process for the installation of metering devices. Operators as well as consumers of services shall not wait for permits to be issued by any public authorities, since the Draft removes regulatory barriers. All expenses related to the introduction of metering and its further replacement and maintenance shall be paid by consumers of utility services. Despite this, business welcomes the Draft, since it will be possible to reduce payments for consumption of utility services.

 

Published draft laws amending the Code of Commercial Procedure of Ukraine, the Civil Procedure Code of Ukraine and the Code of Administrative Court Process of Ukraine, envisage implementation of an “e-court”. How would you comment on this initiative? What is your opinion of its impact on judicial trial?

Semen Kravtsov,

Attorney at Law, Associate, LCF Law Group

The Ukrainian judicial system has always been extremely resistant to any innovations with no chance to catch emerging changes of the XXI-century world. Finally, having recognized the urgent necessity for development of court proceedings, the judicial reform council has prepared and already published drafts of new procedural codes, where had been envisaged as so-called “e-Justice”.

Pursuant to the provisions of the said draft laws, this system, which is scarily named “Unified judicial information and telecommunication system”, intended to exchange e-documents (sending and receiving) between courts, courts and trial participants, trial participants, and to provide trial fixation and participation in the video conference system. Registration in “e-Justice” is compulsory for attorneys-at-law.

It would doubtless be a huge step for the future, but there are a lot of works that should be done. Earlier, the creation of user-friendly software, which allows all, professionals and ordinary people, to manage it with ease. Such software should be stable and prevent “e-Justice” from various sorts of bugs, so everyone would be sure of its efficiency. But obviously nothing has been done yet. Another important thing is adequate legal rules which the system has to comply with.

The implementation of “e-Justice” is aimed not only at trial participants, but also provides benefits for courts to, for instance, reject arguments based on the inability to send any documents to court on time and, of course, queue-free court buildings.

 

The Government of Ukraine and blockchain company Bitfury have signed a memorandum of cooperation. The parties previously agreed on the transfer of state registers of Ukraine to the blockchain system. How can this cooperation affect the safety of state registries?

Orest Gavryliak,

Partner, Lviv branch, Axon Partners

It’s beautiful, but, there is just one uncertainty, why in particular will the Bitfury Group put a sweeping range of Government data on a blockchain platform in Ukraine and not someone else? Anyway, I’ve never seen technology that I thought had greater potential for humanity.

In a blockchain, you do have to trust that the code and the network will function as you expect. The issues of security always play a key role, especially if the technology is close to Government areas, including cyber security. It works in the way of securitization the integrity of critical information in existing databases. The larger the number of nodes and the greater the height of the blockchain, the more secure the operations are. Each operation is verified and synced with every node affiliated with the blockchain before it is written to the system.

Besides, as a back-end infrastructure, blockchains are metaphorically ultimate, non-stop computers. Once launched, they never go down. There is no single point of failure, unlike how bank systems have gone down, cloud-based services have gone down, while bona fide blockchains keep computing.

This is like a rush-hour gridlock trapping a Formula 1 race car. But, still in case of a blockchain revolution, many barriers, technological, governance and organizational, will have to fall. Thus, on the other hand, it would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold.

 

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